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 811-03445
The Merger Fund
(Exact name of registrant as specified in charter)
100 Summit Lake Drive
Valhalla, New York 10595
(Address of principal executive offices) (Zip code)
Roy Behren and Michael T. Shannon
100 Summit Lake Drive
Valhalla, New York 10595
(Name and address of agent for service)
1-800-343-8959
Registrant's telephone number, including area code
Date of fiscal year end: December 31, 2015
Date of reporting period: December 31, 2015
Item 1. Reports to Stockholders.
December 31, 2015
THE MERGER FUND
WCM ALTERNATIVES:
EVENT-DRIVEN FUND
| | Total Firm AUM: | $5.4 billion |
| STANDARDIZED | Strategy Assets: | |
| PERFORMANCE SUMMARY | Merger Arbitrage1 | $4.9 billion |
| As of December 31, 2015 | Multi-Event2 | $560.8 million |
| | Average Annual Total Return (%) |
| Merger Arbitrage | QTD | YTD | 1 YR | 5 YR | 10 YR | Life |
| The Merger Fund | | | | | | |
| (Investor) | 1.25 | -0.82 | -0.82 | 1.88 | 3.24 | 6.32 |
| The Merger Fund | | | | | | |
| (Institutional) | 1.36 | -0.52 | -0.52 | n/a | n/a | 1.36 |
| | Annual Operating Expense Ratio (%)3 |
| | Gross | Net | Expenses Before | | |
| Merger Arbitrage | Expense | Expense | Investment Related | Performance | Fund |
| | Ratio | Ratio3 | Expenses4 | Inception | AUM |
| The Merger Fund | | | | | |
| (Investor) | 1.70% | 1.56% | 1.25% | 01/31/1989 | $3.5 b |
| The Merger Fund | | | | | |
| (Institutional) | 1.46% | 1.32% | 1.01% | 08/01/2013 | $1.2 b |
| | Average Annual Total Return (%) |
| Insurance | | | | | | |
| Dedicated Funds | QTD | YTD | 1 YR | 5 YR | 10 YR | Life |
| The Merger Fund VL | 0.95 | -0.90 | -0.90 | 1.54 | 4.61 | 4.93 |
| | Annual Operating Expense Ratio (%)3 |
| Insurance | Gross | Net | Expenses Before | | |
| Dedicated Funds | Expense | Expense | Investment Related | Performance | Fund |
| | Ratio | Ratio5 | Expenses4 | Inception | AUM |
| The Merger Fund VL | 2.82 | 1.76 | 1.40 | 05/24/2004 | $33.1 m |
| | Average Annual Total Return (%) |
| Multi-Event | QTD | YTD | 1 YR | 5 YR | 10 YR | Life |
| Event-Driven Fund | 1.52 | -2.08 | -2.08 | n/a | n/a | 0.85 |
| | Annual Operating Expense Ratio (%)3 |
| | Gross | Net | Expenses Before | | |
| Multi-Event | Expense | Expense | Investment Related | Performance | Fund |
| | Ratio | Ratio6 | Expenses4 | Inception | AUM |
| Event-Driven Fund | 4.76 | 2.47 | 1.74 | 01/02/2014 | $96.5 m |
Q4 and YTD performance are not annualized. Performance data quoted represent past performance; past performance does not guarantee future results. The performance results portrayed herein reflect the reinvestment of all interest, dividends and distributions. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by calling (800) 343-8959 or by visiting www.westchestercapitalfunds.com. Performance data included herein for periods prior to 2011 reflect that of Westchester Capital Management, Inc., the Funds’ prior investment advisor. Messrs. Behren and Shannon, the Funds’ current portfolio managers, have served as co-portfolio managers of the Funds since 2007.
1Includes USD 57 million in private funds advised by Westchester Capital Management, LLC’s affiliated invested advisor; 2Includes USD 464 million in sub- advised funds. 3Expense ratios are as of a fund’s most recent prospectus. Prospectus dates vary among funds. For The Merger Fund, expense ratios are as of March 15, 2015. The Advisor has contractually agreed to waive a portion of its management fee until December 31, 2016 if its assets exceed certain thresholds, beginning at $1.5 billion. For The Merger Fund VL, expense ratios are as of the April 30, 2015 prospectus. For the Event-Driven Fund, expense ratios are as of the March 15, 2015 prospectus. 4Investment related expenses include acquired fund fees and expenses, interest expense, borrowing expense and dividend expense on securities sold short. 5The Merger Fund VL: The Adviser has contractually agreed to waive its investment advisory fee and to reimburse the Fund for other ordinary operating expenses to the extent necessary to limit ordinary operating expenses to an amount not to exceed 1.40%. The expense limitation is expected to apply until December 31, 2016 except that it may be terminated by the Board of Trustees at any time. 6Event-Driven Fund: The Adviser has contractually agreed to waive its investment advisory fee and to reimburse the Fund for other ordinary operating expenses to the extent necessary to limit ordinary operating expenses of the institutional class of shares to an amount not to exceed 1.74%. The expense limitation is expected to apply until December 31, 2016, except that it may be terminated by the Board of Trustees at any time.
| MARKET INDICES | QTD | YTD | 1 YR | 3 YR | 5 YR | 10 YR |
| Morningstar | | | | | | |
| Category Average: | | | | | | |
| Market Neutral | -0.10% | -0.25% | -0.25% | 1.52% | 1.41% | 1.60% |
| Barclays Aggregate | | | | | | |
| Bond Index | -0.56% | 0.57% | 0.57% | 1.44% | 3.26% | 4.52% |
| MSCI World Index | 5.62% | -0.32% | -0.32% | 10.23% | 8.19% | 5.56% |
| S&P 500 Index | 7.04% | 1.38% | 1.38% | 15.13% | 12.57% | 7.31% |
| HFRX Merger | | | | | | |
| Arbitrage Index | 3.20% | 8.40% | 8.40% | 4.84% | 2.64% | 4.60% |
| HFRX Event | | | | | | |
| Driven Index | -0.60% | -6.94% | -6.94% | 0.55% | 0.49% | 0.94% |
Fellow Shareholders,
Our Funds rebounded modestly and resumed their historical run-rate during the fourth quarter, capping a remarkably messy outlier year. We are not happy absorbing only our third down year in the 26 years since inception in 1989. Our full-year performance of -0.82% for The Merger Fund (“MERFX”) and -2.08% for our Event Driven Fund (“WCEIX”) includes the Q4 bounce-back of 1.25% and 1.52% respectively, and reflects stabilization that has begun to occur in the arbitrage investment space. Our standard deviation continued to run at approximately one quarter of that of the S&P, with betas of just 0.18 (MERFX) and 0.30 (WCEIX).1
Interestingly, when the average investor considers the worst years for the stock market in general, many will reflexively cite the crash of 1987, 1989, the dotcom bubble of 2000 – and of course the 2008 financial crisis. Most casual observers would not have 2015 high on their list. On the surface, U.S. economic indicators flashed green: markets hit record highs early in the year; unemployment continued to decrease; gas prices fell, putting more cash in consumers’ wallets and borrowing costs remained accommodatingly low. More relevant to us, mergers & acquisitions (“M&A”) activity exceeded the record level set in 2007.
However, by year end the Fed had embarked upon the long-anticipated “lift-off” of interest rates, disrupting worldwide market tranquility. Energy prices continued to tumble, as did commodity prices.2 Historic volatility swings roiled securities markets as well as the mutual fund landscape late in 2015, and the average fund in nearly every category posted negative returns for the calendar year. An analysis by Societe Generale claimed that 2015 was “the hardest year to generate returns since 1937,” and we would certainly agree.3 A narrow group of stocks were higher for the year, with overall index performance hiding losses in most securities, raising the possibility that we are in the midst of a “stealth bear market.” We have managed the portfolio through previous business cycles, and during such periods we continue to refine all aspects of our investment process and hope to build upon past, and increase future, outperformance vs. our peers.
A Paradoxical year
Early year headlines bubbled with optimism as the S&P 500 Index and other major U.S. markets touched record highs in the second quarter. Transaction records were smashed in the M&A space with deal volume reaching $4.6 trillion globally, the highest on record—surpassing the $4.3 trillion executed
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1 | As of 12/31/2015 the standard deviation of The Merger Fund® was 2.72% versus 10.62% for the S&P 500 Index and 10.96% for the MSCI World Index. |
2 | The Goldman Sachs Commodity Index is down 60% from its 2008 peak as of the end of 2015. |
3 | A Most Challenging Year by Zachary Karabell, Envestnet PMC, January 11, 2016 |
in 2007. In the U.S. alone, volumes reached a record $2.3 trillion, and 58 of those transactions included mergers of $10 billion or more (see chart below, courtesy of Jefferies LLC). The pipeline backlog is promising for 2016 as well.
But as the ordinarily sleepy dog days of summer progressed, volatility arrived, and with it came significant declines in virtually all global financial markets. If one were to remove the “FANG” stocks (Facebook, Amazon, Netflix and Google) which supported the S&P 500 and NASDAQ Index, both indices would have been down for the year. As Goldman Sachs notes, “FANGs comprise 20% of the Nasdaq 100 and 5.5% of the S&P 500 yet they contributed +3.5% of performance to S&P’s overall return (or lack thereof) this year.”4 That positive contribution masked a phantom market correction in the major U.S. market indices. Even so, U.S. equity performance compares favorably to more significant losses experienced in Europe and Asia.
Bonds were no stroll in the park either. U.S. indices were down from 1% to as much as 5% depending on the subcategory, and global bonds fared considerably worse, with many emerging markets losing well more than ten percent. Credit-rating agencies downgraded 863 issuers last year, accounting for the largest number and greatest portion of ratings actions since 2009. The average spread over benchmark government yields for highly rated debt has widened to 183 basis points, the most in three years, from 118 bps in March.5 As we discussed in prior letters, rising rates and/or widening bond spreads can cause loss of principal in fixed income investments. According to Bank of America Merrill Lynch indices, investors lost 0.2% on global corporate bonds in 2015, net of interest received, snapping a string of annual gains that averaged 7.9 percent over the previous six years.
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4 | Investment Strategy by Jeffrey Saut, Raymond James, January 4, 2016 |
5 | Bloomberg, Some Trillion Dollars Later, The Corporate Debt Boom Looks Exhausted, 1-28-16 |
The Fed’s 0.25% interest-rate increase (and likely subsequent increases) should be reflected in deal spreads as we move forward, providing the potential for higher rates of returns on successful transactions. The Fed’s policy has a direct impact on short-term government debt whose yields are sensitive to changes in the fed-fund rate, as evidenced by the two-year note currently offering in excess of 1%, up from roughly 60 bps since the December increase. While we do not position our portfolio to have directional exposure to either stocks or bonds, there tends to be a correlation between the risk-free investment rate (such as treasury bills), also known as the cost of capital, and the performance of absolute-return strategies such as merger arbitrage.
Even alternative investments provided little shelter this past year. Numerous high profile hedge funds lost money this year, including sub-strategies from managed futures, to unconstrained fixed income, to multi-strategy and event-driven funds.
According to Morningstar, the average mutual fund in all major asset classes delivered negative performance on the year.6 Riskier assets, such as emerging markets securities, performed the poorest. Strikingly, none of the alternative categories escaped a negative return on the year – not even bear market funds.7
WCM YEAR AND QUARTER IN REVIEW
While acknowledging our own shortcomings, the aforementioned market and industry backdrop provides important context as we evaluate our own performance for 2015. As noted, we were largely successful in selecting high probability transactions in 2015 but are disappointed to not have achieved better returns despite the challenging market environment.
Although during the fourth quarter our funds recovered a respectable 1.25% (MERFX), 0.95% (MERVX) and 1.52% (WCEIX) from the negative performance exhibited during the market dislocations of Q3, our full year performances of -0.82%, -0.90% and -2.08% respectively were disappointing, as existing merger spreads widened out and spin-off and restructuring performance was shockingly weak. The second half of 2015 introduced a number of challenges which caused deal spreads to widen and, in hindsight, we observe that certain categories of investments, which had been consistently accretive to our performance and helpful to our risk profile in the past, have not been as successful over the recent periods of market weakness. Spin-offs, for example had been a reliable
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6 | Daily Alts, Weekend Reading 2015 Recap, Fund Flows, Fund Closures, 1-3-16 |
7 | Ibid |
source of alpha up until this year. The concrete separation of disparate businesses has usually allowed for re-valuation of the individual parts, and has dependably served to enhance value in previous years. In fact, 2015 saw 79 completed spin-offs, collectively worth $245 billion, the highest in 20 years, according to Dealogic.8
| Completed Spin-offs 2015 | | |
| Du Pont De Nemours | spin-off | Chemours |
| General Electric Co. | spin-off | Synchrony Financial |
| Ventas Inc. | spin-off | Care Capital Properties |
| Northstar Realty Finance | spin-off | Northstar Realty Europe Corp. |
| Ebay Inc. | spin-off | Paypal Holdings |
| SPX Corp. | spin-off | SPX Flow |
| Computer Sciences Corp. | spin-off | CSRA Inc. |
| Baxter International Inc. | spin-off | Baxalta Inc. |
| EnergizerHoldings Inc. | spin-off | Edgewell Personal Care Co. |
Pending Spin-offs |
| Alcoa Inc. |
| Air Products & Chemicals Inc. |
| Johnson Controls Inc. |
| Dow Chemical Co. |
| Hertz Global Holdings Inc. |
| WR Grace & Co. |
| Du Pont De Nemours |
| Yahoo |
Worth noting, however is that seven of the top ten largest U.S. spin-offs are trading below the level they opened at on their first day of regular-way trading. The worst performer in the “not top ten” is Chemours Co., spun off by DuPont. Chemours was decidedly not teflon-like (its most famous product), as the stock opened at $16 per share in July and is currently trading close to $6.
Spun-off companies and subsidiaries, separately trading as more bite-sized acquisitions, are often gobbled up by larger industry players, but most recently, that theme has only played out with Baxalta Inc., a provider of immune deficiency and hemophilia treatments, spun off from Baxter International. Baxalta recently signed an agreement to be purchased by Shire PLC in a gigantic $32 billion stock and cash transaction expected to close during the third quarter.
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8 | WSJ, 2015 Has Been A Spotty Year for Spinoffs, December 9, 2015 |
Yahoo’s plan to spin-off its 384 million shares in Chinese e-commerce company Alibaba appears stuck in the mud. Yahoo had been searching for a tax-efficient method of monetizing its interest in Alibaba, which currently accounts for approximately two-thirds of the value of Yahoo as a company but virtually all of its market capitalization (as Yahoo is trading barely above the value of its shares held in Alibaba). After the IRS declined to provide an advance ruling that the spin-off would be non-taxable, Yahoo cancelled it and now claims to be considering alternate methods of unlocking shareholder value. Options include a spin-off of its core business and possibly its stake in Yahoo Japan as well.9 Several activist shareholders have called for immediate action, which we fully support, and accordingly we have hedged out our exposure to Alibaba through a short position representing the shares embedded in each share of Yahoo.
Median annualized merger arbitrage spreads fluctuated throughout the year from 6% in 1Q15 to slightly over 8% in 4Q15, with an average of approximately 7%.10 Contributing to volatility were the following factors: the perception of above-average deal risks stemming from antitrust, regulatory, political and legal issues; the size of several deals versus the relative lack of investment capital to compress the spread; general market uncertainty due to Federal Reserve actions, energy price weakness and overall geopolitical instability. In addition, there appeared to be a bit of a “hang-over” from recent unsuccessful transactions that inhibited investor risk tolerance and hurt performance.
Two notable examples are as follows:
| • | Comcast-Time Warner Cable: Comcast Corp. had struck a $45.2 billion deal to buy Time Warner Cable Inc. in February 2014, a bid to combine the nation’s two biggest cable operators. Many on Wall Street believed the deal had a strong chance of being approved, though concessions to regulators were expected. The deal faced objections from the Justice Department, which was concerned that the merger would make Comcast “an unavoidable gatekeeper for Internet-based services that rely on a broadband connection to reach consumers.” This transaction was terminated in April. Although we were invested in this deal, Time Warner Communications quickly agreed to a replacement transaction with Charter Communications, thus mitigating some of our loss on the position. |
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9 | CNNMoney, Hedge Fund is Sick of Marissa Mayer as CEO of Yahoo, January 6, 2016 |
10 | UBS US M&A Review: 2015 and 4Q15 |
| • | Staples-Office Depot: We avoided this deal because of concerns over a probable difficult regulatory review. Staples Inc. agreed to acquire its rival Office Depot Inc. in February in a $6 billion transaction that would merge the country’s two largest office supply stores. The companies argued that they face increased competition from Internet and big-box retailers such as Amazon and Wal-Mart; however antitrust regulators, concerned that the tie-up would eliminate much competition and lead to higher prices for bulk office supplies sued to block the transaction. |
2016 OUTLOOK
The significant volatility that plagued investors throughout 2015, especially in the late summer, has continued into 2016 unabated. As of mid-January, the markets have dropped sharply, unusually correlated with continued energy price weakness and a further collapse of Chinese equity markets.
Nonetheless, we remain optimistic regarding transformational corporate transaction activity. Companies appear enthusiastic about pursuing M&A; in an Ernst & Young survey published in October, almost 60 percent of executives expected to carry out acquisitions in the next 12 months, up from 40% a year earlier.11 The momentum for continued activity is partly fueled by the positive market reaction to both the announcements and completions of transactions, as well as frequently seen “copycat transactions” by competitors trying to keep pace. Moreover, debt remains cheap, stock prices are high by historic standards and corporate balance sheets are still estimated to hold as much as $2.6 trillion in cash. All of these factors provide optimism for a continued surge of transaction activity in the New Year.12
High-quality arbitrage investments on announced merger transactions offer rates of return which are comprised of a spread, known as a risk premium, over the cost of capital, to account for the potential risk of investing in mergers. Therefore, the strategy is naturally positioned in the event that, were interest rates to rise, investments such as ours, with an embedded risk component, would need to provide a greater return than a risk-free investment, and market forces would gradually widen deal spreads to accommodate this dynamic.
Additionally, recent market movements and “risk-off” investor psychology has increased the relative attractiveness of merger arbitrage investments versus parts of the fixed-income universe (see below chart provided by Jefferies LLC).
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11 | Bloomberg, 2015 Was Best-Ever Year for M&A: This Year Looks Good Too, January 5, 2015 |
12 | Ibid |
Here are several transactions which by our assessment have gotten more attractive since Q3:
| | | As of October 31, 2015 |
| | | Annualized Rate | Market-Implied |
| Target | Buyer | of Return if | Likelihood of Deal |
| | | Completed* | Completion** |
| Time Warner | Charter | | |
| Cable | Communications | 11% | 77% |
| BG Group | Royal Dutch Shell | 37% | 81% |
| Broadcom Corp | Avago Technologies | 14% | 85% |
| Precision | Berkshire | | |
| Castparts | Hathaway Inc. | 5% | 95% |
| | | As of December 31, 2015 |
| | | Annualized Rate | Market Implied | WCM Estimated |
| Target | Buyer | of Return if | Likelihood of DealLikelihood of Deal | |
| | | Completed* | Completion** | Completion*** |
| Time Warner | Charter | | | |
| Cable | Communications | 15% | 74% | 90% |
| BG Group | Royal Dutch Shell | 77% | 83% | 92% |
| Broadcom Corp | Avago Technologies | 29% | 93% | 97% |
| Precision | Berkshire | | | |
| Castparts | Hathaway Inc. | 13% | 96% | 98% |
* The ‘Annualized Rate of Return if Completed’ shown represents the potential return then available on the subject investment if the announced transaction occurs on the announced terms and timeline. Any such investment would be subject to a number of conditions and risks and the investment’s actual return may differ from that shown for a number of reasons, including because the transaction may not occur at all or may not occur on the expected terms or timeline. Please see a summary of the risks or conditions that can adversely affect merger-arbitrage related investments on page 13 of this report and in the Funds’ prospectus. The annualized rates of return shown in the table are not intended to be representative of the annualized rates of return on investments held by the Funds, do not reflect adjustments for related expenses, such as fund operating expenses, and are not intended to indicate how the overall Funds might perform in the future. The Funds’ actual investment positions in the transactions listed as of December 31, 2015 are shown in the Schedules of Investments and those positions may not represent a significant portion of the Funds’ portfolio. The Funds’ investment positions may change at any time.
Potential annualized return is calculated as of the end of October and December respectively, through the announced closing date of the deal. Time Warner is expected to close on 07/01/16. As of February 23, 2016, The BG Group, Broadcom Corp, and Precision Castparts deals have closed.
** Market-implied likelihood of success is calculated by dividing the difference between the trading price and expected downside price in the event of deal termination, by the difference between the deal price and the expected downside in the event of deal termination. I.E.> (Trading Price-Downside Price)/(Deal Price-Downside Price). Downside price represents the price at which the security traded immediately prior to the public announcement of the merger, reorganization or other event. There can be no assurance that the values of affected securities will not trade at prices below the expected downside prices used in the table above.
***The Adviser’s quantitative estimate, as of January 11, based upon but not limited to the Adviser’s assessment of various factors such as pending regulatory approvals, necessary shareholder votes, financing considerations and the merger agreement.
We opportunistically adjust our positioning and allocation according to the risk-adjusted return, not just of individual investments, but of types of transactions as well. Given that the risk/return profile of more straightforward (or “plain vanilla”) merger arbitrage investments has improved significantly, it is likely that investors will see a greater concentration of such transactions in our portfolios in the coming months.
The last year or so has been a stark reality check for those of us who have been in the business through several market cycles. We have been surprised by unprecedented governmental as well as company actions, on top of the unpredictability of the market in general. We try to learn what we can during these periods and are continually reevaluating our investment methodology, portfolio construction, and most importantly our risk management processes.
In light of the recent volatility surge and capital market action, we intend to provide a series of monthly updates regarding our positions, relevant market data and an up-to-date transaction and opportunities outlook. It will be available on our website as well as via email distribution.
OUR COMPANY
WCM now manages a total of five SEC-registered mutual funds. Our other vehicles span a spectrum from lower-return, lower-volatility expectations to higher volatility with potentially higher return expectations:
| Account | Vehicle | Strategy | Inception |
The Merger Fund® | | | |
| Investor Share | | | |
| Class (MERFX) | SEC ‘40-Act Fund | Merger Arbitrage | 1989 |
| Institutional Share | | | |
| Class (MERIX) | SEC ‘40-Act Fund | Merger Arbitrage | 2013 |
| The Merger | | | |
| Fund VL (MERVX) | Variable Insurance Trust | Merger Arbitrage | 2004 |
| Dunham Monthly | | | |
| Distribution Fund | Sub-advised | | |
| (DNMDX) | SEC ‘40-Act Fund | Event-Driven | 2008 |
| WCM Alternatives: | | | |
| Event-Driven | | | |
| Fund (WCEIX) | SEC ‘40-Act Fund | Event-Driven | 2014 |
| JNL/Westchester | | | |
| Capital Event | Sub-advised | | |
| Driven Fund | SEC ‘40-Act Fund | Event-Driven | 2015 |
As usual, quarterly statistical summaries for any of our vehicles are provided within two weeks of the end of the quarter typically one month prior to the release of the quarterly letter. They are available electronically on our website, and we would be happy to provide a scheduled email as soon as the data becomes available. For convenience, investors can arrange for e-alerts of important Fund communications. Through our website at www.westchestercapitalfunds.com, you can check direct account balances, make purchases and sales, and sign up for notification of trade confirmations, statements and shareholder communications via e-mail.
 |  |
| |
| Roy Behren | Mike Shannon |
IMPORTANT DISCLOSURES
Before investing in any fund, carefully consider the investment objectives, risks, charges and expenses. For a prospectus or summary prospectus containing this and other fund information, please call (800) 343-8959. Please read the prospectus carefully before investing. The Merger Fund VL is available through variable products offered by third-party insurance companies. For a prospectus containing information for any variable annuity or variable life product that invests in The Merger Fund VL, contact your financial advisor or the offering insurance company for a contract prospectus and prospectus for the underlying funds. To obtain a prospectus for the
Dunham Monthly Distribution Fund, please visit www.dunham.com. Please read it carefully before investing. Shares of JNL/Westchester Capital Event Driven Fund are offered to separate accounts of participating life insurance companies for the purpose of funding variable annuity contracts and variable life insurance policies. Shares of the fund are not offered directly to the public. For a prospectus containing information for any variable annuity or variable life product that invests in the Fund, contact your financial advisor or the offering insurance company for a contract prospectus and prospectus for the underlying funds. Please read it carefully before investing. Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% federal tax penalty if withdrawn before age 59½. Optional benefit costs are added to the ongoing fees and expenses of the variable annuity.
Variable annuities (VA650, VA660) are issued by Jackson National Life Insurance Company® (Home Office: Lansing, Michigan) and in New York (VA650NY, VA660NY) by Jackson National Life Insurance Company of New York® (Home Office: Purchase, New York). Variable annuities are distributed by Jackson National Life Distributors LLC, member FINRA. May not be available in all states and state variations may apply. These products have limitations and restrictions, including withdrawal charges, recapture charges and excess interest adjustments (interest rate adjustments in New York) where applicable. Jackson® issues other annuities with similar features, benefits, limitations and charges. Contact Jackson for more information. Jackson is the marketing name for Jackson National Life Insurance Company and Jackson National Life Insurance Company of New York.
Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security. Please see the Schedules of Investments in this report for complete lists of fund holdings..
Diversification does not assure a profit, nor does it protect against a loss in a declining market.
Mutual fund investing involves risk. Principal loss is possible. Merger‐arbitrage and event‐driven investing involves the risk that the adviser’s evaluation of the outcome of a proposed event, whether it be a merger, reorganization, regulatory issue or other event, will prove incorrect and that the Funds’ return on the investment will be negative. Investments in foreign companies may entail political, cultural, regulatory, legal, and tax risks different from those associated with comparable transactions in the United States. The frequency of the Fund’s transactions will vary from year to year, though merger arbitrage portfolios typically have higher turnover rates than portfolios of typical long‐only funds. Increased portfolio turnover may result in higher brokerage commissions, dealer mark‐ups and other transaction costs. The higher costs associated with increased portfolio turnover may offset gains in the Fund’s performance. The Funds’ may enter into short sale transactions for, among other reasons, purposes of protecting against a decline in the market value of the acquiring company’s shares prior to the acquisition completion. If the price of a security sold short increases between the time of the short sale and the time the Fund covers its short position, the Fund will incur a loss. The amount of a potential loss on an uncovered short sale transaction is theoretically unlimited. Debt securities may fluctuate in value due to, among other things, changes in interest rates, general economic conditions, industry fundamentals, market sentiment and the financial condition of the issuer, including the issuer’s credit rating or financial performance. Derivatives may create leverage which will amplify the effect of the performance of those instruments on the Funds’ and may produce significant losses. The Funds hedging strategy will be subject to the Funds’ investment adviser’s ability to assess correctly the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged.
References to other mutual funds do not construe an offer of those securities.
The views expressed are as of February 4, 2016 and are a general guide to the views of Westchester Capital Management, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. This document does not replace portfolio and fund-specific materials.
Definitions: The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general; The MSCI World Index is a free float-adjusted market capitalization index designed to measure the equity market performance of developed economies; The Barclays Aggregate Bond Index is an intermediate term index comprised of investment grade bonds; The Morningstar Category: Market Neutral is an index comprised of a universe of funds with similar investment objectives. Indices are unavailable for direct investment. The HFRX Merger Arbitrage Index is comprised of strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction. The HFRX Event Driven Index is comprised of managers with positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure. The Goldman Sachs Commodity Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Nasdaq 100 is an index composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. Run-rate is the result of extrapolating the current period’s financial results over a longer period of time. Standard Deviation is the degree by which returns vary relative to the average return. The higher the standard deviation, the greater the variability of the investment; Beta is a measure of the fund’s sensitivity to market movements. A portfolio with a beta greater than 1 is more volatile than the market and a portfolio with a beta less than 1 is less volatile than the market; Alpha is measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. A basis point (often denoted as bp) is a unit equal to 1/100 of a percentage point and can be summarized as follows: 1% change = 100 basis points and 0.01% = 1 basis point; Correlation is calculated using R-Squared; which is a measure that represents the percentage of a fund’s movements that can be explained by movements in a benchmark index. A fund with low R-squared doesn’t act much like the index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. The Nasdaq Composite is an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, Intel and Amgen.
A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. This is different from an event-driven strategy which focuses on exploiting the tendency of the equities of companies in a time of change to drop in price, a merger-arbitrage strategy which attempts to profit from the “spread” between the purchase value and the value of a stock at the completion of a merger, takeover or other reorganization, or an absolute return strategy which looks at the appreciation or depreciation (expressed as a percentage) that an asset – usually a stock or a mutual fund – achieves over a given period of time.
The SEC does not endorse, indemnify, approve nor disapprove of any security.
The Merger Fund® and WCM Alternatives: Event-Driven Fund are distributed by Quasar Distributors, LLC. The Merger VL is available through variable products offered by third-party insurance companies and is not affiliated with Quasar Distributors, LLC. The Dunham Monthly Distribution Fund, which is sub-advised by Westchester Capital Management, LLC, is distributed by Dunham and Associates Investment Counsel, which have no affiliation with Quasar Distributors, LLC.
DEAL COMPOSITION
The Merger Fund (Unaudited)
| Type of Buyer | | | Deal Terms* | |
| Strategic | 97.3% | | Cash | 36.0% |
| Financial | 2.7% | | Cash & Stock | 35.3% |
| | | | Stock and Stub(1) | 18.9% |
| By Deal Type | | | Undetermined(2) | 7.3% |
| Friendly | 99.7% | | Stock with Fixed Exchange Ratio | 2.5% |
| Hostile | 0.3% | | Stock with Flexible | |
| | | | Exchange Ratio (Collar) | 0.0% |
| * | Data expressed as a percentage of long common stock, corporate bonds and swap contract positions as of December 31, 2015. |
1 | “Stub” includes assets other than cash and stock (e.g., escrow notes). |
2 | The compensation is undetermined because the compensation to be received (e.g., stock, cash, escrow notes, other) will be determined at a later date, potentially at the option of the Fund’s investment adviser. |
PORTFOLIO COMPOSITION*
The Merger Fund (Unaudited)
By Sector
By Region
* Data expressed as a percentage of long common stock, corporate bonds and swap contract positions as of December 31, 2015.
PORTFOLIO COMPOSITION*
WCM Alternatives: Event-Driven Fund (Unaudited)
By Sector
By Region
* Data expressed as a percentage of long common stock, corporate bonds and swap contract positions as of December 31, 2015.
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor’s Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE MERGER FUND AND S&P 500
THE MERGER FUND
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 2015
| | 1 Yr. | 3 Yr. | 5 Yr. | 10 Yr. |
| Investor Class | (0.82)% | 1.39% | 1.88% | 3.24% |
| S&P 500 | 1.38% | 15.13% | 12.57% | 7.31% |
| | | Since Inception |
| | 1 Yr. | (8/1/2013) |
| Institutional Class | (0.52)% | 1.36% |
| S&P 500 | 1.38% | 10.03% |
The Standard & Poor’s 500 Index (“S&P 500”) is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. This chart assumes an initial gross investment of $10,000 made on December 31, 2005. Returns shown include the reinvestment of all dividends. Past performance is not predictive of future performance. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or upon redemption of fund shares. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost.
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTMENT
IN THE WCM ALTERNATIVES: EVENT-DRIVEN FUND AND S&P 500
WCM ALTERNATIVES: EVENT-DRIVEN FUND
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 2015
| | | | Since Inception |
| | | 1 Yr. | (1/2/2014) |
| Institutional Class | | (2.08)% | 0.85% |
| S&P 500 | | 1.38% | 7.85% |
The Standard & Poor’s 500 Index (“S&P 500”) is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. This chart assumes an initial gross investment of $1,000,000 made on January 2, 2014. Returns shown include the reinvestment of all dividends. Past performance is not predictive of future performance. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or upon redemptions of fund shares. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost.
The Merger Fund and WCM Alternatives: Event-Driven Fund
EXPENSE EXAMPLE
December 31, 2015 (Unaudited)
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, distribution and/or service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in a 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 7/1/15 — 12/31/15.
Actual Expenses
The first line of the table for each share class 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 this period. The example below includes, among other fees, management fees, fund accounting, custody and transfer agent fees. However, the example below does not include portfolio trading commissions and related expenses, and extraordinary expenses as determined under generally accepted accounting principles.
Hypothetical Example for Comparison Purposes
The second line of the table for each share class provides information about hypothetical account values and hypothetical expenses based on each 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 each 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 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.
The Merger Fund and WCM Alternatives: Event-Driven Fund
EXPENSE EXAMPLE (continued)
December 31, 2015 (Unaudited)
| | | | | Expenses |
| | | | | Paid |
| | Beginning | Ending | | During |
| | Account | Account | Annualized | Period |
| | Value | Value | Expense | 7/1/15 — |
| | 7/1/15 | 12/31/15 | Ratio | 12/31/15* |
| The Merger Fund | | | | |
| Investor Class | | | | |
Actual+(1) | $1,000.00 | $ 984.90 | 1.76% | $ 8.81 |
Hypothetical+(2) | $1,000.00 | $1,016.33 | 1.76% | $ 8.94 |
| Institutional Class | | | | |
Actual++(3) | $1,000.00 | $ 986.50 | 1.43% | $ 7.16 |
Hypothetical++(2) | $1,000.00 | $1,018.00 | 1.43% | $ 7.27 |
| WCM Alternatives: Event-Driven Fund | | | | |
| Institutional Class | | | | |
Actual+++(4) | $1,000.00 | $ 971.50 | 2.10% | $10.44 |
Hypothetical+++(2) | $1,000.00 | $1,014.62 | 2.10% | $10.66 |
| * | Expenses are equal to the Fund’s annualized net expense ratio multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
| + | Excluding dividends and borrowing expense on securities sold short, your actual cost of investment in and your hypothetical cost of investment in The Merger Fund’s Investor Class would have been $6.80 and $6.92, respectively. |
| ++ | Excluding dividends and borrowing expense on securities sold short, your actual cost of investment in and your hypothetical cost of investment in The Merger Fund’s Institutional Class would have been $5.16 and $5.24, respectively. |
| +++ | Excluding dividends and borrowing expense on securities sold short, your actual cost of investment in and your hypothetical cost of investment in WCM Alternatives: Event-Driven Fund’s Institutional Class would have been $8.65 and $8.84, respectively. |
| (1) | Ending account values and expenses paid during the period based on a -1.51% return. This actual return is net of expenses. |
| (2) | Ending account values and expenses paid during period based on a hypothetical 5.00% annual return before expenses. |
| (3) | Ending account values and expenses paid during the period based on a -1.35% return. This actual return is net of expenses. |
| (4) | Ending account values and expenses paid during the period based on a -2.85% return. This actual return is net of expenses. |
The Merger Fund
SCHEDULE OF INVESTMENTS
December 31, 2015
| Shares | | | | Value | |
| | |
| COMMON STOCKS — 75.48% | |
| | | | | | |
| | AEROSPACE & DEFENSE — 6.44% | | | |
| | 1,320,702 | | Precision Castparts Corporation (e) | | $ | 306,416,071 | |
| | | | | | | | |
| | | | APPLICATION SOFTWARE — 2.73% | | | | |
| | 2,282,205 | | King Digital Entertainment plc (b) | | | 40,805,825 | |
| | 1,620,072 | | Solera Holdings, Inc. (e) | | | 88,828,548 | |
| | | | | | | 129,634,373 | |
| | | | AUTO PARTS & EQUIPMENT — 1.44% | | | | |
| | 1,731,900 | | Johnson Controls, Inc. (e) | | | 68,392,731 | |
| | | | | | | | |
| | | | AUTOMOBILE MANUFACTURERS — 2.18% | | | | |
| | 3,050,500 | | General Motors Company (e) | | | 103,747,505 | |
| | | | | | | | |
| | | | BROADCASTING — 1.36% | | | | |
| | 1,373,337 | | CBS Corporation Class B (e) | | | 64,725,373 | |
| | | | | | | | |
| | | | CABLE & SATELLITE — 7.14% | | | | |
| | 1,077,702 | | Cablevision Systems Corporation Class A (e) | | | 34,378,694 | |
| | 1,557,700 | | DISH Network Corporation Class A (a)(e) | | | 89,069,286 | |
| | 6,189,900 | | Sirius XM Holdings, Inc. (a) | | | 25,192,893 | |
| | 1,028,304 | | Time Warner Cable, Inc. (e) | | | 190,842,939 | |
| | | | | | | 339,483,812 | |
| | | | CASINOS & GAMING — 1.05% | | | | |
| | 2,205,100 | | MGM Resorts International (a)(e) | | | 50,099,872 | |
| | | | | | | | |
| | | | DATA PROCESSING & OUTSOURCED SERVICES — 0.00% | | | | |
| | 1,584 | | Heartland Payment Systems, Inc. | | | 150,195 | |
| | | | | | | | |
| | | | DIVERSIFIED CHEMICALS — 3.96% | | | | |
| | 2,236,400 | | The Dow Chemical Company (e) | | | 115,129,872 | |
| | 497,091 | | E.I. Du Pont de Nemours & Company | | | 33,106,261 | |
| | 3,535,293 | | Huntsman Corporation (e) | | | 40,196,281 | |
| | | | | | | 188,432,414 | |
| | | | HOTELS, RESORTS & CRUISE LINES — 1.13% | | | | |
| | 777,334 | | Starwood Hotels & Resorts Worldwide, Inc. | | | 53,853,700 | |
| | | | | | | | |
| | | | HOUSEWARES & SPECIALTIES — 1.30% | | | | |
| | 1,081,870 | | Jarden Corporation (a) | | | 61,796,415 | |
| | | | | | | | |
| | | | INDUSTRIAL CONGLOMERATES — 1.11% | | | | |
| | 1,693,700 | | General Electric Company | | | 52,758,755 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| Shares | | | | Value | |
| | | | | | |
| | INDUSTRIAL GASES — 2.27% | | | |
| | 135,400 | | Air Products and Chemicals, Inc. (e) | | $ | 17,616,894 | |
| | 651,404 | | Airgas, Inc. | | | 90,102,201 | |
| | | | | | | 107,719,095 | |
| | | | INDUSTRIAL MACHINERY — 0.05% | | | | |
| | 89,100 | | SPX FLOW, Inc. (a)(e) | | | 2,486,781 | |
| | | | | | | | |
| | | | INTEGRATED OIL & GAS — 0.23% | | | | |
| | 745,585 | | BG Group plc — ADR (e) | | | 10,825,894 | |
| | | | | | | | |
| | | | INTERNET SOFTWARE & SERVICES — 4.68% | | | | |
| | 4,525,902 | | Yahoo!, Inc. (a)(e) | | | 150,531,500 | |
| | 2,656,636 | | Youku Tudou, Inc. — ADR (a)(e) | | | 72,074,535 | |
| | | | | | | 222,606,035 | |
| | | | LIFE & HEALTH INSURANCE — 0.55% | | | | |
| | 2,167 | | StanCorp Financial Group, Inc. | | | 246,778 | |
| | 816,612 | | Symetra Financial Corporation (e) | | | 25,943,763 | |
| | | | | | | 26,190,541 | |
| | | | MANAGED HEALTH CARE — 2.70% | | | | |
| | 610,026 | | Health Net, Inc. (a)(e) | | | 41,762,380 | |
| | 486,477 | | Humana, Inc. | | | 86,841,009 | |
| | | | | | | 128,603,389 | |
| | | | MOVIES & ENTERTAINMENT — 0.00% | | | | |
| | 220,167 | | SFX Entertainment, Inc. (a) | | | 41,854 | |
| | | | | | | | |
| | | | MULTI-LINE INSURANCE — 3.04% | | | | |
| | 2,331,187 | | American International Group, Inc. (e) | | | 144,463,658 | |
| | | | | | | | |
| | | | OIL & GAS EQUIPMENT & SERVICES — 2.46% | | | | |
| | 680,002 | | Baker Hughes, Inc. | | | 31,382,092 | |
| | 1,351,932 | | Cameron International Corporation (a) | | | 85,442,103 | |
| | | | | | | 116,824,195 | |
| | | | OIL & GAS EXPLORATION & PRODUCTION — 1.16% | | | | |
| | 1,137,800 | | Anadarko Petroleum Corporation (e) | | | 55,274,324 | |
| | | | | | | | |
| | | | OIL & GAS REFINING & MARKETING — 0.06% | | | | |
| | 114,375 | | Northern Tier Energy LP | | | 2,957,738 | |
| | | | | | | | |
| | | | OIL & GAS STORAGE & TRANSPORTATION — 1.17% | | | | |
| | 1,372,675 | | The Williams Companies, Inc. | | | 35,277,748 | |
| | 728,431 | | Williams Partners LP | | | 20,286,803 | |
| | | | | | | 55,564,551 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| Shares | | | | Value | |
| | | | | |
| | PACKAGED FOODS & MEATS — 0.51% | | | |
| | 269,064 | | Keurig Green Mountain, Inc. | | $ | 24,210,379 | |
| | | | | | | | |
| | | | PHARMACEUTICALS — 0.58% | | | | |
| | 33,200 | | Allergan plc (a)(b) | | | 10,375,000 | |
| | 28,900 | | Perrigo Company plc (b) | | | 4,181,830 | |
| | 398,569 | | Pfizer, Inc. | | | 12,865,807 | |
| | | | | | | 27,422,637 | |
| | | | PROPERTY & CASUALTY INSURANCE — 3.76% | | | | |
| | 1,348,772 | | The Chubb Corporation (e) | | | 178,901,118 | |
| | | | | | | | |
| | | | REGIONAL BANKS — 0.92% | | | | |
| | 4,027,047 | | First Niagara Financial Group, Inc. (e) | | | 43,693,460 | |
| | | | | | | | |
| | | | REINSURANCE — 3.47% | | | | |
| | 1,182,530 | | PartnerRe Ltd. (b)(e) | | | 165,246,742 | |
| | | | | | | | |
| | | | REITs — 2.55% | | | | |
| | 925,620 | | BioMed Realty Trust, Inc. (e) | | | 21,927,938 | |
| | 1,117,205 | | Equity Commonwealth (a)(e) | | | 30,980,095 | |
| | 1,547,200 | | NorthStar Realty Finance Corporation | | | 26,348,816 | |
| | 2,029,110 | | Starwood Property Trust, Inc. | | | 41,718,501 | |
| | | | | | | 120,975,350 | |
| | | | SEMICONDUCTORS — 7.34% | | | | |
| | 995,775 | | Atmel Corporation | | | 8,573,623 | |
| | 3,270,799 | | Broadcom Corporation Class A (e) | | | 189,117,598 | |
| | 48,388 | | EZchip Semiconductor Ltd. (a)(b) | | | 1,196,151 | |
| | 56,300 | | Fairchild Semiconductor International, Inc. (a) | | | 1,165,973 | |
| | 2,028,737 | | KLA-Tenor Corporation (e) | | | 140,692,911 | |
| | 718,921 | | PMC-Sierra, Inc. (a) | | | 8,353,862 | |
| | | | | | | 349,100,118 | |
| | | | SPECIALTY CHEMICALS — 2.11% | | | | |
| | 1,009,600 | | W.R. Grace & Company (a)(e) | | | 100,546,064 | |
| | | | | | | | |
| | | | TECHNOLOGY HARDWARE, | | | | |
| | | | STORAGE & PERIPHERALS — 2.07% | | | | |
| | 3,828,719 | | EMC Corporation | | | 98,321,504 | |
| | | | | | | | |
| | | | TRUCKING — 1.90% | | | | |
| | 6,361,400 | | Hertz Global Holdings, Inc. (a)(e) | | | 90,522,722 | |
| | | | | | | | |
| | | | WIRELESS TELECOMMUNICATION SERVICES — 2.06% | | | | |
| | 2,498,100 | | T-Mobile U.S., Inc. (a)(e) | | | 97,725,672 | |
| | | | | | | | |
| | | | TOTAL COMMON STOCKS (Cost $3,636,221,687) | | | 3,589,715,037 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| | Shares | | | | Value | |
| | | | | | | |
| | | | CONTINGENT VALUE RIGHTS — 0.02% | | | |
| | | 1,713,496 | | Casa Ley, S.A. de C.V. (a)(e)(g) | | $ | 771,073 | |
| | | 77,699 | | Leap Wireless International, Inc. (a)(g) | | | 287,486 | |
| | | 1,713,496 | | Property Development Centers LLC (a)(e)(g) | | | 85,675 | |
| | | | | TOTAL CONTINGENT VALUE RIGHTS (Cost $0) | | | 1,144,234 | |
| | | | | | | | | |
Principal Amount | |
| |
| CORPORATE BONDS — 4.37% (f) | |
| | | | | | | | | |
| | | | | Community Health Systems, Inc. | | | | |
| | $ | 15,174,000 | | 8.000%, 11/15/2019 | | | 15,363,675 | |
| | | | | Energy Future Intermediate Holding Company LLC | | | | |
| | | 10,065,404 | | 11.000%, 10/1/2021 (h) | | | 10,694,492 | |
| | | 48,495,001 | | 11.750%, 3/1/2022 (d)(h) | | | 51,768,414 | |
| | | | | LIN Television Corporation | | | | |
| | | 17,885,000 | | 5.875%, 11/15/2022 | | | 17,840,287 | |
| | | | | The Manitowoc Company, Inc. | | | | |
| | | 26,148,000 | | 5.875%, 10/15/2022 | | | 27,128,550 | |
| | | | | MedAssets, Inc. | | | | |
| | | 3,658,000 | | 8.000%, 11/15/2018 | | | 3,731,160 | |
| | | | | Neptune Finco Corporation | | | | |
| | | 31,699,000 | | 10.125%, 1/15/2023 (d) | | | 33,125,455 | |
| | | | | Pinnacle Entertainment, Inc. | | | | |
| | | 46,060,000 | | 7.500%, 4/15/2021 | | | 48,247,850 | |
| | | | | TOTAL CORPORATE BONDS (Cost $209,650,839) | | | 207,899,883 | |
| | | | | | | | | |
Contracts (100 shares per contract) | | | | |
| | | | | |
| PURCHASED CALL OPTIONS — 0.00% | | | | |
| | | | | Aetna, Inc. | | | | |
| | | 770 | | Expiration: January 2016, Exercise Price: $145.00 | | | 4,235 | |
| | | | | Avago Technologies Ltd. | | | | |
| | | 868 | | Expiration: January 2016, Exercise Price: $175.00 | | | 4,340 | |
| | | | | | | | 8,575 | |
| PURCHASED PUT OPTIONS — 0.67% | | | | |
| | | | | Air Products and Chemicals, Inc. | | | | |
| | | 1,083 | | Expiration: March 2016, Exercise Price: $115.00 | | | 148,912 | |
| | | | | American International Group, Inc. | | | | |
| | | 9,054 | | Expiration: February 2016, Exercise Price: $57.50 | | | 660,942 | |
| | | | | Anadarko Petroleum Corporation | | | | |
| | | 7,399 | | Expiration: January 2016, Exercise Price: $45.00 | | | 429,142 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | | |
| | Bayer AG | | | |
| | 790 | | Expiration: January 2016, Exercise Price: EUR 100.00 (f) | | $ | 7,726 | |
| | 672 | | Expiration: February 2016, Exercise Price: EUR 94.00 (f) | | | 19,717 | |
| | | | CBS Corporation Class B | | | | |
| | 1,690 | | Expiration: March 2016, Exercise Price: $37.50 | | | 54,080 | |
| | 14,847 | | Expiration: March 2016, Exercise Price: $40.00 | | | 742,350 | |
| | | | Charter Communications, Inc. Class A | | | | |
| | 896 | | Expiration: January 2016, Exercise Price: $210.00 | | | 2,450,560 | |
| | | | DISH Network Corporation Class A | | | | |
| | 15,577 | | Expiration: January 2016, Exercise Price: $50.00 | | | 116,827 | |
| | | | The Dow Chemical Company | | | | |
| | 6,970 | | Expiration: January 2016, Exercise Price: $44.00 | | | 41,820 | |
| | 1,893 | | Expiration: January 2016, Exercise Price: $45.00 | | | 15,144 | |
| | 9,497 | | Expiration: March 2016, Exercise Price: $43.00 | | | 503,341 | |
| | | | E.I. Du Pont de Nemours & Company | | | | |
| | 817 | | Expiration: January 2016, Exercise Price: $50.00 | | | 6,127 | |
| | 1,615 | | Expiration: January 2016, Exercise Price: $60.00 | | | 20,188 | |
| | 2,508 | | Expiration: April 2016, Exercise Price: $55.00 | | | 191,862 | |
| | | | General Electric Company | | | | |
| | 10,326 | | Expiration: January 2016, Exercise Price: $26.00 | | | 5,163 | |
| | 401 | | Expiration: February 2016, Exercise Price: $25.00 | | | 2,406 | |
| | 7,256 | | Expiration: March 2016, Exercise Price: $27.00 | | | 141,492 | |
| | | | General Motors Company | | | | |
| | 3,529 | | Expiration: January 2016, Exercise Price: $28.00 | | | 14,116 | |
| | 1,402 | | Expiration: January 2016, Exercise Price: $29.00 | | | 6,309 | |
| | 1,140 | | Expiration: January 2016, Exercise Price: $31.00 | | | 11,400 | |
| | | | | | | | |
| | 817 | | Expiration: January 2016, Exercise Price: $32.00 | | | 13,889 | |
| | 17,516 | | Expiration: March 2016, Exercise Price: $31.00 | | | 1,103,508 | |
| | | | Hertz Global Holdings, Inc. | | | | |
| | 29,362 | | Expiration: January 2016, Exercise Price: $15.00 | | | 2,789,390 | |
| | 21,498 | | Expiration: March 2016, Exercise Price: $12.00 | | | 859,920 | |
| | | | Huntsman Corporation | | | | |
| | 32,095 | | Expiration: January 2016, Exercise Price: $10.00 | | | 353,045 | |
| | | | iShares iBoxx $ High Yield Corporate Bond ETF | | | | |
| | 9,325 | | Expiration: June 2016, Exercise Price: $77.00 | | | 2,191,375 | |
| | | | Johnson Controls, Inc. | | | | |
| | 1,886 | | Expiration: January 2016, Exercise Price: $36.00 | | | 23,575 | |
| | 11,978 | | Expiration: January 2016, Exercise Price: $38.00 | | | 383,296 | |
| | | | Keurig Green Mountain, Inc. | | | | |
| | 414 | | Expiration: March 2016, Exercise Price: $85.00 | | | 78,453 | |
| | | | McDonald’s Corporation | | | | |
| | 146 | | Expiration: January 2016, Exercise Price: $92.50 | | | 584 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | | |
| | MGM Resorts International | | | |
| | 7,787 | | Expiration: January 2016, Exercise Price: $17.00 | | $ | 11,681 | |
| | 11,598 | | Expiration: March 2016, Exercise Price: $18.00 | | | 266,754 | |
| | | | NorthStar Realty Financial Corporation | | | | |
| | 13,925 | | Expiration: March 2016, Exercise Price: $13.00 | | | 208,875 | |
| | | | Pfizer, Inc. | | | | |
| | 1,256 | | Expiration: February 2016, Exercise Price: $28.00 | | | 12,560 | |
| | 1,705 | | Expiration: February 2016, Exercise Price: $29.00 | | | 27,280 | |
| | | | SPDR S&P 500 ETF Trust | | | | |
| | 4,416 | | Expiration: January 2016, Exercise Price: $200.00 | | | 587,328 | |
| | 661 | | Expiration: January 2016, Exercise Price: $204.00 | | | 168,555 | |
| | 4,415 | | Expiration: January 2016, Exercise Price: $205.00 | | | 1,306,840 | |
| | 6,156 | | Expiration: March 2016, Exercise Price: $175.00 | | | 827,982 | |
| | 6,156 | | Expiration: March 2016, Exercise Price: $195.00 | | | 2,597,832 | |
| | | | Starwood Hotels & Resorts Worldwide, Inc. | | | | |
| | 2,291 | | Expiration: January 2016, Exercise Price: $63.70 | | | 35,510 | |
| | 584 | | Expiration: January 2016, Exercise Price: $64.90 | | | 12,264 | |
| | 1,325 | | Expiration: February 2016, Exercise Price: $55.00 | | | 25,838 | |
| | | | T-Mobile U.S., Inc. | | | | |
| | 18,130 | | Expiration: January 2016, Exercise Price: $36.00 | | | 480,445 | |
| | | | VMware, Inc. | | | | |
| | 2,706 | | Expiration: September 2016, Exercise Price: $95.00 | | | 10,824,000 | |
| | | | W.R. Grace & Company | | | | |
| | 7,572 | | Expiration: March 2016, Exercise Price: $90.00 | | | 1,135,800 | |
| | | | | | | 31,916,203 | |
| | | | TOTAL PURCHASED OPTIONS (Cost $44,954,885) | | | 31,924,778 | |
Principal Amount | | |
| | | |
| ESCROW NOTES — 0.03% | | |
| | | |
| | $ | 1,243,406 | | AMR Corporation (a)(d)(g)(i) | | | 1,616,428 | |
| | | | | TOTAL ESCROW NOTES (Cost $679,555) | | | 1,616,428 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| Shares | | | | Value | |
| | |
| SHORT-TERM INVESTMENTS — 18.93% | |
| | | | | | | |
| | 24,031,738 | | BlackRock Liquidity Funds TempFund Portfolio, | | | |
| | | | Institutional Share Class, 0.29% (c) | | $ | 24,031,738 | |
| | 292,000,000 | | Fidelity Institutional Government Portfolio, | | | | |
| | | | Institutional Share Class, 0.12% (c)(e) | | | 292,000,000 | |
| | 292,000,000 | | Goldman Sachs Financial Square Money Market Fund, | | | | |
| | | | Institutional Share Class, 0.30% (c)(e) | | | 292,000,000 | |
| | 292,000,000 | | The Liquid Asset Portfolio, | | | | |
| | | | Institutional Share Class, 0.29% (c)(e) | | | 292,000,000 | |
| | | | TOTAL SHORT-TERM INVESTMENTS | | | | |
| | | | (Cost $900,031,738) | | | 900,031,738 | |
| | | | TOTAL INVESTMENTS | | | | |
| | | | (Cost $4,791,538,704) — 99.50% | | | 4,732,332,098 | |
| | | | OTHER ASSETS IN EXCESS OF LIABILITIES — 0.50% | | | 23,674,106 | |
| | | | NET ASSETS — 100.0% | | $ | 4,756,006,204 | |
ADR – American Depository Receipt
ETF – Exchange-Traded Fund
EUR – Euro
plc – Public Limited Company
REITs – Real Estate Investment Trusts
| (a) | Non-income producing security. |
| (b) | Foreign security. |
| (c) | The rate quoted is the annualized seven-day yield as of December 31, 2015. |
| (d) | Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration normally to qualified institutional buyers. As of December 31, 2015, these securities represent 1.78% of total net assets. |
| (e) | All or a portion of the shares have been committed as collateral for open securities sold short, written option contracts, swap contacts, and forward currency exchange contracts. |
| (f) | Level 2 Security. Please see Note 2 in the Notes to the Financial Statements. |
| (g) | Level 3 Security. Please see Note 2 in the Notes to the Financial Statements. |
| (h) | Default or other conditions exist and the security is not presently accruing income. |
| (i) | Security fair valued by the Valuation Group in good faith in accordance with the policies adopted by the Board of Trustees. |
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor’s Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS
December 31, 2015
| Shares | | | | Value | |
| |
| COMMON STOCKS — 70.28% | |
| | | | | |
| | APPLICATION SOFTWARE — 1.11% | | | |
| | 60,068 | | King Digital Entertainment plc (b) | | $ | 1,074,016 | |
| | | | | | | | |
| | | | AUTO PARTS & EQUIPMENT — 2.92% | | | | |
| | 71,454 | | Johnson Controls, Inc. (e) | | | 2,821,719 | |
| | | | | | | | |
| | | | AUTOMOBILE MANUFACTURERS — 2.65% | | | | |
| | 75,100 | | General Motors Company (e) | | | 2,554,151 | |
| | | | | | | | |
| | | | BROADCASTING — 1.29% | | | | |
| | 26,400 | | CBS Corporation Class B (e) | | | 1,244,232 | |
| | | | | | | | |
| | | | CABLE & SATELLITE — 3.94% | | | | |
| | 28,500 | | DISH Network Corporation Class A (a)(e) | | | 1,629,630 | |
| | 46,800 | | Sirius XM Holdings, Inc. (a) | | | 190,476 | |
| | 10,661 | | Time Warner Cable, Inc. (e) | | | 1,978,575 | |
| | | | | | | 3,798,681 | |
| | | | CASINOS & GAMING — 1.40% | | | | |
| | 59,300 | | MGM Resorts International (a) | | | 1,347,296 | |
| | | | | | | | |
| | | | CONSTRUCTION MATERIALS — 1.49% | | | | |
| | 6,988,740 | | West China Cement Ltd. (b) | | | 1,442,827 | |
| | | | | | | | |
| | | | DATA PROCESSING & OUTSOURCED SERVICES — 0.00% | | | | |
| | 48 | | Heartland Payment Systems, Inc. | | | 4,551 | |
| | | | | | | | |
| | | | DIVERSIFIED CHEMICALS — 4.62% | | | | |
| | 49,900 | | The Dow Chemical Company (e) | | | 2,568,852 | |
| | 15,736 | | E.I. Du Pont de Nemours & Company | | | 1,048,018 | |
| | 74,381 | | Huntsman Corporation | | | 845,712 | |
| | | | | | | 4,462,582 | |
| | | | DIVERSIFIED FINANCIAL SERVICES — 1.42% | | | | |
| | 26,500 | | Citigroup, Inc. (e) | | | 1,371,375 | |
| | | | | | | | |
| | | | HOTELS, RESORTS & CRUISE LINES — 2.54% | | | | |
| | 22,400 | | Hilton Worldwide Holdings, Inc. | | | 479,360 | |
| �� | 28,434 | | Starwood Hotels & Resorts Worldwide, Inc. (e) | | | 1,969,908 | |
| | | | | | | 2,449,268 | |
| | | | HOUSEWARES & SPECIALTIES — 1.72% | | | | |
| | 29,015 | | Jarden Corporation (a)(e) | | | 1,657,337 | |
| | | | | | | | |
| | | | INDUSTRIAL CONGLOMERATES — 0.18% | | | | |
| | 5,700 | | General Electric Company (e) | | | 177,555 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| Shares | | | | Value | |
| | | | | |
| | INDUSTRIAL GASES — 2.67% | | | |
| | 4,400 | | Air Products and Chemicals, Inc. (e) | | $ | 572,484 | |
| | 14,522 | | Airgas, Inc. (e) | | | 2,008,683 | |
| | | | | | | 2,581,167 | |
| | | | INDUSTRIAL MACHINERY — 0.07% | | | | |
| | 2,300 | | SPX FLOW, Inc. (a) | | | 64,193 | |
| | | | | | | | |
| | | | INTEGRATED OIL & GAS — 0.04% | | | | |
| | 2,583 | | BG Group plc — ADR | | | 37,505 | |
| | | | | | | | |
| | | | INTEGRATED TELECOMMUNICATION SERVICES — 0.47% | | | | |
| | 13,164 | | AT&T, Inc. (e) | | | 452,973 | |
| | | | | | | | |
| | | | INTERNET SOFTWARE & SERVICES — 5.54% | | | | |
| | 109,552 | | Yahoo!, Inc. (a)(e) | | | 3,643,699 | |
| | 62,905 | | Youku Tudou, Inc. — ADR (a) | | | 1,706,613 | |
| | | | | | | 5,350,312 | |
| | | | LIFE & HEALTH INSURANCE — 0.30% | | | | |
| | 93 | | StanCorp Financial Group, Inc. | | | 10,591 | |
| | 8,668 | | Symetra Financial Corporation (e) | | | 275,382 | |
| | | | | | | 285,973 | |
| | | | MANAGED HEALTH CARE — 3.45% | | | | |
| | 15,170 | | Health Net, Inc. (a)(e) | | | 1,038,538 | |
| | 12,808 | | Humana, Inc. (e) | | | 2,286,356 | |
| | | | | | | 3,324,894 | |
| | | | MOVIES & ENTERTAINMENT — 0.03% | | | | |
| | 127,639 | | SFX Entertainment, Inc. (a)(e) | | | 24,264 | |
| | | | | | | | |
| | | | OIL & GAS EQUIPMENT & SERVICES — 2.34% | | | | |
| | 11,971 | | Baker Hughes, Inc. (e) | | | 552,462 | |
| | 26,962 | | Cameron International Corporation (a)(e) | | | 1,703,998 | |
| | | | | | | 2,256,460 | |
| | | | OIL & GAS EXPLORATION & PRODUCTION — 0.88% | | | | |
| | 17,400 | | Anadarko Petroleum Corporation (e) | | | 845,292 | |
| | | | | | | | |
| | | | OIL & GAS REFINING & MARKETING — 0.06% | | | | |
| | 2,341 | | Northern Tier Energy LP | | | 60,538 | |
| | | | | | | | |
| | | | OIL & GAS STORAGE & TRANSPORTATION — 1.69% | | | | |
| | 43,944 | | The Williams Companies, Inc. | | | 1,129,361 | |
| | 18,116 | | Williams Partners LP | | | 504,530 | |
| | | | | | | 1,633,891 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| Shares | | | | Value | |
| | | | | |
| | PACKAGED FOODS & MEATS — 0.61% | | | |
| | 6,523 | | Keurig Green Mountain, Inc. (e) | | $ | 586,940 | |
| | | | | | | | |
| | | | PHARMACEUTICALS — 0.89% | | | | |
| | 1,300 | | Allergan plc (a)(b) | | | 406,250 | |
| | 500 | | Perrigo Company plc (b)(e) | | | 72,350 | |
| | 11,800 | | Pfizer, Inc. (e) | | | 380,904 | |
| | | | | | | 859,504 | |
| | | | REGIONAL BANKS — 1.21% | | | | |
| | 107,541 | | First Niagara Financial Group , Inc. (e) | | | 1,166,820 | |
| | | | | | | | |
| | | | REINSURANCE — 1.98% | | | | |
| | 13,682 | | PartnerRe Ltd. (b) | | | 1,911,923 | |
| | | | | | | | |
| | | | REITs — 3.62% | | | | |
| | 25,870 | | BioMed Realty Trust, Inc. (e) | | | 612,860 | |
| | 123 | | Blackstone Mortgage Trust, Inc. Class A (e) | | | 3,292 | |
| | 44,676 | | CYS Investments, Inc. (e) | | | 318,540 | |
| | 49,736 | | NorthStar Realty Finance Corporation | | | 847,004 | |
| | 63,081 | | Starwood Property Trust, Inc. (e) | | | 1,296,945 | |
| | 37,504 | | Wheeler Real Estate Investment Trust, Inc. (e) | | | 72,383 | |
| | 26,484 | | Winthrop Realty Trust (e) | | | 343,497 | |
| | | | | | | 3,494,521 | |
| | | | SEMICONDUCTORS — 10.14% | | | | |
| | 40,054 | | Atmel Corporation (e) | | | 344,865 | |
| | 81,058 | | Broadcom Corporation Class A (e) | | | 4,686,774 | |
| | 41,726 | | EZchip Semiconductor Ltd. (a)(b) | | | 1,031,467 | |
| | 19,100 | | Fairchild Semiconductor International, Inc. (a)(e) | | | 395,561 | |
| | 45,595 | | KLA-Tenor Corporation (e) | | | 3,162,013 | |
| | 13,803 | | PMC-Sierra, Inc. (a)(e) | | | 160,391 | |
| | | | | | | 9,781,071 | |
| | | | SPECIALIZED FINANCE — 0.62% | | | | |
| | 25,870 | | Hennessy Capital Acquisition Corporation II (a)(e) | | | 253,526 | |
| | 35,377 | | Pacific Special Acquisition Corporation (a)(b)(e) | | | 348,463 | |
| | | | | | | 601,989 | |
| | | | SPECIALTY CHEMICALS — 1.82% | | | | |
| | 17,600 | | W.R. Grace & Company (a)(e) | | | 1,752,784 | |
| | | | | | | | |
| | | | SYSTEMS SOFTWARE — 1.01% | | | | |
| | 17,500 | | Microsoft Corporation (e) | | | 970,900 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| | Shares | | | | Value | |
| | | | | | | |
| | | | TECHNOLOGY HARDWARE, | | | |
| | | | STORAGE & PERIPHERALS — 2.25% | | | |
| | | 84,416 | | EMC Corporation (e) | | $ | 2,167,803 | |
| | | | | | | | | |
| | | | | TRUCKING — 1.95% | | | | |
| | | 132,300 | | Hertz Global Holdings, Inc. (a)(e) | | | 1,882,629 | |
| | | | | | | | | |
| | | | | WIRELESS TELECOMMUNICATION SERVICES — 1.36% | | | | |
| | | 33,500 | | T-Mobile U.S., Inc. (a)(e) | | | 1,310,520 | |
| | | | | | | | | |
| | | | | TOTAL COMMON STOCKS (Cost $70,685,307) | | | 67,810,456 | |
| | | | | | | | | |
| CLOSED-END FUNDS — 4.69% | |
| | | | | | | | | |
| | | 20,123 | | BlackRock Floating Rate Income Strategies Fund, Inc. | | | 259,587 | |
| | | 35,721 | | DoubleLine Income Solutions Fund | | | 579,395 | |
| | | 94,714 | | Eaton Vance Floating-Rate Income Trust (e) | | | 1,197,185 | |
| | | 149 | | First Trust MLP and Energy Income Fund (e) | | | 1,970 | |
| | | 60,597 | | First Trust Senior Floating Rate Income Fund II (e) | | | 748,373 | |
| | | 1,050 | | Nuveen Energy MLP Total Return Fund | | | 11,655 | |
| | | 211,410 | | Invesco Senior Income Trust | | | 854,096 | |
| | | 173,140 | | Voya Prime Rate Trust | | | 876,088 | |
| | | | | TOTAL CLOSED-END FUNDS (Cost $4,675,602) | | | 4,528,349 | |
| | | | | | | | | |
| PREFERRED STOCKS — 2.29% | |
| | | | | | | | | |
| | | 37,580 | | Equity Commonwealth, 7.250%, Series E (e) | | | 961,672 | |
| | | 52,853 | | NorthStar Realty Finance Corporation, | | | | |
| | | | | 8.750%, Series E | | | 1,244,688 | |
| | | | | TOTAL PREFERRED STOCKS (Cost $2,280,843) | | | 2,206,360 | |
| | | | | | | | | |
| CONTINGENT VALUE RIGHTS — 0.00% | |
| | | | | | | | | |
| | | 5,338 | | Casa Ley, S.A. de C.V. (a)(e)(g) | | | 2,402 | |
| | | 5,338 | | Property Development Centers LLC (a)(e)(g) | | | 267 | |
| | | | | TOTAL CONTINGENT VALUE RIGHTS (Cost $0) | | | 2,669 | |
| | | | | | | | | |
| RIGHTS — 0.01% | |
| | | | | | | | | |
| | | 35,377 | | Pacific Special Acquisition Corporation (a)(b) | | | 6,191 | |
| | | | | TOTAL RIGHTS (Cost $8,171) | | | 6,191 | |
| | | | | | | | | |
| WARRANTS — 0.00% | |
| | | | | | | | | |
| | | 35,377 | | Pacific Special Acquisition Corporation (a)(b) | | | 3,343 | |
| | | | | TOTAL WARRANTS (Cost $3,112) | | | 3,343 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
Principal Amount | | Value | |
| |
| CORPORATE BONDS — 7.05% | |
| | | | | | | |
| | | | Community Health Systems, Inc. | | | |
| | $ | 1,435,000 | | 8.000%, 11/15/2019 | | $ | 1,452,937 | |
| | | | | Energy Future Intermediate Holding Company LLC | | | | |
| | | 430,830 | | 11.000%, 10/1/2021 (h) | | | 457,757 | |
| | | 1,397,224 | | 11.750%, 3/1/2022 (d)(h) | | | 1,491,536 | |
| | | | | The Manitowoc Company, Inc. | | | | |
| | | 1,174,000 | | 5.875%, 10/15/2022 | | | 1,218,025 | |
| | | | | NCR Corporation | | | | |
| | | 476,000 | | 5.000%, 7/15/2022 | | | 463,505 | |
| | | | | Neptune Finco Corporation | | | | |
| | | 537,000 | | 10.125%, 1/15/2023 (d) | | | 561,165 | |
| | | | | Pinnacle Entertainment, Inc. | | | | |
| | | 998,000 | | 7.500%, 4/15/2021 | | | 1,045,405 | |
| | | | | US Foods, Inc. | | | | |
| | | 113,000 | | 8.500%, 6/30/2019 (e) | | | 116,673 | |
| | | | | TOTAL CORPORATE BONDS (Cost $6,949,315) | | | 6,807,003 | |
| | | | | | | | | |
Contracts (100 shares per contract) | | | | |
| | |
| PURCHASED CALL OPTIONS — 0.00% | |
| | | | | | | | | |
| | | | | Aetna, Inc. | | | | |
| | | 32 | | Expiration: January 2016, Exercise Price: $145.00 | | | 176 | |
| | | | | Avago Technologies Ltd. | | | | |
| | | 11 | | Expiration: January 2016, Exercise Price: $175.00 | | | 55 | |
| | | | | | | | 231 | |
| PURCHASED PUT OPTIONS — 0.71% | | | | |
| | | | | | | | | |
| | | | | Air Products and Chemicals, Inc. | | | | |
| | | 36 | | Expiration: March 2016, Exercise Price: $115.00 | | | 4,950 | |
| | | | | American International Group, Inc. | | | | |
| | | 176 | | Expiration: February 2016, Exercise Price: $57.50 | | | 12,848 | |
| | | | | Anadarko Petroleum Corporation | | | | |
| | | 157 | | Expiration: January 2016, Exercise Price: $45.00 | | | 9,106 | |
| | | | | Bayer AG | | | | |
| | | 16 | | Expiration: January 2016, Exercise Price: EUR 100.00 (f) | | | 157 | |
| | | 13 | | Expiration: February 2016, Exercise Price: EUR 94.00 (f) | | | 381 | |
| | | | | CBS Corporation Class B | | | | |
| | | 68 | | Expiration: March 2016, Exercise Price: $37.50 | | | 2,176 | |
| | | 191 | | Expiration: March 2016, Exercise Price: $40.00 | | | 9,550 | |
| | | | | Charter Communications, Inc. Class A | | | | |
| | | 11 | | Expiration: January 2016, Exercise Price: $210.00 | | | 30,085 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | | |
| | Citigroup, Inc. | | | |
| | 77 | | Expiration: January 2016, Exercise Price: $47.00 | | $ | 1,155 | |
| | | | DISH Network Corporation Class A | | | | |
| | 285 | | Expiration: January 2016, Exercise Price: $50.00 | | | 2,137 | |
| | | | The Dow Chemical Company | | | | |
| | 206 | | Expiration: January 2016, Exercise Price: $44.00 | | | 1,236 | |
| | 35 | | Expiration: January 2016, Exercise Price: $45.00 | | | 280 | |
| | 158 | | Expiration: March 2016, Exercise Price: $43.00 | | | 8,374 | |
| | | | E.I. Du Pont de Nemours & Company | | | | |
| | 9 | | Expiration: January 2016, Exercise Price: $50.00 | | | 67 | |
| | 55 | | Expiration: January 2016, Exercise Price: $60.00 | | | 688 | |
| | 74 | | Expiration: April 2016, Exercise Price: $55.00 | | | 5,661 | |
| | | | General Electric Company | | | | |
| | 264 | | Expiration: January 2016, Exercise Price: $26.00 | | | 132 | |
| | 48 | | Expiration: March 2016, Exercise Price: $27.00 | | | 936 | |
| | | | General Motors Company | | | | |
| | 64 | | Expiration: January 2016, Exercise Price: $28.00 | | | 256 | |
| | 27 | | Expiration: January 2016, Exercise Price: $29.00 | | | 121 | |
| | 58 | | Expiration: January 2016, Exercise Price: $31.00 | | | 580 | |
| | 40 | | Expiration: January 2016, Exercise Price: $32.00 | | | 680 | |
| | 504 | | Expiration: March 2016, Exercise Price: $31.00 | | | 31,752 | |
| | | | Hertz Global Holdings, Inc. | | | | |
| | 475 | | Expiration: January 2016, Exercise Price: $15.00 | | | 45,125 | |
| | 584 | | Expiration: March 2016, Exercise Price: $12.00 | | | 23,360 | |
| | | | Hilton Worldwide Holdings, Inc. | | | | |
| | 179 | | Expiration: February 2016, Exercise Price: $18.00 | | | 4,475 | |
| | | | Huntsman Corporation | | | | |
| | 832 | | Expiration: January 2016, Exercise Price: $10.00 | | | 9,152 | |
| | | | iShares iBoxx $ High Yield Corporate Bond ETF | | | | |
| | 187 | | Expiration: June 2016, Exercise Price: $77.00 | | | 43,945 | |
| | | | Johnson Controls, Inc. | | | | |
| | 541 | | Expiration: January 2016, Exercise Price: $38.00 | | | 17,312 | |
| | | | Keurig Green Mountain, Inc. | | | | |
| | 6 | | Expiration: March 2016, Exercise Price: $85.00 | | | 1,137 | |
| | | | MGM Resorts International | | | | |
| | 217 | | Expiration: January 2016, Exercise Price: $17.00 | | | 326 | |
| | 307 | | Expiration: March 2016, Exercise Price: $18.00 | | | 7,061 | |
| | | | Microsoft Corporation | | | | |
| | 140 | | Expiration: February 2016, Exercise Price: $48.00 | | | 4,760 | |
| | | | NorthStar Realty Financial Corporation | | | | |
| | 448 | | Expiration: March 2016, Exercise Price: $13.00 | | | 6,720 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | |
| | Pfizer, Inc. | | | |
| | 37 | | Expiration: February 2016, Exercise Price: $28.00 | | $ | 370 | |
| | 57 | | Expiration: February 2016, Exercise Price: $29.00 | | | 912 | |
| | | | SPDR S&P 500 ETF Trust | | | | |
| | 84 | | Expiration: January 2016, Exercise Price: $200.00 | | | 11,172 | |
| | 13 | | Expiration: January 2016, Exercise Price: $204.00 | | | 3,315 | |
| | 84 | | Expiration: January 2016, Exercise Price: $205.00 | | | 24,864 | |
| | 125 | | Expiration: March 2016, Exercise Price: $175.00 | | | 16,813 | |
| | 125 | | Expiration: March 2016, Exercise Price: $195.00 | | | 52,750 | |
| | | | Starwood Hotels & Resorts Worldwide, Inc. | | | | |
| | 69 | | Expiration: January 2016, Exercise Price: $63.70 | | | 1,069 | |
| | 68 | | Expiration: January 2016, Exercise Price: $64.90 | | | 1,428 | |
| | 27 | | Expiration: February 2016, Exercise Price: $55.00 | | | 527 | |
| | | | T-Mobile U.S., Inc. | | | | |
| | 264 | | Expiration: January 2016, Exercise Price: $36.00 | | | 6,996 | |
| | | | VMware, Inc. | | | | |
| | 64 | | Expiration: September 2016, Exercise Price: $95.00 | | | 256,000 | |
| | | | W.R. Grace & Company | | | | |
| | 132 | | Expiration: March 2016, Exercise Price: $90.00 | | | 19,800 | |
| | | | | | | 682,697 | |
| | | | TOTAL PURCHASED OPTIONS (Cost $978,786) | | | 682,928 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF INVESTMENTS (continued)
December 31, 2015
| Shares | | | | Value | |
| |
| SHORT-TERM INVESTMENTS — 5.66% | |
| |
| | 5,459,138 | | Fidelity Institutional Government Portfolio, | | | |
| | | | Institutional Share Class, 0.12% (c)(e) | | $ | 5,459,138 | |
| | | | TOTAL SHORT-TERM INVESTMENTS | | | | |
| | | | (Cost $5,459,138) | | | 5,459,138 | |
| | | | TOTAL INVESTMENTS | | | | |
| | | | (Cost $91,040,274) — 90.69% | | | 87,506,437 | |
| | | | OTHER ASSETS IN EXCESS OF LIABILITIES — 9.31% | | | 8,982,802 | |
| | | | NET ASSETS — 100.0% | | $ | 96,489,239 | |
ADR – American Depository Receipt
ETF – Exchange-Traded Fund
EUR – Euro
MLP – Master Limited Partnership
plc – Public Limited Company
REITs – Real Estate Investment Trusts
| (a) | Non-income producing security. |
| (b) | Foreign security. |
| (c) | The rate quoted is the annualized seven-day yield as of December 31, 2015. |
| (d) | Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration normally to qualified institutional buyers. As of December 31, 2015, these securities represent 2.13% of total net assets. |
| (e) | All or a portion of the shares have been committed as collateral for open securities sold short, written option contracts, swap contacts, and forward currency exchange contracts. |
| (f) | Level 2 Security. Please see Note 2 in the Notes to the Financial Statements. |
| (g) | Level 3 Security. Please see Note 2 in the Notes to the Financial Statements. |
| (h) | Default or other conditions exist and the security is not presently accruing income. |
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor’s Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF SECURITIES SOLD SHORT
December 31, 2015
| Shares | | | | Value | |
| | |
| COMMON STOCKS — 16.06% | |
| | | | | | |
| | AIRLINES — 0.06% | | | |
| | 65,211 | | American Airlines Group, Inc. | | $ | 2,761,686 | |
| | | | | | | | |
| | | | BANKS — 0.76% | | | | |
| | 2,738,362 | | KeyCorp | | | 36,118,995 | |
| | | | | | | | |
| | | | COMMERICAL SERVICES — 0.00% | | | | |
| | 1,142 | | Global Payments, Inc. | | | 73,670 | |
| | | | | | | | |
| | | | COMMUNICATIONS EQUIPMENT — 0.12% | | | | |
| | 182,896 | | ARRIS Group, Inc. (b)(c) | | | 5,600,275 | |
| | | | | | | | |
| | | | ENERGY EQUIPMENT & SERVICES — 1.42% | | | | |
| | 967,984 | | Schlumberger Ltd. (a) | | | 67,516,884 | |
| | | | | | | | |
| | | | HEALTHCARE FACILITIES & SERVICES — 0.08% | | | | |
| | 58,111 | | Centene Corporation | | | 3,824,285 | |
| | | | | | | | |
| | | | HEALTH CARE PROVIDERS & SERVICES — 0.00% | | | | |
| | 100 | | Aetna, Inc. | | | 10,812 | |
| | | | | | | | |
| | | | HOTELS, RESORTS & CRUISE LINES — 0.39% | | | | |
| | 116,423 | | Interval Leisure Group, Inc. | | | 1,817,363 | |
| | 250,931 | | Marriott International, Inc. Class A | | | 16,822,414 | |
| | | | | | | 18,639,777 | |
| | | | HOUSEWARES — 0.86% | | | | |
| | 932,568 | | Newell Rubbermaid, Inc. | | | 41,107,597 | |
| | | | | | | | |
| | | | INSURANCE — 1.99% | | | | |
| | 811,836 | | ACE Ltd. (a) | | | 94,863,037 | |
| | | | | | | | |
| | | | INTERNET SOFTWARE & SERVICES — 3.69% | | | | |
| | 1,810,360 | | Alibaba Group Holding Ltd. — ADR | | | 147,127,957 | |
| | 94,569 | | Equinix, Inc. (b)(c) | | | 28,344,221 | |
| | | | | | | 175,472,178 | |
| | | | MEDIA — 1.67% | | | | |
| | 433,828 | | Charter Communications, Inc. Class A | | | 79,433,907 | |
| | | | | | | | |
| | | | OIL & GAS EQUIPMENT & SERVICES — 0.48% | | | | |
| | 675,115 | | Halliburton Company | | | 22,980,915 | |
| | | | | | | | |
| | | | OIL & GAS & CONSUMABLE FUELS — 0.71% | | | | |
| | 1,797,767 | | Energy Transfer Equity LP | | | 24,701,319 | |
| | 166,042 | | Royal Dutch Shell plc Class B — ADR | | | 7,644,574 | |
| | 34,041 | | Western Refining, Inc. | | | 1,212,540 | |
| | | | | | | 33,558,433 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF SECURITIES SOLD SHORT (continued)
December 31, 2015
| Shares | | | | Value | |
| | | | | |
| | SEMICONDUCTORS — 3.72% | | | |
| | 652,346 | | Avago Technologies Ltd. | | $ | 94,688,022 | |
| | 1,014,370 | | Lam Research Corporation | | | 80,561,265 | |
| | 55,429 | | Microsemi Corporation | | | 1,806,4310 | |
| | | | | | | 177,055,718 | |
| | | | SOFTWARE — 0.11% | | | | |
| | 87,560 | | VMware Inc. Class A | | | 4,953,269 | |
| | | | TOTAL SECURITIES SOLD SHORT | | | | |
| | | | (Proceeds $746,310,550) | | $ | 763,971,438 | |
ADR – American Depository Receipt
plc – Public Limited Company
| (a) | Foreign security. |
| (b) | Security fair valued by the Valuation Group in good faith in accordance with the policies adopted by the Board of Trustees. |
| (c) | Level 2 Security. Please see Note 2 in the Notes to the Financial Statements. |
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor’s Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF SECURITIES SOLD SHORT
December 31, 2015
| Shares | | | | Value | |
| | |
| COMMON STOCKS — 16.81% | |
| | | | | | |
| | BANKS — 1.00% | | | |
| | 73,126 | | KeyCorp | | $ | 964,532 | |
| | | | | | | | |
| | | | COMMERICAL SERVICES — 0.00% | | | | |
| | 35 | | Global Payments, Inc. | | | 2,258 | |
| | | | | | | | |
| | | | COMMUNICATIONS EQUIPMENT — 0.43% | | | | |
| | 13,446 | | ARRIS Group, Inc. (b)(c) | | | 411,716 | |
| | | | | | | | |
| | | | ENERGY EQUIPMENT & SERVICES — 1.40% | | | | |
| | 19,306 | | Schlumberger Ltd. (a) | | | 1,346,593 | |
| | | | | | | | |
| | | | HEALTH CARE FACILITIES & SERVICES — 0.08% | | | | |
| | 1,163 | | Centene Corporation | | | 76,537 | |
| | | | | | | | |
| | | | HOTELS, RESORTS & CRUISE LINES — 0.60% | | | | |
| | 3,583 | | Interval Leisure Group, Inc. | | | 55,931 | |
| | 7,725 | | Marriott International, Inc. Class A | | | 517,884 | |
| | | | | | | 573,815 | |
| | | | HOUSEWARE — 1.14% | | | | |
| | 25,012 | | Newell Rubbermaid, Inc. | | | 1,102,529 | |
| | | | | | | | |
| | | | INTERNET SOFTWARE & SERVICES — 4.94% | | | | |
| | 43,822 | | Alibaba Group Holding Ltd. — ADR | | | 3,561,414 | |
| | 4,003 | | Equinix, Inc. (b)(c) | | | 1,199,779 | |
| | | | | | | 4,761,193 | |
| | | | MEDIA — 1.82% | | | | |
| | 9,593 | | Charter Communications, Inc. Class A | | | 1,756,478 | |
| | | | | | | | |
| | | | OIL & GAS EQUIPMENT & SERVICES — 0.07% | | | | |
| | 2,096 | | Halliburton Company | | | 71,348 | |
| | | | | | | | |
| | | | OIL & GAS & CONSUMABLE FUELS — 0.89% | | | | |
| | 58,984 | | Energy Transfer Equity LP | | | 810,440 | |
| | 575 | | Royal Dutch Shell plc Class B — ADR | | | 26,473 | |
| | 696 | | Western Refining, Inc. | | | 24,792 | |
| | | | | | | 861,705 | |
| | | | SEMICONDUCTORS — 4.34% | | | | |
| | 16,134 | | Avago Technologies Ltd. | | | 2,341,850 | |
| | 22,795 | | Lam Research Corporation | | | 1,810,379 | |
| | 1,064 | | Microsemi Corporation | | | 34,676 | |
| | | | | | | 4,186,905 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF SECURITIES SOLD SHORT (continued)
December 31, 2015
| Shares | | | | Value | |
| | | | | |
| | SOFTWARE — 0.10% | | | |
| | 1,758 | | VMware Inc. Class A | | $ | 99,450 | |
| | | | TOTAL SECURITIES SOLD SHORT | | | | |
| | | | (Proceeds $15,729,458) | | $ | 16,215,059 | |
ADR – | American Depository Receipt |
plc – | Public Limited Company |
| (a) | Foreign security. |
| (b) | Security fair valued by the Valuation Group in good faith in accordance with the policies adopted by the Board of Trustees. |
| (c) | Level 2 Security. Please see Note 2 in the Notes to the Financial Statements. |
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor’s Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF OPTIONS WRITTEN
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | |
| CALL OPTIONS WRITTEN | | | |
| | | | | |
| | Aetna, Inc. | | | |
| | 769 | | Expiration: January 2016, Exercise Price: $100.00 | | $ | 672,875 | |
| | | | Air Products and Chemicals, Inc. | | | | |
| | 1,354 | | Expiration: March 2016, Exercise Price: $125.00 | | | 1,272,760 | |
| | | | Airgas, Inc. | | | | |
| | 1,650 | | Expiration: January 2016, Exercise Price: $140.00 | | | 20,625 | |
| | 176 | | Expiration: January 2016, Exercise Price: $145.00 | | | 1,760 | |
| | | | Allergan plc | | | | |
| | 332 | | Expiration: January 2016, Exercise Price: $285.00 | | | 996,000 | |
| | | | American International Group, Inc. | | | | |
| | 4,451 | | Expiration: February 2016, Exercise Price: $60.00 | | | 1,479,957 | |
| | 18,196 | | Expiration: February 2016, Exercise Price: $62.50 | | | 3,238,888 | |
| | | | Anadarko Petroleum Corporation | | | | |
| | 8,534 | | Expiration: January 2016, Exercise Price: $52.50 | | | 512,040 | |
| | 2,844 | | Expiration: January 2016, Exercise Price: $67.50 | | | 14,220 | |
| | | | AT&T, Inc. | | | | |
| | 6,221 | | Expiration: January 2016, Exercise Price: $34.00 | | | 311,050 | |
| | | | Bayer AG | | | | |
| | 790 | | Expiration: January 2016, Exercise Price: EUR 110.00 (a) | | | 549,461 | |
| | 915 | | Expiration: January 2016, Exercise Price: EUR 115.00 (a) | | | 268,479 | |
| | 841 | | Expiration: February 2016, Exercise Price: EUR 105.00 (a) | | | 1,087,615 | |
| | | | CBS Corporation Class B | | | | |
| | 2,112 | | Expiration: March 2016, Exercise Price: $42.50 | | | 1,182,720 | |
| | 12,668 | | Expiration: March 2016, Exercise Price: $45.00 | | | 4,750,500 | |
| | 2,316 | | Expiration: March 2016, Exercise Price: $47.50 | | | 487,518 | |
| | | | Charter Communications, Inc. Class A | | | | |
| | 896 | | Expiration: January 2016, Exercise Price: $210.00 | | | 11,200 | |
| | | | DISH Network Corporation Class A | | | | |
| | 15,577 | | Expiration: January 2016, Exercise Price: $55.00 | | | 4,517,330 | |
| | | | The Dow Chemical Company | | | | |
| | 8,136 | | Expiration: January 2016, Exercise Price: $49.00 | | | 2,603,520 | |
| | 2,356 | | Expiration: January 2016, Exercise Price: $50.00 | | | 490,048 | |
| | 11,872 | | Expiration: March 2016, Exercise Price: $48.00 | | | 5,846,960 | |
| | | | E.I. Du Pont de Nemours & Company | | | | |
| | 2,018 | | Expiration: January 2016, Exercise Price: $67.50 | | | 190,701 | |
| | 2,953 | | Expiration: April 2016, Exercise Price: $62.50 | | | 1,867,772 | |
| | | | E.ON SE | | | | |
| | 1,382 | | Expiration: January 2016, Exercise Price: EUR 8.50 (a) | | | 79,603 | |
| | | | EMC Corporation | | | | |
| | 2,963 | | Expiration: January 2016, Exercise Price: $25.00 | | | 268,151 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | | |
| | Energy Transfer Equity LP | | | |
| | 576 | | Expiration: January 2016, Exercise Price: $10.00 | | $ | 215,424 | |
| | | | General Electric Company | | | | |
| | 7,366 | | Expiration: January 2016, Exercise Price: $29.00 | | | 1,613,154 | |
| | 502 | | Expiration: February 2016, Exercise Price: $29.00 | | | 122,488 | |
| | 9,069 | | Expiration: March 2016, Exercise Price: $30.00 | | | 1,528,126 | |
| | | | General Motors Company | | | | |
| | 4,411 | | Expiration: January 2016, Exercise Price: $34.00 | | | 313,181 | |
| | 21,895 | | Expiration: March 2016, Exercise Price: $35.00 | | | 2,298,975 | |
| | | | Halliburton Company | | | | |
| | 865 | | Expiration: February 2016, Exercise Price: $30.00 | | | 408,712 | |
| | | | Health Net, Inc. | | | | |
| | 5,166 | | Expiration: January 2016, Exercise Price: $62.50 | | | 3,099,600 | |
| | | | Hertz Global Holdings, Inc. | | | | |
| | 29,310 | | Expiration: January 2016, Exercise Price: $17.00 | | | 234,480 | |
| | 7,432 | | Expiration: January 2016, Exercise Price: $18.00 | | | 18,580 | |
| | 26,872 | | Expiration: March 2016, Exercise Price: $14.00 | | | 3,627,720 | |
| | | | Humana, Inc. | | | | |
| | 2,222 | | Expiration: January 2016, Exercise Price: $170.00 | | | 2,188,670 | |
| | 1,161 | | Expiration: January 2016, Exercise Price: $175.00 | | | 597,915 | |
| | 590 | | Expiration: February 2016, Exercise Price: $150.00 | | | 1,831,950 | |
| | | | Huntsman Corporation | | | | |
| | 34,930 | | Expiration: January 2016, Exercise Price: $13.00 | | | 174,650 | |
| | | | Johnson Controls, Inc. | | | | |
| | 2,347 | | Expiration: January 2016, Exercise Price: $40.00 | | | 117,350 | |
| | 14,972 | | Expiration: January 2016, Exercise Price: $43.00 | | | 29,944 | |
| | | | Keurig Green Mountain, Inc. | | | | |
| | 646 | | Expiration: January 2016, Exercise Price: $92.50 | | | 23,902 | |
| | 110 | | Expiration: March 2016, Exercise Price: $95.00 | | | 5,500 | |
| | | | King Digital Entertainment plc | | | | |
| | 17,067 | | Expiration: February 2016, Exercise Price: $18.00 | | | 42,668 | |
| | | | MGM Resorts International | | | | |
| | 8,652 | | Expiration: January 2016, Exercise Price: $21.00 | | | 1,648,206 | |
| | 4,615 | | Expiration: March 2016, Exercise Price: $20.00 | | | 1,522,950 | |
| | 8,784 | | Expiration: March 2016, Exercise Price: $21.00 | | | 2,314,584 | |
| | | | NorthStar Realty Financial Corporation | | | | |
| | 13,925 | | Expiration: March 2016, Exercise Price: $16.00 | | | 2,332,438 | |
| | | | Perrigo Company plc | | | | |
| | 289 | | Expiration: February 2016, Exercise Price: $150.00 | | | 124,270 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | | |
| | Pfizer, Inc. | | | |
| | 1,569 | | Expiration: February 2016, Exercise Price: $31.00 | | $ | 263,592 | |
| | 2,416 | | Expiration: February 2016, Exercise Price: $33.00 | | | 108,720 | |
| | | | Royal Dutch Shell plc Class B | | | | |
| | 67 | | Expiration: January 2016, Exercise Price: GBP 15.00 (a) | | | 62,230 | |
| | | | Sirius XM Holdings, Inc. | | | | |
| | 43,703 | | Expiration: January 2016, Exercise Price: $4.00 | | | 524,436 | |
| | 18,196 | | Expiration: February 2016, Exercise Price: $4.00 | | | 327,528 | |
| | | | SPX FLOW, Inc. | | | | |
| | 891 | | Expiration: January 2016, Exercise Price: $22.50 | | | 482,031 | |
| | | | Starwood Hotels & Resorts Worldwide, Inc. | | | | |
| | 2,175 | | Expiration: January 2016, Exercise Price: $67.40 | | | 566,588 | |
| | 1,418 | | Expiration: January 2016, Exercise Price: $68.70 | | | 229,716 | |
| | 1,472 | | Expiration: February 2016, Exercise Price: $62.50 | | | 1,140,800 | |
| | | | T-Mobile U.S., Inc. | | | | |
| | 22,663 | | Expiration: January 2016, Exercise Price: $38.00 | | | 4,249,313 | |
| | 2,318 | | Expiration: February 2016, Exercise Price: $40.00 | | | 352,336 | |
| | | | Vivendi SA | | | | |
| | 4,685 | | Expiration: January 2016, Exercise Price: EUR 19.00 (a) | | | 488,786 | |
| | 5,303 | | Expiration: January 2016, Exercise Price: EUR 19.50 (a) | | | 334,248 | |
| | 6,344 | | Expiration: February 2016, Exercise Price: EUR 20.00 (a) | | | 337,818 | |
| | | | W.R. Grace & Company | | | | |
| | 2,692 | | Expiration: March 2016, Exercise Price: $97.50 | | | 1,534,440 | |
| | 7,404 | | Expiration: March 2016, Exercise Price: $100.00 | | | 3,072,660 | |
| | | | Williams Partners LP | | | | |
| | 208 | | Expiration: January 2016, Exercise Price: $22.50 | | | 111,280 | |
| | 834 | | Expiration: January 2016, Exercise Price: $25.00 | | | 237,690 | |
| | | | | | | 73,581,402 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | |
| PUT OPTIONS WRITTEN | | | |
| | | | | |
| | iShares iBoxx $ High Yield Corporate Bond ETF | | | |
| | 9,325 | | Expiration: June 2016, Exercise Price: $72.00 | | $ | 1,086,363 | |
| | | | SPDR S&P 500 ETF Trust | | | | |
| | 2,208 | | Expiration: January 2016, Exercise Price: $190.00 | | | 58,512 | |
| | 5,729 | | Expiration: January 2016, Exercise Price: $195.00 | | | 332,282 | |
| | 12,312 | | Expiration: March 2016, Exercise Price: $185.00 | | | 2,893,320 | |
| | | | | | | 4,370,477 | |
| | | | TOTAL OPTIONS WRITTEN | | | | |
| | | | (Premiums received $102,853,660) | | $ | 77,951,879 | |
ETF – Exchange-Traded Fund
EUR – Euro
GBP – British Pound
plc – Public Limited Company
| (a) | Level 2 Security. Please see Note 2 in the Notes to the Financial Statements. |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF OPTIONS WRITTEN
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | |
| CALL OPTIONS WRITTEN | | | |
| | | | | |
| | Aetna, Inc. | | | |
| | 32 | | Expiration: January 2016, Exercise Price: $100.00 | | $ | 28,000 | |
| | | | Air Products and Chemicals, Inc. | | | | |
| | 44 | | Expiration: March 2016, Exercise Price: $125.00 | | | 41,360 | |
| | | | Airgas, Inc. | | | | |
| | 33 | | Expiration: January 2016, Exercise Price: $140.00 | | | 412 | |
| | 3 | | Expiration: January 2016, Exercise Price: $145.00 | | | 30 | |
| | | | Allergan plc | | | | |
| | 13 | | Expiration: January 2016, Exercise Price: $285.00 | | | 39,000 | |
| | | | American International Group, Inc. | | | | |
| | 79 | | Expiration: February 2016, Exercise Price: $60.00 | | | 26,267 | |
| | 340 | | Expiration: February 2016, Exercise Price: $62.50 | | | 60,520 | |
| | | | Anadarko Petroleum Corporation | | | | |
| | 182 | | Expiration: January 2016, Exercise Price: $52.50 | | | 10,920 | |
| | 35 | | Expiration: January 2016, Exercise Price: $67.50 | | | 175 | |
| | | | AT&T, Inc. | | | | |
| | 189 | | Expiration: January 2016, Exercise Price: $34.00 | | | 9,450 | |
| | | | Bayer AG | | | | |
| | 16 | | Expiration: January 2016, Exercise Price: EUR 110.00 (a) | | | 11,128 | |
| | 7 | | Expiration: January 2016, Exercise Price: EUR 115.00 (a) | | | 2,054 | |
| | 16 | | Expiration: February 2016, Exercise Price: EUR 105.00 (a) | | | 20,692 | |
| | | | Cablevision Systems Corporation Class A | | | | |
| | 117 | | Expiration: January 2016, Exercise Price: $33.00 | | | 585 | |
| | | | CBS Corporation Class B | | | | |
| | 85 | | Expiration: March 2016, Exercise Price: $42.50 | | | 47,600 | |
| | 163 | | Expiration: March 2016, Exercise Price: $45.00 | | | 61,125 | |
| | 29 | | Expiration: March 2016, Exercise Price: $47.50 | | | 6,104 | |
| | | | Charter Communications, Inc. Class A | | | | |
| | 11 | | Expiration: January 2016, Exercise Price: $210.00 | | | 137 | |
| | | | Citigroup, Inc. | | | | |
| | 60 | | Expiration: January 2016, Exercise Price: $50.00 | | | 13,710 | |
| | 77 | | Expiration: January 2016, Exercise Price: $52.50 | | | 5,775 | |
| | | | DISH Network Corporation Class A | | | | |
| | 285 | | Expiration: January 2016, Exercise Price: $55.00 | | | 82,650 | |
| | | | The Dow Chemical Company | | | | |
| | 257 | | Expiration: January 2016, Exercise Price: $49.00 | | | 82,240 | |
| | 44 | | Expiration: January 2016, Exercise Price: $50.00 | | | 9,152 | |
| | 198 | | Expiration: March 2016, Exercise Price: $48.00 | | | 97,515 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | | |
| | E.I. Du Pont de Nemours & Company | | | |
| | 68 | | Expiration: January 2016, Exercise Price: $67.50 | | $ | 6,426 | |
| | 89 | | Expiration: April 2016, Exercise Price: $62.50 | | | 56,292 | |
| | | | E.ON SE | | | | |
| | 90 | | Expiration: January 2016, Exercise Price: EUR 8.50 (a) | | | 5,184 | |
| | | | EMC Corporation | | | | |
| | 60 | | Expiration: January 2016, Exercise Price: $25.00 | | | 5,430 | |
| | | | Energy Transfer Equity LP | | | | |
| | 5 | | Expiration: January 2016, Exercise Price: $10.00 | | | 1,870 | |
| | | | General Electric Company | | | | |
| | 57 | | Expiration: March 2016, Exercise Price: $30.00 | | | 9,605 | |
| | | | General Motors Company | | | | |
| | 80 | | Expiration: January 2016, Exercise Price: $34.00 | | | 5,680 | |
| | 630 | | Expiration: March 2016, Exercise Price: $35.00 | | | 66,150 | |
| | | | Halliburton Company | | | | |
| | 113 | | Expiration: February 2016, Exercise Price: $30.00 | | | 53,393 | |
| | | | Health Net, Inc. | | | | |
| | 133 | | Expiration: January 2016, Exercise Price: $62.50 | | | 79,800 | |
| | | | Hertz Global Holdings, Inc. | | | | |
| | 473 | | Expiration: January 2016, Exercise Price: $17.00 | | | 3,784 | |
| | 120 | | Expiration: January 2016, Exercise Price: $18.00 | | | 300 | |
| | 730 | | Expiration: March 2016, Exercise Price: $14.00 | | | 98,550 | |
| | | | Hilton Worldwide Holdings, Inc. | | | | |
| | 224 | | Expiration: February 2016, Exercise Price: $21.00 | | | 30,240 | |
| | | | Humana, Inc. | | | | |
| | 45 | | Expiration: January 2016, Exercise Price: $170.00 | | | 44,325 | |
| | 32 | | Expiration: January 2016, Exercise Price: $175.00 | | | 16,480 | |
| | 12 | | Expiration: February 2016, Exercise Price: $150.00 | | | 37,260 | |
| | | | Huntsman Corporation | | | | |
| | 873 | | Expiration: January 2016, Exercise Price: $13.00 | | | 4,365 | |
| | | | Johnson Controls, Inc. | | | | |
| | 677 | | Expiration: January 2016, Exercise Price: $43.00 | | | 1,354 | |
| | | | Keurig Green Mountain, Inc. | | | | |
| | 19 | | Expiration: January 2016, Exercise Price: $92.50 | | | 703 | |
| | 2 | | Expiration: March 2016, Exercise Price: $95.00 | | | 100 | |
| | | | King Digital Entertainment plc | | | | |
| | 457 | | Expiration: February 2016, Exercise Price: $18.00 | | | 1,143 | |
| | | | MGM Resorts International | | | | |
| | 241 | | Expiration: January 2016, Exercise Price: $21.00 | | | 45,911 | |
| | 92 | | Expiration: March 2016, Exercise Price: $20.00 | | | 30,360 | |
| | 260 | | Expiration: March 2016, Exercise Price: $21.00 | | | 68,510 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
December 31, 2015
Contracts (100 shares per contract) | | Value | |
| | | | | | |
| | Microsoft Corporation | | | |
| | 175 | | Expiration: February 2016, Exercise Price: $52.50 | | $ | 70,000 | |
| | | | NorthStar Realty Financial Corporation | | | | |
| | 448 | | Expiration: March 2016, Exercise Price: $16.00 | | | 75,040 | |
| | | | Perrigo Company plc | | | | |
| | 5 | | Expiration: February 2016, Exercise Price: $150.00 | | | 2,150 | |
| | | | Pfizer, Inc. | | | | |
| | 46 | | Expiration: February 2016, Exercise Price: $31.00 | | | 7,728 | |
| | 72 | | Expiration: February 2016, Exercise Price: $33.00 | | | 3,240 | |
| | | | Royal Dutch Shell plc Class B | | | | |
| | 1 | | Expiration: January 2016, Exercise Price: GBP 15.00 (a) | | | 929 | |
| | | | Sirius XM Holdings, Inc. | | | | |
| | 269 | | Expiration: January 2016, Exercise Price: $4.00 | | | 3,228 | |
| | 199 | | Expiration: February 2016, Exercise Price: $4.00 | | | 3,582 | |
| | | | SPX FLOW, Inc. | | | | |
| | 23 | | Expiration: January 2016, Exercise Price: $22.50 | | | 12,443 | |
| | | | Starwood Hotels & Resorts Worldwide, Inc. | | | | |
| | 44 | | Expiration: January 2016, Exercise Price: $67.40 | | | 11,462 | |
| | 57 | | Expiration: January 2016, Exercise Price: $68.70 | | | 9,234 | |
| | 70 | | Expiration: January 2016, Exercise Price: $69.90 | | | 7,350 | |
| | 30 | | Expiration: February 2016, Exercise Price: $62.50 | | | 23,250 | |
| | | | T-Mobile U.S., Inc. | | | | |
| | 330 | | Expiration: January 2016, Exercise Price: $38.00 | | | 61,875 | |
| | 5 | | Expiration: February 2016, Exercise Price: $40.00 | | | 760 | |
| | | | Vivendi SA | | | | |
| | 94 | | Expiration: January 2016, Exercise Price: EUR 19.00 (a) | | | 9,807 | |
| | 239 | | Expiration: January 2016, Exercise Price: EUR 19.50 (a) | | | 15,064 | |
| | 144 | | Expiration: February 2016, Exercise Price: EUR 20.00 (a) | | | 7,668 | |
| | | | W.R. Grace & Company | | | | |
| | 47 | | Expiration: March 2016, Exercise Price: $97.50 | | | 26,790 | |
| | 129 | | Expiration: March 2016, Exercise Price: $100.00 | | | 53,535 | |
| | | | Williams Partners LP | | | | |
| | 5 | | Expiration: January 2016, Exercise Price: $22.50 | | | 2,675 | |
| | 20 | | Expiration: January 2016, Exercise Price: $25.00 | | | 5,700 | |
| | | | | | | 1,743,326 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF OPTIONS WRITTEN (continued)
December 31, 2015
| Contracts (100 shares per contract) | | Value | |
| | | | | |
| PUT OPTIONS WRITTEN | | | |
| | | | | |
| | iShares iBoxx $ High Yield Corporate Bond ETF | | | |
| | 187 | | Expiration: June 2016, Exercise Price: $72.00 | | $ | 21,786 | |
| | | | SPDR S&P 500 ETF Trust | | | | |
| | 42 | | Expiration: January 2016, Exercise Price: $190.00 | | | 1,113 | |
| | 111 | | Expiration: January 2016, Exercise Price: $195.00 | | | 6,438 | |
| | 250 | | Expiration: March 2016, Exercise Price: $185.00 | | | 58,750 | |
| | | | | | | 88,087 | |
| | | | TOTAL OPTIONS WRITTEN | | | | |
| | | | (Premiums received $2,525,448) | | $ | 1,831,413 | |
ETF – Exchange-Traded Fund
EUR – Euro
GBP – British Pound
plc – Public Limited Company
| (a) | Level 2 Security. Please see Note 2 in the Notes to the Financial Statements. |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF FORWARD CURRENCY EXCHANGE CONTRACTS*
December 31, 2015
| | | | | | | USD Value at | | | | | | | USD Value at | | | Unrealized | |
| Settlement | | Currency to | | December 31, | | | Currency to | | December 31, | | | Appreciation | |
| Date | | be Delivered | | 2015 | | | be Received | | 2015 | | | (Depreciation)** | |
| 1/7/16 | | | 29,515,291 | | AUD | | $ | 21,500,771 | | | | 21,154,304 | | USD | | $ | 21,154,304 | | | $ | (346,467 | ) |
| 1/7/16 | | | 11,596,926 | | USD | | | 11,596,926 | | | | 16,344,313 | | AUD | | | 11,906,213 | | | | 309,287 | |
| 2/10/16 | | | 3,427,122 | | AUD | | | 2,492,131 | | | | 2,495,116 | | USD | | | 2,495,116 | | | | 2,985 | |
| 2/10/16 | | | 2,586,673 | | USD | | | 2,586,673 | | | | 3,608,766 | | AUD | | | 2,624,219 | | | | 37,546 | |
| 3/15/16 | | | 7,187,862 | | AUD | | | 5,218,115 | | | | 5,176,698 | | USD | | | 5,176,698 | | | | (41,417 | ) |
| 1/19/16 | | | 2,231,513 | | EUR | | | 2,426,267 | | | | 2,392,963 | | USD | | | 2,392,963 | | | | (33,304 | ) |
| 1/19/16 | | | 1,136,329 | | USD | | | 1,136,329 | | | | 1,056,813 | | EUR | | | 1,149,046 | | | | 12,717 | |
| 1/20/16 | | | 23,430,474 | | EUR | | | 25,476,003 | | | | 25,777,673 | | USD | | | 25,777,673 | | | | 301,670 | |
| 1/20/16 | | | 26,699,217 | | USD | | | 26,699,217 | | | | 23,430,474 | | EUR | | | 25,476,003 | | | | (1,223,214 | ) |
| 1/29/16 | | | 28,221,366 | | EUR | | | 30,692,136 | | | | 30,951,994 | | USD | | | 30,951,994 | | | | 259,858 | |
| 1/29/16 | | | 107,451 | | USD | | | 107,451 | | | | 99,000 | | EUR | | | 107,668 | | | | 217 | |
| 2/19/16 | | | 33,855,158 | | EUR | | | 36,839,061 | | | | 36,799,880 | | USD | | | 36,799,880 | | | | (39,181 | ) |
| 2/19/16 | | | 1,040,113 | | USD | | | 1,040,113 | | | | 951,600 | | EUR | | | 1,035,471 | | | | (4,642 | ) |
| 4/21/16 | | | 22,162,400 | | EUR | | | 24,159,318 | | | | 24,959,311 | | USD | | | 24,959,311 | | | | 799,993 | |
| 4/21/16 | | | 18,600,113 | | USD | | | 18,600,113 | | | | 16,534,328 | | EUR | | | 18,024,135 | | | | (575,978 | ) |
| 1/4/16 | | | 4,989,532 | | GBP | | | 7,355,674 | | | | 7,526,210 | | USD | | | 7,526,210 | | | | 170,536 | |
| 1/4/16 | | | 7,401,971 | | USD | | | 7,401,971 | | | | 4,989,532 | | GBP | | | 7,355,674 | | | | (46,297 | ) |
| 1/28/16 | | | 4,989,532 | | GBP | | | 7,356,116 | | | | 7,402,270 | | USD | | | 7,402,270 | | | | 46,154 | |
| 2/23/16 | | | 15,061,870 | | GBP | | | 22,206,370 | | | | 23,061,002 | | USD | | | 23,061,002 | | | | 854,632 | |
| 3/23/16 | | | 29,871,094 | | GBP | | | 44,042,190 | | | | 45,299,562 | | USD | | | 45,299,562 | | | | 1,257,372 | |
| 3/23/16 | | | 98,279 | | USD | | | 98,279 | | | | 63,636 | | GBP | | | 93,825 | | | | (4,454 | ) |
| 4/21/16 | | | 16,707,576 | | GBP | | | 24,636,705 | | | | 25,911,448 | | USD | | | 25,911,448 | | | | 1,274,743 | |
| 10/4/16 | | | 6,391,704 | | GBP | | | 9,434,864 | | | | 9,648,292 | | USD | | | 9,648,292 | | | | 213,428 | |
| | | | | | | | $ | 333,102,793 | | | | | | | | $ | 336,328,977 | | | $ | 3,226,184 | |
AUD – Australian Dollar
EUR – Euro
GBP – British Pound
USD – U.S. Dollar
| * | JPMorgan Chase & Co., Inc. is the counterparty for all open forward currency exchange contracts held by the Fund as of December 31, 2015. |
| ** | Unrealized appreciation is a receivable and unrealized depreciation is a payable. |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF FORWARD CURRENCY EXCHANGE CONTRACTS*
December 31, 2015
| | | | | | | USD Value at | | | | | | | USD Value at | | | Unrealized | |
| Settlement | | Currency to | | December 31, | | | Currency to | | December 31, | | | Appreciation | |
| Date | | be Delivered | | 2015 | | | be Received | | 2015 | | | (Depreciation)** | |
| 1/7/16 | | | 942,826 | | AUD | | $ | 686,813 | | | | 676,513 | | USD | | $ | 676,513 | | | $ | (10,300 | ) |
| 1/7/16 | | | 370,157 | | USD | | | 370,157 | | | | 521,687 | | AUD | | | 380,029 | | | | 9,872 | |
| 2/10/16 | | | 21,102 | | AUD | | | 15,345 | | | | 15,363 | | USD | | | 15,363 | | | | 18 | |
| 2/10/16 | | | 15,927 | | USD | | | 15,927 | | | | 22,220 | | AUD | | | 16,158 | | | | 231 | |
| 3/15/16 | | | 360,481 | | AUD | | | 261,696 | | | | 259,618 | | USD | | | 259,618 | | | | (2,078 | ) |
| 1/19/16 | | | 145,633 | | EUR | | | 158,343 | | | | 156,170 | | USD | | | 156,170 | | | | ( 2,173 | ) |
| 1/19/16 | | | 74,334 | | USD | | | 74,334 | | | | 69,133 | | EUR | | | 75,166 | | | | 832 | |
| 1/20/16 | | | 712,005 | | EUR | | | 774,165 | | | | 792,335 | | USD | | | 792,335 | | | | 18,170 | |
| 1/20/16 | | | 811,337 | | USD | | | 811,337 | | | | 712,005 | | EUR | | | 774,165 | | | | (37,172 | ) |
| 1/29/16 | | | 1,366,308 | | EUR | | | 1,485,928 | | | | 1,501,181 | | USD | | | 1,501,181 | | | | 15,253 | |
| 1/29/16 | | | 1,050,628 | | USD | | | 1,050,628 | | | | 968,000 | | EUR | | | 1,052,748 | | | | 2,120 | |
| 2/19/16 | | | 1,280,061 | | EUR | | | 1,392,882 | | | | 1,391,401 | | USD | | | 1,391,401 | | | | (1,481 | ) |
| 2/19/16 | | | 23,609 | | USD | | | 23,609 | | | | 21,600 | | EUR | | | 23,504 | | | | (105 | ) |
| 4/21/16 | | | 504,264 | | EUR | | | 549,700 | | | | 569,093 | | USD | | | 569,093 | | | | 19,393 | |
| 4/21/16 | | | 398,095 | | USD | | | 398,095 | | | | 353,656 | | EUR | | | 385,522 | | | | (12,573 | ) |
| 1/4/16 | | | 270,449 | | GBP | | | 398,702 | | | | 407,945 | | USD | | | 407,945 | | | | 9,243 | |
| 1/4/16 | | | 401,211 | | USD | | | 401,211 | | | | 270,449 | | GBP | | | 398,702 | | | | (2,509 | ) |
| 1/28/16 | | | 270,449 | | GBP | | | 398,725 | | | | 401,227 | | USD | | | 401,227 | | | | 2,502 | |
| 2/23/16 | | | 449,108 | | GBP | | | 662,139 | | | | 688,206 | | USD | | | 688,206 | | | | 26,067 | |
| 3/23/16 | | | 684,897 | | GBP | | | 1,009,818 | | | | 1,049,304 | | USD | | | 1,049,304 | | | | 39,486 | |
| 3/23/16 | | | 273 | | USD | | | 273 | | | | 177 | | GBP | | | 261 | | | | (12 | ) |
| 4/21/16 | | | 691,298 | | GBP | | | 1,019,376 | | | | 1,065,418 | | USD | | | 1,065,418 | | | | 46,042 | |
| 10/4/16 | | | 128,612 | | GBP | | | 189,845 | | | | 194,139 | | USD | | | 194,139 | | | | 4,294 | |
| 6/15/16 | | | 11,795,241 | | HKD | | | 1,523,605 | | | | 1,522,780 | | USD | | | 1,522,780 | | | | (825 | ) |
| | | | | | | | $ | 13,672,653 | | | | | | | | $ | 13,796,948 | | | $ | 124,295 | |
AUD – Australian Dollar
EUR – Euro
GBP – British Pound
HKD – Hong Kong Dollar
USD – U.S. Dollar
| * | JPMorgan Chase & Co., Inc. is the counterparty for all open forward currency exchange contracts held by the Fund as of December 31, 2015. |
| ** | Unrealized appreciation is a receivable and unrealized depreciation is a payable. |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
SCHEDULE OF SWAP CONTRACTS
December 31, 2015
| | | | | | | | | Unrealized | | |
| Termination | | | | | | | | Appreciation | | Counter- |
| Date | | Security | | Shares | | Notional | | (Depreciation)* | | party |
| | | | | | | | | | | |
| LONG TOTAL RETURN SWAP CONTRACTS |
| 12/9/16 | | Alcatel-Lucent, | | | | | | | | |
| | | 4.250%, 7/1/2018 | | 440,759 | | $ | 1,701,330 | | $ | 46,278 | | JPM |
| 9/8/16 | | Amlin plc | | 2,248,040 | | | 22,583,690 | | | (603,428 | ) | JPM |
| 8/26/16 | | Asciano Ltd. | | 1,874,737 | | | 11,207,276 | | | 727,767 | | JPM |
| 7/27/16 | | AT&T, Inc. | | 1,244,243 | | | 38,995,235 | | | 3,804,214 | | JPM |
| 4/30/16 | | Bayer AG | | 254,600 | | | 33,823,960 | | | (1,798,056 | ) | JPM |
| 4/8/16 | | BG Group plc | | 6,637,116 | | | 115,110,447 | | | (18,777,289 | ) | JPM |
| 7/22/16 | | BG Group plc | | 399,925 | | | 5,773,327 | | | 30,468 | | BAML |
| 10/5/16 | | CBS Corporation Class B | | 487,662 | | | 19,248,019 | | | 3,706,763 | | BAML |
| 12/16/16 | | E.ON SE | | 138,200 | | | 1,257,620 | | | 83,268 | | JPM |
| 4/24/16 | | Pace plc (a) | | 2,282,772 | | | 14,809,303 | | | (279,978 | ) | JPM |
| 5/19/16 | | Pace plc (a) | | 1,482,913 | | | 9,171,080 | | | 256,285 | | BAML |
| 12/7/16 | | SABMiller plc | | 145,266 | | | 8,806,970 | | | (95,356 | ) | JPM |
| 6/2/16 | | Telecity Group plc (a) | | 2,918,354 | | | 48,495,454 | | | 5,130,482 | | BAML |
| 4/17/16 | | Time Warner Cable, Inc. | | 4,743 | | | 713,098 | | | 166,882 | | JPM |
| 9/11/16 | | TNT Express NV | | 703,509 | | | 5,742,872 | | | 210,440 | | JPM |
| 11/30/16 | | Veda Group Ltd. | | 2,544,376 | | | 5,084,172 | | | 105,069 | | JPM |
| 6/29/16 | | Vivendi SA | | 1,678,283 | | | 39,929,790 | | | (3,724,658 | ) | JPM |
| | | | | | | | | | | | | |
| SHORT TOTAL RETURN SWAP CONTRACTS |
| 4/24/16 | | ARRIS Group, Inc. (a) | | (239,602 | ) | | (8,386,677 | | | 1,050,111 | | JPM |
| 5/19/16 | | ARRIS Group, Inc. (a) | | (125,338 | ) | | (4,207,361 | | | 367,902 | | BAML |
| 11/19/16 | | Dialog | | | | | | | | | | |
| | | Semiconductors plc (a) | | (111,398 | ) | | (4,068,368 | | | 331,335 | | JPM |
| 12/28/16 | | Equinix, Inc. | | (4,017 | ) | | (1,191,383 | | | (23,324 | ) | BAML |
| 12/9/16 | | Nokia Oyj | | (242,417 | ) | | (1,720,918 | | | (16,512 | ) | JPM |
| 12/18/16 | | Royal Dutch Shell plc Class A | | (454 | ) | | (11,201 | | | 988 | | BAML |
| 12/18/16 | | Royal Dutch Shell plc Class A | | (55,368 | ) | | (1,365,381 | | | 119,799 | | JPM |
| 4/8/16 | | Royal Dutch Shell plc | | | | | | | | | | |
| | | Class B | | (2,888,482 | ) | | (87,181,777 | | | 21,482,380 | | JPM |
| 7/22/16 | | Royal Dutch Shell plc | | | | | | | | | | |
| | | Class B | | (178,165 | ) | | (4,029,351 | | | (23,390 | ) | BAML |
| | | | | | | | | | $ | 12,278,440 | | |
BAML – Bank of America Merrill Lynch & Co., Inc.
JPM – JPMorgan Chase & Co., Inc.
plc – Public Limited Company
| * | Based on the net swap value held at each counterparty, unrealized appreciation is a receivable and unrealized depreciation is a payable. |
| (a) | Security fair valued by the Valuation Group in good faith in accordance with the policies adopted by the Board of Trustees. |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF SWAP CONTRACTS
December 31, 2015
| | | | | | | | | Unrealized | | |
| Termination | | | | | | | | Appreciation | | Counter- |
| Date | | Security | | Shares | | Notional | | (Depreciation)* | | party |
| | | | | | | | | | | |
| LONG TOTAL RETURN SWAP CONTRACTS |
| 12/9/16 | | Alcatel-Lucent, | | | | | | | | |
| | | 4.250%, 7/1/2018 | | 8,520 | | $ | 32,887 | | $ | 895 | | JPM |
| 8/25/16 | | American International | | | | | | | | | | |
| | Group, Inc. | | 43,212 | | | 2,498,244 | | | 178,248 | | JPM |
| 9/8/16 | | Amlin plc | | 67,031 | | | 673,703 | | | (18,306 | ) | JPM |
| 4/21/16 | | Anadarko Petroleum | | | | | | | | | | |
| | Corporation | | 4,300 | | | 329,180 | | | (120,490 | ) | JPM |
| 1/10/16 | | Apollo Residential | | | | | | | | | | |
| | Mortgage, Inc. | | 2,996 | | | 47,403 | | | (11,622 | ) | JPM |
| 8/25/16 | | Asciano Ltd. | | 59,838 | | | 358,503 | | | 22,440 | | JPM |
| 7/27/16 | | AT&T, Inc. | | 24,664 | | | 781,676 | | | 66,713 | | JPM |
| 9/4/16 | | Bayer AG | | 3,900 | | | 494,820 | | | (4,232 | ) | JPM |
| 4/8/16 | | BG Group plc | | 143,354 | | | 2,358,268 | | | (277,535 | ) | JPM |
| 7/22/16 | | BG Group plc | | 7,772 | | | 111,510 | | | 1,284 | | BAML |
| 4/16/16 | | BG Group plc — ADR | | 25,069 | | | 450,608 | | | (86,779 | ) | JPM |
| 12/24/16 | | Cablevision Systems | | | | | | | | | | |
| | Corporation Class A | | 32,842 | | | 1,043,850 | | | 3,751 | | BAML |
| 5/5/16 | | CBS Corporation Class B | | 3,390 | | | 171,713 | | | (12,199 | ) | BAML |
| 9/8/16 | | The Chubb Corporation | | 29,363 | | | 3,600,253 | | | 289,446 | | BAML |
| 8/21/16 | | E.ON SE | | 9,000 | | | 108,931 | | | (21,625 | ) | JPM |
| 4/17/16 | | Equity Commonwealth | | 20,698 | | | 538,767 | | | 33,992 | | BAML |
| 1/13/16 | | General Motors Company | | 11,500 | | | 351,085 | | | 39,506 | | BAML |
| 6/11/16 | | Huntsman Corporation | | 4,612 | | | 105,476 | | | (53,195 | ) | BAML |
| 9/28/16 | | Huntsman Corporation | | 8,400 | | | 117,852 | | | (22,392 | ) | JPM |
| 4/24/16 | | Pace plc (a) | | 138,273 | | | 795,482 | | | 84,633 | | JPM |
| 5/19/16 | | Pace plc (a) | | 65,842 | | | 371,734 | | | 46,902 | | BAML |
| 8/14/16 | | PartnerRe Ltd. | | 12,564 | | | 1,737,634 | | | 17,393 | | JPM |
| 8/25/16 | | Precision Castpart | | | | | | | | | | |
| | Corporation | | 26,208 | | | 6,017,760 | | | 60,464 | | JPM |
| 12/7/16 | | SABMiller plc | | 2,923 | | | 177,211 | | | (1,918 | ) | JPM |
| 12/28/16 | | Solera Holdings, Inc. | | 30,606 | | | 1,672,976 | | | 5,104 | | BAML |
| 6/2/16 | | Telecity Group plc (a) | | 120,751 | | | 2,030,830 | | | 187,980 | | BAML |
| 1/13/16 | | Time Warner Cable, Inc. | | 2,036 | | | 348,554 | | | 28,787 | | BAML |
| 4/17/16 | | Time Warner Cable, Inc. | | 13,498 | | | 2,274,091 | | | 230,131 | | JPM |
| 9/11/16 | | TNT Express NV | | 18,826 | | | 155,510 | | | 3,800 | | JPM |
| 11/30/16 | | Veda Group Ltd. | | 127,604 | | | 254,978 | | | 5,269 | | JPM |
| 7/6/16 | | Vivendi SA | | 63,463 | | | 1,525,079 | | | (156,016 | ) | JPM |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
SCHEDULE OF SWAP CONTRACTS (continued)
December 31, 2015
| | | | | | | | | Unrealized | | |
| Termination | | | | | | | | Appreciation | | Counter- |
| Date | | Security | | Shares | | Notional | | (Depreciation)* | | party |
| | | | | | | | | | | |
| SHORT TOTAL RETURN SWAP CONTRACTS |
| 9/8/16 | | ACE Ltd. | | (17,674 | ) | $ | (1,834,435 | ) | $ | (231,039 | ) | BAML |
| 4/24/16 | | ARRIS Group, Inc. (a) | | (8,705 | ) | | (283,792 | ) | | 17,246 | | JPM |
| 5/19/16 | | ARRIS Group, Inc. (a) | | (8,003 | ) | | (228,515 | ) | | (16,625 | ) | BAML |
| 6/30/16 | | Charter Communication, Inc. | | | | | | | | | | |
| | Class A | | (258 | ) | | (44,432 | ) | | (2,960 | ) | BAML |
| 8/20/16 | | Charter Communication, Inc. | | | | | | | | | | |
| | Class A | | (2,350 | ) | | (431,162 | ) | | 514 | | JPM |
| 11/19/16 | | Dialog Semiconductors plc (a) | | (4,482 | ) | | (163,687 | ) | | 13,324 | | JPM |
| 12/6/16 | | Nokia Oyj | | (4,686 | ) | | (33,266 | ) | | (319 | ) | JPM |
| 12/18/16 | | Royal Dutch Shell plc Class A | | (7 | ) | | (161 | ) | | 4 | | BAML |
| 12/18/16 | | Royal Dutch Shell plc Class A | | (1,209 | ) | | (29,836 | ) | | 2,638 | | JPM |
| 7/22/16 | | Royal Dutch Shell plc Class B | | (3,463 | ) | | (77,518 | ) | | (1,254 | ) | BAML |
| 9/4/16 | | Royal Dutch Shell plc | | | | | | | | | | |
| | Class B | | (63,119 | ) | | (1,773,928 | ) | | 338,182 | | JPM |
| 4/16/16 | | Royal Dutch Shell plc | | | | | | | | | | |
| | Class B — ADR | | (5,582 | ) | | (360,895 | ) | | 103,885 | | JPM |
| | | | | | | | | | $ | 744,025 | | |
ADR – American Depository Receipt
BAML – Bank of America Merrill Lynch & Co., Inc.
JPM – JPMorgan Chase & Co., Inc.
plc – Public Limited Company
| * | Based on the net swap value held at each counterparty, unrealized appreciation is a receivable and unrealized depreciation is a payable. |
| (a) | Security fair valued by the Valuation Group in good faith in accordance with the policies adopted by the Board of Trustees. |
The accompanying notes are an integral part of these financial statements.
The Merger Fund and WCM Alternatives: Event-Driven Fund
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 2015
| | | | | | WCM Alternatives: | |
| | | The Merger Fund | | | Event-Driven Fund | |
| ASSETS: | | | | | | |
| Investments, at value (Cost $4,791,538,704 and | | | | | | |
| $91,040,274, respectively) | | $ | 4,732,332,098 | | | $ | 87,506,437 | |
| Cash | | | — | | | | 86 | |
| Cash held in foreign currency (Cost $88 and | | | | | | | | |
| $2,373, respectively) | | | 86 | | | | 2,348 | |
| Receivable from brokers | | | 746,310,550 | | | | 15,729,458 | |
| Deposits at brokers | | | 96,484,670 | | | | 11,158,132 | |
| Receivable for forward | | | | | | | | |
| currency exchange contracts | | | 3,226,184 | | | | 124,295 | |
| Receivable for swap contracts | | | 12,278,440 | | | | 744,025 | |
| Receivable for investments sold | | | 15,552,750 | | | | 659,910 | |
| Receivable for fund shares issued | | | 13,550,842 | | | | 670,122 | |
| Dividends and interest receivable | | | 9,385,029 | | | | 197,320 | |
| Prepaid expenses and other receivables | | | 72,112 | | | | 22,963 | |
| Total Assets | | | 5,629,192,761 | | | | 116,815,096 | |
| | | | | | | | | |
| LIABILITIES: | | | | | | | | |
| Securities sold short, at value (proceeds of | | | | | | | | |
| $746,310,550 and $15,729,458, respectively) | | $ | 763,971,438 | | | $ | 16,215,059 | |
| Written option contracts, at value | | | | | | | | |
| (premiums received $102,853,660 and | | | | | | | | |
| $2,525,448, respectively) | | | 77,951,879 | | | | 1,831,413 | |
| Payable for fund shares redeemed | | | 13,803,759 | | | | 953,740 | |
| Payable for investments purchased | | | 7,529,255 | | | | 1,025,826 | |
| Payable to the investment adviser | | | 3,622,426 | | | | 113,620 | |
| Accrued expenses and other liabilities | | | 2,754,018 | | | | 138,778 | |
| Dividends and interest payable | | | 1,833,904 | | | | 46,423 | |
| Distribution fees payable | | | 1,658,760 | | | | — | |
| Payable for compliance fees | | | 61,118 | | | | 998 | |
| Total Liabilities | | | 873,186,557 | | | | 20,325,857 | |
| NET ASSETS | | $ | 4,756,006,204 | | | $ | 96,489,239 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund and WCM Alternatives: Event-Driven Fund
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2015
| | | | | | WCM Alternatives: | |
| | | The Merger Fund | | | Event-Driven Fund | |
| NET ASSETS CONSISTS OF: | | | | | | |
| Accumulated undistributed | | | | | | |
| net investment loss | | $ | (4,545,160 | ) | | $ | (849,362 | ) |
| Accumulated net realized loss on | | | | | | | | |
| investments, securities sold short, written option | | | | | | | | |
| contracts expired or closed, swap contracts, | | | | | | | | |
| foreign currency translation and forward | | | | | | | | |
| currency exchange contracts | | | (177,890,902 | ) | | | (2,918,626 | ) |
| Net unrealized appreciation (depreciation) on: | | | | | | | | |
| Investments | | | (59,206,606 | ) | | | (3,533,837 | ) |
| Securities sold short | | | (17,660,888 | ) | | | (485,601 | ) |
| Written option contracts | | | 24,901,781 | | | | 694,035 | |
| Forward currency exchange contracts | | | 3,226,184 | | | | 124,295 | |
| Swap contracts | | | 12,278,440 | | | | 744,025 | |
| Foreign currency translation | | | (2 | ) | | | (25 | ) |
| Net unrealized depreciation | | | (36,461,091 | ) | | | (2,457,108 | ) |
| Paid-in capital | | | 4,974,903,357 | | | | 102,714,335 | |
| Total Net Assets | | $ | 4,756,006,204 | | | $ | 96,489,239 | |
| Investor Class | | | | | | | | |
| Net assets | | $ | 3,508,673,718 | | | | | |
| Shares outstanding | | | 229,241,921 | | | | | |
| Net asset value and offering price per share* | | $ | 15.31 | | | | | |
| | | | | | | | | |
| Institutional Class | | | | | | | | |
| Net assets | | $ | 1,247,332,486 | | | $ | 96,489,239 | |
| Shares outstanding | | | 81,813,974 | | | | 10,028,120 | |
| Net asset value and offering price per share* | | $ | 15.25 | | | $ | 9.62 | |
| * | The redemption price per share may vary based on the length of time a shareholder holds Fund shares. |
The accompanying notes are an integral part of these financial statements.
The Merger Fund and WCM Alternatives: Event-Driven Fund
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2015
| | | | | | WCM Alternatives: | |
| | | The Merger Fund | | | Event-Driven Fund | |
| INVESTMENT INCOME: | | | | | | |
| Interest | | $ | 7,776,490 | | | $ | 168,225 | |
| Dividend income on long positions (net of | | | | | | | | |
| foreign withholding taxes of $217,972 | | | | | | | | |
| and $639, respectively) | | | 54,791,634 | | | | 1,170,615 | |
| Total investment income | | | 62,568,124 | | | | 1,338,840 | |
| EXPENSES: | | | | | | | | |
| Investment advisory fees | | | 51,936,373 | | | | 779,242 | |
| Distribution fees (Investor Class) | | | 9,438,611 | | | | — | |
| Sub transfer agent fees (Investor Class) | | | 5,156,653 | | | | — | |
| Sub transfer agent fees (Institutional Class) | | | 521,952 | | | | 59,946 | |
| Administration fees | | | 1,592,360 | | | | 23,558 | |
| Professional fees | | | 747,567 | | | | 136,402 | |
| Reports to shareholders | | | 732,921 | | | | 28,583 | |
| Transfer agent and shareholder | | | | | | | | |
| servicing agent fees | | | 620,666 | | | | 19,718 | |
| Fund accounting expenses | | | 435,633 | | | | 30,523 | |
| Custody fees | | | 392,782 | | | | 34,455 | |
| Miscellaneous expenses | | | 267,362 | | | | 8,539 | |
| Compliance fees | | | 247,755 | | | | 1,569 | |
Trustees’ fees and expenses | | | 230,681 | | | | 15,288 | |
| Federal and state registration fees | | | 216,664 | | | | 36,048 | |
| Borrowing expenses on securities sold short | | | 3,514,422 | | | | 55,028 | |
| Dividends on securities sold short | | | 17,033,565 | | | | 165,036 | |
| Total expenses before | | | | | | | | |
| expense waiver by Adviser | | | 93,085,967 | | | | 1,393,935 | |
| Less: Expense reimbursed by Adviser | | | (6,988,781 | ) | | | (89,167 | ) |
| Net expenses | | | 86,097,186 | | | | 1,304,768 | |
| NET INVESTMENT INCOME (LOSS) | | | (23,529,062 | ) | | | 34,072 | |
The accompanying notes are an integral part of these financial statements.
The Merger Fund and WCM Alternatives: Event-Driven Fund
STATEMENTS OF OPERATIONS (continued)
For the Year Ended December 31, 2015
| | | | | | WCM Alternatives: | |
| | | The Merger Fund | | | Event-Driven Fund | |
| REALIZED AND UNREALIZED GAIN (LOSS) | | | | | | |
| ON INVESTMENTS: | | | | | | |
| Realized gain (loss) on: | | | | | | |
| Investments | | $ | (90,043,279 | ) | | $ | (4,630,917 | ) |
| Securities sold short | | | (67,906,259 | ) | | | 43,971 | |
| Written option contracts expired or closed | | | 180,604,275 | | | | 3,234,264 | |
| Forward currency exchange contracts | | | 49,709,155 | | | | 201,866 | |
| Swap contracts | | | (46,474,183 | ) | | | (1,760 | ) |
| Foreign currency translation | | | (3,903,340 | ) | | | (10,928 | ) |
| Net realized gain (loss) | | | 21,986,369 | | | | (1,163,504 | ) |
| Change in unrealized | | | | | | | | |
| appreciation (depreciation) on: | | | | | | | | |
| Investments | | | (175,795,674 | ) | | | (3,505,413 | ) |
| Securities sold short | | | 93,219,135 | | | | (284,738 | ) |
| Written option contracts | | | 34,936,554 | | | | 723,976 | |
| Forward currency exchange contracts | | | (12,279,292 | ) | | | 82,426 | |
| Swap contracts | | | 20,587,615 | | | | 938,171 | |
| Foreign currency translation | | | (316,326 | ) | | | (769 | ) |
| Net unrealized depreciation | | | (39,647,988 | ) | | | (2,046,347 | ) |
| NET REALIZED AND UNREALIZED | | | | | | | | |
| LOSS ON INVESTMENTS | | | (17,661,619 | ) | | | (3,209,851 | ) |
| NET DECREASE IN NET ASSETS | | | | | | | | |
| RESULTING FROM OPERATIONS | | $ | (41,190,681 | ) | | $ | (3,175,779 | ) |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
STATEMENTS OF CHANGES IN NET ASSETS
| | | Year Ended | | | Year Ended | |
| | | December 31, 2015 | | | December 31, 2014 | |
| Net investment income (loss) | | $ | (23,529,062 | ) | | $ | 112,981,998 | |
| Net realized gain on investments, | | | | | | | | |
| securities sold short, written option contracts | | | | | | | | |
| expired or closed, swap contracts, foreign | | | | | | | | |
| currency translation and forward | | | | | | | | |
| currency exchange contracts | | | 21,986,369 | | | | 120,234,533 | |
| Change in unrealized depreciation on | | | | | | | | |
| investments, securities sold short, | | | | | | | | |
| written option contracts, swap contracts, | | | | | | | | |
| foreign currency translation and forward | | | | | | | | |
| currency exchange contracts | | | (39,647,988 | ) | | | (161,043,838 | ) |
| Net increase (decrease) in net assets | | | | | | | | |
| resulting from operations | | | (41,190,681 | ) | | | 72,172,693 | |
| | | | | | | | | |
Investor Class — | | | | | | | | |
| Distributions to shareholders from: (Note 5) | | | | | | | | |
| Net investment income | | | (28,234,075 | ) | | | (100,172,106 | ) |
| Net realized gains | | | (15,570,634 | ) | | | (53,847,251 | ) |
Total dividends and distributions — | | | | | | | | |
| Investor Class | | | (43,804,709 | ) | | | (154,019,357 | ) |
| | | | | | | | | |
Institutional Class — | | | | | | | | |
| Distributions to shareholders from: (Note 5) | | | | | | | | |
| Net investment income | | | (14,536,377 | ) | | | (38,051,350 | ) |
| Net realized gains | | | (5,504,041 | ) | | | (18,089,631 | ) |
Total dividends and distributions — | | | | | | | | |
| Institutional Class | | | (20,040,418 | ) | | | (56,140,981 | ) |
| Net increase/(decrease) in net assets from | | | | | | | | |
| capital share transactions (Note 4) | | | (540,529,909 | ) | | | 524,390,262 | |
| Net increase (decrease) in net assets | | | (645,565,717 | ) | | | 386,402,617 | |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of year | | | 5,401,571,921 | | | | 5,015,169,304 | |
| End of year (including accumulated | | | | | | | | |
| undistributed net investment loss of | | | | | | | | |
| $(4,545,160) and $(8,243,614), respectively) | | $ | 4,756,006,204 | | | $ | 5,401,571,921 | |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
STATEMENTS OF CHANGES IN NET ASSETS
| | | | | | For the Period from | |
| | | | | | January 2, 2014^ | |
| | | Year Ended | | | through | |
| | | December 31, 2015 | | | December 31, 2014 | |
| Net investment income | | $ | 34,072 | | | $ | 42,259 | |
| Net realized gain (loss) on investments, securities | | | | | | | | |
| sold short, written option contracts expired or | | | | | | | | |
| closed, swap contracts, foreign currency | | | | | | | | |
| translation and forward currency | | | | | | | | |
| exchange contracts | | | (1,163,504 | ) | | | 582,734 | |
| Change in unrealized depreciation on | | | | | | | | |
| investments, securities sold short, written option | | | | | | | | |
| contracts, swap contracts, foreign currency | | | | | | | | |
| translation and forward currency | | | | | | | | |
| exchange contracts | | | (2,046,347 | ) | | | (410,761 | ) |
| Net increase (decrease) in net assets | | | | | | | | |
| resulting from operations | | | (3,175,779 | ) | | | 214,232 | |
| | | | | | | | | |
Institutional Class — | | | | | | | | |
| Distributions to shareholders from: (Note 5) | | | | | | | | |
| Net investment income | | | (859,690 | ) | | | — | |
| Net realized gains | | | (2,073,810 | ) | | | (294,148 | ) |
Total dividends and distributions — | | | | | | | | |
| Institutional Class | | | (2,933,500 | ) | | | (294,148 | ) |
| Net increase in net assets from | | | | | | | | |
| capital share transactions (Note 4) | | | 90,513,163 | | | | 12,165,271 | |
| Net increase in net assets | | | 84,403,884 | | | | 12,085,355 | |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 12,085,355 | | | | — | |
| End of period (including accumulated | | | | | | | | |
| undistributed net investment income (loss) of | | | | | | | | |
| $(849,362) and $182,514, respectively) | | $ | 96,489,239 | | | $ | 12,085,355 | |
| ^ | Commencement of operations January 2, 2014. |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding throughout each period.
Institutional Class
| | | | | | | | | For the Period from | |
| | | Year Ended | | | August 1, 2013^ | |
| | | December 31, | | | through | |
| | | 2015 | | | 2014 | | | December 31, 2013 | |
| Per Share Data: | | | | | | | | | |
| Net Asset Value, | | | | | | | | | |
| beginning of period | | $ | 15.58 | | | $ | 15.97 | | | $ | 16.06 | |
| Income from | | | | | | | | | | | | |
| investment operations: | | | | | | | | | | | | |
Net investment income (loss)(1)(2) | | | (0.03 | ) | | | 0.37 | | | | 0.03 | |
| Net realized and unrealized | | | | | | | | | | | | |
| gain (loss) on investments | | | (0.05 | ) | | | (0.10 | ) | | | 0.31 | |
| Total from investment operations | | | (0.08 | ) | | | 0.27 | | | | 0.34 | |
| Less distributions: | | | | | | | | | | | | |
| From net investment income | | | (0.18 | ) | | | (0.45 | ) | | | (0.35 | ) |
| From net realized gains | | | (0.07 | ) | | | (0.21 | ) | | | (0.08 | ) |
| Total dividends and distributions | | | (0.25 | ) | | | (0.66 | ) | | | (0.43 | ) |
| Net Asset Value, end of period | | $ | 15.25 | | | $ | 15.58 | | | $ | 15.97 | |
| Total Return | | | (0.52 | )% | | | 1.63 | % | | | 2.20 | %(3) |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
FINANCIAL HIGHLIGHTS (continued)
Selected per share data is based on a share of beneficial interest outstanding throughout each period.
Institutional Class
| | | | | | | | | For the Period from | |
| | | Year Ended | | | August 1, 2013^ | |
| | | December 31, | | | through | |
| | | 2015 | | | 2014 | | | December 31, 2013 | |
| Supplemental data and ratios: | | | | | | | | | |
Net assets, end of period (000’s) | | $ | 1,247,332 | | | $ | 1,332,078 | | | $ | 172,247 | |
| Ratio of gross expenses | | | | | | | | | | | | |
| to average net assets: | | | | | | | | | | | | |
| Before expense waiver | | | 1.54 | % | | | 1.44 | % | | | 1.32 | %(4) |
| After expense waiver | | | 1.41 | % | | | 1.28 | % | | | 1.19 | %(4) |
| Ratio of dividends on short | | | | | | | | | | | | |
| positions and borrowing expense | | | | | | | | | | | | |
| on securities sold short to | | | | | | | | | | | | |
| average net assets | | | 0.40 | % | | | 0.29 | % | | | 0.19 | %(4) |
| Ratio of expense to average net | | | | | | | | | | | | |
| assets excluding dividends on | | | | | | | | | | | | |
| short positions and borrowing | | | | | | | | | | | | |
| expense on securities sold short | | | 1.01 | % | | | 0.99 | % | | | 1.00 | %(4) |
| Ratio of net investment income | | | | | | | | | | | | |
| (loss) to average net assets: | | | | | | | | | | | | |
| Before expense waiver | | | (0.34 | )% | | | 2.14 | % | | | 0.29 | %(4) |
| After expense waiver | | | (0.21 | )% | | | 2.30 | % | | | 0.42 | %(4) |
Portfolio turnover rate(5) | | | 157 | % | | | 137 | % | | | 194 | %(3) |
| (1) | Net investment income before dividends and borrowing expense on securities sold short for the year ended December 31, 2015, 2014 and the period ended December 31, 2013 was $0.03, $0.42 and $0.04, respectively. |
| (2) | Net investment income (loss) per share has been calculated based on average shares outstanding during the period. |
| (3) | Not annualized. |
| (4) | Annualized. |
| (5) | The numerator for the portfolio turnover rate includes the lesser of purchases or sales (excluding short-term investments, short-term options, forward currency contracts, swap contracts and short positions). The denominator includes the average long positions throughout the period. |
| ^ | Commencement of operations. |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding throughout each period.
Investor Class
| | | | | | | | | | | | | | | Three Months | | | Year | |
| | | | | | | | | | | | | | | Ended | | | Ended | |
| | | Year Ended December 31, | | | December 31, | | | September 30, | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | | 2011* | | | | 2011 | |
| Per Share Data: | | | | | | | | | | | | | | | | | | | | |
| Net Asset Value, | | | | | | | | | | | | | | | | | | | | |
| beginning of period | | $ | 15.63 | | | $ | 16.01 | | | $ | 15.83 | | | $ | 15.59 | | | $ | 15.59 | | | $ | 15.93 | |
| Income from | | | | | | | | | | | | | | | | | | | | | | | | |
| investment operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment | | | | | | | | | | | | | | | | | | | | | | | | |
income (loss)(1)(2) | | | (0.08 | ) | | | 0.33 | | | | 0.04 | | | | (0.05 | ) | | | (0.02 | ) | | | (0.18 | ) |
| Net realized and | | | | | | | | | | | | | | | | | | | | | | | | |
| unrealized gain (loss) | | | | | | | | | | | | | | | | | | | | | | | | |
| on investments | | | (0.05 | ) | | | (0.10 | ) | | | 0.53 | | | | 0.61 | | | | 0.47 | | | | 0.13 | |
| Total from | | | | | | | | | | | | | | | | | | | | | | | | |
| investment operations | | | (0.13 | ) | | | 0.23 | | | | 0.57 | | | | 0.56 | | | | 0.45 | | | | (0.05 | ) |
| Redemption fees | | | — | | | | — | | | | — | | | | 0.00 | (3) | | | 0.00 | (3) | | | 0.00 | (3) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Less distributions: | | | | | | | | | | | | | | | | | | | | | | | | |
| From net | | | | | | | | | | | | | | | | | | | | | | | | |
| investment income | | | (0.12 | ) | | | (0.40 | ) | | | (0.31 | ) | | | (0.26 | ) | | | (0.08 | ) | | | — | |
| From net | | | | | | | | | | | | | | | | | | | | | | | | |
| realized gains | | | (0.07 | ) | | | (0.21 | ) | | | (0.08 | ) | | | (0.06 | ) | | | (0.37 | ) | | | (0.29 | ) |
| Total dividends | | | | | | | | | | | | | | | | | | | | | | | | |
| and distributions | | | (0.19 | ) | | | (0.61 | ) | | | (0.39 | ) | | | (0.32 | ) | | | (0.45 | ) | | | (0.29 | ) |
| Net Asset Value, | | | | | | | | | | | | | | | | | | | | | | | | |
| end of period | | $ | 15.31 | | | $ | 15.63 | | | $ | 16.01 | | | $ | 15.83 | | | $ | 15.59 | | | $ | 15.59 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Return | | | (0.82 | )% | | | 1.43 | % | | | 3.61 | % | | | 3.61 | % | | | 2.90 | %(4) | | | (0.34 | )% |
The accompanying notes are an integral part of these financial statements.
The Merger Fund
FINANCIAL HIGHLIGHTS (continued)
Investor Class
| | | | | | | | | | | | | | | Three Months | | | Year | |
| | | | | | | | | | | | | | | Ended | | | Ended | |
| | | Year Ended December 31, | | | December 31, | | | September 30, | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | | 2011* | | | | 2011 | |
| Supplemental data and ratios: | | | | | | | | | | | | | | | | | | | | |
| Net assets, end of | | | | | | | | | | | | | | | | | | | | |
| period (in millions) | | $ | 3,509 | | | $ | 4,069 | | | $ | 4,843 | | | $ | 4,416 | | | $ | 5,027 | | | $ | 4,914 | |
| Ratio of gross expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| to average net assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Before expense | | | | | | | | | | | | | | | | | | | | | | | | |
| waiver | | | 1.87 | % | | | 1.68 | % | | | 1.61 | % | | | 1.82 | % | | | 1.77 | %(5) | | | 2.08 | % |
| After expense | | | | | | | | | | | | | | | | | | | | | | | | |
| waiver | | | 1.74 | % | | | 1.52 | % | | | 1.48 | % | | | 1.69 | % | | | 1.64 | %(5) | | | 1.96 | % |
| Ratio of dividends on | | | | | | | | | | | | | | | | | | | | | | | | |
| short positions and | | | | | | | | | | | | | | | | | | | | | | | | |
| borrowing expense on | | | | | | | | | | | | | | | | | | | | | | | | |
| securities sold short to | | | | | | | | | | | | | | | | | | | | | | | | |
| average net assets | | | 0.40 | % | | | 0.29 | % | | | 0.22 | % | | | 0.42 | % | | | 0.31 | %(5) | | | 0.62 | % |
| Ratio of expense | | | | | | | | | | | | | | | | | | | | | | | | |
| to average net | | | | | | | | | | | | | | | | | | | | | | | | |
| assets excluding | | | | | | | | | | | | | | | | | | | | | | | | |
| dividends on short | | | | | | | | | | | | | | | | | | | | | | | | |
| positions and borrowing | | | | | | | | | | | | | | | | | | | | | | | | |
| expense on securities | | | | | | | | | | | | | | | | | | | | | | | | |
| sold short | | | 1.34 | % | | | 1.23 | % | | | 1.26 | % | | | 1.27 | % | | | 1.33 | %(5) | | | 1.34 | % |
| Ratio of net investment | | | | | | | | | | | | | | | | | | | | | | | | |
| income (loss) to average | | | | | | | | | | | | | | | | | | | | | | | | |
| net assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Before expense | | | | | | | | | | | | | | | | | | | | | | | | |
| waiver | | | (0.66 | )% | | | 1.90 | % | | | 0.09 | % | | | (0.47 | )% | | | (0.72 | )%(5) | | | (1.25 | )% |
| After expense | | | | | | | | | | | | | | | | | | | | | | | | |
| waiver | | | (0.53 | )% | | | 2.06 | % | | | 0.22 | % | | | (0.34 | )% | | | (0.59 | )%(5) | | | (1.13 | )% |
| Portfolio | | | | | | | | | | | | | | | | | | | | | | | | |
turnover rate(6) | | | 157 | % | | | 137 | % | | | 194 | % | | | 240 | % | | | 48 | %(4) | | | 293 | % |
Footnotes To Financial Highlights On Following Page
The accompanying notes are an integral part of these financial statements.
The Merger Fund
FINANCIAL HIGHLIGHTS (continued)
Investor Class
| (1) | Net investment income before dividends and borrowing expense on securities sold short for the years ended December 31, 2015, 2014, 2013, 2012, the three months ended December 31, 2011 and the year ended September 30, 2011 was $(0.02), $0.38, $0.07, $0.01, $(0.01) and $(0.08), respectively. |
| (2) | Net investment income (loss) per share has been calculated based on average shares outstanding during the period. |
| (3) | Amount less than $0.005 per share. |
| (4) | Not annualized. |
| (5) | Annualized. |
| (6) | The numerator for the portfolio turnover rate includes the lesser of purchases or sales (excluding short-term investments, short-term options, forward currency contracts, swap contracts and short positions). The denominator includes the average long positions throughout the period. |
| * | Stub period from October 1, 2011 through December 31, 2011. |
The accompanying notes are an integral part of these financial statements.
WCM Alternatives: Event-Driven Fund
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding throughout each period.
Institutional Class
| | | | | | For the Period from | |
| | | | | | January 2, 2014^ | |
| | | Year Ended | | | through | |
| | | December 31, 2015 | | | December 31, 2014 | |
| Per Share Data: | | | | | | |
| Net Asset Value, beginning of period | | $ | 10.14 | | | $ | 10.00 | |
| Income from investment operations: | | | | | | | | |
Net investment income(1)(2) | | | 0.01 | | | | 0.05 | |
| Net realized and unrealized | | | | | | | | |
| gain (loss) on investments | | | (0.22 | ) | | | 0.34 | |
| Total from investment operations | | | (0.21 | ) | | | 0.39 | |
| Less distributions: | | | | | | | | |
| From net investment income | | | (0.09 | ) | | | — | |
| From net realized gains | | | (0.22 | ) | | | (0.25 | ) |
| Total dividends and distributions | | | (0.31 | ) | | | (0.25 | ) |
| Net Asset Value, end of period | | $ | 9.62 | | | $ | 10.14 | |
| Total Return | | | (2.08 | )% | | | 3.87 | %(3) |
| Supplemental data and ratios: | | | | | | | | |
Net assets, end of period (000’s) | | $ | 96,489 | | | $ | 12,085 | |
| Ratio of gross expenses to average net assets: | | | | | | | | |
| Before expense waiver | | | 2.23 | % | | | 7.95 | %(4) |
| After expense waiver | | | 2.09 | % | | | 2.39 | %(4) |
| Ratio of dividends on short positions and | | | | | | | | |
| borrowing expense on securities sold short | | | | | | | | |
| to average net assets | | | 0.35 | % | | | 0.65 | %(4) |
| Ratio of expenses to average net assets excluding | | | | | | | | |
| dividends on short positions and borrowing | | | | | | | | |
| expense on securities sold short | | | 1.74 | % | | | 1.74 | %(4) |
| Ratio of net investment income (loss) | | | | | | | | |
| to average net assets: | | | | | | | | |
| Before expense waiver | | | (0.09 | )% | | | (5.04 | )%(4) |
| After expense waiver | | | 0.05 | % | | | 0.52 | %(4) |
Portfolio turnover rate(5) | | | 199 | % | | | 212 | %(3) |
| (1) | Net investment income before dividends and borrowing expense on securities sold short for the year ended December 31, 2015 and 2014 was $0.04 and $0.12, respectively. |
| (2) | Net investment income (loss) per share has been calculated based on average shares outstanding during the period. |
| (3) | Not annualized. |
| (4) | Annualized. |
| (5) | The numerator for the portfolio turnover rate includes the lesser of purchases or sales (excluding short-term investments, short-term options, forward currency contracts, swap contracts and short positions). The denominator includes the average long positions throughout the period. |
| ^ | Commencement of operations. |
The accompanying notes are an integral part of these financial statements.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2015
Note 1 — ORGANIZATION
The Merger Fund (“TMF”) is a no-load, open-end, diversified investment company organized as a trust under the laws of the Commonwealth of Massachusetts on April 12, 1982, and registered under the Investment Company Act of 1940, as amended (the “1940 Act”). TMF was formerly known as the Risk Portfolio of The Ayco Fund. In January of 1989, TMF’s fundamental investment policies were amended to permit TMF to engage in merger arbitrage. At the same time, Westchester Capital Management, Inc. became TMF’s investment adviser, and TMF began to do business as The Merger Fund. In a transaction that closed on December 31, 2010, Westchester Capital Management, Inc. transferred substantially all of its business and assets to Westchester Capital Management, LLC (the “Adviser”), which became TMF’s investment adviser. Therefore, the performance information included herein for periods prior to 2011 reflects the performance of Westchester Capital Management, Inc. Roy Behren and Michael Shannon, TMF’s current portfolio managers, have served as co-portfolio managers of TMF since January 2007. The Investor Class inception date was January 31, 1989, and the Institutional Class inception date was August 1, 2013. The investment objective of TMF is to seek to achieve capital growth by engaging in merger arbitrage. Merger arbitrage is a highly specialized investment approach generally designed to profit from the successful completion of publicly announced mergers, takeovers, tender offers, leveraged buyouts, spin-offs, liquidations and other corporate reorganizations. At December 31, 2015, 55.4% of the shares outstanding of TMF’s Investor Class were owned by 2 omnibus accounts. At December 31, 2015, 86.2% of the shares outstanding of TMF’s Institutional Class were owned by 4 omnibus accounts.
Westchester Capital Funds (“WCF”) is an open-end series management investment company organized under the laws of the Commonwealth of Massachusetts on March 20, 2013, and registered under the 1940 Act. WCM Alternatives: Event-Driven Fund (“EDF”), a series of WCF, is a no-load, open-end, non-diversified investment company with two classes of shares, Investor Class shares and Institutional Class shares. The Institutional Class inception date was January 2, 2014. Investor Class shares have not yet commenced operations. The investment objective of EDF is to seek to provide attractive risk-adjusted returns with low relative volatility in virtually all market environments. Risk-adjusted return is a concept that considers not only an investment’s return, but also the amount of potential risk involved in producing that return. At December 31, 2015, 94.9% of the shares outstanding of EDF were owned by 3 omnibus accounts.
Each class of shares of TMF and EDF (each a “Fund” and together, the “Funds”) has different eligibility and minimum investment requirements. The underlying assets attributable to a class of a Fund are charged with
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 1 — ORGANIZATION (continued)
the expenses attributable to that class of the Fund and with a share of the general expenses of the Fund. Any general expenses of a Fund that are not readily identifiable as belonging to a particular class of the Fund are allocated by or under the direction of the Boards of Trustees of the Funds (the “Board of Trustees” or “Trustees”) in such manner as the Trustees determine. Shares of classes may have different voting rights, such as (i) when required by the 1940 Act, or (ii) when the Trustees determine that such a matter affects only the interests of a particular class. Shares have no preemptive or subscription rights. The Institutional Class shares do not have a distribution fee. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains or losses on investments of a Fund are allocated to each class of a Fund based on its relative net assets.
Note 2 — SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements. These policies are in conformity with U.S. generally accepted accounting principles (“GAAP”). The Funds are investment companies and, accordingly, follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standards Codification Topic 946 – Investment Companies. The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
A. Investment Valuation
The following is a summary of the Funds’ pricing procedures. It is intended to be a general discussion and may not necessarily reflect all pricing procedures followed by the Funds.
Equity securities that trade on an exchange will typically be valued based on the last reported sale price. Securities listed on NASDAQ are typically valued using the NASDAQ Official Closing Price. The securities valued using quoted prices in active markets are classified as Level 1 investments. If, on a particular day, an exchange-listed security does not trade, then the mean between the closing bid and asked prices will typically be used to value the security. These securities are classified as Level 2 investments. Fixed income securities having a maturity of greater than 60 days are typically valued based on evaluations provided by a pricing vendor approved by the Board. These are classified as Level 2 investments.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
Exchange-traded options are typically valued at the higher of the intrinsic value of the option (i.e., what a Fund would pay or can receive upon the option being exercised) or the last reported composite sale price when such sale falls between the bid and asked prices. When the last sale of an exchange-traded option is outside the bid and asked prices, the Funds will typically value the option at the higher of the intrinsic value of the option or the mean between the last reported bid and asked prices. Options for which there is an active market are classified as Level 1 investments, but options not listed on an exchange are classified as Level 2 investments. Investments in United States government securities (other than short-term securities) are valued at the mean between the 4:00 PM New York time bid and asked prices supplied by a third party vendor. Investments in registered open-end investment companies are typically valued at their reported NAV per share. Short-term fixed-income securities having a maturity of less than 60 days are valued at market quotations or based on valuations supplied by a third party pricing service. If a reliable price from a third party pricing service is unavailable, amortized cost may be used if it is determined that the instrument’s amortized cost value represents approximately the fair value of the security. Forward currency contracts are valued daily at the prevailing forward exchange rate. These securities are generally classified as Level 2. Total return swap prices are determined using the same methods as would be used to price the underlying security. These securities are generally classified as Level 2.
The Funds typically fair value securities and assets for which (a) market quotations are not readily available or (b) market quotations are believed to be unrepresentative of market value. For example, a Fund may fair value a security that primarily trades on an exchange that closes before the NYSE if a significant event occurs after the close of the exchange on which the security primarily trades but before the NYSE closes. Fair valuations are determined in good faith by the Valuation Group (the “Valuation Group”), a committee comprised of persons who are officers of the Fund or representatives of the Adviser, acting pursuant to procedures adopted by the Board. When fair-value pricing is employed, the prices of securities used by the Funds to calculate their NAV may differ from quoted or published prices for the same securities. In addition, due to the subjective nature of fair-value pricing, it is possible that the value determined for a particular asset may be materially different from the value realized upon such asset’s sale. These securities are generally classified as Level 2 or 3 depending on the inputs as described below. At December 31, 2015, securities fair valued in good faith based on the
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
absolute value of long and short investments, and unrealized appreciation (depreciation) of swap contracts represented 0.90% of net assets for TMF and 2.05% of net assets for EDF.
The Funds have performed analyses of all existing investments to determine the significance and character of all inputs to their fair value determination. Various inputs are used in determining the value of the Funds’ 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, prepayment speeds, credit risk, etc.). |
| | | |
| | Level 3 — | Significant unobservable inputs are those inputs that reflect the applicable Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information. |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following tables provide the fair value measurements of applicable Fund assets and liabilities by level within the fair value hierarchy for the Fund as of December 31, 2015. These assets and liabilities are measured on a recurring basis.
| Investments at Fair Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| The Merger Fund | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | |
| Common Stocks* | | $ | 3,589,715,037 | | | $ | — | | | $ | — | | | $ | 3,589,715,037 | |
| Contingent Value Rights | | | — | | | | — | | | | 1,144,234 | | | | 1,144,234 | |
| Corporate Bonds | | | — | | | | 207,899,883 | | | | — | | | | 207,899,883 | |
| Purchased Option Contracts | | | 31,897,335 | | | | 27,443 | | | | — | | | | 31,924,778 | |
| Escrow Notes | | | — | | | | — | | | | 1,616,428 | | | | 1,616,428 | |
| Short-Term Investments | | | 900,031,738 | | | | — | | | | — | | | | 900,031,738 | |
| Forward Currency | | | | | | | | | | | | | | | | |
| Exchange Contracts** | | | — | | | | 3,226,184 | | | | — | | | | 3,226,184 | |
| Swap Contracts** | | | — | | | | 12,278,440 | | | | — | | | | 12,278,440 | |
| Total | | $ | 4,521,644,110 | | | $ | 223,431,950 | | | $ | 2,760,662 | | | $ | 4,747,836,722 | |
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Common Stocks Sold Short* | | $ | 730,026,942 | | | $ | 33,944,496 | | | $ | — | | | $ | 763,971,438 | |
| Written Option Contracts | | | 74,743,639 | | | | 3,208,240 | | | | — | | | | 77,951,879 | |
| Total | | $ | 804,770,581 | | | $ | 37,152,736 | | | $ | — | | | $ | 841,923,317 | |
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
| Investments at Fair Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| WCM Alternatives: Event-Driven Fund | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | |
| Common Stocks* | | $ | 67,810,456 | | | $ | — | | | $ | — | | | $ | 67,810,456 | |
| Closed-End Funds | | | 4,528,349 | | | | — | | | | — | | | | 4,528,349 | |
| Preferred Stocks | | | 2,206,360 | | | | — | | | | — | | | | 2,206,360 | |
| Contingent Value Rights | | | — | | | | — | | | | 2,669 | | | | 2,669 | |
| Rights | | | — | | | | 6,191 | | | | — | | | | 6,191 | |
| Warrants | | | — | | | | 3,343 | | | | — | | | | 3,343 | |
| Corporate Bonds | | | — | | | | 6,807,003 | | | | — | | | | 6,807,003 | |
| Purchased Option Contracts | | | 682,390 | | | | 538 | | | | — | | | | 682,928 | |
| Short-Term Investments | | | 5,459,138 | | | | — | | | | — | | | | 5,459,138 | |
| Forward Currency | | | | | | | | | | | | | | | | |
| Exchange Contracts** | | | — | | | | 124,295 | | | | — | | | | 124,295 | |
| Swap Contracts** | | | — | | | | 744,025 | | | | — | | | | 744,025 | |
| | | $ | 80,686,693 | | | $ | 7,685,395 | | | $ | 2,669 | | | $ | 88,374,757 | |
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Common Stocks Sold Short* | | $ | 14,603,564 | | | $ | 1,611,495 | | | $ | — | | | $ | 16,215,059 | |
| Written Option Contracts | | | 1,758,887 | | | | 72,526 | | | | — | | | | 1,831,413 | |
| | | $ | 16,362,451 | | | $ | 1,684,021 | | | $ | — | | | $ | 18,046,472 | |
| * | | Please refer to the Schedules of Investments and Schedule of Securities Sold Short to view common stocks segregated by industry type. |
| ** | | Swap contracts and forward currency exchange contracts are valued at the net unrealized appreciation (depreciation) on the instrument. |
The Level 2 securities are priced using inputs such as current yields, discount rates, credit quality, yields on comparable securities, trading volume, maturity date, market bid and ask prices, prices on comparable securities and other significant inputs. Level 3 securities are valued by brokers using broker quotes or such other pricing sources or data as are permitted by the Fund’s pricing procedures. At December 31, 2015, the value of these securities held by TMF and EDF were $2,760,662 and $2,669, respectively. The inputs for these securities are not readily available or cannot be reasonably estimated and are generally those inputs as described in Note 2 A. The appropriateness of fair values for these securities is monitored on an ongoing basis which may include results of back testing, results of broker due diligence, unchanged price review and consideration of macro or security specific event.
The Funds did not have transfers into or out of Level 1, 2 or 3 securities during the year. Transfers are recorded at the end of the reporting period.
Level 3 Reconciliation Disclosure
The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
The Merger Fund
| | | Contingent | | | Escrow | | | Investment | |
| Description | | Value Rights | | | Notes | | | Total | |
| Balance as of December 31, 2014 | | $ | 242,809 | | | $ | 2,580,067 | | | $ | 2,822,876 | |
| Purchases on Investments | | | — | | | | — | | | | — | |
| (Sales) of Investments | | | — | | | | — | | | | — | |
| Transfers Into Level 3 | | | — | | | | — | | | | — | |
| (Transfers Out) of Level 3 | | | — | | | | — | | | | — | |
| Change in Unrealized | | | | | | | | | | | | |
| Appreciation (Depreciation) | | | 901,425 | | | | (963,639 | ) | | | (62,214 | ) |
| Balance as of December 31, 2015 | | $ | 1,144,234 | | | $ | 1,616,428 | | | $ | 2,760,662 | |
| | | | | | | | | | | | | |
| WCM Alternatives: Event-Driven Fund | | | | | | | | | | | | |
| | | Contingent | | | Investment | | | | | |
| Description | | Value Rights | | | Total | | | | | |
| Balance as of December 31, 2014 | | $ | — | | | $ | — | | | | | |
| Purchases on Investments | | | — | | | | — | | | | | |
| (Sales) of Investments | | | — | | | | — | | | | | |
| Transfers Into Level 3 | | | — | | | | — | | | | | |
| (Transfers Out) of Level 3 | | | — | | | | — | | | | | |
| Change in Unrealized Appreciation | | | 2,669 | | | | 2,669 | | | | | |
| Balance as of December 31, 2015 | | $ | 2,669 | | | $ | 2,669 | | | | | |
The realized and unrealized gains and losses from Level 3 transactions are included with the net realized gain (loss) on investments and net change in unrealized appreciation (depreciation) on investments on the Statements of Operations. The net change in unrealized appreciation (depreciation) on investments related to Level 3 securities held by TMF and EDF at December 31, 2015 totals $(62,214) and $2,669, respectively.
B. Securities Sold Short
The Funds sell securities or currencies short for economic hedging purposes or any other investment purpose. For financial statement purposes, an amount equal to the settlement amount is initially included in the Statements of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently priced to reflect the current value of the short position. Subsequent fluctuations in the market prices of securities or currencies sold, but not yet purchased, may require purchasing the securities or currencies at prices which may differ from the market value reflected on the Statements of Assets and Liabilities. Short sale transactions result in off balance sheet risk because the ultimate obligation may exceed the related amounts shown in the Statements of Assets and Liabilities. The Funds will incur losses if the price of the security
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
increases between the date of the short sale and the date on which the Funds purchase the securities to replace the borrowed securities. The Funds’ losses on short sales are potentially unlimited because there is no upward limit on the price a borrowed security could attain.
The Funds are liable for any dividends payable on securities while those securities are sold short. Until the security is replaced, the Funds are required to pay to the lender any income earned, which is recorded as an expense by the Funds. The Funds segregate liquid assets in an amount equal to the market value of securities sold short, which is reflected in the Schedules of Investments. These assets are required to be adjusted daily to reflect changes in the value of the securities or currencies sold short.
C. Transactions with Brokers
The Funds’ receivables from brokers for proceeds on securities sold short and deposits at brokers for securities sold short are with two securities dealers. The Funds do not require the brokers to maintain collateral in support of the receivables from the brokers for proceeds on securities sold short. The Funds are required by the brokers to maintain collateral at the brokers for securities sold short. The receivable from brokers on the Statements of Assets and Liabilities represents the collateral for securities sold short. The Funds maintain cash deposits at brokers beyond the receivables for short sales.
The Funds’ equity swap contracts’ and forward currency exchange contracts’ cash deposits are monitored daily by the Adviser and counterparty. Cash deposits by the Funds are presented as deposits at brokers on the Statements of Assets and Liabilities. These transactions may involve market risk in excess of the amounts receivable or payable reflected on the Statements of Assets and Liabilities.
D. Federal Income Taxes
No provision for federal income taxes has been made since the Funds have complied to date with the provisions of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and intends to continue to so comply in future years and to distribute investment company net taxable income and net capital gains to shareholders. Additionally, the Funds intend to make all required distributions to avoid federal excise tax.
The Funds have reviewed all open tax years in major jurisdictions and concluded that there is no impact on the Funds’ net assets and there is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Funds are also not aware of any tax positions for which it is reasonably
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months. As of December 31, 2015, TMF’s open Federal and New York tax years include the tax years ended December 31, 2012 through December 31, 2015, and EDF’s open Federal and New York tax years include the tax years ended December 31, 2014 through December 31, 2015. The Funds have no tax examination in progress.
E. Written Option Contracts
The Funds are subject to equity price risk in the normal course of pursuing their investment objectives. The Funds write (sell) put or call options for hedging purposes, volatility management purposes, or otherwise to gain, or reduce, long or short exposure to one or more asset classes or issuers. When a Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently priced daily to reflect the current value of the option written. Refer to Note 2 A. for a pricing description. By writing an option, a Fund may become obligated during the term of the option to deliver or purchase the securities underlying the option at the exercise price if the option is exercised. These contracts may involve market risk in excess of the amounts receivable or payable reflected on the Statements of Assets and Liabilities. Refer to Note 2 Q. for further derivative disclosures, and Note 2 O. for further counterparty risk disclosure.
When an option expires on its stipulated expiration date or the Funds enter into a closing purchase transaction, the Funds realize gains or losses if the cost of the closing purchase transaction differs from the premium received when the option was sold without regard to any unrealized appreciation or depreciation on the underlying security, and the liability related to such option is eliminated. When a written call option is exercised, the premium originally received decreases the cost basis of the security and the Funds realize gains or losses from the sale of the underlying security. When a written put option is exercised, the cost of the security acquired is decreased by the premium received for the put.
F. Purchased Option Contracts
The Funds are subject to equity price risk in the normal course of pursuing their investment objectives. The Funds purchase put or call options for hedging purposes, volatility management purposes, or otherwise to gain, or reduce, long or short exposure to one or more asset classes or issuers. When the Funds purchase an option contract, an amount equal to the premiums paid is included in the Statements of Assets and Liabilities as an investment, and is subsequently priced daily to reflect the
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
value of the purchased option. Refer to Note 2 A. for a pricing description. Refer to Note 2 Q. for further derivative disclosures, and Note 2 O. for further counterparty risk disclosure.
When option contracts expire or are closed, realized gains or losses are recognized without regard to any unrealized appreciation or depreciation on the underlying securities that may be held by the Funds. If the Fund exercises a call option, the cost of the security acquired is increased by the premium paid for the call. If the Fund exercises a put option, the premium paid for the put option increases the cost of the underlying security and a gain or loss is realized from the sale of the underlying security.
G. Forward Currency Exchange Contracts
The Funds are subject to foreign currency exchange rate risk in the normal course of pursuing their investment objectives. During the year ended December 31, 2015, the Funds used forward currency exchange contracts to hedge against changes in the value of foreign currencies. The Funds may enter into forward currency exchange contracts obligating the Funds to deliver and receive a currency at a specified future date. Forward contracts are valued daily, and unrealized appreciation or depreciation is recorded daily as the difference between the contract exchange rate and the closing forward rate applied to the face amount of the contract. Refer to Note 2 A. for a pricing description. A realized gain or loss is recorded at the time the forward contract expires. Credit risk may arise as a result of the failure of the counterparty to comply with the terms of the contract. Refer to Note 2 O. for further counterparty risk disclosure.
The use of forward currency exchange contracts does not eliminate fluctuations in the underlying prices of the Funds’ investment securities. The use of forward currency exchange contracts involves the risk that anticipated currency movements will not be accurately predicted. A forward currency exchange contract would limit the risk of loss due to a decline in the value of a particular currency; however, it would also limit any potential gain that might result should the value of the currency increase instead of decrease. These contracts may involve market risk in excess of the amounts receivable or payable reflected on the Statements of Assets and Liabilities. Refer to Note 2 Q. for further derivative disclosures.
H. Equity Swap Contracts
The Funds are subject to equity price risk and interest rate risk in the normal course of pursuing their investment objectives. During the year ended December 31, 2015, the Funds entered into both long and short equity swap contracts with multiple broker-dealers. A long equity swap contract entitles the Funds to receive from the counterparty any
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
appreciation and dividends paid on an individual security, while obligating the Funds to pay the counterparty any depreciation on the security as well as interest on the notional amount of the contract at a rate equal to LIBOR plus an agreed upon spread (generally between 25 to 100 basis points). A short equity swap contract obligates the Funds to pay the counterparty any appreciation and dividends paid on an individual security, while entitling the Funds to receive from the counterparty any depreciation on the security, and to pay to or receive from the counterparty interest on the notional value of the contract at a rate equal to LIBOR less an agreed upon spread (generally between 25 to 100 basis points). Refer to Note 2 A. for a pricing description.
The Funds may also enter into equity swap contracts whose value may be determined by the spread between a long equity position and a short equity position. This type of swap contract obligates the Funds to pay the counterparty an amount tied to any increase in the spread between the two securities over the term of the contract. The Funds are also obligated to pay the counterparty any dividends paid on the short equity holding as well as any net financing costs. This type of swap contract entitles the Funds to receive from the counterparty any gains based on a decrease in the spread as well as any dividends paid on the long equity holding and any net interest income.
Fluctuations in the value of an open contract are recorded daily as net unrealized appreciation or depreciation. The Funds will realize gains or losses upon termination or reset of the contract. Either party, under certain conditions, may terminate the contract prior to the contract’s expiration date. Equity swap contracts are typically valued based on market quotations or pricing service evaluations for the underlying reference asset. The Valuation Group monitors the credit quality of the Funds’ counterparties and may adjust the valuation of a swap in the Valuation Group’s discretion due to, among other things, changes in a counterparty’s credit quality.
Credit risk may arise as a result of the failure of the counterparty to comply with the terms of the contract. Refer to Note 2 O. for further counterparty risk disclosure. Additionally, risk may arise from unanticipated movements in interest rates or in the value of the underlying securities. These contracts may involve market risk in excess of the amounts receivable or payable reflected on the Statements of Assets and Liabilities. Refer to Note 2 Q. for further derivative disclosures.
I. Distributions to Shareholders
Dividends from net investment income and net realized capital gains, if any, are declared and paid at least annually. Income and capital gain
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
distributions are determined in accordance with income tax regulations which may differ from GAAP. These differences are due primarily to wash sale-loss deferrals, constructive sales, straddle-loss deferrals, adjustments on swap contracts, and unrealized gains or losses on Section 1256 contracts, which were realized, for tax purposes, at the end of the Funds’ fiscal year.
J. Foreign Securities
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in U.S. companies and the U.S. government. These risks include fluctuations in currency exchange rates and adverse political, cultural, regulatory, legal, tax, and economic developments as well as different custody and/or settlement practices or delayed settlements in some foreign markets. Moreover, securities of many foreign companies and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government.
K. Foreign Currency Translations
The books and records of the Funds are maintained in U.S. dollars. Foreign currency transactions are translated into U.S. dollars on the following basis: (i) market value of investment securities, assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. For financial reporting purposes, the Funds do not isolate changes in the exchange rate of investment securities from the fluctuations arising from changes in the market prices of securities. However, for federal income tax purposes, the Funds do isolate and treat as ordinary income the effect of changes in foreign exchange rates on realized gain or loss from the sale of investment securities and payables and receivables arising from trade-date and settlement-date differences. Foreign currency held as cash by the Funds’ custodian is reported separately on the Statements of Assets and Liabilities and on the Statements of Operations.
L. Cash and Cash Equivalents
The Funds consider highly liquid short-term fixed income investments purchased with an original maturity of less than three months to be cash equivalents. Cash equivalents are included in short-term investments on the Schedule of Investments as well as in investments on the Statements of Assets and Liabilities. Temporary cash overdrafts are reported as payable to custodian.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
M. Guarantees and Indemnifications
In the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds’ maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. The Funds have not historically incurred material expenses in respect of those provisions.
N. Security Transactions, Investment Income and Expenses
Transactions are recorded for financial statement purposes on the trade date. Realized gains and losses from security transactions are recorded on the identified cost basis. Distributions to shareholders are recorded on the ex-dividend date. Dividend income is recorded on the ex-dividend date, except for certain dividends on foreign securities, which are recorded as soon as the Fund is informed after the ex-dividend date. Interest is accounted for on the accrual basis and includes amortization of premiums and discounts on the effective interest method. Expenses include $3,514,422 and $55,028 of borrowing expenses on securities sold short for TMF and EDF, respectively.
O. Counterparty Risk
The Funds help manage counterparty credit risk by entering into agreements only with counterparties the Adviser believes have the financial resources to honor their obligations. The Adviser considers the creditworthiness of each counterparty to a contract in evaluating potential credit risk. The counterparty risk for forward currency exchange contracts to the Funds includes the amount of any net unrealized appreciation on the contract. The counterparty risk for equity swaps contracts to the Funds includes the risk of loss of the full amount of any net unrealized appreciation on the contract, along with dividends receivable on long equity contracts and interest receivable on short equity contracts. Written and purchased options sold on an exchange expose the Funds to counterparty risk; however, they are exchange traded and the exchange’s clearinghouse guarantees the options against default. Over-the-counter options counterparty risk includes the risk of loss of the full amount of any net unrealized appreciation.
P. The Right to Offset
Financial assets and liabilities, as well as cash collateral received by the Funds’ counterparties and posted are offset by the respective counterparty, and the net amount is reported in the Statements of Assets and Liabilities when the Funds believe there exists a legally enforceable right to offset the recognized amounts.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
Q. Derivatives
The Funds may utilize derivative instruments such as options, swaps, futures, forward contracts and other instruments with similar characteristics to the extent that they are consistent with the Funds’ respective investment objectives and limitations. The use of these instruments may involve additional investment risks, including the possibility of illiquid markets or imperfect correlation between the value of the instruments and the underlying securities. Derivatives also may create leverage which will amplify the effect of their performance on the Funds and may produce significant losses.
The Funds have adopted authoritative standards regarding disclosure about derivatives and hedging activities and how they affect the Funds’ Statements of Assets and Liabilities and Statements of Operations. For the year ended December 31, 2015, the Funds’ monthly average quantity and notional value are described below:
The Merger Fund
| | | Monthly Average | | | Monthly Average | |
| | | Quantity | | | Notional Value | |
| Purchased Option Contracts | | | 380,811 | | | $ | 45,796,322 | |
| Written Option Contracts | | | 637,404 | | | $ | 137,949,813 | |
| Forward Currency Exchange Contracts | | | 13 | | | $ | 252,338,361 | |
| Long Total Return Swap Contracts | | | 29,581,204 | | | $ | 609,884,936 | |
| | | | | | | | | |
| WCM Alternatives: Event-Driven Fund | | | | | | | | |
| | | Monthly Average | | | Monthly Average | |
| | | Quantity | | | Notional Value | |
| Purchased Option Contracts | | | 6,163 | | | $ | 698,169 | |
| Written Option Contracts | | | 8,869 | | | $ | 2,047,072 | |
| Forward Currency Exchange Contracts | | | 12 | | | $ | 4,349,996 | |
| Long Total Return Swap Contracts | | | 821,417 | | | $ | 24,440,766 | |
Statements of Assets and Liabilities
Fair values of derivative instruments as of December 31, 2015:
| | Asset Derivatives | |
| Statements of Assets | | | |
Derivatives | and Liabilities Location | | Fair Value | |
| The Merger Fund | | | | |
| Equity Contracts: | | | | |
| Purchased Option Contracts | Investments | | $ | 31,924,778 | |
| Swap Contracts | Receivables | | | 12,278,440 | |
| Foreign Exchange Contracts: | | | | | |
| Forward Currency Exchange Contracts | Receivables | | | 3,226,184 | |
| Total | | | $ | 47,429,402 | |
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
| | Asset Derivatives | |
| | Statements of Assets | | | |
Derivatives | and Liabilities Location | | Fair Value | |
| WCM Alternatives: Event-Driven Fund | | | | |
| Equity Contracts: | | | | |
| Purchased Option Contracts | Investments | | $ | 682,928 | |
| Swap Contracts | Receivables | | | 744,025 | |
| Foreign Exchange Contracts: | | | | | |
| Forward Currency Exchange Contracts | Receivables | | | 124,295 | |
| Total | | | $ | 1,551,248 | |
| | | | | | |
| | Liability Derivatives | |
| | Statements of Assets | | | | |
Derivatives | and Liabilities Location | | Fair Value | |
| The Merger Fund | | | | | |
| Equity Contracts: | | | | | |
| Written Option Contracts | Written Option Contracts | | $ | 77,951,879 | |
| Total | | | $ | 77,951,879 | |
| | | | | | |
| WCM Alternatives: Event-Driven Fund | | | | | |
| Equity Contracts: | | | | | |
| Written Option Contracts | Written Option Contracts | | $ | 1,831,413 | |
| Total | | | $ | 1,831,413 | |
Statement of Operations
The effect of derivative instruments on the Statements of Operations for the year ended December 31, 2015:
Amount of Realized Gain (Loss) on Derivatives
| | | | | | | | | Forward | | | | | | | |
| | | Purchased | | | Written | | | Currency | | | | | | | |
| | | Option | | | Option | | | Exchange | | | Swap | | | | |
Derivatives | | Contracts* | | | Contracts | | | Contracts | | | Contracts | | | Total | |
| The Merger Fund | | | | | | | | | | | | | | | |
| Equity Contracts | | $ | (92,784,179 | ) | | $ | 180,604,275 | | | $ | — | | | $ | (46,474,183 | ) | | $ | 41,345,913 | |
| Foreign Exchange | | | | | | | | | | | | | | | | | | | | |
| Contracts | | | — | | | | — | | | | 49,709,155 | | | | — | | | | 49,709,155 | |
| Total | | $ | (92,784,179 | ) | | $ | 180,604,275 | | | $ | 49,709,155 | | | $ | (46,474,183 | ) | | $ | 91,055,068 | |
| | | | | | | | | | | | | | | | | | | | | |
| WCM Alternatives: | | | | | | | | | | | | | | | | | | | | |
| Event-Driven Fund | | | | | | | | | | | | | | | | | | | | |
| Equity Contracts | | $ | (305,967 | ) | | $ | 3,234,264 | | | $ | — | | | $ | (1,760 | ) | | $ | 2,926,537 | |
| Foreign Exchange | | | | | | | | | | | | | | | | | | | | |
| Contracts | | | — | | | | — | | | | 201,866 | | | | — | | | | 201,866 | |
| Total | | $ | (305,967 | ) | | $ | 3,234,264 | | | $ | 201,866 | | | $ | (1,760 | ) | | $ | 3,128,403 | |
* The amounts disclosed are included in the realized gain (loss) on investments.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
Change in Unrealized Appreciation (Depreciation) on Derivatives
| | | | | | | | | Forward | | | | | | | |
| | | Purchased | | | Written | | | Currency | | | | | | | |
| | | Option | | | Option | | | Exchange | | | Swap | | | | |
Derivatives | | Contracts* | | | Contracts | | | Contracts | | | Contracts | | | Total | |
| The Merger Fund | | | | | | | | | | | | | | | |
| Equity Contracts | | $ | 6,652,494 | | | $ | 34,936,554 | | | $ | — | | | $ | 20,587,615 | | | $ | 62,176,663 | |
| Foreign Exchange | | | | | | | | | | | | | | | | | | | | |
| Contracts | | | — | | | | — | | | | (12,279,292 | ) | | | — | | | | (12,279,292 | ) |
| Total | | $ | 6,652,494 | | | $ | 34,936,554 | | | $ | (12,279,292 | ) | | $ | 20,587,615 | | | $ | 49,897,371 | |
| | | | | | | | | | | | | | | | | | | | | |
| WCM Alternatives: | | | | | | | | | | | | | | | | | | | | |
| Event-Driven Fund | | | | | | | | | | | | | | | | | | | | |
| Equity Contracts | | $ | (238,392 | ) | | $ | 723,976 | | | $ | — | | | $ | 938,171 | | | $ | 1,423,755 | |
| Foreign Exchange | | | | | | | | | | | | | | | | | | | | |
| Contracts | | | — | | | | — | | | | 82,426 | | | | — | | | | 82,426 | |
| Total | | $ | (238,392 | ) | | $ | 723,976 | | | $ | 82,426 | | | $ | 938,171 | | | $ | 1,506,181 | |
* The amounts disclosed are included in the change in unrealized appreciation (depreciation) on investments.
Note 3 — AGREEMENTS
The Funds’ investment adviser is Westchester Capital Management, LLC pursuant to an investment advisory agreement between TMF and the Adviser dated as of January 1, 2011 (the “TMF Advisory Agreement”) and pursuant to an investment advisory agreement between WCF, with respect to EDF, and the Adviser dated as of July 30, 2013 (the “EDF Advisory Agreement” and together with the TMF Advisory Agreement, the “Advisory Agreements”).
Under the terms of the TMF Advisory Agreement, the Adviser is entitled to receive a fee, calculated daily and payable monthly, at the annual rate of 1.00% of TMF’s average daily net assets. The Adviser has agreed until December 31, 2016 to reduce its advisory fee so that the advisory fee will be: (i) 1.0% on an annualized basis of the average daily net assets of TMF on net assets below $1.5 billion; (ii) 0.9% on an annualized basis of the average daily net assets of TMF on net assets between $1.5 billion and $2.0 billion; (iii) 0.8% on an annualized basis of the average daily net assets of TMF on net assets between $2.0 billion and $5.0 billion and (iv) 0.75% on an annualized basis of the average daily net assets of TMF on net assets over $5.0 billion (the “TMF Fee Waiver Agreement”). Investment advisory fees waived by the Adviser on behalf of TMF for the year ended December 31, 2015 were $6,988,781.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 3 — AGREEMENTS (continued)
Under the terms of the EDF Advisory Agreement, the Adviser is entitled to receive a fee, calculated daily and payable monthly, at the annual rate of 1.25% of EDF’s average daily net assets. The Adviser has contractually agreed until December 31, 2016 to waive its investment advisory fee and to reimburse EDF for other ordinary operating expenses to the extent necessary to limit ordinary operating expenses to an amount not to exceed 1.74% for Institutional Class shares and 1.99% for Investor Class shares (the “EDF Expense Limitation Agreement”). Ordinary operating expenses exclude taxes, commissions, mark-ups, litigation expenses, indemnification expenses, interest expenses, borrowing expenses, including on securities sold short, dividend expenses on securities sold short, trading or investment expenses, acquired fund fees and expenses, and any extraordinary expenses. To the extent that the Adviser waives its investment advisory fee for EDF and/or reimburses EDF for other ordinary operating expenses, it may seek reimbursement of a portion or all of such amounts at any time within three fiscal years after the fiscal year in which such amounts were waived or reimbursed, subject to the expense limitation in place at the time such amounts were waived or reimbursed. For the year ended December 31, 2015, the Adviser waived $89,167 of advisory fees to EDF.
Investment advisory fees waived and expenses reimbursed on behalf of EDF that are subject to potential recovery by the Adviser are shown in the following table by year of expiration.
| | Year of Expiration | Potential Recovery | |
| | 12/31/2017 | $451,849 | |
| | 12/31/2018 | $ 89,167 | |
Each of the TMF Fee Waiver Agreement and the EDF Expense Limitation Agreement may be terminated at any time by such Fund’s Board of Trustees. Certain officers of the Funds are also officers of the Adviser. Each Advisory Agreement was approved for an initial term of two years and thereafter will remain in effect from year to year provided that such continuance is specifically approved at least annually by the vote of a majority of the relevant Fund’s Trustees who are not interested persons of the Adviser or such Fund or by a vote of a majority of the outstanding voting securities of such Fund.
U.S. Bancorp Fund Services, LLC, a subsidiary of U.S. Bancorp, a publicly held bank holding company, serves as transfer agent, administrator, accountant, dividend paying agent and shareholder servicing agent for the Funds. U.S. Bank, N.A. serves as custodian for the Funds.
Distribution services are performed pursuant to distribution contracts with broker-dealers and other qualified institutions.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 4 — SHARES OF BENEFICIAL INTEREST
The Board of Trustees of each Fund has the authority to issue an unlimited amount of shares of beneficial interest without par value.
Changes in shares of beneficial interest were as follows:
| | | Year Ended | | | Year Ended | |
| The Merger Fund | | December 31, 2015 | | | December 31, 2014 | |
| Investor Class | | Shares | | | Amount | | | Shares | | | Amount | |
| Issued | | | 74,453,909 | | | $ | 1,166,286,253 | | | | 112,329,963 | | | $ | 1,820,604,986 | |
| Issued as reinvestment | | | | | | | | | | | | | | | | |
| of dividends | | | 2,726,064 | | | | 41,708,780 | | | | 9,346,043 | | | | 146,265,568 | |
| Redeemed | | | (108,267,683 | ) | | | (1,690,174,354 | ) | | | (163,799,886 | ) | | | (2,672,660,067 | ) |
| Net decrease | | | (31,087,710 | ) | | $ | (482,179,321 | ) | | | (42,123,880 | ) | | $ | (705,789,513 | ) |
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | Year Ended | |
| | | December 31, 2015 | | | December 31, 2014 | |
| Institutional Class | | Shares | | | Amount | | | Shares | | | Amount | |
| Issued | | | 33,945,525 | | | $ | 529,461,870 | | | | 80,724,530 | | | $ | 1,327,392,190 | |
| Issued as reinvestment | | | | | | | | | | | | | | | | |
| of dividends | | | 614,723 | | | | 9,368,350 | | | | 1,155,895 | | | | 18,031,956 | |
| Redeemed | | | (38,259,329 | ) | | | (597,180,808 | ) | | | (7,149,741 | ) | | | (115,244,371 | ) |
| Net increase (decrease) | | | (3,699,081 | ) | | $ | (58,350,588 | ) | | | 74,730,684 | | | $ | 1,230,179,775 | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | Period Ended | |
| WCM Alternatives: | | December 31, 2015 | | | December 31, 2014* | |
| Event-Driven Fund | | Shares | | | Amount | | | Shares | | | Amount | |
| Institutional Class | | | | | | | | | | | | | | | | |
| Issued | | | 10,713,173 | | | $ | 109,252,172 | | | | 1,300,522 | | | $ | 13,282,670 | |
| Issued as reinvestment | | | | | | | | | | | | | | | | |
| of dividends | | | 305,573 | | | | 2,933,500 | | | | 28,980 | | | | 294,148 | |
| Redeemed | | | (2,182,487 | ) | | | (21,672,509 | ) | | | (137,641 | ) | | | (1,411,547 | ) |
| Net increase | | | 8,836,259 | | | $ | 90,513,163 | | | | 1,191,861 | | | $ | 12,165,271 | |
* The Fund’s commencement date of operations was January 2, 2014.
Note 5 — INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION
TMF’s purchases and sales of securities for the year ended December 31, 2015 (excluding short-term investments, short-term options, forward currency contracts, swap contracts and short positions) in the aggregate were $6,918,424,120 and $6,579,656,248, respectively. EDF’s purchases and sales of securities for the year ended December 31, 2015 (excluding short-term investments, short-term options, forward currency contracts, swap contracts and short positions) in the aggregate were $184,447,824 and $99,212,749, respectively. There were no purchases or sales of U.S. Government securities for the Funds.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 5 — INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION (continued)
At December 31, 2015, the components of accumulated earnings (losses) on a tax basis were as follows:
| | | | | | WCM Alternatives: | |
| | | The Merger Fund | | | Event-Driven Fund | |
| Cost of investments* | | $ | 4,834,775,478 | | | $ | 92,480,529 | |
| Gross unrealized appreciation | | | 190,408,884 | | | | 3,300,211 | |
| Gross unrealized depreciation | | | (292,852,264 | ) | | | (8,274,303 | ) |
| Net unrealized depreciation | | $ | (102,443,380 | ) | | $ | (4,974,092 | ) |
| Undistributed ordinary income | | | — | | | | — | |
| Undistributed long-term capital gain | | | | | | | — | |
| Total distributable earnings | | $ | — | | | $ | — | |
| Other accumulated losses | | | (116,453,773 | ) | | | (1,251,004 | ) |
| Total accumulated losses | | $ | (218,897,153 | ) | | $ | (6,225,096 | ) |
* Represents cost for federal income tax purposes and differs from the cost for financial reporting purposes due to wash sales and constructive sales.
GAAP requires that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. Permanent differences are primarily related to foreign currency transactions, swap treatment, and equalization. These reclassifications have no effect on net assets or net asset value per share. For the year ended December 31, 2015, the following table shows the reclassifications made:
| | | Accumulated Net | |
| | | Realized Loss on | |
| | | Investment, Securities | |
| | | Sold Short, Written Option | |
| | | Contracts Expired or | |
| | Accumulated | Closed, Swap Contracts, | |
| | Undistributed | Foreign Currency Translation | |
| | Net Investment | and Forward Currency | |
| | Income | Exchange Contracts | Paid-in Capital |
| The Merger Fund | $ 69,997,968 | $(50,381,480) | $(19,616,488) |
| WCM Alternatives: | | | |
| Event Driven Fund | $ (206,258) | $ 202,339 | $ 3,919 |
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 5 — INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION (continued)
The tax components of dividends paid during the fiscal years ended December 31, 2015 and December 31, 2014 were as follows:
| | | | | | | | | WCM Alternatives: | |
| | | The Merger Fund | | | Event-Driven Fund | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Investor Class | | | | | | | | | | | | |
| Ordinary Income | | $ | 43,804,709 | | | $ | 154,019,357 | | | | N/ | A | | | N/ | A |
| Long-Term Capital Gains | | | — | | | | — | | | | N/ | A | | | N/ | A |
| Total Distributions Paid | | $ | 43,804,709 | | | $ | 154,019,357 | | | | N/ | A | | | N/ | A |
| | | | | | | | | | | | | | | | | |
| | | | 2015 | | | | 2014 | | | | 2015 | | | | 2014 | |
| Institutional Class | | | | | | | | | | | | | | | | |
| Ordinary Income | | $ | 20,040,418 | | | $ | 56,140,981 | | | $ | 2,933,500 | | | $ | 294,148 | |
| Long-Term Capital Gains | | | — | | | | — | | | | — | | | | — | |
| Total Distributions Paid | | $ | 20,040,418 | | | $ | 56,140,981 | | | $ | 2,933,500 | | | $ | 294,148 | |
TMF designated as long-term capital gain dividend, pursuant to Internal Revenue Case Section 852(b)(3), the amount necessary to reduce the earnings and profits of the Fund related to net capital gain to zero for the tax year ended December 31, 2015.
As of December 31, 2015, TMF and EDF did not have any post-October ordinary losses deferred, on a tax basis. As of December 31, 2015, TMF and EDF had post-October capital losses of $37,585,677 and $812,033, respectively. As of December 31, 2015, TMF and EDF did not have any capital loss carryforwards.
Note 6 — WRITTEN OPTION CONTRACTS
The premium amount and the number of written option contracts during the year ended December 31, 2015 were as follows:
| | | | | | | | | WCM Alternatives: | |
| | | The Merger Fund | | | Event-Driven Fund | |
| | | Number of | | | Premium | | | Number of | | | Premium | |
| | | Contracts | | | Amount | | | Contracts | | | Amount | |
| Options outstanding at December 31, 2014 | | | 691,075 | | | $ | 100,349,065 | | | | 1,713 | | | $ | 249,755 | |
| Options written | | | 3,289,654 | | | | 719,086,558 | | | | 55,820 | | | | 12,510,190 | |
| Options closed | | | (2,506,048 | ) | | | (590,329,009 | ) | | | (33,669 | ) | | | (8,274,774 | ) |
| Options exercised | | | (453,192 | ) | | | (73,081,048 | ) | | | (5,885 | ) | | | (1,103,444 | ) |
| Options expired | | | (531,461 | ) | | | (53,171,906 | ) | | | (7,040 | ) | | | (856,279 | ) |
| Options outstanding at December 31, 2015 | | | 490,028 | | | $ | 102,853,660 | | | | 10,939 | | | $ | 2,525,448 | |
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 7 — DISTRIBUTION PLAN
TMF has adopted an Amended and Restated Plan of Distribution (the “TMF Plan”) dated July 30, 2013, pursuant to Rule 12b-1 under the 1940 Act that applies to TMF’s Investor Class shares. EDF has adopted a Plan of Distribution (the “EDF Plan” and together with the TMF Plan, the “Plans”) dated July 30, 2013, pursuant to Rule 12b-1 under the 1940 Act that applies to EDF’s Investor Class shares. Under each Plan, the respective Fund will compensate broker dealers or other qualified institutions with whom the Fund has entered into a contract to distribute the Fund’s Investor Class shares. Under each Plan, the amount of such compensation paid in any one year shall not exceed 0.25% annually of the average daily net assets attributable to the respective Fund’s Investor Class shares, which may be payable as a distribution fee or a service fee for providing permitted recordkeeping, subaccounting, subtransfer agency and/or shareholder liaison services. For the year ended December 31, 2015, TMF incurred $9,438,611 pursuant to the TMF Plan in respect of TMF’s Investor Class shares. As of December 31, 2015, EDF had no outstanding Investor Class shares. Each Plan will remain in effect from year to year provided such continuance is approved at least annually by a vote either of a majority of the relevant Fund’s Trustees, including a majority of the non-interested Trustees, or a majority of the relevant Fund’s outstanding Investor Class shares.
Note 8 — OFFSETTING ASSETS AND LIABILITIES
Each Fund is subject to various Master Netting Arrangements, which govern the terms of certain transactions with select counterparties. The Master Netting Arrangements allow each Fund to close out and net its total exposure to a counterparty in the event of a default with respect to all the transactions governed under a single agreement with a counterparty. The Master Netting Arrangements also specify collateral posting arrangements at pre-arranged exposure levels. Under the Master Netting Arrangements, collateral is routinely transferred if the total net exposure to certain transactions (net of existing collateral already in place) governed under the relevant Master Netting Arrangement with a counterparty in a given account exceeds a specified threshold depending on the counterparty and the type of Master Netting Arrangement.
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 8 — OFFSETTING ASSETS AND LIABILITIES (continued)
The Merger Fund
| | | | | | Gross | | | Net | | | | | | | | | | |
| | | | | | Amounts | | | Amounts | | | | | | | | | | |
| | | | | | Offset | | | Presented | | | Gross Amounts not | | | | |
| | | Gross | | | in the | | | in the | | | offset in the Statement | | | | |
| | | Amounts of | | | Statement | | | Statement | | | of Assets and Liabilities | | | | |
| | | Recognized | | | of Assets | | | of Assets | | | | | | Collateral | | | | |
| | | Assets/ | | | and | | | and | | | Financial | | | Received/ | | | Net | |
| | | Liabilities | | | Liabilities | | | Liabilities | | | Instruments | | | Pledged* | | | Amount | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Description | | | | | | | | | | | | | | | | | | |
| Forward | | | | | | | | | | | | | | | | | | |
| Currency | | | | | | | | | | | | | | | | | | |
| Exchange | | | | | | | | | | | | | | | | | | |
| Contracts** | | $ | 5,541,138 | | | $ | 2,314,954 | | | $ | 3,226,184 | | | $ | — | | | $ | — | | | $ | 3,226,184 | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| JPMorgan | | | | | | | | | | | | | | | | | | | | | | | | |
| Chase & | | | | | | | | | | | | | | | | | | | | | | | | |
| Co., Inc. | | | 28,127,543 | | | | 25,295,277 | | | | 2,832,266 | | | | — | | | | — | | | | 2,832,266 | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank of America | | | | | | | | | | | | | | | | | | | | | | | | |
| Merrill Lynch | | | | | | | | | | | | | | | | | | | | | | | | |
| & Co. Inc. | | | 9,492,888 | | | | 46,714 | | | | 9,446,174 | | | | — | | | | — | | | | 9,446,174 | |
| | | $ | 43,161,569 | | | $ | 27,656,945 | | | $ | 15,504,624 | | | $ | — | | | $ | — | | | $ | 15,504,624 | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency | | | | | | | | | | | | | | | | | | | | | | | | |
| Exchange | | | | | | | | | | | | | | | | | | | | | | | | |
| Contracts** | | $ | 2,314,954 | | | $ | 2,314,954 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| JPMorgan | | | | | | | | | | | | | | | | | | | | | | | | |
| Chase & | | | | | | | | | | | | | | | | | | | | | | | | |
| Co., Inc. | | | 25,295,277 | | | | 25,295,277 | | | | — | | | | — | | | | — | | | | — | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank of America | | | | | | | | | | | | | | | | | | | | | | | | |
| Merrill Lynch | | | | | | | | | | | | | | | | | | | | | | | | |
| & Co. Inc. | | | 46,714 | | | | 46,714 | | | | — | | | | — | | | | — | | | | — | |
| Written | | | | | | | | | | | | | | | | | | | | | | | | |
| Option | | | | | | | | | | | | | | | | | | | | | | | | |
| Contracts** | | | 77,951,879 | | | | — | | | | 77,951,879 | | | | — | | | | 77,951,879 | | | | — | |
| | | $ | 105,608,824 | | | $ | 27,656,945 | | | $ | 77,951,879 | | | $ | — | | | $ | 77,951,879 | | | $ | — | |
| * | | In some instances, the actual collateral pledged/received may be more than amount shown. |
| ** | | JPMorgan Chase & Co., Inc. is the counterparty for all open forward currency exchange contracts and prime broker for all written option contracts held by the Funds as of December 31, 2015. |
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 8 — OFFSETTING ASSETS AND LIABILITIES (continued)
WCM Alternatives: Event-Driven Fund
| | | | | | Gross | | | Net | | | | | | | | | | |
| | | | | | Amounts | | | Amounts | | | | | | | | | | |
| | | | | | Offset | | | Presented | | | Gross Amounts not | | | | |
| | | Gross | | | in the | | | in the | | | offset in the Statement | | | | |
| | | Amounts of | | | Statement | | | Statement | | | of Assets and Liabilities | | | | |
| | | Recognized | | | of Assets | | | of Assets | | | | | | Collateral | | | | |
| | | Assets/ | | | and | | | and | | | Financial | | | Received/ | | | Net | |
| | | Liabilities | | | Liabilities | | | Liabilities | | | Instruments | | | Pledged* | | | Amount | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Description | | | | | | | | | | | | | | | | | | |
| Forward | | | | | | | | | | | | | | | | | | |
| Currency | | | | | | | | | | | | | | | | | | |
| Exchange | | | | | | | | | | | | | | | | | | |
| Contracts** | | $ | 193,524 | | | $ | 69,229 | | | $ | 124,295 | | | $ | — | | | $ | — | | | $ | 124,295 | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| JPMorgan | | | | | | | | | | | | | | | | | | | | | | | | |
| Chase & | | | | | | | | | | | | | | | | | | | | | | | | |
| Co., Inc. | | | 1,145,775 | | | | 721,234 | | | | 424,541 | | | | — | | | | — | | | | 424,541 | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank of America | | | | | | | | | | | | | | | | | | | | | | | | |
| Merrill Lynch | | | | | | | | | | | | | | | | | | | | | | | | |
| & Co. Inc. | | | 636,756 | | | | 317,272 | | | | 319,484 | | | | — | | | | — | | | | 319,484 | |
| | | $ | 1,976,055 | | | $ | 1,107,735 | | | $ | 868,320 | | | $ | — | | | $ | — | | | $ | 868,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency | | | | | | | | | | | | | | | | | | | | | | | | |
| Exchange | | | | | | | | | | | | | | | | | | | | | | | | |
| Contracts** | | $ | 69,229 | | | $ | 69,229 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| JPMorgan | | | | | | | | | | | | | | | | | | | | | | | | |
| Chase & Co., Inc. | | | 721,234 | | | | 721,234 | | | | — | | | | — | | | | — | | | | — | |
| Swap | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts — | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank of America | | | | | | | | | | | | | | | | | | | | | | | | |
| Merrill Lynch | | | | | | | | | | | | | | | | | | | | | | | | |
| & Co. Inc. | | | 317,272 | | | | 317,272 | | | | — | | | | — | | | | — | | | | — | |
| Written | | | | | | | | | | | | | | | | | | | | | | | | |
| Option | | | | | | | | | | | | | | | | | | | | | | | | |
| Contracts** | | | 1,831,413 | | | | — | | | | 1,831,413 | | | | — | | | | 1,831,413 | | | | — | |
| | | $ | 2,939,148 | | | $ | 1,107,735 | | | $ | 1,831,413 | | | $ | — | | | $ | 1,831,413 | | | $ | — | |
| * | | In some instances, the actual collateral pledged/received may be more than amount shown. |
| ** | | JPMorgan Chase & Co., Inc. is the counterparty for all open forward currency exchange contracts and prime broker for all written option contracts held by the Funds as of December 31, 2015. |
The Merger Fund and WCM Alternatives: Event-Driven Fund
NOTES TO THE FINANCIAL STATEMENTS (continued)
December 31, 2015
Note 9 — SUBSEQUENT EVENTS
Management has evaluated events and transactions occurring after December 31, 2015 through the date that the financial statements were issued, and has determined that no additional disclosure in the financial statements is required.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
The Merger Fund and WCM Alternatives Event-Driven Fund:
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, securities sold short, options written, forward currency exchange contracts, and swap contracts, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Merger Fund and WCM Alternatives: Event-Driven Fund (hereafter referred to as the “Funds”) at December 31, 2015, the results of each of their operations for the year then ended, the changes in each of their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2015 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
New York, New York
February 29, 2016
BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(Unaudited)
Each year, the Board of Trustees of each of The Merger Fund, The Merger Fund VL, and WCM Alternatives: Event-Driven Fund (together, the “Board”), including a majority of the Trustees who are not interested persons of The Merger Fund, The Merger Fund VL, and WCM Alternatives: Event-Driven Fund (together, the “Independent Trustees”), is required to determine whether to continue the advisory agreements for each of The Merger Fund, The Merger Fund VL, and WCM Alternatives: Event-Driven Fund, respectively. In October 2015, the Board and the Independent Trustees approved the continuation of The Merger Fund’s, The Merger Fund VL’s, and WCM Alternatives: Event-Driven Fund’s (each, a “Fund” and, together, the “Funds”) advisory arrangements with Westchester Capital Management LLC (the “Adviser”) (collectively, the “Agreements”) for an additional one-year period. A summary of the material factors and conclusions that formed the basis for the approval by the Board and the Independent Trustees are discussed below.
Review Process
The Investment Company Act of 1940, as amended, requires that the Board request and evaluate, and that the Adviser furnish, such information as may reasonably be necessary to evaluate the terms of the Funds’ Agreements. The Independent Trustees began their formal review process in the summer of 2015 by compiling a request for information that sought a wide range of information the Independent Trustees believed was necessary to evaluate the terms of the Funds’ Agreements. The Trustees evaluated all information available to them on a fund-by-fund basis, and their deliberations were made separately in respect of each Fund. Throughout the review process, the Independent Trustees were advised by their independent counsel. The Independent Trustees also discussed the continuation of the Agreements in a private session with their independent counsel. The Independent Trustees and Board, in approving the continuation of the Agreements after completing their review process, did not identify any particular information that was all-important or controlling, and each Trustee attributed different weights to the various factors. The following summary describes the most important, but not all, of the factors considered by the Board and the Independent Trustees.
Materials Reviewed
During the course of each year, the Board receives a wide variety of materials relating to the services provided by the Adviser and the Funds’ other service providers, including reports on: each Fund’s investment results; portfolio construction; portfolio composition; portfolio trading practices; and other information relating to the nature, extent and quality of services provided by the Adviser to the Funds. In addition, in connection with its annual consideration of the Agreements, the Board requested and reviewed supplementary information regarding the terms of the Agreements, the Funds’ investment results, advisory fee and total expense comparisons, financial and profitability information regarding the Adviser
BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(continued) (Unaudited)
and its affiliates, descriptions of various functions undertaken by the Adviser, such as compliance monitoring, and information about the personnel providing investment management services to the Funds.
The Board also requested and evaluated performance and expense information for other investment companies that were compiled and presented by Morningstar. During the review process, the Board held a telephonic meeting with representatives of Morningstar in which the Board received information regarding the methodology used in compiling Morningstar’s report and the process for how each Fund’s peer group was determined. The Board and the Independent Trustees also considered information regarding so-called “fall-out” benefits to the Adviser and its affiliates due to the Adviser’s relationships with the Funds.
Nature, Extent and Quality of Services
Nature and Extent of Services – In considering whether to continue the Agreements for an additional year, the Board and the Independent Trustees evaluated the nature and extent of the services provided by the Adviser. The Board and the Independent Trustees considered information concerning the investment philosophy and investment process used by the Adviser in managing the Funds. In this context, the Board and the Independent Trustees considered the in-house research capabilities of the Adviser as well as other resources available to the Adviser, including research services available to the Adviser as a result of securities transactions effected for the Funds and other investment advisory clients of the Adviser. The Trustees considered the scope and quality of services provided by the Adviser under the Agreements, and noted that the scope of work required of the Adviser to perform the contracted-for services had expanded over time as a result of regulatory and other developments. The Board and the Independent Trustees also considered the managerial and financial resources available to the Adviser.
Quality of Services – The Board and the Independent Trustees considered the quality of the services provided by the Adviser and the quality of the resources of the Adviser available to the Funds. The Board and the Independent Trustees considered the specialized experience, expertise and professional qualifications of the personnel of the Adviser, including that the Adviser was among a limited number of investment advisers with a long track record managing merger arbitrage and event-driven strategies within the context of a registered mutual fund. The Board and the Independent Trustees considered the complexity of managing the Funds’ strategies relative to other types of funds. The Board and the Independent Trustees also received and reviewed information regarding the non-portfolio management services provided to the Funds by the Adviser in support of the Funds’ operations. The Trustees also considered the personnel that had been retained by the Adviser over recent periods to maintain and potentially improve the level of services provided to the Funds.
BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(continued) (Unaudited)
In their evaluation of the quality of the services provided by the Adviser, the Board and the Independent Trustees considered the performance of the Funds. The Board and the Independent Trustees considered whether the Funds operated within their investment objectives and their record of compliance with their investment restrictions. The Board and the Independent Trustees reviewed information comparing the Funds’ historical performance to relevant market indices and to performance information for other investment companies with similar investment strategies over the 1-, 3-, 5- and 10-year periods (if the Funds were in existence) ended August 31, 2015. At the request of the Independent Trustees, Morningstar also provided for the Board’s October 2015 meeting, updated performance information for the Funds as of September 30, 2015. The Board considered that The Merger Fund VL ranked in the first or second quartiles of its peer group in Morningstar’s report for the three-, five-, and ten-year periods ended August 31, 2015, while performing in the third quartile of its peer group for the one-year period. The Board also considered that while The Merger Fund ranked in the third or fourth quartile of its peer group in Morningstar’s report for each of the one-, three-, and ten-year periods ended August 31, 2015, and in the second quartile for the five-year period, it outperformed the HFRX Merger Arbitrage Index over each of those periods other than the one-year period ended August 31, 2015. The Board also considered that WCM Alternatives: Event-Driven Fund ranked in the first quartile of its Morningstar peer group for the one-year period ended June 30, 2015. The Trustees also noted that WCM Alternatives: Event-Driven Fund still has a relatively short operating history since it commenced operations on January 2, 2014. The Trustees noted that Morningstar’s report included a relatively low number of peer funds for comparison due to the limited number of registered mutual funds pursuing merger-arbitrage and/or event-driven investment strategies, especially over the longer-term periods. The Board and the Independent Trustees concluded, within the context of their overall conclusions regarding each of the Agreements, that they were satisfied with the nature, extent and quality of the services provided by the Adviser and that each Fund’s performance record supported the renewal of the Agreements.
Management Fees and Expenses
The Board and the Independent Trustees reviewed information, including comparative information provided by Morningstar, regarding the advisory fees paid to the Adviser and the total expenses borne by the Funds. They considered the Funds’ advisory fees relative to their peer groups. In this regard, the Independent Trustees noted that each Fund’s net advisory fees and net operating expenses, after taking into account any expense limitation arrangements or advisory fee waivers, remained competitive with its peers. In this regard, the Independent Trustees noted The Merger Fund’s net advisory fees and net operating expenses (Investor
BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(continued) (Unaudited)
Class) were substantially below the median of its peer group and that The Merger Fund VL’s and WCM Alternatives: Event-Driven Fund’s net advisory fees and net operating expenses were at or near their respective peer group medians, notwithstanding their significantly smaller asset size.
The Board and the Independent Trustees also considered the fees that the Adviser and its affiliates charge other clients with investment strategies similar to the Funds, including where an account is subject to a performance-based fee. The Board and the Independent Trustees considered information provided by the Adviser describing the differences in services provided to these other clients. In this regard, the Adviser noted that the services provided to these other clients typically consist solely or primarily of portfolio management services. The Adviser described the additional level of services provided to the Funds under the terms of the Funds’ advisory arrangements or otherwise, such as supplying Fund management, general coordination of the Funds’ other service providers, the provision of middle and back office support functions, provision of certain compliance and regulatory functions, and quarterly preparation and attendance of meetings with the Board, as well as the greater financial obligations and entrepreneurial risks the Adviser undertakes in respect of sponsoring a registered investment company. The Board and the Independent Trustees concluded, within the context of their overall conclusions regarding each of the Agreements, that the fees to be charged under the Agreements represent reasonable compensation to the Adviser in light of the services provided.
Profitability and Possible Economies of Scale
Profitability – The Board and the Independent Trustees reviewed information regarding the cost of services provided by the Adviser and the profitability (before distribution expenses and prior to taxes) of the Adviser’s relationship with the Funds. The Board noted that, in reporting on its profitability, the Adviser had included an estimated expense for compensation of the Funds’ portfolio managers because the Funds’ portfolio managers are principal owners of the Adviser and do not receive a salary or bonus. The Board noted that the Adviser would have incurred significant compensation expense if it instead had to hire equivalently qualified portfolio managers to perform the services performed by the owners, which costs would significantly reduce the Adviser’s profitability. In evaluating the Adviser’s reported profitability, the Independent Trustees considered that certain of the information provided by the Adviser was necessarily estimated and that preparing the related profitability information involved certain assumptions and allocations that were imprecise. The Board and the Independent Trustees recognized that the probative value of profitability information may be limited because a wide range of comparative information often is not generally available and it can be affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, the
BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(continued) (Unaudited)
efficiency of an adviser’s operations, numerous assumptions about allocations and the adviser’s cost of capital. The Independent Trustees concluded that the Adviser’s profitability with respect to The Merger Fund may be relatively high in comparison to other mutual funds, but they noted that the Adviser was among a limited number of investment advisers with an extensive history of providing competitive merger-arbitrage portfolio management services within a registered investment company vehicle and that The Merger Fund’s long-term performance (gross of fees) was favorable relative to the HFRX Merger Arbitrage Index and comparable to the only other two funds with ten years of investment performance in the peer group materials, and each of those was subject to advisory fees that were higher than those of The Merger Fund.
In addition, the Board and the Independent Trustees considered information regarding the direct and indirect benefits the Adviser receives as a result of its relationship with the Funds, including research purchased with soft dollar credits earned from portfolio transactions effected on behalf of the Funds (soft dollar arrangements) and reputational benefits.
Economies of Scale – The Board and the Independent Trustees reviewed the extent to which the Adviser may realize economies of scale in managing the Funds. The Board and the Independent Trustees concluded within the context of their overall conclusions regarding each of the Agreements that the Adviser’s level of profitability from its relationship with each Fund was not excessive in light of, among other things, the Funds’ competitive advisory fees and expense ratios. The Trustees also considered that the Adviser proposed to continue, also for an additional one-year period, to apply waivers to The Merger Fund’s advisory fee that generally had the effect of breakpoints in the Adviser’s advisory fee and proposed to continue the expense limitation agreements applicable to The Merger Fund VL and WCM Alternatives: Event-Driven Fund. The Independent Trustees concluded that those measures were reasonably designed to result in the sharing of economies of scale realized by the Adviser, if any, with the Funds and their shareholders.
Conclusions
Based on their review, including their consideration of each of the factors referred to above, the Board and the Independent Trustees concluded that the terms of the Agreements, including the fees payable to the Adviser, are fair and reasonable to the Funds and their shareholders given the scope and quality of the services provided to the Funds and such other considerations as the Independent Trustees considered relevant in the exercise of their reasonable business judgment and that the continuation of the Agreements was in the best interests of the Funds and their shareholders. Accordingly, the Board and Independent Trustees unanimously approved the continuation of the Agreements.
INFORMATION ABOUT TRUSTEES AND OFFICERS
The business and affairs of the Funds are managed under the direction of the Funds’ Board of Trustees. Information pertaining to the Funds’ Trustees and Officers is set forth below. The Statement of Additional Information includes additional information about the Fund’s Trustees and Officers and is available, without charge, upon request by calling 1-800-343-8959.
| | | | | # of | Other |
| | | Term of | | Portfolios | Directorships |
| | | Office | | in Fund | Held by |
| | | and | Principal | Complex | Trustee |
| Name, | Position(s) | Length | Occupation(s) | Overseen | During |
| Address and | Held with | of Time | During the | by | the Past |
Year of Birth | the Fund | Served | Past Five Years | Trustee** | Five Years |
| | | | | | |
| Interested Trustees | | | | | |
| Roy D. Behren* | Co-President, | Indefinite; | Co-Portfolio Manager | 3 | None |
| Westchester Capital | Treasurer and | since 2011 | and Co-President | | |
| Management, LLC | Trustee | for TMF | of Westchester Capital | | |
| 100 Summit Lake Drive | | and | Management, LLC, | | |
| Valhalla, NY 10595 | | since | the Fund's Adviser, | | |
| Year of Birth: 1960 | | inception | since 2011. | | |
| | | for EDF | | | |
| | | | | | |
| Michael T. Shannon* | Co-President | Indefinite; | Co-Portfolio Manager | 3 | None |
| Westchester Capital | and | Co- | and Co-President of | | |
| Management, LLC | Trustee | President | Westchester Capital | | |
| 100 Summit Lake Drive | | since 2011 | Management, LLC, the | | |
| Valhalla, NY 10595 | | and | Fund’s Adviser, since | | |
| Year of Birth: 1966 | | Trustee | 2011. | | |
| | | since | | | |
| | | 2014 for | | | |
| | | TMF and | | | |
| | | since | | | |
| | | inception | | | |
| | | for EDF | | | |
| | | | | | |
| Non-Interested Trustees | | | | | |
| Barry Hamerling | Independent | Indefinite; | Managing Partner of | 3 | Trustee of |
| c/o Westchester | Trustee | since | Premium Ice Cream of | | AXA Premier |
| Capital | | 2007 | America since 1995. | | VIP Trust |
| Management, LLC | | for TMF | Managing Partner of | | |
| 100 Summit Lake Drive | | and since | B&J Freeport since 1990. | | |
| Valhalla, NY 10595 | | inception | Managing Partner of | | |
| Year of Birth: 1946 | | for EDF | Let-US Creations from | | |
| | | | 1999 to 2011. | | |
INFORMATION ABOUT TRUSTEES AND OFFICERS (continued)
| | | | | # of | Other |
| | | Term of | | Portfolios | Directorships |
| | | Office | | in Fund | Held by |
| | | and | Principal | Complex | Trustee |
| Name, | Position(s) | Length | Occupation(s) | Overseen | During |
| Address and | Held with | of Time | During the | by | the Past |
Year of Birth | the Fund | Served | Past Five Years | Trustee** | Five Years |
| | | | | | |
| Richard V. Silver | Independent | Indefinite; | Consultant with AXA | 3 | None |
| c/o Westchester | Trustee | since | Equitable Life Insurance | | |
| Capital | | 2013 | Company from May | | |
| Management, LLC | | for TMF | 2012 to April 2013. | | |
| 100 Summit Lake Drive | | and since | Senior Executive Vice | | |
| Valhalla, NY 10595 | | inception | President, Chief Legal | | |
| Year of Birth: 1955 | | for EDF | Officer and Chief | | |
| | | | Administrative Officer | | |
| | | | of AXA Equitable Life | | |
| | | | Insurance Company from | | |
| | | | February 2010 to April | | |
| | | | 2012. | | |
| | | | | | |
| Christianna Wood | Independent | Indefinite; | Chief Executive Officer | 3 | Director of |
| c/o Westchester | Trustee | since | and President of Gore | | H&R Block |
| Capital | | 2013 | Creek Capital, Ltd. since | | Corporation; |
| Management, LLC | | for TMF | August 2009. | | Director of |
| 100 Summit Lake Drive | | and since | | | International |
| Valhalla, NY 10595 | | inception | | | Securities |
| Year of Birth: 1959 | | for EDF | | | Exchange; |
| | | | | | Director of |
| | | | | | Grange |
| | | | | | Insurance |
| Officers | | | | | |
| Bruce Rubin | Vice | One-year | Chief Operating Officer | N/A | N/A |
| Westchester Capital | President, | terms; | of Westchester Capital | | |
| Management, LLC | Chief | since 2010 | Management, LLC, the | | |
| 100 Summit Lake Drive | Compliance | for TMF | Fund's Adviser. | | |
| Valhalla, NY 10595 | Officer and | and since | | | |
| Year of Birth: 1959 | Anti-Money | inception | | | |
| | Laundering | for EDF | | | |
| | Compliance | | | | |
| | Officer | | | | |
INFORMATION ABOUT TRUSTEES AND OFFICERS (continued)
| | | | | # of | Other |
| | | Term of | | Portfolios | Directorships |
| | | Office | | in Fund | Held by |
| | | and | Principal | Complex | Trustee |
| Name, | Position(s) | Length | Occupation(s) | Overseen | During |
| Address and | Held with | of Time | During the | by | the Past |
Year of Birth | the Fund | Served | Past Five Years | Trustee** | Five Years |
| | | | | | |
| Abraham Cary | Secretary | One-year | Head of Trading of | N/A | N/A |
| Westchester Capital | | terms; | Westchester Capital | | |
| Management, LLC | | since 2012 | Management, LLC, the | | |
| 100 Summit Lake Drive | | for TMF | Fund’s Adviser since | | |
| Valhalla, NY 10595 | | and since | 2011. | | |
| Year of Birth: 1975 | | inception | | | |
| | | for EDF | | | |
| * | Denotes a trustee who is an “interested person” (as that term is defined in Section 2(a)(19) of the 1940 Act) of the Funds or of the Funds’ investment adviser. Messrs. Behren and Shannon are deemed to be interested persons because of their affiliation with the Funds’ investment adviser, Westchester Capital Management, LLC, and because they are officers of the Funds. |
| ** | The fund complex consists of TMF, The Merger Fund VL and EDF. |
ADDITIONAL INFORMATION (Unaudited)
For the fiscal year ended December 31, 2015, certain dividends paid by TMF may be subject to a maximum tax rate of 15% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income for the fiscal year ended December 31, 2015 was 53.29% for TMF and 18.96% for EDF.
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends-received deduction for the fiscal year ended December 31, 2015 was 42.47% for TMF and 11.38% for EDF.
The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Code Section 871(k)(2)(c) for the fiscal year ended December 31, 2015 was 33.01% for TMF and 57.34% for EDF.
AVAILABILITY OF PROXY VOTING INFORMATION
Information regarding how the Funds generally votes proxies relating to portfolio securities may be obtained without charge by calling the Funds’ Transfer Agent at 1-800-343-8959 or by visiting the SEC’s website at www.sec.gov. Information regarding how the Funds voted proxies during the most recent 12-month period ended June 30 is available on the SEC’s website or by calling the toll-free number listed above.
AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULE
The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the SEC’s website at www.sec.gov and 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 1-800-SEC-0330.
The Merger Fund and WCM Alternatives: Event-Driven Fund
PRIVACY POLICY
We collect the following non-public personal information about you:
| | • | Information we receive from you on or in applications or other forms, correspondence, or conversations, including, but not limited to, your name, address, phone number, social security number, assets, income and date of birth; and |
| | | |
| | • | Information about your transactions with us, our affiliates, or others, including, but not limited to, your account number and balance, payments history, parties to transactions, cost basis information, and other financial information. |
We do not disclose any non-public personal information about our current or former shareholders to non-affiliated third parties, except as permitted by law. For example, we are permitted by law to disclose all of the information we collect, as described above, to our transfer agent to process your transactions. Furthermore, we restrict access to your non-public personal information to those persons who require such information to provide products or services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your non-public personal information.
In the event that you hold shares of the Fund through a financial intermediary, including, but not limited to, a broker-dealer, bank, or trust company, the privacy policy of your financial intermediary would govern how your non-public personal information would be shared with non-affiliated third parties.
THIS PRIVACY POLICY IS NOT A PART OF THE ANNUAL REPORT.
| Investment Adviser |
| | Westchester Capital Management, LLC |
| | 100 Summit Lake Drive |
| | Valhalla, NY 10595 |
| | (914) 741-5600 |
| | www.westchestercapitalfunds.com |
| | |
| Administrator, Transfer Agent, Accountant, |
| Dividend Paying Agent and Shareholder Servicing Agent |
| | U.S. Bancorp Fund Services, LLC |
| | 615 East Michigan Street |
| | P.O. Box 701 |
| | Milwaukee, WI 53201-0701 |
| | (800) 343-8959 |
| | |
| Custodian |
| | U.S. Bank, N.A. |
| | 1555 North Rivercenter Drive, Suite 302 |
| | Milwaukee, WI 53212 |
| | (800) 343-8959 |
| | |
| Distributor |
| | Quasar Distributors, LLC |
| | 615 East Michigan Street |
| | Milwaukee, WI 53202 |
| | |
| Trustees |
| | Roy Behren |
| | Michael T. Shannon |
| | Barry Hamerling |
| | Richard V. Silver |
| | Christianna Wood |
| | |
| Executive Officers |
| | Roy Behren, Co-President and Treasurer |
| | Michael T. Shannon, Co-President |
| | Bruce Rubin, Vice President and |
| | Chief Compliance Officer |
| | Abraham R. Cary, Secretary |
| | |
| Counsel |
| | Ropes & Gray LLP |
| | 1211 Avenue of the Americas |
| | New York, NY 10036 |
| | |
| Independent Registered |
| Public Accounting Firm |
| | PricewaterhouseCoopers LLP |
| | 300 Madison Avenue |
| | New York, NY 10017 |
Item 2. Code of Ethics.
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer and principal financial officer. The registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report. A copy of the registrant’s Code of Ethics is filed herewith. You may also receive a copy of the registrant’s Code of Ethics, free of charge, upon request by calling (800) 343-8959.
Item 3. Audit Committee Financial Expert.
The registrant’s board of trustees has determined that there is at least one audit committee financial expert serving on its audit committee. Barry Hamerling and Christianna Wood are the “audit committee financial experts” and are considered to be “independent” as each term is defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
The registrant has engaged its principal accountant, PricewaterhouseCoopers LLP, to perform audit services, audit-related services, tax services and other services during the past two fiscal years. “Audit services” refer to performing an audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. “Audit-related services” refer to the assurance and related services by the principal accountant that are reasonably related to the performance of the audit. “Tax services” refer to professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. The following table details the aggregate fees billed or expected to be billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant.
| | FYE 12/31/2015 | FYE 12/31/2014 |
| Audit Fees | $101,700 | $101,700 |
| Audit-Related Fees | $ - | $ - |
| Tax Fees | $12,225 | $11,870 |
| All Other Fees | $ - | $ - |
The audit committee has adopted pre-approval policies and procedures that require the audit committee to pre approve all audit and non-audit services of the registrant, including services provided to any entity affiliated with the registrant.
The percentage of fees billed by PricewaterhouseCoopers LLP applicable to non-audit services pursuant to waiver of pre-approval requirement were as follows:
| | FYE 12/31/2015 | FYE 12/31/2014 |
| Audit-Related Fees | 0% | 0% |
| Tax Fees | 0% | 0% |
| All Other Fees | 0% | 0% |
All of the principal accountant’s hours spent on auditing the registrant’s financial statements were attributed to work performed by full time permanent employees of the principal accountant.
The following table indicates the non-audit fees billed or expected to be billed by the registrant’s accountant for services to the registrant and to the registrant’s investment adviser (and any other controlling entity, etc.—not including any sub-advisers) for the last two years. The audit committee of the board of trustees has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser is compatible with maintaining the principal accountant's independence and has concluded that the provision of such non-audit services by the accountant has not compromised the accountant’s independence.
| Non-Audit Related Fees | FYE 12/31/2015 | FYE 12/31/2014 |
| Registrant | - | - |
| Registrant’s Investment Adviser | - | - |
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
The registrant’s Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 9. Purchases of Equity Securities by Closed‑End Management Investment Company and Affiliated Purchasers.
Not applicable to open-end investment companies.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s board of trustees.
Item 11. Controls and Procedures.
| (a) | The registrant’s Co-Presidents/Chief Executive Officers and Treasurer/Chief Financial Officer have reviewed the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as 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. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the registrant and by the registrant’s service provider. |
| (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 has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
Item 12. Exhibits.
| (a) | (1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Filed herewith. |
(2) A separate certification for each principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c‑1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies.
| (b) | Certifications pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002. Furnished 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) The Merger Fund
By (Signature and Title)* /s/Michael T. Shannon
Michael T. Shannon, Co-President
Date March 8, 2016
By (Signature and Title)* /s/Roy Behren
Roy Behren, Co-President and Treasurer
Date March 8, 2016
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 (Signature and Title)* /s/Michael T. Shannon
Michael T. Shannon, Co-President
Date March 8, 2016
By (Signature and Title)* /s/Roy Behren
Roy Behren, Co-President and Treasurer
Date March 8, 2016
* Print the name and title of each signing officer under his or her signature.
