As filed with the Securities and Exchange Commission on February 28, 2017
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 811-22842
FORUM FUNDS II
Three Canal Plaza, Suite 600
Portland, Maine 04101
Jessica Chase, Principal Executive Officer
Three Canal Plaza, Suite 600
Portland, Maine 04101
207-347-2000
Date of fiscal year end: December 31
Date of reporting period: January 1, 2016 – December 31, 2016
ITEM 1. REPORT TO STOCKHOLDERS.
| Phocas Real Estate Fund |
Annual Report
December 31, 2016
PHOCAS REAL ESTATE FUND A MESSAGE TO OUR SHAREHOLDERS (Unaudited) DECEMBER 31, 2016 |
Market Summary
The securitized commercial real estate market, as measured by the FTSE NAREIT All Equity REITs Index (the "Index" or the "Benchmark"), posted a negative total return in the fourth quarter of -3.3%. The strong month of December was more than offset by October and November. Despite the pullback in the fourth quarter, real estate investment trusts ("REITs") rose +8.63% as a group for the full year as represented by the Index. The Phocas Real Estate Fund (the "Fund") underperformed its benchmark with a return of 7.64% for the year.
While REITs underperformed and sold off ahead of the election, the group actually delivered positive returns subsequently. The speed with which the market suddenly recalibrated its growth expectations overall was quick, and shows how important a role psychology plays in investment decisions versus actual economic data. This is especially true with strong REIT performance despite the rise in the 10-Year U.S. Treasury Bond's yield post-election. The movement in interest rates remains a topic of discussion amongst investors, but comprehensive tax reform, private capital on the sidelines, the Trump administration's policies and impact on GDP growth are now consistent topics as well.
REITs debuted as a stand-alone sector within the Global Industry Classifications Standard (GICS) on September 1, 2016, but have not benefitted from the perceived recognition as much as some investors may have hoped. Operationally, 2017 could look like 2016 for many REITs with new supply coming online, solid job growth, and stable, but declining same store net operating income.
Performance Summary
The fourth quarter performance benefited from the strong rally post-election, particularly in Lodging as the sector posted a total return of 20.4%. Lodging REITS benefitted from the expected pro-business policies of the new administration, and market enthusiasm for better economic growth backdrop. That said, we are reluctant to become too bullish given valuations have risen significantly in the hope of a quick reacceleration in demand and the ongoing supply increases in key markets.
New York and Washington, DC Office REITs also benefitted as leasing is expected to pick up post-election, at least per Boston Properties (BXP) and SL Green (SLG) and DC should get a boost not only from renewed focus on Defense but also having more legislation passed that, per BXP management, ties directly to office leasing activity. In fact, JLL recently published a report highlighting the positive correlation between tenant demand in DC and the number of bills enacted into law.
Underperforming in the quarter was Retail, specifically Malls, as that sector remains under pressure from fallout concern regarding online sales and department stores. While Retail may continue to be questioned by investors with its ability to compete with online retailers and poor holiday sales, we are comforted that the demand for prime retail centers remains strong. Note that Macy's 68 store closings are almost all in Class B and C malls and tertiary locations. The retail environment remains challenged, with some retailers shrinking while others continue to open stores.
Health Care also underperformed materially in the quarter as rising interest rates, negative sentiment regarding regulatory issues, an upward bias in labor costs, and exposure to long triple net leases have all contributed to the sector being out of favor with investors. Also impacting the sector is the rotation away from defensive groups, like Health Care, and towards pro-cyclical growth sectors.
Following, please see a breakdown of performance and yields by sector within the Index.
| Sector | 4th Qtr 2016 | 2016 | Yield |
| Industrial | -0.3% | 30.7% | 3.3% |
| Office | 0.6% | 13.2% | 3.1% |
| Retail | -10.7% | 0.9% | 4.0% |
| Shopping Centers | -8.5% | 3.7% | 3.7% |
| Regional Malls | -11.6% | -5.2% | 4.0% |
| Free Standing | -13.0% | 17.0% | 4.7% |
| Residential | 1.1% | 4.5% | 3.1% |
| Apartments | 1.7% | 2.9% | 3.2% |
| Manufactured Homes | -3.2% | 14.2% | 2.9% |
| Single Family Homes | -1.9% | 26.6% | 1.6% |
| Diversified | -2.1% | 10.3% | 4.6% |
| Lodging/Resorts | 20.4% | 24.3% | 5.7% |
| Health Care | -10.8% | 6.4% | 5.4% |
| Self Storage | 0.2% | -8.1% | 3.8% |
| Timber | -3.5% | 8.3% | 4.1% |
| Infrastructure | -7.0% | 10.0% | 3.5% |
| Data Centers | 0.8% | 26.4% | 2.8% |
| Specialty | 2.1% | 20.0% | 6.3% |
| NAREIT All Equity REIT Index | -3.3% | 8.6% | 4.0% |
All figures include dividends. Source: NAREIT
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PHOCAS REAL ESTATE FUND A MESSAGE TO OUR SHAREHOLDERS (Unaudited) DECEMBER 31, 2016 |
Portfolio Positioning
We continue to view a gradual increase in interest rate hikes over the next 18 months as having a minimal impact on commercial real estate prices and cap rates, and thus REIT share prices. Despite the rise in rates, most companies still have above market long-term debt maturing for at least the next few years. Recall the 10-year U.S Treasury Bond yield in 2007 averaged 4.63% and averaged 3.66% in 2008, versus 2.42% currently.
The Strategy remains overweight versus the Benchmark in CBD Office and Industrial. We continue to believe that industry trends will drive solid demand for Industrial REITs, and growth in e-commerce is an additional benefit. In terms of the Office holdings, we prefer the larger, more urban asset owners who should benefit from tenant demand and transactional activity. Of note, Washington, DC is a market in which investors appear eager to see a recovery, and it seems as this may finally be the case as leasing should be driven by increased legislation. Despite Apartments suffering from oversupply in a few key markets, New York City and San Francisco, part of the Portfolio exposure to the sector is in Manufactured Housing (Sun Communities, SUI). Concerns over department stores at Class A Malls are overblown, and we only hold Class A malls today. In fact, Simon Properties (SPG) expects lease spreads to top mid-teens the next five years.
Contributors
For a second consecutive quarter, Colony Capital (CLNY, up 13.3%) was a top performer as the company closes in on its accretive merger with NorthStar Financial Realty (NRF) and NorthStar Asset Management (NSAM). While questions on synergies abound, the deal will certainly be accretive to shareholders. The merger has since closed and the new company is Colony NorthStar (CLNS). With Lodging REITs rebounding since the election, Chatham Lodging (CLDT, 8.5%) has been a strong performing position in the Portfolio. We continue to favor CLDT as its portfolio is not heavily exposed to the highly challenged markets of San Francisco and New York City. Coresite (COR, 8.3%) also outperformed in the quarter as Data Centers returned to be viewed positively by investors. The rebound in Data Center REIT share prices this quarter was more to do with an overselling in the prior two quarters, and less about any fundamental changes at the individual company level.
Detractors
In light of the headlines surrounding retailer risks in both Shopping Centers and Malls, it's not terribly surprising to find the bottom three performers in the quarter in the Retail sector. Seritage Growth Properties (SRG, -15.2%) lagged as fears mounted from headlines from its top tenant Sears Holding (SHLD). That said, SRG has successfully released space formerly occupied by Sears at rental rates 4.4x prior rents, and continues to commence redevelopment projects with approximately 12% incremental returns. While Simon Property Group (SPG, -13.4%) also underperformed during the quarter, we believe this is a short term dip as investors sold down all Mall REITs regardless of quality. While the transaction market for lower quality malls and locations will likely remain soft as asset- level financing is tough given perceived risk around sales trends, space demands and department store exposure, SPG should excel given its Class A mall portfolio. Regency Centers (REG, -10.4%) was under pressure during the quarter as a result of its purchase of Equity One (EQY) for $5B and making it the largest Neighborhood Shopping Center REIT. While this appears to be a solid long term positive for REG through additional redevelopment opportunities, the near term synergies are not obvious outside G&A expense savings.
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PHOCAS REAL ESTATE FUND A MESSAGE TO OUR SHAREHOLDERS (Unaudited) DECEMBER 31, 2016 |
Best Regards,
Phocas Financial Corporation
William Schaff, CFA James Murray, CFA
IMPORTANT RISKS AND DISCLOSURES
The views expressed in this report reflect those of the Fund's Portfolio Managers as of the date this report is first published and may not reflect their views anytime thereafter. These views are intended to assist shareholders in understanding the Fund's investment methodology and do not constitute investment advice. This report may contain discussions about investments that may or may not be held by the Fund as of the date this report is first published. All current and future holdings are subject to risk and to change. To the extent this report contains forward looking statements, unforeseen circumstances may cause actual results to differ materially from the views expressed as of the date this is written.
The Fund is exposed to the same risks that are associated with the direct ownership of real estate including, but not limited to, a general decline in the value of real estate, fluctuations in rental income, changes in interest rates, increases in property taxes, increasing operating costs, overbuilding, changes in zoning laws, and changes in consumer demand for real estate. The Fund may invest in foreign securities which involve political, economic and currency risks, greater volatility, and differences in accounting methods from investing solely in the U.S. These risks are magnified in emerging markets. The Fund is non-diversified, meaning it may invest its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund.
The FTSE NAREIT All Equity REITs Index is an unmanaged index of all tax qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. One cannot invest directly in an index.
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PHOCAS REAL ESTATE FUND PERFORMANCE CHART AND ANALYSIS (Unaudited) DECEMBER 31, 2016 |
The following chart reflects the change in the value of a hypothetical $10,000 investment, including reinvested dividends and distributions, in the Phocas Real Estate Fund (the "Fund") compared with the performance of the benchmark, the FTSE NAREIT All Equity REITs Index (the "NAREIT Equity Index"), since inception. The NAREIT Equity Index is an unmanaged index of all tax qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meets minimum size and liquidity criteria. The total return of the NAREIT Equity Index includes the reinvestment of dividends and income. The total return of the Fund includes operating expenses that reduce returns, while the total return of the NAREIT Equity Index does not include expenses. The Fund is professionally managed, while the NAREIT Equity Index is unmanaged and is not available for investment.
Comparison of Change in Value of a $10,000 Investment
Phocas Real Estate Fund vs. FTSE NAREIT All Equity REITs Index
PHOCAS REAL ESTATE FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2016 |
 | Shares | Security Description | Value |
PHOCAS REAL ESTATE FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2016 |
AFPORTFOLIO HOLDINGS | ||
| % of Total Investments | ||
| Apartments | 14.9 | % |
| Data Centers | 7.1 | % |
| Diversified | 3.7 | % |
| Diversified Financials | 6.1 | % |
| Freestanding | 2.8 | % |
| Health Care | 3.1 | % |
| Industrial | 9.6 | % |
| Lodging/Resorts | 4.7 | % |
| Manufactured Homes | 2.3 | % |
| Mixed | 2.3 | % |
| Office | 20.1 | % |
| Regional Malls | 8.3 | % |
| Self Storage | 9.0 | % |
| Shopping Centers | 6.0 | % |
| 100.0 | % |
See Notes to Financial Statements. | 6 |
PHOCAS REAL ESTATE FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2016 |
| ASSETS | |||||||
| . | Total investments, at value (Cost $8,734,909) | $ | 12,030,207 | ||||
| Cash | 351,340 | ||||||
| Receivables: | |||||||
| Dividends and interest | 73,042 | ||||||
| Prepaid expenses | 1,408 | ||||||
| Total Assets | 12,455,997 | ||||||
| LIABILITIES | |||||||
| Accrued Liabilities: | |||||||
| Investment advisor fees | 4,781 | ||||||
| Trustees' fees and expenses | 20 | ||||||
| Fund services fees | 6,533 | ||||||
| Other expenses | 23,543 | ||||||
| Total Liabilities | 34,877 | ||||||
| NET ASSETS | $ | 12,421,120 | |||||
| COMPONENTS OF NET ASSETS | |||||||
| Paid-in capital | $ | 9,064,733 | |||||
| Accumulated net realized gain | 61,089 | ||||||
| Net unrealized appreciation | 3,295,298 | ||||||
| NET ASSETS | $ | 12,421,120 | |||||
| SHARES OF BENEFICIAL INTEREST AT NO PAR VALUE (UNLIMITED SHARES AUTHORIZED) | 388,758 | ||||||
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE* | $ | 31.95 | |||||
| * | Shares redeemed or exchanged within 90 days of purchase are charged a 1.00% redemption fee. | ||||||
See Notes to Financial Statements. | 7 |
PHOCAS REAL ESTATE FUND STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2016 |
| INVESTMENT INCOME | |||||||
| Dividend income | . | $ | 477,116 | ||||
| Interest income | 459 | ||||||
| Total Investment Income | 477,575 | ||||||
| EXPENSES | |||||||
| Investment advisor fees | 87,915 | ||||||
| Fund services fees | 94,400 | ||||||
| Custodian fees | 5,000 | ||||||
| Registration fees | 2,043 | ||||||
| Professional fees | 43,329 | ||||||
| Trustees' fees and expenses | 2,852 | ||||||
| Miscellaneous expenses | 18,926 | ||||||
| Total Expenses | 254,465 | ||||||
| Fees waived and expenses reimbursed | (78,634 | ) | |||||
| Net Expenses | 175,831 | ||||||
| NET INVESTMENT INCOME | 301,744 | ||||||
| NET REALIZED AND UNREALIZED GAIN (LOSS) | |||||||
| Net realized gain on investments | 25,119 | ||||||
| Net change in unrealized appreciation (depreciation) on investments | 527,384 | ||||||
| NET REALIZED AND UNREALIZED GAIN | 552,503 | ||||||
| INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 854,247 | |||||
See Notes to Financial Statements. | 8 |
PHOCAS REAL ESTATE FUND STATEMENTS OF CHANGES IN NET ASSETS |
| For the Year Ended December 31, 2016 | For the Year Ended December 31, 2015 | ||||||||||
| OPERATIONS | |||||||||||
| Net investment income | $ | 301,744 | $ | 197,900 | |||||||
| Net realized gain | 25,119 | 710,194 | |||||||||
| Net change in unrealized appreciation (depreciation) | 527,384 | (791,734 | ) | ||||||||
| Increase in Net Assets Resulting from Operations | 854,247 | 116,360 | |||||||||
| DISTRIBUTIONS TO SHAREHOLDERS FROM | |||||||||||
| Net investment income | (133,353 | ) | (127,117 | ) | |||||||
| Net realized gain | (482,261 | ) | (436,973 | ) | |||||||
| Total Distributions to Shareholders | (615,614 | ) | (564,090 | ) | |||||||
| CAPITAL SHARE TRANSACTIONS | |||||||||||
| Sale of shares | 1,686,936 | 1,983,740 | |||||||||
| Reinvestment of distributions | 615,614 | 564,090 | |||||||||
| Redemption of shares | (1,171,733 | ) | (1,830,078 | ) | |||||||
| Increase in Net Assets from Capital Share Transactions | 1,130,817 | 717,752 | |||||||||
| Increase in Net Assets | 1,369,450 | 270,022 | |||||||||
| NET ASSETS | |||||||||||
| Beginning of Year | 11,051,670 | 10,781,648 | |||||||||
| End of Year | $ | 12,421,120 | $ | 11,051,670 | |||||||
| SHARE TRANSACTIONS | |||||||||||
| Sale of shares | 51,662 | 60,274 | |||||||||
| Reinvestment of distributions | 19,647 | 18,158 | |||||||||
| Redemption of shares | (36,450 | ) | (56,878 | ) | |||||||
| Increase in Shares | 34,859 | 21,554 | |||||||||
See Notes to Financial Statements. | 9 |
PHOCAS REAL ESTATE FUND FINANCIAL HIGHLIGHTS |
| These financial highlights reflect selected data for a share outstanding throughout each year. | |||||||||||||||||||||||||||||||||||||
| For the Years Ended Decemer 31, | |||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||
| NET ASSET VALUE, Beginning | |||||||||||||||||||||||||||||||||||||
| of Year | $ | 31.23 | $ | 32.44 | $ | 24.66 | $ | 23.30 | $ | 20.13 | |||||||||||||||||||||||||||
| INVESTMENT OPERATIONS | |||||||||||||||||||||||||||||||||||||
| Net investment income | 0.83 | (a) | 0.57 | (a) | 0.45 | (a) | 0.46 | (a) | 0.13 | ||||||||||||||||||||||||||||
Net realized and unrealized gain (loss) | 1.51 | (0.18 | ) | 7.35 | 1.09 | 3.23 | |||||||||||||||||||||||||||||||
Total from Investment Operations | 2.34 | 0.39 | 7.80 | 1.55 | 3.36 | ||||||||||||||||||||||||||||||||
| DISTRIBUTIONS TO | |||||||||||||||||||||||||||||||||||||
| SHAREHOLDERS FROM | |||||||||||||||||||||||||||||||||||||
| Net investment income | (0.35 | ) | (0.36 | ) | (0.02 | ) | (0.19 | ) | (0.19 | ) | |||||||||||||||||||||||||||
| Net realized gain | (1.27 | ) | (1.24 | ) | — | — | — | ||||||||||||||||||||||||||||||
| Total Distributions to Shareholders | (1.62 | ) | (1.60 | ) | (0.02 | ) | (0.19 | ) | (0.19 | ) | |||||||||||||||||||||||||||
| NET ASSET VALUE, End of Year | $ | 31.95 | $ | 31.23 | $ | 32.44 | $ | 24.66 | $ | 23.30 | |||||||||||||||||||||||||||
| TOTAL RETURN | 7.64 | % | 1.28 | % | 31.65 | % | 6.64 | % | 16.70 | % | |||||||||||||||||||||||||||
| RATIOS/SUPPLEMENTARY DATA | |||||||||||||||||||||||||||||||||||||
| Net Assets at End of | |||||||||||||||||||||||||||||||||||||
| Year (000's omitted) | $12,421 | $11,052 | $10,782 | $7,492 | $5,092 | ||||||||||||||||||||||||||||||||
| Ratios to Average Net Assets: | |||||||||||||||||||||||||||||||||||||
| Net investment income | 2.57 | % | 1.75 | % | 1.59 | % | 1.83 | % | 0.61 | % | |||||||||||||||||||||||||||
| Net expenses | 1.50 | % | 1.50 | % | 1.50 | % | 1.50 | % | 1.50 | % | |||||||||||||||||||||||||||
| Gross expenses (b) | 2.17 | % | 2.30 | % | 2.93 | % | 3.85 | % | 4.19 | % | |||||||||||||||||||||||||||
| PORTFOLIO TURNOVER RATE | 26 | % | 30 | % | 18 | % | 29 | % | 35 | % | |||||||||||||||||||||||||||
| (a) | Calculated based on average shares outstanding during each year. | ||||||||||||||||||||||||||||||||||||
| (b) | Reflects the expense ratio excluding any waivers and/or reimbursements. | ||||||||||||||||||||||||||||||||||||
See Notes to Financial Statements. | 10 |
PHOCAS REAL ESTATE FUND NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 |
Note 1. Organization
The Phocas Real Estate Fund (the "Fund") is a non-diversified portfolio of Forum Funds II (the "Trust"). The Trust is a Delaware statutory trust that is registered as an open-end, management investment company under the Investment Company Act of 1940, as amended (the "Act"). Under its Trust Instrument, the Trust is authorized to issue an unlimited number of the Fund's shares of beneficial interest without par value. The Fund commenced operations on September 29, 2006. The Fund seeks long-term total investment return through a combination of capital appreciation and current income.
On July 19, 2013, at a Special Meeting of Shareholders of the Phocas Real Estate Fund (the "Predecessor Fund"), a series of the Advisor Series Trust, the shareholders approved a proposal to reorganize the Predecessor Fund into the Fund, a newly created series of the Trust. The Fund is designed to be substantially similar from an investment perspective to the Predecessor Fund, and is managed by the same investment advisor. As a result of the reorganization, the Fund is now operating under the supervision of a different board of trustees. On August 1, 2013, the shares of the Predecessor Fund were, in effect, exchanged on a tax-free basis for shares of the Fund with the same aggregate value. No sales load, commission or other transactional fees were imposed on shareholders in connection with the tax-free exchange of their shares.
Note 2. Summary of Significant Accounting Policies
The Fund is an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946, "Financial Services-Investment Companies". These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of increases and decreases in net assets from operations during the fiscal year. Actual amounts could differ from those estimates. The following summarizes the significant accounting policies of the Fund:
Security Valuation – Securities are valued at market prices using the last quoted trade or official closing price from the principal exchange where the security is traded, as provided by independent pricing services on each Fund business day. In the absence of a last trade, securities are valued at the mean of the last bid and ask price provided by the pricing service. Shares of non-exchange traded open-end mutual funds are valued at net asset value ("NAV"). Short-term investments that mature in 60 days or less may be valued at amortized cost.
The Fund values its investments at fair value pursuant to procedures adopted by the Trust's Board of Trustees (the "Board") if (1) market quotations are insufficient or not readily available or (2) the Fund believes that the values available are unreliable. The Trust's Valuation Committee, as defined in the Fund's registration statement, performs certain functions as they relate to the administration and oversight of the Fund's valuation procedures. Under these procedures, the Valuation Committee convenes on a regular and ad-hoc basis to review such investments and considers a number of factors, including valuation methodologies and significant unobservable inputs, when arriving at fair value.
The Valuation Committee may work with the Advisor, as defined in Note 4, to provide valuation inputs. In determining fair valuations, inputs may include market-based analytics which may consider related or comparable assets or liabilities, recent transactions, market multiples, book values and other relevant investment information. Advisor inputs may include an income-based approach in which the anticipated future cash flows of the investment are discounted in determining fair value. Discounts may also be applied based on the nature or duration of any restrictions on the disposition of the investments. The Valuation Committee performs regular reviews of valuation methodologies, key inputs and assumptions, disposition analysis and market activity.
Fair valuation is based on subjective factors and, as a result, the fair value price of an investment may differ from the security's market price and may not be the price at which the asset may be sold. Fair valuation could result in a different NAV than a NAV determined by using market quotes.
The Fund has a three-tier fair value hierarchy. The basis of the tiers is dependent upon the various "inputs" used to determine the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1 — quoted prices in active markets for identical assets and liabilities
Level 2 — other significant observable inputs (including quoted prices of similar securities, interest rates, prepayment speeds, credit risk, etc.)
PHOCAS REAL ESTATE FUND NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 |
Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments)
The aggregate value by input level, as of December 31, 2016, for the Fund's investments is included at the end of the Fund's Schedule of Investments.
Security Transactions, Investment Income and Realized Gain and Loss – Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as possible after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. Income and capital gains on some foreign securities may be subject to foreign withholding taxes, which are accrued as applicable. Interest income is recorded on an accrual basis. Premium is amortized and discount is accreted using the effective interest method. Identified cost of investments sold is used to determine the gain and loss for both financial statement and federal income tax purposes.
Distributions to Shareholders – Distributions to shareholders of net investment income, if any, are declared and paid at least annually. Distributions to shareholders of net capital gains, if any, are declared and paid at least annually. Distributions to shareholders are recorded on the ex-dividend date. Distributions are based on amounts calculated in accordance with applicable federal income tax regulations, which may differ from GAAP. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Fund, timing differences and differing characterizations of distributions made by the Fund.
Federal Taxes – The Fund intends to continue to qualify each year as a regulated investment company under Subchapter M of Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended ("Code"), and to distribute all of its taxable income to shareholders. In addition, by distributing in each calendar year substantially all of its net investment income and capital gains, if any, the Fund will not be subject to a federal excise tax. Therefore, no federal income or excise tax provision is required. The Fund files a U.S. federal income and excise tax return as required. The Fund's federal income tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. As of December 31, 2016, there are no uncertain tax positions that would require financial statement recognition, de-recognition or disclosure.
REITs – The Fund has made certain investments in real estate investment trusts ("REITs") which pay dividends to their shareholders based upon funds available from operations. It is quite common for these dividends to exceed the REIT's taxable earnings and profits resulting in the excess portion of such dividends being designated as a return of capital. The Fund may include the gross dividends from such REITs in income or may utilize estimates of any potential REIT dividend reclassifications in the Fund's annual distributions to shareholders and, accordingly, a portion of the Fund's distributions may be designated as a return of capital, require reclassification, or be under distributed on an excise basis and subject to excise tax.
Income and Expense Allocation – The Trust accounts separately for the assets, liabilities and operations of each of its investment portfolios. Expenses that are directly attributable to more than one investment portfolio are allocated among the respective investment portfolios in an equitable manner.
Redemption Fees – A shareholder who redeems or exchanges shares within 90 days of purchase will incur a redemption fee of 1.00% of the current NAV of shares redeemed or exchanged, subject to certain limitations. The fee is charged for the benefit of the remaining shareholders and will be paid to the Fund to help offset transaction costs. The fee is accounted for as an addition to paid-in capital. The Fund reserves the right to modify the terms of or terminate the fee at any time. There are limited exceptions to the imposition of the redemption fee. Redemption fees incurred for the Fund, if any, are reflected on the Statements of Changes in Net Assets.
Commitments and Contingencies – In the normal course of business, the Fund enters into contracts that provide general indemnifications by the Fund to the counterparty to the contract. The Fund's maximum exposure under these arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated; however, based on experience, the risk of loss from such claims is considered remote.
Note 3. Cash – Concentration in Uninsured Account
For cash management purposes the Fund may concentrate cash with the Fund's custodian. This typically results in cash balances exceeding the Federal Deposit Insurance Corporation ("FDIC") insurance limits. As of December 31, 2016, The Fund held $101,340 as cash reserves at MUFG Union Bank, N.A. that exceeded the FDIC insurance limit.
PHOCAS REAL ESTATE FUND NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 |
Note 4. Fees and Expenses
Investment Advisor – Phocas Financial Corporation (the "Advisor") is the investment advisor to the Fund. Pursuant to an investment advisory agreement, the Advisor receives an advisory fee, payable monthly, from the Fund at an annual rate of 0.75% of the Fund's average daily net assets.
Distribution – Foreside Fund Services, LLC serves as the Fund's distributor (the "Distributor"). The Fund has adopted a Distribution Plan (the "Plan") in accordance with Rule 12b-1 of the Act. Under the Plan, the Fund may pay the Distributor and/or any other entity as authorized by the Board a fee of up to 0.25% of the Fund's average daily net assets for providing distribution and/or shareholder services to the Fund. The Distributor is not affiliated with the Advisor or Atlantic Fund Administration, LLC (d/b/a Atlantic Fund Services) ("Atlantic") or their affiliates.
Other Service Providers – Atlantic provides fund accounting, fund administration, compliance and transfer agency services to the Fund. The fees related to these services are included in Fund services fees within the Statement of Operations. Atlantic also provides certain shareholder report production and EDGAR conversion and filing services. Pursuant to an Atlantic services agreement, the Fund pays Atlantic customary fees for its services. Atlantic provides a Principal Executive Officer, a Principal Financial Officer, a Chief Compliance Officer and an Anti-Money Laundering Officer to the Fund, as well as certain additional compliance support functions.
Trustees and Officers – The Trust pays each Independent Trustee an annual fee of $16,000 ($21,000 for the Chairman) for service to the Trust. The Independent Trustees and Chairman may receive additional fees for special Board meetings. The Independent Trustees are also reimbursed for all reasonable out-of-pocket expenses incurred in connection with their duties as Trustees, including travel and related expenses incurred in attending Board meetings. The amount of Independent Trustees' fees attributable to the Fund is disclosed in the Statement of Operations. Certain officers of the Trust are also officers or employees of the above named service providers, and during their terms of office received no compensation from the Fund.
Note 5. Expenses Reimbursed and Fees Waived
The Advisor has contractually agreed to waive its fee and/or reimburse certain expenses to limit total operating expenses (excluding all taxes, interest, portfolio transaction expenses, acquired fund fees and expenses, proxy expenses and extraordinary expenses) to 1.50% through April 30, 2017. Other fund service providers have voluntarily agreed to waive and reimburse a portion of their fees. These voluntary fee waivers and reimbursements may be reduced or eliminated at any time. For the year ended December 31, 2016, fees waived and expenses reimbursed were as follows:
| Investment Advisor Fees Waived | Other Waivers | Total Fees Waived | |||||
| $ | 62,634 | $ | 16,000 | $ | 78,634 | ||
The Fund may repay the Advisor for fees waived and expenses reimbursed pursuant to the expense cap if such payment is made within three years of the fee waiver or expense reimbursement and the resulting expenses do not exceed the lesser of (i) the then-current expense cap, or (ii) the expense cap in place at the time the fees/expenses were waived/reimbursed. As of December 31, 2016, $253,318 is subject to recapture by the Advisor.
Note 6. Security Transactions
The cost of purchases and proceeds from sales of investment securities (including maturities), other than short-term investments during the year ended December 31, 2016, were $3,665,175 and $2,930,963, respectively.
Note 7. Federal Income Tax
Distributions paid during the fiscal years ended as noted were characterized for tax purposes as follows:
| 2016 | 2015 | |||||
| Ordinary Income | $ | 78,381 | $ | 124,023 | ||
| Long-Term Capital Gain | 537,233 | 440,067 | ||||
| $ | 615,614 | $ | 564,090 | |||
13 |
PHOCAS REAL ESTATE FUND NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 |
As of December 31, 2016, distributable earnings (accumulated loss) on a tax basis were as follows:
| Undistributed Long-Term Gain | $ | 106,113 | ||
| Unrealized Appreciation | 3,250,274 | |||
| Total | $ | 3,356,387 |
The difference between components of distributable earnings on a tax basis and the amounts reflected in the Statement of Assets and Liabilities are primarily due to wash sales and differences between book and tax treatment on distributions from REITs.
On the Statement of Assets and Liabilities, as a result of permanent book to tax differences, certain amounts have been reclassified for the year ended December 31, 2016. The following reclassification was the result of REIT adjustments, non-deductible excise tax paid, and distribution reclassifications and has no impact on the net assets of the Fund.
| Undistributed Net Investment Income (Loss) | $ | (168,391 | ) | |
| Accumulated Net Realized Gain (Loss) | 168,510 | |||
| Paid-in-Capital | (119 | ) |
Note 8. Recent Accounting Pronouncements
In October 2016, the U.S. Securities and Exchange Commission ("SEC") issued a new rule, Investment Company Reporting Modernization, which, among other provisions, amends Regulation S-X to require standardized, enhanced disclosures, particularly related to derivatives, in investment company financial statements. Compliance with the amendments to Regulation S-X is required for financial statements filed with the SEC on or after August 1, 2017. Management is currently evaluating the impact that the amendments will have on the Fund's financial statements and related disclosures.
Note 9. Subsequent Events
Subsequent events occurring after the date of this report through the date these financial statements were issued have been evaluated for potential impact, and the Fund has had no such events.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTNIG FIRM |
To the Board of Trustees of Forum Funds II and the Shareholders of Phocas Real Estate Fund
We have audited the accompanying statement of assets and liabilities of Phocas Real Estate Fund, a series of shares of beneficial interest in Forum Funds II, (the "Fund") including the schedule of investments, as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the four-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended December 31, 2012 were audited by other auditors whose report dated March 1, 2013 expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2016 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Phocas Real Estate Fund as of December 31, 2016, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and its financial highlights for each of the years in the four-year period then ended, in conformity with accounting principles generally accepted in the United States of America.
BBD, LLP
Philadelphia, Pennsylvania
February 23, 2017
15 |
PHOCAS REAL ESTATE FUND ADDITIONAL INFORMATION (Unaudited) DECEMBER 31, 2016 |
Proxy Voting Information
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling (866) 746-2271 and on the U.S. Securities and Exchange Commission's (the "SEC") website at www.sec.gov. The Fund's proxy voting record for the most recent twelve-month period ended June 30 is available, without charge and upon request, by calling (866) 746-2271 and on the SEC's website at www.sec.gov.
Availability of Quarterly Portfolio Schedules
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. These filings are available, without charge and upon request on the SEC's website at www.sec.gov or may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.
Shareholder Expense Example
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees, 12b-1 fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund, and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2016, through December 31, 2016.
Actual Expenses – The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during the period.
Hypothetical Example for Comparison Purposes – The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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 redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning | Ending | Expenses | Annualized | ||||||||
| Account Value | Account Value | Paid During | Expense | ||||||||
| July 1, 2016 | December 31, 2016 | Period* | Ratio* | ||||||||
| Actual | $ | 1,000.00 | $ | 981.76 | $ | 7.47 | 1.50 | % | |||
| Hypothetical (5% return before expenses) | $ | 1,000.00 | $ | 1,017.60 | $ | 7.61 | 1.50 | % | |||
| * | Expenses are equal to the Fund's annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184) divided by 366 to reflect the half-year period. |
Federal Tax Status of Dividends Declared during the Fiscal Year
For federal income tax purposes, dividends from short-term capital gains are classified as ordinary income. The Fund designates 0.18% as qualified interest income exempt from U.S. tax for foreign shareholders (QII).
PHOCAS REAL ESTATE FUND ADDITIONAL INFORMATION (Unaudited) DECEMBER 31, 2016 |
Trustees and Officers of the Trust
The Board is responsible for oversight of the management of the Trust's business affairs and of the exercise of all the Trust's powers except those reserved for the shareholders. The following table provides information about each Trustee and certain officers of the Trust. Each Trustee and officer holds office until the person resigns, is removed, or is replaced. Unless otherwise noted, the persons have held their principal occupations for more than five years. The address for all Trustees and officers is Three Canal Plaza, Suite 600, Portland, Maine 04101. Mr. Keffer and Mr. Hong are considered Interested Trustees due to their affiliation with Atlantic. The Fund's Statement of Additional Information includes additional information about the Trustees and is available, without charge and upon request, by calling (866) 746-2271.
PHOCAS REAL ESTATE FUND ADDITIONAL INFORMATION (Unaudited) DECEMBER 31, 2016 |
| Name and Year of Birth | Position(s) with the Trust | Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Series of Fund Complex¹ Overseen by Trustee | Other Directorships Held by Trustee |
Geoffrey Ney Born: 1975 | Vice President | Since 2013 | Manager, Atlantic since 2013; Senior Fund Accountant, Atlantic, 2008-2013. | N/A | N/A |
Todd Proulx Born: 1978 | Vice President | Since 2013 | Manager, Atlantic since 2013; Senior Fund Accountant, Atlantic, 2008-2013. | N/A | N/A |
Carlyn Edgar Born: 1963 | Chief Compliance Officer | Since 2013 | Senior Vice President, Atlantic since 2008. | N/A | N/A |
1The Fund Complex includes the Trust, Forum Funds, Forum ETF Trust and U.S. Global Investors Funds and is overseen by different Boards of Trustees. | |||||
18 |
PHOCAS REAL ESTATE FUND
FOR MORE INFORMATION:
P.O. Box 588
Portland, ME 04112
(866) 746-2271 (toll free)
INVESTMENT ADVISOR
Phocas Financial Corporation
980 Atlantic Avenue, Suite 106
Alameda, CA 94501
TRANSFER AGENT
Atlantic Fund Services
P.O. Box 588
Portland, ME 04112
www.atlanticfundservices.com
DISTRIBUTOR
Foreside Fund Services, LLC
Three Canal Plaza, Suite 100
Portland, Maine 04101
www.foreside.com
This report is submitted for the general information of the shareholders of the Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus, which includes information regarding the Fund's risks, objectives, fees and expenses, experience of its management, and other information.
215-ANR-1216
ITEM 2. CODE OF ETHICS.
| (a) | As of the end of the period covered by this report, Forum Funds II (the "Registrant") has adopted a code of ethics, which applies to its Principal Executive Officer and Principal Financial Officer (the "Code of Ethics"). |
| (c) | There have been no amendments to the Registrant's Code of Ethics during the period covered by this report. |
(d) There have been no waivers to the Registrant's Code of Ethics during the period covered by this report.
(e) Not applicable.
(f) (1) A copy of the Code of Ethics is being filed under Item 12(a) hereto.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees has determined that Mr. Mark Moyer is an "audit committee financial expert" as that term is defined under applicable regulatory guidelines. Mr. Moyer is a non- "interested" Trustee (as defined in Section 2(a)(19) under the Investment Company Act of 1940, as amended (the "Act")), and serves as Chairman of the Audit Committee.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees - The aggregate fees billed for each of the last two fiscal years (the "Reporting Periods") 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 principal accountant in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $12,900 in 2015 and $13,400 in 2016.
(b) Audit-Related Fees – The aggregate fees billed in the Reporting Periods for assurance and related services rendered by the principal accountant that were reasonably related to the performance of the audit of the Registrant's financial statements and are not reported under paragraph (a) of this Item 4 were $0 in 2015 and $0 in 2016.
(c) Tax Fees - The aggregate fees billed in the Reporting Periods for professional services rendered by the principal accountant to the Registrant for tax compliance, tax advice and tax planning were $3,000 in 2015 and $3,000 in 2016. These services consisted of review or preparation of U.S. federal, state, local and excise tax returns.
(d) All Other Fees - The aggregate fees billed in the Reporting Periods for products and services provided by the principal accountant to the Registrant, other than the services reported in paragraphs (a) through (c) of this Item, were $0 in 2015 and $0 in 2016.
(e) (1) The Audit Committee reviews and approves in advance all audit and "permissible non-audit services" (as that term is defined by the rules and regulations of the Securities and Exchange Commission) to be rendered to a series of the Registrant (each, a "Series"). In addition, the Audit Committee reviews and approves in advance all "permissible non-audit services" to be provided to an investment adviser (not including any sub-adviser) of a Series, or an affiliate of such investment adviser, that is controlling, controlled by or under common control with the investment adviser and provides on-going services to the Registrant ("Affiliate"), by the Series' principal accountant if the engagement relates directly to the operations and financial reporting of the Series. The Audit Committee considers whether fees paid by a Series' investment adviser or an Affiliate to the Series' principal accountant for audit and permissible non-audit services are consistent with the principal accountant's independence.
(e) (2) No services included in (b) - (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable
(g) The aggregate non-audit fees billed by the principal accountant for services rendered to the Registrant for the Reporting Periods were $0 in 2015 and $0 in 2016. There were no fees billed in either of the Reporting Periods for non-audit services rendered by the principal accountant to the Registrant's investment adviser or any Affiliate.
(h) During the Reporting Period, the Registrant's principal accountant provided no non-audit services to the investment advisers or any entity controlling, controlled by or under common control with the investment advisers to the series of the Registrant to which this report relates.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. INVESTMENTS.
| (a) | Included as part of report to shareholders under Item 1. |
| (b) | Not applicable. |
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant does not accept nominees to the board of trustees from shareholders.
ITEM 11. CONTROLS AND PROCEDURES
(a) The Registrant's Principal Executive Officer and Principal Financial Officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Act are effective, based on their evaluation of the controls and procedures required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as of a date within 90 days of the filing date of this report.
(b) There were no changes in the Registrant's internal control over financial reporting (as defined in
Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of 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.
(a)(1) Code of Ethics (Exhibit filed herewith).
(a)(2) Certifications pursuant to Rule 30a-2(a) of the Act, and Section 302 of the Sarbanes-Oxley Act of 2002. (Exhibits filed herewith)
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) of the Act, and Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit 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.
Registrant Forum Funds II
| By | /s/ Jessica Chase | |
| Jessica Chase, Principal Executive Officer | ||
| Date | February 15, 2017 |
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.
| By | /s/ Jessica Chase | |
| Jessica Chase, Principal Executive Officer | ||
| Date | February 15, 2017 |
| By | /s/ Karen Shaw | |
| Karen Shaw, Principal Financial Officer | ||
| Date | February 15, 2017 |