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OMB Number: 3235-0570
Expires: August 31, 2011
Estimated average burden
hours per response: 18.9
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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 811-21868
---------------------------------------------
Surgeons Diversified Investment Fund
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
633 N. Clair Street Chicago, Illinois 60611
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Savitri P. Pai
Surgeons Asset Management, LLC 633 N. Clair Street Chicago, Illinois 60611
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 202-5056
---------------------------
Date of fiscal year end: August 31, 2008
---------------------------------------------
Date of reporting period: August 31, 2008
---------------------------------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
- --------------------------------------------------------------------------------
SURGEONS
DIVERSIFIED
INVESTMENT
FUND
[LOGO OMITTED] Serving the membership of the
American College of Surgeons
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT
AUGUST 31, 2008
|DIVERSIFIED
SURGEONS |INVESTMENT
|FUND
- --------------------------------------------------------------------------------
SURGEONS DIVERSIFIED INVESTMENT FUND
================================================================================
Dear Fellow Shareholder,
We are pleased to share with you our second Annual Report for the Surgeons
Diversified Investment Fund (SDIF). During the past year, severe market turmoil
reflected loss of confidence in global capital markets. Despite coordinated U.S.
and foreign government involvement, efforts to assure and insure global flows of
assets had little impact on deleveraging, panic selling, and increased lending
by financial institutions. Notwithstanding this scenario, we continue to believe
in SDIF's asset allocation as the driver of success for a long-term investment
portfolio. Upon the conclusion of the present consumer-led global recession, we
believe the potential exists for higher real returns particularly from emerging
markets, commodities and energy asset classes.
SDIF'S ASSET ALLOCATION UNDERWENT ADJUSTMENT DURING THE SECOND YEAR.
One of SDIF's most important features is its managed asset allocation. During
the past year, SDIF's asset allocation shifted from its initial targets. In
February 2008, a 3 percent commodities allocation was added to SDIF in an effort
to further align its asset allocation with that of the American College of
Surgeons endowment. The commodities component allows SDIF shareholders to obtain
exposure to various types of commodities, including industrial and precious
metals, agriculture, livestock, and energy. Commodities exposure adds an asset
class to SDIF that provides further diversification and one that historically
has a negative correlation to stocks and bonds. While we expect demand for
commodities to decline during a recession, we view the decline as a buying
opportunity. SDIF's historical asset allocation changes can be viewed in the
table below:
- --------------------------------------------------------------------------------
12/31/06 3/31/07 8/31/07 6/30/08
- --------------------------------------------------------------------------------
U.S. equity
Large cap value stocks 8% 9% 8% 8%
Large cap growth stocks 8 9 8 8
Large cap index stocks 7 8 8 8
Small cap value stocks 5 3.5 3.5 3.5
Small cap growth stocks 5 3.5 3.5 3.5
REIT stocks 6 6 6 6
Energy stocks 6 6 6 6
- --------------------------------------------------------------------------------
International equity 25 25 23 23
- --------------------------------------------------------------------------------
Emerging markets N/A N/A 4 4
- --------------------------------------------------------------------------------
Commodities N/A N/A N/A 3
- --------------------------------------------------------------------------------
U.S. fixed income 30 30 30 27
- --------------------------------------------------------------------------------
TOTAL 100% 100% 100% 100%
- --------------------------------------------------------------------------------
1
As of fiscal year end, 43% of SDIF's equity exposure is targeted to U.S.
equities (8% large cap value, 8% large cap growth, 8% large cap index, 3.5%
small cap value, 3.5% small cap growth, 6% REITs (real estate investment
trusts), and 6% energy). SDIF's non-U.S. equity exposure is allocated with 23%
to international equities and 4% to emerging market equities. The remaining 27%
of net assets is targeted towards fixed income, and finally 3% to commodities.
ENERGY AND U.S. FIXED INCOME ASSET CLASSES CONTRIBUTED TO SDIF'S PERFORMANCE.
SDIF's overall performance for the year ended August 31, 2008 was helped by its
exposure to energy and fixed income. Record oil prices spurred growth in our
energy holdings. Our fixed income exposure added stability and a reasonable
return. All other asset classes fell during the year in response to expectations
of a worldwide slowdown in growth, deleveraging by hedge funds and others, and
panic selling. Furthermore, U.S. markets fell less than international and
emerging markets this past summer, contributing in large part to SDIF's
underperformance relative to its U.S. based benchmark (the hypothetical,
unmanaged, blended benchmark comprised of 70% S&P 500 Index and 30% Lehman
Brothers U.S. Aggregate Bond Index). During the fiscal year SDIF, had
approximately 27% exposure to international and emerging equity markets versus
the S&P 500 Index that contains no direct exposure to these markets.
LOWER EXPENSE RATIO; LOWER MINIMUM INVESTMENT.
As you may recall, SDIF lowered its expense ratio in February 2008 to 1.08%,
which includes the costs of SDIF's investments in exchange-traded funds and
exchange-traded notes. In addition, we recently reduced our minimum investment
to $5,000, assuming an automatic investment plan of at least $100 per month is
implemented, and $10,000 if no automatic investment plan is implemented; waivers
of the minimum are possible. SDIF is a no-load fund, and does not charge IRA
fees. SDIF is also available for use in accounts held for children and/or
grandchildren.
Financial markets are always unpredictable, but investing for the long term and
investing regularly (i.e. dollar cost averaging*) can even out the ups and downs
of the market while keeping one fully invested. Furthermore, studies indicate
that diversification and asset allocation are the most important determinants of
a portfolio's long-term success. We believe that SDIF provides investors with a
strong tool for such success. We thank you for your continued investment in
SDIF, and thank the following surgical organizations for their investment in
SDIF:
Alabama Chapter of the American College of Surgeons
American College of Surgeons
American Society of Transplant Surgeons
American Surgical Association
Arizona Chapter of the American College of Surgeons
Association of Academic Surgery Foundation
Association of Women Surgeons
Association of Women Surgeons Foundation
Congenital Heart Surgeons Society
Connecticut Chapter of the American College of Surgeons
The Foundation for Exxcellence for Women's Health Care, Inc.
2
National Foundation for Trauma Care
Ohio Chapter of the American College of Surgeons
Ohio Committee on Trauma
The Ohio State University Physicians Inc.
Society of Gynecologic Oncologists
Virginia Chapter of the American College of Surgeons
West Virginia Chapter of the American College of Surgeons
We look forward to our future growth with you.
John L. Cameron, MD, FACS
CHAIRMAN, BOARD OF TRUSTEES
SURGEONS DIVERSIFIED INVESTMENT FUND
Savitri P. Pai, Esq.
PRESIDENT
SURGEONS DIVERSIFIED INVESTMENT FUND
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RESULTS AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER
THAN THE PERFORMANCE DATA QUOTED. PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, ARE AVAILABLE BY CALLING 1-800-208-6070.
AN INVESTOR SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND
EXPENSES OF THE FUND CAREFULLY BEFORE INVESTING. THE FUND'S PROSPECTUSES CONTAIN
THIS AND OTHER IMPORTANT INFORMATION. TO OBTAIN A COPY OF THE FUND'S PROSPECTUS
PLEASE CALL 1-800-208-6070 AND A COPY WILL BE SENT TO YOU FREE OF CHARGE OR
VISIT SDIF'S WEBSITE AT WWW.SURGEONSFUND.COM. PLEASE READ THE PROSPECTUS
CAREFULLY BEFORE YOU INVEST. SDIF IS DISTRIBUTED BY ULTIMUS FUND DISTRIBUTORS,
LLC.
The Letter to Shareholders seeks to describe some of the Manager's current
opinions and views of the financial markets. Although the Manager believes it
has a reasonable basis for any opinions or views expressed, actual results may
differ, sometimes significantly so, from those expected or expressed.
The surgical organizations listed above authorized the Manager to name them in
Fund related materials. This should not be considered an endorsement by these
organizations and their investment experiences in the Fund may not be
representative of other investors.
* A plan of regular investing does not assure a profit or protect against
depreciation in a declining market. Since a dollar-cost averaging plan
involves continuous investment in securities regardless of fluctuating
prices, you should consider your financial ability to continue purchases
through periods of low price levels.
3
SURGEONS DIVERSIFIED INVESTMENT FUND
PORTFOLIO INFORMATION
AUGUST 31, 2008 (UNAUDITED)
================================================================================
GROWTH OF $10,000 OVER THE PERIOD SINCE
INCEPTION FOR AN INVESTMENT MADE ON SEPTEMBER 22, 2006
[LINE GRAPH OMITTED]
SURGEONS BLENDED S&P 500/ LEHMAN BROTHERS
DIVERSIFIED LEHMAN BROTHERS S&P 500 U.S. AGGREGATE
DATE INVESTMENT FUND U.S. AGGREGATE INDEX* INDEX** BOND INDEX***
- --------------------------------------------------------------------------------
9/22/2006 $ 10,000 $ 10,000 $ 10,000 $ 10,000
11/30/2006 10,660 10,537 10,693 10,177
2/28/2007 10,809 10,636 10,792 10,269
5/31/2007 11,404 11,314 11,794 10,247
8/31/2007 11,132 11,114 11,407 10,428
11/30/2007 11,444 11,311 11,519 10,792
2/29/2008 10,732 10,608 10,404 11,019
5/31/2008 11,287 11,017 11,004 10,953
8/31/2008 10,383 10,435 10,136 11,039
Past performance is not predictive of future performance.
Average Annual
Total Return (a)
-------------------- Final Value
Since of a $10,000
One Year Inception(b) Investment
- --------------------------------------------------------------------------------
Surgeons Diversified Investment Fund (6.72%) 1.96% $10,383
- --------------------------------------------------------------------------------
Blended S&P 500/Lehman Brothers
U.S.Aggregate Index* (6.11%) 2.22% 10,435
- --------------------------------------------------------------------------------
S&P 500 Index** (11.14%) 0.70% 10,136
- --------------------------------------------------------------------------------
Lehman Brothers U.S.Aggregate Bond Index*** 5.86% 5.22% 11,039
- --------------------------------------------------------------------------------
* The blend of the S&P 500 Index and Lehman Brothers U.S. Aggregate Index is
comprised of 70% S&P 500 Index and 30% Lehman Brothers U.S. Aggregate
Index.
** The Standard & Poor's Composite Index of 500 stocks is a widely
recognized, unmanaged index of common stock prices.
*** Lehman Brothers U.S. Aggregate Bond Index is the broadest measure of the
taxable U.S. bond market, including most Treasury, agency, corporate,
mortgage-backed, asset-backed, and international dollar-denominated
issues, all with investment-grade ratings and maturities of 1 year or
more.
(a) The total returns shown do not reflect the deduction of taxes a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(b) Commencement of operations was September 22, 2006.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND SHARE
PRICE WILL FLUCTUATE WITH MARKET CONDITIONS, AND INVESTORS MAY HAVE A GAIN OR
LOSS WHEN SHARES ARE SOLD. FUND PERFORMANCE CHANGES OVER TIME AND CURRENTLY MAY
BE LOWER OR HIGHER THAN STATED ABOVE. PERFORMANCE IS UPDATED MONTHLY AND IS
AVAILABLE BY CALLING 800-208-6070. VISIT THE FUND'S WEBSITE WWW.SURGEONSFUND.COM
FOR CURRENT CALENDAR QUARTER PERFORMANCE INFORMATION.
4
SURGEONS DIVERSIFIED INVESTMENT FUND
PORTFOLIO INFORMATION
AUGUST 31, 2008 (UNAUDITED)
================================================================================
SECTOR ALLOCATION (% OF NET ASSETS)
- --------------------------------------------------------------------------------
[PIE CHART OMITTED]
Commodities 2.8%
Emerging Market 3.5%
Energy 6.0%
International 22.0%
Large Cap Growth 7.9%
Large Cap Index 7.9%
Large Cap Value 8.0%
REITs 6.1%
Small Cap Growth 3.8%
Small Cap Value 3.7%
U.S. Fixed Income 28.1%
Other 0.2%
5
SURGEONS DIVERSIFIED INVESTMENT FUND
SCHEDULE OF INVESTMENTS
AUGUST 31, 2008
================================================================================
SHARES EXCHANGE TRADED FUNDS -- 97.0% VALUE
- --------------------------------------------------------------------------------
EMERGING MARKET -- 3.5%
20,126 Vanguard Emerging Markets Stock Index Fund ......... $ 826,374
ENERGY -- 6.0%
33,092 iShares S&P Global Energy Sector Index Fund ........ 1,438,509
INTERNATIONAL -- 22.0%
82,289 iShares MSCI EAFE Index Fund ....................... 5,231,112
LARGE CAP GROWTH -- 7.9%
34,507 iShares Russell 1000 Growth Index Fund ............. 1,886,843
LARGE CAP INDEX -- 7.9%
14,579 S&P Depositary Receipts Trust Series 1 ............. 1,876,463
LARGE CAP VALUE -- 8.0%
27,516 iShares Russell 1000 Value Index Fund .............. 1,910,986
REITS -- 6.1%
22,786 iShares Dow Jones U.S. Real Estate Index Fund ...... 1,445,316
SMALL CAP GROWTH -- 3.8%
11,269 iShares Russell 2000 Growth Index Fund ............. 899,154
SMALL CAP VALUE -- 3.7%
12,678 iShares Russell 2000 Value Index Fund .............. 884,037
U.S. FIXED INCOME -- 28.1%
66,382 iShares Lehman Aggregate Bond Fund ................. 6,687,986
------------
TOTAL EXCHANGE TRADED FUNDS (Cost $25,362,060) ..... $ 23,086,780
------------
================================================================================
SHARES EXCHANGE TRADED NOTES -- 2.8% VALUE
- --------------------------------------------------------------------------------
COMMODITIES -- 2.8%
11,336 iPath Dow Jones - AIG Commodity Index
Total Return ETN* (Cost $729,131) ................ $ 659,528
------------
6
SURGEONS DIVERSIFIED INVESTMENT FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
================================================================================
SHARES SHORT-TERM INVESTMENTS -- 0.2% VALUE
- --------------------------------------------------------------------------------
37,074 Northern Institutional Government Select Portfolio**
(Cost $37,074) ................................... $ 37,074
----------
TOTAL INVESTMENTS AT VALUE -- 100.0%
(Cost $26,128,265) ................................. $ 23,783,382
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.0% ........ $ 1,655
----------
TOTAL NET ASSETS -- 100.0%$ .......................... $ 23,785,037
==========
* Non-income producing security.
** Affiliated investment (Note 4).
See accompanying notes to financial statements.
7
SURGEONS DIVERSIFIED INVESTMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2008
================================================================================
ASSETS
Investments at market value (Cost $26,091,191) (Note 2) ...... $ 23,746,308
Investments in affiliates at market value
(Cost $37,074) (Note 2 and 4) .............................. 37,074
Dividends receivable ......................................... 53
Receivable for capital shares sold ........................... 8,283
Receivable from Manager (Note 4) ............................. 13,111
Other assets ................................................. 16,671
------------
TOTAL ASSETS ............................................... 23,821,500
------------
LIABILITIES
Payable to Administrator (Note 4) ............................ 7,210
Payable to Custodian (Note 4) ................................ 4,000
Other accrued expenses ....................................... 25,253
------------
TOTAL LIABILITIES .......................................... 36,463
------------
NET ASSETS ..................................................... $ 23,785,037
============
Net assets consist of:
Paid-in capital ................................................ $ 25,777,751
Accumulated undistributed net investment income ................ 311,374
Accumulated undistributed net realized gains
from security transactions ................................... 40,795
Net unrealized depreciation on investments ..................... (2,344,883)
------------
Net assets ..................................................... $ 23,785,037
============
Shares of beneficial interest outstanding (unlimited number of
shares authorized, no par value) ............................. 2,352,528
============
Net asset value, offering price and redemption
price per share (Note 2) ..................................... $ 10.11
============
See accompanying notes to financial statements.
8
SURGEONS DIVERSIFIED INVESTMENT FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2008
================================================================================
INVESTMENT INCOME
Dividends .................................................... $ 1,381,004
Dividends from affiliates .................................... 4,598
------------
TOTAL INVESTMENT INCOME .................................... 1,385,602
------------
EXPENSES
Investment management fees (Note 4) .......................... 422,130
Professional fees ............................................ 96,074
Administration fees (Note 4) ................................. 63,362
Compliance service fees and expenses (Note 4) ................ 37,635
Fund accounting fees (Note 4) ................................ 34,224
Registration fees ............................................ 26,439
Printing, postage and supplies ............................... 18,295
Transfer agent and shareholder services fees (Note 4) ........ 18,000
Trustees' fees and meeting expenses .......................... 17,973
Insurance expense ............................................ 12,700
Custodian fees (Note 4) ...................................... 11,994
Distribution expense (Note 4) ................................ 7,296
Other expenses ............................................... 15,864
------------
TOTAL EXPENSES ............................................. 781,986
Less fees waived by the Manager (Note 4) ..................... (328,070)
------------
NET EXPENSES ............................................... 453,916
------------
NET INVESTMENT INCOME .......................................... 931,686
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions ................ 136,183
Net realized gains from in-kind redemptions (Note 2) ......... 276,129
Net change in unrealized appreciation/
depreciation on investments ................................ (3,378,913)
------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS .............. (2,966,601)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS ..................... $ (2,034,915)
============
See accompanying notes to financial statements
9
SURGEONS DIVERSIFIED INVESTMENT FUND
STATEMENTS OF CHANGES IN NET ASSETS
=========================================================================================
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
2008 2007 (a)
- -----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income ................................. $ 931,686 $ 380,030
Net realized gains (losses) from security transactions 136,183 (33,032)
Net realized gains from in-kind redemptions (Note 2) .. 276,129 --
Net change in unrealized appreciation/
depreciation on investments ......................... (3,378,913) 1,034,030
------------ ------------
Net increase (decrease) in net assets from operations ... (2,034,915) 1,381,028
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ............................ (762,447) (240,705)
From net realized gains from security transactions .... (62,370) --
------------ ------------
Decrease in net assets from distributions to shareholders (824,817) (240,705)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ............................. 6,860,286 43,546,517
Net asset value of shares issued in
reinvestment of distributions to shareholders ....... 823,038 240,705
Payments for shares redeemed .......................... (25,821,479) (244,621)
------------ ------------
Net increase (decrease) in net assets from
capital share transactions ............................ (18,138,155) 43,542,601
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ................. (20,997,887) 44,682,924
NET ASSETS
Beginning of period ................................... 44,782,924 100,000
------------ ------------
End of period ......................................... $ 23,785,037 $ 44,782,924
============ ============
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ................................. $ 308,564 $ 139,325
============ ============
CAPITAL SHARE ACTIVITY
Sold .................................................. 631,429 4,051,041
Reinvested ............................................ 74,686 22,623
Redeemed .............................................. (2,414,999) (22,252)
------------ ------------
Net increase (decrease) in shares outstanding ......... (1,708,884) 4,051,412
Shares outstanding at beginning of period ............. 4,061,412 10,000
------------ ------------
Shares outstanding at end of period ................... 2,352,528 4,061,412
============ ============
(a) Represents the period from the commencement of operations on September 22,
2006 through August 31, 2007.
See accompanying notes to financial statements.
10
SURGEONS DIVERSIFIED INVESTMENT FUND
FINANCIAL HIGHLIGHTS
=========================================================================================
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- -----------------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
AUGUST 31, AUGUST 31,
2008 2007 (a)
- -----------------------------------------------------------------------------------------
Net asset value at beginning of period ..................... $ 11.03 $ 10.00
---------- ----------
Income (loss) from investment operations:
Net investment income ................................... 0.28 0.13
Net realized and unrealized gains (losses) on investments (1.01) 1.00
---------- ----------
Total from investment operations ........................... (0.73) 1.13
---------- ----------
Less distributions:
From net investment income .............................. (0.18) (0.10)
From net realized gains from security transactions ...... (0.01) --
---------- ----------
Total distributions ........................................ (0.19) (0.10)
---------- ----------
Net asset value at end of period ........................... $ 10.11 $ 11.03
========== ==========
Total return (b) ........................................... (6.72%) 11.32%(c)
========== ==========
Net assets at end of period (000's) ........................ $ 23,785 $ 44,783
========== ==========
Ratio of net expenses to average net assets (e) ............ 1.08% 1.35%(d)
Ratio of net investment income to average net assets ....... 2.21% 1.37%(d)
Portfolio turnover rate .................................... 25% 4%(c)
(a) Represents the period from the commencement of operations on September 22,
2006 through August 31, 2007.
(b) Total return is a measure of the change in value of an investment in the
Fund over the periods covered, which assumes any dividends or capital
gains distributions are reinvested in shares of the Fund. The returns
shown do not reflect the deduction of taxes a shareholder would pay on
Fund distributions or the redemption of Fund shares.
(c) Not annualized.
(d) Annualized.
(e) Absent investment management fee waivers by the Manager, the ratio of
expenses to average net assets would have been 1.86% and 1.96%(d) for the
periods ended August 31, 2008 and 2007, respectively.
See accompanying notes to financial statements.
11
SURGEONS DIVERSIFIED INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2008
================================================================================
1. ORGANIZATION
Surgeons Diversified Investment Fund (the "Fund") is an open-end diversified
management investment company established as an Ohio business trust under a
Declaration of Trust dated March 2, 2006. On July 27, 2006, 10,000 shares of the
Fund were issued for cash, at $10.00 per share, to Surgeons Asset Management,
LLC (the "Manager"), the investment manager to the Fund. The public offering of
shares of the Fund commenced on September 22, 2006. The Fund had no operations
prior to the public offering of shares except for the initial issuance of shares
to the Manager.
The investment objective of the Fund is to provide long-term capital
appreciation and income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Fund's significant accounting policies:
SECURITIES VALUATION - The Fund's portfolio securities are valued as of the
close of the regular session of trading on the New York Stock Exchange ("NYSE")
(normally 4:00 p.m., Eastern time). Securities, other than options, listed on
the NYSE or other exchanges are valued on the basis of their last sale price on
the exchanges on which they are primarily traded. However, if the last sale
price on the NYSE?is different than the last sale price on any other exchange,
the NYSE price will be used. If there are no sales on that day, the securities
are valued at the closing bid price on the NYSE or other primary exchange for
that day. Securities which are quoted by NASDAQ are valued at the NASDAQ
Official Closing Price. If there are no sales on that day, the securities are
valued at the last bid price as reported by NASDAQ. Securities traded in the
over-the-counter market are valued at the last sales price, if available,
otherwise at the mean of the closing bid and ask prices. In the event that
market quotations are not readily available, securities and other assets are
valued at fair value as determined in accordance with procedures adopted by the
Board of Trustees.
SHARE VALUATION - The net asset value per share of the Fund is calculated daily
by dividing the total value of the Fund's assets, less liabilities, by the
number of shares outstanding. The offering price and redemption price per share
of the Fund is equal to the net asset value per share.
INVESTMENT INCOME - Dividend income is recorded on the ex-dividend date.
Interest income is accrued as earned.
SECURITY TRANSACTIONS - Security transactions are accounted for on the trade
date. Gains and losses on securities sold are determined on a specific
identification basis.
DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders arising from net
investment income and net realized capital gains, if any, are distributed at
least once each year. The amount of distributions from net investment income and
net realized
12
SURGEONS DIVERSIFIED INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
gains are determined in accordance with federal income tax regulations, which
may differ from accounting principles generally accepted in the United States of
America. Dividends and distributions to shareholders are recorded on ex-dividend
date.
The tax character of distributions paid during the periods ended August 31, 2008
and 2007 was as follows:
Long-Term
Ordinary Capital Total
Period Ended Income Gains Distributions
- --------------------------------------------------------------------------------
August 31, 2008 $ 774,751 $ 50,066 $ 824,817
August 31, 2007 $ 240,705 $ -- $ 240,705
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
FEDERAL INCOME TAX - It is the Fund's policy to comply with the special
provisions of Subchapter M of the Internal Revenue Code applicable to regulated
investment companies. As provided therein, in any fiscal year in which the Fund
so qualifies and distributes at least 90% of its taxable net income, the Fund
(but not the shareholders) will be relieved of federal income tax on the income
distributed. Accordingly, no provision for income taxes is required.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31), plus undistributed amounts from prior years.
The following information is computed on a tax basis for each item as of August
31, 2008:
- --------------------------------------------------------------------------------
Cost of portfolio investments .................................. $ 26,143,695
=============
Gross unrealized appreciation................................... $ 172,884
Gross unrealized depreciation................................... (2,533,197)
-------------
Net unrealized depreciation..................................... $ (2,360,313)
Undistributed ordinary income................................... 311,374
Undistributed long-term gains................................... 56,225
-------------
Accumulated deficit ............................................ $ (1,992,714)
=============
- --------------------------------------------------------------------------------
The difference between the federal income tax cost of portfolio investments and
the financial statement cost for the Fund is due to certain timing differences
in the recognition of capital gains or losses under income tax regulations and
accounting principles generally accepted in the United States of America. These
"book/tax" differences are temporary in nature and are primarily due to the tax
deferral of losses on wash sales.
13
SURGEONS DIVERSIFIED INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
During the year ended August 31, 2008, the Fund utilized capital losses from the
prior fiscal year of $19,399 to offset current year realized gains.
During the year ended August 31, 2008, the Fund realized $276,129 of net capital
gains resulting from in-kind redemptions (redemptions in which shareholders who
redeemed Fund shares received securities held by the Fund rather than cash). The
Fund recognizes a gain on in-kind redemptions to the extent that the value of
the distributed securities on the date of redemption exceeds the cost of those
securities. Such gains are not taxable to the Fund and are not required to be
distributed to shareholders. The Fund has reclassified its net capital gains
resulting from in-kind redemptions of $276,129 against paid-in capital. In
addition, the Fund reclassified a non-deductible expense of $2,824 against
paid-in capital and reclassified $14 of distribution in excess of net realized
gains to ordinary income. These reclassifications are reflected on the Statement
of Assets and Liabilities. Such reclassifications, the result of permanent
differences between the financial statement and income tax reporting
requirements, had no effect on the Fund's net assets or net asset value per
share.
The Financial Accounting Standards Board's ("FASB") Interpretation No. 48 ("FIN
48") "Accounting for Uncertainty in Income Taxes" provides guidance for how
uncertain tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the evaluation of tax positions
taken in the course of preparing the Fund's tax returns to determine whether the
tax positions are "morelikely- than-not" of being sustained by the applicable
tax authority. Tax positions not deemed to meet the more-likely-than-not
threshold would be recorded as a tax benefit or expense in the current year.
Based on management's analysis, the application of FIN 48 does not have a
material impact on these financial statements. The statute of limitations on the
Fund's tax returns remains open for the period endedAugust 31, 2007.
3. INVESTMENT TRANSACTIONS
During the year ended August 31, 2008, cost of purchases and proceeds from sales
of investment securities, other than short-term investments and U.S. government
securities, amounted to $10,323,685 and $28,285,878, respectively.
4. TRANSACTIONS WITH AFFILIATES
INVESTMENT MANAGEMENT CONTRACT
Under the terms of an Investment Management Contract between the Fund and the
Manager, the Manager serves as the investment manager to the Fund. For its
services, the Fund pays the Manager an investment management fee computed at the
annual rate of 1.00% of the Fund's average daily net assets.
Pursuant to an Expense Limitation Agreement effective as of April 24, 2008, the
Manager has contractually agreed for the life of the Fund to reduce its
management fees and/or reimburse the Fund to the extent necessary to limit the
"ratio of net expenses to average net assets," as disclosed in the Financial
Highlights, to an amount that, when
14
SURGEONS DIVERSIFIED INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
added to the underlying costs of investing in the Exchange Traded Funds ("ETFs")
held by the Fund (e.g., management fees and other operating expenses of the
ETFs), and based upon such ETF expenses incurred during the Fund's most recently
completed fiscal year, it will result in a total annual operating expense ratio
(Fund expenses plus ETF expenses) not to exceed 1.08%. Prior to April 24, 2008,
the Fund's ratio of net expenses to average daily net assets was capped at
1.35%.
Any such fee reductions by the Manager, or payments by the Manager of expenses
which are the Fund's obligation, are subject to repayment by the Fund, provided
that the repayment does not cause the Fund's total annual operating expense
ratio (Fund expenses plus ETF expenses) to exceed the 1.08% limit, and provided
further that the fees and expenses which are the subject of the repayment were
incurred within three years of the repayment. During the year ended August 31,
2008, the Manager reduced its investment management fees by $328,070.
As of August 31, 2008, the Manager may in the future recoup fee reductions and
expense reimbursements totaling $498,876. The Manager may recoup a portion of
such amounts no later than the dates as stated below:
August 31, 2010 August 31, 2011
--------------- ---------------
$170,806 $328,070
SUBADVISORY AGREEMENT
Northern Trust Investments, N.A. (the "ETF Subadviser"), has been retained by
the Manager to manage the Fund's investments in Exchange Traded Funds and
Exchange Traded Notes pursuant to the terms of a Subadvisory Agreement between
the ETF Subadviser, the Manager and the Fund. The Manager (not the Fund) pays
the ETF Subadviser a fee based on the Fund's average daily net assets, subject
to a minimum annual fee. The ETF Subadviser is a wholly-owned subsidiary of The
Northern Trust Company, which is the principal subsidiary of Northern Trust
Corporation and serves as the custodian to the Fund.
CUSTODY AGREEMENT
The Northern Trust Company (the "Custodian") serves as custodian to the Trust
pursuant to a Custody Agreement. The Custodian's responsibilities include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, and collecting interest and dividends on the
Fund's investments.
ADMINISTRATION AGREEMENT
Under the terms of an Administration Agreement with the Fund, Ultimus Fund
Solutions, LLC ("Ultimus") supplies executive, administrative and regulatory
services to the Fund, supervises the preparation of tax returns, and coordinates
the preparation of reports to shareholders and reports to and filings with the
Securities and Exchange Commission and state securities authorities. For these
services, the Fund pays to Ultimus, on a monthly basis, a fee equal to 0.15% per
annum of the Fund's average daily net assets up to $50 million, 0.125% of such
assets from $50 million to $100 million,
15
SURGEONS DIVERSIFIED INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
0.10% of such assets from $100 million to $250 million, 0.075% of such assets
from $250 million to $500 million and 0.05% of such assets in excess of $500
million, provided, however, that the minimum fee is $2,000 per month.
ACCOUNTING SERVICES AGREEMENT
Under the terms of a Fund Accounting Agreement with the Fund, Ultimus calculates
the daily net asset value per share and maintains the financial books and
records of the Fund. For these services, Ultimus earns a base fee of $2,500 per
month, plus an asset-based fee at the annual rate of 0.01% of the first $500
million of the Fund's average daily net assets and 0.005% of such assets in
excess of $500 million. In addition, the Fund pays all costs of external pricing
services.
TRANSFER AGENT AGREEMENT
Under the terms of a TransferAgent and Shareholder ServicesAgreement with the
Fund, Ultimus maintains the records of each shareholder's account, answers
shareholders' inquiries concerning their accounts, processes purchase and
redemption of the Fund's shares, acts as dividend and distribution disbursing
agent and performs other shareholder service functions. For these services,
Ultimus earns a fee payable monthly at an annual rate of $20 per account,
provided, however, that the minimum fee is $1,500 per month. In addition, the
Fund pays out-of-pocket expenses, including but not limited to, postage and
supplies.
DISTRIBUTION AGREEMENT
Pursuant to the terms of a Distribution Agreement with the Fund, Ultimus Fund
Distributors, LLC (the "Distributor") serves as the Fund's principal
underwriter. The Distributor earns annual compensation of $6,000 for such
services from the Fund.
Certain Trustees and officers of the Fund are directors and officers of the
Manager, or of Ultimus, or of the Distributor.
DISTRIBUTION PLAN
The Fund has adopted a plan of distribution pursuant to and in accordance with
Rule 12b-1 of the Investment Company Act of 1940 (the "Plan") under which the
Fund may reimburse expenses related to the distribution and promotion of Fund
shares. The annual limitation for payment of such expenses pursuant to the Plan
is 0.25% of the Fund's average daily net assets. During the year ended August
31, 2008, the Fund incurred $7,296 of distribution related expenses.
COMPLIANCE CONSULTING AGREEMENT
Under the terms of a Compliance Consulting Agreement, Drake Compliance, LLC
("Drake") provides ongoing regulatory compliance consulting, monitoring and
reporting services for the Fund. In addition, a principal of Drake serves as the
Trust's Chief Compliance Officer as required under Rule 38a-1 of the Investment
Company Act
16
SURGEONS DIVERSIFIED INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
of 1940. For these services, Drake earns $3,000 per month from the Fund. In
addition, the Fund reimburses certain out-of-pocket expenses incurred by Drake
including, but not limited to, postage and supplies and travel expenses.
5. CONTINGENCIES AND COMMITMENTS
The Fund indemnifies its officers and Trustees for certain liabilities that
might arise from their performance of their duties to the Fund. Additionally, in
the normal course of business the Fund enters into contracts that contain a
variety of representations and warranties and that provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
6. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, the FASB issued Statement on Financial Accounting Standards
No. 157 ("SFAS No. 157") "Fair Value Measurements." This standard establishes a
single authoritative definition of fair value, sets out a framework for
measuring fair value and requires additional disclosures about fair value
measurements. SFAS No. 157 applies to fair value measurements already required
or permitted by existing standards. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The changes to current generally accepted
accounting principles from the application of SFAS No. 157 relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. As of August 31, 2008, the
Fund does not believe the adoption of SFAS No. 157 will impact the amounts
reported in the financial statements, however, additional disclosures will be
required about the inputs used to develop the measurements and the effect of
certain of the measurements reported on the Statement of Changes in Net Assets
for a fiscal period.
17
SURGEONS DIVERSIFIED INVESTMENT FUND
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
The Board of Trustees and Shareholders of Surgeons Diversified Investment Fund:
We have audited the accompanying statement of assets and liabilities of Surgeons
Diversified Investment Fund (the Fund), including the schedule of investments,
as of August 31, 2008, and the related statement of operations for the year then
ended, and the statements of changes in net assets and the financial highlights
for the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of August 31, 2008, by correspondence with the custodian. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Surgeons Diversified Investment Fund as ofAugust 31, 2008, and the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for the periods indicated therein, in conformity with
U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
October 23, 2008
18
SURGEONS DIVERSIFIED INVESTMENT FUND
ABOUT YOUR FUND'S EXPENSES (UNAUDITED)
================================================================================
We believe it is important for you to understand the impact of costs on your
investment. As a shareholder of the Fund, you incur ongoing costs, including
management fees, distribution fees (12b-1) and other Fund expenses. The
following examples are intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds.
A mutual fund's ongoing costs are expressed as a percentage of its average net
assets. This figure is known as the expense ratio. The expenses in the table
below are based on an investment of $1,000 made at the beginning of the period
shown and held for the entire period (March 1, 2008 through August 31, 2008).
The table below illustrates the Fund's costs in two ways:
Actual fund return - This section helps you to estimate the actual expenses that
you paid over the period. The "Ending Account Value" shown is derived from the
Fund's actual return, and the third column shows the dollar amount of operating
expenses that would have been paid by an investor who started with $1,000 in the
Fund. You may use the information here, together with the amount you invested,
to estimate the expenses that you paid over the period.
To do so, 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
given for the Fund under the heading "Expenses Paid During Period."
Hypothetical 5% return - This section is intended to help you compare the Fund's
costs with those of other mutual funds. It assumes that the Fund had an annual
return of 5% before expenses during the period shown, but that the expense ratio
is unchanged. In this case, because the return used is not the Fund's actual
return, the results do not apply to your investment. The example is useful in
making comparisons because the Securities and Exchange Commission requires all
mutual funds to calculate expenses based on a 5% return. You can assess the
Fund's costs by comparing this hypothetical example with the hypothetical
examples that appear in shareholder reports of other funds.
Note that expenses shown in the table are meant to highlight and help you
compare ongoing costs only. The Fund does not charge any sales loads or
redemption fees.
The calculations assume no shares were bought or sold during the period. Your
actual costs may have been higher or lower, depending on the amount of your
investment and the timing of any purchases or redemptions.
19
SURGEONS DIVERSIFIED INVESTMENT FUND
ABOUT YOUR FUND'S EXPENSES (UNAUDITED)
(CONTINUED)
================================================================================
More information about the Fund's expenses, including annualized expense ratios,
can be found in this report. For additional information on operating expenses
and other shareholder costs, please refer to the Fund's prospectus.
- ----------------------------------------------------------------------------------------
BEGINNING ENDING
ACCOUNT VALUE ACCOUNT VALUE EXPENSES PAID
MARCH 1, 2008 AUGUST 31, 2008 DURING PERIOD*
- ----------------------------------------------------------------------------------------
Based on Actual Fund Return $1,000.00 $ 967.50 $4.01
Based on Hypothetical 5% Return
(before expenses) $1,000.00 $1,021.06 $4.12
- ----------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 0.81% for the
period, multiplied by the average account value over the period,
multiplied by 184/366 (to reflect the one-half year period).
OTHER INFORMATION (UNAUDITED)
================================================================================
The Fund files a complete listing of portfolio holdings of the Fund with the
Securities and Exchange Commission ("SEC") as of the end of the first and third
quarters of each fiscal year on Form N-Q. The filings are available upon
request, by calling 1-800-282-1581. Furthermore, you may obtain a copy of these
filings on the SEC's website at http://www.sec.gov. The Fund's Forms N-Q may
also be reviewed and copied at the SEC's Public Reference Room in Washington,
DC, and information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330.
A description of the policies and procedures that the Fund uses to vote proxies
relating to portfolio securities is available without charge upon request by
calling toll-free 1-800-208-6070, or on the SEC's website at http://www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
without charge upon request by calling toll-free 1-800-208-6070, or on the SEC's
website at http://www.sec.gov.
FEDERAL TAX INFORMATION (UNAUDITED)
================================================================================
In accordance with federal tax requirements, the following provides shareholders
with information concerning distributions from ordinary income and net realized
gains made by the Fund during the year ended August 31, 2008. For the fiscal
year ended August 31, 2008, certain dividends paid by the Fund may be subject to
a maximum tax rate of 15%, as provided by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. The Fund intends to designate up to a maximum amount
of $824,817 as taxed at a maximum rate of 15%. Complete information was computed
and reported in conjunction with your 2007 Form 1099-DIV.
20
SURGEONS DIVERSIFIED INVESTMENT FUND
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED)
================================================================================
Overall responsibility for the management of the Trust rests with the Board of
Trustees. The Trustees serve for terms of indefinite duration until death,
resignation, retirement or removal from office. The Board of Trustees may fill
any vacancy on the Board provided that after such appointment, at least
two-thirds of the Trustees have been elected by shareholders. The Board of
Trustees elects the officers of the Trust. Each officer serves until the
election and qualification of his or her successor, or until he or she sooner
dies, resigns or is removed or disqualified.
The names, ages and addresses of the Trustees and executive officers, the date
each was first elected or appointed to office, their principal business
occupations and directorships of public companies they have held during the last
five years are shown below.
- -----------------------------------------------------------------------------------------------
NUMBER OF
DATE FIRST PORTFOLIOS IN
ELECTED OR PRINCIPAL OCCUPATIONS FUND COMPLEX
NAME, AGE, ADDRESS, POSITIONS APPOINTED TO DURING PAST 5 YEARS AND OTHER OVERSEEN BY
HELD WITH THE TRUST OFFICE DIRECTORSHIPS HELD TRUSTEE
- -----------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
- -----------------------------------------------------------------------------------------------
James W. Atkinson July 2006 Executive Vice President and 1
(age 58) Chief Financial Officer of Ariel
633 N. Saint Clair Street Capital Management, a registered
Chicago, IL 60611 investment adviser, from 1995 to
June 2005.
- -----------------------------------------------------------------------------------------------
Michael Abecassis, M.D., MBA July 2006 Associate Medical Director, 1
(age 50) United Healthcare 1999 to
633 N. Saint Clair Street present; Associate Professor,
Chicago, IL 60611 Northwestern University, 2000 to
September 2004;
and Professor at Northwestern
University since September 2004.
- -----------------------------------------------------------------------------------------------
INTERESTED TRUSTEE:
- -----------------------------------------------------------------------------------------------
John L. Cameron, M.D.* July 2006 Professor, The Johns Hopkins 1
(age 72) Hospital, 1970 to present.
633 N. Saint Clair Street
Chicago, IL 60611
- -----------------------------------------------------------------------------------------------
21
SURGEONS DIVERSIFIED INVESTMENT FUND
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED)
(CONTINUED)
================================================================================
- ------------------------------------------------------------------------------------------------
DATE FIRST
NAME, AGE, ADDRESS, ELECTED OR PRINCIPAL OCCUPATIONS
POSITIONS HELD APPOINTED TO DURING PAST 5 YEARS AND
WITH THE TRUST OFFICE OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS:
- ------------------------------------------------------------------------------------------------
Savitri P. Pai July 2006 Chief Operating Officer of Surgeons
(age 42) Asset Management, LLC since April
President 2006; General Counsel, Chief
633 N. Saint Clair Street Compliance Officer and Head of
Chicago, IL 60611 Operations for CCM Advisors, LLC (a
registered investment adviser) and
Chief Legal Officer, Chief Compliance
Officer of AHA Investment Funds, Inc.
(a registered investment company)
from March 2003 to March 2006.
- ------------------------------------------------------------------------------------------------
Mark J. Seger March 2006 Managing Director of Ultimus Fund
(age 46) Solutions, LLC (a registered transfer
Treasurer agent) and Ultimus Fund Distributors,
225 Pictoria Drive, Suite 450 LLC (a registered broker-dealer).
Cincinnati, OH 45246
- ------------------------------------------------------------------------------------------------
Robert G. Dorsey July 2006 Managing Director of Ultimus Fund
(age 51) Solutions, LLC and Ultimus Fund
Vice President Distributors, LLC.
225 Pictoria Drive, Suite 450
Cincinnati, OH 45246
- ------------------------------------------------------------------------------------------------
John F. Splain March 2006 Managing Director of Ultimus Fund
(age 52) Solutions, LLC and Ultimus Fund
Secretary Distributors, LLC.
225 Pictoria Drive, Suite 450
Cincinnati, OH 45246
- ------------------------------------------------------------------------------------------------
David D. Jones July 2006 Managing Member, Drake Compliance,
(age 50) LLC (a compliance consulting firm)
Chief Compliance Officer since January 2004; Attorney, David
395 Sawdust Road #2137 Jones & Assoc., P.C. (a law firm)
The Woodlands, TX 77380 since January 1998.
- ------------------------------------------------------------------------------------------------
* John L. Cameron is deemed to be an interested person of the Fund because
of his leadership role in the American College of Surgeons.
Additional information about members of the Board of Trustees and Executive
Officers may be found in the Fund's Statement of Additional Information ("SAI").
To obtain a free copy of the SAI, please call 1-800-208-6070.
22
SURGEONS DIVERSIFIED INVESTMENT FUND
APPROVAL OF THE SUBADVISORY AGREEMENT
AND INVESTMENT MANAGEMENT CONTRACT
(UNAUDITED)
================================================================================
The Board of Trustees, including the Independent Trustees voting separately,
have reviewed and approved the continuance of the Subadvisory Agreement and the
Investment Management Contract (collectively referred to as the "Agreements")
with the ETF Subadviser and the Manager, respectively, for the Surgeons
Diversified Investment Fund. These approvals took place at an in-person meeting
held on June 12, 2008, at which all of the Trustees were present.
The Trustees were advised by independent counsel of their fiduciary obligations
in approving the Agreements and the Trustees requested such information from the
ETF Subadviser and the Manager as they deemed reasonably necessary to evaluate
the terms of theAgreements and whether theAgreements continue to be in the best
interests of the Fund and its shareholders. For each Agreement the Trustees
reviewed: (i) the nature, extent and quality of the services provided; (ii) the
investment performance of the Fund and fees; (iii) costs of the services and
realized profits; (iv) economies of scale; and (v) fall-out benefits.
The Independent Trustees were advised by experienced independent counsel
throughout the process. Prior to voting on the Agreements, the Independent
Trustees reviewed the Agreements with management and also met in a private
session with counsel at which no representatives of the ETF Subdviser or the
Manager were present. Below are summaries of the discussions and findings of the
Trustees in regard to the approvals of the Agreements. The discussions with
regards to each Agreement are provided separately.
APPROVAL SUBADVISORY AGREEMENT - NORTHERN TRUST INVESTMENTS, N.A.
(i) THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE ETF
SUBADVISER. The Board examined the nature, quality and extent of
services provided by the ETF Subadviser to the Fund. The Board
reviewed the background and experience of the ETF Subadviser's key
personnel who provide investment management services to the Fund as
well as the fact that, under the Subadvisory Agreement, the ETF
Subadviser has the authority and responsibility to make and execute
investment decisions for the Fund within the framework of the Fund's
investment policies and restrictions, subject to supervision of the
Manager and review by the Board. The Board considered the Manager's
positive opinion of the services being provided by the ETF
Subadviser. The Board further considered the Manager's
representation that the services provided under the Subadvisory
Agreement are the types of services customarily provided by
investment subadvisors in the fund industry. Based on the foregoing,
the Board concluded that the Fund is likely to benefit from the
nature, extent and quality of the services provided by the ETF
Subadviser under the Subadvisory Agreement.
23
SURGEONS DIVERSIFIED INVESTMENT FUND
APPROVAL OF THE SUBADVISORY AGREEMENT
AND INVESTMENT MANAGEMENT CONTRACT
(UNAUDITED) (CONTINUED)
================================================================================
(ii) INVESTMENT PERFORMANCE OF THE FUND AND FEES. The Board considered
the performance of the Fund, including comparative information and
how the Fund performed versus its benchmark index. The Independent
Trustees reviewed the Fund's asset allocation strategy, focusing on
the roles and responsibilities of the ETF Subadviser in implementing
the Fund's asset allocation strategy. The Board considered the
performance of the Fund compared it to the performance of its
Morningstar peer group, moderate allocation funds, for the one-year
period. The Board also considered the performance of the Fund
against its blended benchmark (70% Standard & Poor's 500 Index and
30% Lehman Brothers Aggregate Bond Index) for the same period. Based
on the foregoing, the Board concluded that the investment
performance of the Fund was acceptable.
The Board also considered that the Manager is responsible for paying
the ETF Subadviser out of its management fee and that, therefore,
any increase or reduction in the fee charged by the ETF Subadviser
would increase or reduce the margin of fees retained by the Manager
but would not have any impact on the fees paid by the Fund.
(iii) COSTS OF SERVICES AND PROFITS REALIZED BY THE ETF SUBADVISER AND ITS
AFFILIATES. The Board reviewed the ETF Subadviser's costs in serving
as subadviser, including the costs associated with staffing,
personnel and systems necessary to manage the Fund. The Board
considered the reported profitability of the ETF Subadviser and its
affiliates resulting from their relationship with the Fund. The
Board also considered the competitive brokerage commission rates
negotiated by the ETF Subadviser on behalf of the Fund, consistently
maintaining an average brokerage commission rate of approximately
1(cent) per share. The Board took into account the financial
strength of the ETF Subadviser and its commitment to maintain
adequate systems and personnel.
(iv) ECONOMIES OF SCALE. The Board considered whether the Fund's
subadvisory fee reflects the potential for economies of scale for
the benefit of Fund shareholders and concluded that, because the
fees to the ETF Subadviser are paid by the Manager out of its
management fees, the existence of breakpoints in the subadvisory
fees would not have any impact on the fees paid by the Fund.
(v) FALL-OUT BENEFITS. The Board considered whether the ETF Subadviser
or any of its affiliates serve the Fund in various capacities or
receive compensation from the Fund in connection with providing
services to the Fund. The Board noted that each service provided to
the Fund is pursuant to a written agreement, which the Board
evaluates periodically as required by law.
24
SURGEONS DIVERSIFIED INVESTMENT FUND
APPROVAL OF THE SUBADVISORY AGREEMENT
AND INVESTMENT MANAGEMENT CONTRACT
(UNAUDITED)(CONTINUED)
================================================================================
INVESTMENT MANAGEMENT CONTRACT - SURGEONS ASSET MANAGEMENT, LLC
(i) THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE
MANAGER. The Board examined the overall services provided by the
Manager, including its personnel, performance, compliance with laws,
availability of the Manager's personnel to provide information, and
the other services the Manager provides to the Fund.
The Board also considered that the Manager's duties with respect to
the Fund include: (i) oversight of investment research and security
selection, (ii) adherence to (and monitoring compliance with) the
Fund's investment policies and restrictions and the Investment
Company Act of 1940, (iii) monitoring the performance of the various
organizations providing services to the Fund, including the Fund's
distributor, administrator, transfer agent, custodian and the ETF
Subadvisor. The Board also considered compliance reports about the
Manager from the Fund's chief compliance officer.
Based on the foregoing, the Board concluded that the Fund is likely
to benefit from the nature, extent and quality of the services
provided by the Manager under the Investment Management Agreement.
(ii) INVESTMENT PERFORMANCE OF THE FUND AND FEES. The Board compared the
performance of the Fund against the performance of the universe of
funds categorized by Morningstar as "moderate allocation" funds. The
Board considered the Fund's performance as compared to its blended
benchmark (70% Standard & Poor's 500 Index and 30% Lehman Brothers
Aggregate Bond Index) for the one-year period. The Board concluded
that the performance of the Fund was acceptable.
The Board reviewed the fees and expenses paid by the Fund and
compared these with the fees paid by a peer group of comparable
funds. The Board considered that the Manager had agreed to cap the
Fund's expense ratio at 1.08%. The Board also considered that,
although the Fund's management fee (1.00% per annum) was higher than
the average management fee for the moderate allocation category
(0.43% per annum), the Fund's overall expense ratio of 1.08% (net of
fee waivers but including the expenses of the underlying ETFs) is
lower than the average expense ratio of 1.09% for Morningstar's
moderate allocation category.
(iii) COSTS OF SERVICES AND PROFITS REALIZED BY THE MANAGER AND ITS
AFFILIATES. The Board considered the Manager's analysis of its
revenues and expenses. The Board considered the unique structure of
the Manager, noting that the Manager was created by the American
College of Surgeons to provide
25
SURGEONS DIVERSIFIED INVESTMENT FUND
APPROVAL OF THE SUBADVISORY AGREEMENT
AND INVESTMENT MANAGEMENT CONTRACT
(UNAUDITED)(CONTINUED)
================================================================================
investment advisory services to the Fund as a member benefit and
that the Manager was not providing services to other clients.
(iv) ECONOMIES OF SCALE. The Board considered whether the advisory fee
reflected the potential for economies of scale for the benefit of
shareholders. The Board noted that the Fund had a short operating
history and limited assets and that, as the Fund's assets grow,
shareholders should be able to benefit from economies of scale. In
light of the expense cap agreed to by the Manager and in light of
current asset levels, the Board concluded that it is not necessary
to consider any changes on fee breakpoints at the current time.
(v) FALL-OUT BENEFITS. The Board considered whether any fall-out
benefits were derived by the Manager or its affiliates as a result
of its relationship with the Fund. The Board noted that, as a result
of its relationship with the Fund, the American College of Surgeons
may have increased its visibility among its members.
The Independent Trustees concluded, based upon the totality of the factors
considered and reviewed, that the renewal of the Investment Management Contract
and the Subadvisory Agreement are in the best interests of the Fund and its
shareholders.
26
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INVESTMENT MANAGER CUSTODIAN
Surgeons Asset Management, LLC The Northern Trust Company
633 North Saint Clair Street 50 South LaSalle Street
Chicago, Illinois 60611-3211 Chicago, Illinois 60675
312.202.5056
INDEPENDENT REGISTERED
SUBADVISER PUBLIC ACCOUNTING FIRM
Northern Trust Investments, N.A. Ernst & Young LLP
50 South LaSalle Street 1900 Scripps Center
Chicago, Illinois 60675 312 Walnut Street
Cincinnati, Ohio 45202
ADMINISTRATOR/TRANSFER AGENT
Ultimus Fund Solutions, LLC LEGAL COUNSEL
225 Pictoria Drive, Suite 450 Bell, Boyd & Lloyd LLP
Cincinnati, Ohio 45246 Three First National Plaza
1-800.208.6070 70 West Madison Street, Suite 3100
Chicago, Illinois 60602-4207
[LOGO OMITTED] Serving the membership of the
American College of Surgeons
- --------------------------------------------------------------------------------
|DIVERSIFIED
SURGEONS |INVESTMENT
|FUND
633 N. Saint Clair St.
Chicago, IL 60611
Voice 312.202.5056 Fax 312.202.5026
www.surgeonsfund.com
Investment Company Act File No. 811-21868
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party. Pursuant to Item 12(a)(1), a
copy of registrant's code of ethics is filed as an exhibit to this Form N-CSR.
During the period covered by this report, the code of ethics has not been
amended, and the registrant has not granted any waivers, including implicit
waivers, from the provisions of the code of ethics.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of trustees has determined that the registrant has at
least one audit committee financial expert serving on its audit committee. The
name of the audit committee financial expert is James W. Atkinson. Mr. Atkinson
is "independent" for purposes of this Item.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The aggregate fees billed for professional services
rendered by the principal accountant for the audit of the
registrant's annual financial statements or for services that are
normally provided by the accountant in connection with statutory and
regulatory filings or engagements were $30,500 and $29,000 with
respect to the registrant's fiscal years ended August 31, 2008 and
2007, respectively.
(b) AUDIT-RELATED FEES. The aggregate fees billed for assurance and
related services by the principal accountant that are reasonably
related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of
this Item were $0 and $500 with respect to the registrant's fiscal
years ended August 31, 2008 and 2007, respectively. The services
comprising these fees are the review of registrant's semi-annual
report.
(c) TAX FEES. The aggregate fees billed for professional services
rendered by the principal accountant for tax compliance, tax advice,
and tax planning were $376 and $3,000 with respect to the
registrant's fiscal years ended August 31, 2008 and 2007,
respectively. The services comprising these fees are the preparation
of the registrant's federal income and excise tax returns.
(d) ALL OTHER FEES. No fees were billed in either of the last two fiscal
years for products and services provided by the principal
accountant, other than the services reported in paragraphs (a)
through (c) of this Item.
(e)(1) The audit committee has not adopted pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation
S-X.
(e)(2) None of the services described in paragraph (b) through (d) of this
Item were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50% of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the
most recent fiscal year were attributed to work performed by persons
other than the principal accountant's full-time, permanent
employees.
(g) Aggregate non-audit fees of $376 and $3,000 were billed by the
registrant's accountant for services rendered to the registrant with
respect to the registrant's fiscal years ended August 31, 2008 and
2007, respectively. No non-audit fees were billed in either if the
last two fiscal years by the registrant's accountant for services
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and
any entity controlling, controlled by, or under common control with
the adviser that provides ongoing services to the registrant.
(h) The principal accountant has not provided any non-audit services to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable [schedule filed with Item 1]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant's Committee of Independent Trustees shall review shareholder
recommendations to fill vacancies on the registrant's board of trustees if such
recommendations are submitted in writing, addressed to the Committee at the
registrant's offices, and meet any minimum qualifications adopted by the
Committee from time to time. The Committee may adopt, by resolution, a policy
regarding its procedures for considering candidates for the board of trustees,
including any recommended by shareholders.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940) as of a date within 90 days of the filing date of this report, the
registrant's principal executive officer and principal financial officer have
concluded that such disclosure controls and procedures are reasonably designed
and are operating effectively to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to them
by others within those entities, particularly during the period in which this
report is being prepared, and that the information required in filings on Form
N-CSR is recorded, processed, summarized, and reported on a timely basis.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940)
that occurred during the second fiscal quarter of the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(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 the Item 2 requirements through filing of an exhibit: Attached hereto
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the Act (17 CFR 270.30a-2(a)): Attached hereto
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act (17 CFR 270.23c-1) sent or given during the period covered by the report
by or on behalf of the registrant to 10 or more persons: Not applicable
(b) Certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)): Attached hereto
Exhibit 99.CODE ETH Code of Ethics
Exhibit 99.CERT Certifications required by Rule 30a-2(a) under the Act
Exhibit 99.906CERT Certifications required by Rule 30a-2(b) under the Act
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) Surgeons Diversified Investment Fund
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By (Signature and Title)* /s/ Savitri P. Pai
-----------------------------------------------------
Savitri P. Pai, President
Date November 6, 2008
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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/ Savitri P. Pai
-----------------------------------------------------
Savitri P. Pai, President
Date November 6, 2008
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By (Signature and Title)* /s/ Mark J. Seger
-----------------------------------------------------
Mark J. Seger, Treasurer
Date November 6, 2008
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* Print the name and title of each signing officer under his or her signature.