This report and the financial statements contained herein are submitted for the general information of the shareholders of the Modern Capital Tactical Opportunities Fund (the “Fund”). The Fund’s shares are not deposits or obligations of, or guaranteed by, any depository institution. The Fund’s shares are not insured by the FDIC, Federal Reserve Board or any other agency, and are subject to investment risks, including possible loss of principal amount invested. Neither the Fund nor the Fund’s distributor is a bank.
The Modern Capital Tactical Opportunities Fund is distributed by Capital Investment Group, Inc., Member FINRA/SIPC, 100 E. Six Forks Road, Suite 200, Raleigh, NC, 27609. There is no affiliation between the Fund, including its principals, and Capital Investment Group, Inc.
1. Organization and Significant Accounting Policies
The Modern Capital Tactical Opportunities Fund (the “Fund”) is a series of the Modern Capital Fund Trust (the “Trust”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (“1940 Act”), as an open-end management investment company. The Fund is a separate, non-diversified series of the Trust.
The investment objective of the Fund is to seek to provide income and capital gains. The Fund seeks to achieve its investment objective by tactically investing long or short primarily in domestic or foreign common stocks and debt instruments using its “tactical” investment strategy by investing in these asset classes directly or through publicly traded closed-end funds, exchange-traded funds (“ETFs”), and sponsored American Depositary Receipts (“ADRs”). The Fund seeks income from interest payments and dividends; and seeks capital gains through short-term trading strategies. The Fund may invest without restriction as to issuer capitalization, currency, or country. However, it focuses primarily on issuers in the $100 million to $10 billion range and generally limits emerging market exposure to 20% of portfolio assets.
The Fund currently has an unlimited number of authorized shares, which are divided into two classes – Class A Shares and Class ADV Shares. Each class of shares has equal rights to assets of the Fund, and the classes are identical except for differences sales loads.
The Class A Shares and Class ADV Shares are subject to distribution plan fees as described in Note 4. The Fund’s Class A Shares are sold with an initial sales charge of 5.00%. Income, expenses (other than distribution and service fees), and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Both classes have equal voting privileges, except where otherwise required by law or when the Trustees determine that the matter to be voted on affects only the interests of the shareholders of a particular class.
The following is a summary of significant accounting policies consistently followed by the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Fund follows the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 946 “Financial Services – Investment Companies,” and Financial Accounting Standards Update (“ASU”) 2013-08.
Investment Valuation
The Fund’s investments in securities are carried at fair value. Securities listed on an exchange or quoted on a national market system are valued at the last sales price as of 4:00 p.m. Eastern Time. Securities traded in the NASDAQ over-the-counter market are generally valued at the NASDAQ Official Closing Price. Other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value. Securities and assets for which representative market quotations are not readily available (e.g., (i) an exchange-traded portfolio security is so thinly traded that there have been no transactions for that security over an extended period of time or the validity of a market quotation received is questionable; (ii) the exchange on which the portfolio security is principally traded closes early; or (iii) trading of the portfolio security is halted during the day and does not resume prior to the Fund’s NAV calculation) or which cannot be accurately valued using the Fund’s normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Trustees. A security’s “fair value” price may differ from the price next available for that security using the Fund’s normal pricing procedures.
Fair Value Measurement
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1: quoted prices in active markets for identical securities
Level 2: other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)
Level 3: significant unobservable inputs (including the Fund’s own assumptions in determining fair value of investments)
| Modern Capital Tactical Opportunities Fund |
|
Notes to Financial Statements (Unaudited) |
|
| As of September 30, 2021 |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following table summarizes the inputs as of September 30, 2021 for the Fund’s assets measured at fair value:
| Sector Rotation Fund | | |
| Investments in Securities (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | |
| Closed-End Funds | $ | 3,428,822 | $ | 3,428,822 | $ | - | $ | - |
| Common Stocks * | | 831,507 | | 831,507 | | - | | - |
| Exchange-Traded Product* | | 60,071 | | 60,071 | | - | | - |
| Master Limited Partnership* | | 72,300 | | - | | 72,300 | | - |
| Grantor Trusts* | | 641,783 | | - | | 641,783 | | - |
| Short-Term Investment | | 2,606,603 | | 2,606,603 | | - | | - |
| Total | $ | 7,641,086 | $ | 6,927,003 | $ | 714,083 | $ | - |
| | | | | | | | | |
| (a) | The Fund had no Level 3 holdings during the initial period ended September 30, 2021. |
*Refer to Schedule of Investments for breakdown by Industry.
Investment Transactions and Investment Income
Investment transactions are accounted for as of the date purchased or sold (trade date). Dividend income is recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded as soon as the Fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums using the effective interest method. Gains and losses are determined on the identified cost basis, which is the same basis used for federal income tax purposes.
Expenses
The Fund is responsible for all expenses incurred specifically on its behalf as well as a portion of Trust level expenses, which are allocated according to methods reviewed annually by the Trustees.
Distributions
The Fund may declare and distribute dividends from net investment income (if any) annually. Distributions from capital gains (if any) are generally declared and distributed annually. Dividends and distributions to shareholders are recorded on ex-date.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in the net assets from operations during the reported period. Actual results could differ from those estimates.
| Modern Capital Tactical Opportunities Fund |
|
Notes to Financial Statements (Unaudited) |
|
| As of September 30, 2021 |
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as the Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Internal Revenue Code applicable to regulated investment companies.
| 2. | Transactions with Related Parties and Service Providers |
Advisor
The Fund pays a monthly fee to Modern Capital Management Co. (the “Advisor”) calculated at the annual rate of 0.60% of the Fund’s average daily net assets.
The Advisor has entered into a contractual agreement (the “Expense Limitation Agreement”) with the Trust, on behalf of the Fund, under which it has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in amounts that limit the Fund’s total operating expenses (exclusive of any (i) front-end or contingent deferred loads; (ii) brokerage fees and commissions, (iii) acquired fund fees and expenses; (iv) borrowing costs (such as interest and dividend expense on securities sold short); (v) taxes; (vi) specialized pricing services and (vii) extraordinary expenses, such as litigation expenses (which may include indemnification of Trust officers and Trustees, contractual indemnification of fund service providers (other than the Advisor))to not more than 0.90%. The Expense Limitation Agreement runs through March 31, 2022 and may be terminated by the Board at any time. The Advisor may not terminate the Agreement without consent of the Board. The Advisor will be permitted to recover fees and expenses it has borne, within three years after the fees were waived or expenses reimbursed, only to the extent that the Fund’s expenses do not exceed the lesser of (1) the expense limit in effect at the time the Advisor waives or limits the fees and (2) the expense limit in effect at the time the Advisor recovers fees.
For the period April 5, 2021 (Commencement of Operations) through September 30, 2021, $3,548 in advisory fees were incurred by the Fund, all of which were waived by the Advisor, and $125,828 of expenses were reimbursed to the Fund by the Advisor.
Administrator
The Fund pays a monthly fee to The Nottingham Company (the “Administrator”) based upon the average daily net assets of the Fund and calculated at the annual rates shown in the schedule below subject to a minimum of $2,000 per month. The Administrator also receives a fee as to procure and pay the Fund’s custodian, as additional compensation for fund accounting and recordkeeping services, and additional compensation for certain costs involved with the daily valuation of securities and as reimbursement for out-of-pocket expenses. The Administrator also receives a miscellaneous compensation fee for peer group, comparative analysis, and compliance support totaling $625 per month. For the period April 5, 2021 (Commencement of Operations) through September 30, 2021, the Administrator received $3,759 in miscellaneous reporting expenses.
A breakdown of the fees is provided in the following table:
| Administration Fees* | Custody Fees* | Fund Accounting Fees (minimum monthly) | Fund Accounting Fees (asset- based fee) | Blue Sky Administration Fees (annual) |
Average Net Assets | Annual Rate | Average Net Assets | Annual Rate |
| First $250 million | 0.100% | First $200 million
| 0.020%
| $2,250 | 0.01% | $150 per state |
| Next $250 million | 0.080% | Over $200 million
| 0.009%
| | | |
| Next $250 million | 0.060% | | | | | |
| Next $250 million | 0.050% | *Minimum monthly fees of $2,000 and $417 for Administration and Custody, respectively. |
| Next $1 billion | 0.040% |
| Over $2 billion | 0.035% |
| Modern Capital Tactical Opportunities Fund |
|
Notes to Financial Statements (Unaudited) |
|
| As of September 30, 2021 |
The Fund incurred $15,750 in administration fees, $6,917 in custody fees, and $18,973 in fund accounting fees for the period from April 5, 2021 (Commencement of Operations) through September 30, 2021.
Compliance Services
Cipperman Compliance Services, LLC provides services as the Trust’s Chief Compliance Officer. Cipperman Compliance Services, LLC is entitled to receive customary fees from the Fund for their services pursuant to the Compliance Services agreement with the Fund. The Fund incurred $5,907 in compliance fees for the period from April 5, 2021 (Commencement of Operations) through September 30, 2021.
Transfer Agent
Nottingham Shareholder Services, LLC (“Transfer Agent”) serves as transfer, dividend paying, and shareholder servicing agent for the Fund. For its services, the Transfer Agent is entitled to receive compensation from the Fund pursuant to the Transfer Agent’s fee arrangements with the Fund. The Fund incurred $24,962 in transfer agent fees for the period from April 5, 2021 (Commencement of Operations) through September 30, 2021.
Distributor
Capital Investment Group, Inc. (the “Distributor”) serves as the Fund’s principal underwriter and distributor. The Distributor receives $6,500 per year paid in monthly installments for services provided and expenses assumed. This expense is included in the shareholder fulfillment expenses on the Statement of Operations.
3. Trustees and Officers
The Trust is governed by the Board of Trustees, which is responsible for the management and supervision of the Fund. The Trustees meet periodically throughout the year to review contractual agreements with companies that furnish services to the Fund; review performance of the Advisor and the Fund; and oversee activities of the Fund. Officers of the Trust and Trustees who are interested persons of the Trust or the Advisor will receive no salary or fees from the Trust. Each Trustee who is not an “interested person” of the Trust or the Advisor within the meaning of the 1940 Act, as amended (the “Independent Trustees”) receives $2,500 per quarter from the Fund. The Trust reimburses each Trustee and officer of the Trust for his or her travel and other expenses related to attendance of Board meetings.
Certain officers of the Trust may also be officers of the Administrator.
4. Distribution and Service Fees
The Board of Trustees, including a majority of the Independent Trustees, adopted a distribution and service plan pursuant to Rule 12b-1 of the 1940 Act (the “Plan”) for the Class A Shares and Class ADV Shares. The 1940 Act regulates the manner in which a registered investment company may assume costs of distributing and promoting the sales of its shares and servicing of its shareholder accounts. The Plan provides that the Fund may incur certain costs, which may not exceed 0.25% per annum of the average daily net assets of the Class A Shares and Class ADV Shares for each year elapsed subsequent to adoption of the Plan, for payment to the Distributor and others for items such as advertising expenses, selling expenses, commissions, travel, or other expenses reasonably intended to result in sales of Class A Shares or Class ADV Shares or servicing of Class A and Class ADV shareholder accounts. The Distribution and Service Fees of the Class A Shares and Class ADV Shares for the Fund during the initial period ended September 30, 2021 were $853 and $625, respectively.
5. Purchases and Sales of Investment Securities
For the period April 5, 2021 (Commencement of Operations) through September 30, 2021, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
| Modern Capital Tactical Opportunities Fund |
|
Notes to Financial Statements (Unaudited) |
|
| As of September 30, 2021 |
| Purchases of Securities | Proceeds from Sales of Securities |
| $14,689,305 | $9,636,851 |
There were no long-term purchases or sales of U.S Government Obligations for the period April 5, 2021 (Commencement of Operations) through September 30, 2021.
6. Risks
Active Trading Risk. Active trading of portfolio securities (commonly known as day-trading strategies) may result in added expenses, a lower return and increased tax liability. Because the Advisor engages in high turnover trading strategies that seek to leverage short term price dislocations through the duration of a trade, the Fund will have high portfolio turnover rates, which at times may be in excess of 1,000% of capital over the course of a year. Increased portfolio turnover causes the Fund to incur higher brokerage costs, which may adversely affect the Fund’s performance and may produce increased taxable distributions.
Closed-End Fund Risk. Closed-end funds are subject to investment advisory and other expenses, which will be indirectly paid by the Fund resulting in duplicative fees and expenses. As such, your cost of investing will be higher than the cost of investing directly in a closed-end fund and may be higher than other mutual funds that invest directly in stocks and bonds. Closed-end funds are also subject to management risk because the adviser to the underlying closed-end fund may be unsuccessful in meeting the fund’s investment objective. These funds may also trade at a discount or premium to their net asset value and may trade at a larger discount or smaller premium subsequent to purchase by the Fund. Since closed-end funds trade on exchanges, the Fund will also incur brokerage expenses and commissions when it buys or sells closed-end fund shares.
Equity Securities Risk. The Fund may invest in equity securities including common stocks, which include the common stock of any class or series of domestic or foreign corporations or any similar equity interest, such as a trust or partnership interest. The value of the equity securities held by the Fund may fall due to general market and economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate, or facts relating to specific companies in which the Fund invests. These investments may or may not pay dividends and may or may not carry voting rights. Common stock occupies the most junior position in a company’s capital structure.
ADR Risk. ADRs are receipts, issued by depository banks in the United States, for shares of a foreign-based company that entitle the holder to dividends and capital gains on the underlying security. ADRs may be sponsored or unsponsored. In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some or all of the depositary’s transaction fees. Under an unsponsored ADR arrangement, the foreign issuer assumes no obligations and the depositary’s transaction fees are paid directly by the ADR holders. In addition to the risks of investing in foreign securities, there is no guarantee that an ADR issuer will continue to offer a particular ADR. As a result, the Fund may have difficulty selling the ADR or selling them quickly and efficiently at the prices at which they have been valued. The issuers of unsponsored ADRs are not obligated to disclose information that is considered material in the U.S. and voting rights with respect to the deposited securities are not passed through. ADRs may not track the prices of the underlying foreign securities on which they are based, and their values may change materially at times when U.S. markets are not open for trading.
Call Risk. During periods of falling interest rates, an issuer of a callable bond held by the Fund may “call” or repay the security before its stated maturity, and the Fund may have to reinvest the proceeds at lower interest rates, resulting in a decline in the Fund’s income.
Credit Risk. There is a risk that debt issuers will not make payments on securities held by the Fund, resulting in losses to the Fund.
Cybersecurity. The computer systems, networks and devices used by the Fund and its service providers to carry out routine business operations employ a variety of protections designed to prevent damage or interruption from computer viruses, network failures, computer and telecommunication failures, infiltration by unauthorized persons and security breaches. Despite the various protections utilized by the Fund and its service providers, systems, networks, or devices potentially can be breached. The Fund and its shareholders could be negatively impacted as a result of a cybersecurity breach.
| Modern Capital Tactical Opportunities Fund |
|
Notes to Financial Statements (Unaudited) |
|
| As of September 30, 2021 |
Emerging Market Risk. Emerging market countries may have relatively unstable governments, weaker economies, and less-developed legal systems with fewer security holder rights. Emerging market economies may be based on only a few industries and security issuers may be more susceptible to economic weakness and more likely to default. Emerging market securities also tend to be less liquid.
ETF Risk. When the Fund invests in an ETF, it will indirectly bear its proportionate share of any fees and expenses payable directly by the ETF. Therefore, the Fund will incur higher expenses, many of which may be duplicative. In addition, the Fund may be affected by losses of the ETFs and the level of risk arising from the investment practices of the ETFs (such as the use of leverage by the funds). The Fund has no control over the investments and related risks taken by the ETFs in which it invests. Additionally, investments in ETFs are also subject to the following risks: (i) the market price of an ETF’s shares may trade above or below their net asset value; (ii) an active trading market for an ETF’s shares may not develop or be maintained; or (iii) trading of an ETF’s shares may be halted for a number of reasons.
Foreign and Currency Exposure Risk. Foreign markets can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from the U.S. market. The value of foreign securities is also affected by the value of the local currency relative to the U.S. dollar.
High-Yield Risk. High-yield, high-risk securities, commonly called “junk bonds,” are considered speculative. While generally providing greater income than investments in higher-quality securities, these lower-quality securities will involve greater risk of principal and income that higher-quality securities.
Interest Rate Risk. Interest rate risk is the risk that debt prices overall, including the prices of securities held by the Fund, will decline over short or even long periods of time due to rising interest rates. Debt instruments with longer maturities tend to be more sensitive to interest rates than bonds with shorter maturities. Recently, interest rates have been historically low. Current conditions may result in a rise in interest rates. As a result, for the present, interest rate risk may be heightened. 6
Leverage Risk. The use of leverage by the Fund, by borrowing money to purchase securities, will cause the Fund to incur additional expenses and magnify the Fund’s gains or losses.
Limited History of Operations Risk. The Fund is a new mutual fund and, as of the date of this prospectus, has no history of operations. Therefore, the adviser does not have a track record managing this Fund that can be evaluated by investors.
Management Risk. The Advisor’s tactical strategy may not produce the desired results. The portfolio manager’s judgments about the attractiveness, value and potential appreciation of particular asset classes, sectors or other securities in which the Fund invests may prove to be incorrect and there is no guarantee that the portfolio manager’s judgment will produce the desired results.
New Adviser Risk. The Advisor is newly registered and has not previously managed a mutual fund. Accordingly, investors in the Fund bear the risk that the Advisor’s inexperience may limit its effectiveness.
Non-Diversification Risk. Because a relatively high percentage of a non-diversified Fund’s assets may be invested in the securities of a limited number of companies that could be in the same or related economic sectors, the Fund’s portfolio may be more susceptible to any single economic, technological or regulatory occurrence than the portfolio of a diversified fund.
Security Market Risk. The value of the Fund may decrease in response to the activities and financial prospects of the securities markets generally, or an individual security in the Fund’s portfolio. Unexpected local, regional or global events, such as war; acts of terrorism; financial, political or social disruptions; natural, environmental or man-made disasters; the spread of infectious illnesses or other public health issues, climate change and climate related events; and recessions and depressions could have a significant impact on the Fund and its investments and may impair market liquidity. Such events can cause investor fear, which can adversely affect the economies of nations, regions and the market in general, in ways that cannot necessarily be foreseen. An outbreak of infectious respiratory illness known as COVID-19, which is caused by a novel coronavirus (SARS-CoV-2), was first detected in China in December 2019 and subsequently spread globally. This coronavirus has resulted in, among other things, travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, significant disruptions to business operations, market closures, cancellations and restrictions, supply chain disruptions, lower consumer demand, and significant volatility and declines in global financial markets, as well as general concern and uncertainty. The impact of COVID-19 has adversely affected, and other infectious illness outbreaks that may arise in the future could adversely affect, the economies of many nations and the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.
| Modern Capital Tactical Opportunities Fund |
|
Notes to Financial Statements (Unaudited) |
|
| As of September 30, 2021 |
Short Selling Risk. If a security sold short increases in price, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. The Fund may not be able to successfully implement its short sale strategy due to limited availability of desired securities or for other reasons.
Small and Medium (Mid) Capitalization Stock Risk. The earnings and prospects of small and mid-capitalization companies are more volatile than larger companies, they may experience higher failure rates than larger companies and normally have a lower trading volume than larger companies, which may tend to make their market price fall more disproportionately than larger companies in response to selling pressures.
Stock Value Risk. Stocks involve the risk that they may never reach what the portfolio manager believes is their full market value, either because the market fails to recognize the stock’s intrinsic worth or the manager misgauged that worth.
7. Federal Income Tax
Distributions are determined in accordance with Federal income tax regulations, which differ from GAAP, and, therefore, may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
Management reviewed the Fund’s tax positions taken or to be taken on federal income tax returns for the initial period of September 30, 2021 and determined that the Fund does not have a liability for uncertain tax positions. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period, the Fund did not incur any interest or penalties.
There were no net investment income or capital gains distributions during the period from April 5, 2021 (Commencement of Operations) through September 30, 2021.
At September 30, 2021, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | $ | 7,635,150 |
| | | |
| Unrealized Appreciation | | 75,600 |
| Unrealized Depreciation | | (69,664) |
| Net Unrealized Appreciation | $ | 5,936
|
| | | | | | |
8. Commitments and Contingencies
Under the Trust’s organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Trust entered into contracts with its service providers, on behalf of the Fund, and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. The Fund expects risk of loss to be remote.
| Modern Capital Tactical Opportunities Fund |
|
Notes to Financial Statements (Unaudited) |
|
| As of September 30, 2021 |
9. Subsequent Events
In accordance with GAAP, management has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date of issuance of these financial statements. Management has concluded there are no additional matters, other than those noted above, requiring recognition or disclosure.
| 1. | Proxy Voting Policies and Voting Record |
A copy of the Advisor’s Proxy and Corporate Action Voting Policies and Procedures is included as Appendix A to the Fund’s Statement of Additional Information and is available, without charge, upon request, by calling 800-773-3863, and on the website of the Securities and Exchange Commission (“SEC”) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available (1) without charge, upon request, by calling the Fund at the number above and (2) on the SEC’s website at http://www.sec.gov.
| 2. | Quarterly Portfolio Holdings |
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-PORT. The Fund’s Form N-PORT is available on the SEC’s website at http://www.sec.gov. You may also obtain copies without charge, upon request, by calling the Fund at 800-773-3863.
We are required to advise you within 60 days of the Fund’s fiscal year-end regarding the federal tax status of certain distributions received by shareholders during each fiscal year. The following information is provided for the Fund’s initial period from April 5, 2021 (Date of Initial Public Investment) through September 30, 2021.
During the period from April 5, 2021 (Commencement of Operations) through September 30, 2021, no income distributions and no capital gains were paid from the Fund.
Dividend and distributions received by retirement plans such as IRAs, Keogh-type plans, and 403(b) plans need not be reported as taxable income. However, many retirement plans may need this information for their annual information meeting.
| 4. | Schedule of Shareholder Expenses |
As a shareholder of the Fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the period from April 5, 2021 (Commencement of Operations) through September 30, 2021.
Actual Expenses – The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (e.g., an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes – The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Modern Capital Tactical Opportunities Fund |
|
Additional Information
(Unaudited) |
|
| As of September 30, 2021 |
| Class A Shares | Beginning Account Value April 5, 2021 | Ending Account Value September 30, 2021 | Expenses Paid During Period* |
Actual Hypothetical (5% annual return before expenses) | | | |
| $1,000.00 | $1,086.00 | $4.60 |
| $1,000.00 | $1,020.11 | $4.46 |
*Expenses are equal to the average account value over the period multiplied by the Fund’s annualized expense ratio of 0.90%, multiplied by 178/365 (to reflect the initial period).
| Class ADV Shares | Beginning Account Value June 23, 2021 | Ending Account Value September 30, 2021 | Expenses Paid During Period* |
Actual Hypothetical (5% annual return before expenses) | | | |
| $1,000.00 | $ 986.00 | $2.45 |
| $1,000.00 | $1,020.11 | $2.49 |
*Expenses are equal to the average account value over the period multiplied by the Fund’s annualized expense ratio of 0.90%, multiplied by 99/365 (to reflect the initial period).
| 5. | Approval of Investment Advisory Agreement |
The Board of Trustees (the “Board”) of Modern Capital Funds Trust (the “Trust”) met virtually at the Trust’s organizational meeting on November 16, 2020, for purposes of, among other things, considering whether it would be in the best interests of Modern Capital Tactical Opportunities Fund (the “Fund”) and its shareholders for the Board to approve a new Management Agreement (the “Agreement”) by and between the Fund and Modern Capital Management Co. (the “Advisor”).
In connection with the Board’s review of the Agreement, the Trustees of the Trust who were not “interested persons” of the Fund within the meaning of the Investment Company Act of 1940, as amended (the “1940 Act”) (collectively, the “Independent Trustees”) requested, and the Advisor provided the Board with information about a variety of matters, including, without limitation, the following information:
| • | nature, extent and quality of services to be provided by the Advisor, including background information on the qualifications and experience of key professional of the Advisor personnel that provide services to the Fund; |
| • | fees charged to and expenses of the Fund, including comparative fee and expense information for registered investment companies similar to the Fund; |
| • | costs of the services provided, and profits, if any, expected to be realized by the Advisor; |
At the November 16, 2020 meeting, the Board and the Independent Trustees determined that the Agreement was in the best interests of the Fund in light of the proposed services, personnel, expenses and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment and approved them.
To reach this determination, the Board considered its duties under the 1940 Act as well as under the general principles of state law in reviewing and approving advisory contracts; the fiduciary duty of investment advisor with respect to an advisory agreement and the receipt of investment advisory compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreement, the Independent Trustees received materials in advance of the Board meeting from the Advisor. The Board applied its business judgment to determine whether the arrangement by the Fund and Advisor is a reasonable business arrangement from the Fund’s perspective as well as from the perspective of its proposed shareholders.
| Modern Capital Tactical Opportunities Fund |
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Additional Information
(Unaudited) |
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| As of September 30, 2021 |
Nature, Extent and Quality of Services Provided by the Advisor
The Board considered the following factors to be of fundamental importance to its consideration of the nature, extent and quality of services to be provided by the Advisor: (i) background information on the qualifications and experience of the Advisor’s management and the key professional personnel that will provide services to the Fund; (ii) the proposed portfolio managers’ experience in managing quantitative strategies; and (iii) the Advisor’s marketing plan designed to grow the assets of the Fund. The Board noted that the Advisor will provide research, trade execution, operations, risk monitoring, settlement, and service provider monitoring for the Fund. The Board discussed the particular risks associated with the Advisor’s strategy, including turnover risk, and considered the Advisor’s compliance policies and procedures in place to mitigate such risks. The Board concluded that the Advisor had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to perform its duties under the Agreement and that the nature, overall quality and extent of the management services to be provided by the Advisor to the Fund were expected to be satisfactory.
Investment Performance
The Board noted that the Fund had not yet commenced operations and thus there was no Fund performance to review.
Fees and Expenses
The Board considered that the Advisor proposed a management fee equal to 0.60% of the average daily net assets of the Fund and that the fee was less than the average management fee in the Fund’s peer group, which was 1.20%, and in the lower range of management fees in the Fund’s peer group, which ranged from 0.60% to 2.00%. The Board noted that the Fund’s average expense ratio would be 0.90%, which was lower than the peer group average of 1.54%. The Board concluded that the fee to be collected by the Advisor for managing the Fund was not unreasonable.
Profitability
The Board reviewed the profitability analysis provided by the Advisor with respect to its management of the Fund. With respect to profitability, the Board noted that the Advisor expected to operate with a loss for the first year of the Fund’s operations.
Economies of Scale
The Board considered the possibility of any economies of scale in the provision of services by the Advisor if the Fund grows and whether those economies would be shared with the Fund. Such economies could be shared through breakpoints in the Advisor’s management fee or other means, such as expense caps or fee waivers. The Board noted that the assets of the Fund at its outset would be too small to meaningfully consider economies of scale and the necessity of breakpoints. The Board concluded that the current fee structure as proposed for the Fund was reasonable and that no changes were currently necessary.
Fall Out Benefits
The Board reviewed the “fallout” benefits or ancillary revenue to be received by the Advisor or an affiliated person of the Advisor in connection with the services provided to the Fund by the Advisor. The Board noted that portfolio transactions on behalf of the Fund would be placed through an affiliated person of the Advisor would be reported to the Board pursuant to Rule 17e-1 under the 1940 Act. The Board concluded that any such ancillary benefits would not be disadvantageous to the Fund’s shareholders and thus would not alter the Board’s conclusion with respect to the appropriateness of approving the Agreement.
Conclusion
It was noted that no single factor was cited as determinative to the decision of the Trustees. Rather, after weighing all of the considerations and conclusions discussed above, the entire Board, including all of the Independent Trustees, approved the Management Agreement, concluding that having the Fund receive services from the Advisor under the Agreement was in the best interest of the shareholders of the Fund and that the investment advisory fee rate was reasonable in relation to the services provided.
