As filed with the Securities and Exchange Commission on July 27, 2010
1933 Act File No. 033-70958
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
|X| Pre-Effective Amendment No. 2 |_| Post-Effective Amendment No.
(Check appropriate box or boxes)
Touchstone Funds Group Trust
(Exact Name of Registrant as Specified in Charter)
303 Broadway, Suite 1100
Cincinnati, OH 45202
(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)
(800) 543-0407
(Area Code and Telephone Number)
Jay S. Fitton, Esq.
JPMorgan
303 Broadway, Suite 900
Cincinnati, OH 45202
513-878-4066
(Name and Address of Agent for Service)
Copies to:
John Ford, Esq.
Pepper Hamilton LLP
Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103
215-981-4009
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective under the Securities Act of 1933.
July 27, 2010
TOUCHSTONE INSTITUTIONAL FUNDS TRUST
Touchstone Mazama Institutional Growth Fund
Dear Shareholder:
The Prospectus/Proxy Statement that accompanies this letter describes a
proposed reorganization of the Touchstone Mazama Institutional Growth Fund, a
series of Touchstone Institutional Funds Trust, into the Touchstone Mazama
Growth Fund, a new series of Touchstone Funds Group Trust (the
"Reorganization"). You are being asked to vote on this proposal. The Board of
Trustees of the Touchstone Institutional Funds Trust has approved the proposal
and recommends that you vote FOR the proposal.
The Prospectus/Proxy Statement contains details about the Touchstone
Mazama Growth Fund's investment objective, policies, management and costs that
are important for you to know. I urge you to take the time to review it
carefully. The Touchstone Mazama Growth Fund's investment objective and policies
are substantially identical to those of the Touchstone Mazama Institutional
Growth Fund. Mazama Capital Management, Inc., the current investment sub-advisor
to the Touchstone Mazama Institutional Growth Fund, is the sub-advisor for the
Touchstone Mazama Growth Fund. As such, Mazama Capital Management, Inc. manages
the Touchstone Mazama Growth Fund substantially in the same way it manages the
Touchstone Mazama Institutional Growth Fund. Your vote is important no matter
how many shares you own. I would like to answer some initial basic questions
about the proposed Reorganization.
WHY ARE YOU DOING THIS?
The current unified fee structure of Mazama Institutional does not allow
Touchstone Advisors, Inc. to realize a reasonable economic profit from its
efforts in serving as investment advisor to Mazama Institutional at the current
asset level of the Fund. The Reorganization would make it economically
practicable for Touchstone Advisors, Inc. to continue to serve as investment
advisor to the shareholders of Mazama Institutional. The Reorganization may
benefit you by achieving operating efficiencies by broadening the Fund's
distribution and therefore its asset growth potential which, if realized, may
provide greater economies of scale.
WHAT WILL HAPPEN TO MY EXISTING SHARES?
If you currently own shares of the Touchstone Mazama Institutional Growth
Fund you will receive Institutional shares of the Touchstone Mazama Growth Fund.
Because the Touchstone Mamaza Growth Fund is a new series, you will receive the
same amount of Touchstone Mazama Growth Fund shares as you hold of Touchstone
Mazama Institutional Growth Fund as of the date of the Reorganization.
HOW WILL THE FEES COMPARE?
As a result of eliminating the unified fee structure the gross expenses of
Mazama Growth are higher than those of Mazama Institutional. However, Touchstone
Funds Group Trust and Touchstone Advisors, Inc. have entered into an expense
limitation agreement whereby Mazama Growth's total operating expenses (excluding
dividend expenses relating to short sales, interest, taxes, brokerage
commissions, other expenditures which are capitalized in accordance with
generally accepted accounting principles, the cost of "Acquired Fund Fees and
Expenses," if any, other extraordinary expenses not incurred in the ordinary
course of Touchstone's business, and amounts, if any, payable pursuant to a plan
adopted in accordance with Rule 12b-1 under the 1940 Act) will be contractually
limited until at least January 27, 2014 and will not exceed 0.98%.
WILL I HAVE TO PAY FEDERAL INCOME TAXES AS A RESULT OF THE REORGANIZATION?
Shareholders are not expected to recognize gain or loss for federal income
tax purposes on the exchange of their shares for shares of Mazama Growth Fund.
The Reorganization is intended to qualify for federal income tax purposes as a
tax-free reorganization.
WHAT ARE MY CHOICES?
On the enclosed proxy card you have three options. You may vote YES, as
the Trustees and management of the Touchstone Institutional Funds Trust
recommends. You may vote NO, or you may ABSTAIN. An abstain vote is not a
neutral response; it is the equivalent of a No vote. Approval of the
Reorganization requires the affirmative vote of the holders of a "majority of
the outstanding voting securities" of Touchstone Mazama Institutional Growth
Fund. The term "majority of the outstanding voting securities," as defined in
the 1940 Act and as used in this Prospectus/Proxy Statement, means: the
affirmative vote of the lesser of (i) 67% of the voting securities of Touchstone
Mazama Institutional Growth Fund present at a meeting if more than 50% of the
outstanding voting securities of Touchstone Mazama Institutional Growth Fund are
present in person or by proxy or (ii) more than 50% of the outstanding voting
securities of Touchstone Mazama Institutional Growth Fund. If the shareholders
of Touchstone Mazama Institutional Growth Fund do not approve the Plan, the
Board of Trustees may consider other possible courses of action in the best
interest of shareholders.
Shares will be voted at a Special Meeting of Shareholders to be held at
10:00 a.m. Eastern Time, on September 17, 2010, at the offices of the Touchstone
Institutional Funds Trust, 303 Broadway, Suite 1100, Cincinnati, Ohio, 45202. If
you attend the meeting, you may vote your shares in person. If you do not expect
to attend the meeting, please complete, date, sign, and return the enclosed
proxy card in the enclosed postage paid envelope. Or you may follow the
instructions on your proxy card to call in your vote or vote through the
Internet.
If you have any questions about the proxy card, please call Touchstone
Institutional Funds Trust at 1-800-543-0407. If we do not receive your vote
within a few days, you may be contacted by Broadridge, our proxy solicitor, who
will remind you to vote.
Thank you for considering the proposal carefully.
Sincerely,
/s/ Jill T. McGruder
Jill T. McGruder
President
Touchstone Institutional Funds Trust
TOUCHSTONE INSTITUTIONAL FUNDS TRUST
303 BROADWAY, SUITE 1100
CINCINNATI, OHIO 45202
TOUCHSTONE MAZAMA INSTITUTIONAL GROWTH FUND
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on September 17, 2010
To the Shareholders of the Touchstone Mazama Institutional Growth Fund:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of the
Touchstone Mazama Institutional Growth Fund of the Touchstone Institutional
Funds Trust, will be held at the offices of the Touchstone Institutional Funds
Trust, 303 Broadway, Suite 1100, Cincinnati, OH, 45202 on September 17, 2010 at
10:00 a.m. Eastern Time and any adjournments thereof (the "Special Meeting") for
the following purpose:
To consider and act upon an Agreement and Plan of Reorganization
(the "Plan") providing for the acquisition of all of the assets of
the Touchstone Mazama Institutional Growth Fund (the "Mazama
Institutional Fund") by the Touchstone Mazama Growth Fund (the
"Mazama Growth Fund"), a new series of the Touchstone Funds Group
Trust, in exchange for Institutional shares of the Mazama Growth
Fund and the assumption by the Mazama Growth Fund of the liabilities
of the Mazama Institutional Fund. The Plan also provides for
distribution of shares of the Mazama Growth Fund to shareholders of
the Mazama Institutional Fund in liquidation and subsequent
termination of the Mazama Institutional Fund.
The Board of Trustees has fixed the close of business on July 21, 2010 as
the record date for determination of shareholders entitled to notice of and to
vote at the Special Meeting.
By order of the Board of Trustees
/s/ Jill T. McGruder
Jill T. McGruder
President
Touchstone Institutional Funds Trust
July 27, 2010
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE REQUESTED TO
COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. SHAREHOLDERS
MAY ALSO VOTE BY TELEPHONE OR VOTE THROUGH THE INTERNET. INSTRUCTIONS FOR THE
PROPER EXECUTION OF THE PROXY ARE SET FORTH IMMEDIATELY FOLLOWING THIS NOTICE
OR, WITH RESPECT TO TELEPHONE OR INTERNET VOTING, ON THE PROXY CARD. IT IS
IMPORTANT THAT YOU VOTE PROMPTLY.
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance
to you and avoid the time and expense to the Touchstone Institutional Funds
Trust in validating your vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration
on the proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of
registration. For example:
REGISTRATION VALID SIGNATURE
------------ ---------------
CORPORATE ACCOUNTS
------------------
(1) ABC Corp ABC Corp.
(2) ABC Corp John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
--------------
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 Jane B. Doe
CUSTODIAL OR ESTATE ACCOUNTS
----------------------------
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA John B. Smith
(2) Estate of John B. Smith John B. Smith, Jr., Executor
PROSPECTUS/PROXY STATEMENT
Acquisition of Assets and Liabilities of
TOUCHSTONE MAZAMA INSTITUTIONAL GROWTH FUND
a series of
TOUCHSTONE INSTITUTIONAL FUNDS TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
By and In Exchange For Shares of
TOUCHSTONE MAZAMA GROWTH FUND
a series of
TOUCHSTONE FUNDS GROUP TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
July 27, 2010
This Prospectus/Proxy Statement is being furnished in connection with the
proposed Agreement and Plan of Reorganization (the "Plan") which will be
submitted to shareholders of the Touchstone Mazama Institutional Growth Fund
("Mazama Institutional") for consideration at a Special Meeting of Shareholders
of Touchstone Institutional Funds Trust to be held on September 17, 2010 at
10:00 a.m. Eastern Time at the offices of the Touchstone Institutional Funds
Trust, 303 Broadway, Suite 1100, Cincinnati, OH, 45202, and any adjournments
thereof (the "Meeting"). The statement of additional information, dated July 27,
2010, which relates to this Prospectus/Proxy Statement and the Reorganization is
available upon oral or written request and without charge by calling (800)
543-0407 or by writing to Touchstone Funds Group Trust at P.O. Box 5354,
Cincinnati, OH 45201-5354.
GENERAL
The Board of Trustees of the Touchstone Institutional Funds Trust has
approved the proposed reorganization of Mazama Institutional into the Touchstone
Mazama Growth Fund ("Mazama Growth"), a new series of Touchstone Funds Group
Trust. Mazama Institutional and Mazama Growth are sometimes referred to in this
Prospectus/Proxy Statement individually as a "Fund" and collectively as the
"Funds." Touchstone Institutional Funds Trust and Touchstone Funds Group Trust
are sometimes referred to in this Prospectus/Proxy Statement individually as a
"Trust" and collectively as the "Trusts."
In the reorganization, all of the assets of Mazama Institutional will be
acquired by Mazama Growth in exchange for Institutional shares of Mazama Growth
and the assumption by Mazama Growth of all the liabilities of Mazama
Institutional (the "Reorganization"). If the Reorganization is approved, shares
of Mazama Growth will be distributed to shareholders of Mazama Institutional in
liquidation of Mazama Institutional, and Mazama Institutional will be terminated
as a series of the Touchstone Institutional Funds Trust. If you own shares of
Mazama Institutional, you will receive Institutional shares of Mazama Growth.
The number of shares you hold and the total value of your investment will not
change as a result of the Reorganization. You will not incur any sales loads or
similar transaction charges as a result of the Reorganization. The
Reorganization is intended to qualify for federal income tax purposes as a
tax-free reorganization.
Mazama Institutional and Institutional shares of Mazama Growth do not
charge an initial sales charge, contingent deferred sales charge ("CDSC"), 12b-1
fee or redemption fee.
Upon completion of the Reorganization you will hold that number of full
and fractional shares of Mazama Growth that have an aggregate net asset value
equal to the aggregate net asset value of your shares of Mazama Institutional in
which you are currently a shareholder.
The investment objectives of Mazama Institutional and Mazama Growth are
identical. Each Fund seeks long-term capital appreciation.
The investment strategies for Mazama Institutional and Mazama Growth are
substantially identical. See "How do the Funds' investment objectives, principal
investment strategies and risks compare?"
This Prospectus/Proxy Statement explains concisely the information about Mazama
Growth that you should know before voting on the Reorganization. Please read it
carefully and keep it for future reference. Additional information concerning
Mazama Institutional and the Reorganization is contained in the documents
described below, all of which have been filed with the Securities and Exchange
Commission ("SEC") and all of the documents described below are incorporated
herein by reference (legally considered to be part of this Prospectus/Proxy
Statement):
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INFORMATION ABOUT MAZAMA INSTITUTIONAL:
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Prospectus of the Touchstone Institutional Funds Trust relating to the Fund
dated April 30, 2010
Statement of Additional Information of the Touchstone Institutional Funds Trust
relating to the Fund dated April 30, 2010
Annual Report of the Touchstone Institutional Funds Trust relating to the Fund
for the year ended December 31, 2009 ("Mazama Institutional Annual Report")
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HOW TO OBTAIN THIS INFORMATION:
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Copies are available upon request and without charge if you:
o Write to the Touchstone Institutional Funds Trust at P.O. Box 5354,
Cincinnati, OH 45201-5354; or
o Call (800) 543-0407 toll-free.
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INFORMATION ABOUT THE REORGANIZATION AND MAZAMA GROWTH:
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Statement of Additional Information dated July 27, 2010, which relates to this
Prospectus/Proxy Statement and the Reorganization
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HOW TO OBTAIN THIS INFORMATION:
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A copy is available upon request and without charge if you:
o Write to the Touchstone Funds Group Trust at P.O. Box 5354, Cincinnati, OH
45201-5354; or
o Call (800) 543-0407 toll-free.
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You can also obtain copies of any of these documents without charge on the
EDGAR database on the SEC's Internet site at http://www.sec.gov. Copies are
available for a fee by electronic request at the following E-mail address:
publicinfo@sec.gov, or from the Public Reference Section, Securities and
Exchange Commission, Washington, D.C. 20549-0102.
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED THAT THE INFORMATION
IN THIS PROSPECTUS/PROXY STATEMENT IS ACCURATE OR ADEQUATE, NOR HAS IT APPROVED
OR DISAPPROVED THESE SECURITIES. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A
CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
AN INVESTMENT IN MAZAMA GROWTH:
[_] IS NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK
[_] IS NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY
[_] IS NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
[_] INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF YOUR ORIGINAL
INVESTMENT
TABLE OF CONTENTS
SUMMARY
Why is the Reorganization being proposed?
What are the key features of the Reorganization?
After the Reorganization, what shares of Touchstone will I own?
How will the Reorganization affect me?
How do the Trustees recommend that I vote?
How do the Funds' investment goals and, principal investment strategies
compare?
How do the Funds' investment limitations compare?
How do the Funds' fees and expenses compare?
How do the Funds' performance records compare?
Will I be able to purchase, exchange and redeem shares and receive
distributions the same way?
Who will be the Advisor, Sub-Advisor and Portfolio Manager of my Fund
after the Reorganization?
Will Mazama Growth have the same service providers as Mazama
Institutional?
What will be the primary federal tax consequences of the
Reorganization?
RISKS
Are the risk factors for the Funds similar?
What are the primary risks of investing in each Fund?
Are there any other risks of investing in each Fund?
INFORMATION ABOUT THE REORGANIZATION
Reasons for the Reorganization
Agreement and Plan of Reorganization
Description of the Securities to be Issued
Federal Income Tax Consequences
Pro-forma Capitalization
Distribution of Shares
Purchase and Redemption Procedures
Exchange Privileges
Dividend Policy
INFORMATION ON SHAREHOLDERS' RIGHTS
Form of Organization
Capitalization
Shareholder Liability
Shareholder Meetings and Voting Rights
Liquidation
Liability and Indemnification of Trustees
VOTING INFORMATION CONCERNING THE MEETING
Shareholder Information
Control Persons and Principal Holders of Securities
FINANCIAL STATEMENTS AND EXPERTS
LEGAL MATTERS
ADDITIONAL INFORMATION
OTHER BUSINESS
EXHIBIT A Form of Agreement and Plan of Reorganization
SUMMARY
This section summarizes the primary features and consequences of the
Reorganization. It may not contain all of the information that is important to
you. To understand the Reorganization, you should read this entire
Prospectus/Proxy Statement and the exhibits.
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus and Statement of Additional Information relating to both Funds and a
form of the Agreement and Plan of Reorganization, which is attached to this
Prospectus/Proxy Statement as Exhibit A.
WHY IS THE REORGANIZATION BEING PROPOSED?
The Reorganization will combine two series with identical investment
objectives into one. The Reorganization is being proposed in order to achieve
operating efficiencies and to provide the opportunity for a more efficient
investment management process. Furthermore, the current unified fee structure of
Mazama Institutional does not allow Touchstone Advisors, Inc. to realize a
reasonable economic profit from its efforts in serving as investment advisor to
Mazama Institutional at the current asset level of the Fund. Mazama Growth will
offer four classes of shares including retail classes of shares. The
Reorganization may benefit you by achieving operating efficiencies by broadening
the Fund's distribution and therefore its asset growth potential which, if
realized, may provide greater economies of scale. The Reorganization would make
it economically practicable for Touchstone Advisors, Inc. to continue to serve
as investment advisor to the shareholders of Mazama Institutional. The Trustees
believe that the Reorganization is in the best interests of Mazama
Institutional's shareholders.
WHAT ARE THE KEY FEATURES OF THE REORGANIZATION?
The Plan sets forth the key features of the Reorganization. A description
of the Reorganization is set out in the Plan, a form of which is attached as
Exhibit A. The Plan generally provides for the following:
[_] the transfer of all of the assets of Mazama Institutional to Mazama
Growth in exchange for shares of Mazama Growth;
[_] the assumption by Mazama Growth of all of the liabilities of Mazama
Institutional;
[_] the liquidation of Mazama Institutional subsequent to the
distribution of shares of Mazama Growth to Mazama Institutional's
shareholders; and
[_] the structuring of the Reorganization as a tax-free reorganization
for federal income tax purposes.
The Reorganization is expected to be completed on or about September 24,
2010.
1
AFTER THE REORGANIZATION, WHAT SHARES OF TOUCHSTONE WILL I OWN?
If you own shares of Mazama Institutional, you will own Institutional
shares of Mazama Growth. The new shares you receive will have the same total
value as your shares of Mazama Institutional as of the close of business on the
day immediately prior to the Reorganization.
HOW WILL THE REORGANIZATION AFFECT ME?
It is anticipated that the Reorganization will affect you as follows:
[_] OPERATING EFFICIENCIES: Upon completion of the Reorganization,
Mazama Growth may achieve operating efficiencies because it expects
to achieve a greater level of assets through distribution and sales
channels for the Fund.
[_] RISKS: Upon completion of the Reorganization, you will be subject to
the risks of investing in Mazama Growth. Mazama Growth and Mazama
Institutional have identical risks. For more information, see
"Risks."
|_| GROSS EXPENSES: As a result of eliminating the unified fee structure
the gross expenses of Mazama Growth are higher than those of Mazama
Institutional. However, Touchstone Funds Group Trust and Touchstone
Advisors, Inc. have entered into an expense limitation agreement
whereby Mazama Growth's total operating expenses (excluding dividend
expenses relating to short sales, interest, taxes, brokerage
commissions, other expenditures which are capitalized in accordance
with generally accepted accounting principles, the cost of "Acquired
Fund Fees and Expenses," if any, other extraordinary expenses not
incurred in the ordinary course of Touchstone's business, and
amounts, if any, payable pursuant to a plan adopted in accordance
with Rule 12b-1 under the 1940 Act) will be contractually limited
until at least January 27, 2014 and will not exceed 0.98%.
After the Reorganization, Mazama Growth will succeed to the financial
history and the historical performance of Mazama Institutional. Neither the
Funds nor the shareholders will bear any costs of the Meeting, this proxy
solicitation or any adjourned session. All of the costs of the Reorganization
will be paid by Touchstone Advisors, Inc. and Mazama Capital Management, Inc.
Such costs, including costs of the Meeting and printing costs as well as proxy
solicitation costs, will be approximately $1,000.
Like Mazama Institutional, Mazama Growth will pay dividends from net
investment income quarterly and will distribute net realized capital gains, if
any, at least annually. You will receive dividends and distributions in the form
of additional Fund shares unless you elect to receive payment in cash. To elect
cash payment, you must notify Mazama Growth in writing prior to the date of the
distribution. Your election will be effective for dividends and distributions
paid after the written notice is received.
THE TRUSTEES RECOMMEND THAT YOU VOTE FOR THE PROPOSED REORGANIZATION.
HOW DO THE TRUSTEES RECOMMEND THAT I VOTE?
The Trustees of the Touchstone Institutional Funds Trust, including the
Trustees who are not "interested persons" (the "Disinterested Trustees"), as
such term is defined in the 1940 Act, have concluded that the Reorganization
would be in the best interest of the shareholders of Mazama Institutional and
that their interests will not be diluted as a result of the Reorganization.
Accordingly, the Trustees have submitted the Plan for the approval of
shareholders of Mazama Institutional.
The Trustees of Touchstone Funds Group Trust have also approved the Plan
on behalf of Mazama Growth.
HOW DO THE FUNDS' INVESTMENT GOALS AND PRINCIPAL INVESTMENT STRATEGIES
COMPARE?
Because Mazama Growth is a new Fund organized specifically to receive all
the assets and carry on the business of Mazama Institutional, the investment
objective of Mazama Growth is identical to that of Mazama Institutional, and the
investment strategies of each Fund are substantially identical. The investment
goal of each Fund is to seek long-term capital appreciation. The investment goal
of Mazama Institutional is non-fundamental and may be changed by the Trust's
Board of Trustees without shareholder approval. Each Fund will give shareholders
30 days' prior notice of any change in the Fund's investment objectives.
2
The following discussion compares the principal investment strategies of
Mazama Institutional and Mazama Growth.
Each Fund seeks to achieve its objective by investing primarily in common
stocks of companies with market capitalizations found within the Russell Midcap
Growth Index and that the Funds' Sub-Advisor, Mazama Capital Management, Inc.
("Mazama"), believes possess superior growth characteristics. Mazama
Institutional classifies this policy as non-fundamental and can change this
policy upon 60 days' prior notice to shareholders. Mazama Growth has not adopted
a similar notice requirement. For each Fund, Mazama utilizes a proprietary price
performance model to assist it in identifying growth companies it believes are
undervalued relative to their management quality and earnings potential,
including growth companies offered as part of an initial public offering ("IPO")
of company stock. For each Fund, Mazama usually sells a security when it
concludes that a company's fundamentals have deteriorated or when a company is
no longer an attractive investment according to Mazama's proprietary price
performance model.
Under normal circumstances, each Fund will invest at least 80% of its net
assets in common stocks of companies with market capitalizations found within
the Russell Midcap Growth Index (between $829 million and $12 billion at the
time of its most recent reconstitution on May 31, 2009) at the time of purchase.
The market capitalization range and composition of the Russell Midcap Growth
Index are subject to change.
The Funds may depart from their principal investment strategies by taking
temporary defensive positions in response to adverse market, economic, political
or other conditions, including conditions when the Fund is unable to identify
attractive investment opportunities. During these times, the Funds may not
achieve their investment goal.
The Funds have other investment policies, practices and restrictions,
which are discussed in Mazama Institutional's Prospectus and Statement of
Additional Information, the "Additional Information" section below with respect
to Mazama Growth and the Statement of Additional Information relating to this
Prospectus/Proxy Statement.
Because the Funds have identical investment objectives and substantially
identical investment strategies, it is not anticipated that the securities held
by Mazama Institutional will be sold in order to comply with the policies and
investment practices of Mazama Growth in connection with the Reorganization.
HOW DO THE FUNDS' INVESTMENT LIMITATIONS COMPARE?
The investment limitations of Mazama Growth are substantially similar to
the investment limitations of Mazama Institutional. A fundamental investment
limitation cannot be changed with respect to a Fund without the consent of the
holders of a majority of that Fund's outstanding shares. The term "majority of
the outstanding shares" means the vote of (i) 67% or more of a Fund's shares
present at a meeting, if more than 50% of the outstanding shares of a Fund are
present or represented by proxy, or (ii) more than 50% of a Fund's outstanding
shares, whichever is less. The following table compares the fundamental
investment limitations of Mazama Growth and Mazama Institutional.
3
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MAZAMA GROWTH MAZAMA INSTITUTIONAL
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DIVERSIFICATION The Fund may not purchase The Fund may not
securities of an issuer purchase securities of
that would cause the Fund an issuer that would
to fail to satisfy the cause the Fund to fail
diversification to satisfy the
requirement for a diversification
diversified management requirement for a
company under the 1940 diversified management
Act, the rules or company under the 1940
regulations thereunder or Act, the rules or
any exemption therefrom, regulations thereunder
as such statute, rules or or any exemption
regulations may be amended therefrom, as such
or interpreted from time statute, rules or
to time. regulations may be
amended or interpreted
from time to time.
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BORROWING MONEY The Fund may not engage in The Fund may not borrow
borrowing except as money except from banks
permitted by the and then in an amount
Investment Company Act of which does not exceed
1940, any rule, regulation 33 1/3% of the value of
or order under the Act or its total assets
any SEC staff (including the amount
interpretation of the Act. borrowed) less the
Fund's liabilities
(other than
borrowings), except
that the Fund may
borrow up to an
additional 5% of its
total assets (not
including the amount
borrowed) from a bank
for temporary or
emergency purposes.
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UNDERWRITING The Fund may not The Fund may not
underwrite securities underwrite securities
issued by other persons, of other issuers,
except to the extent that, except insofar as the
in connection with the Fund may be deemed an
sale or disposition of underwriter under the
portfolio securities, the Securities Act of 1933,
Fund may be deemed to be as amended, in
an underwriter under connection with the
certain federal securities disposition of its fund
laws or in connection with securities.
investments in other
investment companies.
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LOANS The Fund may not make The Fund may not make
loans to other persons loans of money or
except that the Fund may securities to other
(1) engage in repurchase persons, except through
agreements, (2) lend purchasing fixed income
portfolio securities, (3) securities, lending
purchase debt securities, fund securities or
(4) purchase commercial entering into
paper, and (5) enter into repurchase agreements
any other lending in a manner consistent
arrangement permitted by with the Fund's
the Investment Company Act investment policies.
of 1940, any rule,
regulation or order under
the Act or any SEC staff
interpretation of the Act.
4
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REAL ESTATE The Fund may not purchase The Fund may not
or sell real estate except purchase or sell real
that the Fund may (1) hold estate or interests
and sell real estate therein, except that it
acquired as a result of may invest in
the Fund's ownership of securities of issuers
securities or other engaged in the real
instruments (2) purchase estate industry and may
or sell securities or invest in securities
other instruments backed secured by real estate
by real estate or or interests therein.
interests in real estate
and (3) purchase or sell
securities of entities or
investment vehicles,
including real estate
investment trusts that
invest, deal or otherwise
engage in transactions in
real estate or interests
in real estate.
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COMMODITIES The Fund may not purchase The Fund may not
or sell physical purchase or sell
commodities except that physical commodities or
the Fund may (1) hold and commodity contracts,
sell physical commodities except that each Fund
acquired as a result of may purchase
the Fund's ownership of commodities contracts
securities or other relating to financial
instruments, (2) purchase instruments, such as
or sell securities or financial futures
other instruments backed contracts and options
by physical commodities, on such contracts.
(3) purchase or sell
options, and (4) purchase
or sell futures contracts.
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CONCENTRATION OF The Fund may not purchase The Fund may not invest
INVESTMENTS the securities of an 25% or more of the
issuer (other than value of its total
securities issued or assets in the
guaranteed by the United securities (other than
States Government, its U.S. government
agencies or its securities) of issuers
instrumentalities) if, as engaged in any single
a result, more than 25% of industry or group of
the Fund's total assets industries.
would be invested in the
securities of companies in
the same industry or group
of industries.
------------------------------------------------------------------------------
SENIOR SECURITIES The Fund may not issue The Fund may not issue
senior securities except senior securities.
as permitted by the
Investment Company Act of
1940, any rule, regulation
or order under the Act or
any SEC staff
interpretation of the Act.
------------------------------------------------------------------------------
In addition to the fundamental limitations listed above, Mazama
Institutional has adopted the following non-fundamental investment limitations,
which may be changed by the Touchstone Institutional Funds Trust's Board of
Trustees without shareholder approval. Mazama Institutional may not:
1. Pledge, mortgage or hypothecate assets except to secure borrowings (not to
exceed 33 1/3% of a Fund's assets) permitted by the Fund's fundamental
limitation on borrowing, as described above.
2. Invest in companies for the purpose of exercising control.
5
3. Purchase securities on margin or effect short sales, except that each Fund
may (i) obtain short-term credits as necessary for the clearance of
security transactions; (ii) provide initial and variation margin payments
in connection with transactions involving futures contracts and options on
such contracts; and (iii) make short sales "against the box."
4. Invest its assets in securities of any investment company, except as
permitted by the Investment Company Act of 1940, as amended (the "1940
Act").
5. Invest 15% or more of its net assets in illiquid securities.
6. Make investments in securities when outstanding borrowings exceed 5% of
the Fund's total assets.
HOW DO THE FUNDS' FEES AND EXPENSES COMPARE?
After the Reorganization, shares of Mazama Institutional will be exchanged
for Institutional shares of Mazama Growth.
The following tables show the various fees and expenses that you may pay
for buying, holding and redeeming shares of Mazama Institutional and Mazama
Growth (Pro Forma). The amounts for the shares of Mazama Institutional set forth
in the following table and in the examples are based on the expenses for the
fiscal year ended December 31, 2009. Mazama Growth is newly organized and has
not commenced operations to date. The amounts for shares of Mazama Growth (Pro
Forma) set forth in the following table and in the examples are based on what
the estimated expenses of Mazama Growth will be for the fiscal year ending
September 30, 2010, assuming the Reorganization had taken place as of that date.
------------------------------------------------------------------------------------------
MAZAMA MAZAMA GROWTH
INSTITUTIONAL (PRO FORMA)
------------------------------------------------------------------------------------------
Wire Redemption Fee None(1) None
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Management Fees 0.95% 0.95%
------------------------------------------------------------------------------------------
Distribution (12b-1) Fees None None
------------------------------------------------------------------------------------------
Other Expenses 0.03% 0.43%(2)
------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.98%(3) 1.38%
------------------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement N/A 0.40%(4)
------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses After Fee Waiver N/A 0.98%
and/or Expense Reimbursement
------------------------------------------------------------------------------------------
1 A fee may be imposed for wire transfers of redemption proceeds.
2 "Other Expenses" are based on estimated amounts for the current fiscal
year.
3 Touchstone Advisors and Touchstone Institutional Funds Trust have entered
into an expense limitation agreement whereby Touchstone Advisors has
contractually agreed to waive a portion of its fees and/or reimburse
certain Fund expenses in order to limit annual fund operating expenses to
0.98%. This expense limitation will remain in effect until at least April
29, 2011 but can be terminated by a vote of the Board of Trustees of the
Fund if they deem the termination to be beneficial to the Fund
shareholders.
4 Touchstone Advisors and Touchstone Funds Group Trust have entered into an
expense limitation agreement whereby Touchstone Advisors has contractually
agreed to waive a portion of its fees and/or reimburse certain Fund
expenses in order to limit annual fund operating expenses to 0.98% for
Institutional shares. This expense limitation will remain in effect until
at least January 27, 2014 but can be terminated by a vote of the Board of
Trustees of the Fund if they deem the termination to be beneficial to the
Fund shareholders.
6
The table below shows an example of the total expenses you would pay on a
$10,000 investment over one-, three-, five- and ten-year periods. The example is
intended to help you compare the cost of investing in Mazama Institutional
versus Mazama Growth (Pro Forma), assuming the Reorganization is completed. The
example assumes a 5% average annual return, that you redeem all of your shares
at the end of each time period, that the Funds' operating expenses remain the
same, that you reinvest all of your dividends and that the contractual expense
limitation agreement of Mazama Growth remains in effect until January 27, 2014.
The example is for illustration only, and your actual costs may be higher or
lower.
----------------------------------------------------------------------------
EXAMPLE OF FUND EXPENSES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------------
Mazama Institutional $100 $312 $542 $1,201
----------------------------------------------------------------------------
Mazama Growth - (Pro Forma) $100 $312 $634 $1,547
----------------------------------------------------------------------------
PORTFOLIO TURNOVER: Each Fund pays transaction costs, such as commissions,
when it buys and sells securities (or "turns over" its portfolio). A higher
portfolio turnover rate may indicate higher transaction costs and may result in
higher taxes when Fund shares are held in a taxable account. These costs, which
are not reflected in Total Annual Fund Operating Expenses or in the Example,
affect the Funds' performance. During the most recent fiscal year, Mazama
Institutional's portfolio turnover rate was 124% of the average value of its
portfolio. Mazama Growth's portfolio turnover rate for the next fiscal year is
not expected to be substantially different than the turnover rate for the
previous year given the continuity of management.
HOW DO THE FUNDS' PERFORMANCE RECORDS COMPARE?
The following chart shows the past performance of Mazama Institutional.
Past performance before and after taxes is not an indication of future results.
Mazama Growth is newly formed and has no operational history. Consequently, it
does not have an investment performance record. After the Reorganization, Mazama
Growth, as the successor to Mazama Institutional, will assume and publish the
investment performance record of Mazama Institutional.
7
MAZAMA INSTITUTIONAL TOTAL RETURN AS OF DECEMBER 31
The bar chart and performance table below illustrate some indication of
the risks of investing in the Fund by showing changes in the Fund's performance
from year to year (before taxes) and by showing how the Fund's average annual
total returns for 1 Year and Since Inception (before and after taxes) compare
with the Russell Midcap Growth Index. The Fund's past performance (before and
after taxes) does not necessarily indicate how the Fund will perform in the
future. Updated performance is available at no cost by visiting
www.TouchstoneInvestments.com or by calling 1.800.543.0407.
[bar chart]
2009 59.89%
----------------------------------------------
Best Quarter 2nd Quarter 2009: 30.54%
----------------------------------------------
Worst Quarter 1st Quarter 2009: -6.67%
----------------------------------------------
After-tax returns are calculated using the highest individual federal
income tax rate and do not reflect the impact of state and local taxes. Your
after-tax returns may differ from those shown and depend on your tax situation.
The after-tax returns do not apply to shares held in an IRA, 401(k) or other
tax-deferred account.
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIOD ENDED 12/31/2009)
----------------------------------------------------------------------------------------
SINCE INCEPTION
MAZAMA INSTITUTIONAL 1 YEAR (01/30/08)
----------------------------------------------------------------------------------------
Return Before Taxes 59.89% -5.71%
----------------------------------------------------------------------------------------
Return After Taxes on Distributions 59.88% -5.80%
----------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 38.94% -4.88%
----------------------------------------------------------------------------------------
Russell Midcap Growth Index 46.29% -5.79%
----------------------------------------------------------------------------------------
Important information about Mazama Institutional's performance is also
contained in the management discussion section of the Touchstone Institutional
Funds Trust's most recent Annual Report.
8
WILL I BE ABLE TO PURCHASE AND REDEEM SHARES AND RECEIVE DISTRIBUTIONS THE
SAME WAY?
Mazama Growth shares are sold in a continuous offering and are offered to
the public, and may be purchased through securities dealers or directly from
Touchstone's underwriter, Touchstone Securities, Inc. In the proposed
Reorganization, Mazama Institutional shareholders will receive Institutional
shares of Mazama Growth and will be able to purchase and redeem shares and
receive distributions the same way. Both Mazama Institutional and Institutional
Shares of Mazama Growth require a minimum initial investment of $500,000.
WHO WILL BE THE ADVISOR, SUB-ADVISOR AND PORTFOLIO MANAGER OF MY FUND
AFTER THE REORGANIZATION? WHAT WILL THE ADVISORY FEES BE AFTER THE
REORGANIZATION?
The Advisor, Sub-Advisor and Portfolio Managers of Mazama Growth will not
change as a result of the Reorganization. Also, Mazama Growth's advisory fee and
net expenses will not increase as a result of the Reorganization.
Management of the Funds
The overall management of each Fund is the responsibility of, and is
supervised by, the Board of Trustees of each of their respective Trusts.
Advisor
Touchstone Advisors, Inc. is the investment advisor of both Funds.
Pursuant to an Investment Advisory Agreement with the Touchstone Funds Group
Trust and a Management Agreement with Touchstone Institutional Funds Trust,
Touchstone Advisors, Inc. selects each Fund's sub-advisor, subject to approval
by the Board of Trustees. Touchstone Advisors, Inc. pays the fees to each
sub-advisor and monitors each sub-advisor's investment program. Touchstone
Advisors, Inc. is a wholly owned subsidiary Western - Southern Mutual Holding
Company ("Western-Southern").
Facts about Touchstone Advisors, Inc.:
--------------------------------------------------------------------------
[_] As of June 30, 2010, Touchstone Advisors, Inc. had assets under
management of approximately $5.3 billion.
[_] Touchstone Advisors, Inc. is located at 303 Broadway, Suite 1100,
Cincinnati, Ohio 45202.
--------------------------------------------------------------------------
For Mazama Growth, Touchstone Advisors, Inc. has received an order from
the SEC that permits it, under certain conditions, to select or change
unaffiliated sub-advisors, enter into new sub-advisory agreements or amend
existing sub-advisory agreements without first obtaining shareholder approval.
Mazama Growth must still obtain shareholder approval of any sub-advisory
agreement with a sub-advisor affiliated with Touchstone Funds Group Trust or
Touchstone Advisors, Inc. other than by reason of serving as a sub-advisor to
one or more funds.
Sub-Advisor
Mazama Capital Management, Inc. is the sub-advisor of both Funds. Pursuant
to Sub-Advisory Agreements with Touchstone Advisors, Inc., Mazama Capital
Management, Inc. continuously furnishes an investment program for the Funds,
makes the day-to-day investment decisions on behalf of Touchstone and arranges
the execution of Fund transactions.
9
Portfolio Management
The Funds have the same portfolio managers as follows:
RONALD A. SAUER, CEO, Chief Investment Officer and Senior Portfolio
Manager, is the founder of Mazama Capital Management, Inc. and has been its
Chief Executive Officer and Senior Portfolio Manager since the founding of the
firm in 1997. Prior to founding the firm, he was the President and Director of
Research for Black and Company, Inc., which he joined in 1983. Mr. Sauer has
overall responsibility for the management of the investment team, oversees the
portfolio construction process, conducts research and participates in the
security selection process for the Funds.
GRETCHEN NOVAK, CFA, Portfolio Manager and Sector Portfolio Manager,
joined Mazama Capital Management, Inc. in 1999. Prior to joining the firm, she
was an Equity Analyst with Cramer Rosenthal McGlynn, LLC in New York. Ms. Novak
is responsible for researching small & mid cap growth consumer discretionary and
consumer staple companies and she participates in the security selection process
for the Funds.
JOEL RUBENSTEIN, Associate Portfolio Manager, joined Mazama Capital
Management, Inc. in 2003. He serves as an Associate Portfolio Manager,
supporting the overall management of the Funds. He has worked as an equity
research analyst for Mazama Capital Management, Inc. since 2003. Prior to
joining Mazama Capital Management, Inc., he was employed by Banc of America
Securities for two years as a senior equity research associate in the technology
group. He also spent three years as a senior research analyst at Analysis Group,
a leading provider of economic and business strategy consulting services.
Advisory Fees
For its management and supervision of the daily business affairs of Mazama
Institutional, Touchstone Advisors, Inc., receives a unified, monthly fee at the
annual rate of 0.95% of Mazama Institutional's average daily net assets. Under
the unified fee arrangement, Touchstone Advisors, Inc. is responsible for
compensating any third party engaged by Touchstone Advisors, Inc. to provide
services under its supervision, including sub-advisors, sub-administrators,
transfer and dividend disbursing agents, and custodians. Touchstone Advisors,
Inc. is also responsible for fees of the independent Trustees, the independent
registered public accounting firm and legal counsel. The unified fee arrangement
does not include the costs of any interest, taxes, dues, fees and other charges
of governments and their agencies including the costs of qualifying shares for
sale in any jurisdiction, or brokerage or other transaction costs. In addition,
the unified fee does not include legal and audit fees and other costs in
contemplation of or arising out of litigation or administrative actions to which
the Fund, its officers or Trustees are a party or incurred in anticipation of
becoming a party. Out of this fee, Touchstone Advisors, Inc. pays Mazama Capital
Management, Inc. a sub-advisory fee for its services for Mazama Institutional.
This fee arrangement causes Touchstone Advisors, Inc. to incur losses due
to the expenses incurred in performing its services for Mazama Institutional. In
order to address the adverse economics associated with the investment advisory
fee payable to Touchstone Advisors, Inc. under the terms of the current
Agreement, to allow Touchstone Advisors, Inc. to realize a reasonable economic
profit from its efforts in serving as investment advisor to the Fund, and to
maintain what the Board believes to be value added to shareholders through the
Mazama investment sub-advisory relationship, Mazama Growth is not be subject to
a unified fee structure.
10
For its management and supervision of the daily business affairs of Mazama
Growth, Touchstone Advisors, Inc. receives a monthly fee at the annual rate of
0.95% of Mazama Growth's average daily net assets. Mazama Growth is not subject
to the same unified fee as Mazama Institutional. Out of this fee, Touchstone
Advisors, Inc. pays Mazama Capital Management, Inc. a sub-advisory fee for its
services for Mazama Growth. Touchstone Advisors, Inc. also receives a monthly
administration fee at the annual rate of 0.20% of Mazama Growth's average daily
net assets. Because Mazama Growth is not subject to the unified fee, it is
expected that Mazama Growth will have a higher total expense ratio than Mazama
Institutional. However, as discussed below, Mazama Growth is subject to an
expense limitation agreement such that its net expense ratio will not exceed
that of Mazama Institutional for the term of the agreement.
Touchstone Institutional Funds Trust and Touchstone Advisors, Inc. have
entered into an expense limitation agreement whereby Mazama Institutional's
total operating expenses (excluding interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, the cost of "Acquired Fund Fees and Expenses," if any,
and other extraordinary expenses not incurred in the ordinary course of
Touchstone's business) will be contractually limited until at least April 29,
2011 and will not exceed 0.98%.
Touchstone Funds Group Trust and Touchstone Advisors, Inc. have entered
into an expense limitation agreement whereby Mazama Growth's total operating
expenses (excluding dividend expenses relating to short sales, interest, taxes,
brokerage commissions, other expenditures which are capitalized in accordance
with generally accepted accounting principles, the cost of "Acquired Fund Fees
and Expenses," if any, other extraordinary expenses not incurred in the ordinary
course of Touchstone's business, and amounts, if any, payable pursuant to a plan
adopted in accordance with Rule 12b-1 under the 1940 Act) will be contractually
limited until at least January 27, 2014 and will not exceed 0.98%.
Sub-Advisory Fees
For both Funds, Touchstone Advisors, Inc. pays sub-advisory fees to Mazama
from its advisory fee.
WILL MAZAMA GROWTH HAVE THE SAME SERVICE PROVIDERS AS MAZAMA
INSTITUTIONAL?
Touchstone Funds Group Trust and Touchstone Institutional Trust have the
same service providers. Upon completion of the Reorganization, Touchstone Funds
Group Trust will continue to engage its existing service providers.
WHAT WILL BE THE PRIMARY FEDERAL TAX CONSEQUENCES OF THE REORGANIZATION?
Prior to or at the completion of the Reorganization, Mazama Growth and
Mazama Institutional will have each received an opinion from the law firm of
Pepper Hamilton LLP that the Reorganization intends to qualify as a tax-free
reorganization within the meaning of section 368(a) of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"). Accordingly, it is believed that no gain
or loss generally will be recognized by Mazama Institutional or Mazama Growth or
their respective shareholders (see "Information About the Reorganization-Federal
Income Tax Consequences").
11
RISKS
ARE THE RISK FACTORS FOR THE FUNDS SIMILAR?
The risks of investing in Mazama Institutional and Mazama Growth are the
same. The risks of each Fund are described in greater detail in Mazama
Institutional's Prospectus and in the "Additonal Information" section of this
Prospectus/Proxy statement relating to Mazama Growth.
WHAT ARE THE PRIMARY RISKS OF INVESTING IN EACH FUND?
An investment in each Fund is subject to certain risks. There is no
assurance that the investment performance of either Mazama Institutional or
Mazama Growth will be positive or that the Funds will meet their investment
objectives. You could lose money on your investment in the Funds and the Funds
could also return less than other investments. The following discussions
highlight the primary risks associated with an investment in each of the Funds.
EACH FUND IS SUBJECT TO MARKET AND EQUITY SECURITIES RISK.
Since it purchases common stocks, each Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles. The value of the Fund's equity securities
may fluctuate from day to day. Individual companies may report poor results or
be negatively affected by industry and/or economic trends and developments. The
prices of securities issued by these companies may decline in response to such
developments, which could result in a decline in the value of the Fund's shares.
These factors contribute to price volatility, which is the principal risk of
investing in the Fund. In addition, common stocks represent a share of ownership
in a company, and rank after bonds and preferred stock in their claim on the
company's assets in the event of liquidation. Preferred stock represents an
equity or ownership interest in an issuer that pays dividends at a specified
rate and that has precedence over common stock in the payment of dividends. In
the event an issuer is liquidated or declares bankruptcy, the claims of owners
of bonds take precedence over the claims of those who own preferred and common
stock. If interest rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as provisions allowing
the stock to be called or redeemed prior to its maturity, which can have a
negative impact on the stock's price when interest rates decline.
EACH FUND IS SUBJECT TO MID CAP COMPANIES RISK.
Each Fund is subject to the risk that medium capitalization stocks may
underperform other types of stocks or the equity markets as a whole. Moreover,
the medium capitalization companies in which the Fund invests may be more
vulnerable to adverse business or economic events than larger, more established
companies. In particular, these medium companies may have more limited product
lines, markets and financial resources, and may depend upon a relatively small
management group. Therefore, medium cap company stocks may be more volatile than
stocks of larger companies.
12
EACH FUND IS SUBJECT TO GROWTH COMPANIES RISK.
A principal risk of growth stocks is that investors expect growth
companies to increase their earnings at a certain rate that is generally higher
than the rate expected for non-growth companies. If a growth company does not
meet these expectations, the price of its stock may decline significantly, even
if it has increased earnings. Growth companies also typically do not pay
dividends. Companies that pay dividends often have lower stock price declines
during market downturns.
EACH FUND IS SUBJECT TO INITIAL PUBLIC OFFERINGS RISK.
IPO risk is the risk that the market value of IPO shares will fluctuate
considerably due to factors such as the absence of a prior public market,
unseasoned trading, the small number of shares available for trading and limited
information about the issuer. The purchase of IPO shares may involve high
transaction costs. IPO shares are subject to market risk and liquidity risk
(i.e., the potential that the Fund may be unable to dispose of the IPO shares
promptly or at a reasonable price). When the Fund's asset base is small, a
significant portion of its performance could be attributable to investments in
IPOs, because such investments would have a magnified impact on the Fund. As the
Fund's assets grow, the effect of investments in IPOs on the Fund's performance
probably will decline, which could reduce performance.
EACH FUND IS SUBJECT TO MANAGER OF MANAGERS RISK.
Because the Funds engage a sub-advisor to make investment decisions on
behalf of the Fund, there is a risk that Touchstone Advisors, Inc. may be unable
to identify and retain sub-advisors who achieve superior investment returns
relative to other similar sub-advisors.
EACH FUND IS SUBJECT TO MARKET CAPITALIZATION RISK.
Each Fund specifies in its principal investment strategy a market
capitalization range for acquiring portfolio securities. If a security that is
within the range for the Fund at the time of purchase later falls outside the
range, which is most likely to happen because of market fluctuation, the Fund
may continue to hold the security if, in the sub-advisor's judgment, the
security remains otherwise consistent with the Fund's investment goal and
strategies. However, this change could affect the Fund's flexibility in making
new investments.
EACH FUND IS SUBJECT TO PORTFOLIO TURNOVER RISK.
Each Fund may sell its securities, regardless of the length of time that
they have been held, if the Advisor and/or the sub-advisor determines that it
would be in the Fund's best interest to do so. These transactions will increase
the Fund's "portfolio turnover." High turnover rates generally result in higher
brokerage costs to the Fund and in higher net taxable gain for shareholders, and
may reduce the Fund's returns.
ARE THERE ANY OTHER RISKS OF INVESTING IN EACH FUND?
No
13
INFORMATION ABOUT THE REORGANIZATION
REASONS FOR THE REORGANIZATION
The Reorganization will combine two Funds with substantially identical
investment objectives into one and may result in operating efficiencies. Upon
completion of the Reorganization, Mazama Growth may achieve operating
efficiencies because it will seek to achieve a greater level of assets through
distribution and sales channels for the Fund. This may result in lower expenses
through greater economies of scale. The Reorganization would make it
economically practicable for Touchstone Advisors, Inc. to continue to serve as
investment advisor to the shareholders of Mazama Institutional.
At a regular meeting held on February 18, 2010 and May 19, 2010, all of
the Trustees of the Touchstone Institutional Funds Trust, including the
Disinterested Trustees, considered and approved the Reorganization; they
determined that the Reorganization was in the best interests of shareholders of
Mazama Institutional and that the interests of existing shareholders of Mazama
Institutional will not be diluted as a result of the transactions contemplated
by the Reorganization.
Before approving the Plan, the Trustees evaluated extensive information
provided by the management of the Touchstone Institutional Funds Trust, and
reviewed various factors about the Funds and the proposed Reorganization.
In addition, the Trustees considered, among other things:
[_] the terms and conditions of the Reorganization;
[_] the fact that the Reorganization would not result in the dilution of
shareholders' interests;
[_] the expense ratios, fees and expenses of Mazama Institutional and
the anticipated expense ratios, fees and expenses of Mazama Growth;
[_] the fact that Touchstone Advisors, Inc. has contractually agreed to
limit the total annual operating expenses of Mazama Growth until at
least January 27, 2014;
[_] the fact that both Funds have identical investment objectives and
policies;
[_] the investment personnel, expertise and resources of Touchstone
Advisors, Inc.;
[_] the fact that the Reorganization will provide continuity of money
management for shareholders because the sub-advisor for Mazama
Growth is the same sub-advisor for Mazama Institutional;
[_] the fact that Touchstone Advisors, Inc. and Mazama Capital
Management, Inc. will bear the expenses incurred by Mazama
Institutional and Mazama Growth in connection with the
Reorganization;
[_] the potential benefits to shareholders, including operating
efficiencies, which may be achieved from the Reorganization;
[_] the fact that Mazama Growth will assume all of the liabilities of
Mazama Institutional;
14
[_] the fact that the Reorganization is expected to be a tax-free
transaction for federal income tax purposes;
[_] the fact that without the Reorganization, Mazama Institutional may
be liquidated because the current unified fee structure of Mazama
Institutional does not allow Touchstone Advisors, Inc. to realize a
reasonable economic profit from its efforts in serving as investment
advisor to Mazama Institutional at the current asset level of the
Fund; and
[_] alternatives available to shareholders of Mazama Institutional,
including the ability to redeem their shares.
During their consideration of the Reorganization, the Disinterested
Trustees of the Touchstone Institutional Funds Trust discussed with counsel the
legal issues involved.
After consideration of the factors noted above, together with other
factors and information considered to be relevant, and recognizing that there
can be no assurance that any operating efficiencies or other benefits will in
fact be realized, the Trustees of the Touchstone Institutional Funds Trust
concluded that the proposed Reorganization would be in the best interests of
Mazama Institutional and its shareholders. Consequently, they approved the Plan
and directed that the Plan be submitted to shareholders of Mazama Institutional
for approval.
The Board concluded that these benefits were more favorable for
shareholders than the alternative of liquidating Mazama Institutional as
Touchstone Advisors, Inc. indicated it might have to do.
The Trustees of Touchstone Funds Group Trust similarly found that
participation in the Reorganization is in the best interests of Mazama Growth
and that the interests of Mazama Growth will not be diluted as a result of the
Reorganization.
AGREEMENT AND PLAN OF REORGANIZATION
The following summary is qualified in its entirety by reference to the
Plan (the form of which is attached as Exhibit A to this Prospectus/Proxy
Statement).
The Plan provides that all of the assets of Mazama Institutional will be
acquired by Mazama Growth in exchange for Institutional shares of Mazama Growth
and the assumption by Mazama Growth of all of the liabilities of Mazama
Institutional immediately prior to the opening of business on September 24, 2010
or such other date as may be agreed upon by the parties (the "Closing Date").
Prior to the Closing Date, Mazama Institutional will endeavor to discharge all
of its known liabilities and obligations. Mazama Institutional will prepare an
unaudited statement of its assets and liabilities as of the close of regular
trading on the NYSE, typically 4:00 p.m. Eastern Time, on the business day
immediately prior to the Closing Date (the "Valuation Date").
At or prior to the Valuation Time, for tax reasons, Mazama Institutional
will declare a dividend or dividends and distribution or distributions which,
together with all previous dividends and distributions, shall have the effect of
distributing to the Fund's shareholders all of the Fund's investment company
taxable income for the taxable period ending on the Closing Date (computed
without regard to any deduction for dividends paid), all of the Fund's net tax
exempt income and all of its net capital gains realized in all taxable periods
ending on the Closing Date (after reductions for any capital loss carryforward).
15
The number of full and fractional shares of Mazama Growth to be received
by the shareholders of Mazama Institutional will be determined by multiplying
the number of outstanding full and fractional shares of Mazama Institutional by
a factor which shall be computed by dividing the net asset value per share of
Mazama Institutional by the net asset value per share of Mazama Growth. These
computations will take place as of the Valuation Date. For Mazama Institutional,
the net asset value per share will be determined by dividing assets, less
liabilities, by the total number of outstanding shares.
JPMorgan Chase Bank, N.A, the accounting agent for Mazama Institutional,
will compute the value of Mazama Institutional's portfolio of securities. The
method of valuation employed will be consistent with the procedures set forth in
Touchstone Funds Group Trust's Declaration of Trust, the Prospectus and
Statement of Additional Information relating to Mazama Growth or such other
valuation procedures as shall be mutually agreed upon by the parties.
As soon after the Closing Date as conveniently practicable, Mazama
Institutional will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date the full and fractional shares
of Mazama Growth received by Mazama Institutional. The liquidation and
distribution will be accomplished by the establishment of accounts in the names
of Mazama Institutional's shareholders on Mazama Growth's share records of its
transfer agent. Each account will represent the respective pro rata number of
full and fractional shares of Mazama Growth due to Mazama Institutional's
shareholders. All issued and outstanding shares of Mazama Institutional will be
canceled. Shares of Mazama Growth to be issued will have no preemptive or
conversion rights and no share certificates will be issued. After these
distributions and the winding up of its affairs, Mazama Institutional will be
liquidated.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Mazama Institutional's shareholders,
accuracy of various representations and warranties and receipt of opinions of
counsel. Notwithstanding approval by Mazama Institutional's shareholders, the
Plan may be terminated (a) by the mutual agreement of Mazama Institutional and
Mazama Growth; or (b) at or prior to the Closing Date by either party (1)
because of a breach by the other of any representation, warranty, or agreement
contained in the Plan to be performed at or prior to the Closing Date, if not
cured within 30 days, or (2) because a condition in the Plan expressed to be
precedent to the obligations of the terminating party has not been met and it
reasonably appears that it will not or cannot be met.
Whether or not the Reorganization is consummated, Touchstone Advisors,
Inc. and Mazama Capital Management, Inc. will pay the expenses incurred by
Mazama Institutional and Mazama Growth in connection with the Reorganization
(including the cost of proxy solicitation).
If Mazama Institutional's shareholders do not approve the Reorganization,
the Trustees will consider other possible courses of action that may be in the
best interests of shareholders.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
Shareholders of Mazama Institutional as of the Closing Date will receive
full and/or fractional Mazama Growth shares in accordance with the procedures
provided for in the Plan, as described above. Mazama Growth shares to be issued
in connection with the Reorganization will be fully paid and non-assessable when
issued.
16
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify for federal income tax purposes
as a tax-free reorganization under section 368(a) of the Code. As a condition to
the closing of the Reorganization, Mazama Growth and Mazama Institutional will
have each received an opinion from Pepper Hamilton LLP to the effect that, on
the basis of the existing provisions of the Code, U.S. Treasury regulations
issued thereunder, current administrative rules, pronouncements and court
decisions, and certain representations made by the Funds, for federal income tax
purposes, upon consummation of the Reorganization:
(a) The transfer of all of Mazama Institutional assets in exchange
solely for Mazama Growth Shares and the assumption by Mazama Growth of the
liabilities of Mazama Institutional followed by the distribution of Mazama
Growth Shares to Mazama Institutional Shareholders in dissolution and
liquidation of Mazama Institutional will constitute a "reorganization" within
the meaning of Section 368(a) of the Code, and Mazama Growth and Mazama
Institutional will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
(b) No gain or loss will be recognized by Mazama Growth upon the
receipt of the assets of Mazama Institutional solely in exchange for Mazama
Growth Shares and the assumption by Mazama Growth of the liabilities of Mazama
Institutional.
(c) No gain or loss will be recognized by Mazama Institutional upon
the transfer of Mazama Institutional assets to Mazama Growth in exchange for
Mazama Growth Shares and the assumption by Mazama Growth of the liabilities of
Mazama Institutional or upon the distribution (whether actual or constructive)
of Mazama Growth Shares to Selling Fund Shareholders in exchange for their
shares of Mazama Institutional.
(d) No gain or loss will be recognized by Mazama Institutional
Shareholders upon the exchange of their Mazama Institutional shares for Mazama
Growth Shares in liquidation of Mazama Institutional.
(e) The aggregate tax basis for Mazama Growth Shares received by
each Mazama Institutional shareholder pursuant to the Reorganization will be the
same as the aggregate tax basis of Mazama Institutional shares held by such
shareholder immediately prior to the Closing, and the holding period of Mazama
Growth Shares received by each Mazama Institutional shareholder will include the
period during which Mazama Institutional shares exchanged therefore were held by
such shareholder (provided Mazama Institutional shares were held as capital
assets on the date of the Closing).
(f) The tax basis of Mazama Institutional assets acquired by Mazama
Growth will be the same as the tax basis of such assets to Mazama Institutional
immediately prior to the Closing, and the holding period of the assets of Mazama
Institutional in the hands of Mazama Growth will include the period during which
those assets were held by Mazama Institutional.
Pepper Hamilton will express no opinion as to (1) any federal income tax
consequences of the Reorganization except as expressly set forth above, (2) any
tax consequences of any other transaction except those consummated in accordance
with the Reorganization Agreement, (3) the tax consequences with respect to any
asset as to which any unrealized gain or loss is required to be recognized for
U.S. federal income tax purposes at the end of a taxable year (or on the
termination thereof) under a mark-to-market system of accounting, (4) the tax
consequences with respect to any stock held in a passive foreign investment
company as defined in Section 1297(a) of the Code, and (5) any foreign, state or
local tax consequences of the Reorganization.
17
Such opinion shall be based on customary assumptions, limitations and such
representations as Pepper Hamilton LLP may reasonably request, and Mazama
Institutional and Mazama Growth will cooperate to make and certify the accuracy
of such representations. Such opinion may contain such assumptions and
limitations as shall be in the opinion of such counsel appropriate to render the
opinions expressed therein. Notwithstanding anything in the Plan to the
contrary, neither Mazama Growth nor Mazama Institutional may waive the
conditions set forth above.
DISTRIBUTION OF SHARES
Touchstone Securities, Inc. is the principal underwriter of the Funds, as
such, the exclusive agent for distribution of the Funds' shares. Shares of the
Mazama Institutional are, and shares of Mazama Growth will be, sold in a
continuous offering directly through Touchstone Securities, Inc., through
financial advisors and financial intermediaries or through processing
organizations. Touchstone Securities, Inc. allows concessions to dealers who
sell shares of the Funds. Touchstone Securities, Inc. receives that portion of
the sales charge that is not reallowed to dealers and retains the entire sales
charge on all direct investments and accounts with no designated dealer of
record. Touchstone Securities, Inc. is a wholly owned subsidiary of
Western-Southern.
PURCHASE AND REDEMPTION PROCEDURES
The minimum initial purchase requirement for both Mazama Institutional and
Institutional Shares of Mazama Growth is $500,000. The minimum for subsequent
purchases of Mazama Institutional and Institutional Shares of Mazama Growth is
$0. The Funds provide for telephone, mail or wire redemption of shares at net
asset value as next determined after receipt of a redemption request on each day
the NYSE is open for trading. For more information, see the "Additional
Information" section of this Prospectus/Proxy statement relating to Mazama
Growth and see "Investing with Touchstone" in Mazama Institutional's Prospectus.
DIVIDEND POLICY
The Funds intends to distribute their net investment income quarterly. The
Funds distribute their net realized gains, if any, at least annually to
shareholders of record on the dividend record date. Dividends and distributions
are reinvested in additional shares of the respective Fund, or paid in cash, as
a shareholder has elected. Additional information concerning dividends and
distributions is contained in Mazama Institutional's Prospectus and in the
"Additional Information" section of this Prospectus/Proxy statement relating to
Mazama Growth.
After the Reorganization, shareholders will receive dividends and
distributions in the form of additional Fund shares unless you elect to receive
payment in cash. To elect cash payment, you must notify Mazama Growth in writing
prior to the date of the distribution. Your election will be effective for
dividends and distributions paid after the written notice is received.
18
INFORMATION ON SHAREHOLDERS' RIGHTS
FORM OF ORGANIZATION
Both the Touchstone Institutional Funds Trust and Touchstone Funds Group
Trust are open-end management investment companies registered with the SEC under
the 1940 Act that continuously offer shares to the public. Each Trust is
organized as a Delaware statutory trust and is governed by its Declaration of
Trust, By-Laws, a Board of Trustees and by applicable Delaware and federal law.
CAPITALIZATION
The beneficial interests in the Touchstone Institutional Funds Trust and
Touchstone Funds Group Trust are represented by an unlimited number of
transferable shares of beneficial interest ($0.01 par value per share for each
Trust) of one or more series. The Declaration of Trust of each of the Trusts
permits the Trustees to allocate shares into one or more series, and classes
thereof, with rights determined by the Trustees, all without shareholder
approval. Fractional shares may be issued by each Fund.
Shares of Mazama Institutional are offered in only one class and represent
an equal proportionate interest in the Fund. Mazama Growth offers four classes
of shares: Class A, Class C, Class Y and Institutional. Shares of the classes
represent an equal proportionate interest in the Fund. Shareholders of each Fund
are entitled to receive dividends and other amounts as determined by the
Trustees.
Shareholders of each Fund vote separately, by Fund, as to matters that
affect only their particular Fund, such as changes in fundamental investment
restrictions, approval of or amendments to investment advisory agreements or
proposed mergers.
SHAREHOLDER LIABILITY
Under Delaware law, shareholders of a Delaware statutory trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. To the extent that a Trust or a shareholder is subject
to the jurisdiction of courts in other states, it is possible that a court may
not apply Delaware law and may thereby subject shareholders of the Trust to
liability. To guard against that risk, each Trust's Declaration of Trust states
that neither the Trust nor the Trustees, nor any officer, employee or agent of
the Trust has any power to bind personally any shareholder nor to call upon any
shareholder for payment of any sum of money or assessment whatsoever other than
such as the shareholder may personally agree to pay. If any shareholder (or
former shareholder) is exposed to liability by reason of a claim or demand
relating to his or her being or having been a shareholder and not because of his
or her acts or omissions, the shareholder (or former shareholder) is entitled to
be held harmless from and indemnified out of the assets of the applicable series
of the Trust against all loss and expense arising from such claim or demand.
SHAREHOLDER MEETINGS AND VOTING RIGHTS
Neither Trust is required to hold an annual meeting of shareholders.
Neither Trust currently intends to hold regular shareholder meetings.
19
For each Trust, except when a larger quorum is required by applicable law,
the By-Laws or the Trust's Declaration of Trust, 40% of the shares entitled to
vote constitute a quorum at a shareholder's meeting. When any one or more series
(or classes) is to vote as a single class separate from any other shares, 40% of
the shares of each such series (or classes) entitled to vote constitute a quorum
at a shareholder meeting of that series. Any shareholder meeting may be
adjourned by a majority of the votes cast upon the question of adjourning a
meeting to another date and time whether or not a quorum is present. When a
quorum is present, a majority of the shares voted will decide any questions and
a plurality will elect a trustee except when a larger vote is required by each
Trust's Declaration of Trust, By-Laws or applicable law. A shareholder meeting
for the purpose of electing or removing one or more Trustees may be called (i)
by the Trustees upon their own vote, or (ii) upon the demand of shareholders
owning 10% or more of the shares of each Trust in the aggregate. Cumulative
voting is not permitted in the election of Trustees of each Trust. A Trustee of
each Trust may be removed at a meeting of shareholders by a vote of two-thirds
of the outstanding shares of the Trust, or with or without cause by vote of a
majority of the then Trustees. Under the Declaration of Trust of each Trust,
each whole share of beneficial interest of a Fund is entitled to one vote, and
each fractional share is entitled to a proportionate vote. The Declaration of
Trust of Touchstone Funds Group Trust provides that the Board of Trustees may,
to the extent consistent with applicable law, cause the Trust or a Fund to be
merged or consolidated with another trust or company, provided such merger or
consolidation is authorized by vote of a majority of the outstanding shares of
the Trust or any affected series, as applicable. The Declaration of Trust of
Touchstone Institutional Funds Trust provides that the Trustees may without
shareholder approval unless such approval is required by applicable law cause
the Trust to merge or consolidate with or into one or more trusts (or series
thereof to the extent permitted by law).
LIQUIDATION
In the event of the liquidation of either Trust or Fund, the shareholders
are entitled to receive, when and as declared by the Trustees, the excess of the
assets belonging to the Trust or the Fund over the liabilities belonging to the
Trust or the Fund. In either case, the assets so distributable to shareholders
of the Fund will be distributed among the shareholders in proportion to the
number of shares of the Fund held by them on the date of distribution.
LIABILITY AND INDEMNIFICATION OF TRUSTEES
The Declaration of Trust of each Trust provides that no Trustee or officer
shall be liable in any event for any neglect or wrong-doing of any officer,
agent, employee, investment adviser or principal underwriter of each Trust nor
for the actor omission of any other Trustee except for his or her own willful
misfeasance, bad faith, gross negligence or reckless disregard of his or her
duties involved in the conduct of his or her office. Each Trust, out of its
assets, will indemnify and hold harmless each and every Trustee from and against
any and all claims and demands whatsoever arising out of or related to each
Trustee's performance of his or her duties as a Trustee unless he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
The foregoing is only a summary of the material characteristics of the
operations of the Declaration of Trust of each Trust, their By-Laws and Delaware
law and is not a complete description of those documents or law. Shareholders
should refer to the provisions of such Declaration of Trust and By-Laws directly
for more complete information.
20
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is being sent to shareholders of Mazama
Institutional in connection with a solicitation of proxies by the Trustees of
the Touchstone Institutional Funds Trust, to be used at the Meeting to be held
at 10:00 a.m. Eastern Time, September 17, 2010, at the offices of the Touchstone
Institutional Funds Trust, 303 Broadway, Suite 1100, Cincinnati, Ohio, 45202,
and at any adjournments thereof. This Prospectus/Proxy Statement, along with a
Notice of the Meeting and a proxy card, is first being mailed to shareholders of
Mazama Institutional on or about August 2, 2010.
The Board of Trustees of the Touchstone Institutional Funds Trust has
fixed the close of business on July 21, 2010 as the record date (the "Record
Date") for determining the shareholders of Mazama Institutional entitled to
receive notice of the Meeting and to vote, and for determining the number of
shares that may be voted, with respect to the Meeting or any adjournment
thereof.
In voting for the Reorganization, each shareholder of Mazama Institutional
is entitled to one vote for each full share owned and a fractional vote for each
fractional share held.
Proxies may be revoked by executing and delivering a later-dated signed
proxy to the Secretary of the Touchstone Institutional Funds Trust at the
address set forth on the cover page of this Prospectus/Proxy Statement, or by
attending the Meeting in person and voting your shares. Unless revoked, all
valid proxies will be voted in accordance with the specifications thereon or, in
the absence of such specifications, FOR approval of the Plan and the
Reorganization contemplated thereby.
If you wish to participate in the Meeting, you may submit the proxy card
included with this Prospectus/Proxy Statement, vote by telephone, vote through
the Internet, or attend in person. (Guidelines on voting by proxy card are
immediately after the Notice of Special Meeting. Instructions for telephone and
Internet voting are set forth on the proxy card.)
If the enclosed proxy is properly executed and returned in time to be
voted at the Meeting, the proxies named thereon will vote the shares of
beneficial interest represented by the proxy in accordance with the instructions
marked on the returned proxy.
PROXIES THAT ARE PROPERLY EXECUTED AND RETURNED BUT ARE NOT MARKED WITH
VOTING INSTRUCTIONS WILL BE VOTED FOR THE PROPOSED REORGANIZATION AND FOR
ANY OTHER MATTERS DEEMED APPROPRIATE.
Approval of the Reorganization requires the affirmative vote of the
holders of a "majority of the outstanding voting securities" of Mazama
Institutional. The term "majority of the outstanding voting securities," as
defined in the 1940 Act and as used in this Prospectus/Proxy Statement, means:
the affirmative vote of the lesser of (i) 67% of the voting securities of Mazama
Institutional present at a meeting if more than 50% of the outstanding voting
securities of Mazama Institutional are present in person or by proxy or (ii)
more than 50% of the outstanding voting securities of Mazama Institutional.
Forty percent of the shares entitled to vote constitutes a quorum.
Proxy solicitations will be made primarily by mail, but beginning on or
about August 2, 2010 proxy solicitations may also be made by telephone, or
personal solicitations may be conducted by officers and employees of Touchstone
Advisors, Inc., its affiliates or other representatives of Mazama Institutional
(who will not be paid for their soliciting activities). In addition, proxy
solicitations may be made by Broadridge, Mazama Institutional's proxy solicitor.
The estimated cost of the proxy solicitation is approximately $250. The costs of
solicitation and the expenses incurred in connection with preparing this
Prospectus/Proxy Statement and its enclosures (totaling approximately $1,000)
will be paid by Touchstone Advisors, Inc. and Mazama Capital Management, Inc.
whether or not the Reorganization is approved by shareholders.
21
Proxies that reflect abstentions and "broker non-votes" (i.e., shares held
by brokers or nominees as to which (i) instructions have not been received from
the beneficial owners or the persons entitled to vote and (ii) the broker or
nominee does not have discretionary voting power on a particular matter) will be
counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum, but shall not be deemed to be represented
at the meeting for the purposes of calculating the number of shares present in
person or by proxy and will have no effect on the vote regarding the Plan.
If shareholders of Mazama Institutional do not vote to approve the
Reorganization, the Trustees of the Touchstone Institutional Funds Trust will
consider other possible courses of action in the best interests of shareholders,
including liquidation of the Fund. If sufficient votes to approve the
Reorganization are not received, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any adjournment will require an affirmative vote of a majority of those shares
represented at the Meeting in person or by proxy. The persons named as proxies
will vote upon such adjournment after consideration of all circumstances that
may bear upon a decision to adjourn the Meeting.
A shareholder of Mazama Institutional who objects to the proposed
Reorganization will not be entitled under either Delaware law or the Trust's
Declaration of Trust to demand payment for, or an appraisal of, his or her
shares. However, shareholders should be aware that the Reorganization as
proposed is not expected to result in recognition of gain or loss to
shareholders for federal income tax purposes. If the Reorganization is
consummated, shareholders will be free to redeem the shares of Mazama Growth
that they receive in the transaction at their then-current net asset value.
Shares of Mazama Institutional may be redeemed at any time prior to the
consummation of the Reorganization. Shareholders of Mazama Institutional may
wish to consult their tax advisors as to any tax consequences of redeeming Fund
shares prior to the Reorganization or exchanging such shares in the
Reorganization.
The Trusts do not hold annual shareholder meetings. If the Reorganization
is not approved, shareholders wishing to submit proposals to be considered for
inclusion in a proxy statement for a subsequent shareholder meeting should send
their written proposals to the Secretary of the Trust at the address set forth
on the cover of this Prospectus/Proxy Statement so that they will be received by
the Trust in a reasonable period of time prior to that meeting.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Mazama Institutional whether other persons are beneficial owners
of shares for which proxies are being solicited and, if so, the number of copies
of this Prospectus/Proxy Statement needed to be supplied to the beneficial
owners of the respective shares.
22
SHAREHOLDER INFORMATION
The shareholders of Mazama Institutional at the close of business on the
Record Date will be entitled to be present and vote at the Meeting with respect
to shares of Mazama Institutional owned as of the Record Date. As of the Record
Date, the total number of shares of Mazama Institutional outstanding and
entitled to vote was as follows:
--------------------------------------------------------------------
NUMBER OF SHARES
--------------------------------------------------------------------
MAZAMA INSTITUTIONAL 2,153,776
--------------------------------------------------------------------
As of the Record Date, the officers and Trustees of Touchstone
Institutional Funds Trust beneficially owned as a group less than 1% of the
outstanding shares of Mazama Institutional.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On the Record Date to the knowledge of the Trustees and management of
Touchstone Institutional Funds Trust, other than as set forth below, no person
owned beneficially or of record more than 5% of Mazama Institutional's
outstanding shares.
--------------------------------------------------------------------------------
Name and Address Number of Percent of Fund
Shares
--------------------------------------------------------------------------------
Western Southern Financial Group 1,011,758 46.98%
400 Broadway
Cincinnati, OH 45202
--------------------------------------------------------------------------------
US Bank 250,198 11.62%
PO Box 1787
Milwaukee, WI 53201
--------------------------------------------------------------------------------
US Bank 564,745 26.22%
1555 N Rivercenter Drive Suite 302
Milwaukee, WI 53212
--------------------------------------------------------------------------------
CapInco C/O US Bank TTEE 134,157 6.23%
1555 N Rivercenter Drive Suite 302
Milwaukee, WI 53212
--------------------------------------------------------------------------------
As of the record date, Mazama Growth has not commenced operations and has
no outstanding shares.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report of the Touchstone Institutional Funds Trust relating to
Mazama Institutional for the year ended as of December 31, 2009, and the
financial statements and financial highlights for the periods indicated therein,
has been incorporated by reference herein in reliance upon the report of Ernst &
Young LLP, independent registered public accounting firm, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
Certain legal matters in connection with the issuance of Mazama Growth's
Shares will be passed upon by Pepper Hamilton LLP, located at 3000 Two Logan
Square, 18th and Arch Streets, Philadelphia, PA 19103.
23
ADDITIONAL INFORMATION
The Trusts are subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and in accordance therewith files reports
and other information including proxy material and charter documents with the
SEC. These items can be inspected and copied at the Public Reference Facilities
maintained by the SEC in Washington, D.C., and at the SEC's Regional Offices
located at Northeast Regional Office, 3 World Financial Center, Room 4300, New
York, New York 10281; Southeast Regional Office, 801 Brickell Avenue, Suite
1800, Miami, Florida 33131; Midwest Regional Office, 175 W. Jackson Boulevard,
Suite 900, Chicago, Illinois 60604; Central Regional Office, 1801 California
Street, Suite 1500, Denver, Colorado 80202-2656; and Pacific Regional Office,
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648. Copies
of such materials can also be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549.
The following additional information supplements information about Mazama
Growth contained elsewhere in the Prospectus/Proxy Statement.
INFORMATION ABOUT MAZAMA GROWTH
TOUCHSTONE FUNDS GROUP TRUST
Touchstone Funds Group Trust is a group of 21 mutual funds, including Mazama
Growth. The Trust is part of the Touchstone Family of Funds which also consists
of Touchstone Investment Trust, a group of taxable bond and money market mutual
funds, Touchstone Strategic Trust, a group of equity mutual funds, Touchstone
Tax-Free Trust, a group of tax-free bond and money market mutual funds,
Touchstone Variable Series Trust, a group of variable series funds and
Touchstone Institutional Funds Trust, a group of institutional equity mutual
funds. Each Fund has a different investment goal and risk level.
The Fund is managed by Touchstone Advisors, Inc. Touchstone Advisors, Inc. has
selected Mazama Capital Management, Inc. to manage the Fund's investments on a
daily basis.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase the Fund through a broker-dealer or other financial intermediary
(such as a bank), the Fund and its related companies may pay the financial
intermediary for the sale of Fund Shares and related services. These payments
may create a conflict of interest by influencing the broker-dealer or other
financial intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediary's web site
for more information.
OTHER RISKS OF INVESTING IN THE FUND
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities to
brokers, dealers and financial institutions under guidelines adopted by the
Board of Trustees, including a requirement that the Fund must receive collateral
equal to no less than 100% of the market value of the securities loaned. The
risk in lending portfolio securities, as with other extensions of credit,
consists of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities, the Fund's sub-advisor
will consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
24
MARKET DISRUPTION RISK. The United States has recently experienced significant
disruption to its financial markets impacting the liquidity and volatility of
securities generally, including securities in which the Fund may invest. During
periods of extreme market volatility, prices of securities held by the Fund may
be negatively impacted due to imbalances between market participants seeking to
sell the same or similar securities and market participants willing or able to
buy such securities. As a result, the market prices of securities held by the
Fund could go down, at times without regard to the financial condition of or
specific events impacting the issuer of the security.
The recent instability in the financial markets has led the U.S. Government to
take a number of unprecedented actions designed to support certain financial
institutions and segments of the financial markets that have experienced extreme
volatility, and in some cases a lack of liquidity. Federal, state, and other
governments, their regulatory agencies, or self regulatory organizations may
take actions that affect the regulation of the instruments in which the Fund
invests, or the issuers of such instruments, in ways that are unforeseeable.
Legislation or regulation may also change the way in which the Fund itself is
regulated. Such legislation or regulation could limit or preclude the Fund's
ability to achieve their investment goal.
Governments or their agencies may also acquire distressed assets from financial
institutions and acquire ownership interests in those institutions. The
implications of government ownership and disposition of these assets are
unclear, and such a program may have positive or negative effects on the
liquidity, valuation and performance of the Fund's portfolio holdings.
Furthermore, volatile financial markets can expose the Fund to greater market
and liquidity risk and potential difficulty in valuing portfolio instruments
held by the Fund. The Fund has established procedures to assess the liquidity of
portfolio holdings and to value instruments for which market prices may not be
readily available. The Advisor and sub-advisor will monitor developments and
seek to manage the Fund in a manner consistent with achieving the Fund's
investment goals, but there can be no assurance that it will be successful in
doing so.
NEW FUND RISK. The Fund may not grow to a size that is viable for continued
operation and may be liquidated due to certain size constraints. A liquidation
of the Fund could be done without shareholder consent and could cause a taxable
event for the shareholder.
THE FUND'S MANAGEMENT
Touchstone Advisors, Inc. has been a registered investment advisor since 1994.
As of December 31, 2009, Touchstone Advisors, Inc. had approximately $5.7
billion in assets under management. As the Fund's Advisor, Touchstone Advisors,
Inc. continuously reviews, supervises and administers the Fund's investment
programs and also ensures compliance with the Fund's investment policies and
guidelines.
Touchstone Advisors, Inc. is responsible for selecting the Fund's
sub-advisor(s), subject to approval by the Board of Trustees. Touchstone
Advisors, Inc. selects a sub-advisor that has shown good investment performance
in its areas of expertise. Touchstone Advisors, Inc. considers various factors
in evaluating a sub-advisor, including:
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over 5 years or more
o Level of compliance with investment rules and strategies
25
o Employees facilities and financial strength
o Quality of service
Touchstone Advisors, Inc. will also continually monitor each sub-advisor's
performance through various analyses and through in-person, telephone and
written consultations with a sub-advisor. Touchstone Advisors, Inc. discusses
its expectations for performance with each sub-advisor and provides evaluations
and recommendations to the Board of Trustees, including whether or not a
sub-advisor's contract should be renewed, modified or terminated.
The Securities and Exchange Commission (the "SEC") has granted an exemptive
order that permits the Trust or Touchstone Advisors, Inc., under certain
conditions, to select or change unaffiliated sub-advisors, enter into new
sub-advisory agreements or amend existing sub-advisory agreements without first
obtaining shareholder approval. The Fund must still obtain shareholder approval
of any sub-advisory agreement with a sub-advisor affiliated with the Trust or
Touchstone Advisors, Inc. other than by reason of serving as a sub-advisor to
one or more Funds. Shareholders of the Fund will be notified of any changes in
its sub-advisory arrangements.
Two or more sub-advisors may manage the Fund, with each managing a portion of
the Fund's assets. If the Fund has more than one sub-advisor, Touchstone
Advisors, Inc. allocates how much of the Fund's assets are managed by each
sub-advisor. Touchstone Advisors, Inc. may change these allocations from time to
time, often based upon the results of its evaluations of the sub-advisors.
Touchstone Advisors, Inc. is also responsible for running all of the operations
of the Fund, except those that are subcontracted to a sub-advisor, custodian,
transfer agent, sub-administrative agent or other parties. For its services,
Touchstone Advisors, Inc. is entitled to receive a base investment advisory fee
from the Fund at an annualized rate, based on the average daily net assets of
the Fund. Touchstone Advisors, Inc. pays sub-advisory fees to the sub-advisor
from its advisory fee. The fee to be paid to Touchstone Advisors, Inc. by the
Fund during its current fiscal year is set forth below.
--------------------------------------------------------------------------------
Mazama Growth Fund 0.95%
--------------------------------------------------------------------------------
ADVISORY AND SUB-ADVISORY AGREEMENT APPROVAL
A discussion of the basis for the Board of Trustees' approval of the Fund's
advisory and sub-advisory agreements can be found in the Trust's March 31, 2010
Semiannual Report and September 30, 2010 Annual Report.
FUND SUB-ADVISOR
Mazama Capital Management, Inc., located at One Southwest Columbia Street, Suite
1500, Portland, OR 97258, is registered under the Investment Advisers Act of
1940, as amended, and serves as sub-advisor to Mazama Growth. Mazama Capital
Management, Inc. is the successor firm to Mazama Capital Management, LLC, which
was organized in 1997 in connection with the acquisition by such firm of
substantially all of the assets of Black & Company Asset Management, Inc., an
investment advisory firm founded in 1993. Mazama Capital Management, Inc. serves
as investment advisor to certain pension and profit sharing plans, trusts,
charitable organizations and other institutional investors. As sub-advisor,
Mazama Capital Management, Inc. makes investment decisions for this Fund and
also ensures compliance with the Fund's investment policies and guidelines.
26
INVESTING WITH TOUCHSTONE
INSTITUTIONAL SHARES
Institutional shares of the Fund are sold at NAV without an initial sales charge
so that the full amount of your purchase payment may be immediately invested in
the Fund. Institutional shares are not subject to a 12b-1 fee or CDSC.
For Institutional shares, you may purchase shares of the Fund directly from
Touchstone Securities, Inc. or through your financial institution.
In any event, you must complete an investment application. You can obtain an
investment application from Touchstone Securities, Inc., your financial advisor,
your financial institution, or by visiting our website at
TouchstoneInvestments.com. For more information about how to purchase shares,
call Touchstone Securities, Inc. at 1.800.543.0407.
INVESTOR ALERT: Each Touchstone Fund reserves the right to restrict or reject
any purchase request, including exchanges from other Touchstone Funds, that it
regards as disruptive to efficient portfolio management. For example, a purchase
request could be rejected because of the timing of the investment or because of
a history of excessive trading by the investor.
OPENING AN ACCOUNT
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING AN ACCOUNT
Federal law requires all financial institutions to obtain, verify and record
information that identifies each person who opens an account. What this means
for you: When you open an account, we will ask for your name, residential
address, date of birth, government identification number and other information
that will allow us to identify you. We may also ask to see your driver's license
or other identifying documents. If we do not receive these required pieces of
information, there will be a delay in processing your investment request, which
could subject your investment to market risk. If we are unable to immediately
verify your identity, the Fund may restrict further investment until your
identity is verified. However, if we are unable to completely verify your
identity through our verification process, the Fund reserves the right to close
your account without notice and return your investment to you at the price
determined at the end of business (usually 4:00 p.m. eastern time ("ET")), on
the day that your account is closed. If we close your account because we are
unable to completely verify your identity, your investment will be subject to
market fluctuation, which could result in a loss of a portion of your principal
investment.
INVESTING IN THE FUND
BY MAIL OR THROUGH YOUR FINANCIAL ADVISOR
o Please make your check (drawn on a U.S. bank and payable in U.S. dollars)
payable to the Touchstone Funds. We do not accept third party checks for
initial investments.
o Send your check with the completed investment application by regular mail
to Touchstone, P.O. Box 5354, Cincinnati, Ohio 45201-5354, or by overnight
mail to Touchstone, c/o JPMorgan Chase Bank, N.A., 303 Broadway, Suite
900, Cincinnati, Ohio 45202-4203.
27
o Your application will be processed subject to your check clearing. If your
check is returned for insufficient funds or uncollected funds, you may be
charged a fee and you will be responsible for any resulting loss to the
Fund.
o You may also open an account through your financial advisor.
THROUGH YOUR FINANCIAL INSTITUTION
o You may invest in certain share classes by establishing an account through
financial institutions that have appropriate selling agreements with
Touchstone.
o Your financial institution will act as the shareholder of record of your
shares.
o Financial institutions may set different minimum initial and additional
investment requirements, may impose other restrictions or may charge you
fees for their services.
o Financial institutions may designate intermediaries to accept purchase and
sales orders on the Fund's behalf.
o Your financial institution may receive compensation from the Fund,
Touchstone Securities, Inc., Touchstone Advisors, Inc. or their
affiliates.
o Before investing in the Fund through your financial institution, you
should read any materials provided by your financial institution together
with this Prospectus.
THROUGH RETIREMENT PLANS
You may invest in the Fund through various retirement plans. These include
individual retirement plans and employer sponsored retirement plans.
INDIVIDUAL RETIREMENT PLANS
o Traditional Individual Retirement Accounts ("IRAs")
o Savings Incentive Match Plan for Employees ("SIMPLE IRAs")
o Spousal IRAs
o Roth Individual Retirement Accounts ("Roth IRAs")
o Coverdell Education Savings Accounts ("Education IRAs")
o Simplified Employee Pension Plans ("SEP IRAs")
EMPLOYER SPONSORED RETIREMENT PLANS
o Defined benefit plans
o Defined contribution plans (including 401(k) plans, profit sharing plans
and money purchase plans)
o 457 plans
SPECIAL TAX CONSIDERATION
To determine which type of retirement plan is appropriate for you, you are urged
and advised to consult your own tax advisor.
For further information about any of the plans, agreements, applications and
annual fees, contact Touchstone Securities, Inc. at 1.800.543.0407 or contact
your financial advisor.
THROUGH A PROCESSING ORGANIZATION
You may also purchase shares of the Fund through a "processing organization,"
(e.g., a mutual fund supermarket) which is a broker-dealer, bank or other
financial institution that purchases shares for its customers. Some of the
Touchstone Funds have authorized certain processing organizations ("Authorized
Processing Organizations") to receive purchase and sales orders on their behalf.
Before investing in the Fund through a processing organization, you should read
any materials provided by the processing organization together with this
Prospectus. You should also ask the processing organization if they are
authorized by the Touchstone Funds to receive purchase and sales orders on their
behalf. If the processing organization is not authorized, then your purchase
order could be rejected which could subject your investment to market risk. When
shares are purchased with an Authorized Processing Organization, there may be
various differences compared to investing directly with Touchstone Securities,
Inc. The Authorized Processing Organization may:
28
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on the
Fund's behalf
Touchstone Securities, Inc. considers a purchase or sales order as received when
an Authorized Processing Organization, or its authorized designee, receives the
order in proper form. These orders will be priced based on the Fund's NAV or
offering price (which is NAV plus any applicable sales charge), if applicable,
next computed after such order is received in proper form by an Authorized
Processing Organization, or its authorized designee.
Shares held through an Authorized Processing Organization may be transferred
into your name following procedures established by your Authorized Processing
Organization and Touchstone. Certain Authorized Processing Organizations may
receive compensation from the Fund, Touchstone Securities, Inc., Touchstone
Advisors or their affiliates.
It is the responsibility of an Authorized Processing Organization to transmit
properly completed orders so that they will be received by Touchstone in a
timely manner.
PRICING OF PURCHASES
We price direct purchases in the Fund based upon the next determined public
offering price (NAV plus any applicable sales charge) after your order is
received. Direct purchase orders received by Touchstone Securities, Inc., an
Authorized Processing Organization, financial advisor or financial institution,
by the close of the regular session of trading on the New York Stock Exchange
("NYSE"), generally 4:00 p.m. ET, are processed at that day's public offering
price. Direct purchase orders received by Touchstone Securities, Inc., an
Authorized Processing Organization, financial advisor or financial institution,
after the close of the regular session of trading on the NYSE, generally 4:00
p.m. ET, are processed at the public offering price next determined on the
following business day. It is the responsibility of the financial institution,
financial advisor or Authorized Processing Organization to transmit orders that
will be received by Touchstone Securities, Inc. in proper form and in a timely
manner.
ADDING TO YOUR ACCOUNT
BY CHECK
o Complete the investment form provided at the bottom of a recent account
statement.
o Make your check (drawn on a U.S. bank and payable in U.S. dollars) payable
to the Touchstone Funds.
29
o Write your account number on the check.
o Either: (1) Mail the check with the investment form to Touchstone
Securities, Inc.; or (2) Mail the check directly to your financial advisor
or financial institution at the address printed on your account statement.
Your financial advisor or financial institution is responsible for
forwarding payment promptly to Touchstone Securities, Inc.
o If your check is returned for insufficient funds or uncollected funds, you
may be charged a fee and you will be responsible for any resulting loss to
the Fund.
BY WIRE
o Contact Touchstone Securities, Inc., your financial advisor or your
financial institution for further instructions.
o Contact your bank and ask it to wire federal funds to Touchstone
Securities, Inc. Specify your name and account number when remitting the
funds.
o Your bank may charge a fee for handling wire transfers.
o Purchases in the Fund will be processed at that day's NAV (or public
offering price, if applicable) if Touchstone receives a properly executed
wire by the close of the regular session of trading on the NYSE, generally
4:00 p.m. ET, on a day when the NYSE is open for regular trading.
PURCHASES WITH SECURITIES
Shares may be purchased by tendering payment in-kind in the form of marketable
securities, including but not limited to, shares of common stock, provided the
acquisition of such securities is consistent with the applicable Fund's
investment goal and is otherwise acceptable to Touchstone Advisors, Inc.
SPECIAL TAX CONSIDERATION You are urged and advised to consult with your own tax
advisor as to the federal income tax consequences to you upon your transfer of
securities to the Fund in exchange for Fund shares.
AUTOMATIC INVESTMENT OPTIONS
The various ways that you can automatically invest in the Fund are outlined
below. Touchstone Securities, Inc. does not charge any fees for these services.
For further details about these services, call Touchstone Securities, Inc. at
1.800.543.0407. If you hold your shares through a financial institution or
Authorized Processing Organization, please contact them for further details on
automatic investment options.
AUTOMATIC INVESTMENT PLAN. You can pre-authorize monthly investments in the Fund
of $50 or more to be processed electronically from a checking or savings
account. You will need to complete the appropriate section in the investment
application to do this. Amounts that are automatically invested in the Fund will
not be available for redemption until three business days after the automatic
reinvestment.
REINVESTMENT/CROSS REINVESTMENT. Dividends and capital gains can be
automatically reinvested in the Fund that pays them or in another Touchstone
Fund within the same class of shares without a fee or sales charge. Dividends
and capital gains will be reinvested in the Fund that pays them, unless you
indicate otherwise on your investment application. You may also choose to have
your dividends or capital gains paid to you in cash. If you elect to receive
dividends and distributions in cash and the payment (1) is returned and marked
as "undeliverable" or (2) is not cashed for six months, your cash election will
be changed automatically and future dividends will be reinvested in the Fund at
the per share net asset value determined as of the date of payment. In addition,
any undeliverable checks or checks that are not cashed for six months will be
cancelled and then reinvested in the Fund at the per share net asset value
determined as of the date of cancellation.
30
DIRECT DEPOSIT PURCHASE PLAN. You may automatically invest Social Security
checks, private payroll checks, pension pay outs or any other pre-authorized
government or private recurring payments in the Fund.
DOLLAR COST AVERAGING. Our dollar cost averaging program allows you to diversify
your investments by investing the same amount on a regular basis. You can set up
periodic automatic exchanges of at least $50 from one Touchstone Fund to any
other. The applicable sales charge, if any, will be assessed.
SELLING YOUR SHARES
You may sell some or all of your shares on any day that the Fund calculates its
NAV. If your request is received by Touchstone Securities, Inc., an Authorized
Processing Organization, financial advisor or financial institution, in proper
form by the close of regular trading on the NYSE (usually 4:00 p.m. ET), you
will receive a price based on that day's NAV for the shares you sell. Otherwise,
the price you receive will be based on the NAV that is next calculated.
THROUGH TOUCHSTONE SECURITIES, INC. - BY TELEPHONE
o You can sell or exchange your shares over the telephone, unless you have
specifically declined this option. If you do not wish to have this
ability, you must mark the appropriate section of the investment
application. You may only sell shares over the telephone if the amount is
less than $100,000.
o To sell your Fund shares by telephone, call Touchstone Securities, Inc. at
1.800.543.0407.
o Shares held in IRA accounts and qualified retirement plans cannot be sold
by telephone.
o If we receive your sale request by the close of the regular session of
trading on the NYSE, generally 4:00 p.m. ET, on a day when the NYSE is
open for regular trading, the sale of your shares will be processed at the
next determined NAV on that day. Otherwise it will occur on the next
business day.
o Interruptions in telephone service could prevent you from selling your
shares by telephone when you want to. When you have difficulty making
telephone sales, you should mail to Touchstone (or send by overnight
delivery), a written request for the sale of your shares.
o In order to protect your investment assets, Touchstone Securities, Inc.
will only follow instructions received by telephone that it reasonably
believes to be genuine. However, there is no guarantee that the
instructions relied upon will always be genuine and Touchstone Securities,
Inc. will not be liable, in those cases. Touchstone Securities, Inc. has
certain procedures to confirm that telephone instructions are genuine. If
it does not follow such procedures in a particular case, it may be liable
for any losses due to unauthorized or fraudulent instructions. Some of
these procedures may include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account shown on
Touchstone Securities, Inc.'s records
o Mailing checks only to the account address shown on Touchstone
Securities, Inc.'s records
31
o Directing wires only to the bank account shown on Touchstone
Securities, Inc.'s records
o Providing written confirmation for transactions requested by
telephone
o Digitally recording instructions received by telephone
THROUGH TOUCHSTONE SECURITIES, INC. - BY MAIL
o Write to Touchstone Securities, Inc.
o Indicate the number of shares or dollar amount to be sold.
o Include your name and account number.
o Sign your request exactly as your name appears on your investment
application.
o You may be required to have your signature guaranteed.
THROUGH TOUCHSTONE SECURITIES, INC. - BY WIRE
o Complete the appropriate information on the investment application.
o You may be charged a fee by the Fund or Fund's Authorized Processing
Organization for wiring redemption proceeds. You may also be charged a fee
by your bank.
o Redemption proceeds will only be wired to a commercial bank or brokerage
firm in the United States.
o Your redemption proceeds may be deposited without a charge directly into
your bank account through an ACH transaction. Contact Touchstone for more
information.
THROUGH TOUCHSTONE SECURITIES, INC. - THROUGH A SYSTEMATIC WITHDRAWAL PLAN
o You may elect to receive, or send to a third party, withdrawals of $50 or
more if your account value is at least $5,000.
o Withdrawals can be made monthly, quarterly, semiannually or annually.
o There is no fee for this service.
o There is no minimum account balance required for retirement plans.
SPECIAL TAX CONSIDERATION
Systematic withdrawals may result in the sale of your shares at a loss or may
result in taxable gains.
THROUGH YOUR FINANCIAL ADVISOR, FINANCIAL INSTITUTION OR AUTHORIZED PROCESSING
ORGANIZATION
o You may also sell shares by contacting your financial advisor, financial
institution or Authorized Processing Organization, which may charge you a
fee for this service. Shares held in street name must be sold through your
financial advisor, financial institution or, if applicable, the Authorized
Processing Organization.
o Your financial advisor, financial institution or Authorized Processing
Organization is responsible for making sure that sale requests are
transmitted to Touchstone Securities, Inc. in proper form and in a timely
manner.
o Your financial institution may charge you a fee for selling your shares.
o Redemption proceeds will only be wired to a commercial bank or brokerage
firm in the United States.
SPECIAL TAX CONSIDERATION
Selling your shares may cause you to incur a taxable gain or loss.
32
INVESTOR ALERT: Unless otherwise specified, proceeds will be sent to the record
owner at the address shown on Touchstone Securities, Inc.'s records.
SIGNATURE GUARANTEES
Some circumstances require that your request to sell shares be made in writing
accompanied by an original Medallion Signature Guarantee. A Medallion Signature
Guarantee helps protect you against fraud. You can obtain one from most banks or
securities dealers, but not from a notary public. The Fund reserves the right to
require a signature guarantee for any request related to your account including,
but not limited to:
o Proceeds to be paid when information on your account has been changed
within the last 30 days (including a change in your name or your address,
or the name or address of a payee)
o Proceeds are being sent to an address other than the address of record
o Proceeds or shares are being sent/transferred from unlike registrations
such as a joint account to an individual's account
o Sending proceeds via wire or ACH when bank instructions have been added or
changed within 30 days of your redemption request
o Proceeds or shares are being sent/transferred between accounts with
different account registrations
MARKET TIMING POLICY
Market timing or excessive trading in accounts that you own or control may
disrupt portfolio investment strategies, may increase brokerage and
administrative costs, and may negatively impact investment returns for all
shareholders, including long-term shareholders who do not generate these costs.
The Fund will take reasonable steps to discourage excessive short-term trading
and will not knowingly accommodate frequent purchases and redemptions of Fund
shares by shareholders. The Board of Trustees has adopted the following policies
and procedures with respect to market timing of the Fund by shareholders. The
Fund will monitor selected trades on a daily basis in an effort to deter
excessive short-term trading. If the Fund has reason to believe that a
shareholder has engaged in excessive short-term trading, the Fund may ask the
shareholder to stop such activities or restrict or refuse to process purchases
or exchanges in the shareholder's accounts. While the Fund cannot assure the
prevention of all excessive trading and market timing, by making these judgments
the Fund believes it is acting in a manner that is in the best interests of its
shareholders. However, because the Fund cannot prevent all market timing,
shareholders may be subject to the risks described above.
Generally, a shareholder may be considered a market timer if he or she has (i)
requested an exchange or redemption out of any of the Touchstone Funds within 2
weeks of an earlier purchase or exchange request out of any Touchstone Fund, or
(ii) made more than 2 "round-trip" exchanges within a rolling 90 day period. A
"round-trip" exchange occurs when a shareholder exchanges from one Touchstone
Fund to another Touchstone Fund and back to the original Touchstone Fund. If a
shareholder exceeds these limits, the Fund may restrict or suspend that
shareholder's exchange privileges and subsequent exchange requests during the
suspension will not be processed. The Fund may also restrict or refuse to
process purchases by the shareholder. These exchange limits and excessive
trading policies generally do not apply to purchases and redemptions of money
market funds (except in situations where excessive trading may have a
detrimental or disruptive effect on share prices or portfolio management of
these funds), systematic purchases and redemptions.
33
Financial intermediaries (such as investment advisors and broker-dealers) often
establish omnibus accounts in the Fund for their customers through which
transactions are placed. If the Fund identifies excessive trading in such an
account, the Fund may instruct the intermediary to restrict the investor
responsible for the excessive trading from further trading in the Fund. In
accordance with Rule 22c-2 under the 1940 Act, the Fund has entered into
information sharing agreements with certain financial intermediaries. Under
these agreements, a financial intermediary is obligated to: (1) enforce during
the term of the agreement, the Fund's market-timing policy; (2) furnish the
Fund, upon its request, with information regarding customer trading activities
in shares of the Fund; and (3) enforce the Fund's market-timing policy with
respect to customers identified by the Fund as having engaged in market timing.
When information regarding transactions in the Fund's shares is requested by the
Fund and such information is in the possession of a person that is itself a
financial intermediary to a financial intermediary (an "indirect intermediary"),
any financial intermediary with whom the Fund has an information sharing
agreement is obligated to obtain transaction information from the indirect
intermediary or, if directed by the Fund, to restrict or prohibit the indirect
intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund applies these policies and procedures uniformly to all shareholders
believed to be engaged in market timing or excessive trading. The Fund has no
arrangements to permit any investor to trade frequently in shares of the Fund,
nor will they enter into any such arrangements in the future.
HOUSEHOLDING POLICY (ONLY APPLICABLE FOR SHARES HELD THROUGH TOUCHSTONE
SECURITIES, INC. DIRECTLY)
The Fund will send one copy of prospectuses and shareholder reports to
households containing multiple shareholders with the same last name. This
process, known as "householding," reduces costs and provides a convenience to
shareholders. If you share the same last name and address with another
shareholder and you prefer to receive separate prospectuses and shareholder
reports, call Touchstone Securities, Inc. at 1.800.543.0407 and we will begin
separate mailings to you within 30 days of your request. If you or others in
your household invest in the Fund through a broker or other financial
institution, you may receive separate prospectuses and shareholder reports,
regardless of whether or not you have consented to householding on your
investment application.
RECEIVING SALE PROCEEDS
Touchstone Securities, Inc. will forward the proceeds of your sale to you (or to
your financial advisor, Authorized Processing Organization or financial
institution) within 7 days (normally within 3 business days) after receipt of a
proper request.
PROCEEDS SENT TO FINANCIAL ADVISORS, AUTHORIZED PROCESSING ORGANIZATIONS OR
FINANCIAL INSTITUTIONS. Proceeds that are sent to your financial advisor,
Authorized Processing Organization or financial institution will not usually be
reinvested for you unless you provide specific instructions to do so. Therefore,
the financial advisor, Authorized Processing Organization or financial
institution may benefit from the use of your money.
FUND SHARES PURCHASED BY CHECK (ONLY APPLICABLE FOR SHARES HELD THROUGH
TOUCHSTONE SECURITIES, INC. DIRECTLY). We may delay mailing your redemption
proceeds for shares you recently purchased by check until your check clears,
which may take up to 15 days. If you need your money sooner, you should purchase
shares by bank wire.
34
LOW ACCOUNT BALANCES (ONLY APPLICABLE FOR SHARES HELD THROUGH TOUCHSTONE
SECURITIES, INC. DIRECTLY). If your balance falls below the minimum amount
required for your account, based on actual amounts you have invested (as opposed
to a reduction from market changes), your account may be subject to an annual
account maintenance fee or Touchstone Securities, Inc. may sell your shares and
send the proceeds to you. This involuntary sale does not apply to retirement
accounts or custodian accounts under the Uniform Gifts/Transfers to Minors Act
("UGTMA"). Touchstone Securities, Inc. will notify you if your shares are about
to be sold and you will have 30 days to increase your account balance to the
minimum amount.
DELAY OF PAYMENT. It is possible that the payment of your sale proceeds could be
postponed or your right to sell your shares could be suspended during certain
circumstances. These circumstances can occur:
o When the NYSE is closed on days other than customary weekends and holidays
o When trading on the NYSE is restricted
o During any other time when the SEC, by order, permits.
REDEMPTION IN KIND. Under unusual circumstances, when the Board of Trustees
deems it appropriate, the Fund may make payment for shares redeemed in portfolio
securities of the Fund taken at current value. Shareholders may incur
transaction and brokerage costs when they sell these portfolio securities
including federal income tax on the amount by which the fair market value of the
securities sold exceeds the basis of the Fund shares redeemed. Until such time
as the shareholder sells the securities they receive in kind, the securities are
subject to market risk.
PRICING OF FUND SHARES
The Fund's share price (also called "NAV") and offering price (NAV plus a sales
charge, if applicable) are determined as of the close of trading (normally 4:00
p.m. ET) every day the NYSE is open. The Fund calculates its NAV per share,
generally using market prices, by dividing the total value of its net assets by
the number of shares outstanding. Shares are purchased or sold at the next
offering price determined after your purchase or sale order is received in
proper form by Touchstone Securities, Inc., an Authorized Processing
Organization or financial institution.
The Fund's equity investments are valued based on market value or, if no market
value is available, based on fair value as determined by the Board of Trustees
(or under their direction). The Fund may use pricing services to determine
market value for investments. Some specific pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days or
less are valued on the basis of amortized cost which the Board of Trustees
has determined as fair value.
o Securities mainly traded on a U.S. exchange are valued at the last sale
price on that exchange or, if no sales occurred during the day, at the
current quoted bid price.
Although investing in foreign securities is not a principal investment strategy
of the Fund, any foreign securities held by the Fund will be priced as follows:
o All assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values.
35
o Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However, if an
event that may change the value of a security occurs after the time that
the closing value on the non-U.S. exchange was determined, but before the
close of regular trading on the NYSE, the security may be priced based on
fair value. This may cause the value of the security on the books of the
Fund to be significantly different from the closing value on the non-U.S.
exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S.
exchange may trade on weekends or other days when the Fund does not price
its shares, the Fund's NAV may change on days when shareholders will not
be able to buy or sell shares.
Securities held by the Fund that do not have readily available market
quotations, or securities for which the available market quotation is not
reliable, are priced at their fair value using procedures approved by the Board
of Trustees. Any debt securities held by the Fund for which market quotations
are not readily available are generally priced at their most recent bid prices
as obtained from one or more of the major market makers for such securities. The
Fund may use fair value pricing under the following circumstances, among others:
o If the value of a security has been materially affected by events
occurring before the Fund's pricing time but after the close of the
primary markets on which the security is traded.
o If a security, such as a small cap or micro cap security, is so thinly
traded that reliable market quotations are unavailable due to infrequent
trading.
o If the exchange on which a portfolio security is principally traded closes
early or if trading in a particular portfolio security was halted during
the day and did not resume prior to the Fund's NAV calculation.
The use of fair value pricing has the effect of valuing a security based upon
the price the Fund might reasonably expect to receive if it sold that security
but does not guarantee that the security can be sold at the fair value price.
The Fund's determination of a security's fair value price often involves the
consideration of a number of subjective factors, and is therefore subject to the
unavoidable risk that the value that the Fund assigns to a security may be
higher or lower than the security's value would be if a reliable market
quotation for the security was readily available. With respect to any portion of
the Fund's assets that is invested in other mutual funds, that portion of the
Fund's NAV is calculated based on the NAV of that mutual fund. The prospectus
for the other mutual fund explains the circumstances and effects of fair value
pricing for that fund.
DISTRIBUTION AND TAXES
SPECIAL TAX CONSIDERATION
You are urged and advised to consult your own tax advisor to address your own
tax situation and the impact an investment in the Fund will have on your own tax
situation.
The Fund intends to distribute to its shareholders substantially all of its
income and capital gains. The Fund distributes its income, if any, quarterly as
a dividend to shareholders.
The Fund makes distributions of capital gains, if any, at least annually. If you
own shares on the Fund's distribution record date, you will be entitled to
receive the distribution.
You will receive income dividends and distributions of capital gains in the form
of additional Fund shares unless you elect to receive payment in cash. To elect
cash payment, you must notify the Fund in writing or by phone prior to the date
of distribution. Your election will be effective for dividends and distributions
paid after we receive your notice. To cancel your election, simply send written
notice to Touchstone Securities, Inc., P.O. Box 5354, Cincinnati, Ohio
45201-5354, or by overnight mail to Touchstone Securities, Inc., c/o JPMorgan
Chase Bank, N.A., 303 Broadway, Suite 900, Cincinnati, Ohio 45202-4203, or call
Touchstone Securities, Inc. at 1.800.543.0407. If you hold your shares through a
financial institution, you must contact it to elect cash payment.
36
TAX INFORMATION
GENERAL. The Fund intends to qualify annually to be treated as a regulated
investment company under the Code. As such, the Fund will not be subject to
federal income taxes on the earnings it distributes to shareholders provided it
satisfies certain requirements and restrictions of the Code. If for any taxable
year the Fund fails to qualify as a regulated investment company: (1) it will be
subject to tax in the same manner as an ordinary corporation and thus will be
subject to tax on a graduated basis with a maximum tax rate of 35%; and (2)
distributions from its earnings and profits (as determined under federal income
tax principles) will be taxable as ordinary dividend income eligible for the 15%
non-corporate shareholder rate (for taxable years beginning prior to January 1,
2011) and the dividends-received deduction for corporate shareholders.
DISTRIBUTIONS. The Fund will make distributions to you that may be taxed as
ordinary income or capital gains. The dividends and distributions you receive
may be subject to federal, state and local taxation, depending upon your tax
situation. Dividends are taxable whether you reinvest such dividends in
additional shares of the Fund or choose to receive cash.
ORDINARY INCOME. Net investment income, except for qualified dividends, and
short-term capital gains that are distributed to you are taxable as ordinary
income for federal income tax purposes regardless of how long you have held your
Fund shares. Certain dividends distributed to non-corporate shareholders in
taxable years beginning before January 1, 2011 and designated by the Fund as
"qualified dividend income" are eligible for the long-term capital gain rate 15%
(0% for individuals in lower tax brackets).
NET CAPITAL GAINS. Net capital gains (i.e., the excess of net long-term capital
gains over net short-term capital losses) distributed to you, if any, are
taxable as long-term capital gains for federal income tax purposes regardless of
how long you have held your Fund shares. For tax years beginning before January
1, 2011, the maximum individual tax rate on net long-term capital gains is 15%.
SALE OR EXCHANGE OF SHARES. It is a taxable event for you if you sell shares of
the Fund or exchange shares of the Fund for shares of another Fund. Depending on
the purchase price and the sale price of the shares you sell or exchange, you
may have a taxable gain or loss on the transaction. Any realized gain will be
taxable to you, and, generally, will be capital gain, assuming you hold the
shares of the Fund as a capital asset, which capital gain will be long-term or
short-term depending on how long you have held the shares of such Fund.
SPECIAL TAX CONSIDERATION
For federal income tax purposes, an exchange of shares in one Fund for shares of
another Fund is treated as a sale of the shares and a purchase of the shares you
receive in exchange. Therefore, you may incur a taxable gain or loss in
connection with the exchange.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. federal income tax
on all taxable distributions and sales payable to shareholders who fail to
provide their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. The current backup withholding rate is
28%.
37
STATE AND LOCAL INCOME TAXES. You are urged and advised to consult your tax
adviser concerning state and local taxes, which may have different consequences
from those of the federal income tax law.
NON-U.S. SHAREHOLDERS. Non-U.S. shareholders may be subject to U.S. tax as a
result of an investment in the Fund. This Prospectus does not discuss the U.S.
or foreign country tax consequences of an investment by a non-U.S. shareholder
in the Fund. Accordingly, non-U.S. shareholders are urged and advised to consult
their own tax advisors as to the U.S. and foreign country tax consequences of an
investment in the Fund.
STATEMENTS AND NOTICES. You will receive an annual statement outlining the tax
status of your distributions. You will also receive written notices of certain
foreign taxes and distributions paid by the Fund during the prior taxable year.
FINANCIAL HIGHLIGHTS
Mazama Growth will adopt the financial statements of Mazama Institutional. The
Mazama Institutional Annual Report is incorporated herein by reference.
OTHER BUSINESS
The Trustees of the Touchstone Institutional Funds Trust do not intend to
present any other business at the Meeting. If, however, any other matters are
properly brought before the Meeting, the persons named in the accompanying form
of proxy will vote thereon in accordance with their judgment.
THE TRUSTEES OF THE TRUST RECOMMEND APPROVAL OF THE PLAN.
ANY SIGNED BUT UNMARKED PROXIES WITHOUT INSTRUCTIONS
WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
38
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 29th day of April, 2010, by and between the Touchstone Funds Group Trust
("TFGT"), on behalf of the Touchstone Mazama Growth Fund (the "Acquiring Fund"),
and Touchstone Institutional Funds Trust ("TIFT"), on behalf of Touchstone
Mazama Growth Fund (the "Selling Fund") and, for purposes of Section 9.1 and
11.2 only, Mazama Capital Management, Inc. TFGT and TIFT (each a "Trust" and
collectively the "Trusts") are Delaware statutory trusts, with their principal
place of business at 303 Broadway, Suite 1100, Cincinnati, Ohio 45202.
The reorganization (the "Reorganization") will consist of (i) the transfer
of all of the assets of the Selling Fund in exchange solely for shares of
beneficial interest, with a par value of $.01 per share, of the Acquiring Fund
(the "Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of all
of the liabilities of the Selling Fund; and (iii) the distribution, after the
Closing Date hereinafter defined, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, the Selling Fund and the Acquiring Fund are authorized to issue
their shares of beneficial interest;
WHEREAS, the Board of Trustees of TFGT, including a majority of the
Trustees who are not "interested persons" of the Trust, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act") ("Independent
Trustees"), have determined that the transactions contemplated herein will be in
the best interests of the Acquiring Fund and its shareholders and that the
interests of the existing shareholders of the Acquiring Fund's will not be
diluted as a result of the transactions contemplated herein;
WHEREAS, the Board of Trustees of TIFT, including a majority of the
Independent Trustees, have determined that it is in the best interests of the
Selling Fund to exchange all of its assets and liabilities for Acquiring Fund
Shares and that the interests of the existing shareholders of the Selling Fund
will not be diluted as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth and
on the basis of the representations and warranties contained herein, the Selling
Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange for
the Selling Fund's assets (i) to deliver to the Selling Fund the number of
Acquiring Fund Shares, including fractional Acquiring Fund Shares, computed in
the manner and as of the time and date set forth in paragraphs 2.2 and 2.3; and
(ii) to assume all of the liabilities of the Selling Fund, as set forth in
paragraph 1.3. Such transactions shall take place on the Closing Date provided
for in paragraph 3.1.
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1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be acquired
by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
unaudited financial statements, which contain a list of all of the Selling
Fund's assets as of the date thereof. The Selling Fund hereby represents that as
of the date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses. The
Selling Fund reserves the right to sell any of such securities, but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to discharge
all of its known liabilities and obligations prior to the Closing Date. The
Acquiring Fund shall assume all of the Selling Fund's liabilities and
obligations of any kind whatsoever, whether absolute, accrued, contingent or
otherwise in existence on the Closing Date.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date as
is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to terminate
as set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be canceled on the books of the Selling Fund.
The Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be shown
on the books of the Acquiring Fund's transfer agent. Shares of the Acquiring
Fund will be issued in the manner described in the Prospectus/Proxy Statement on
Form N-14 which has been distributed to shareholders of the Selling Fund as
described in paragraph 4.1(o).
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
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1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the Selling
Fund is and shall remain the responsibility of the Selling Fund up to and
including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Trust shall take all necessary and appropriate steps
under applicable law to terminate the Selling Fund promptly following the
Closing Date and the making of all distributions pursuant to paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in TFGT's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share of the Selling Fund computed
as of the close of business on the New York Stock Exchange on the Valuation
Date, using the valuation procedures set forth in TFGT's Declaration of Trust
and the Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of full and fractional Acquiring Fund
Shares to be issued in exchange for the Selling Fund's assets shall be
determined by multiplying the outstanding shares of the Selling Fund by the
ratio computed by dividing the net asset value per share of the Selling Fund by
the net asset value per share of the Acquiring Fund on the Valuation Date,
determined in accordance with paragraph 2.2. Institutional shares of the
Acquiring Fund will be issued for shares of the Selling Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
JPMorgan Chase Bank, N.A., the Acquiring Fund's and the Selling Fund's
accounting agent, in accordance with its regular practice in pricing the shares
and assets of the Acquiring Fund and the Selling Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The closing of the Reorganization (the "Closing") shall
take place on or about July 19, 2010 or such other date as the parties may agree
to in writing (the "Closing Date"). All acts taking place at the Closing shall
be deemed to take place simultaneously immediately prior to the opening of
business on the Closing Date unless otherwise provided. The Closing shall be
held as of 8:00 a.m. EST at the offices of the Trusts, or at such other time
and/or place as the parties may agree.
3.2 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date (and the Closing Date) shall
be postponed until the first business day after the day when trading shall have
been fully resumed and reporting shall have been restored.
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3.3 TRANSFER AGENT'S CERTIFICATE. The Selling Fund shall cause its
transfer agent to deliver at the Closing a certificate of an authorized officer
stating that its records contain the names and addresses of the Selling Fund
Shareholders and the number and percentage ownership of outstanding shares owned
by each such shareholder immediately prior to the Closing. The Acquiring Fund
shall issue and deliver, or cause its transfer agent, to issue and deliver, to
the Secretary of TFGT a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date or provide evidence satisfactory to the Selling
Fund that such Acquiring Fund Shares have been credited to the Selling Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts and other documents as such other party or its
counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund represents and
warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of TIFT, a
statutory trust duly organized, validly existing, and in good standing under the
laws of the State of Delaware.
(b) The Selling Fund is a separate investment series of TIFT, which
is registered as an investment company classified as a management company of the
open-end type, and its registration with the Securities and Exchange Commission
(the "Commission") as an investment company under the 1940 Act, is in full force
and effect.
(c) The current prospectus and statement of additional information
of the Selling Fund conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
1940 Act and the rules and regulations of the Commission thereunder and do not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of TIFT's Declaration of Trust or By-Laws or of
any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other commitments
(other than this Agreement) that will be terminated with liability to it prior
to the Closing Date, except for liabilities, if any, to be discharged as
provided in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or to its knowledge
threatened against the Selling Fund or any of its properties or assets, which,
if adversely determined, would materially and adversely affect its financial
condition, the conduct of its business, or the ability of the Selling Fund to
carry out the transactions contemplated by this Agreement. The Selling Fund
knows of no facts that might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
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(g) The audited financial statements of the Selling Fund at December
31, 2009 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since December 31, 2009, there has not been any material adverse
change in the Selling Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Selling Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred, except as otherwise disclosed to and
accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such date
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund has met
the requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company and has distributed in each such year all net
investment income and realized capital gains.
(k) The Acquired Fund is not under the jurisdiction of a court in a
"Title 11 or similar case" (within the meaning of Section 368(a)(3)(A) of the
Code);
(l) All issued and outstanding shares of the Selling Fund are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable by the Selling Fund. All of the issued and outstanding shares
of the Selling Fund will, at the time of the Closing Date, be held by the
persons and in the amounts set forth in the records of the transfer agent as
provided in paragraph 3.3. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(m) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
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(n) The execution, delivery, and performance of this Agreement have
been duly authorized by all necessary action on the part of the Selling Fund
and, subject to approval by the Selling Fund's shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(o) The information furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations thereunder applicable thereto.
(p) The Selling Fund has provided the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus, which
included the proxy statement of the Selling Fund (the "Prospectus/Proxy
Statement"), all of which was included in a Registration Statement on Form N-14
of the Acquiring Fund (the "Registration Statement"), in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the 1940 Act in connection with the meeting of the shareholders of the Selling
Fund to approve this Agreement and the transactions contemplated hereby. The
Prospectus/Proxy Statement included in the Registration Statement (other than
information therein that relates to the Acquiring Fund and any other fund
described therein other than the Selling Fund) does not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund represents
and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of TFGT, a
statutory trust, duly organized, validly existing, and in good standing under
the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of TFGT,
which is registered as an investment company classified as a management company
of the open-end type, and its registration with the Commission as an investment
company under the 1940 Act is in full force and effect.
(c) The prospectus and statement of additional information, as of
the date of the Prospectus/Proxy Statement, of the Acquiring Fund will conform
in all material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations of the Commission thereunder and will not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of TFGT's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling Fund and
accepted by the Selling Fund, no litigation, administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
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(f) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law to be filed by such date shall
have been filed, and all federal and other taxes shown due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof. To the best of the Acquiring Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(g) The Acquiring Fund was established in order to effect the
transactions described in this Agreement, and, prior to the Closing Date, shall
not have carried on any business activity (other than such activities as are
customary to the organization of a new series prior to its commencement of
investment operations). The Acquiring Fund has not yet filed its first federal
income tax return and, thus, has not yet elected to be treated as a "regulated
investment company" for federal income tax purposes. However, upon filing its
first federal income tax return at the completion of its first taxable year, the
Acquiring Fund shall elect to be a "regulated investment company" and until such
time shall take all steps reasonably necessary to ensure that it qualifies for
taxation as a "regulated investment company" under Sections 851 and 852 of the
Code.
(h) All issued and outstanding Acquiring Fund Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(i) The execution, delivery, and performance of this Agreement have
been duly authorized by all necessary action on the part of the Acquiring Fund,
and this Agreement constitutes a valid and binding obligation of the Acquiring
Fund enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other laws relating to
or affecting creditors' rights and to general equity principles.
(j) The Acquiring Fund Shares to be issued and delivered to the
Selling Fund, for the account of the Selling Fund Shareholders, pursuant to the
terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(k) The information furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
(l) The Prospectus/Proxy Statement included in the Registration
Statement (only insofar as it relates to the Acquiring Fund) does not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading.
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(m) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling Fund
each will operate its business in the ordinary course between the date hereof
and the Closing Date, it being understood that such ordinary course of business
will include customary dividends and distributions.
5.2 APPROVAL BY SHAREHOLDERS. The Trust will call a meeting of the
shareholders of the Selling Fund to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 TAX-FREE REORGANIZATION. It is the intention of the parties that the
transaction will qualify as a reorganization within the meaning of Section
368(a)(1)(F) of the Code. Except as otherwise expressly provided in this
Agreement, neither the TFGT, TIFT, the Selling Fund nor the Acquiring Fund shall
take any action or cause any action to be taken (including without limitation
the filing of any tax return) that is inconsistent with such treatment or
results in the failure of the transaction to qualify as a reorganization within
the meaning of Section 368(a) of the Code. At or prior to the Closing Date, the
parties to this Agreement will take such reasonable action, or cause such action
to be taken, as is reasonably necessary to enable Pepper Hamilton LLP to render
the tax opinion contemplated in this Agreement.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
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6.1 All representations and warranties of the Acquiring Fund contained in
this Agreement shall be true and correct as of the date hereof and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date, and the Acquiring Fund shall have delivered to the Selling Fund a
certificate executed in its name by TFGT's President or Vice President, in form
and substance reasonably satisfactory to the Selling Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Selling Fund
shall reasonably request.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of the Selling Fund contained in
this Agreement shall be true and correct as of the date hereof and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date, and the Selling Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by TIFT's President or Vice
President, in form and substance satisfactory to the Acquiring Fund and dated as
of the Closing Date, to such effect and as to such other matters as the
Acquiring Fund shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer or Assistant Treasurer of TIFT.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of TIFT's Agreement and
Declaration of Trust, By-Laws, the 1940 Act and other applicable law and
certified copies of the resolutions evidencing such approval shall have been
delivered to the Acquiring Fund. Notwithstanding anything herein to the
contrary, neither the Acquiring Fund or the Selling Fund may waive the
conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
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8.3 All required consents of other parties and all other consents, orders,
and permits of federal, state and local regulatory authorities (including those
of the Commission and of state Blue Sky securities authorities, including any
necessary "no-action" positions of and exemptive orders from such federal and
state authorities) to permit consummation of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order, or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Selling Fund, provided
that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the 1933
Act, and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable periods ending on the Closing Date (computed
without regard to any deduction for dividends paid) and all of the net capital
gains realized in all taxable periods ending on the Closing Date (after
reduction for any capital loss carryforward).
8.6 The Trust shall have received a favorable opinion of Pepper Hamilton
LLP addressed to the Acquiring Fund and the Selling Fund substantially to the
effect that, for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
solely for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
the liabilities of the Selling Fund followed by the distribution of the
Acquiring Fund Shares to the Selling Fund Shareholders in dissolution and
liquidation of the Selling Fund will constitute a "reorganization" within the
meaning of Section 368(a) of the Code, and the Acquiring Fund and the Selling
Fund will each be a "party to a reorganization" within the meaning of Section
368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund upon the
transfer of the Selling Fund assets to the Acquiring Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the
liabilities of the Selling Fund or upon the distribution (whether actual or
constructive) of the Acquiring Fund Shares to Selling Fund Shareholders in
exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
A-10
(e) The aggregate tax basis for the Acquiring Fund Shares received
by each Selling Fund Shareholder pursuant to the Reorganization will be the same
as the aggregate tax basis of the Selling Fund shares held by such Shareholder
immediately prior to the Closing, and the holding period of the Acquiring Fund
Shares received by each Selling Fund Shareholder will include the period during
which the Selling Fund shares exchanged therefore were held by such Shareholder
(provided the Selling Fund shares were held as capital assets on the date of the
Closing).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Closing, and the holding period of the assets of
the Selling Fund in the hands of the Acquiring Fund will include the period
during which those assets were held by the Selling Fund.
No opinion will be expressed as to (1) any federal income tax consequences
of the Reorganization except as expressly set forth above, (2) any tax
consequences of any other transaction except those consummated in accordeance
with this Agreement, (3) the tax consequences with respect to any asset as to
which any unrealized gain or loss is required to be recognized for U.S. federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting, (4) the tax
consequences with respect to any stock held in a passive foreign investment
company as defined in Section 1297(a) of the Code, and (5) any foreign, state or
local tax consequences of the Reorganization.
Such opinion shall be based on customary assumptions, limitations and such
representations as Pepper Hamilton LLP may reasonably request, and the Selling
Fund and Acquiring Fund will cooperate to make and certify the accuracy of such
representations. Such opinion may contain such assumptions and limitations as
shall be in the opinion of such counsel appropriate to render the opinions
expressed therein. Notwithstanding anything herein to the contrary, neither the
Acquiring Fund nor the Acquired Fund may waive the conditions set forth in this
paragraph 8.6.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund, whether incurred before or after the date of this Agreement,
will be borne by Touchstone Advisors, Inc. and Mazama Capital Management, Inc.,
the investment advisor and sub-advisor, respectively, to the Trusts. Such
expenses include, without limitation, (a) expenses incurred in connection with
the entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are residents as of the date of the mailing of the Prospectus/Proxy
Statement to such shareholders; (d) postage; (e) printing; (f) accounting fees;
(g) legal fees; and (h) solicitation costs of the transaction.
A-11
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty, or
agreement contained herein to be performed at or prior to the Closing Date, if
not cured within 30 days; or
(b) a condition herein expressed to be precedent to the obligations
of the terminating party has not been met and it reasonably appears that it will
not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of the Acquiring
Fund, the Selling Fund, the Trust, or its Trustees or officers, to the other
party, but Touchstone Advisors, Inc. and Mazama Capital Management, Inc. shall
bear the expenses incurred by them incidental to the preparation and carrying
out of this Agreement as provided in paragraph 9.1.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Trusts; provided, however, that following the meeting of shareholders of the
Selling Fund pursuant to paragraph 5.2 of this Agreement, no such amendment may
have the effect of changing the provisions for determining the number of the
Acquiring Fund Shares to be issued to the Selling Fund Shareholders under this
Agreement to the detriment of such Selling Fund Shareholders without their
further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
A-12
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without giving effect to the conflicts of
laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and permitted assigns, any rights or remedies under or by reason of
this Agreement.
13.5 With respect to the Trusts, the names used herein refer respectively
to the two trusts created and, as the case may be, the Trustees, as trustees but
not individually or personally, acting from time to time under organizational
documents filed in Delaware, which are hereby referred to and are also on file
at the principal offices of the Trusts. The obligations of the Trusts entered
into in the name or on behalf thereof by any of the Trustees, representatives or
agents of the Trusts, are made not individually, but in such capacities, and are
not binding upon any of the Trustees, shareholders or representatives of the
Trusts personally, but bind only the trust property, and all persons dealing
with the Selling Fund and the Acquiring Fund must look solely to the trust
property belonging to the Selling Fund and the Acquiring Fund for the
enforcement of any claims against the Selling Fund and the Acquiring Fund,
respectively.
A-13
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all as
of the date first written above.
TOUCHSTONE INSTITUTIONAL FUNDS TRUST ON BEHALF OF
MAZAMA INSTITUTIONAL GROWTH FUND
By:
-----------------------------------------
Name: Jill T. McGruder
Title: President
TOUCHSTONE FUNDS GROUP TRUST ON BEHALF OF MAZAMA
GROWTH FUND
By:
-----------------------------------------
Name: Jill T. McGruder
Title: President
For purposes of 9.1 and 11.2 only:
MAZAMA CAPITAL MANAGEMENT, INC.
By:
-----------------------------------------
Name:
Title:
EVERY SHAREHOLDER'S VOTE IS
IMPORTANT! PLEASE SIGN, DATE AND RETURN
YOUR VOTING INSTRUCTIONS TODAY!
PROXY TABULATOR TO VOTE BY INTERNET
P.O. BOX 9112
FARMINGDALE, NY 11735 1) READ THE PROXY STATEMENT AND HAVE THE PROXY
CARD BELOW AT HAND.
2) GO TO WEBSITE WWW.PROXYVOTE.COM
3) FOLLOW THE INSTRUCTIONS PROVIDED ON THE
WEBSITE.
TO VOTE BY TELEPHONE
1) READ THE PROXY STATEMENT AND HAVE THE PROXY
CARD BELOW AT HAND.
2) CALL 1-800-690-6903
3) FOLLOW THE INSTRUCTIONS.
TO VOTE BY MAIL
1) READ THE PROXY STATEMENT.
2) CHECK THE APPROPRIATE BOXES ON THE PROXY
CARD BELOW.
3) SIGN AND DATE THE PROXY CARD.
4) RETURN THE PROXY CARD IN THE ENVELOPE
PROVIDED.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOXS: |X|
KEEP THIS PORTION FOR YOUR RECORDS
--------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
TOUCHSTONE MAZAMA INSTITUTIONAL GROWTH FUND
--------------------------------------------------------------------------------
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
VOTE THIS PROXY CARD TODAY!
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE FOLLOWING PROPOSALS:
FOR AGAINST ABSTAIN
1. To approve the Reorganization of the Touchstone Mazama |_| |_| |_|
Institutional Growth Fund into the Touchstone Mazama
Growth Fund.
2. To transact such other business that may properly come
before the Meeting, or any adjournments thereof.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR(S) ON THIS CARD. When signing
as attorney, executor, administrator, trustee, guardian or as custodian for a
minor, please sign your name and give your full title as such. If signing on
behalf of a corporation please sign the full corporate name and your name and
indicate your title. If you are a partner signing for a partnership, please sign
the partnership name, your name and indicate your title. Joint owners should
each sign these instructions. Please sign, date and return.
PLEASE SIGN, DATE, AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE
DATE DATE
---------------------------------- ----------------------------------
SIGNATURE [PLEASE SIGN WITHIN BOX] SIGNATURE (JOINT OWNERS)
--------------------------------------------------------------------------------
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE SPECIAL MEETING:
The Notice of Special Meeting and Proxy Statement are available at
www.proxyvote.com.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROXY PROXY
TOUCHSTONE INSTITUTIONAL FUNDS TRUST
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
SEPTEMBER 17, 2010
The undersigned shareholder(s) of the Touchstone Mazama Institutional Growth
Fund (the "Fund") of the Touchstone Institutional Funds Trust (the "Trust")
hereby appoints Jay Fitton and Frank Newbauer, or any one of them true and
lawful attorneys with power of substitution of each, to vote all shares which
the undersigned is entitled to vote, at the Special Meeting of Shareholders of
the Fund to be held on September 17, 2010, at 303 Broadway, Suite 1100,
Cincinnati, Ohio 45202, at 10:00 a.m. Eastern Time, and at any adjournment
thereof as indicated on the reverse side. In its discretion, the Fund is
authorized to vote upon such other matters as may properly come before the
meeting.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY
STATEMENT, AS APPLICABLE, IS HEREBY ACKNOWLEDGED. THE SHARES REPRESENTED HEREBY
WILL BE VOTED AS INDICATED OR FOR THE PROPOSAL IF NO CHOICE IS INDICATED.
IMPORTANT: PLEASE SIGN AND DATE ON THE REVERSE SIDE BEFORE MAILING
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
July 27, 2010
Acquisition of Assets of
TOUCHSTONE MAZAMA INSTITUTIONAL GROWTH FUND
TICKER: TMIGX
a series of
TOUCHSTONE INSTITUTIONAL FUNDS TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
By and In Exchange For Shares of
TOUCHSTONE MAZAMA GROWTH FUND
TICKER: _______
a series of
TOUCHSTONE FUNDS GROUP TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with the
Prospectus/Proxy Statement dated July 27, 2010, relating specifically to the
proposed transfer of the assets and liabilities of Touchstone Mazama
Institutional Growth Fund, a series of Touchstone Institutional Funds Trust, to
Touchstone Mazama Growth Fund, a series of Touchstone Funds Group Trust, in
exchange for shares of beneficial interest of Touchstone Mazama Growth Fund (to
be issued to holders of shares of Touchstone Mazama Institutional Growth Fund).
The transfer is to occur pursuant to an Agreement and Plan of Reorganization.
This SAI consists of this cover page and the following documents attached hereto
and incorporated by reference herein:
(1) The Statement of Additional Information of Touchstone Institutional
Funds Trust dated April 30, 2010 (previously filed on EDGAR,
Accession No. 0001144204-10-023211); and
(2) Annual Report of Touchstone Institutional Funds Trust, for the year
ended December 31, 2009 (previously filed on EDGAR, Accession No.
0001144204-10-012362)
A copy of the Prospectus/Proxy Statement may be obtained without charge by
calling or writing to Touchstone Institutional Funds Trust at the telephone
number or address set forth above.
Pro Forma Financial Statements
Pro Forma financial information has not been prepared for the Reorganization
because Mazama Institutional is being reorganized into a newly organized series
with no assets and liabilities that will commence investment operations upon
completion of the Reorganization and continue the operations of Mazama
Institutional. Mazama Growth will adopt the financial statements and financial
history of Mazama Institutional upon the consummation of the Reorganization.
TABLE OF CONTENTS
THE TRUST.......................................................................
PERMITTED INVESTMENTS AND RISK FACTORS..........................................
INVESTMENT LIMITATIONS..........................................................
THE ADVISOR.....................................................................
THE ADMINISTRATOR...............................................................
DISTRIBUTION AND SHAREHOLDER SERVICES...........................................
TRUSTEES AND OFFICERS OF THE TRUST..............................................
PURCHASE AND REDEMPTION OF SHARES...............................................
DETERMINATION OF NET ASSET VALUE................................................
TAXES...........................................................................
PORTFOLIO TRANSACTIONS..........................................................
DISCLOSURE OF PORTFOLIO HOLDINGS................................................
VOTING..........................................................................
DESCRIPTION OF SHARES...........................................................
SHAREHOLDER LIABILITY...........................................................
LIMITATION OF TRUSTEES' LIABILITY...............................................
CODE OF ETHICS..................................................................
PROXY VOTING....................................................................
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS......................................
CUSTODIAN.......................................................................
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...................................
LEGAL COUNSEL...................................................................
FINANCIAL STATEMENTS............................................................
APPENDIX A - DESCRIPTION OF CORPORATE BOND RATINGS...........................A-1
APPENDIX B - PROXY VOTING POLICIES...........................................B-1
2
THE TRUST
This SAI relates only to the Touchstone Intermediate Fixed Income Fund
("Intermediate Fixed Income Fund") (formerly Touchstone Clover Core Fixed Income
Fund and Constellation Clover Core Fixed Income Fund), Touchstone Ultra Short
Duration Fixed Income Fund ("Ultra Short Duration Fixed Income Fund") (formerly
Constellation Chartwell Ultra Short Duration Fixed Income Fund), Touchstone
Short Duration Fixed Income Fund ("Short Duration Fixed Income Fund") (formerly
Constellation Chartwell Short Duration Fixed Income Fund), Touchstone Sands
Capital Select Growth Fund ("Sands Capital Select Growth Fund") (formerly
Constellation Sands Capital Select Growth Fund), Touchstone Mid Cap Fund ("Mid
Cap Fund") (formerly Constellation TIP Mid Cap Fund), Touchstone Healthcare and
Biotechnology Fund ("Healthcare and Biotechnology Fund") (formerly TIP
Healthcare and Biotechnology Fund), Touchstone Small Cap Value Opportunities
Fund ("Small Cap Value Opportunities Fund") (formerly Constellation TIP Small
Cap Value Opportunities Fund), Touchstone Premium Yield Equity Fund ("Premium
Yield Equity Fund"), Touchstone International Growth Fund ("International Growth
Fund"), Touchstone Capital Appreciation Fund ("Capital Appreciation Fund"),
Touchstone Core Plus Fixed Income Fund ("Core Plus Fixed Income Fund"),
Touchstone Emerging Markets Equity Fund ("Emerging Markets Equity Fund"),
Touchstone Global Equity Fund ("Global Equity Fund"), Touchstone Global Real
Estate Fund ("Global Real Estate Fund"), Touchstone International Fixed Income
Fund ("International Fixed Income Fund"), Touchstone Large Cap Relative Value
Fund ("Large Cap Relative Value Fund"), Touchstone Market Neutral Equity Fund
("Market Neutral Equity Fund") (formerly Long/Short Equity Fund), Touchstone Mid
Cap Value Fund ("Mid Cap Value Fund"), Touchstone Small Cap Core Fund ("Small
Cap Core Fund"), Touchstone Focused Equity Fund ("Focused Equity Fund") and
Touchstone Mazama Growth Fund ("Mazama Growth Fund"). Each Fund is a separate
series of the Touchstone Funds Group Trust (formerly, Constellation Funds,
formerly Alpha Select Funds) (the "Trust"), an open-end management investment
company established as a Delaware statutory trust under an Agreement and
Declaration of Trust dated October 25, 1993, as amended on March 24, 2004, and
November 20, 2006 (the "Declaration of Trust"), which consists of both
diversified and non-diversified Funds. All Funds are diversified except for the
International Growth Fund, the Sands Capital Select Growth Fund, the Healthcare
and Biotechnology Fund, the Global Real Estate Fund, the Small Cap Core Fund,
the International Fixed Income Fund and the Focused Equity Fund. Prior to
November 20, 2006, the name of the Trust was Constellation Funds. Effective
November 20, 2006, the Trust's name changed to Touchstone Funds Group Trust. The
Declaration of Trust permits the Trust to offer separate series of units of
beneficial interest (the "shares") and separate classes of funds. Each Fund is a
separate mutual fund and each share of each Fund represents an equal
proportionate interest in that Fund.
The Trust offers five separate classes of shares: Class A, Class C, Class Z,
Class Y and Institutional shares. The shares of a Fund represent an interest in
the same assets of such Fund, have the same rights and are identical in all
material respects except that: (i) each class of shares may bear different (or
no) distribution fees; (ii) each class of shares may be subject to different (or
no) sales charges; (iii) certain other class specific expenses will be borne
solely by the class to which such expenses are attributable, including transfer
agent fees attributable to a specific class of shares, printing and postage
expenses related to preparing and distributing materials to current shareholders
of a specific class, registration fees incurred by a specific class of shares,
the expenses of administrative personnel and services required to support the
shareholders of a specific class, litigation or other legal expenses relating to
a class of shares, Trustees' fees or expenses incurred as a result of issues
relating to a specific class of shares and accounting fees and expenses relating
to a specific class of shares; (iv) each class has exclusive voting rights with
respect to matters relating to its own distribution arrangements; and (v)
certain classes offer different features and services to shareholders. The Board
of Trustees may classify and reclassify the shares of a Fund into additional
classes of shares at a future date.
3
The Trust's Funds and Classes thereof that are currently offered are listed
below:
---------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL
FUNDS CLASS A CLASS C CLASS Y CLASS Z SHARES
---------------------------------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund x x
---------------------------------------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund x
---------------------------------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund x
---------------------------------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund x
---------------------------------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund x x
---------------------------------------------------------------------------------------------------------------------
Mid Cap Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Sands Capital Select Growth Fund x x
---------------------------------------------------------------------------------------------------------------------
Premium Yield Equity Fund x x x
---------------------------------------------------------------------------------------------------------------------
International Growth Fund x x x
---------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Core Plus Fixed Income Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Emerging Markets Equity Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Global Equity Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Global Real Estate Fund x x x x
---------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Large Cap Relative Value Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Market Neutral Equity Fund x x x
---------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Small Cap Core Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Focused Equity Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Mazama Growth Fund x x x x
---------------------------------------------------------------------------------------------------------------------
Effective as of the close of business on May 7, 2004, the Intermediate Fixed
Income Fund, Ultra Short Duration Fixed Income Fund, Short Duration Fixed Income
Fund, Small Cap Value Opportunities Fund and Healthcare and Biotechnology Fund
acquired all of the assets and liabilities of the Turner Funds', which include
Turner Core Value Fund, Turner Small Cap Value Fund, Turner Core Fixed Income
Fund, Turner Ultra Short Duration Fixed Income Fund, Turner Short Duration Fixed
Income Fund, Turner Small Cap Value Opportunities Fund and Turner Healthcare and
Biotechnology Fund (each a "Constellation Turner Fund"), respectively.
Performance information relating to an aforementioned Fund presented prior to
May 7, 2004 refers to the Fund's performance as a predecessor Constellation
Turner Fund. Effective as of the close of business on July 30, 2004, the Sands
Capital Select Growth Fund acquired all of the assets and liabilities of the
Pitcairn Select Growth Fund. Performance information relating to an
aforementioned Fund presented prior to July 30, 2004 refers to the Fund's
performance as the Pitcairn Select Growth Fund.
4
Effective as of the close of business on April 14, 2005, the Mid Cap Fund
acquired all of the assets and liabilities of the Constellation Institutional
Portfolios' Midcap Core Portfolio (the "predecessor CIP Midcap Core Portfolio").
Performance information presented prior to April 15, 2005 refers to the Fund's
performance as the predecessor CIP Midcap Core Portfolio.
Effective as of the close of business on September 27, 2008, the International
Growth Fund acquired all of the assets and liabilities of the Navellier
International Growth Portfolio (the "predecessor Navellier International
Portfolio"). Performance information presented prior to September 27, 2008
refers to the Fund's performance as the predecessor Navellier International
Portfolio. Navellier & Associates, Inc. remained as the sub-advisor after this
reorganization.
From the Healthcare and Biotechnology Fund's inception on February 28, 2001
until May 7, 2004, the Fund operated as the Turner Healthcare & Biotechnology
Fund, a portfolio of the Turner Funds and was advised by TIP. On May 7, 2004,
the Turner Healthcare & Biotechnology Fund was reorganized into the
Constellation TIP Healthcare & Biotechnology Fund. On November 20, 2006 the
Constellation TIP Healthcare & Biotechnology Fund was renamed the Touchstone
Healthcare and Biotechnology Fund. Turner Investment Partners, Inc. remained the
sub-advisor after this name change.
From the Mid Cap Fund's inception on January 2, 2003 until April 14, 2005, the
Fund operated as the Midcap Core Portfolio, a separate series of Constellation
Institutional Portfolios. TIP served as the Midcap Core Portfolio's investment
advisor from January 2, 2003 until March 1, 2004, and as the Midcap Core
Portfolio's investment sub-advisor with day-to-day portfolio management
responsibility from March 1, 2004 until April 14, 2005. On April 14, 2005, the
Midcap Core Portfolio was reorganized into the Constellation TIP Mid Cap Fund.
On November 20, 2006, the Constellation TIP Mid Cap Fund was renamed the
Touchstone Mid Cap Fund. TIP remained as the sub-advisor after these changes. On
February 2, 2009, the Fund's Y Shares were renamed the Institutional shares. On
January 28, 2010, the Institutional shares were renamed the Y shares.
From the Sands Capital Select Growth Fund's inception on August 11, 2000 until
August 1, 2004, the Fund operated as the Pitcairn Select Growth Fund and was
managed by Sands Capital. On August 1, 2004, the Pitcairn Select Growth Fund was
reorganized into the Constellation Sands Capital Select Growth Fund. On November
20, 2006 the Constellation Sands Capital Select Growth Fund was renamed the
Touchstone Sands Capital Select Growth Fund. Sands Capital remained as the
sub-advisor after the change.
From the Short Duration Fixed Income Fund's inception on March 1, 1994 until
July 1, 1999, the Fund operated as the Alpha Select Short Duration Government
Funds - Three Year Portfolio. On July 1, 1999, the Fund converted to the TIP
Funds (now Turner Funds) Turner Short Duration Government Funds - Three Year
Portfolio, and later the Turner Short Duration Fixed Income Fund. On May 7,
2004, the Turner Short Duration Fixed Income Fund was reorganized into the
Constellation Chartwell Short Duration Fixed Income Fund. On November 20, 2006
the Constellation Chartwell Short Duration Fixed Income Fund was renamed the
Touchstone Short Duration Fixed Income Fund. In February 2009 the Fund replaced
its previous sub-advisor with Longfellow Investment Management Co.
5
From the Intermediate Fixed Income Fund's inception on December 6, 1991 until
May 1, 2001, the Fund operated as the Clover Fixed Income Fund and was advised
by Clover Capital Management, Inc. On May 1, 2001, the shareholders of the
Clover Fixed Income Fund voted to approve Turner Investment Partners, Inc. as
the Fund's investment advisor and Clover Capital Management, Inc. as the
sub-advisor, and from that date until May 7, 2004, the Fund operated as the
Turner Core Fixed Income Fund. On May 7, 2004, the Turner Core Fixed Income Fund
was reorganized into the Constellation Clover Core Fixed Income Fund. On
November 20, 2006 the Constellation Clover Core Fixed Income Fund was renamed
the Touchstone Clover Core Fixed Income Fund. Clover Capital Management, Inc.
remained as the sub-advisor after the change. On December 1, 2008, Federated
Investors, Inc. acquired Clover Capital Management, Inc. On April 22, 2009,
Milne LLC d/b/a JKMilne Asset Management became sub-advisor to the Fund and the
Fund was renamed the Touchstone Intermediate Fixed Income Fund. Prior to April
22, 2009, the Fund's Institutional Shares were named "Class I Shares."
From the Small Cap Value Opportunities Fund's inception on March 4, 2002 until
May 7, 2004, the Fund operated as the Turner Small Cap Value Opportunities Fund,
a portfolio of the Turner Funds and was advised by Turner Investment Management,
LLC, a majority-owned subsidiary of TIP. On May 7, 2004, the Turner Small Cap
Value Opportunities Fund was reorganized into the Constellation TIP Small Cap
Value Opportunities Fund. Effective December 22, 2005, the Fund's name was
changed to Constellation Small Cap Value Opportunities Fund. On November 20,
2006 the Constellation Small Cap Value Opportunities Fund was renamed the
Touchstone Small Cap Value Opportunities Fund. Turner Investment Partners, Inc.
and Diamond Hill Capital Management, Inc. remained as the sub-advisors to the
Fund after the change. James Investment Research, Inc. became a Sub-Advisor to
the Fund on June 20, 2007. Diamond Hill Capital Management, Inc. and James
Investment Research, Inc. were removed as Sub-Advisors to the Fund on June 16,
2008.
From the Ultra Short Duration Fixed Income Fund's inception on March 1, 1994
until July 1, 1999, the Fund operated as the Alpha Select Short Duration
Government Funds - One Year Portfolio. On July 1, 1999, the Fund converted to
the TIP Funds (now Turner Funds) Turner Short Duration Government Funds - One
Year Portfolio, and later the Turner Ultra Short Duration Fixed Income Fund. On
May 7, 2004, the Turner Ultra Short Duration Fixed Income Fund was reorganized
into the Constellation Chartwell Ultra Short Duration Fixed Income Fund. On
November 20, 2006 the Constellation Chartwell Ultra Short Duration Fixed Income
Fund was renamed the Touchstone Ultra Short Duration Fixed Income Fund. In
October 2008, the Fund replaced its previous sub-advisor with Fort Washington
Investment Advisors, Inc. The performance shown prior to October 2008 represents
the performance of the previous sub-advisor.
6
Effective as of the close of business on September 24, 2010, the Mazama Growth
Fund acquired all of the assets and liabilities of the Touchstone Mazama
Institutional Growth Fund (the "Predecessor Mazama Fund"). Performance
information presented prior to September 24, 2010 refers to the Fund's
performance as the Predecessor Mazama Fund. Mazama Capital Management, Inc.
remained as the sub-advisor after this reorganization.
PERMITTED INVESTMENTS AND RISK FACTORS
Each Fund's principal strategy and principal risks are described in the
Prospectuses. The following supplements the information contained in the
Prospectuses concerning each Fund's principal strategy and principal risks. In
addition, although not principal strategies of the Funds, the Funds may invest
in other types of securities and engage in other investment practices as
described in the Prospectuses or in this SAI. Unless otherwise indicated, each
Fund is permitted to invest in each of the investments listed below, or engage
in each of the investment techniques listed below consistent with the Fund's
investment objectives, policies and strategies. The investment limitations below
are considered to be non-fundamental policies which may be changed at any time
by a vote of the Fund's Board of Trustees, unless designated as a "Fundamental"
policy. In addition, any stated percentage limitations are measured at the time
of the purchase of a security.
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
ADRs as well as other "hybrid" forms of ADRs, including GDRs, are certificates
evidencing ownership of shares of a foreign issuer. These certificates are
issued by depository banks and generally trade on an established market in the
United States or elsewhere. The underlying shares are held in trust by a
custodian bank or similar financial institution. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends interest and
shareholder information regarding corporate actions. ADRs may be available
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the security underlying the receipt and a
depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the underlying security. Holders of
unsponsored depositary receipts generally bear all the costs of the unsponsored
facility. The depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through, to the holders of the receipts,
voting rights with respect to the deposited securities.
The Intermediate Fixed Income Fund, Ultra Short Duration Fixed Income Fund and
Short Duration Fixed Income Fund do not invest in ADRs. The Capital Appreciation
Fund, Large Cap Relative Value Fund and Mid Cap Value Fund may invest up to 10%
of their net assets in ADRs. The Focused Equity Fund may invest up to 35% of its
net assets in ADRs.
BORROWING
Borrowing may exaggerate changes in the net asset value of a Fund's shares and
in the return on the Fund's portfolio. Although the principal of any borrowing
will be fixed, a Fund's assets may change in value during the time the borrowing
is outstanding. The Funds may be required to liquidate portfolio securities at a
time when it would be disadvantageous to do so in order to make payments with
respect to any borrowing. The Funds may be required to earmark or segregate
liquid assets in an amount sufficient to meet their obligations in connection
with such borrowings. In an interest rate arbitrage transaction, a Fund borrows
money at one interest rate and lends the proceeds at another, higher interest
rate. These transactions involve a number of risks, including the risk that the
borrower will fail or otherwise become insolvent or that there will be a
significant change in prevailing interest rates. The Funds have adopted
fundamental limitations and certain of the Funds have also adopted
non-fundamental limitations which restrict circumstances in which and degree to
which the Funds can engage in borrowing. See the section entitled "Investment
Limitations," below.
7
BUSINESS DEVELOPMENT COMPANIES
Business development companies ("BDCs") are a type of closed-end fund regulated
under the Investment Company Act of 1940, as amended (the "1940 Act"). BDCs are
publicly-traded mezzanine/private equity funds that typically invest in and lend
to small and medium-sized private companies that may not have access to public
equity markets for capital raising. BDCs are unique in that at least 70% of
their investments must be made to private U.S. businesses, and BDCs are required
to make available significant managerial assistance to their portfolio
companies. BDCs are not taxed on income distributed to shareholders provided
they comply with the applicable requirements of the Internal Revenue Code of
1986, as amended (the "Code"). BDCs have expenses associated with their
operations. Accordingly, the Fund will indirectly bear its proportionate share
of any management and other expenses, and of any performance based fees, charged
by the BDCs in which it invests.
Investments in BDCs are subject to various risks, including management's ability
to meet the BDC's investment objective, and to manage the BDC's portfolio when
the underlying securities are redeemed or sold, during periods of market turmoil
and as investors' perceptions regarding a BDC or its underlying investments
change. BDC shares are not redeemable at the option of the BDC shareholder and,
as with shares of other closed-end funds, they may trade in the secondary market
at a discount to their net asset value. The Premium Yield Equity Fund and
Focused Equity Fund may invest up to 10% of their net assets in BDCs.
CANADIAN INCOME TRUSTS
Canadian Income Trusts are a qualified income trust as designated by the Canada
Revenue Agency that operates as a profit-seeking corporation. This type of
income trust, which pays out all earnings to unit holders before paying taxes,
is usually traded publicly on a securities exchange. Canadian income trusts
enjoy special corporate tax privileges. The Premium Yield Equity Fund may invest
up to 10% of its net assets in Canadian Income Trusts.
8
CONVERTIBLE SECURITIES
Convertible securities are corporate securities that are exchangeable for a set
number of another security at a prestated price. Convertible securities
typically have characteristics of both fixed income and equity securities.
Because of the conversion feature, the market value of a convertible security
tends to move with the market value of the underlying stock. The value of a
convertible security is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
The Ultra Short Duration Fixed Income Fund, Short Duration Fixed Income Fund and
Intermediate Fixed Income Fund do not invest in convertible securities.
DERIVATIVES
Derivatives are securities that derive their value from other securities,
financial instruments or indices. The following are considered derivative
securities: options on futures, futures, options on securities (e.g., puts and
calls), swap agreements, mortgage-backed securities (e.g., collateralized
mortgage obligations ("CMOs")), real estate mortgage investment conduits
("REMICs"), interest-only ("IOs") and principal-only ("POs"), when issued
securities and forward commitments, floating and variable rate securities,
convertible securities, "stripped" U.S. Treasury securities (e.g., receipts and
separately traded registered interested and principal securities ("STRIPs")),
privately issued stripped securities (e.g., TGRs, TRs, and CATs). These various
instruments are discussed later in this section.
The Intermediate Fixed Income Fund may invest in mortgage-backed securities,
variable and floating rate securities, REMICs, when issued securities and
forward commitments, stripped U.S. Treasury securities and privately issued
stripped securities, but not in other derivatives discussed above.
EQUITY-LINKED WARRANTS
Equity linked warrants provide a way for investors to access markets where entry
is difficult and time consuming due to regulation. Typically, a broker issues
warrants to an investor and then purchases shares in the local market and issues
a call warrant hedged on the underlying holding. If the investor exercises his
call and closes his position, the shares are sold and the warrant is redeemed
with the proceeds.
Each warrant represents one share of the underlying stock. Therefore, the price,
performance and liquidity of the warrant are all directly linked to the
underlying stock. The warrants can be redeemed for 100% of the value of the
underlying stock (less transaction costs). Being American style warrants, they
can be exercised at any time. The warrants are U.S. dollar denominated and
priced daily on several international stock exchanges.
9
EUROBONDS
A Eurobond is a bond denominated in U.S. dollars or another currency and sold to
investors outside of the country whose currency is used. Eurobonds may be issued
by government or corporate issuers, and are typically underwritten by banks and
brokerage firms from numerous countries. While Eurobonds typically pay principal
and interest in Eurodollars (U.S. dollars held in banks outside of the United
States), they may pay principal and interest in other currencies.
EXCHANGE TRADED FUNDS
Exchange traded funds ("ETFs") represent shares of ownership in either mutual
funds, unit investment trusts, or depositary receipts that hold portfolios of
common stocks which closely track the performance and dividend yield of specific
indices, either broad market, sector or international. ETFs allow an investor to
buy or sell an entire portfolio of stocks in a single security which is priced
and can be bought and sold throughout the trading day. A Fund could purchase an
ETF to gain exposure to a portion of the U.S. or foreign market, or while
awaiting an opportunity to purchase securities directly. The risks of owning an
ETF generally reflect the risks of owning the underlying securities it is
designed to track, although lack of liquidity in an ETF could result in it being
more volatile than the underlying portfolio of securities and ETFs have
management fees and other fees and expenses that are incurred directly by the
Fund that increase their costs versus the costs of owning the underlying
securities directly. Also, although ETFs seek to provide investment results that
correspond generally to the price and yield performance of a particular market
index, the price movement of an ETF may not track the underlying index.
For hedging or other purposes, each Fund may invest in ETFs that seek to track
the composition and/or performance of specific indices or portions of specific
indices. Certain ETFs are traded on a securities exchange. The market prices of
index-based investments will fluctuate in accordance with changes in the
underlying portfolio securities of the investment company and also due to supply
and demand of the investment company's shares on the exchange upon which the
shares are traded. Index-based investments may not replicate or otherwise match
the composition or performance of their specified index due to transaction
costs, among other things. Examples of ETFs include SPDRs(R), Select Sector
SPDRs(R), DIAMONDS(SM), NASDAQ 100 Shares, and iShares.
ETFs are considered investment companies under the 1940 Act. Ordinarily,
investments in ETFs are subject to the limitations on investments in other
investment companies, as described in the section entitled "Investment Company
Shares". However, pursuant to an order issued by the SEC to the iShares Funds
and the iShares Trust, and procedures approved by the Board of Trustees, each
Fund, except the predecessor Constellation Turner Funds and Mid Cap Fund may
invest in iShares ETFs in excess of the limits presented by the 1940 Act,
provided that the Fund invests in ETFs and other short-term investments pursuant
to the policies and procedures adopted by the Board of Trustees and otherwise
complies with the conditions of the SEC exemptive order, as it may be amended,
and any other applicable investment limitations. See also "Investment Company
Shares."
10
FOREIGN CURRENCY RISK
While the Funds net assets are valued in U.S. dollars, the securities of foreign
companies are frequently denominated in foreign currencies. Thus, a change in
the value of a foreign currency against the U.S. dollar will result in a
corresponding change in value of securities denominated in that currency. Some
of the factors that may impair the investments denominated in a foreign currency
are: (1) It may be expensive to convert foreign currencies into U.S. dollars and
vice versa; (2) Complex political and economic factors may significantly affect
the values of various currencies, including U.S. dollars, and their exchange
rates; (3) Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts, since
exchange rates may not be free to fluctuate in response to other market forces;
(4) There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis; (5) Available
quotation information is generally representative of very large round-lot
transactions in the inter-bank market and thus may not reflect exchange rates
for smaller odd-lot transactions (less than $1 million) where rates may be less
favorable; and (6) The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while the markets
for the underlying currencies remain open, certain markets may not always
reflect significant price and rate movements.
FORWARD FOREIGN CURRENCY CONTRACTS
The Funds may enter into forward foreign currency contracts to manage foreign
currency exposure and as a hedge against possible variations in foreign exchange
rates. The Funds may enter into forward foreign currency contracts to hedge a
specific security transaction or to hedge a portfolio position. These contracts
may be bought or sold to protect the Funds, to some degree, against possible
losses resulting from an adverse change in the relationship between foreign
currencies and the U.S. dollar. The Funds also may invest in foreign currency
futures and in options on currencies. A forward contract involves an obligation
to purchase or sell a specific currency amount at a future date, agreed upon by
the parties, at a price set at the time of the contract. A Fund may enter into a
contract to sell, for a fixed amount of U.S. dollars or other appropriate
currency, the amount of foreign currency approximating the value of some or all
of a Fund's securities denominated in such foreign currency.
By entering into forward foreign currency contracts, a Fund will seek to protect
the value of its investment securities against a decline in the value of a
currency. However, these forward foreign currency contracts will not eliminate
fluctuations in the underlying prices of the securities. Rather, they simply
establish a rate of exchange which one can obtain at some future point in time.
Although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, they also tend to limit any potential gain
which might result should the value of such currency increase. At the maturity
of a forward contract, a Fund may either sell a portfolio security and make
delivery of the foreign currency, or it may retain the security and terminate
its contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader, obligating it to purchase,
on the same maturity date, the same amount of the foreign currency. A Fund may
realize a gain or loss from currency transactions.
11
When entering into a contract for the purchase or sale of a security in a
foreign currency, a Fund may enter into a forward foreign currency contract for
the amount of the purchase or sale price to protect against variations, between
the date the security is purchased or sold and the date on which payment is made
or received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
Also, when a Fund's portfolio manager anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Fund may enter into a forward contract to
sell, for a fixed amount, the amount of foreign currency approximating the value
of its securities denominated in such foreign currency. With respect to any such
forward foreign currency contract, it will not generally be possible to match
precisely the amount covered by that contract and the value of the securities
involved due to changes in the values of such securities resulting from market
movements between the date the forward contract is entered into and the date it
matures. In addition, while forward foreign currency contracts may offer
protection from losses resulting from declines in value of a particular foreign
currency, they also limit potential gains which might result from increases in
the value of such currency. A Fund will also incur costs in connection with
forward foreign currency contracts and conversions of foreign currencies into
U.S. dollars. A Fund will place assets in a segregated account or otherwise
earmark assets as cover to assure that its obligations under forward foreign
currency contracts are covered.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. An option on a futures contract gives the
purchaser the right, in exchange for a premium, to assume a position in a
futures contract at a specified exercise price during the term of the option. A
Fund may use futures contracts and related options for bona fide hedging
purposes, to offset changes in the value of securities held or expected to be
acquired or be disposed of, to minimize fluctuations in foreign currencies, or
to gain exposure to a particular market or instrument. A Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges. In
addition, a Fund will only sell covered futures contracts and options on futures
contracts.
Stock and bond index futures are futures contracts for various stock and bond
indices that are traded on registered securities exchanges. Stock and bond index
futures contracts obligate the seller to deliver (and the purchaser to take) an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock or bond index at the close of the last trading day
of the contract and the price at which the agreement is made.
12
Stock and bond index futures contracts are bilateral agreements pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock or bond index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the stocks or bonds
comprising the index is made; generally contracts are closed out prior to the
expiration date of the contracts.
No price is paid upon entering into futures contracts. Instead, a Fund would be
required to deposit an amount of cash or U.S. Treasury securities known as
"initial margin." Subsequent payments, called "variation margin," to and from
the broker, would be made on a daily basis as the value of the futures position
varies (a process known as "marking to market"). The margin is in the nature of
a performance bond or good-faith deposit on a futures contract.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures; (3) there may not be a liquid secondary market
for a futures contract or option; (4) trading restrictions or limitations may be
imposed by an exchange; and (5) government regulations may restrict trading in
futures contracts and futures options.
A Fund may buy and sell futures contracts and related options to manage its
exposure to changing interest rates and securities prices. Some strategies
reduce a Fund's exposure to price fluctuations, while others tend to increase
its market exposure. Futures and options on futures can be volatile instruments
and involve certain risks that could negatively impact a Fund's return. In order
to avoid leveraging and related risks, when a Fund purchases futures contracts,
it will collateralize its position by depositing an amount of cash or liquid
securities, equal to the market value of the futures positions held, less margin
deposits, in a segregated account with its custodian or otherwise earmark assets
as cover. Collateral equal to the current market value of the futures position
will be marked to market on a daily basis.
The Intermediate Fixed Income Fund and the Core Plus Fixed Income Fund will not
invest in futures contracts and options on futures contracts.
ILLIQUID SECURITIES
Subject to the limitations in the 1940 Act, the Funds may invest in illiquid
securities. Illiquid securities are securities that cannot be disposed of within
seven business days at approximately the price at which they are being carried
on a Fund's books. Illiquid securities include demand instruments with demand
notice periods exceeding seven days, securities for which there is no active
secondary market, and repurchase agreements with maturities of over seven days
in length. The Funds may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities.
Investing in such unlisted emerging country equity securities, including
investments in new and early stage companies, may involve a high degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Because these types of securities are
thinly traded, if at all, and market prices for these types of securities are
generally not readily available, the Fund typically determines the price for
these types of securities in good faith in accordance with policies and
procedures adopted by the Board of Trustees. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Fund, or less than what
may be considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration.
In addition, the Funds believe that carefully selected investments in joint
ventures, cooperatives, partnerships, private placements, unlisted securities
and other similar situations (collectively, "special situations") could enhance
the Funds' capital appreciation potential. To the extent these investments are
deemed illiquid, the Funds' investment in them will be consistent with their
applicable restriction on investment in illiquid securities. Investments in
special situations and certain other instruments may be liquid, as determined by
the Funds' Advisor and/or Sub-Advisors based on criteria approved by the Board
of Trustees.
13
INITIAL PUBLIC OFFERINGS ("IPOS")
Due to the typically small size of the IPO allocation available to the Funds and
the nature and market capitalization of the companies involved in IPOs, a Fund's
Advisor and/or Sub-Advisors will often purchase IPO shares that would qualify as
a permissible investment for a Fund but will, instead, decide to allocate those
IPO purchases to other funds they advise. Any such allocation will be done on a
non-discriminatory basis. Because IPO shares frequently are volatile in price,
the Funds may hold IPO shares for a very short period of time. This may increase
the turnover of a Fund's portfolio and may lead to increased expenses to a Fund,
such as commissions and transaction costs. By selling shares of an IPO, a Fund
may realize taxable capital gains that it will subsequently distribute to
shareholders.
Most IPOs involve a high degree of risk not normally associated with offerings
of more seasoned companies. Companies involved in IPOs generally have limited
operating histories, and their prospects for future profitability are uncertain.
These companies often are engaged in new and evolving businesses and are
particularly vulnerable to competition and to changes in technology, markets and
economic conditions. They may be dependent on certain key managers and third
parties, need more personnel and other resources to manage growth and require
significant additional capital. They may also be dependent on limited product
lines and uncertain property rights and need regulatory approvals. Investors in
IPOs can be affected by substantial dilution in the value of their shares, by
sales of additional shares and by concentration of control in existing
management and principal shareholders. Stock prices of IPOs can also be highly
unstable, due to the absence of a prior public market, the small number of
shares available for trading and limited investor information.
INVESTMENT COMPANY SHARES
Such investments are subject to limitations prescribed by the 1940 Act, the
rules thereunder and applicable SEC staff interpretations thereof, or applicable
exemptive relief granted by the SEC. The 1940 Act limitations currently provide,
in part, that the Fund may not purchase shares of an investment company if (a)
such a purchase would cause the Fund to own in the aggregate more than 3% of the
total outstanding voting stock of the investment company or (b) such a purchase
would cause the Fund to have more than 5% of its total assets invested in the
investment company or (c) more than 10% of the Fund's total assets would be
invested in the aggregate in all investment companies. These investment
companies typically incur fees that are separate from those fees incurred
directly by the Fund. A Fund's purchase of such investment company securities
results in the layering of expenses, such that shareholders would indirectly
bear a proportionate share of the operating expenses of such investment
companies, including advisory fees, in addition to paying Fund expenses.
14
The Advisor has received an exemptive order from the Securities and Exchange
Commission ("SEC") that permits the funds it manages to invest their uninvested
cash or cash collateral in one or more affiliated money market funds. Each Fund
(subject to its investment limitations) may invest up to 25% of its total assets
in affiliated money market funds.
See also "Investment Limitations" and "Exchange Traded Funds."
LEVERAGING
Leveraging a Fund creates an opportunity for increased net income, but, at the
same time, creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of a Fund's shares and in the yield on
the Fund's portfolio. Although the principal amount of such borrowings will be
fixed, a Fund's assets may change in value during the time the borrowing is
outstanding. Leveraging creates interest expenses for a Fund which could exceed
the income from the assets retained. To the extent the income derived from
securities purchased with borrowed funds exceeds the interest that a Fund will
have to pay, the Fund's net income will be greater than if leveraging were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of leveraging, the net income of the Fund will
be less than if leveraging were not used, and therefore the amount available for
distribution to stockholders as dividends will be reduced.
Because the SEC staff believes that, among other transactions, reverse
repurchase agreements and dollar roll transactions are collateralized
borrowings, the SEC staff believes that they create leverage. The requirement
that such transactions be fully collateralized by assets segregated by the
Funds' custodian or otherwise subject to "covering" techniques imposes a
practical limit on the leverage these transactions create. The Short Duration
Fixed Income Fund will not use leverage if, as a result, the effective duration
of its portfolio would not be between one and three years.
LOWER-RATED SECURITIES
The Funds, except for the Ultra Short Duration Fixed Income Fund, Short Duration
Fixed Income Fund and Intermediate Fixed Income Fund, may invest in lower-rated
bonds commonly referred to as "junk bonds" or high-yield/high-risk securities.
Lower-rated securities are defined as securities rated below the fourth highest
rating category by a nationally recognized statistical rating organization
(NRSRO). Such obligations are speculative and may be in default. There may be no
bottom limit on the ratings of high-yield securities that may be purchased or
held by a Fund. Lower-rated or unrated (i.e., high-yield) securities are more
likely to react to developments affecting issuers than are more highly rated
securities, which primarily react to movements in the general level of interest
rates. The market values of fixed-income securities tend to vary inversely with
the level of interest rates. Yields and market values of high-yield securities
will fluctuate over time, reflecting not only changing interest rates but the
market's perception of credit quality and the outlook for economic growth. When
economic conditions appear to be deteriorating, medium to lower-rated securities
may decline in value due to heightened concern over credit quality, regardless
of prevailing interest rates. Investors should carefully consider the relative
risks of investing in high-yield securities and understand that such securities
are not generally meant for short-term investing.
15
Adverse economic developments can disrupt the market for high-yield securities,
and severely affect the ability of issuers, especially highly leveraged issuers,
to service their debt obligations or to repay their obligations upon maturity
which may lead to a higher incidence of default on such securities. In addition,
the secondary market for high-yield securities, which is concentrated in
relatively few market makers, may not be as liquid as the secondary market for
more highly rated securities. As a result, a Fund could find it more difficult
to sell these securities or may be able to sell the securities only at prices
lower than if such securities were widely traded. Furthermore, a Fund may
experience difficulty in valuing certain securities at certain times. Prices
realized upon the sale of such lower-rated or unrated securities, under these
circumstances, may be less than the prices used in calculating each Fund's net
asset value.
Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's investment portfolio and
increasing the exposure of the Fund to the risks of high-yield securities.
Growth of High-Yield, High-Risk Bond Market: The widespread expansion of
government, consumer and corporate debt within the U.S. economy has made the
corporate sector more vulnerable to economic downturns or increased interest
rates. Further, an economic downturn could severely disrupt the market for
lower-rated bonds and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. The market for
lower-rated securities may be less active, causing market price volatility and
limited liquidity in the secondary market. This may limit the Fund's ability to
sell such securities at their market value. In addition, the market for these
securities may be adversely affected by legislative and regulatory developments.
Credit quality in the junk bond market can change suddenly and unexpectedly, and
even recently issued credit ratings may not fully reflect the actual risks
imposed by a particular security.
Sensitivity to Interest Rate and Economic Changes: Lower-rated bonds are very
sensitive to adverse economic changes and corporate developments. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress that would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issuer
of a bond defaulted on its obligations to pay interest or principal or entered
into bankruptcy proceedings, a Fund may incur losses or expenses in seeking
recovery of amounts owed to it. In addition, periods of economic uncertainty and
change can be expected to result in increased volatility of market prices of
high-yield, high-risk bonds and a Fund's net asset value.
16
Payment Expectations: High-yield, high-risk bonds may contain redemption or call
provisions. If an issuer exercised these provisions in a declining interest rate
market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a
high-yield, high-risk bond's value will decrease in a rising interest rate
market, as will the value of a Fund's assets. If a Fund experiences significant
unexpected net redemptions, this may force it to sell high-yield, high-risk
bonds without regard to their investment merits, thereby decreasing the asset
base upon which expenses can be spread and possibly reducing a Fund's rate of
return.
Taxes: A Fund may purchase debt securities (such as zero-coupon or pay-in-kind
securities) that contain original issue discount. Original issue discount that
accrues in a taxable year is treated as earned by a Fund and therefore is
subject to the distribution requirements of the Code even though the Fund has
not received any interest payments on such obligations during that period.
Because the original issue discount earned by a Fund in a taxable year is not
represented by cash income, the Fund may have to dispose of other securities and
use the proceeds to make distributions to shareholders. In the event a Fund
realizes net capital gains from such transactions, its shareholders may receive
a larger capital gain distribution, if any, than they would have in the absence
of such transactions. Borrowing to fund any distribution also has tax
implications. See "Taxation of the Funds".
The Core Plus Fixed Income Fund and International Fixed Income Fund may invest
up to 20% of their net assets in lower-rated securities.
MASTER LIMITED PARTNERSHIPS
Master limited partnerships ("MLPs") are limited partnerships in which the
ownership units are publicly traded. MLP units are registered with the SEC and
are freely traded on a securities exchange or in the over-the-counter market.
MLPs often own several properties or businesses (or own interests) that are
related to oil and gas industries, but they also may finance research and
development and other projects. Generally, a MLP is operated under the
supervision of one or more managing general partners. Limited partners (like the
Fund that invests in a MLP) are not involved in the day-to-day management of the
partnership. They are allocated income and capital gains associated with the
partnership project in accordance with the terms established in the partnership
agreement. Generally speaking, MLP investment returns are enhanced during
periods of declining/low interest rates and tend to be negatively influenced
when interest rates are rising. As an income vehicle, the unit price can be
influenced by general interest rate trends independent of specific underlying
fundamentals. In addition, most MLPs are fairly leveraged and typically carry a
portion of "floating" rate debt. As such, a significant upward swing in interest
rates would also drive interest expense higher. Furthermore, most MLPs grow by
acquisitions partly financed by debt, and higher interest rates could make it
more difficult to transact accretive acquisitions. To the extent that an MLP's
interests are all in a particular industry, the MLP will, accordingly, be
negatively impacted by economic events impacting that industry. The risks of
investing in a MLP are generally those involved in investing in a partnership as
opposed to a corporation. For example, state law governing partnerships is often
less restrictive than state law governing corporations. Accordingly, there may
be fewer protections afforded to investors in a MLP than investors in a
corporation. In addition, MLPs may be subject to state taxation in certain
jurisdictions which will have the effect of reducing the amount of income paid
by the MLP to its investors.
17
The Large Cap Relative Value Fund may invest up to 10% of net assets in MLPs.
MICRO CAP SECURITIES. The Funds may invest in companies whose total market
capitalization at the time of investment is generally between $30 million and
$500 million, referred to as micro cap companies. Micro cap companies may not be
well-known to the investing public, may not have significant institutional
ownership and may have cyclical, static or only moderate growth prospects. Micro
cap companies may have greater risk and volatility than large companies and may
lack the management depth of larger, mature issuers. Micro cap companies may
have relatively small revenues and limited product lines, markets, or financial
resources, and their securities may trade less frequently and in more limited
volume than those of larger, more mature companies. In addition, micro cap
companies may be developing or marketing new products or services for which
markets are not yet established and may never become established. As a result,
the prices of their securities may fluctuate more than those of larger issuers.
The Focused Equity Fund may invest up to 20% of its net assets in micro cap
securities.
MONEY MARKET INSTRUMENTS
Money market securities are high-quality, dollar-denominated, short-term debt
instruments. They include: (i) bankers' acceptances, certificates of deposits,
notes and time deposits of highly-rated U.S. banks and U.S. branches of foreign
banks; (ii) U.S. Treasury obligations and obligations issued or guaranteed by
the agencies and instrumentalities of the U.S. government; (iii) high-quality
commercial paper issued by U.S. and foreign corporations; (iv) debt obligations
with a maturity of one year or less issued by corporations with outstanding
high-quality commercial paper ratings; and (v) repurchase agreements involving
any of the foregoing obligations entered into with highly-rated banks and
broker-dealers.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Asset-Backed Securities
Asset-backed securities are secured by non-mortgage assets such as company
receivables, truck and auto loans, leases and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. Covered bonds are a type of asset backed security that is
created from public sector loans or mortgage loans where the security is backed
by a separate group of loans. Covered bonds typically carry a 2 to10 year
maturity rate and enjoy relatively high credit ratings, depending on the quality
of the pool of loans backing the bond. The International Fixed Income Fund may
invest up to 10% of its net assets in foreign covered bonds.
18
Mortgage Pass-Through Securities
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by Government National Mortgage Association (GNMA))
are described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The rate of pre-payments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective duration of the security relative to what was
anticipated at the time of purchase. To the extent that unanticipated rates of
pre-payment on underlying mortgages increase in the effective duration of a
mortgage-related security, the volatility of such security can be expected to
increase. The residential mortgage market in the United States recently has
experienced difficulties that may adversely affect the performance and market
value of certain of the Fund's mortgage-related investments. Delinquencies and
losses on residential mortgage loans (especially subprime and second-lien
mortgage loans) generally have increased recently and may continue to increase,
and a decline in or flattening of housing values (as has recently been
experienced and may continue to be experienced in many housing markets) may
exacerbate such delinquencies and losses. Borrowers with adjustable rate
mortgage loans are more sensitive to changes in interest rates, which affect
their monthly mortgage payments, and may be unable to secure replacement
mortgages at comparably low interest rates. Also, a number of residential
mortgage loan originators have recently experienced serious financial
difficulties or bankruptcy. Consequently, reduced investor demand for mortgage
loans and mortgage-related securities and increased investor yield requirements
have caused limited liquidity in the secondary market for mortgage-related
securities, which can adversely affect the market value of mortgage-related
securities. It is possible that such limited liquidity in such secondary markets
could continue or worsen.
Government Pass-Through Securities
Government Pass-Through Securities are securities that are issued or guaranteed
by a U.S. government agency representing an interest in a pool of mortgage
loans. The primary issuers or guarantors of these mortgage-backed securities are
GNMA, Fannie Mae and Freddie Mac. GNMA, Fannie Mae and Freddie Mac guarantee
timely distributions of interest to certificate holders. GNMA and Fannie Mae
also guarantee timely distributions of scheduled principal. Freddie Mac
generally guarantees only the ultimate collection of principal of the underlying
mortgage loan. Certain federal agencies, such as the GNMA, have been established
as instrumentalities of the United States government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the United States government, are either backed by the full faith
and credit of the United States (e.g., GNMA securities) or supported by the
issuing agencies' right to borrow from the U.S. Treasury. The issues of other
agencies are supported by the credit of the instrumentality (e.g., Fannie Mae
securities). Government and private guarantees do not extend to the securities'
value, which is likely to vary inversely with fluctuations in interest rates.
19
There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "GNMAs")
that are guaranteed as to the timely payment of principal and interest by GNMA
and are backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of GNMA
to borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by Fannie Mae include Fannie Mae Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes") that are solely
the obligations of Fannie Mae and are not backed by or entitled to the full
faith and credit of the United States. Fannie Maes are guaranteed as to timely
payment of the principal and interest by Fannie Mae. Mortgage-backed securities
issued by Freddie Mac include Freddie Mac Mortgage Participation Certificates
(also known as "Freddie Macs" or "PC's"). Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by Freddie
Mac. Freddie Mac guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When Freddie Mac does not
guarantee timely payment of principal, Freddie Mac may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship
overseen by the Federal Housing Finance Agency (FHFA). In addition to placing
the companies in conservatorship, the U.S. Treasury announced three additional
steps that it intended to take with respect to Fannie Mae and Freddie Mac.
First, the U.S. Treasury has entered into Senior Preferred Stock Purchase
Agreements under which, if the FHFA determines that Fannie Mae's or Freddie
Mac's liabilities have exceeded its assets under generally accepted accounting
principles, the U.S. Treasury will contribute up to $100 billion in funds to
that company in an amount equal to the difference between such liabilities and
assets. Second, the U.S. Treasury established a new secured lending credit
facility that is available to Fannie Mae and Freddie Mac until December 2009.
Third, the U.S. Treasury initiated a temporary program to purchase Fannie Mae
and Freddie Mac mortgage-backed securities, which ended in December 2009. No
assurance can be given that the U.S. Treasury initiatives discussed above with
respect to the debt and mortgage-backed securities issued by Fannie Mae and
Freddie Mac will be successful.
20
REMICS
REMICs are private entities formed for the purpose of holding a fixed pool of
mortgages secured by interests in real property. For Freddie Mac REMIC
Certificates, Freddie Mac guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates. Fannie Mae REMIC Certificates
are issued and guaranteed as to timely distribution of principal and interest by
Fannie Mae. The Core Plus Fixed Income Fund may invest up to 10% of its net
assets in REMICs.
CMOs
A CMO is a debt obligation of a legal entity that is collateralized by mortgages
and divided into classes. Similar to a bond, interest and prepaid principal is
paid, in most cases, on a monthly basis. CMOs may be collateralized by whole
mortgage loans or private mortgage bonds, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, Freddie
Mac, or Fannie Mae, and their income streams.
CMOs are structured into multiple classes, often referred to as "tranches," with
each class bearing a different stated maturity and entitled to a different
schedule for payments of principal and interest, including pre-payments. Actual
maturity and average life will depend upon the pre-payment experience of the
collateral. In the case of certain CMOs (known as "sequential pay" CMOs),
payments of principal received from the pool of underlying mortgages, including
pre-payments, are applied to the classes of CMOs in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs until all other classes having an earlier
final distribution date have been paid in full. The Core Plus Fixed Income Fund
may invest up to 10% of its net assets in CMOs.
Commercial Mortgage-Backed Securities
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities. The Core Plus Fixed Income Fund
may invest up to 15% of its net assets in Commercial Mortgage-Backed Securities.
Mortgage Dollar Rolls
Mortgage "dollar rolls" are transactions in which mortgage-backed securities are
sold for delivery in the current month and the seller simultaneously contracts
to repurchase substantially similar securities on a specified future date. The
difference between the sale price and the purchase price (plus any interest
earned on the cash proceeds of the sale) is netted against the interest income
foregone on the securities sold to arrive at an implied borrowing rate.
Alternatively, the sale and purchase transactions can be executed at the same
price, with a Fund being paid a fee as consideration for entering into the
commitment to purchase. Mortgage dollar rolls may be renewed prior to cash
settlement and initially may involve only a firm commitment agreement by a Fund
to buy a security. If the broker-dealer to whom a Fund sells the security
becomes insolvent, the Fund's right to repurchase the security may be
restricted. Other risks involved in entering into mortgage dollar rolls include
the risk that the value of the security may change adversely over the term of
the mortgage dollar roll and that the security a Fund is required to repurchase
may be worth less than the security that the Fund originally held. To avoid any
leveraging concerns, a Fund will place U.S. government or other liquid
securities in a segregated account or otherwise earmark assets as cover in an
amount sufficient to cover its repurchase obligation. The Core Plus Fixed Income
Fund may invest up to 45% of its net assets in mortgage dollar rolls.
21
OBLIGATIONS OF SUPRANATIONAL ENTITIES
Obligations of supranational entities are obligations of entities established
through the joint participation of several governments, such as the Asian
Development Bank, the Inter-American Development Bank, International Bank of
Reconstruction and Development (World Bank), African Development Bank, European
Economic Community, European Investment Bank and the Nordic Investment Bank.
OPTIONS
A put option gives the purchaser of the option the right to sell, and the writer
of the option the obligation to buy, the underlying security at any time during
the option period. A call option gives the purchaser of the option the right to
buy, and the writer of the option the obligation to sell, the underlying
security at any time during the option period. The premium paid to the writer is
the consideration for undertaking the obligations under the option contract. The
initial purchase (sale) of an option contract is an "opening transaction." In
order to close out an option position, a Fund may enter into a "closing
transaction," which is simply the sale (purchase) of an option contract on the
same security with the same exercise price and expiration date as the option
contract originally opened. If a Fund is unable to effect a closing purchase
transaction with respect to an option it has written, it will not be able to
sell the underlying security until the option expires or the Fund delivers the
security upon exercise.
A Fund may purchase put and call options to protect against a decline in the
market value of the securities in its portfolio or to anticipate an increase in
the market value of securities that the Fund may seek to purchase in the future.
A Fund will pay a premium when purchasing put and call options. If price
movements in the underlying securities are such that exercise of the options
would not be profitable for a Fund, loss of the premium paid may be offset by an
increase in the value of the Fund's securities or by a decrease in the cost of
acquisition of securities by the Fund.
A Fund may write covered call options as a means of increasing the yield on its
portfolio and as a means of providing limited protection against decreases in
its market value. When a Fund sells an option, if the underlying securities do
not increase or decrease to a price level that would make the exercise of the
option profitable to the holder thereof, the option generally will expire
without being exercised and the Fund will realize as profit the premium received
for such option. When a call option written by a Fund is exercised, the Fund
will be required to sell the underlying securities to the option holder at the
strike price, and will not participate in any increase in the price of such
securities above the strike price. When a put option written by a Fund is
exercised, the Fund will be required to purchase the underlying securities at
the strike price, which may be in excess of the market value of such securities.
22
A Fund may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the SEC that OTC options are generally illiquid.
A Fund may purchase and write put and call options on foreign currencies (traded
on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currencies written by a Fund
will be "covered," which means that the Fund will own an equal amount of the
underlying foreign currency. With respect to put options on foreign currency
written by a Fund, the Fund will establish a segregated account with its
custodian consisting of cash or liquid, high grade debt securities in an amount
equal to the amount the Fund would be required to pay upon exercise of the put
or otherwise earmark assets as cover.
A Fund may purchase and write put and call options on indices and enter into
related closing transactions. Put and call options on indices are similar to
options on securities except that options on an index give the holder the right
to receive, upon exercise of the option, an amount of cash if the closing level
of the underlying index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike options on
individual securities, all settlements are in cash, and gain or loss depends on
price movements in the particular market represented by the index generally,
rather than the price movements in individual securities. A Fund may choose to
terminate an option position by entering into a closing transaction. The ability
of a Fund to enter into closing transactions depends upon the existence of a
liquid secondary market for such transactions.
All options written on indices must be covered. When a Fund writes an option on
an index, it will establish a segregated account containing cash or liquid
securities with its custodian in an amount at least equal to the market value of
the option and will maintain the account while the option is open or will
otherwise cover the transaction.
23
A Fund will not engage in transactions involving interest rate futures contracts
for speculation but only as a hedge against changes in the market values of debt
securities held or intended to be purchased by the Fund and where the
transactions are appropriate to reduce the Fund's interest rate risks. There can
be no assurance that hedging transactions will be successful. A Fund also could
be exposed to risks if it cannot close out its futures or options positions
because of any illiquid secondary market.
Futures and options have effective durations that, in general, are closely
related to the effective duration of the securities that underlie them. Holding
purchased futures or call option positions (backed by segregated cash or other
liquid securities) will lengthen the duration of a Fund's portfolio.
Risks associated with options transactions include: (1) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while a Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
The Intermediate Fixed Income Fund and Core Plus Fixed Income Fund will not
invest in options. The Emerging Markets Equity Fund and Mid Cap Value Fund may
invest in options for hedging purposes only. The International Fixed Income Fund
may not write options.
ORDINARY SHARES
Ordinary shares are shares of foreign issuers that are traded abroad and on a
United States exchange. Ordinary shares may be purchased with and sold for U.S.
Dollars. Investing in foreign companies may involve risks not typically
associated with investing in United States companies. See "Securities of Foreign
Issuers."
PAY-IN-KIND BONDS
Pay-in-kind bonds are securities which, at the issuer's option, pay interest in
either cash or additional securities for a specified period. Pay-in-kind bonds,
like zero coupon bonds, are designed to give an issuer flexibility in managing
cash flow. Pay-in-kind bonds are expected to reflect the market value of the
underlying debt plus an amount representing accrued interest since the last
payment. Pay-in-kind bonds are usually less volatile than zero coupon bonds, but
more volatile than cash pay securities.
The Core Plus Fixed Income Fund may invest up to 5% of its net assets in
pay-in-kind bonds.
PREFERRED STOCK
Preferred stock has a preference over common stock in liquidation (and generally
dividends as well) but is subordinated to the liabilities of the issuer in all
respects. As a general rule, the market value of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates and
perceived credit risk, while the market price of convertible preferred stock
generally also reflects some element of conversion value. Because preferred
stock is junior to debt securities and other obligations of the issuer,
deterioration in the credit quality of the issuer will cause greater changes in
the value of a preferred stock than in a more senior debt security with similar
stated yield characteristics. Unlike interest payments on debt securities,
preferred stock dividends generally are payable only if declared by the issuer's
board of directors. Preferred stock also may be subject to optional or mandatory
redemption provisions.
24
The Core Plus Fixed Income Fund and Mid Cap Value Fund may invest up to 10% of
their net assets in preferred stock.
PRIVATELY-PLACED SECURITIES
The Funds may invest in securities that are neither listed on a stock exchange
nor traded over-the-counter, including privately placed securities. Investing in
such unlisted securities, including investments in new and early stage
companies, may involve a high degree of business and financial risk that can
result in substantial losses. As a result of the absence of a public trading
market for these securities, they may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Fund, or less than what may be considered the fair value
of such securities. Further, companies whose securities are not publicly traded
may not be subject to the disclosure and other investor protection requirements
that might be applicable if their securities were publicly traded. If such
securities are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration.
PRIVATIZATION
Privatizations are foreign government programs for selling all or part of the
interests in government owned or controlled enterprises. The ability of a U.S.
entity to participate in privatizations in certain foreign countries may be
limited by local law, or the terms on which a Fund may be permitted to
participate may be less advantageous than those applicable for local investors.
There can be no assurance that foreign governments will continue to sell their
interests in companies currently owned or controlled by them or that
privatization programs will be successful.
RECEIPTS
Receipts are sold as zero coupon securities, which means that they are sold at a
substantial discount and redeemed at face value at their maturity date without
interim cash payments of interest or principal. This discount is accreted over
the life of the security, and such accretion will constitute the income earned
on a security for both accounting and tax purposes. Because of these features,
such securities may be subject to greater interest rate volatility than interest
paying investments.
25
REITS
The Funds may invest in REITs, which pool investors' money for investment in
income producing commercial real estate or real estate related loans or
interests.
A REIT is not taxed on income distributed to its shareholders or unitholders if
it complies with regulatory requirements relating to its organization,
ownership, assets and income, and with a regulatory requirement that it
distribute to its shareholders or unitholders at least 90% of its taxable income
for each taxable year. Generally, REITs can be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs invest the majority of their
assets directly in real property and derive their income primarily from rents
and capital gains from appreciation realized through property sales. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs. A shareholder in a Fund
should realize that by investing in REITs indirectly through the Fund, he or she
will bear not only his or her proportionate share of the expenses of the Fund,
but also indirectly, similar expenses of underlying REITs.
A Fund may be subject to certain risks associated with the direct investments of
the REITs. REITs may be affected by changes in their underlying properties and
by defaults by borrowers or tenants. Mortgage REITs may be affected by the
quality of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in financing a limited number of properties. REITs
depend generally on their ability to generate cash flow to make distributions to
shareholders or unitholders, and may be subject to defaults by borrowers and to
self-liquidations. In addition, the performance of a REIT may be affected by its
failure to qualify for tax-free pass-through of income under the Code or its
failure to maintain exemption from registration under the 1940 Act.
The Capital Appreciation Fund, Large Cap Relative Value Fund, Market Neutral
Equity Fund and Mid Cap Value Fund may invest up to 10% of their net assets in
REITs. The Global Equity Fund may invest up to 20% of its net assets in REITs.
The Emerging Markets Equity Fund and Focused Equity Fund may invest up to 25% of
their net assets in REITs.
REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller (a member bank of
the Federal Reserve System or primary securities dealer as recognized by the
Federal Reserve Bank) at an agreed upon price (including principal and interest)
on an agreed upon date within a number of days (usually not more than seven)
from the date of purchase. The resale price reflects the purchase price plus an
agreed upon market rate of interest which is unrelated to the coupon rate or
maturity of the underlying security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security.
26
Repurchase agreements are considered to be loans by a Fund for purposes of its
investment limitations. The repurchase agreements entered into by a Fund will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (Touchstone Advisors
monitors compliance with this requirement). In addition, even though the
Bankruptcy Code provides protection for most repurchase agreements, if the
seller should be involved in bankruptcy or insolvency proceedings, a Fund may
incur delay and costs in selling the underlying security or may suffer a loss of
principal and interest if the Fund is treated as an unsecured creditor and is
required to return the underlying security to the seller's estate.
The Ultra Short Duration Fixed Income Fund may invest in repurchase agreements
as part of its principal investment strategy as more fully described in the
Prospectus.
REVERSE REPURCHASE AGREEMENT, DOLLAR ROLL AND REVERSE DOLLAR ROLL TRANSACTIONS
A reverse repurchase agreement involves a sale by a Fund of securities that it
holds to a bank, broker-dealer or other financial institution concurrently with
an agreement by the Fund to repurchase the same securities at an agreed-upon
price and date. Reverse repurchase agreements are considered borrowing by the
Fund and are subject to the Fund's limitations on borrowing. A dollar roll
transaction involves a sale by a Fund of an eligible security to a financial
institution concurrently with an agreement by the Fund to repurchase a similar
eligible security from the institution at a later date at an agreed-upon price.
A reverse dollar roll transaction involves a purchase by a Fund of an eligible
security from a financial institution concurrently with an agreement by the Fund
to resell a similar security to the institution at a later date at an
agreed-upon price. Each Fund will fully collateralize its reverse repurchase
agreements, dollar roll and reverse dollar roll transactions in an amount at
least equal to the Fund's obligations under the reverse repurchase agreement,
dollar roll or reverse dollar roll transaction by segregating or otherwise
earmarking cash or other liquid securities.
The Core Plus Fixed Income Fund may invest up to 5% of its net assets in reverse
repurchase agreements.
ROYALTY TRUSTS
Royalty trusts are structured similarly to REITs. A royalty trust generally
acquires an interest in natural resource companies or chemical companies and
distributes the income it receives to the investors of the royalty trust. A
sustained decline in demand for crude oil, natural gas and refined petroleum
products could adversely affect income and royalty trust revenues and cash
flows. Factors that could lead to a decrease in market demand include a
recession or other adverse economic conditions, an increase in the market price
of the underlying commodity, higher taxes or other regulatory actions that
increase costs, or a shift in consumer demand for such products. A rising
interest rate environment could adversely impact the performance of royalty
trusts. Rising interest rates could limit the capital appreciation of royalty
trusts because of the increased availability of alternative investments at more
competitive yields. The Premium Yield Equity Fund may invest up to 10% of its
net assets in royalty trusts.
27
The Large Cap Relative Value Fund may invest up to 10% of its net assets in
royalty trusts.
RULE 144A SECURITIES
Rule 144A securities are securities exempt from registration on resale pursuant
to Rule 144A under the Securities Act of 1933, as amended ("1933 Act"). Rule
144A securities are traded in the institutional market pursuant to this
registration exemption, and, as a result, may not be as liquid as
exchange-traded securities since they may only be resold to certain qualified
institutional investors. Due to the relatively limited size of this
institutional market, these securities may affect the liquidity of Rule 144A
securities to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Nevertheless, Rule 144A securities
may be treated as liquid securities pursuant to guidelines adopted by the
Trust's Board of Trustees. The Mid Cap Fund may not purchase Rule 144A
securities. The Core Plus Fixed Income Fund may invest up to 25% of its net
assets in Rule 144A securities. The Emerging Markets Equity Fund, International
Fixed Income Fund and Focused Equity Fund may invest up to 10% of their net
assets in Rule 144A securities.
SECURITIES LENDING
In order to generate additional income, a Fund may lend its securities pursuant
to agreements requiring that the loan be continuously secured by collateral
consisting of: (1) cash in U.S. dollars; (2) securities issued or fully
guaranteed by the United States government or issued and unconditionally
guaranteed by any agencies thereof; or (3) irrevocable performance letters of
credit issued by banks approved by each Fund. All collateral must equal at least
100% of the market value of the loaned securities. A Fund continues to receive
interest on the loaned securities while simultaneously earning interest on the
investment of cash collateral. Collateral is marked to market daily. There may
be risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially or become
insolvent. In addition, cash collateral invested by the lending Fund is subject
to investment risk and the Fund may experience losses with respect to its
collateral investments. The SEC currently requires that the following conditions
must be met whenever the Fund's portfolio securities are loaned: (1) the Fund
must receive at least 100% cash collateral from the borrower; (2) the borrower
must increase such collateral whenever the market value of the securities rises
above the level of such collateral; (3) the Fund must be able to terminate the
loan at any time; (4) the Fund must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions on the loaned securities,
and any increase in market value; (5) the Fund may pay only reasonable custodian
fees approved by the Board in connection with the loan; (6) while voting rights
on the loaned securities may pass to the borrower, the Board must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs, and (7) the Fund may not loan its portfolio
securities so that the value of the loaned securities is more than one-third of
its total asset value, including collateral received from such loans.
The Intermediate Fixed Income Fund will not lend its securities.
28
SECURITIES OF FOREIGN ISSUERS
The Funds may invest in securities of foreign issuers and in sponsored and
unsponsored ADRs. Investments in the securities of foreign issuers may subject
the Funds to investment risks that differ in some respects from those related to
investments in securities of U.S. issuers. Such risks include future adverse
political and economic developments, possible imposition of withholding taxes on
income, possible seizure, nationalization or expropriation of foreign deposits,
possible establishment of exchange controls or taxation at the source or greater
fluctuation in value due to changes in exchange rates. Foreign issuers of
securities often engage in business practices different from those of domestic
issuers of similar securities, and there may be less information publicly
available about foreign issuers. In addition, foreign issuers are, generally
speaking, subject to less government supervision and regulation than are those
in the United States. Investments in securities of foreign issuers are
frequently denominated in foreign currencies and the value of a Fund's assets
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and the Funds may incur
costs in connection with conversions between various currencies.
The International Growth Fund, Emerging Markets Equity Fund, Global Equity Fund,
Global Real Estate Fund and International Fixed Income Fund invest in securities
of foreign issuers as part of their principal investment strategy as more fully
described in the Prospectus. The Capital Appreciation Fund, Large Cap Relative
Value Fund and Mid Cap Value Fund may invest up to 10% of their net assets in
foreign securities. The Focused Equity Fund may invest up to 35% of its net
assets in foreign securities. The Core Plus Fixed Income Fund may invest up to
50% of its net assets in securities of foreign issuers of which up to 20% may be
denominated in a foreign currency.
Emerging Market Securities
Emerging market countries are generally countries that are included in the
Morgan Stanley Capital International ("MSCI") Emerging Markets Index, or
otherwise excluded from the MSCI World Index. As of December 31, 2009, the
countries in the MSCI World Index included: Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the United States. The country composition
of the MSCI Emerging Markets Index and the MSCI World Index can change over
time. In addition, emerging market countries include those that are considered
by the Advisor or Sub-Advisor to have an economy and financial system comparable
to countries included in the MSCI Emerging Markets Index; or whose economic
activity and capital markets are dependent on emerging market countries.
Examples include Hong Kong and Singapore. When a Fund invests in securities of a
company in an emerging market country, it invests in securities issued by a
company that (i) is organized under the laws of an emerging market country, (ii)
maintains its principal place of business in an emerging market country, (iii)
has its principal trading market for its securities in an emerging market
country, (iv) derives at least 50% of its revenues or profits from operations
within emerging market countries, or has at least 50% of its assets located in
emerging market countries.
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Investments in the securities of issuers domiciled in countries with emerging
capital markets involve certain additional risks that do not generally apply to
investments in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets; (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments; (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other foreign or U.S.
governmental laws or restrictions applicable to such investments; (iv) national
policies that may limit the Fund's investment opportunities such as restrictions
on investment in issuers or industries deemed sensitive to national interests;
and (v) the lack or relatively early development of legal structures governing
private and foreign investments and private property. In addition to withholding
taxes on investment income, some countries with emerging markets may impose
differential capital gains taxes on foreign investors.
Political and economic structures in emerging market countries may be undergoing
significant evolution and rapid development, and these countries may lack the
social, political and economic stability characteristic of more developed
countries. In such a dynamic environment, there can be no assurance that any or
all of these capital markets will continue to present viable investment
opportunities for the Fund. Some of these countries may have in the past failed
to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. There is no assurance that such
expropriations will not reoccur. In such an event, it is possible that the Fund
could lose the entire value of its investments in the affected market. As a
result the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of investments in these countries
and the availability to the Fund of additional investments. The small size and
inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most
Western European countries.
Also, there may be less publicly available information about issuers in emerging
markets than would be available about issuers in more developed capital markets,
and such issuers may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which U.S. companies
are subject. In certain countries with emerging capital markets, reporting
standards vary widely. As a result, traditional investment measurements used in
the United States, such as price/earnings ratios, may not be applicable.
Emerging market securities may be substantially less liquid and more volatile
than those of mature markets, and company shares may be held by a limited number
of persons. This may adversely affect the timing and pricing of the Fund's
acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because
the Fund will need to use brokers and counterparties that are less well
capitalized, and custody and registration of assets in some countries may be
unreliable. The possibility of fraud, negligence, undue influence being exerted
by the issuer or refusal to recognize ownership exists in some emerging markets,
and, along with other factors, could result in ownership registration being
completely lost. The Fund would absorb any loss resulting from such registration
problems and may have no successful claim for compensation.
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The International Growth Fund, Global Equity Fund and Focused Equity Fund may
invest up to 20% of their net assets in emerging market securities. The Capital
Appreciation Fund and Mid Cap Value Fund may invest up to 10% of their net
assets in ADRs of emerging market issuers. The Core Plus Fixed Income Fund may
invest up to 10% of its net assets in investment grade emerging market debt
securities and up to 10% of its net assets in non-investment grade emerging
market debt securities. The International Fixed Income Fund may invest up to 10%
of its net assets in emerging market debt securities.
The Emerging Markets Equity Fund may also invest up to 20% of its net assets in
participatory notes (commonly known as P-notes), which are offshore derivative
instruments issued to foreign institutional investors and their sub-accounts
against underlying Indian securities listed on the Indian bourses. These
securities are not registered with the Securities and Exchange Board of India.
Participatory notes are similar to ADRs and the risks of investing in
participatory notes are similar to those discussed above with respect to
securities of foreign issuers in general.
SHORT SALES
In a short sale, a Fund sells a security, which it does not own, in anticipation
of a decline in the market value of the security. To complete the sale, the Fund
must borrow the security (generally from the broker through which the short sale
is made) in order to make delivery to the buyer. The Fund must replace the
security borrowed by purchasing it at the market price at the time of
replacement. The Fund is said to have a "short position" in the securities sold
until it delivers them to the broker. The period during which the Fund has a
short position can range from one day to more than a year. Until the Fund
replaces the security, the proceeds of the short sale are retained by the
broker, and the Fund must pay to the broker a negotiated portion of any
dividends or interest, which accrue during the period of the loan.
A short sale is "against the box" if at all times during which the short
position is open, a Fund owns at least an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities that are sold short. A short sale
against the box is a taxable transaction to the Fund with respect to the
securities that are sold short.
In the view of the SEC, a short sale involves the creation of a "senior
security" as such term is defined in the 1940 Act, unless the sale is "against
the box" and the securities sold short are placed in a segregated account (not
with the broker), or unless the Fund's obligation to deliver the securities sold
short is otherwise "covered," whether by placing assets in a segregated account
or otherwise earmarking assets as cover in an amount equal to the difference
between the market value of the securities sold short at the time of the short
sale and any such collateral required to be deposited with a broker in
connection with the sale (not including the proceeds from the short sale), which
difference is adjusted daily for changes in the value of the securities sold
short, or otherwise. Any Fund that engages in short sales will comply with these
requirements.
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The Market Neutral Equity Fund may maintain open short equity positions in an
amount equal to 100% of the market value of its long equity portfolio.
SOVEREIGN DEBT
The cost of servicing sovereign debt will also generally be adversely affected
by rising international interest rates, because many external debt obligations
bear interest at rates that are adjusted based upon international interest
rates. The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing or other factors, a governmental obligor may
default on its obligations. If such an event occurs, a Fund may have limited
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign sovereign debt securities to obtain recourse may be
subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not contest
payments to the holders of other foreign sovereign debt obligations in the event
of default under their commercial bank loan agreements.
TIME DEPOSITS
Time deposits are non-negotiable receipts issued by a bank in exchange for the
deposit of funds. Like a certificate of deposit, it earns a specified rate of
interest over a definite period of time; however, it cannot be traded in the
secondary market. Time deposits with a withdrawal penalty are considered to be
illiquid securities.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest up to 100% of its total
assets in money market instruments (including U.S. government securities, bank
obligations, commercial paper rated in the highest rating category by an NRSRO
and repurchase agreements involving the foregoing securities), shares of money
market investment companies (to the extent permitted by applicable law and
subject to certain restrictions) and cash.
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities. Some U.S. Government
securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds,
which differ only in their interest rates, maturities and times of issuance, are
supported by the full faith and credit of the United States. Others are
supported by: (i) the right of the issuer to borrow from the U.S. Treasury, such
as securities of the Federal Home Loan Banks; (ii) the discretionary authority
of the U.S. Government to purchase the agency's obligations, such as securities
of Fannie Mae; or (iii) only the credit of the issuer, such as securities of the
Student Loan Marketing Association. No assurance can be given that the U.S.
Government will provide financial support in the future to U.S. Government
agencies, authorities or instrumentalities that are not supported by the full
faith and credit of the United States.
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Securities guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities include: (i) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participation interests in loans made to foreign
governments or other entities that are so guaranteed. The secondary market for
certain of these participation interests is limited and, therefore, may be
regarded as illiquid.
U.S. Government securities also include securities guaranteed by the Federal
Deposit Insurance Corporation ("FDIC") under its Temporary Liquidity Guarantee
Program. Under the Temporary Liquidity Guarantee Program, the FDIC guarantees,
with the full faith and credit of the United States, the payment of principal
and interest on the debt issued by private entities through the earlier of the
maturity date of the debt or July 27, 2012.
U.S. TREASURY OBLIGATIONS
U.S. Treasury Obligations are bills, notes and bonds issued by the U.S.
Treasury, and separately traded interest and principal component parts of such
obligations that are transferable through the federal book-entry system known as
separately traded registered interest and principal securities ("STRIPS") and
coupons under book entry safekeeping ("CUBES"). They also include Treasury
inflation-protection securities ("TIPS").
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain obligations may carry variable or floating rates of interest, and may
involve a conditional or unconditional demand feature. Such instruments bear
interest at rates which are not fixed, but which vary with changes in specified
market rates or indices. The interest rates on these securities may be reset
daily, weekly, quarterly or some other reset period, and may have a floor or
ceiling on interest rate changes. There is a risk that the current interest rate
on such obligations may not accurately reflect existing market interest rates. A
demand instrument with a demand notice exceeding seven days may be considered
illiquid if there is no secondary market for such security.
WARRANTS AND RIGHTS
Warrants are instruments giving holders the right, but not the obligation, to
buy equity or fixed income securities of a company at a given price during a
specified period. Subscription rights normally have a short life span to
expiration. The purchase of warrants or rights involves the risk that the Fund
could lose the purchase value of a warrant or right if the right to subscribe to
additional shares is not exercised prior to the warrants' and rights'
expiration. Also, the purchase of warrants and/or rights involves the risk that
the effective price paid for the warrants and/or rights added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. Buying a warrant does not make the Fund a
shareholder of the underlying stock. The warrant holder has no voting or
dividend rights with respect to the underlying stock. A warrant does not carry
any right to assets of the issuer, and for this reason investment in warrants
may be more speculative than other equity-based investments.
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The Focused Equity Fund may invest 5% of its net assets in warrants and rights.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
When-issued or delayed delivery securities are subject to market fluctuations
due to changes in market interest rates and it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed. Although a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring the securities for its investment portfolio, a
Fund may dispose of a when-issued security or forward commitment prior to
settlement if it deems appropriate.
YANKEE OBLIGATIONS
Yankee obligations ("Yankees") are U.S. dollar-denominated instruments of
foreign issuers who either register with the SEC or issue securities under Rule
144A of the 1933 Act. These consist of debt securities (including preferred or
preference stock of non-governmental issuers), certificates of deposit, fixed
time deposits and bankers' acceptances issued by foreign banks, and debt
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies and supranational entities. Some
securities issued by foreign governments or their subdivisions, agencies and
instrumentalities may not be backed by the full faith and credit of the foreign
government. Yankee obligations, as obligations of foreign issuers, are subject
to the same types of risks discussed above in "Foreign Securities".
The Yankee obligations selected for the Funds will adhere to the same quality
standards as those utilized for the selection of domestic debt obligations.
ZERO COUPON SECURITIES
Zero coupon securities are securities that are sold at a discount to par value
and securities on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received "income" annually. Because a Fund
will distribute its "income" to shareholders, to the extent that shareholders
elect to receive dividends in cash rather than reinvesting such dividends in
additional shares, a Fund will have fewer assets with which to purchase income
producing securities. In the event of adverse market conditions, zero coupon
securities may be subject to greater fluctuations in value and may be less
liquid than comparably rated securities paying cash interest at regular interest
payment periods.
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Corporate or municipal zero coupon securities are: (i) notes or debentures which
do not pay current interest and are issued at substantial discounts from par
value, or (ii) notes or debentures that pay no current interest until a stated
date one or more years into the future, after which date the issuer is obligated
to pay interest until maturity, usually at a higher rate than if interest were
payable from the date of issuance, and may also make interest payments in kind
(e.g., with identical zero coupon securities). Such corporate and municipal zero
coupon securities, in addition to the risks identified above, are subject to the
risk of the issuer's failure to pay interest and repay principal in accordance
with the terms of the obligation.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental policies of each Fund which
cannot be changed with respect to a Fund without the consent of the holders of a
majority of that Fund's outstanding shares. The term "majority of the
outstanding shares" means the vote of (i) 67% or more of a Fund's shares present
at a meeting, if more than 50% of the outstanding shares of a Fund are present
or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares,
whichever is less. Except for the limitations on illiquid securities and bank
borrowings, if a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
percentage resulting from changing market values or other circumstances will not
be considered a deviation from this policy.
The Intermediate Fixed Income Fund, Ultra Short Duration Fixed Income Fund,
Short Duration Fixed Income Fund, Small Cap Value Opportunities Fund, and
Healthcare and Biotechnology Fund may not, except as otherwise provided below:
1. With respect to 75% of the Fund's assets: (i) purchase securities of any
issuer (except securities issued or guaranteed by the United States
government, its agencies or instrumentalities and repurchase agreements
involving such securities) if, as a result, more than 5% of the total
assets of the Fund would be invested in the securities of such issuer; or
(ii) acquire more than 10% of the outstanding voting securities of any one
issuer. This does not apply to the Healthcare and Biotechnology Fund.
2. Invest more than 25% of the Fund's assets in securities issued by
companies in a single industry or related group of industries. This
limitation does not apply to the Healthcare and Biotechnology Fund (which
invests 25% or more of its assets in securities of issuers conducting
their principal business activities in the healthcare and/or biotechnology
industries). To that extent, the Healthcare and Biotechnology Fund is
subject to legislative or regulatory changes, adverse market conditions
and/or increased competition affecting that industry in greater proportion
than funds that are more diversified by industry.
3. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or
require the fund to segregate assets are not considered to be borrowings.
Asset coverage of at least 300% is required for all borrowings, except
where the Fund has borrowed money for temporary purposes in amounts not
exceeding 5% of its total assets. Each Fund will not purchase securities
while its borrowings exceed 5% of its total assets.
35
4. Make loans to other persons except through the lending of its portfolio
securities, provided that this limitation does not apply to the purchase
of debt securities and loan participations and/or engaging in direct
corporate loans or repurchase agreements in accordance with its investment
objectives and policies. The loans cannot exceed 33 1/3% of a Fund's
assets. A Fund may also make loans to other investment companies to the
extent permitted by the 1940 Act or any exemptions therefrom which may be
granted to the Fund by the SEC.
For example, at a minimum, the Fund will not make any such loans unless
all requirements regarding common control and ownership of Fund shares are
met.
5. Purchase or sell real estate, physical commodities, or commodities
contracts, except that each Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including REITs),
commodities, or commodities contracts; and (ii) commodities contracts
relating to financial instruments, such as financial futures contracts and
options on such contracts.
6. Issue senior securities as defined in the 1940 Act except as permitted by
rule, regulation or order of the SEC.
7. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
8. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
The Sands Capital Select Growth Fund, Premium Yield Equity Fund, and
International Growth Fund may not:
1. Purchase any securities which would cause 25% or more of the net assets of
the Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry,
provided that this limitation does not apply to investments in obligations
issued or guaranteed by the United States government, its agencies or
instrumentalities.
2. Borrow money from banks in an amount which exceeds 33 1/3% of the value of
its total assets (including the amount borrowed) less the Fund's
liabilities (other than borrowings), except that the Fund may borrow up to
an additional 5% of its total assets (not including the amount borrowed)
from a bank for temporary or emergency purposes.
36
3. Purchase or sell real estate, although it may purchase or sell securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein (including
REITs).
4. Purchase or sell physical commodities (which shall not, for purposes of
this restriction, include currencies), or commodities contracts, except
that each Fund may (i) purchase or sell marketable securities issued by
companies which own or invest in commodities (including currencies), or
commodities contracts; and (ii) enter into commodities and futures
contracts relating to securities, currencies, indexes or any other
financial instruments, such as financial futures contracts and options on
such contracts.
5. Make loans to other persons except through the lending of its portfolio
securities, provided that this limitation does not apply to the purchase
of debt securities and loan participations and/or engaging in direct
corporate loans or repurchase agreements in accordance with its investment
objectives and policies. The loans cannot exceed 33 1/3% of a Fund's
assets. A Fund may also make loans to other investment companies to the
extent permitted by the 1940 Act or any exemptions therefrom which may be
granted to the Fund by the SEC.
For example, at a minimum, the Fund will not make any such loans unless
all requirements regarding common control and ownership of Fund shares are
met.
6. Issue senior securities (as defined in the 1940 Act) except as permitted
by rule, regulation or order of the SEC, or SEC staff interpretation.
7. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security or when selling its
own shares.
8. The Premium Yield Equity Fund may not, with respect to 75% of its total
assets, (i) purchase the securities of any issuer (except securities
issued or guaranteed by the United States government, its agencies or
instrumentalities or cash items) if, as a result, more than 5% of its
total assets would be invested in the securities of such issuer; or (ii)
acquire more than 10% of the outstanding voting securities of any one
issuer.
The Mid Cap Fund may not:
1. Invest 25% or more of the value of its total assets in the securities
(other than U.S. government securities) of issuers engaged in any single
industry.
2. Issue senior securities representing stock, except to the extent permitted
by the 1940 Act. In addition, the Fund will not issue senior securities
representing indebtedness, except as otherwise permitted under the 1940
Act.
3. Underwrite securities of other issuers, except insofar as the Fund may be
deemed an underwriter under the Securities Act in connection with the
disposition of its portfolio securities.
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4. Make loans of money or securities to other persons, except through
purchasing fixed income securities, lending portfolio securities or
entering into repurchase agreements in a manner consistent with the Fund's
investment policies.
5. Purchase or sell physical commodities or commodity contracts, except that
the Fund may purchase commodities contracts relating to financial
instruments, such as financial futures contracts and options on such
contracts.
6. Purchase or sell real estate or interests therein, except that it may
invest in securities of issuers engaged in the real estate industry and
may invest in securities secured by real estate or interests therein.
7. Purchase securities of an issuer, except as consistent with the
maintenance of its status as an open-end diversified company under the
1940 Act, the rules or regulations thereunder or any exemption there from,
as such statute, rules or regulations may be interpreted from time to
time.
8. Borrow money except from banks and then in an amount which does not exceed
33 1/3% of the value of its total assets (including the amount borrowed)
less the Fund's liabilities (other than borrowings), except that the Fund
may borrow up to an additional 5% of its total assets (not including the
amount borrowed) from a bank for temporary or emergency purposes.
The Capital Appreciation Fund, Core Plus Fixed Income Fund, Emerging Markets
Equity Fund, Global Equity Fund, Global Real Estate Fund, International Fixed
Income Fund, Large Cap Relative Value Fund, Market Neutral Equity Fund, Mid Cap
Value Fund, Small Cap Core Fund, Focused Equity Fund and Mazama Growth Fund may
not:
1. DIVERSIFICATION. For each diversified fund only, the Funds may not
purchase securities of an issuer that would cause the Funds to fail to
satisfy the diversification requirement for a diversified management
company under the 1940 Act, the rules or regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
2. BORROWING MONEY. The Funds may not engage in borrowing except as permitted
by the Investment Company Act of 1940, any rule, regulation or order under
the Act or any SEC staff interpretation of the Act.
3. UNDERWRITING. The Funds may not underwrite securities issued by other
persons, except to the extent that, in connection with the sale or
disposition of portfolio securities, a Fund may be deemed to be an
underwriter under certain federal securities laws or in connection with
investments in other investment companies.
4. LOANS. The Funds may not make loans to other persons except that a Fund
may (1) engage in repurchase agreements, (2) lend portfolio securities,
(3) purchase debt securities, (4) purchase commercial paper, and (5) enter
into any other lending arrangement permitted by the Investment Company Act
of 1940, any rule, regulation or order under the Act or any SEC staff
interpretation of the Act.
38
5. REAL ESTATE. The Funds may not purchase or sell real estate except that a
Fund may (1) hold and sell real estate acquired as a result of the Fund's
ownership of securities or other instruments (2) purchase or sell
securities or other instruments backed by real estate or interests in real
estate and (3) purchase or sell securities of entities or investment
vehicles, including real estate investment trusts that invest, deal or
otherwise engage in transactions in real estate or interests in real
estate.
6. COMMODITIES. The Funds may not purchase or sell physical commodities
except that a Fund may (1) hold and sell physical commodities acquired as
a result of the Fund's ownership of securities or other instruments, (2)
purchase or sell securities or other instruments backed by physical
commodities, (3) purchase or sell options, and (4) purchase or sell
futures contracts.
7. CONCENTRATION OF INVESTMENTS. The Funds, except the Global Real Estate
Fund, may not purchase the securities of an issuer (other than securities
issued or guaranteed by the United States Government, its agencies or its
instrumentalities) if, as a result, more than 25% of the Fund's total
assets would be invested in the securities of companies in the same
industry or group of industries. The Global Real Estate Fund will invest
more than 25% of its total assets the real estate industry.
8. SENIOR SECURITIES. The Funds may not issue senior securities except as
permitted by the Investment Company Act of 1940, any rule, regulation or
order under the Act or any SEC staff interpretation of the Act.
The following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
1. Diversification. Under the 1940 Act, a diversified investment
management company, as to 75% of its total assets, may not purchase
securities of any issuer (other than securities issued or guaranteed by
the U.S. Government, its agents or instrumentalities or securities of
other investment companies) if, as a result, more than 5% of its total
assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be held by the
fund.
2. Borrowing. The 1940 Act allows a fund to borrow from any bank
(including pledging, mortgaging or hypothecating assets) in an amount up
to 33 1/3% of its total assets (not including temporary borrowings not in
excess of 5% of its total assets).
3. Underwriting. Under the 1940 Act, underwriting securities involves a
fund purchasing securities directly from an issuer for the purpose of
selling (distributing) them or participating in any such activity either
directly or indirectly. Under the 1940 Act, a diversified fund may not
make any commitment as underwriter, if immediately thereafter the amount
of its outstanding underwriting commitments, plus the value of its
investments in securities of issuers (other than investment companies) of
which it owns more than 10% of the outstanding voting securities, exceeds
25% of the value of its total assets.
39
4. Lending. Under the 1940 Act, a fund may only make loans if expressly
permitted by its investment policies. The Fund's current investment policy
on lending is as follows: the Fund may not make loans if, as a result,
more than 33 1/3% of its total assets would be lent to other parties,
except that the Fund may: (i) purchase or hold debt instruments in
accordance with its investment objective and policies; (ii) enter into
repurchase agreements that are collateralized fully; and (iii) engage in
securities lending as described in its Statement of Additional
Information.
5. Senior Securities. Senior securities may include any obligation or
instrument issued by a fund evidencing indebtedness. The 1940 Act
generally prohibits funds from issuing senior securities, although it does
not treat certain transactions as senior securities, such as certain
borrowings, short sales, reverse repurchase agreements, firm commitment
agreements and standby commitments, with appropriate earmarking or
segregation of assets to cover such obligation.
NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the
Intermediate Fixed Income Fund, the Ultra Short Duration Fixed Income Fund, the
Short Duration Fixed Income Fund, the Sands Capital Select Growth Fund, the Mid
Cap Fund, the Healthcare and Biotechnology Fund, the Small Cap Value
Opportunities Fund, the Premium Yield Equity Fund and the International Growth
Fund and may be changed with respect to a Fund by the Board of Trustees.
No Fund may:
1. Pledge, mortgage or hypothecate assets except to secure borrowings (not to
exceed 33 1/3% of a Fund's assets) permitted by the fund's fundamental
limitation on borrowing.
2. Purchase securities on margin or effect short sales, except that each Fund
may (i) obtain short-term credits as necessary for the clearance of
security transactions; (ii) provide initial and variation margin payments
in connection with transactions involving futures contracts and options on
such contracts; and (iii) make short sales "against the box" or in
compliance with the SEC's position regarding the asset segregation
requirements imposed by Section 18 of the 1940 Act.
3. Purchase or hold illiquid securities, i.e., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in
more than seven days) if, in the aggregate, more than 15% (or 10%, with
respect to the Short Duration Fixed Income Fund and Ultra Short Duration
Fixed Income Fund) of its net assets would be invested in illiquid
securities. Unregistered securities sold in reliance on the exemption from
registration in Section 4(2) of the Securities Act of 1933 ("the 1933
Act") and securities exempt from registration on re-sale pursuant to Rule
144A of the 1933 Act may be treated as liquid securities under procedures
adopted by the Board of Trustees.
40
4. The predecessor Constellation Turner Funds and Mid Cap Fund may not invest
in companies for the purpose of exercising control.
5. The predecessor Constellation Turner Funds and Mid Cap Fund may not invest
its assets in securities of any investment company, except as permitted by
the 1940 Act.
6. The predecessor Constellation Turner Funds may not enter into futures
contracts and options on futures contracts except as permitted by
guidelines in the Funds' statement of additional information.
7. Make investments in securities when outstanding borrowings exceed 5% of
the Fund's total assets.
The following investment policies are non-fundamental policies of the
Intermediate Fixed Income Fund, the Ultra Short Duration Fixed Income Fund, the
Short Duration Fixed Income Fund, the Sands Capital Select Growth Fund, the Mid
Cap Fund, the Healthcare and Biotechnology Fund, the Small Cap Value
Opportunities Fund, the Premium Yield Equity Fund and the International Growth
Fund and may be changed with respect to a Fund by the Board of Trustees without
shareholder approval.
1. Each Fund may purchase securities on a when-issued basis and borrow money
(borrowing money is permitted by the Funds' fundamental limitation on
borrowing). The Intermediate Income Fund will not invest in when-issued
securities.
2. Each Fund, except the Intermediate Fixed Income Fund, may enter into
futures and options transactions.
3. Each Fund may hold up to 15% (10% for the Short Duration Fixed Income Fund
and Ultra Short Duration Fixed Income Fund) of its net assets in illiquid
securities.
4. Each Fund, except the Short Duration Fixed Income Fund, Ultra Short
Duration Fixed Income Fund and Intermediate Fixed Income Fund, may
purchase convertible securities.
5. Each Fund may enter into repurchase agreements not to exceed 33 1/3% of a
Fund's assets.
6. Each Fund may purchase fixed income securities, including variable and
floating rate instruments and zero coupon securities.
7. Each Fund, except for the Mid Cap Fund, may purchase Rule 144A securities
and other restricted securities.
41
8. Each Fund may purchase obligations of supranational entities in an amount
totaling less than 25% of the Fund's total assets.
9. Each Fund may, for temporary defensive purposes, invest up to 100% of its
total assets in money market instruments (including U.S. government
securities, bank obligations, commercial paper rated in the highest rating
category by an NRSRO and repurchase agreements involving the foregoing
securities), shares of money market investment companies (to the extent
permitted by applicable law and subject to certain restrictions) and cash.
THE ADVISOR
Touchstone Advisors, Inc. (the "Advisor"), is the Funds' investment advisor
under the terms of an advisory agreement (the "Advisory Agreement") dated March
1, 2006. Under the Advisory Agreement, the Advisor continuously reviews,
supervises and administers the Funds' investment program, subject to the
supervision of, and policies established by, the Board of Trustees of the Trust
(the "Trustees"). The Advisor determines the appropriate allocation of assets to
each Fund's sub-advisor(s) (the "Sub-Advisors").
The Advisory Agreement provides that the Advisor shall not be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in carrying out its duties, but shall not
be protected against any liability to the Trust or its shareholders by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its obligations or
duties thereunder. Prior to March 1, 2006, the Trust's advisor was Constellation
Investment Management Company, LP ("CIMCO").
The continuance of the Advisory Agreement as to the Funds after the first two
years must be specifically approved at least annually (i) by the vote of the
Trustees or by a vote of the shareholders of the Fund, and, in either case, (ii)
by the vote of a majority of the Trustees who are not parties to the Advisory
Agreement or "interested persons" (as defined in the 1940 Act) of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement will terminate automatically in the event of
its assignment, and is terminable at any time without penalty by the Trustees
or, with respect to a Fund, by a majority of the outstanding shares of the Fund,
on not less than 30 days' nor more than 60 days' written notice to the Advisor,
or by the Advisor on 90 days' written notice to the Trust.
The Advisor is a wholly-owned subsidiary of IFS Financial Services, Inc., which
is a wholly-owned subsidiary of The Western and Southern Life Insurance Company.
The Western and Southern Life Insurance Company is a wholly-owned subsidiary of
Western & Southern Financial Group, Inc., which is a wholly-owned subsidiary of
Western - Southern Mutual Holding Company. Ms. Jill T. McGruder may be deemed to
be an affiliate of the Advisor because she is a Director of the Advisor and an
officer of affiliates of the Advisor. Ms. McGruder, by reason of these
affiliations, may directly or indirectly receive benefits from the advisory fees
paid to the Advisor.
42
MANAGER OF MANAGER'S STRUCTURE
The Trust, on behalf of each Fund, seeks to achieve its investment goal by using
a "manager of managers" structure. Under a manager of managers structure, the
Advisor acts as investment adviser, subject to direction from and oversight by
the Trustees, to allocate and reallocate the Fund's assets among Sub-Advisors,
and to recommend that the Trustees hire, terminate or replace unaffiliated
Sub-Advisors without shareholder approval. By reducing the number of shareholder
meetings that may have to be held to approve new or additional sub-advisors for
the Fund, the Trust anticipates that there will be substantial potential cost
savings, as well as the opportunity to achieve certain management efficiencies,
with respect to any fund in which the manager of managers approach is chosen.
For the fiscal years ended September 30, 2007, 2008 and 2009, the Trust paid
advisory fees and received waivers and reimbursements as shown in the following
table:
---------------------------------------------------------------------------------------------------------------------
ADVISORY FEES PAID
(EXPENSES REIMBURSED) ADVISORY FEES WAIVED
------------------------------------------------------------------------------------------
FUND 2007 2008 2009 2007 2008 2009
---------------------------------------------------------------------------------------------------------------------
Intermediate Fixed
Income Fund $91,543 $83,811 $111,119 $24,697 $55,243 $82,907
---------------------------------------------------------------------------------------------------------------------
Ultra Short Duration
Fixed Income Fund $390,257 $404,936 $295,784 $98,807 $205,930 $190,717
---------------------------------------------------------------------------------------------------------------------
Short Duration Fixed
Income Fund $165,561 $132,307 $111,671 $56,515 $104,399 $97,457
---------------------------------------------------------------------------------------------------------------------
Healthcare and
Biotechnology Fund $500,196 $676,816 $456,120 $66,492 $127,367 $176,291
---------------------------------------------------------------------------------------------------------------------
Small Cap Value
Opportunities Fund $2,175,657 $1,525,525 $791,470 $286,251 $382,767 $186,348
---------------------------------------------------------------------------------------------------------------------
Sands Capital Select
Growth Fund $4,376,477 $5,322,750 $2,490,441 $246,159 $153,618 $298,538
---------------------------------------------------------------------------------------------------------------------
Mid Cap Fund $2,470,376 $3,785,848 $1,558,659 $485,026 $661,074 $324,722
---------------------------------------------------------------------------------------------------------------------
The advisory fees for the Capital Appreciation Fund, Core Plus Fixed Income
Fund, Emerging Markets Equity Fund, Global Equity Fund, Global Real Estate Fund,
International Fixed Income Fund, Large Cap Relative Value Fund, Market Neutral
Equity Fund, Mid Cap Value Fund, Small Cap Core Fund and Focused Equity Fund are
not included because the Funds had not commenced operations prior to September
30, 2009.
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the Premium Yield Equity Fund paid
advisory fees and received waivers and reimbursements as shown in the following
table:
43
---------------------------------------------------------------------------------------------------------------------
ADVISORY FEES PAID
(EXPENSES REIMBURSED) ADVISORY FEES WAIVED
------------------------------------------------------------------------------------------
FUND 2008 2009 2008 2009
---------------------------------------------------------------------------------------------------------------------
Premium Yield Equity Fund $126,397 $119,246 $72,299 $84,051
---------------------------------------------------------------------------------------------------------------------
For the fiscal year ended December 31, 2007, the period from January 1, 2008
through September 30, 2008, and the fiscal year ended September 30, 2009, the
International Growth Fund paid advisory fees and received waivers and
reimbursements as shown in the following table:
---------------------------------------------------------------------------------------------------------------------
ADVISORY FEES PAID
(EXPENSES REIMBURSED) ADVISORY FEES WAIVED
------------------------------------------------------------------------------------------
FUND 2007 2008 2009 2007 2008 2009
---------------------------------------------------------------------------------------------------------------------
International Growth Fund ($147,383)* $(152,134)* $228,655 $0 $0 $124,781
---------------------------------------------------------------------------------------------------------------------
* Reflects amount paid to Navellier & Associates, Inc. and Navellier
Management, Inc. by the predecessor Navellier International Portfolio
pursuant to an investment advisory agreement.
For the fiscal year ended December 31, 2008 and December 31, 2009, the
Predecessor Mazama Fund paid the following unified management fees to the
Advisor and received waivers and reimbursements as shown in the following table:
---------------------------------------------------------------------------------------------------------------------
ADVISORY FEES PAID
(EXPENSES REIMBURSED) ADVISORY FEES WAIVED
------------------------------------------------------------------------------------------
FUND 2008 2009 2008 2009
---------------------------------------------------------------------------------------------------------------------
Mazama Growth Fund $125,853* $
---------------------------------------------------------------------------------------------------------------------
* Fees paid/expenses reimbursed from the commencement date of the
Predecessor Mazama Fund (January 30, 2008) through December 31, 2008.
Reflects amount paid to the Advisor by the Predecessor Mazama Fund pursuant
to a Management Agreement.
For its services, the Advisor is entitled to receive an investment advisory fee
from each Fund at an annualized rate, based on the average daily net assets of
the Fund, as set forth below. The Advisor pays sub-advisory fees to each
Sub-Advisor from its advisory fee.
----------------------------------------------------------------------------------------------------------------
NAME OF FUND ANNUAL FEE RATE
----------------------------------------------------------------------------------------------------------------
Mid Cap Fund 0.80%
----------------------------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund 1.00%
----------------------------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund 0.40%
----------------------------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund 0.25%
----------------------------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund 0.25%
----------------------------------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund 0.95%
----------------------------------------------------------------------------------------------------------------
Premium Yield Equity Fund 0.70% on the first $100 million of assets; 0.65% on
the value of assets above that amount
----------------------------------------------------------------------------------------------------------------
44
----------------------------------------------------------------------------------------------------------------
NAME OF FUND ANNUAL FEE RATE
----------------------------------------------------------------------------------------------------------------
International Growth Fund 0.90%
----------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 0.75% on first $25 million of assets; 0.70% next
$225 million of assets; 0.65% on assets over $250
million
----------------------------------------------------------------------------------------------------------------
Core Plus Fixed Income Fund 0.45% on first $100 million of assets; 0.425% on
next $150 million of assets; 0.40% on assets over
$250 million
----------------------------------------------------------------------------------------------------------------
Emerging Markets Equity Fund 1.10% on first $200 million of assets; 1.05% on next
$200 million of assets; 0.95% on assts over $400
million
----------------------------------------------------------------------------------------------------------------
Global Equity Fund 0.85% on first $50 million of assets; 0.80% on next
$450 million of assets; 0.75% on assets over $500
million
----------------------------------------------------------------------------------------------------------------
Global Real Estate Fund 0.80%
----------------------------------------------------------------------------------------------------------------
International Fixed Income Fund 0.55% on first $100 million of assets; 0.50% on next
$150 million of assets; 0.45% on assets over $250
million
----------------------------------------------------------------------------------------------------------------
Large Cap Relative Value Fund 0.70% on first $100 million of assets; 0.65% on
assets over $100 million
----------------------------------------------------------------------------------------------------------------
Market Neutral Equity Fund 1.30%
----------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund 0.85% on first $100 million of assets; 0.80% on next
$300 million of assets; 0.75% on assets over $400
million
----------------------------------------------------------------------------------------------------------------
Small Cap Core Fund 0.85%
----------------------------------------------------------------------------------------------------------------
Focused Equity Fund 0.70% on first $100 million of assets; 0.65% on next
$400 million of assets; 0.60% on assets over $500
million
----------------------------------------------------------------------------------------------------------------
Mazama Growth Fund 0.95%
----------------------------------------------------------------------------------------------------------------
As described in the Prospectus, the Sands Capital Select Growth Fund is subject
to base investment advisory fees that may be adjusted if the Fund outperforms or
under-performs a stated benchmark. The "Highest/Lowest Possible Advisory Fee"
column represents the maximum and minimum amount that the Advisor may receive
pursuant to the performance fee under the Advisory Agreement. Set forth below is
information about the advisory fee arrangements of the Sands Capital Select
Growth Fund:
-------------------------------------------------------------------------------------------------------------------------
HIGHEST /
LOWEST
ANNUAL POSSIBLE
BASE ADVISORY ADJUSTMENT ADVISORY
FUND BENCHMARK REQUIRED EXCESS PERFORMANCE FEE RATE FEE
-------------------------------------------------------------------------------------------------------------------------
Sands Capital Select Russell 1000 1.00% /
Growth Fund Growth Index +/- 2.50% 0.85% +/- 0.15% 0.70%
-------------------------------------------------------------------------------------------------------------------------
Each Fund's advisory fee is accrued daily and paid monthly, based on the Fund's
average net assets during the current month. The Sands Capital Select Growth
Fund's performance adjustment is calculated and paid monthly by comparing the
Fund's performance to the performance of the Fund's benchmark over a
"performance period." The performance period consists of a rolling 12-month
period that includes the most current month for which performance is available
plus the previous 11 months. The Fund's annual performance adjustment rate is
multiplied by the average net assets of the Fund over the performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the current month and the denominator of which is 365 (366 in leap
years). The resulting amount is then added (in the case of overperformance) or
subtracted from (in the case of underperformance) to the Fund's base fee.
45
For example, assume that the Sands Capital Select Growth Fund's average net
assets as of March 31 were $55,000,000, the average net assets of the Fund over
the 12-month period ending March 31 was $50,000,000, and that it is not a leap
year. The Fund's base fee for March is $39,705 ($55,000,000 x 0.85%, x 31/365).
If the Fund outperformed (or underperformed) the Russell 1000 Growth Index by
less than 2.50% over this performance period, then there is no adjustment to the
Fund's base fee. If the Fund outperformed (or underperformed) the Russell 1000
Growth Index by 2.50% or more over this performance period, then the Advisor's
advisory fee would increase (or decrease) by a maximum of $6,370 ($50,000,000 x
0.15%, x 31/365).
Because the adjustment to the Sands Capital Select Growth Fund's base advisory
fee is based upon the Fund's performance compared to the investment record of
its stated benchmark, the controlling factor as to whether a performance
adjustment will be made is not whether the Fund's performance is up or down per
se, but whether it is up or down more or less than the record of its respective
benchmark. Moreover, the comparative investment performance of the Fund is based
solely on the relevant performance period without regard to relative performance
over a longer or shorter period of time.
Pursuant to a Fee Waiver Agreement between the Advisor and the Trust, the
Advisor has agreed to limit certain Funds net operating expenses ("Net
Expenses") to the following levels. These expense limitations will remain in
effect until at least January 27, 2011, except the Mazama Growth Fund which will
remain in effect until at least January 27, 2014.
CONTRACTUAL LIMIT
FUND ON "NET EXPENSES"
--------------------------------------------------------------------------------
Mid Cap Fund Class A 1.21%
--------------------------------------------------------------------------------
Mid Cap Fund Class C 1.96%
--------------------------------------------------------------------------------
Mid Cap Fund Class Y 0.96%
--------------------------------------------------------------------------------
Mid Cap Fund Class Z 1.21%
--------------------------------------------------------------------------------
Small Cap Value Opportunities Fund Class Z 1.50%
--------------------------------------------------------------------------------
Healthcare and Biotechnology Fund Class A 1.55%
--------------------------------------------------------------------------------
Healthcare and Biotechnology Fund Class C 2.30%
--------------------------------------------------------------------------------
Short Duration Fixed Income Fund Class Z 0.74%
--------------------------------------------------------------------------------
Short Duration Fixed Income Fund Class Y 0.49%
--------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund Class Z 0.69%
--------------------------------------------------------------------------------
Intermediate Fixed Income Fund Institutional Shares 0.40%
--------------------------------------------------------------------------------
Premium Yield Equity Fund Class A 1.20%
--------------------------------------------------------------------------------
Premium Yield Equity Fund Class C 1.95%
--------------------------------------------------------------------------------
Premium Yield Equity Fund Class Y 0.95%
--------------------------------------------------------------------------------
International Growth Fund Class A 1.35%
--------------------------------------------------------------------------------
46
--------------------------------------------------------------------------------
International Growth Fund Class C 2.10%
--------------------------------------------------------------------------------
International Growth Fund Class Y 1.10%
--------------------------------------------------------------------------------
Emerging Markets Equity Fund Class A 1.74%
--------------------------------------------------------------------------------
Emerging Markets Equity Fund Class C 2.49%
--------------------------------------------------------------------------------
Emerging Markets Equity Fund Class Y 1.49%
--------------------------------------------------------------------------------
Emerging Markets Equity Fund Institutional Shares 1.34%
--------------------------------------------------------------------------------
Capital Appreciation Fund Class A 1.19%
--------------------------------------------------------------------------------
Capital Appreciation Fund Class C 1.94%
--------------------------------------------------------------------------------
Capital Appreciation Fund Class Y 0.94%
--------------------------------------------------------------------------------
Capital Appreciation Fund Institutional Shares 0.79%
--------------------------------------------------------------------------------
Mid Cap Value Fund Class A 1.29%
--------------------------------------------------------------------------------
Mid Cap Value Fund Class C 2.04%
--------------------------------------------------------------------------------
Mid Cap Value Fund Class Y 1.04%
--------------------------------------------------------------------------------
Mid Cap Value Fund Institutional Shares 0.89%
--------------------------------------------------------------------------------
Global Real Estate Fund Class A 1.39%
--------------------------------------------------------------------------------
Global Real Estate Fund Class C 2.14%
--------------------------------------------------------------------------------
Global Real Estate Fund Class Y 1.14%
--------------------------------------------------------------------------------
Global Real Estate Fund Institutional Shares 0.99%
--------------------------------------------------------------------------------
Large Cap Relative Value Fund Class A 1.19%
--------------------------------------------------------------------------------
Large Cap Relative Value Fund Class C 1.94%
--------------------------------------------------------------------------------
Large Cap Relative Value Fund Class Y 0.94%
--------------------------------------------------------------------------------
Large Cap Relative Value Fund Institutional Shares 0.79%
--------------------------------------------------------------------------------
Small Cap Core Fund Class A 1.34%
--------------------------------------------------------------------------------
Small Cap Core Fund Class C 2.09%
--------------------------------------------------------------------------------
Small Cap Core Fund Class Y 1.09%
--------------------------------------------------------------------------------
Small Cap Core Fund Institutional Shares 0.94%
--------------------------------------------------------------------------------
Global Equity Fund Class A 1.34%
--------------------------------------------------------------------------------
Global Equity Fund Class C 2.09%
--------------------------------------------------------------------------------
Global Equity Fund Class Y 1.09%
--------------------------------------------------------------------------------
Global Equity Fund Institutional Shares 0.94%
--------------------------------------------------------------------------------
Market Neutral Equity Fund Class A 1.75%
--------------------------------------------------------------------------------
Market Neutral Equity Fund Class C 2.50%
--------------------------------------------------------------------------------
Market Neutral Equity Fund Class Y 1.50%
--------------------------------------------------------------------------------
Core Plus Fixed Income Fund Class A 0.95%
--------------------------------------------------------------------------------
Core Plus Fixed Income Fund Class C 1.70%
--------------------------------------------------------------------------------
Core Plus Fixed Income Fund Class Y 0.70%
--------------------------------------------------------------------------------
Core Plus Fixed Income Fund Institutional Shares 0.50%
--------------------------------------------------------------------------------
International Fixed Income Fund Class A 1.09%
--------------------------------------------------------------------------------
International Fixed Income Fund Class C 1.84%
--------------------------------------------------------------------------------
International Fixed Income Fund Class Y 0.84%
--------------------------------------------------------------------------------
International Fixed Income Fund Institutional Shares 0.69%
--------------------------------------------------------------------------------
Focused Equity Fund Class A 1.20%
--------------------------------------------------------------------------------
Focused Equity Fund Class C 1.95%
--------------------------------------------------------------------------------
Focused Equity Fund Class Y 0.95%
--------------------------------------------------------------------------------
Focused Equity Fund Institutional Shares 0.80%
--------------------------------------------------------------------------------
Mazama Growth Fund Class A 1.38%
--------------------------------------------------------------------------------
Mazama Growth Fund Class C 2.13%
--------------------------------------------------------------------------------
Mazama Growth Fund Class Y 1.13%
--------------------------------------------------------------------------------
Mazama Growth Fund Institutional Shares 0.98%
--------------------------------------------------------------------------------
47
Pursuant to a Fee Waiver Agreement between the Advisor and the Trust, the
Advisor has agreed to limit the Sands Capital Select Growth Fund's other
operating expenses ("Other Expenses") to the following levels. These expense
limitations will remain in effect until at least January 27, 2011.
CONTRACTUAL LIMIT
FUND ON "OTHER EXPENSES"
--------------------------------------------------------------------------------
Sands Capital Select Growth Fund Class Y 0.25%
--------------------------------------------------------------------------------
Sands Capital Select Growth Fund Class Z 0.25%
--------------------------------------------------------------------------------
THE SUB-ADVISORS
The Advisor has selected Sub-Advisors to manage all or a portion of a Fund's
assets, which allocation is determined by the Advisor. The Sub-Advisors make the
investment decisions for the Fund assets allocated to them, and continuously
review, supervise and administer a separate investment program, subject to the
supervision of, and policies established by, the Trustees of the Trust.
Each Sub-Advisory Agreement provides that a Sub-Advisor shall not be protected
against any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties, or from reckless disregard of its obligations or duties thereunder.
For their respective services, the Sub-Advisors receive a fee from the Advisor.
As described in the Prospectus, each Sub-Advisor receives sub-advisory fees with
respect to each Fund that it sub-advises, except Sands Capital Management, LLC
receives a base investment sub-advisory fee that may be adjusted if the Fund
outperforms or under-performs its stated benchmark. Each Sub-Advisor's base fee
with respect to each sub-advised Fund is accrued daily and paid monthly, based
on the Fund's average net assets allocated to the Sub-Advisor during the current
month.
MILNE LLC D/B/A JKMILNE ASSET MANAGEMENT
Milne LLC d/b/a JKMilne Asset Management ("JKMilne"), 1520 Royal Palm Square
Blvd, Suite 210, Fort Myers, FL 33919, serves as investment sub-advisor to the
Touchstone Intermediate Fixed Income Fund. JKMilne is independently owned.
JKMilne is controlled by John K. Milne.
A portfolio management team consisting of John K. Milne, Deborah S. Wingerson
and Brian D. Borneman manages the Intermediate Fixed Income Fund.
Other Accounts. As of September 30, 2009 Mr. Milne managed 0 other registered
investment companies, 0 other pooled investment vehicles, and 25 other accounts
with total assets of approximately $1.7 billion. With respect to such accounts,
none of the accounts pay JKMilne a fee based upon the performance of the
account.
48
As of September 30, 2009 Ms. Wingerson managed 0 other registered investment
companies, 0 other pooled investment vehicles, and 25 other accounts with total
assets of approximately $1.7 billion. With respect to such accounts, none of the
accounts pay JKMilne a fee based upon the performance of the account.
As of September 30, 2009 Mr. Borneman managed 0 other registered investment
companies, 0 other pooled investment vehicles, and 25 other accounts with total
assets of approximately $1.7 billion. With respect to such accounts, none of the
accounts pay JKMilne a fee based upon the performance of the account.
Conflicts. Actual or potential conflicts of interest may arise when a portfolio
manager has management responsibilities to more than one account (including the
Fund). This would include the execution and allocation of investment
opportunities. Other potential conflicts might include conflicts created by
specific portfolio manager compensation arrangements, personal securities
trading, and conflicts relating to selection of brokers or dealers to execute
Fund portfolio trades and/or specific uses of commissions from Fund portfolio
trades (for example, research, or "soft dollars"). JKMilne has adopted policies
and procedures designed to safeguard the Fund from being negatively affected as
a result of any such potential conflicts. JKMilne policies and procedures
address such issues as execution of portfolio transactions, aggregation and
allocation of trades, directed brokerage and soft dollars. Additionally, JKMilne
maintains a code of ethics that addresses rules on personal trading and insider
information.
Compensation. Each portfolio manager is paid a fixed base salary and a variable
annual incentive. Base salary is determined within a market competitive
position-specific salary range, based on the portfolio manager's experience and
performance. The annual incentive amount is discretionary and based primarily on
a portfolio manager's contribution to the client and firm goals.
Fund Ownership. As of September 30, 2009 Mr. Milne, Ms. Wingerson and Mr.
Borneman did not own any shares of the Intermediate Fixed Income Fund.
FORT WASHINGTON INVESTMENT ADVISORS, INC.
Fort Washington Investment Advisors, Inc. ("Fort Washington"), 303 Broadway,
Suite 1200, Cincinnati, Ohio, 45202, serves as investment sub-advisor to the
Ultra Short Duration Fixed Income Fund and Focused Equity Fund. Fort Washington
is a wholly owned subsidiary of The Western and Southern Life Insurance Company.
The Western and Southern Life Insurance Company is a wholly owned subsidiary of
Western & Southern Financial Group, Inc., which is a wholly owned subsidiary of
Western-Southern Mutual Holding Company. Ms. McGruder may be deemed to be an
affiliate of Fort Washington.
A core portfolio management team consisting of Scott D. Weston and Brent A.
Miller, CFA, manages the Ultra Short Duration Fixed Income Fund. Even though
each person has separate sector responsibilities, the team shares equally in the
decision making and structuring process of the Funds.
49
James Wilhelm manages the Focused Equity Fund.
Other Accounts. As of September 30, 2009, Mr. Weston managed one registered
investment company with approximately $112 million in total assets, one other
pooled investment vehicle with total assets of approximately $61 million, and 34
other accounts with total assets of approximately $4.8 billion. With respect to
such accounts, none of the accounts pay Fort Washington a fee based upon the
performance of the account.
As of September 30, 2009, Mr. Miller managed one other registered investment
company with approximately $112 million in total assets, one other pooled
investment vehicle with total assets of approximately $61 million, and 34 other
accounts with total assets of approximately $4.8 billion. With respect to such
accounts, none of the accounts pay Fort Washington a fee based upon the
performance of the account.
As of September 30, 2009, Mr. Wilhelm managed zero other registered investment
companies, zero other pooled investment vehicles, and three other accounts with
total assets of approximately $25.3 million. With respect to such accounts, none
of the accounts pay Fort Washington a fee based upon the performance of the
account.
Conflicts. Actual or potential conflicts of interest may arise when a portfolio
manager has management responsibilities to more than one account (including the
Funds). This would include devotion of unequal time and attention to the
management of the accounts, inability to allocate limited investment
opportunities across a broad array of accounts and incentive to allocate
opportunities to an account where the portfolio manager has a greater financial
incentive, such as allocation opportunities for performance based accounts. Fort
Washington has adopted policies and procedures to address such conflicts.
Compensation. All of Fort Washington's portfolio managers receive a fixed base
salary and annual performance bonuses. Bonuses are based primarily on the
overall performance of Fort Washington as well as the pre-tax performance
(relative to the appropriate benchmark) of their respective asset category over
a one-year and a three-year time horizon. Secondarily, portfolio managers are
also assessed on their ability to retain clients and attract new clients.
Additionally, a long-term retention plan was instituted in 2000, whereby certain
investment professionals are periodically granted participation units with a
7-year cliff vesting schedule. The structure includes long-term vesting
provisions. The percentage of compensation allocated to performance bonuses,
asset-increase incentives and long-term incentive compensation is determined
annually by the firm's President and approved by the Board of Directors.
Fund Ownership. There is no fund ownership information available for the Focused
Equity Fund since the Fund had not commenced operations prior to September 30,
2009. The following table indicates for the Ultra Short Duration Fixed Income
Fund, the dollar range of shares beneficially owned by each of the Fund's
portfolio managers as of September 30, 2009:
50
-------------------------------------------------------------------------------------------------------------
PORTFOLIO MANAGER FUND DOLLAR RANGE OF FUND SHARES OWNED
-------------------------------------------------------------------------------------------------------------
Scott D. Weston Ultra Short Duration Fixed Income Fund None
-------------------------------------------------------------------------------------------------------------
Brent A. Miller Ultra Short Duration Fixed Income Fund None
-------------------------------------------------------------------------------------------------------------
TURNER INVESTMENT PARTNERS
Turner Investment Partners, Inc. ("Turner"), 1205 Westlakes Drive, Suite 100,
Berwyn, Pennsylvania 19312, serves as sub-advisor for the Mid Cap, Healthcare
and Biotechnology and Small Cap Value Opportunities Funds. Turner is a
professional investment management firm founded in March 1990. Robert E. Turner
is the Chairman and controlling shareholder of Turner.
Other Accounts. Frank Sustersic, CFA, is the lead manager on the Healthcare and
Biotechnology Fund and has primary responsibility for the management of the
Fund. Heather McMeekin and Vijay Shankaran are co-managers on the Healthcare and
Biotechnology Fund.
As of September 30, 2009, Mr. Sustersic managed 2 other registered investment
companies with approximately $446 million in total assets, 4 other pooled
investment vehicles with total assets of approximately $20 million and 9 other
accounts with approximately $176 million in total assets. With respect to other
pooled investment vehicles, 3 accounts with assets of approximately $20 million
pays Turner a fee based upon the performance of the account. With respect to
other accounts, 1 account with assets of approximately $9 million pays Turner a
fee based upon the performance of the account.
As of September 30, 2009, Ms. McMeekin co-managed 5 other registered investment
company accounts with approximately $751 million in total assets, 19 other
pooled investment vehicles with total assets of approximately $127 million and
23 other accounts with approximately $640 million in total assets. With respect
to other pooled investment vehicles, 3 accounts with assets of approximately $27
million pays Turner a fee based upon the performance of the account. With
respect to other accounts, 1 account with assets of approximately $9 million
pays Turner a fee based upon the performance of the account.
As of September 30, 2009, Mr. Shankaran co-managed 1 other registered investment
company account with approximately $13 million in total assets, 6 other pooled
investment vehicles with total assets of approximately $58 million and 4 other
accounts with approximately $17 million in total assets. With respect to other
pooled investment vehicles, 4 accounts with assets of approximately $43 million
pays Turner a fee based upon the performance of the account. With respect to
other accounts, 2 accounts with assets of approximately $12 million pays Turner
a fee based upon the performance of the account.
Thomas DiBella, CFA, Steven Gold, CFA, and Joseph Krocheski are responsible for
the management of the Mid Cap Fund with Mr. DiBella acting as lead manager. Mr.
DiBella, Mr. Gold, David J. Brenia and Robert S. Clark are responsible for the
management of the Small Cap Value Opportunities Fund with Mr. DiBella acting as
lead manager.
As of September 30, 2009, Mr. DiBella co-managed 2 other registered investment
companies with approximately $31 million in total assets, 18 other pooled
investment vehicles with total assets of approximately $242 million and 29 other
accounts with approximately $1.2 billion in total assets, none of which pay
Turner a fee based upon the performance of the account.
51
As of September 30, 2009, Mr. Gold co-managed 2 registered investment companies
with approximately $31 million in total assets, 18 other pooled investment
vehicles with total assets of approximately $242 million and 28 other account
with approximately $1.2 billion in total assets, none of which pay Turner a fee
based upon the performance of the account.
As of September 30, 2009, Mr. Kroscheski co-managed 1 other registered
investment company account with approximately $2 million in total assets, 9
other pooled investment vehicles with total assets of approximately $148 million
and 7 other accounts with approximately $421 million in total assets, none of
which pay Turner a fee based upon the performance of the account.
As of September 30, 2009, Mr. Brenia co-managed 0 other registered investment
company accounts, 0 other pooled investment vehicles and 8 other accounts with
approximately $233 million in total assets, none of which pay Turner a fee based
upon the performance of the account.
As of September 30, 2009, Mr. Clark co-managed 0 other registered investment
company accounts, 0 other pooled investment vehicles and 8 other accounts with
approximately $233 million in total assets, none of which pay Turner a fee based
upon the performance of the account.
Conflicts. As is typical for many money managers, potential conflicts of
interest may arise relating to Turner's management of accounts where not all
accounts are able to participate in a desired IPO, or other limited opportunity;
Turner's use of soft dollars and other brokerage practices; the voting of
proxies; employee personal securities trading; the side by side management of
accounts with performance based fees and accounts with fixed fees; and a variety
of other circumstances. In all cases, however, Turner believes it has written
policies and procedures in place reasonably designed to prevent violations of
the federal securities laws and to prevent material conflicts of interest from
arising.
Compensation. Turner's investment professionals receive a base salary
commensurate with their level of experience. Turner's goal is to maintain
competitive base salaries through review of industry standards, market
conditions and salary surveys. Bonus compensation, which is a multiple of base
salary, is based on the performance of each individual's sector and portfolio
assignments relative to appropriate market benchmarks. In addition, each
employee is eligible for equity awards. Turner believes this compensation
provides incentive to attract and retain highly qualified people.
The objective performance criteria noted above accounts for 90% of the bonus
calculation. The remaining 10% is based upon subjective, "good will" factors
including teamwork, interpersonal relations, the individual's contribution to
overall success of the firm, media and client relations, presentation skills and
professional development. Portfolio managers/analysts are reviewed on an annual
basis. The Chief Investment Officer, Robert E. Turner CFA, is responsible for
setting base salaries, bonus targets and making all subjective judgments related
to an investment professional's compensation.
52
Fund Ownership. The following table indicates for the Healthcare and
Biotechnology, Mid Cap, and Small Cap Value Opportunities Funds, the dollar
range of shares beneficially owned by each of the Fund's portfolio managers as
of September 30, 2009.
-------------------------------------------------------------------------------------------------------------
PORTFOLIO MANAGER FUND DOLLAR RANGE OF FUND SHARES OWNED
-------------------------------------------------------------------------------------------------------------
Thomas DiBella Small Cap Value Opportunities Fund None
Mid Cap Fund $100,001-$500,000
-------------------------------------------------------------------------------------------------------------
Steven Gold Mid Cap Fund None
Small Cap Value Opportunities Fund None
-------------------------------------------------------------------------------------------------------------
Frank Sustersic Healthcare and Biotechnology Fund $100,001-$500,000
-------------------------------------------------------------------------------------------------------------
Heather McMeekin Healthcare and Biotechnology Fund $50,001-$100,000
-------------------------------------------------------------------------------------------------------------
Vijay Shankaran Healthcare and Biotechnology Fund None
-------------------------------------------------------------------------------------------------------------
Joseph Krocheski Mid Cap Fund None
-------------------------------------------------------------------------------------------------------------
David J. Brenia Small Cap Value Opportunities Fund None
-------------------------------------------------------------------------------------------------------------
Robert S. Clark Small Cap Value Opportunities Fund None
-------------------------------------------------------------------------------------------------------------
SANDS CAPITAL MANAGEMENT
Sands Capital Management, LLC ("Sands Capital Management"), located at 1101
Wilson Boulevard, Suite 2300, Arlington, VA 22209, serves as investment
sub-advisor to the Sands Capital Select Growth Fund. Sands Capital Management is
controlled by Frank M. Sands, Sr., Frank M. Sands, Jr., Marjorie R. Sands and
Jessica Sands. As a sub-advisor, Sands Capital Management makes investment
decisions for the Fund.
Other Accounts. Sands Capital employs a growth strategy for all investors - the
Sands Capital Large Cap Growth Equity strategy is their primary strategy - as of
September 30, 2009 this strategy was utilized for approximately 99.0% of its
client portfolios, including funds as well as institutional and individual
accounts.
The Sands Capital Select Growth Fund is managed by a team led by Frank M. Sands,
Jr., CFA.
As of September 30, 2009, Mr. Sands, Jr. and the investment team sub-advised 8
other registered investment companies with approximately $2.0 billion in total
assets and 659 other accounts totaling $13.0 billion in assets. This other
account number counts each separately managed account program (or "wrap"
program) as one account.
As of September 30, 2009, Sands Capital participated in 3 separately managed
account programs in which there were approximately 1396 underlying accounts. The
investment team also managed 9 other pooled investment vehicles with total
assets of approximately $1.5 billion. With respect to such underlying accounts,
10 accounts, with assets of approximately $1.5 billion, pays Sands Capital
Management a fee based upon the performance of the account in addition to a base
fee.
53
Conflicts. As an investment adviser to a variety of clients, Sands Capital
recognizes there are actual or potential conflicts of interest inherent in its
business. For example, conflicts of interest could result from a portfolio
managers' management of multiple accounts for multiple clients, the execution
and allocation of investment opportunities, the use of brokerage commission to
obtain research, multiple fee arrangements, and personal trading by firm
employees. Sands Capital has addressed these conflicts by developing policies
and procedures it believes are reasonably designed to treat all clients in a
fair and equitable manner over time. Sands Capital's policies and procedures
address such issues as execution of portfolio transactions, aggregation and
allocation of trades, directed brokerage and soft dollars. Additionally, Sands
Capital maintains a Code of Ethics that addresses rules on personal trading and
insider information.
Compensation. Investment professionals benefit from a salary competitive in the
industry, an annual qualitative bonus based on subjective review of the
employees' overall contribution, and a standard profit sharing plan and 401(k)
plan. Additional incentives include equity participation. The investment
professionals also participate in an investment results bonus. The investment
results bonus is calculated from the pre-tax performance variance of the Sands
Capital composite returns and their respective benchmarks over 1, 3 and 5 year
periods, weighted towards the 3 and 5 year results.
Fund Ownership. As of September 30, 2009, Frank Sands, Jr. did not own any
shares of the Sands Capital Select Growth Fund.
Sands Capital's performance adjustment with respect to the Sands Capital Select
Growth Fund's performance is calculated and paid monthly by comparing the Fund's
performance to the performance of the Fund's benchmark, the Russell 1000 Growth
Index, over a "performance period." The performance period consists of a rolling
12-month period that includes the current month for which performance is
available plus the previous 11 months. The Fund's annual performance adjustment
rate is multiplied by the average net assets of the Fund over the performance
period, which is then multiplied by a fraction, the numerator of which is the
number of days in the current month and the denominator of which is 365 (366 in
leap years). The resulting amount is then added to (in the case of
overperformance) or subtracted from (in the case of underperformance) the Sands
Capital's base fee, provided such overperformance or underperformance exceeds a
designated "hurdle rate."
MILLER/HOWARD INVESTMENTS
Miller/Howard Investments Inc. ("Miller/Howard"), an SEC-registered investment
adviser located at 324 Upper Byrdcliffe Road, Woodstock, NY, 12498, serves as
sub-advisor to the Touchstone Premium Yield Equity Fund. Miller/Howard was
founded in 1984 and is owned by Lowell G. Miller, Helen Hamada, John E. Leslie
III, Lee S. Chun and Bryan J. Spratt.
Lowell G. Miller, Bryan J. Spratt, John E. Leslie III and Roger G. Young are
responsible for the daily management of the Premium Yield Equity Fund.
Other Accounts. As of September 30, 2009, the portfolio management team that
manages the Premium Yield Equity Fund managed 1 other registered investment
company with approximately $19.3 million in total assets, 2 other pooled
investment vehicles (collective trusts) with total assets of approximately $45.4
million and 1,944 other accounts with approximately $1.0 billion in total
assets. None of the accounts listed have a performance based fee.
54
Conflicts. As an investment advisor to multiple types of clients, Miller/Howard
recognizes that actual or potential conflicts of interest may arise. For
example, conflicts of interest could result from a portfolio managers'
management of multiple accounts for multiple clients, the allocation and
execution of investment opportunities, multiple fee arrangements, and personal
trading. Miller/Howard addresses potential conflicts by developing policies and
procedures it believes are reasonably designed to treat all clients in a fair
and equitable manner. Miller/Howard's policies and procedures cover such issues
as execution of portfolio transactions, aggregation and allocation of trades,
brokerage and soft dollars. Miller/Howard has adopted a Code of Ethics that
addresses rules on personal trading and insider information which all employees
are required to observe.
Compensation. Miller/Howard's investment professionals receive a base salary in
line with industry and geographic standards, bonus based on performance, company
contribution to a retirement plan, participation in the company health insurance
plan and profit sharing based on ownership. Investment professionals are
evaluated annually by the company's Board of Directors for their contribution to
portfolio performance as well as participation in proprietary research projects
that the firm conducts on an ongoing basis. Mr. Miller, Mr. Spratt and Mr.
Leslie are currently equity owners in the firm, and each receives an annual
share of firm profits available after all expenses are paid. Each member of the
Investment Team shares in the progress of the firm and shares responsibility for
that progress through stock selection, monitoring, and the development of the
firm's information and research expertise. The firm makes no real distinction
between "portfolio manager" and "analyst," and each member of the Investment
Team is evaluated based on his or her performance with regard to management,
analysis, and basic research.
Fund Ownership. As of September 30, 2009, Mr. Miller, Mr. Spratt, Mr. Leslie and
Mr. Young did not own any shares of the Premium Yield Equity Fund.
NAVELLIER & ASSOCIATES
Navellier & Associates Inc. ("Navellier"), an SEC-registered investment adviser
located at One East Liberty, Third Floor, Reno, NV 89501, serves as sub-advisor
to the Touchstone International Growth Fund. Navellier was founded in 1987 and
Louis G. Navellier is the primary and majority owner of Navellier.
Louis G. Navellier, James O'Leary and Phillip Mitteldorf are responsible for the
daily management of the International Growth Fund.
Other Accounts. As of September 30, 2009, Mr. Navellier managed 2 other
registered investment companies with approximately $888 million in total assets,
0 other pooled investment vehicles and 5,206 other accounts with approximately
$1.7 billion in total assets. 88 of the 5,206 accounts listed have a performance
based fee totaling $25 million.
55
As of September 30, 2009, Mr. O'Leary managed 0 other registered investment
companies, 0 other pooled investment vehicles and 94 other accounts with
approximately $88 million in total assets. Three of the other accounts listed
have a performance based fee totaling $1 million.
As of September 30, 2009, Mr. Mitteldorf managed 0 other registered investment
companies, 0 other pooled investment vehicles and 94 other accounts with
approximately $88 million in total assets. Three of the accounts listed for Mr.
Mitteldorf have a performance based fee totaling $1 million.
Compensation. Portfolio managers receive a fixed base salary and incentive
compensation. Incentive compensation is based upon the asset growth of the
portfolio(s) for which they are responsible. Incentive compensation is based
upon reaching certain asset levels and is measured on a quarterly basis.
Incentive compensation is paid as a percentage of the management fees received
from those portfolios for which the portfolio manager is directly responsible.
Portfolio managers are eligible to participate in Navellier's stock ownership
program. Stock is granted to key employees dependent upon various measures such
as asset growth and performance.
Conflicts. Actual or potential conflicts of interest may arise when a portfolio
manager has management responsibilities to more than one account (including the
Fund), such as devotion of unequal time and attention to the management of the
accounts, inability to allocate limited investment opportunities across a broad
band of accounts and incentive to allocate opportunities to an account where the
portfolio manager has a greater financial incentive, such as a pooled investment
vehicle or other account with a performance based fee. Navellier manages
separate managed accounts that conform to the same investment model as the Fund;
however a portfolio manager is not compensated differently on other account
types. Additionally, the portfolio manager issues orders to buy and sell
securities to Navellier's Trading Department and does not give specific
instructions as to whether a particular account should receive priority in the
trading process.
Fund Ownership. The following table indicates for the International Growth Fund,
the dollar range of shares beneficially owned by each of the Fund's portfolio
managers as of September 30, 2009.
--------------------------------------------------------------------
PORTFOLIO MANAGER DOLLAR RANGE OF FUND SHARES OWNED
--------------------------------------------------------------------
Louis G. Navellier $50,001-$100,000
--------------------------------------------------------------------
Phillip Mitteldorf $50,001-$100,000
--------------------------------------------------------------------
James O'Leary $100,001-$500,000
--------------------------------------------------------------------
LONGFELLOW INVESTMENT MANAGEMENT
Longfellow Investment Management Co. ("Longfellow"), an SEC-registered
investment adviser located at 20 Winthrop Square, Boston, MA 02110, serves as
sub-advisor to the Touchstone Short Duration Fixed Income Fund. Longfellow was
founded in 1986 and is 100% employee owned. John Ciarleglio III, David W. Seeley
and Barbara J. McKenna each owns one-third of the firm.
56
A short duration portfolio management team consisting of Barbara J. McKenna and
David W. Seeley are responsible for the daily management of the Short Duration
Fixed Income Fund. The Short Duration Fixed Income Fund is managed as a team
with input from portfolio managers and analysts.
Other Accounts. As of September 30, 2009, Ms. McKenna managed 0 other registered
investment companies, 1 other pooled investment vehicles with total assets of
approximately $132 million and 55 other accounts with approximately $1.7 billion
in total assets. None of the accounts listed have a performance based fee.
As of September 30, 2009, Mr. Seeley managed 0 other registered investment
companies, 1 other pooled investment vehicles with total assets of approximately
$132 million and 55 other accounts with approximately $1.7 billion in total
assets. None of the accounts listed have a performance based fee.
Compensation. Longfellow's Senior Investment Officers own 100% of the firm and
thus receive a portion of the firm's profits. Additionally, they receive a base
salary. Longfellow's other professionals receive a base salary that considers
their responsibilities and their experience. They also are awarded a significant
annual bonus based upon their specific contributions to the success and
profitability of the firm.
Conflicts. Actual or potential conflicts of interest may arise when a portfolio
manager has management responsibilities to more than one account (including the
Short Duration Fixed Income Fund). This would include devotion of unequal time
and attention to the management of the accounts and the inability to allocate
limited investment opportunities across a broad array of accounts. Longfellow
has adopted policies and procedures to address such conflicts.
Fund Ownership. As of September 30, 2009, Mr. McKenna and Mr. Seeley did not own
any shares of the Short Duration Fixed Income Fund.
FARR, MILLER & WASHINGTON LLC
Farr, Miller & Washington LLC ("FMW"), an SEC-registered investment adviser
located at 1020 19th Street, NW, Suite 200, Washington, DC, 20036, serves as
sub-advisor to the Touchstone Capital Appreciation Fund. FMW was founded in 1996
and is 100% employee owned. Co-founder, President, CEO, and CIO Michael Farr is
the majority owner of the firm.
Michael Farr and Taylor McGowan are responsible for the daily management of the
Capital Appreciation Fund. The Capital Appreciation Fund is managed as a team
with input from portfolio managers and analysts.
Other Accounts. As of September 30, 2009, Michael Farr and Taylor McGowan
managed 0 other registered investment companies, 0 other pooled investment
vehicles, and 665 other accounts with total assets of approximately $494.9
million. With respect to such accounts, none of the accounts pay FMW a fee based
upon the performance of the account.
57
Compensation. The members of the management team are all principals of the firm.
They are compensated by salary, bonus, and partnership interest. The salary is
fixed and the bonus and partnership interest are based on the firm's overall
profitability.
Conflicts. FMW believes that there are not any material conflicts of interest in
connection with the management of the Fund's investments and other accounts
managed under Farr, Miller & Washington, LLC.
Fund Ownership. There is no fund ownership information available for the Capital
Appreciation Fund since the Fund had not commenced operations prior to September
30, 2009.
BRADFORD & MARZEC LLC
Bradford & Marzec LLC ("Bradford & Marzec"), an SEC-registered investment
adviser located at 333 S. Hope Street, Suite 4050, Los Angeles, California,
90071, serves as sub-advisor to the Touchstone Core Plus Fixed Income Fund.
Bradford & Marzec was founded in 1984 and is a 100% owned by Bradford & Marzec
Inc.
A team consisting of Edward Bradford, Zelda Marzec, Douglas Lopez, Jeff
Brothers, Graham Allen and Terence Reidt are responsible for the daily
management of the Core Plus Fixed Income Fund. The Core Plus Fixed Income Fund
is managed as a team with input from portfolio managers and analysts.
Other Accounts. As of September 30, 2009, Edward Bradford, Zelda Marzec, Douglas
Lopez, Jeff Brothers, Graham Allen and Terence Reidt managed 0 other registered
investment companies, 1 other pooled investment vehicle with total assets of
approximately $20 million, and 156 other accounts with total assets of
approximately $3.3 billion. With respect to the other accounts, 2 with total
assets of approximately $221 million pay Bradford & Marzec a fee based upon the
performance of the account.
Compensation. All employees of the firm are compensated using an incentive-based
system. Overall compensation is determined as the combination of salary, a
discretionary performance bonus, and incentive plans. This system makes every
effort to reward superior performance and retain key professionals.
Bradford & Marzec LLC periodically participates in an industry salary survey to
collect information on the specific positions used by the firm to compare
Bradford & Marzec's compensation practices versus the competition. In addition,
the existing salaries of candidates who are asked to complete an employment
application are gathered during Bradford & Marzec's recruiting process. These
salaries (which include both base compensation and most-recent bonuses) provide
management with a comparison of Bradford & Marzec's competitors' compensation.
The final determination is whether we are able to retain key employees, which we
have been able to do.
Conflicts. Bradford & Marzec LLC currently manages two portfolios that pay
advisory fees, in whole or in part, based upon portfolio returns (performance
based fee). The two Managing Partners hold individual accounts that are managed
by the firm which are considered to be principal accounts. Policies and
procedures are in place with respect to trade allocation to provide
direction/impartiality to the allocation process and individual portfolio
allocations are regularly reviewed and compared to allocations of other
portfolios managed within a particular strategy to verify all clients are
treated equitably.
58
Fund Ownership. There is no fund ownership information available for the Core
Plus Fixed Income Fund since the Fund had not commenced operations prior to
September 30, 2009.
AGF INVESTMENTS AMERICA INC.
AGF Investments America Inc. ("AGF"), a SEC-registered investment adviser
located at 53 State Street, Suite 1301, Boston, Massachusetts, 02109, serves as
sub-advisor to the Touchstone Emerging Markets Equity Fund. AGF Management
Limited, the ultimate parent company for AGF, was founded in 1957 and its
non-voting shares are listed on the Toronto Stock Exchange. AGF was formed in
2009 to provide investment management services in the United States of America.
Patricia Perez-Coutts and Stephen Way are responsible for the daily management
of the Emerging Markets Equity Fund. Both portfolio managers are dually employed
by both AGF and AGF Investments, Inc., under the parent company AGF Management
Limited.
Other Accounts. As of September 30, 2009, Patricia Perez-Coutts managed 0 other
registered investment companies, 2 other pooled investment vehicles with total
assets of approximately $860 million and 5 other accounts with total assets of
approximately $2 billion. With respect to such accounts, none of the accounts
pay AGF a fee based upon the performance of the account.
As of September 30, 2009, Stephen Way managed 0 other registered investment
companies, 7 other pooled investment vehicles with total assets of approximately
$639.3 million and 3 other accounts with total assets of approximately $191.9
million. With respect to such accounts, none of the accounts pay AGF a fee based
upon the performance of the account.
Compensation. The compensation program for portfolio managers is designed to
attract, motivate, reward, and retain talented individuals. This program is
strongly influenced by the philosophy that the compensation of managers should
be primarily linked to the performance of the mandates they manage. Salaries are
based on individual responsibilities, performance and relevant competitive
market data.
The salaries for portfolio managers have been established within competitive
ranges, taking into account the type and size of the funds they manage. Salaries
are reviewed on an annual basis. Incentive bonuses are determined relative to
salary for the achievement of mandate performance relative to a peer group and
managers are eligible to receive a multiple of base salary annually in the form
of bonus. Long-term incentive compensation is offered through three stock
acquisition plans: the stock options plan, share appreciation rights and the
employee share ownership plan. These plans allow interested employees, subject
to eligibility, to become shareholders which directly align their interests with
those of non-employee shareholders.
59
Conflicts. Actual or potential conflicts of interest may arise when the
portfolio manager has management responsibilities for more than one client
account including and not limited to the execution and allocation of investment
opportunities, use of soft dollars and other brokerage practices, personal
securities trading. AGF has adopted policies and procedures to address such
conflicts.
Fund Ownership. There is no fund ownership information available for the
Emerging Markets Equity Fund since the Fund had not commenced operations prior
to September 30, 2009.
BEDLAM ASSET MANAGEMENT PLC
Bedlam Asset Management PLC ("Bedlam"), an SEC-registered investment adviser and
authorized and regulated by the UK Financial Services Authority, located at 20
Abchurch Lane, London EC4N 7BB, United Kingdom, serves as sub-advisor to the
Touchstone Global Equity Fund. Bedlam was founded in 2001 and is 54% employee
owned with outside investors owning the remainder. Jonathan Compton is the
largest shareholder with a 25% stake.
A team consisting of Jonathan Compton and Ian McCallum are responsible for the
daily management of the Global Equity Fund. The Global Equity Fund is managed as
a team with input from portfolio managers and analysts.
Other Accounts. As of September 30, 2009, the portfolio managers manage one
other registered investment company, Bedlam Funds plc, a Dublin registered
company which is authorized and regulated by the Irish Financial Services
Regulatory authority totaling approximately $392 million of which $346 million
is in the global strategy; 1 other pooled investment vehicle with total assets
of approximately $3.4 million; and 7 other accounts with total assets of
approximately $275 million.
With respect to Bedlam Funds plc., Bedlam is entitled to performance fees on
some of these assets based on achieving absolute rates of return subject to
meeting a mixture of hurdle rates and a high water mark principle. Of the other
accounts, 2 accounts totaling $20 million have a performance fee based on a high
water mark principle.
Compensation. Compensation in the form of salary, bonus and equity is based on
overall contribution to the team and company. Salaries are competitive against
industry standards and the bonus pool is calculated as 40% of the pre-tax,
pre-bonus profit for the company. This bonus pool is allocated across all the
staff and paid out in cash within two months of the company's year-end. Since
Bedlam's investment process is very team based, they are looking for
contributions not only to a specific company remit but also on a wider global
scale. Once again, they strongly value individual contributions to the overall
success of the firm. A final part of the evaluation is positive energy in the
office, which although subjective, is important. All compensation is decided by
the compensation committee and approved by the main Board of Directors.
All employees share in the ownership of Bedlam and equity is issued to staff by
share options. In addition some staff has acquired shares in the company for
cash.
60
Reward for performance success is built into the compensation structure in both
annual bonus and the equity methodology whereby all employees are owners of
Bedlam.
The continuity of investment professionals is based on combining a stimulating,
enjoyable place to work with the opportunity to be rewarded for success. A team
based approach means that everyone contributes to investment decisions and to
the business. Financially, there is a competitive salary and incentive bonus
based on individual contribution and overall firm success. Importantly, all
employees have an equity stake in the firm.
Conflicts. Bedlam believes that there are no known conflicts.
Fund Ownership. There is no fund ownership information available for the Global
Equity Fund since the Fund had not commenced operations prior to September 30,
2009.
CORNERSTONE REAL ESTATE ADVISERS LLC
Cornerstone Real Estate Advisers LLC ("Cornerstone"), an SEC-registered
investment adviser located at 1 Financial Plaza, Suite 1700, Hartford, CT,
06103, serves as sub-advisor to the Touchstone Global Real Estate Fund.
Cornerstone was founded in 1994 and is a wholly owned subsidiary of
Massachusetts Mutual Life Insurance Company.
A team consisting of Dave Wharmby and Scott Westphal are responsible for the
daily management of the Global Real Estate Fund.
Other Accounts. As of September 30, 2009, Dave Wharmby managed 0 other
registered investment companies, 1 other pooled investment vehicle with total
assets of approximately $62 million which pays Cornerstone a fee based upon
performance, and 0 other accounts.
As of September 30, 2009, Scott Westphal managed 9 other pooled investment
vehicles with total assets of approximately $83 million, 1 other registered
investment company with approximately $480 million in total assets, and 0 other
accounts. With respect to such accounts, 5 of the other pooled investment
vehicle pay Cornerstone a fee based upon the performance of the account with
total assets of approximately $8 million
Compensation. Cornerstone utilizes a competitive compensation structure to
reward all employees who contribute to the firm's overall success consisting of
market base pay and merit bonus. The compensation program emphasizes
"individual" and "team" results and encourages a culture of collaboration with
individual performance expectations. The base pay and merit bonus benchmarks are
reviewed periodically and measured against the compensation programs of
competitors in the investment management industry to ensure that Cornerstone's
compensation program is both current and competitive within the industry. The
bonus pool represents a significant proportion of Cornerstone's net operating
income, comprising of base and incentive fees. The bonus pool is allocated based
on individual contributions to achieving portfolio performance and service
goals. Portfolio Managers' bonuses are a percentage of base pay and are tied to
specific portfolio performance and service goals. The Cornerstone compensation
program reinforces that investment success is dependent on two fundamental
concepts: 1) a strong team approach to investing and client service and 2)
individual contributions to achieving portfolio goals.
61
Conflicts. As indicated above, the Portfolio managers also manage other funds
and accounts including those for its ultimate owner, the Massachusetts Mutual
Life Insurance Company. At different times, the Fund's Portfolio Manager may
manage other funds or accounts with investment objectives and strategies similar
to those of the fund, or may manage funds or accounts with different investment
objectives and strategies. At times, those responsibilities could potentially
conflict with the interests of the Fund. That may occur whether the investment
objectives and strategies of the other funds and accounts are the same as, or
different from, the Fund's investment objectives and strategies. For example,
the Portfolio Manager may need to allocate investment opportunities between the
Fund and another fund or account having similar objectives or strategies, or may
need to execute transactions for another fund or account that could have a
negative impact on the value of securities held by the Fund. Not all funds and
accounts advised by the Sub-Adviser have the same management fee. If the
management fee structure of another fund or account is more advantageous to the
Sub-Adviser than the fee structure of the Fund or the adviser is managing an
account for an affiliate, the Sub-Adviser could have an incentive to favor the
other fund or account. However, the Sub-Advisors' compliance procedures and Code
of Ethics recognize the Sub-Advisor's obligation to treat all of its clients,
including the Fund, fairly and equitably, and are designed to preclude the
Portfolio Manger from favoring one client over another. It is possible, of
course, that those compliance procedures and Code of Ethics may not always be
adequate to do so.
Fund Ownership. There is no fund ownership information available for the Global
Real Estate Fund since the Fund had not commenced operations prior to September
30, 2009.
AUGUSTUS ASSET MANAGERS LIMITED
Augustus Asset Managers Limited ("Augustus"), an SEC-registered investment
adviser located at 2 St James Place, London, SW1A INX, serves as sub-advisor to
the Touchstone International Fixed Income Fund. Augustus was incorporated on
June, 12 1980. On January 11, 2007, Augustus went through a management buy-out.
Prior to the management buy-out, 90% of the firm was owned by management and
employees of Augustus Asset Managers Limited and 10% was owned by Julius Baer
Holding Limited. As of June 1, 2009, GAM Holdings acquired Augustus. Augustus is
now a wholly owned subsidiary of GAM Holdings.
A team consisting of Daniel Sheard and Tim Haywood are responsible for the daily
management of the International Fixed Income Fund. The International Fixed
Income Fund is managed as a team with input from portfolio managers and
analysts.
Other Accounts. As of September 30, 2009, Daniel Sheard and Tim Haywood
co-managed 5 other registered investment companies with approximately $4,927
million in total assets, 0 other pooled investment vehicles, and 14 other
accounts with total assets of approximately $1,992 million. With respect to such
accounts, all of the registered investment companies pay Augustus a fee based
upon the performance of the account.
62
Compensation. The criteria used to assess performance for investment
professionals, is based on a formal annual review. This is a rigorous process
comprising appraisal, assessment and setting objectives for the year ahead. The
standard compensation package consists of competitive base salaries and
comprehensive employee benefits. All staff are paid a discretionary bonus
structured to closely align them with the company's profitability. Additionally,
fund managers can be required to invest part of their performance based bonus in
shares of the fund they manage, and such shares will revert to the company
should the individual leave within 2 years of receiving them. Permanent staff
can own shares in the holding company of Augustus, and if the employee leaves,
the shares are repurchased by the company on terms which reflect the
circumstances of departure.
Augustus believes the compensation structure is competitive with those of other
firms within the industry.
Conflicts. There are very few areas of potential conflict, given the unit only
invests in certain investment areas, and managers do not invest in the
instruments that we use for clients. The main area of potential conflict is
between customers, where we are bound by rules, both by the regulator as well as
by clients, on best execution and 'pro rata' allocations for partially filled
orders.
Fund Ownership. There is no fund ownership information available for the
International Fixed Income Fund since the Fund had not commenced operations
prior to September 30, 2009.
EARNEST PARTNERS LLC
EARNEST Partners LLC ("EARNEST Partners"), an SEC-registered investment adviser
located at 1180 Peachtree Street, Suite 2300, Atlanta, GA, 30309, serves as
sub-advisor to the Touchstone Large Cap Relative Value Fund. EARNEST Partners
was founded in 1998 and is independently owned and operated. EARNEST Partners is
controlled by Paul Viera. Westchester Limited, LLC owns greater than 75% of
EARNEST Partners and is controlled by Paul Viera.
Paul Viera is responsible for the daily management of the Large Cap Relative
Value Fund.
Other Accounts. As of September 30, 2009, Paul Viera managed 9 other registered
investment companies with approximately $1,085.4 million in total assets, 11
other pooled investment vehicles with total assets of approximately $73.1
million, and 235 other accounts with total assets of approximately $9,742.2
million. With respect to the other accounts, 9 with total assets of
approximately $606.2 million pay EARNEST Partners a fee based upon the
performance of the account.
Compensation. EARNEST Partners personnel are paid a salary and a discretionary
bonus. A portion of the bonus may consist of profit sharing and/or deferred
compensation. EARNEST Partners also matches a portion of employees' 401(k)
contributions, if any. The bonus is a function of client satisfaction with
respect to investment results and service. Equity ownership is another component
of compensation for the portfolio manager. EARNEST Partners is employee-owned.
63
Conflicts. EARNEST Partners may be responsible for managing the Large Cap
Relative Value Fund in addition to other client accounts which may include, but
are not limited to, proprietary accounts, separate accounts and other pooled
investment vehicles. EARNEST Partners may manage other client accounts which may
have higher fee arrangements than the Large Cap Relative Value Fund and/or may
also have performance-based fees. Side-by-side management of these other client
accounts may create potential conflicts of interest which may relate to, among
other things, the allocation of investment opportunities and the aggregation and
allocation of transactions.
EARNEST Partners seeks best execution with respect to all securities
transactions and to aggregate and allocate the securities to client accounts in
a fair and equitable manner. EARNEST Partners has implemented policies and
procedures that it believes are reasonably designed to mitigate and manage the
potential conflicts of interest that may arise from side-by-side management.
Specifically, EARNEST Partners manages client accounts to model portfolios that
are approved by its investment committee, and aggregates and then allocates
securities transactions to client accounts in a manner that EARNEST Partners
believes to be fair and equitable.
Fund Ownership. There is no fund ownership information available for the Large
Cap Relative Value Fund since the Fund had not commenced operations prior to
September 30, 2009.
ARONSON+JOHNSON+ORTIZ
Aronson+Johnson+Ortiz ("AJO"), an SEC-registered investment adviser located at
230 South Broad Street, 20th Floor, Philadelphia, Pennsylvania, 19102, serves as
sub-advisor to the Touchstone Market Neutral Equity Fund. AJO was founded in
1984 and is a limited partnership wholly owned by 13 principals. Theodore R.
Aronson is majority equity owner and managing principal of AJO.
A team consisting of Theodore R. Aronson, Stefani Cranston, Gina Marie N. Moore,
Martha E. Ortiz, Christopher J. W. Whitehead and R. Brian Wenzinger are
responsible for the daily management of the Market Neutral Equity Fund. The
Market Neutral Equity Fund is managed as a team with input from AJO's research
analysts and traders.
Other Accounts. As of September 30, 2009, the team managed 18 other registered
investment companies with total assets of approximately $4,783 million, 21 other
pooled investment vehicles with total assets of approximately $2,875 million,
and 104 other accounts with total assets of approximately $11,612 million. Of
these accounts, 2 registered investment companies with total assets of
approximately $81 million, 5 other pooled investment vehicles with total assets
of approximately $233 million, and 45 other accounts with total assets of
approximately $4,011 million pay AJO a fee based upon the performance of the
account.
Compensation. Each of AJO's portfolio managers is a principal of the firm. All
principals are compensated through a fixed salary, equity-based cash
distributions, and merit-based cash bonuses that are awarded entirely for
contributions to the firm. Each calendar year-end, the managing principal of
AJO, in consultation with the other senior principals, determines the bonus
amount for each portfolio manager. Bonuses can be a significant portion of a
portfolio manager's overall compensation. Bonus amounts are generally based on
the following factors: net revenues and cash position of AJO, ownership
percentage of the portfolio manager, and overall contributions of the portfolio
manager to the operations of AJO. Portfolio managers may also be awarded
non-cash compensation in the form of increased ownership in the firm.
64
Although many of the firm's fee arrangements are performance-based, no
individual's compensation is directly tied to account performance or to the
value of the assets held in particular funds, or even to firm-wide assets.
Portfolio managers may also be awarded non-cash compensation in the form of
increased ownership in the firm. Presently, AJO has no deferred compensation
arrangements.
Conflicts. Conflicts of interest may arise in connection with the portfolio
managers' management of the Fund on the one hand and other accounts for which
the portfolio managers are responsible on the other. For example, portfolio
managers may have conflicts of interest in allocating management time,
resources, and investment opportunities among the Fund and other accounts
advised by the portfolio managers. Differences between accounts may lead to
additional conflicts -- accounts may differ in terms of fee structure (fixed
versus performance-based), size (and, hence, absolute fee), restrictions, or
investment strategy.
AJO has policies and procedures in place to mitigate potential conflicts of
interest. For example, AJO's fixed-fee schedules are standardized and all
discretionary fixed-fee accounts of similar size and similar mandate are subject
to AJO's most-favored-nation fee policy. Investment opportunities and aggregated
trades are both subject to policies requiring fair treatment across accounts,
without regard to account size or fee type. All material conflicts are disclosed
in AJO's Form ADV.
Fund Ownership. There is no fund ownership information available for the Market
Neutral Equity Fund since the Fund had not commenced operations prior to
September 30, 2009.
LEE MUNDER CAPITAL GROUP, LLC
Lee Munder Capital Group, LLC ("LMCG"), an SEC-registered investment adviser
located at 200 Clarendon Street, 28th Floor, Boston, MA, 02116, serves as
sub-advisor to the Touchstone Mid Cap Value Fund. LMCG was founded in 2000.
Convergent Capital Management, LLC and Rednum Family Investments, LP each owns
greater than 25% of LMCG while the rest is owned by employees.
A team consisting of Peter Zuger and Don Cleven are responsible for the daily
management of the Mid Cap Value Fund. The Mid Cap Value Fund is managed as a
team with input from portfolio managers and analysts.
Other Accounts. As of September 30, 2009, Peter Zuger managed 4 other registered
investment companies with approximately $169 million in total assets, 1 other
pooled investment vehicles with total assets of approximately $2.1 million, and
8 other accounts with total assets of approximately $13.8 million. With respect
to such accounts, none of the accounts pay LMIL a fee based upon the performance
of the account.
65
As of September 30, 2009, Don Cleven supported the LMCG's Value Team in the
management of 7 registered investment companies with approximately $640 million
in total assets, 4 other pooled investment vehicles with total assets of
approximately $89.9 million, and 54 other accounts with total assets of
approximately $1,066.9 million. With respect to the other accounts, 4 with total
assets of $59 million pay LMCG a fee based upon the performance of the account.
Compensation. Touchstone pays LMCG a fee based on the assets under management of
the Mid Cap Value Fund as set forth in an investment sub-advisory agreement
between LMCG and Touchstone. LMCG pays its investment professionals out of its
total revenues and other resources, including the sub-advisory fees earned with
respect to the Mid Cap Value Fund. The following information relates to the
period ended September 30, 2009.
Portfolio managers at Lee Munder Capital Group, LLC (LMCG) are compensated
through a combination of salary and incentive bonus. Bonuses are formula driven
based on revenues and performance relative to peer groups.
LMCG's incentive bonus compensation plans for investment teams are based on
actual composite performance relative to a benchmark. The benchmark used to
measure performance is a peer group universe blending retail and institutional
data. Particular attention is paid to the team's performance ranking within the
universe for a blended time period which includes one year, three years and
since inception performance. Performance is calculated on a pre-tax basis
annually.
Conflicts. The portfolio managers' management of Other Accounts may give rise to
potential conflicts of interest in connection with their management of the Mid
Cap Value Funds' investments, on the one hand, and the investments of the Other
Accounts, on the other. The Other Accounts include all portfolios managed. The
Other Accounts might have similar investment objectives as the Mid Cap Value
Fund or hold, purchase, or sell securities that are eligible to be held,
purchased, or sold by the Mid Cap Value Fund. While the portfolio managers'
management of Other Accounts may give rise to the following potential conflicts
of interest, LMCG does not believe that the conflicts, if any, are material or,
to the extent any such conflicts are material, LMCG believes that it has
designed policies and procedures that are designed to manage those conflicts in
an appropriate way.
A potential conflict of interest may arise as a result of the portfolio
managers' day-to-day management of the Mid Cap Value Fund. Because of their
positions with the Mid Cap Value Fund, the portfolio managers know the size,
timing, and possible market impact of Mid Cap Value Fund trades. It is
theoretically possible that the portfolio managers could use this information to
the advantage of Other Accounts they manage and to the possible detriment of the
Mid Cap Value Fund. However, LMCG has adopted policies and procedures reasonably
designed to allocate investment opportunities on a fair and equitable basis over
time.
66
A potential conflict of interest may arise as a result of the portfolio
managers' management of the Mid Cap Value Fund and Other Accounts which, in
theory, may allow them to allocate investment opportunities in a way that favors
Other Accounts over the Mid Cap Value Fund. This conflict of interest may be
exacerbated to the extent that LMCG or the portfolio managers receive, or expect
to receive, greater compensation from their management of the Other Accounts
than the Mid Cap Value Fund. Notwithstanding this theoretical conflict of
interest, it is LMCG's policy to manage each account based on its investment
objectives and related restrictions and, as discussed above, LMCG has adopted
policies and procedures reasonably designed to allocate investment opportunities
on a fair and equitable basis over time and in a manner consistent with each
account's investment objectives and related restrictions. For example, while the
portfolio managers may buy for Other Accounts securities that differ in identity
or quantity from securities bought for the Mid Cap Value Fund, such an approach
might not be suitable for the Mid Cap Value Fund given their investment
objectives and related restrictions.
Fund Ownership. There is no fund ownership information available for the Mid Cap
Value Fund since the Fund had not commenced operations prior to September 30,
2009.
LONDON COMPANY OF VIRGINIA D/B/A THE LONDON COMPANY
London Company of Virginia d/b/a The London Company ("TLC"), an SEC-registered
investment adviser located at 1801 Bayberry Court, Suite 301, Richmond,
Virginia, 23226, serves as sub-advisor to the Touchstone Small Cap Core Fund.
TLC was founded in 1994 and Stephen Goddard owns 100%.
A team consisting of Stephen Goddard, Jonathan Moody and Wade Stinnette are
responsible for the daily management of the Small Cap Core Fund. The Small Cap
Core Fund is managed as a team with input from portfolio managers and analysts.
Other Accounts. As of September 30, 2009, the team managed 3 other registered
investment companies with approximately $60 million in total assets, 0 other
pooled investment vehicles, and 1,894 other accounts with total assets of
approximately $870 million. With respect the other accounts, 1 with
approximately $2 million in total assets, pays TLC a fee based upon the
performance of the account.
Compensation. Portfolio Managers are compensated through salary and bonus. In
addition to base salaries, Portfolio Managers are eligible to receive bonus
compensation based on their individual contribution to the research effort as
well as client retention and sales. They also have a potential for ownership
after 5-years with the firm.
Conflicts. TLC believes that there are no foreseen conflicts of interest that
may arise in connection with the Portfolio Managers' management of the Fund's
investments and any other accounts that are managed by the Portfolio Manager.
Fund Ownership. There is no fund ownership information available for the Small
Cap Core Fund since the Fund had not commenced operations prior to September 30,
2009.
67
MAZAMA CAPITAL MANAGEMENT, INC.
Mazama Capital Management, Inc. ("Mazama"), an SEC-registered investment adviser
located at One Southwest Columbia Street, Suite 1500, Portland, OR 97258, serves
as sub-advisor to the Mazama Growth Fund. Mazama is controlled by Ronald A.
Sauer.
A team consisting of Ronald Sauer, Gretchen Novak and Joel Rubenstein are
responsible for the daily management of the Mazama Growth Fund.
Other Accounts. As of March 31, 2010, Mr. Sauer managed 2 other registered
investment companies with approximately $62 million in total assets, 0 other
pooled investment vehicles, and 24 other accounts with total assets of
approximately $1.02 billion in total assets. With respect the other accounts, 1
with approximately $87 million in total assets, pays Mazama a fee based upon the
performance of the account.
As of March 31, 2010, Ms. Novak managed 2 other registered investment companies
with approximately $62 million in total assets, 0 other pooled investment
vehicles, and 24 other accounts with total assets of approximately $1.02 billion
in total assets. With respect the other accounts, 1 with approximately $87
million in total assets, pays Mazama a fee based upon the performance of the
account.
As of March 31, 2010, Mr. Rubenstein managed 2 other registered investment
companies with approximately $62 million in total assets, 0 other pooled
investment vehicles, and 24 other accounts with total assets of approximately
$1.02 billion in total assets. With respect the other accounts, 1 with
approximately $87 million in total assets, pays Mazama a fee based upon the
performance of the account.
Compensation. Mazama's compensation structure is designed to attract and retain
highly skilled investment professionals. The compensation is structured to
maximize performance and keep the interests of each member of our portfolio
management team aligned with those of our clients.
The incentive compensation structure keeps each member of the team focused on
the pre-tax performance of each strategy versus its respective benchmark. Each
Portfolio Manager and Research Analyst receives a base salary and performance
based incentive compensation. Performance based incentive compensation includes:
i) a percentage of fees received by Mazama for all accounts under management,
providing each team member with significant upside participation; and ii) an
annual bonus representing between 5% and 20% of total compensation for any
calendar year in which the performance of the related composite exceeds the
benchmark return by 250 basis points or more, net of management fees. The
Investment Team does not distinguish between different accounts within each
investment style/strategy with respect to compensation. Cash compensation
increases as assets under management increase, whether by appreciation or by
attracting new clients, both of which are accomplished by achieving higher than
average excess returns. Excess returns are measured as the difference between
our composite returns versus those of the relevant benchmark.
Each portfolio manager and analyst is also a stakeholder in Mazama. The firm is
93% employee owned, 80% of which is directly or indirectly owned by the
investment team. Mazama provides ongoing equity incentives to its portfolio
managers, analysts and other employees in order to attract and retain highly
talented professionals throughout the firm.
68
Conflicts. As every member of the Investment Team has day-to-day management
responsibilities with respect to more than one account and more than one
investment strategy, actual or apparent conflicts may arise.
The compensation paid to Mazama for managing the Fund is based on a percentage
of assets under management rather than a share of the gains. As described above,
members of the Investment Team, as equity owners and by receiving a share of
portfolio management fees, benefit from Mazama's revenues and profitability.
Conflicts of interest can arise to the extent that larger client accounts
generate more fees and potentially larger profits for Mazama compared to small
accounts. One account pays a fee based on a percentage of assets that can
increase and decrease based on performance against a benchmark index, these two
accounts are managed consistently with their stated investment strategy. Despite
these differences Mazama believes that its trade allocation and other compliance
procedures effectively address any related conflicts of interest. Otherwise, no
member of the Investment Team is compensated in a way that would add to those
conflicts of interest by creating an incentive to favor particular accounts over
other accounts.
Execution and research services provided by brokers may not always be utilized
in connection with the Fund or with other client accounts that may have paid the
commission or a portion of the commission to the broker providing the services.
Mazama allocates brokerage commissions for these services in a manner that it
believes is fair and equitable and consistent with its fiduciary obligations to
each of its clients.
An apparent or actual conflict may arise if a member of the Investment Team
identifies a limited investment opportunity that may be suitable for one or more
accounts including the Fund. To mitigate this conflict of interest, Mazama
aggregates orders for the Fund with orders from each of its other client
accounts participating in the same strategy in order to ensure that clients are
treated fairly and equitably over time.
Mazama has adopted policies and procedures to address and prevent the above
conflicts of interest; however there is no guarantee that such procedures will
detect each and every situation in which a conflict arises.
Fund Ownership. The following table indicates for the Predecessor Mazama Fund,
the dollar range of shares beneficially owned by each of the Fund's portfolio
managers as of March 31, 2010.
--------------------------------------------------------------------------------
PORTFOLIO MANAGER BENEFICIAL OWNERSHIP IN PREDECESSOR MAZAMA FUND
--------------------------------------------------------------------------------
Ronald Sauer Over $1,000,000
--------------------------------------------------------------------------------
Gretchen Novak $10,001 to $50,000
--------------------------------------------------------------------------------
Joel Rubenstein None
--------------------------------------------------------------------------------
69
FEES PAID TO THE SUB-ADVISORS
For the fiscal years ended September 30, 2009, 2008 and 2007, the Advisor paid
to the Sub-Advisors the following amounts for each Fund during the periods
indicated below:
-------------------------------------------------------------------------------------------------------------------------------
SUB-ADVISORY FEES PAID
-------------------------------------------
FUND 2007 2008 2009
-------------------------------------------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund - Clover Capital & JKMilne* $45,590 $41,881 $46,404
-------------------------------------------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund - Chartwell Investment Partners & Fort
Washington** $194,947 $202,462 $147,772
-------------------------------------------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund - Chartwell Investment Partners & Longfellow*** $82,800 $66,112 $61,825
-------------------------------------------------------------------------------------------------------------------------------
Sands Capital Select Growth Fund - Sands Capital Management $2,844,805 $2,643,130 $1,192,940
-------------------------------------------------------------------------------------------------------------------------------
Mid Cap Fund - Turner $1,485,862 $2,365,137 $970,686
-------------------------------------------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund - Turner $249,106 $338,576 $227,660
-------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund
-------------------------------------------------------------------------------------------------------------------------------
Turner $598,481 $289,046 $457,492
-------------------------------------------------------------------------------------------------------------------------------
James Investment Research, Inc.**** $95,226 $175,147 N/A
-------------------------------------------------------------------------------------------------------------------------------
Diamond Hill Capital Management, Inc.**** $473,319 $393,926 N/A
-------------------------------------------------------------------------------------------------------------------------------
* As of April 22, 2009, JKMilne became sub-advisor to the Intermediate Fixed
Income Fund
** As of October 1, 2008, Fort Washington became sub-advisor to the Ultra Short
Duration Fixed Income Fund.
*** As of February 27, 2009, Longfellow became sub-advisor to the Short Duration
Fixed Income Fund.
**** As of June 16, 2008, James Investment Research, Inc. and Diamond Hill
Capital Management, Inc. are no longer sub-advisors to the Small Cap Value
Opportunities Fund.
The sub-advisory fees for the Capital Appreciation Fund, Core Plus Fixed Income
Fund, Emerging Markets Equity Fund, Global Equity Fund, Global Real Estate Fund,
International Fixed Income Fund, Large Cap Relative Value Fund, Market Neutral
Equity Fund, Mid Cap Value Fund, Small Cap Core Fund and Focused Equity Fund are
not included because the Funds had not commenced operations prior to September
30, 2009.
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the Advisor paid to the
Sub-Advisor the following amount for the Premium Yield Equity Fund:
70
--------------------------------------------------------------------------------
SUB-ADVISORY FEES PAID
------------------------
FUND 2008 2009
--------------------------------------------------------------------------------
Premium Yield Equity Fund - Miller/Howard* $31,016 $68,182
--------------------------------------------------------------------------------
* As of May 23, 2008 Chartwell Investment Partners was replaced with
Miller/Howard as sub-advisor to the Premium Yield Equity Fund. Fees paid from
December 3, 2007 through May 22, 2008 represent fees paid to Chartwell
Investment Partners.
For the period from September 29, 2008 through September 30, 2008, and the
fiscal year ended September 30, 2009, the Advisor paid to the Sub-Advisor the
following amount for the International Growth Fund:
--------------------------------------------------------------------------------
SUB-ADVISORY FEES PAID
------------------------
FUND 2008 2009
--------------------------------------------------------------------------------
International Growth Fund - Navellier* $142 $101,754
--------------------------------------------------------------------------------
* The sub-advisory fees for the International Growth Fund for periods prior to
September 28, 2008 are not shown because the predecessor Navellier International
Portfolio did not have a sub-advisor.
For the fiscal year ended December 31, 2008 and December 31, 2009, the Advisor
paid to the Sub-Advisor the following amounts for the Predecessor Mazama Fund:
--------------------------------------------------------------------------------
SUB-ADVISORY FEES PAID
------------------------
FUND 2008 2009
--------------------------------------------------------------------------------
Predecessor Mazama Fund $67,359(1) $
--------------------------------------------------------------------------------
(1) Fees paid from the commencement date of the Predecessor Mazama Fund
(January 30, 2008) through December 31, 2008.
THE ADMINISTRATOR
The Trust and the Advisor have entered into an administration agreement (the
"Administration Agreement") that appoints the Advisor as the administrator (the
"Administrator") for the Trust. The Administration Agreement provides that the
Administrator shall perform or supervise the performance of other administrative
services, such as regulatory or performance reporting and fund accounting and
related accounting services, in connection with the operation of the Funds. The
Administrator shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with the matters to which the
Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Administrator in
the performance of its duties or from reckless disregard by it of its duties and
obligations thereunder. The Administration Agreement provides that the Trust
will pay an administrative fee to the Advisor of 0.20% of aggregate net assets
up to $6 billion; 0.16% of the next $4 billion of aggregate net assets and 0.12%
on assets in excess of $10 billion. Aggregate net assets include the average
daily net assets of all series of the Trust, Touchstone Strategic Trust,
Touchstone Tax-Free Trust and Touchstone Investment Trust ("TINT"), except the
TINT Institutional Money Market Fund.
71
After the initial two year period, the continuance of the Administration
Agreement must be specifically approved at least annually (i) by the vote of a
majority of the Trustees or by the vote of a majority of the outstanding voting
securities of the Trust, and, in either case, (ii) by the vote of a majority of
the Trustees of the Trust who are not parties to the Administration Agreement or
an "interested person" (as that term is defined in the 1940 Act) of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval.
Under the Administration Agreement, the Administrator may enter into agreements
with service providers to provide administration services to the Trust. The
Administrator has appointed JPMorgan Chase Bank, N.A. ("JPMorgan"), 303
Broadway, Cincinnati, Ohio 45202 as the Trust's sub-administrator. JPMorgan
prepares and effects regulatory filings for the Trust, prepares and distributes
materials for Board meetings, works with the Administrator to resolve any daily
pricing issues, reviews daily reports by existing service providers and performs
other duties as requested by the Administrator. JPMorgan also provides
accounting and pricing services to the Funds. The sub-administration fees for
JPMorgan are paid by the Administrator.
The Advisor served as the investment adviser to the Predecessor Mazama Fund,
pursuant a Management Agreement and received a unified fee. Under the Management
Agreement, the Advisor also provided administrative services, and could hire
other service providers, including its affiliates, to perform administrative
services. Under the unified fee arrangement, the Advisor was responsible for
compensating any third party engaged by the Advisor to provide services under
its supervision, including sub-advisors, sub-administrators, transfer and
dividend disbursing agents, and custodians.
For the fiscal years ended September 30, 2007, 2008 and 2009, the Trust paid the
following administrative fees (net of waivers):
----------------------------------------------------------------------------------------------
ADMINISTRATIVE FEES PAID
---------------------------------------------------
FUND 2007 2008 2009
----------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund $36,531 $37,249 $53,645
----------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund $280,675 $323,951 $236,629
----------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund $117,850 $105,846 $89,338
----------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund $89,901 $135,364 $91,225
----------------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund $411,942 $321,165 $166,810
----------------------------------------------------------------------------------------------
Sands Capital Select Growth Fund $1,010,955 $1,152,887 $680,956
----------------------------------------------------------------------------------------------
Mid Cap Fund $584,259 $946,442 $389,668
----------------------------------------------------------------------------------------------
The administration fees for the Capital Appreciation Fund, Core Plus Fixed
Income Fund, Emerging Markets Equity Fund, Global Equity Fund, Global Real
Estate Fund, International Fixed Income Fund, Large Cap Relative Value Fund,
Market Neutral Equity Fund, Mid Cap Value Fund, Small Cap Core Fund and Focused
Equity Fund are not included because the Funds had not commenced operations
prior to September 30, 2009.
72
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the Premium Yield Equity Fund paid
the following administrative fees (net of waivers):
--------------------------------------------------------------------------
ADMINISTRATIVE FEES PAID
-------------------------------
FUND 2008 2009
--------------------------------------------------------------------------
Premium Yield Equity Fund $36,045 $34,071
--------------------------------------------------------------------------
For the period from September 29, 2008 through September 30, 2008, and the
fiscal year ended September 30, 2009, the International Growth Fund paid the
following administrative fees (net of waivers):
--------------------------------------------------------------------------
ADMINISTRATIVE FEES PAID
-------------------------------
FUND 2008 2009
--------------------------------------------------------------------------
International Growth Fund* $61 $50,813
--------------------------------------------------------------------------
* The administrative fees for the International Growth Fund for periods prior to
September 28, 2008 are not shown because the predecessor Navellier International
Portfolio had an agreement with Navellier to pay for certain administrative fees
(the fees were not a fund expense).
For the fiscal years ended September 30, 2007, 2008 and 2009, the Administrator
paid the following sub-administrative fees:
----------------------------------------------------------------------------------------------
SUB-ADMINISTRATIVE FEES PAID
--------------------------------------------------
FUND 2007 2008 2009
----------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund $13,728 $14,866 $20,060
----------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund $115,157 $129,451 $92,602
----------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund $48,838 $42,239 $39,024
----------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund $36,786 $54,138 $40,111
----------------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund $168,808 $127,973 $66,256
----------------------------------------------------------------------------------------------
Sands Capital Select Growth Fund $412,147 $459,976 $257,986
----------------------------------------------------------------------------------------------
Mid Cap Fund $251,191 $377,699 $152,306
----------------------------------------------------------------------------------------------
The sub-administration fees for the Capital Appreciation Fund, Core Plus Fixed
Income Fund, Emerging Markets Equity Fund, Global Equity Fund, Global Real
Estate Fund, International Fixed Income Fund, Large Cap Relative Value Fund,
Market Neutral Equity Fund, Mid Cap Value Fund, Small Cap Core Fund and Focused
Equity Fund are not included because the Funds had not commenced operations
prior to September 30, 2009.
73
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the Administrator paid the
following sub-administrative fees for the Premium Yield Equity Fund:
--------------------------------------------------------------------------
SUB-ADMINISTRATIVE FEES PAID
-----------------------------
FUND 2008 2009
--------------------------------------------------------------------------
Premium Yield Equity Fund $14,566 $19,328
--------------------------------------------------------------------------
For the period from September 29, 2008 through September 30, 2008, and the
fiscal year ended September 30, 2009, the Administrator paid the following
sub-administrative fees for the International Growth Fund:
--------------------------------------------------------------------------
SUB-ADMINISTRATIVE FEES PAID
-----------------------------
FUND 2008 2009
--------------------------------------------------------------------------
International Growth Fund* $0 $25,248
--------------------------------------------------------------------------
* The sub-administrative fees for the International Growth Fund for periods
prior to September 27, 2008 are not shown because the predecessor Navellier
International Portfolio did not have a sub-administrator.
The Advisor paid to JPMorgan the following sub-administrative fees for the
Predecessor Mazama Fund for the fiscal year December 31, 2008 and December 31,
2009:
--------------------------------------------------------------------------
SUB-ADMINISTRATIVE FEES PAID
-----------------------------
FUND 2008 2009
--------------------------------------------------------------------------
Predecessor Mazama Fund $7,173(1) $
--------------------------------------------------------------------------
(1) Fees paid from the commencement date of the Predecessor Mazama Fund (January
30, 2008) through December 31, 2008.
Effective November 20, 2006, JPMorgan began serving as the Trust's transfer
agent (the "Transfer Agent"). JPMorgan maintains the records of each
shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of the Funds' shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For providing transfer agent and shareholder services to the
Trust, JPMorgan receives a monthly per account fee from each Fund, plus out
of-pocket expenses. The Funds may also pay a fee to certain servicing
organizations (such as broker-dealers and financial institutions) that provide
sub-transfer agency services. These services include maintaining shareholder
records, processing shareholder transactions and distributing communications to
shareholders.
74
Effective November 20, 2006, JPMorgan began providing compliance program
development, implementation and administration services to the Trust pursuant to
a Compliance Services Agreement. For providing compliance services to the Trust,
the Funds pay an annual compliance administration fee. The Funds also pay other
costs and expenses incurred in connection with the services provided under the
Compliance Services Agreement.
For the fiscal period from November 20, 2006 through September 30, 2007, and the
fiscal years ended September 30, 2008 and 2009, the Trust paid the following
compliance fees:
----------------------------------------------------------------------------------------------
COMPLIANCE FEES PAID
--------------------------------------------------
FUND 2007 2008 2009
----------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund $864 $1,523 $1,679
----------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund $1,140 $2,224 2,499
----------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund $958 $1,703 $2,053
----------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund $921 $1,806 $2,005
----------------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund $1,286 $2,219 $2,224
----------------------------------------------------------------------------------------------
Sands Capital Select Growth Fund $1,946 $4,035 $3,674
----------------------------------------------------------------------------------------------
Mid Cap Fund $1,554 $3,635 $2,964
----------------------------------------------------------------------------------------------
The compliance fees for the Capital Appreciation Fund, Core Plus Fixed Income
Fund, Emerging Markets Equity Fund, Global Equity Fund, Global Real Estate Fund,
International Fixed Income Fund, Large Cap Relative Value Fund, Market Neutral
Equity Fund, Mid Cap Value Fund, Small Cap Core Fund, Focused Equity Fund are
not included because the Funds had not commenced operations prior to September
30, 2009. The Predecessor Mazama Fund did not pay any compliance fees.
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the Premium Yield Equity Fund paid
the following compliance fees:
--------------------------------------------------------------------------
COMPLIANCE FEES PAID
-------------------------------
FUND 2008 2009
--------------------------------------------------------------------------
Premium Yield Equity Fund $988 $1,898
--------------------------------------------------------------------------
For the fiscal year ended December 31, 2007, the fiscal period from January 1,
2008 through September 30, 2008, and the fiscal year ended September 30, 2009,
the International Growth Fund paid the following compliance fees:
--------------------------------------------------------------------------
COMPLIANCE FEES PAID
----------------------------------------
FUND 2007 2008 2009
--------------------------------------------------------------------------
International Growth Fund* $120 $90 $2,000
--------------------------------------------------------------------------
*The predecessor Navellier International Portfolio paid compliance fess
pursuant to a compliance services agreement.
75
DISTRIBUTION AND SHAREHOLDER SERVICES
Touchstone Securities, Inc. (the "Distributor"), and the Trust are parties to a
distribution agreement (the "Distribution Agreement") with respect to the Funds.
The Distributor's principal place of business is 303 Broadway, Suite 1100,
Cincinnati Ohio 45202. The Distributor is a registered broker-dealer, and an
affiliate of the Advisor by reason of common ownership. The Distributor is
obligated to sell shares on a best efforts basis only against purchase orders
for the shares. Shares of the Funds are offered to the public on a continuous
basis. As compensation for providing the services under the Distribution
Agreement, the Distributor receives distribution and service fees, contingent
deferred sales charges and front-end sales charges. The Distributor may re-allow
any or all of the distribution or service fees, contingent deferred sales
charges or front-end sales charges to such brokers, dealers and other financial
institutions and intermediaries as the Distributor may from time to time
determine.
Ms. McGruder may be deemed to be an affiliate of the Distributor because she is
a Director of the Distributor and an officer of affiliates of the Distributor.
Ms. McGruder, by reason of such affiliations, may directly or indirectly receive
benefits from the underwriting fees paid to the Distributor.
The Distribution Agreement shall remain in effect for a period of two years
after the effective date of the agreement and is renewable annually. The
Distribution Agreement may be terminated by the Distributor, by a majority vote
of the Trustees who are not interested persons and have no financial interest in
the Distribution Agreement or by a majority vote of the outstanding securities
of the Trust upon not more than 60 days' written notice by either party or upon
assignment by the Distributor.
The Distributor may from time to time pay from its own resources cash bonuses or
other incentives to selected dealers in connection with the sale of shares of
the Funds. On some occasions, such bonuses or incentives may be conditioned upon
the sale of a specified minimum dollar amount of the shares of the Funds and/or
other funds in the Touchstone Funds during a specific period of time. Such
bonuses or incentives may include financial assistance to dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising, sales campaigns and other dealer-sponsored programs or
events. The Advisor, at its expense, may also provide additional compensation to
certain affiliated and unaffiliated dealers, financial intermediaries or service
providers for distribution, administrative and/or shareholder servicing
activities. The Advisor may also reimburse the Distributor for making these
payments.
The Funds may compensate dealers, including the Distributor and its affiliates,
based on the average balance of all accounts in the Funds for which the dealer
is designated as the party responsible for the account. See "Distribution Plans"
below.
DISTRIBUTION AND SHAREHOLDER SERVICE ARRANGEMENTS.
Certain Funds have adopted a distribution and/or shareholder servicing plan for
certain classes of Shares which permits a Fund to pay for expenses incurred in
the distribution and promotion of its shares pursuant to Rule 12b-1 under the
1940 Act and account maintenance and other shareholder services in connection
with maintaining such account. The Distributor may provide those services itself
or enter into arrangements under which third parties provide such services and
are compensated by the Distributor.
76
CLASS A SHARES. With respect to its Class A Shares each Fund has adopted a plan
of distribution and shareholder service (the "Class A Plan") under which the
Distributor is paid up to, but not exceeding twenty-five basis points (0.25%)
for distribution payments. Of the total compensation authorized, the Fund may
pay for shareholder services in an amount up to 0.25%. Under the Class A Plan,
the Distributor is compensated regardless of its expenses.
CLASS C SHARES. With respect to its Class C Shares each Fund has adopted a plan
of distribution and shareholder service (the "Class C Plan") under which the
Distributor is paid up to, but not exceeding one hundred basis points (1.00%) in
the aggregate, with twenty-five basis points (0.25%) for shareholder service
fees and seventy-five basis points (0.75%) for distribution payments. Under the
Class C Plan, the Distributor is compensated regardless of its expenses.
CLASS Z SHARES. With respect to its Class Z Shares each Fund has adopted a
shareholder service plan (the "Class Z Plan") under which the Distributor is
paid up to, but not exceeding twenty-five basis points (0.25%) for shareholder
service fees. Under the Class Z Plan, the Distributor is compensated regardless
of its expenses.
GENERAL INFORMATION. In connection with the distribution of Shares, the
Distributor may use the payments for: (i) compensation for its services in
distribution assistance; or (ii) payments to financial institutions and
intermediaries such as banks, savings and loan associations, insurance companies
and investment counselors, broker-dealers, mutual fund supermarkets and the
Distributor's affiliates and subsidiaries as compensation for services or
reimbursement of expenses incurred in connection with distribution assistance.
In addition, the Distributor may use payments to provide or enter into written
agreements with service providers who will provide shareholder services,
including: (i) maintaining accounts relating shareholders that invest in Shares;
(ii) arranging for bank wires; (iii) responding to client inquiries relating to
the services performed by the Distributor and/or service providers; (iv)
responding inquires from shareholders concerning their investment in shares; (v)
assisting shareholders in changing dividend options, account designations and
addresses; (vi) providing information periodically to shareholders showing their
position in shares; (vii) forwarding shareholder communications from the Funds
such as proxies, shareholder reports, annual reports, dividend distribution and
tax notices to shareholders; (viii) processing purchase, exchange and redemption
requests from shareholders and placing orders with the Funds or the service
providers; (ix) processing dividend payments from the Funds on behalf of
shareholders; and (x) providing such other similar services as the Fund may
reasonably request.
Agreements implementing the Plans (the "Implementation Agreements"), including
agreements with dealers wherein such dealers agree for a fee to act as agents
for the sale of the Funds' shares, are in writing and have been approved by the
Board of Trustees. All payments made pursuant to the Plans are made in
accordance with written Implementation Agreements. Some financial intermediaries
charge fees in excess of the amounts available under the Plans, in which case
the Advisor pays the additional fees.
77
The continuance of the Plans and the Implementation Agreements must be
specifically approved at least annually by a vote of the Trust's Board of
Trustees and by a vote of the Independent Trustees who have no direct or
indirect financial interest in the Plans or any Implementation Agreement at a
meeting called for the purpose of voting on such continuance. A Plan may be
terminated at any time by a vote of a majority of the Independent Trustees or by
a vote of the holders of a majority of the outstanding shares of a Fund or the
applicable class of a Fund. In the event a Plan is terminated in accordance with
its terms, the affected Fund (or class) will not be required to make any
payments for expenses incurred by the Distributor after the termination date.
Each Implementation Agreement terminates automatically in the event of its
assignment and may be terminated at any time by a vote of a majority of the
Independent Trustees or by a vote of the holders of a majority of the
outstanding shares of a Fund (or the applicable class) on not more than 60 days'
written notice to any other party to the Implementation Agreement. The Plans may
not be amended to increase materially the amount to be spent for distribution
without shareholder approval. All material amendments to the Plans must be
approved by a vote of the Trust's Board of Trustees and by a vote of the
Independent Trustees.
In approving the Plans, the Trustees determined, in the exercise of their
business judgment and in light of their fiduciary duties as Trustees, that there
is a reasonable likelihood that the Plans will benefit the Funds and their
shareholders. The Board of Trustees believes that expenditure of the Funds'
assets for distribution expenses under the Plans should assist in the growth of
the Funds, which will benefit each Fund and its shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
diversification and less chance of disruption of planned investment strategies.
The Plans will be renewed only if the Trustees make a similar determination for
each subsequent year of the Plans. There can be no assurance that the benefits
anticipated from the expenditure of the Funds' assets for distribution will be
realized. While the Plans are in effect, all amounts spent by the Funds pursuant
to the Plans and the purposes for which such expenditures were made must be
reported quarterly to the Board of Trustees for its review. Distribution
expenses attributable to the sale of more than one class of shares of a Fund
will be allocated at least annually to each class of shares based upon the ratio
in which the sales of each class of shares bears to the sales of all the shares
of the Fund. In addition, the selection and nomination of those Trustees who are
not interested persons of the Trust are committed to the discretion of the
Independent Trustees during such period.
Jill T. McGruder, as an interested person of the Trust, may be deemed to have a
financial interest in the operation of the Plans and the Implementation
Agreements.
78
For the fiscal year ended September 30, 2009, the Funds paid the following in
Distribution and Shareholder Servicing fees:
------------------------------------------------------------------------------------
2009
------------------------------------------------------------------------------------
SHAREHOLDER
DISTRIBUTION SERVICING FEES
FUND FEES PAID PAID
------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund Class Z $0 $263,241
------------------------------------------------------------------------------------
Short Duration Fixed Income Fund Class Z $0 $107,303
------------------------------------------------------------------------------------
Sands Capital Select Growth Fund Class Z $0 $577,377
------------------------------------------------------------------------------------
Mid Cap Fund Class A $680 $0
------------------------------------------------------------------------------------
Mid Cap Fund Class C $1,226 $0
------------------------------------------------------------------------------------
Mid Cap Fund Class Z $0 $4,435
------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund Class A $104,009 $0
------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund Class C $40,081 $0
------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund Class Z $0 $185,725
------------------------------------------------------------------------------------
Premium Yield Equity Fund Class A $39,031 $0
------------------------------------------------------------------------------------
Premium Yield Equity Fund Class C $13,118 $0
------------------------------------------------------------------------------------
International Growth Fund Class A $63,215 $0
------------------------------------------------------------------------------------
International Growth Fund Class C $1,145 $0
------------------------------------------------------------------------------------
The distribution and shareholder servicing fees for the Capital Appreciation
Fund, Core Plus Fixed Income Fund, Emerging Markets Equity Fund, Global Equity
Fund, Global Real Estate Fund, International Fixed Income Fund, Large Cap
Relative Value Fund, Market Neutral Equity Fund, Mid Cap Value Fund, Small Cap
Core Fund and Focused Equity Fund are not included because the Funds had not
commenced operations prior to September 30, 2009. The Predecessor Mazama Fund
did not adopt a distribution plan pursuant to Rule 12b-1.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Intermediate Fixed Income Fund's shares were $0 of which the Distributor
paid $0 to unaffiliated broker-dealers in the selling network, earned $0 as a
broker-dealer in the selling network and retained $0 in underwriting
commissions.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Ultra Short Duration Fixed Income Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Short Duration Fixed Income Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
79
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Sands Capital Select Growth Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Mid Cap Fund's shares were $8,197 of which the Distributor paid $5,615 to
unaffiliated broker-dealers in the selling network, earned $1,547 as a
broker-dealer in the selling network and retained $1,035 in underwriting
commissions.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Healthcare and Biotechnology Fund's shares were $47,519 of which the
Distributor paid $35,389 to unaffiliated broker-dealers in the selling network,
earned $5,305 as a broker-dealer in the selling network and retained $6,825 in
underwriting commissions.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Small Cap Value Opportunities Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $. in
underwriting commissions.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Premium Yield Equity Fund's shares were $21,333 of which the Distributor
paid $17,335 to unaffiliated broker-dealers in the selling network, earned $299
as a broker-dealer in the selling network and retained $3,699 in underwriting
commissions.
For the fiscal year ended September 30, 2009, the aggregate commissions on sales
of the Touchstone International Growth Fund's shares were $5,095 of which the
Distributor paid $2,894 to unaffiliated broker-dealers in the selling network,
earned $1,432 as a broker-dealer in the selling network and retained $769 in
underwriting commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Intermediate Fixed Income Fund's shares were $0 of which the Distributor
paid $0 to unaffiliated broker-dealers in the selling network, earned $0 as a
broker-dealer in the selling network and retained $0 in underwriting
commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Ultra Short Duration Fixed Income Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Short Duration Fixed Income Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
80
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Sands Capital Select Growth Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Mid Cap Fund's shares were $4,018 of which the Distributor paid $735 to
unaffiliated broker-dealers in the selling network, earned $2,709 as a
broker-dealer in the selling network and retained $574 in underwriting
commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Healthcare and Biotechnology Fund's shares were $291,335 of which the
Distributor paid $227,696 to unaffiliated broker-dealers in the selling network,
earned $21,793 as a broker-dealer in the selling network and retained $41,847 in
underwriting commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Small Cap Value Opportunities Fund's shares were $2,089 of which the
Distributor paid $1,055 to unaffiliated broker-dealers in the selling network,
earned $750 as a broker-dealer in the selling network and retained $284 in
underwriting commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Premium Yield Equity Fund's shares were $382 of which the Distributor
paid $0 to unaffiliated broker-dealers in the selling network, earned $319 as a
broker-dealer in the selling network and retained $63 in underwriting
commissions.
For the fiscal year ended September 30, 2008, the aggregate commissions on sales
of the Touchstone International Growth Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $240,000 in
underwriting commissions.
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Intermediate Fixed Income Fund's shares were $0 of which the Distributor
paid $0 to unaffiliated broker-dealers in the selling network, earned $0 as a
broker-dealer in the selling network and retained $0 in underwriting
commissions.
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Ultra Short Duration Fixed Income Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Short Duration Fixed Income Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
81
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Sands Capital Select Growth Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Mid Cap Fund's shares were $3,056 of which the Distributor paid $1,099 to
unaffiliated broker-dealers in the selling network, earned $1,521 as a
broker-dealer in the selling network and retained $436 in underwriting
commissions.
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Healthcare and Biotechnology Fund's shares were $92,432 of which the
Distributor paid $71,065 to unaffiliated broker-dealers in the selling network,
earned $7,553 as a broker-dealer in the selling network and retained $13,814 in
underwriting commissions.
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Small Cap Value Opportunities Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
For the fiscal year ended September 30, 2007, the aggregate commissions on sales
of the Touchstone International Growth Fund's shares were $0 of which the
Distributor paid $0 to unaffiliated broker-dealers in the selling network,
earned $0 as a broker-dealer in the selling network and retained $0 in
underwriting commissions.
The aggregate commissions on sales of shares of the Capital Appreciation Fund,
Core Plus Fixed Income Fund, Emerging Markets Equity Fund, Global Equity Fund,
Global Real Estate Fund, International Fixed Income Fund, Large Cap Relative
Value Fund, Market Neutral Equity Fund, Mid Cap Value Fund, Focused Equity Fund
and Small Cap Core Fund are not included because the Funds had not commenced
operations prior to September 30, 2009.
The Distributor retains the contingent deferred sales charge on redemptions of
shares of the Mid Cap Fund, Healthcare and Biotechnology Fund, Small Cap Value
Opportunities Fund, Premium Yield Equity Fund, Touchstone International Growth
Fund, Capital Appreciation Fund, Core Plus Fixed Income Fund, Emerging Markets
Equity Fund, Global Equity Fund, Global Real Estate Fund, International Fixed
Income Fund, Large Cap Relative Value Fund, Market Neutral Equity Fund, Mid Cap
Value Fund, Small Cap Core Fund and Focused Equity Fund that are subject to a
contingent deferred sales charge. The Predecessor Mazama Fund did not charge a
contingent deferred sales charge.
For the fiscal years ended September 30, 2009, 2008 and 2007, the Distributor
retained $0, $0 and $0, respectively, of contingent deferred sales charges on
the redemption of the Mid Cap Fund.
82
For the fiscal years ended September 30, 2009, 2008 and 2007, the Distributor
retained $3,171, $6,923 and $0, respectively, of contingent deferred sales
charges on the redemption of the Healthcare and Biotechnology Fund.
For the fiscal years ended September 30, 2009, 2008 and 2007, the Distributor
retained $0, $20 and $0, respectively, of contingent deferred sales charges on
the redemption of the Small Cap Value Opportunities Fund.
For the fiscal years ended September 30, 2009 and 2008, the Distributor retained
$138 and $23 of contingent deferred sales charges on the redemption of the
Premium Yield Equity Fund.
For the fiscal years ended September 30, 2009, 2008 and 2007, the Distributor
retained $0, $0 and $0, respectively, of contingent deferred sales charges on
the redemption of the Touchstone International Growth Fund.
The amounts retained by the Distributor for the Capital Appreciation Fund, Core
Plus Fixed Income Fund, Emerging Markets Equity Fund, Global Equity Fund, Global
Real Estate Fund, International Fixed Income Fund, Large Cap Relative Value
Fund, Market Neutral Equity Fund, Mid Cap Value Fund, Small Cap Core Fund and
Focused Equity Fund are not included because the Funds had not commenced
operations prior to September 30, 2009.
83
TRUSTEES AND OFFICERS OF THE TRUST
The following is a list of the Trustees and principal officers of the Trust, the
length of time served, principal occupations for the past 5 years, number of
funds overseen in the Touchstone Fund Complex and other directorships held. All
funds managed by the Advisor are part of the "Touchstone Fund Complex." The
Touchstone Fund Complex consists of the Trust, Touchstone Investment Trust,
Touchstone Strategic Trust, Touchstone Variable Series Trust, Touchstone
Tax-Free Trust and Touchstone Institutional Funds Trust. The Trustees who are
not interested persons of the Trust, as defined in the 1940 Act, are referred to
as "Independent Trustees."
----------------------------------------------------------------------------------------------------------------------------------
INTERESTED
TRUSTEES(1):
----------------------------------------------------------------------------------------------------------------------------------
TERM OF NUMBER OF
OFFICE FUNDS
AND OVERSEEN OTHER
NAME POSITION LENGTH OF IN THE DIRECTORSHIPS
ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING PAST TOUCHSTONE FUND HELD DURING PAST 5
YEAR OF BIRTH TRUST SERVED(2) 5 YEARS COMPLEX(3) YEARS (4)
----------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder Trustee and Until President and CEO of IFS Financial 45 Director of
Touchstone President retirement Services, Inc. (a holding LaRosa's (a
Advisors, Inc at age 75 company). restaurant chain),
303 Broadway or until Capital Analysts
Cincinnati, OH she resigns Incorporated (an
Year of Birth: 1955 or is investment advisor
removed and broker-dealer),
IFS Financial
Trustee Services, Inc. (a
since 2006 holding company),
Integrity and
National Integrity
Life Insurance
Co., Touchstone
Securities (the
Trust's
distributor),
Touchstone
Advisors (the
Trust's investment
advisor and
administrator) and
W&S Financial
Group Distributors
(a distribution
company).
----------------------------------------------------------------------------------------------------------------------------------
84
----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT
TRUSTEES:
----------------------------------------------------------------------------------------------------------------------------------
TERM OF NUMBER OF
OFFICE FUNDS
AND OVERSEEN OTHER
NAME POSITION LENGTH OF IN THE DIRECTORSHIPS
ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING PAST TOUCHSTONE FUND HELD DURING PAST 5
YEAR OF BIRTH TRUST SERVED(2) 5 YEARS COMPLEX(3) YEARS (4)
----------------------------------------------------------------------------------------------------------------------------------
Phillip R. Cox Trustee Until President and Chief Executive 45 Director of
105 East Fourth Street retirement Officer of Cox Financial Corp. (a Cincinnati Bell (a
Cincinnati, OH at age 75 financial services company). communications
Year of Birth: 1947 or until he company), Bethesda
resigns or Inc. (a hospital),
is removed Timken Co. (a
manufacturing
Trustee company), Diebold
since 2006 (a technology
solutions
company), Ohio
Business Alliance
for Higher
Education.
Director of Duke
Energy from 1994 -
2008.
----------------------------------------------------------------------------------------------------------------------------------
H. Jerome Lerner Trustee Until Principal of HJL Enterprises (a 45 None
c/o Touchstone retirement privately held investment company).
Advisors, Inc. at age 75
303 Broadway or until he
Cincinnati, OH resigns or
Year of Birth: 1938 is removed
Trustee
since 2007
----------------------------------------------------------------------------------------------------------------------------------
Donald C. Siekmann Trustee Until Executive for Duro Bag 45 None
c/o Touchstone retirement Manufacturing Co. (a bag
Advisors, Inc. at age 75 manufacturer) from 2002 -2008.
303 Broadway or until he
Cincinnati, OH resigns or
Year of Birth: 1938 is removed
Trustee
since 2006
----------------------------------------------------------------------------------------------------------------------------------
John P. Zanotti Trustee Until CEO, Chairman and Director of 45 Director of Q Med
c/o Touchstone retirement Avaton, Inc. (a wireless (a health care
Advisors, Inc. at age 75 entertainment company) until 2006. management
303 Broadway or until he President of Cincinnati Biomedical company) from 2004
Cincinnati, OH resigns or (a life science and economic - 2007..
Year of Birth: 1948 is removed development company) from 2003 -
2007.
Trustee Chairman of Integrated Media
since 2007 Technologies (a media company).
----------------------------------------------------------------------------------------------------------------------------------
Susan J. Hickenlooper Trustee Until Trustee of Episcopal Retirement 45 Trustee of Gateway
c/o Touchstone retirement Homes Foundation Trust (a
Advisors, Inc. at age 75 charitable
303 Broadway or until he organization) from
Cincinnati, OH resigns or 2006 - 2008,
Year of Birth: 1946 is removed Trustee of
Cincinnati Parks
Trustee Foundation (a
since 2009 charitable
organization).
----------------------------------------------------------------------------------------------------------------------------------
(1) Ms. McGruder, as a director of the Advisor and the Distributor and
an officer of affiliates of the Advisor and the Distributor, is an
"interested person" of the Trust within the meaning of Section
2(a)(19) of the 1940 Act.
(2) Each Trustee is elected to serve until the age of 75 or until he or
she sooner resigns or is removed.
(3) The Touchstone Fund Complex consists of 21 series of the Trust, 5
series of Touchstone Strategic Trust, 3 series of Touchstone
Tax-Free Trust, 4 series of Touchstone Investment Trust, 11 variable
annuity series of Touchstone Variable Series Trust and 1 series of
Touchstone Institutional Funds Trust.
(4) Each Trustee is also a Trustee of Touchstone Tax-Free Trust,
Touchstone Investment Trust, Touchstone Strategic Trust, Touchstone
Variable Series Trust and Touchstone Institutional Funds Trust.
85
-------------------------------------------------------------------------------------------------------------
PRINCIPAL
OFFICERS:
-------------------------------------------------------------------------------------------------------------
NAME POSITION TERM OF OFFICE AND
ADDRESS HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING
YEAR OF BIRTH TRUST(1) SERVED PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Jill T. McGruder President and Until resignation, See biography above.
Touchstone Trustee removal or
Advisors, Inc. disqualification
303 Broadway
Cincinnati, OH President since
Year of Birth: 1955 2006
-------------------------------------------------------------------------------------------------------------
Brian E. Hirsch Vice President Until resignation, Senior Vice President and Chief
Touchstone removal or Compliance Officer of IFS
Advisors, Inc. disqualification Financial Services, Inc. (a
303 Broadway holding company)
Cincinnati, OH Vice President
Year of Birth: 1956 since 2006
-------------------------------------------------------------------------------------------------------------
Steven M. Graziano Vice President Until resignation, President of Touchstone Advisors,
Touchstone Advisors, Inc. removal or Inc.; Executive Vice President of
303 Broadway disqualification Pioneer Investment Management,
Cincinnati, OH Head of Retail Distribution and
Year of Birth: 1954 Vice President Strategic Marketing 2007 - 2008;
since 2009 Executive Vice President of
Pioneer Investment Management,
Chief Marketing Officer 2002 - 2007.
-------------------------------------------------------------------------------------------------------------
Joseph Melcher Chief Compliance Until resignation, Vice President of Compliance of
Touchstone Advisors, Inc. Officer removal or IFS Financial Services (a holding
303 Broadway disqualification company); Assistant Vice President
Cincinnati, OH of Compliance of IFS Financial
Year of Birth: 1973 Chief Compliance Services 2005 - 2010.
Officer since 2010
-------------------------------------------------------------------------------------------------------------
Terrie A. Wiedenheft Controller Until resignation, Chief Financial Officer and Senior
Touchstone and Treasurer removal or Vice President of IFS Financial
Advisors, Inc. disqualification Services, Inc. (a holding company)
303 Broadway
Cincinnati, OH Controller and
Year of Birth: 1962 Treasurer since 2006
-------------------------------------------------------------------------------------------------------------
Jay S. Fitton Secretary Until resignation, Assistant Vice President and
JPMorgan removal or Senior Counsel at JPMorgan Chase
303 Broadway disqualification Bank, N.A
Cincinnati, OH
Year of Birth: 1970 Secretary since
2006
-------------------------------------------------------------------------------------------------------------
(1) Each officer also holds the same office with Touchstone Investment
Trust, Touchstone Tax-Free Trust, Touchstone Variable Series Trust,
Touchstone Strategic Trust and Touchstone Institutional Funds Trust.
86
ADDITIONAL INFORMATION ABOUT THE TRUSTEES
The Board believes that each Trustee's experience, qualifications, attributes or
skills on an individual basis and in combination with those of the other
Trustees lead to the conclusion that the Trustees possess the requisite
experience, qualifications, attributes and skills to serve on the Board. The
Board believes that the Trustees' ability to review critically, evaluate,
question and discuss information provided to them; to interact effectively with
the Advisor, Sub-Advisors, other service providers, counsel and independent
auditors; and to exercise effective business judgment in the performance of
their duties, support this conclusion. The Board has also considered the
contributions that each Trustee can make to the Board and the Funds. In
addition, the following specific experience, qualifications, attributes and/or
skills apply as to each Trustee: Ms. McGruder, experience as a chief executive
officer of a financial services company and director of various other
businesses, as well as executive and leadership roles within the Adviser; Mr.
Cox, experience as a chief executive officer of a financial services company and
director of companies from varied industries; Mr. Lerner, owner of a management
consulting services company and executive experience at various businesses; Mr.
Siekmann, accounting experience as a partner at a major accounting firm,
director experience at another mutual fund complex, executive experience at
various businesses and a leadership role at a charitable organization; Mr.
Zanotti, executive and board experience at companies from various industries;
and Ms. Hickenlooper, executive and board experience at various businesses,
foundations and charitable organizations. In its periodic self-assessment of the
effectiveness of the Board, the Board considers the complementary individual
skills and experience of the individual Trustees primarily in the broader
context of the Board's overall composition so that the Board, as a body,
possesses the appropriate (and appropriately diverse) skills and experience to
oversee the business of the Fund. References to the qualifications, attributes
and skills of Trustees are pursuant to requirements of the Securities and
Exchange Commission, do not constitute holding out the Board or any Trustee as
having any special expertise or experience, and shall not impose any greater
responsibility on any such person or on the Board by reason thereof.
BOARD STRUCTURE
The Board of Trustees is composed of five Independent Trustees and one
Interested Trustee, Jill T. McGruder, who is Chairperson of the Board of
Trustees. The full Board has appointed Phillip R. Cox to serve as the Lead
Independent Trustee. Ms. McGruder oversees the day-to-day business affairs of
the Trust and communicates with Mr. Cox regularly on various Trust issues, as
appropriate. Mr. Cox, among other things, chairs meetings of the Independent
Trustees, serves as a spokesperson for the Independent Trustees and serves as a
liaison between the Independent Trustees and the Trust's management between
Board meetings. Except for any duties specified herein, the designation of Lead
Independent Trustee does not impose on such Independent Trustee any duties,
obligations or liability that is greater than the duties, obligations or
liability imposed on such person as a member of the Board, generally. The
Independent Trustees are advised at these meetings, as well as at other times,
by separate, independent legal counsel.
The Board holds four regular meetings each year to consider and address matters
involving the Trust and its Funds. The Board also may hold special meetings to
address matters arising between regular meetings. The Independent Trustees also
regularly meet outside the presence of management and are advised by independent
legal counsel. These meetings may take place in-person or by telephone.
87
The Board has established a committee structure that includes an Audit Committee
and a Governance Committee (discussed in more detail below). Each Committee is
comprised entirely of Independent Trustees. The Board reviews its structure
regularly and believes that its leadership structure, including having a
super-majority of Independent Trustees, coupled with an Interested Chairperson
and a Lead Independent Trustee, is appropriate and in the best interests of the
Trust, given its specific characteristics.
BOARD OVERSIGHT OF RISK
Consistent with its responsibilities for oversight of the Trust and its Funds,
the Board, among other things, oversees risk management of each Fund's
investment program and business affairs directly and through the committee
structure that it has established. Risks to the Funds include, among others,
investment risk, credit risk, liquidity risk, valuation risk and operational
risk, as well as the overall business risk relating to the Funds. The Board has
adopted, and periodically reviews, policies and procedures designed to address
these risks. Under the overall supervision of the Board, the Advisor,
Sub-Advisors, and other key service providers to the Funds, including the
administrator, the distributor, the transfer agent, the custodian, and the
independent auditors, have also implemented a variety of processes, procedures
and controls to address these risks. Different processes, procedures and
controls are employed with respect to different types of risks. These processes
include those that are embedded in the conduct of regular business by the Board
and in the responsibilities of officers of the Trust and other service
providers.
The Board requires senior officers of the Trust, including the Chief Compliance
Officer ("CCO"), to report to the Board on a variety of matters at regular and
special meetings of the Board, including matters relating to risk management.
The Board and the Audit Committee receive regular reports from the Trust's
independent auditors on internal control and financial reporting matters. On at
least a quarterly basis, the Board meets with the Trust's CCO, including
meetings in executive sessions, to discuss issues related to portfolio
compliance and, on at least an annual basis, receives a report from the CCO
regarding the effectiveness of the Trust's compliance program. In addition, the
Board also receives reports from the Advisor on the investments and securities
trading of the Funds, including their investment performance and asset
weightings compared to appropriate benchmarks, as well as reports regarding the
valuation of those investments. The Board also receives reports from the Trust's
primary service providers on a periodic or regular basis, including the
Sub-Advisors to the Portfolios.
88
TRUSTEE COMPENSATION*
The following table shows the compensation paid to the Trustees by the Trust and
the aggregate compensation paid by the Touchstone Fund Complex during the fiscal
year ended September 30, 2009.
---------------------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM THE
FROM THE TRUST FOR THE TOUCHSTONE FUND COMPLEX(2) FOR
FISCAL YEAR ENDED THE FISCAL YEAR ENDED
NAME SEPTEMBER 30, 2009(1) SEPTEMBER 30, 2009
---------------------------------------------------------------------------------------------
Jill T. McGruder $0 $0
---------------------------------------------------------------------------------------------
Phillip R. Cox $14,083 $84,500
---------------------------------------------------------------------------------------------
Donald Siekmann $13,417 $80,500
---------------------------------------------------------------------------------------------
Susan J. Hickenlooper $2,708 $16,250
---------------------------------------------------------------------------------------------
H. Jerome Lerner $12,083 $72,500
---------------------------------------------------------------------------------------------
John P. Zanotti $12,833 $77,000
---------------------------------------------------------------------------------------------
(1) The Independent Trustees are eligible to participate in the
Touchstone Trustee Deferred Compensation Plan, which allows them to
defer payment of a specific amount of their Trustee compensation,
subject to a minimum quarterly reduction of $1,000. The total amount
of deferred compensation accrued by the Independent Trustees from
the Touchstone Fund Complex during the fiscal year ended September
30, 2009 is as follows: $0.
(2) The Touchstone Fund Complex consists of 21 series of the Trust, 3
series of Touchstone Tax-Free Trust, 4 series of Touchstone
Investment Trust, 5 series of Touchstone Strategic Trust, 11
variable annuity series of Touchstone Variable Series Trust and 1
series of Touchstone Institutional Funds Trust.
Each Independent Trustee receives a quarterly retainer of $9,500 and a fee of
$4,500 for each Board meeting attended in person and $1,500 for attendance by
telephone. Each Committee member receives a fee of $2,250 for each committee
meeting attended in person and $1,500 for attendance by telephone. The lead
Trustee receives an additional $3,000 quarterly retainer. The Committee Chairmen
receive an additional $1,500 - $2,000 quarterly retainer, depending on the
committee. All fees are split equally among the Trusts comprising the Touchstone
Fund Complex.
STANDING COMMITTEES OF THE BOARD
The Board of Trustees is responsible for overseeing the operations of the Trust
in accordance with the provisions of the 1940 Act and other applicable laws and
the Trust's Declaration of Trust. The Board has established the following
committees to assist in its oversight functions. Each Committee is composed
entirely of Independent Trustees.
89
AUDIT COMMITTEE. Messrs. Siekmann and Lerner are members of the Audit Committee.
The Audit Committee is responsible for overseeing the Trust's accounting and
financial reporting policies, practices and internal controls. During the fiscal
year ended September 30, 2009, the Audit Committee held four meetings.
GOVERNANCE COMMITTEE. Messrs. Cox and Zanotti and Ms. Hickenlooper are members
of the Governance Committee. The Governance Committee is responsible for
overseeing the Trust's compliance program and compliance issues, procedures for
valuing securities and responding to any pricing issues. The Governance
Committee held four meetings during the fiscal year ended September 30, 2009.
In addition, the Governance Committee is responsible for recommending candidates
to serve on the Board. The Governance Committee will consider shareholder
recommendations for nomination to the Board only in the event that there is a
vacancy on the Board. Shareholders who wish to submit recommendations for
nominations to the Board to fill the vacancy must submit their recommendations
in writing to John P. Zanotti, Chairman of the Governance Committee, c/o
Touchstone, 303 Broadway, Suite 1100, Cincinnati, OH 45202. Shareholders should
include appropriate information on the background and qualifications of any
person recommended to the Governance Committee (e.g., a resume), as well as the
candidate's contact information and a written consent from the candidate to
serve if nominated and elected. Shareholder recommendations for nominations to
the Board will be accepted on an ongoing basis and such recommendations will be
kept on file for consideration in the event of a future vacancy on the Board.
TRUSTEE OWNERSHIP IN THE TOUCHSTONE FUND COMPLEX
The following table reflects the Trustees' beneficial ownership in the Funds*
and the Touchstone Fund Complex as of December 31, 2009.
------------------------------------------------------------------------------------------------------------------
Dollar Range of
Securities in Dollar Range of Dollar Range of
International Growth Securities in Small Cap Securities in Emerging
Fund Value Opportunities Fund Markets Equity Fund
------------------------------------------------------------------------------------------------------------------
Jill T. McGruder None None None
Phillip R. Cox None None None
H. Jerome Lerner None None None
Donald C. Siekmann $50,001 -$100,000 None None
Susan J. Hickenlooper None None $10,001 - $50,000
John P. Zanotti None $1 - $10,000 None
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Dollar Range of Dollar Range of Dollar Range of
Securities in Global Securities in Global Securities in Large Cap
Equity Fund Real Estate Fund Relative Value Fund
------------------------------------------------------------------------------------------------------------------
Jill T. McGruder None None None
Phillip R. Cox None None None
H. Jerome Lerner None None None
Donald C. Siekmann None None None
Susan J. Hickenlooper $10,001 - $50,000 $10,001 - $50,000 $10,001 - $50,000
John P. Zanotti None None None
------------------------------------------------------------------------------------------------------------------
90
--------------------------------------------------------------------------------
Dollar Range of Aggregate Dollar Range
Securities in Small of Securities in the
Cap Core Fund Touchstone Fund
Complex(1)
--------------------------------------------------------------------------------
Jill T. McGruder None Over $100,000
Phillip R. Cox None None
H. Jerome Lerner None Over $100,000
Donald C. Siekmann None Over $100,000
Susan J. Hickenlooper $10,001 - $50,000 $50,001 - $100,000
John P. Zanotti None $50,001 - $100,000
--------------------------------------------------------------------------------
* The Trustees did not have any beneficial interest in the Funds that are not
listed in the chart above.
(1) The Touchstone Fund Complex consists of 21 series of the Trust, 5
series of Touchstone Strategic Trust, 3 series of Touchstone
Tax-Free Trust, 4 series of Touchstone Investment Trust, 11 variable
annuity series of Touchstone Variable Series Trust and 1 series of
Touchstone Institutional Funds Trust.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through JPMorgan P.O. Box 5354 Cincinnati,
OH 45201-5354, (the "Transfer Agent") on days when the New York Stock Exchange
is open for business. Currently, the days on which each Fund is closed for
business are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Shares of each Fund are offered on a continuous basis.
The Trust intends to pay your redemption proceeds in cash. However, under
unusual conditions that make the payment in cash unwise (and for the protection
of the remaining shareholders of the Fund) the Trust reserves the right to pay
all, or part, of your redemption proceeds in liquid securities with a market
value equal to the redemption price (redemption in-kind). The Trust has elected
to be governed by Rule 18f-1 of the 1940 Act under which the Trust is obligated
to redeem shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of a Fund's net asset value during any 90-day period. Although it
is highly unlikely that your shares would ever actually be redeemed in kind, you
would have to pay brokerage costs to sell the securities distributed to you.
Each Fund's net asset value ("NAV") per share is computed once daily, Monday
through Friday, at 4:00 p.m. Eastern Time except when the Fund is not open for
business, days during which the Fund receives no purchase or redemption orders,
customer holidays and on days when the New York Stock Exchange is closed.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of a Fund's securities is not reasonably practicable, or
for such other periods as the SEC has by order permitted. The Trust also
reserves the right to suspend sales of shares of any Fund for any period during
which the New York Stock Exchange, the Advisor, the sub-advisors, the
Administrator, the Transfer Agent and/or the Fund's custodian are not open for
business.
91
The Funds participate in fund "supermarket" arrangements. In such an
arrangement, a program is made available by a broker or other institution (a
sponsor) that allows investors to purchase and redeem shares of the Funds
through the sponsor of the fund supermarket. In connection with these
supermarket arrangements, each Fund has authorized one or more brokers to accept
on its behalf purchase and redemption orders. In turn, the brokers are
authorized to designate other intermediaries to accept purchase and redemption
orders on the Funds' behalf. As such, a Fund will be deemed to have received a
purchase or redemption order when an authorized broker or, if applicable, a
broker's authorized designee, accepts the order. The customer order will be
priced at the Fund's NAV next computed after acceptance by an authorized broker
or the broker's authorized designee. In addition, a broker may charge
transaction fees on the purchase and/or sale of Fund shares. Also in connection
with fund supermarket arrangements, the performance of a participating Fund may
be compared in publications to the performance of various indices and
investments for which reliable performance data is available and compared in
publications to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services. The Trust's annual report contains
additional performance information and will be made available to investors upon
request and without charge.
CLASS A SHARES. Class A shares are sold at NAV plus an initial sales charge as
shown in the table below. In some cases the initial sales charge for purchases
of Class A shares may be waived or reduced, as described in the Prospectuses.
SALES CHARGE FOR EQUITY AND THE TOUCHSTONE GLOBAL REAL ESTATE FUND AND THE
TOUCHSTONE MARKET NEUTRAL EQUITY FUND (THE "ALTERNATIVE INVESTMENT FUNDS"):
-------------------------------------------------------------------------------------------------------------
Amount of Investment Percentage of Dealer
Offering Price Which Equals this Reallowance as
Deducted for Percentage of Your Net Percentage of
Sales Charge Investment Offering Price
-------------------------------------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10% 5.00%
-------------------------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71% 3.75%
-------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63% 2.75%
-------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.95% 3.04% 2.25%
-------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.25% 2.30% 1.75%
-------------------------------------------------------------------------------------------------------------
$1,000,000 or more None None None
-------------------------------------------------------------------------------------------------------------
92
SALES CHARGE FOR BOND FUNDS
-------------------------------------------------------------------------------------------------------------
Amount of Investment Percentage of Dealer
Offering Price Which Equals this Reallowance as
Deducted for Percentage of Your Net Percentage of
Sales Charge Investment Offering Price
-------------------------------------------------------------------------------------------------------------
Less than $50,000 4.75% 4.99% 4.00%
-------------------------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71% 3.75%
-------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63% 2.75%
-------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.95% 3.04% 2.25%
-------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.25% 2.30% 1.75%
-------------------------------------------------------------------------------------------------------------
$1,000,000 or more None None None
-------------------------------------------------------------------------------------------------------------
For initial purchases of Class A shares of $1 million or more and subsequent
purchases further increasing the size of the account, participating unaffiliated
dealers may receive compensation of up to 1.00% of such purchases from the
Distributor according to the following schedule:
Amount of Investment Dealer Fee
-------------------- ----------
$1 million but less than $3 million 1.00%
$3 million but less than $5 million 0.75%
$5 million but less than $25 million 0.50%
$25 million or more 0.25%
The Distributor does not have an annual reset for these fees. In determining a
dealer's eligibility for such commission, purchases of Class A shares of the
Funds may be aggregated with concurrent purchases of Class A shares of other
Touchstone Funds. If a commission was paid to a participating unaffiliated
dealer and the Class A shares are redeemed within a year of their purchase, a
contingent deferred sales charge ("CDSC") of 1.00% will be charged on the
redemption. Dealers should contact the Distributor for more information on the
calculation of the dealer's commission in the case of combined purchases.
An exchange from other Touchstone Funds will not qualify for payment of the
dealer's commission unless the exchange is from a Touchstone Fund with assets as
to which a dealer's commission or similar payment has not been previously paid.
No commission will be paid if the purchase represents the reinvestment of a
redemption from a Fund made during the previous twelve months. Redemptions of
Class A shares may result in the imposition of a CDSC if the dealer's commission
described in this paragraph was paid in connection with the purchase of such
shares. See "CDSC for Certain Redemptions of Class A shares" below.
CLASS C SHARES. Class C shares are sold at NAV, without an initial sales charge
and are subject to a CDSC of 1.00% on redemptions of Class C shares made within
one year of their purchase. The CDSC will be a percentage of the dollar amount
of shares redeemed and will be assessed on an amount equal to the lesser of (1)
the NAV at the time of purchase of the Class C shares being redeemed, or (2) the
NAV of such Class C shares being redeemed. A CDSC will not be imposed upon
redemptions of Class C shares held for at least one year. Class C shares are
subject to an annual 12b-1 fee of up to 1.00% of a Fund's average daily net
assets allocable to Class C shares. The Distributor intends to pay a commission
of 1.00% of the purchase amount to your broker at the time you purchase Class C
shares.
93
CLASS Y SHARES. Class Y shares are sold at NAV, without an initial sales charge
and are not subject to a 12b-1 fee or CDSC. Class Y shares are offered through
certain broker-dealers or financial institutions that have distribution
agreements with the Distributor. These agreements are generally limited to
discretionary managed, asset allocation, or wrap products offered by
broker-dealers and financial institutions and may be subject to fees by the
participating broker-dealer or financial institution.
CLASS Z SHARES. Class Z shares are sold at NAV, without an initial sales charge
and are not subject to a 12b-1 fee or CDSC but are subject to a shareholder
servicing fee. Class Z shares are offered through certain broker-dealers or
financial institutions that have distribution agreements with the Distributor.
INSTITUTIONAL SHARES. Institutional shares are sold at NAV, without an initial
sales charge and are not subject to a 12b-1 fee or CDSC, but are subject to
higher initial investment requirements than other classes of shares of a Fund.
Institutional shares are offered through certain broker-dealers or financial
institutions that have distribution agreements with the Distributor. These
agreements are generally limited to discretionary managed, asset allocation, or
wrap products offered by broker-dealers and financial institutions and may be
subject to fees by the participating broker-dealer or financial institution.
Institutional shares may also be purchased directly through the Distributor.
Class A shareholders who are eligible to invest in Class Y shares are eligible
to exchange their Class A shares for Class Y shares of the same fund, if offered
in their state and such an exchange can be accommodated by their financial
institution. Class Y shares may be available through financial institutions that
have appropriate selling agreements with Touchstone, or through "processing
organizations" (e.g., mutual fund supermarkets) that purchase shares for their
customers. No sales charges or other charges will apply to any such exchange,
which will be processed as a liquidation and a purchase. For federal income tax
purposes, asset transfers between share classes of the same fund are not
expected to result in the realization by the investor of a capital gain or loss.
There can be no assurance of any particular tax treatment, however, and you
should consult with your tax advisor before entering into a share class
exchange.
ADDITIONAL INFORMATION ON THE CDSC
The CDSC is waived under the following circumstances:
o Any partial or complete redemption following death or disability (as
defined in the Code) of a shareholder (including one who owns the shares
with his or her spouse as a joint tenant with rights of survivorship) from
an account in which the deceased or disabled is named. The Distributor may
require documentation prior to waiver of the charge, including death
certificates, physicians' certificates, etc.
o Redemptions from a systematic withdrawal plan. If the systematic
withdrawal plan is based on a fixed dollar amount or number of shares,
systematic withdrawal redemptions are limited to no more than 10% of your
account value or number of shares per year, as of the date the transfer
agent receives your request. If the systematic withdrawal plan is based on
a fixed percentage of your account value, each redemption is limited to an
amount that would not exceed 10% of your annual account value at the time
of withdrawal.
94
o Redemptions from retirement plans qualified under Section 401 of the Code.
The CDSC will be waived for benefit payments made by Touchstone directly
to plan participants. Benefit payments will include, but are not limited
to, payments resulting from death, disability, retirement, separation from
service, required minimum distributions (as described under Section
401(a)(9) of the Code), in-service distributions, hardships, loans and
qualified domestic relations orders. The CDSC waiver will not apply in the
event of termination of the plan or transfer of the plan to another
financial institution.
o Redemptions that are mandatory withdrawals from a traditional IRA account
after age 70 1/2. The Worker, Retiree, and Employer Recovery Act of 2008
abated this mandatory withdrawal requirement for the 2009 calendar year.
GENERAL. All sales charges imposed on redemptions are paid to the Distributor.
In determining whether the CDSC is payable, it is assumed that shares not
subject to the CDSC are the first redeemed followed by other shares held for the
longest period of time. The CDSC will not be imposed upon shares representing
reinvested dividends or capital gains distributions, or upon amounts
representing share appreciation.
CDSC FOR CERTAIN REDEMPTIONS OF CLASS A SHARES. A CDSC is imposed upon certain
redemptions of Class A shares of the Funds (or shares into which such Class A
shares were exchanged) purchased at NAV in amounts totaling $1 million or more,
if the dealer's commission described above was paid by the Distributor and the
shares are redeemed within one year from the date of purchase. The CDSC will be
paid to the Distributor and will be equal to the commission percentage paid at
the time of purchase as applied to the lesser of (1) the NAV at the time of
purchase of the Class A shares being redeemed, or (2) the NAV of such Class A
shares at the time of redemption. If a purchase of Class A shares is subject to
the CDSC, you will be notified on the confirmation you receive for your
purchase. Redemptions of such Class A shares of the Funds held for at least one
year will not be subject to the CDSC.
EXAMPLES. The following example will illustrate the operation of the CDSC.
Assume that you open an account and purchase 1,000 shares at $10 per share and
that six months later the NAV per share is $12 and, during such time, you have
acquired 50 additional shares through reinvestment of distributions. If at such
time you should redeem 450 shares (proceeds of $5,400), 50 shares will not be
subject to the charge because of dividend reinvestment. With respect to the
remaining 400 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in NAV of $2 per share. Therefore, $4,000 of the
$5,400 redemption proceeds will pay the charge. At the rate of 1.00%, the CDSC
would be $40 for redemptions of Class C shares. In determining whether an amount
is available for redemption without incurring a deferred sales charge, the
purchase payments made for all shares in your account are aggregated.
95
PURCHASE AND REDEMPTION INFORMATION
WAIVER OF MINIMUM INVESTMENT REQUIREMENTS. The minimum and subsequent investment
requirements for purchases in the Funds may not apply to:
1. Any director, officer or other employee (and their immediate family
members, as defined below) of Western & Southern Life Insurance Company or
any of its affiliates or any portfolio advisor or service provider to the
Trust.
2. Any employee benefit plan that is provided administrative services by a
third-party administrator that has entered into a special service
arrangement with the Distributor.
The minimum investment waivers are not available for Institutional shares of the
Funds.
WAIVER OF CLASS A SALES CHARGES. In addition to the categories of purchasers
described in the prospectus from whom the sales charge on purchases of Class A
shares of the Funds may be waived, Class A shares issued or purchased in the
following transactions are not subject to sales charges (and no concessions are
paid by the Distributor on such purchases):
1. purchases into a Fund by any director, officer, employee (and their immediate
family members, as defined below), or current separate account client of or
referral by a Sub-Advisor to that particular Fund;
2. purchases by any director, officer or other employee (and their immediate
family members, as defined below) of Western & Southern Financial Group or any
of its affiliates; and
3. purchases by any employees of JPMorgan (formerly Integrated Investment
Services, Inc.) who provide services for Touchstone Investments.
Exemptions must be qualified in advance by the Distributor. At the option of the
Trust, the front-end sales charge may be included on purchases by such persons
in the future.
Immediate family members are defined as the spouse, parents, siblings, domestic
partner, natural or adopted children, mother-in-law, father-in-law,
brother-in-law, and sister-in-law of a director, officer or employee. The term
"employee" is deemed to include current and retired employees.
WAIVER OF CLASS A SALES CHARGE FOR FORMER CONSTELLATION SHAREHOLDERS.
Shareholders who owned shares of the Trust as of November 17, 2006 who are
purchasing additional shares for their accounts or opening new accounts in any
Touchstone Fund are not subject to the frond-end sales charge for purchases of
Class A Shares. If you are purchasing shares through a financial intermediary,
you must notify the intermediary at the time of purchase that a purchase
qualifies for a sales load waiver and you may be required to provide copies of
account statements verifying your qualification.
WAIVER OF CLASS A SALES CHARGE FOR FORMER NAVELLIER SHAREHOLDERS. Shareholders
who owned shares of the Navellier International Growth Portfolio as of September
26, 2008 who are purchasing additional shares for their accounts or opening new
accounts in any Touchstone Fund are not subject to the frond-end sales charge
for purchases of Class A Shares. If you are purchasing shares through a
financial intermediary, you must notify the intermediary at the time of purchase
that a purchase qualifies for a sales load waiver and you may be required to
provide copies of account statements verifying your qualification.
96
CLASS Y SHARES GRANDFATHER CLAUSE. New purchases of the Class Y shares are no
longer available directly through Touchstone. Those shareholders who owned Class
Y shares purchased directly through Touchstone prior to February 2, 2009 may
continue to hold Class Y shares of the corresponding Fund(s). In addition, those
shareholders may continue to make subsequent purchases into existing accounts of
Class Y shares of the Fund(s) they owned prior to February 2, 2009.
PURCHASES IN KIND. Shares may be purchased by tendering payment in-kind in the
form of marketable securities, including but not limited to shares of common
stock, provided the acquisition of such securities is consistent with the Fund's
investment goals and is otherwise acceptable to the Advisor. Before purchasing
shares by tendering payment in-kind, an investor is urged and advised to consult
with his, her or its tax advisor regarding the tax consequences of such a
transaction.
REDEMPTION IN KIND. Under unusual circumstances, when the Board of Trustees
deems it in the best interests of a Fund's shareholders, the Fund may make
payment for shares repurchased or redeemed in whole or in part in securities of
the Fund taken at current value. Should payment be made in securities, the
redeeming shareholder will bear the market risk until the securities are sold
and the redeeming shareholder will generally incur brokerage costs and other
costs, including income taxes, if any, in converting such securities to cash.
Portfolio securities that are issued in an in-kind redemption will be readily
marketable. The Trust has filed an irrevocable election with the SEC under Rule
18f-1 of the 1940 Act wherein the Funds are committed to pay redemptions in
cash, rather than in kind, to any shareholder of record of a Fund who redeems
during any ninety day period, the lesser of $250,000 or 1% of a Fund's NAV at
the beginning of such period.
UNCASHED DISTRIBUTION CHECKS. If you elect to receive dividends and
distributions in cash and the payment (1) is returned and marked as
"undeliverable" or (2) is not cashed for six months, your cash election will be
changed automatically and future dividends will be reinvested in the Fund at the
per share net asset value determined as of the date of payment. In addition, any
undeliverable checks or checks that are not cashed for six months will be
cancelled and then reinvested in the Fund at the per share net asset value
determined as of the date of cancellation.
FUND SHARES PURCHASED BY CHECK. We may delay paying your redemption proceeds for
shares you recently purchased by check until your check clears, which may take
up to 15 days. If you need your money sooner, you should purchase shares by bank
wire.
LOW ACCOUNT BALANCES. If your balance falls below the minimum amount required
for your account, based on actual amounts you have invested (as opposed to a
reduction from market changes), your account may be subject to an annual account
maintenance fee or Touchstone may sell your shares and send the proceeds to you.
Touchstone will notify you if your shares are about to be sold and you will have
30 days to increase your account balance to the minimum amount.
97
DETERMINATION OF NET ASSET VALUE
The securities of each Fund are valued under the direction of the Administrator
and under the general supervision of the Trustees. The Administrator or its
delegates may use independent pricing services to obtain valuations of
securities. The pricing services rely primarily on prices of actual market
transactions as well as on trade quotations obtained from third parties. Prices
are generally determined using readily available market prices. If market prices
are unavailable or believed to be unreliable, the Sub-Administrator will
initiate a process by which the Trust's Fair Value Committee will make a good
faith determination as to the "fair value" of the security using procedures
approved by the Trustees. The pricing services may use a matrix system to
determine valuations of fixed income securities when market prices are not
readily available. This system considers such factors as security prices,
yields, maturities, call features, ratings and developments relating to specific
securities in arriving at valuations. The procedures used by any such pricing
service and its valuation results are reviewed by the officers of the Trust
under the general supervision of the Trustees.
Some Funds may hold portfolio securities that are listed on foreign exchanges.
These securities may trade on weekends or other days when the Funds do not
calculate net asset value. As a result, the value of these investments may
change on days when you cannot purchase or sell Fund shares.
Securities with remaining maturities of 60 days or less will be valued by the
amortized cost method, which involves valuing a security at its cost on the date
of purchase and thereafter (absent unusual circumstances) assuming a constant
amortization of maturity of any discount or premium, regardless of the impact of
fluctuations in general market rates of interest on the value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by this method, is higher or lower than the
price a Fund would receive if it sold the instrument.
TAXES
The following discussion summarizes certain U.S. federal income tax
considerations affecting the Funds and their shareholders. This discussion is
for general information only and does not purport to consider all aspects of
U.S. federal income taxation that might be relevant to beneficial owners of
shares of a Fund. The summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable U.S. Treasury
Regulations promulgated thereunder (the "Regulations"), and administrative and
judicial interpretations thereof, all of which are subject to change, which
change could be retroactive, and may affect the conclusions expressed herein.
The summary applies only to beneficial owners of a Fund's shares in whose hands
such shares are capital assets within the meaning of Section 1221 of the Code,
and may not apply to certain types of beneficial owners of a Fund's shares,
including, but not limited to insurance companies, tax-exempt organizations,
shareholders holding a Fund's shares through tax-advantaged accounts (such as an
individual retirement account (an "IRA"), a 401(k) plan account, or other
qualified retirement account), financial institutions, pass-through entities,
broker-dealers, entities that are not organized under the laws of the United
States or a political subdivision thereof, persons who are neither a citizen nor
resident of the United States, shareholders holding a Fund's shares as part of a
hedge, straddle or conversion transaction, and shareholders who are subject to
the alternative minimum tax. Persons who may be subject to tax in more than one
country should consult the provisions of any applicable tax treaty to determine
the potential tax consequences to them.
98
No Fund has requested nor will any Fund request an advance ruling from the
Internal Revenue Service (the "IRS") as to the federal income tax matters
described below. The IRS could adopt positions contrary to those discussed below
and such positions could be sustained. In addition, the following discussion
applicable to shareholders of a Fund addresses only some of the federal income
tax considerations generally affecting investments in such Fund. SHAREHOLDERS
ARE URGED AND ADVISED TO CONSULT THEIR OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES OF THE OWNERSHIP, PURCHASE AND DISPOSITION OF AN INVESTMENT IN A
FUND INCLUDING, BUT NOT LIMITED TO, THE APPLICABILITY OF STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AFFECTING THE PARTICULAR SHAREHOLDER OF SUCH FUND'S SHARES
AND TO POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
GENERAL. For federal tax purposes, each Fund is treated as a separate
corporation. Each Fund has elected, and intends to continue to qualify for,
taxation as a regulated investment company ("RIC") under the Code. By qualifying
as a RIC, a Fund (but not the shareholders) will not be subject to federal
income tax on that portion of its investment company taxable income and net
realized capital gains that it distributes to its shareholders.
Shareholders should be aware that investments made by a Fund, some of which are
described below, may involve complex tax rules some of which may result in
income or gain recognition by it without the concurrent receipt of cash.
Although each Fund seeks to avoid significant noncash income, such noncash
income could be recognized by a Fund, in which case it may distribute cash
derived from other sources in order to meet the minimum distribution
requirements described below. Cash to make the required minimum distributions
may be obtained from sales proceeds of securities held by a Fund (even if such
sales are not advantageous) or, if permitted by its governing documents, through
borrowing the amounts required.
QUALIFICATION AS REGULATED INVESTMENT COMPANY. Qualification as a RIC under the
Code requires, among other things, that: (a) each Fund derive at least 90% of
its gross income for each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including but not
limited to gains from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
(the "Qualifying Income Requirement"), and net income from certain qualified
publicly traded partnerships; (b) each Fund diversify its holdings so that, at
the close of each quarter of the taxable year: (i) at least 50% of the value of
its assets is comprised of cash, cash items (including receivables), U.S.
government securities, securities of other RICs and other securities, with those
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of its total assets and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (ii) not more
than 25% of the value of its assets is invested in the securities (other than
U.S. government securities or securities of other RICs) of any one issuer or the
securities (other than the securities of other RICs) of two or more issuers
controlled by it and engaged in the same, similar or related trades or
businesses, or one or more "qualified publicly traded partnerships"; and (c)
each Fund distribute for each taxable year the sum of (i) at least 90% of its
investment company taxable income (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign currency exchange gains, and any
other taxable income other than "net capital gain" as defined below and is
reduced by deductible expenses all determined without regard to any deduction
for dividend paid); and (ii) 90% of its tax-exempt interest, if any, net of
expenses allocable thereto.
99
The Treasury Department is authorized to promulgate regulations under which
gains from foreign currencies (and options, futures, and forward contracts on
foreign currency) would constitute qualifying income for purposes of the
qualifying income requirement only if such gains are directly related to the
principal business of a Fund in investing in stock or securities or options and
futures with respect to stock or securities. To date, no such regulations have
been issued.
As a RIC, a Fund generally will not be subject to U.S. federal income tax on the
portion of its income and capital gains that it distributes to its shareholders
in any taxable year for which it distributes, in compliance with the Code's
timing and other requirements at least 90% of its investment company taxable
income and at least 90% of the excess of its gross tax-exempt interest income,
if any, over certain disallowed deductions ("net tax-exempt interest"). Each
Fund may retain for investment all or a portion of its net capital gain (i.e.,
the excess of its net long-term capital gain over its net short-term capital
loss). If a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, it may designate the retained
amount as undistributed net capital gain in a notice to its shareholders, who
will be (i) required to include in income for federal income tax purposes, as
long-term capital gain, their shares of such undistributed amount; and (ii)
entitled to credit their proportionate shares of tax paid by such Fund against
their federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities. For federal income tax purposes, the tax
basis of the shares owned by a shareholder of a Fund will be increased by the
amount of undistributed net capital gain included in the shareholder's gross
income and decreased by the federal income tax paid by such Fund on that amount
of capital gain.
If for any taxable year a Fund fails to qualify as a RIC, it will be subject to
tax in the same manner as an ordinary corporation subject to tax on a graduated
basis with a maximum tax rate of 35% and all distributions from earnings and
profits (as determined under the U.S. federal income tax principles) to its
shareholders will be taxable as ordinary dividend income eligible for the 15%
non-corporate shareholder rate (for taxable years beginning prior to January 1,
2011) and the dividends-received deduction for corporation shareholders.
100
EXCISE TAX. If a Fund fails to distribute by December 31 of each calendar year
an amount equal to the sum of (1) at least 98% of its taxable ordinary income
(excluding capital gains and losses) for such year, (2) at least 98% of the
excess of its capital gains over its capital losses (as adjusted for certain
ordinary losses) for the twelve month period ending on October 31 of such year),
and (3) all taxable ordinary income and the excess of capital gains over capital
losses for the prior year that were not distributed during such year and on
which it did not pay federal income tax, such Fund will be subject to a
nondeductible 4% excise tax (the "Excise Tax") on the undistributed amounts. A
distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Fund in October, November, or December of that year to
shareholders of record on a date in such month and paid by it during January of
the following year. Such distributions will be taxable to shareholders (other
than those not subject to federal income tax) in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. Each Fund generally intends to actually distribute
or be deemed to have distributed substantially all of its net income and gain,
if any, by the end of each calendar year in compliance with these requirements
so that it will generally not be required to pay the Excise Tax. A Fund may in
certain circumstances be required to liquidate its investments in order to make
sufficient distributions to avoid Excise Tax liability at a time when an
investment adviser might not otherwise have chosen to do so, and liquidation of
investments in such circumstances may affect the ability of a Fund to satisfy
the requirements for qualification as a RIC. No assurances can be given that a
Fund will not be subject to the Excise Tax and, in fact, in certain instances if
warranted, a Fund may choose to pay the Excise Tax as opposed to making an
additional distribution.
CAPITAL LOSS CARRYFORWARDS. A Fund is permitted to carry forward a net capital
loss from any year to offset its capital gains, if any, realized during the
eight years following the year of the loss. A Fund's capital loss carryforward
is treated as a short-term capital loss in the year to which it is carried. If
future capital gains are offset by carried forward capital losses, such future
capital gains are not subject to Fund-level federal income taxation, regardless
of whether they are distributed to shareholders. As of September 30, 2009, the
Funds had the following capital loss carryforwards for federal income tax
purposes. Capital loss carryforward information for the Predecessor Mazama Fund
is as of December 31, 2009.
--------------------------------------------------------------------------------
FUND AMOUNT OF CAPITAL LOSS CARRYFORWARDS
--------------------------------------------------------------------------------
Intermediate Fixed Income Fund $87,072
--------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund $10,462,531
--------------------------------------------------------------------------------
Short Duration Fixed Income Fund $5,458,876
--------------------------------------------------------------------------------
Sands Capital Select Growth Fund $30,790,451
--------------------------------------------------------------------------------
International Growth Fund $328,042
--------------------------------------------------------------------------------
Healthcare and Biotechnology Fund $6,462,446
--------------------------------------------------------------------------------
Mid Cap Fund $120,759,656
--------------------------------------------------------------------------------
Premium Yield Equity Fund $3,084,301
--------------------------------------------------------------------------------
Small Cap Value Opportunities Fund $31,350,357
--------------------------------------------------------------------------------
Predecessor Mazama Fund $4,170,130
--------------------------------------------------------------------------------
101
A Fund cannot carry back or carry forward any net operating losses. If a Fund
engages in a reorganization, either as an acquiring fund or as an acquired fund,
its ability to use its capital loss carryforwards (if any), its unrealized
losses (if any), and any such losses of other funds participating in the
reorganization may be substantially limited.
ORIGINAL ISSUE DISCOUNT AND MARKET DISCOUNT. A Fund may make investments in
STRIPS, TRs, TIGRs, LYONs, CATS and other Zero Coupon securities which are
treated as having acquisition discount, or original issue discount ("OID")
(generally a debt obligation with a purchase price less than its principal
amount). Generally, a Fund will be required to include the acquisition discount,
or OID, in income over the term of the debt security, even though it will not
receive cash payments for such discount until a later time, usually when the
debt security matures. A Fund may make one or more of the elections applicable
to debt securities having acquisition discount, or OID, which could affect the
character and timing of recognition of income. Inflation-protected bonds
generally can be expected to produce OID income as their principal amounts are
adjusted upward for inflation. A portion of the OID includible in income with
respect to certain high-yield corporate debt securities may be treated as a
dividend for federal income tax purposes.
A debt security acquired in the secondary market by a Fund may be treated as
having market discount if acquired at a price below redemption value or adjusted
issue price if issued with original issue discount. Market discount generally is
accrued ratably, on a daily basis, over the period from the date of acquisition
to the date of maturity even though no cash will be received. Absent an election
by a Fund to include the market discount in income as it accrues, gain on its
disposition of such an obligation will be treated as ordinary income rather than
capital gain to the extent of the accrued market discount.
In addition, pay-in-kind securities will give rise to income which is required
to be distributed and is taxable even though a Fund holding such securities
receives no interest payments in cash on such securities during the year.
Each Fund generally will be required to make distributions to shareholders
representing the income accruing on the debt securities, described above, that
is currently includable in income, even though cash representing such income may
not have been received by such Fund. Cash to pay these distributions may be
obtained from sales proceeds of securities held by a Fund (even if such sales
are not advantageous) or, if permitted by such Fund's governing documents,
through borrowing the amounts required to be distributed. In the event a Fund
realizes net capital gains from such transactions, its shareholders may receive
a larger capital gain distribution, if any, than they would have in the absence
of such transactions. Borrowing to fund any distribution also has tax
implications, such as potentially creating unrelated business taxable income.
102
OPTIONS, FUTURES AND FORWARD CONTRACTS. The writing (selling) and purchasing of
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses a Fund realizes in
connection with such transactions.
Gains and losses on the sale, lapse, or other termination of options and futures
contracts, options thereon and certain forward contracts (except certain foreign
currency options, forward contracts and futures contracts) will generally be
treated as capital gains and losses. Some regulated futures contracts, certain
foreign currency contracts, and certain non-equity options (such as certain
listed options or options on broad based securities indexes) held by a Fund
("Section 1256 contracts"), other than contracts on which it has made a
"mixed-straddle election", will be required to be "marked-to-market" for federal
income tax purposes, that is, treated as having been sold at their market value
on the last day of such Fund's taxable year. These provisions may require a Fund
to recognize income or gains without a concurrent receipt of cash. Any gain or
loss recognized on actual or deemed sales of Section 1256 contracts will be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss, although certain foreign currency gains and losses from such contracts may
be treated as ordinary income or loss as described below. Transactions that
qualify as designated hedges are exempt from the mark-to-market rule, but may
require a Fund to defer the recognition of losses on futures contracts, foreign
currency contracts and certain options to the extent of any unrecognized gains
on related positions held by it.
The tax provisions described above applicable to options, futures and forward
contracts may affect the amount, timing, and character of a Fund's distributions
to its shareholders. For example, the Section 1256 rules described above may
operate to increase the amount a Fund must distribute to satisfy the minimum
distribution requirement for the portion treated as short-term capital gain
which will be taxable to its shareholders as ordinary income, and to increase
the net capital gain it recognizes, without, in either case, increasing the cash
available to it. A Fund may elect to exclude certain transactions from the
operation of Section 1256, although doing so may have the effect of increasing
the relative proportion of net short-term capital gain (taxable as ordinary
income) and thus increasing the amount of dividends it must distribute. Section
1256 contracts also may be marked-to-market for purposes of the Excise Tax.
When a covered call option written (sold) by a Fund expires such Fund will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a Fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less than (or exceeds) the premium received when it wrote the option. When a
covered call option written by a Fund is exercised, such Fund will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending upon the holding period of the underlying security and
whether the sum of the option price received upon the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.
103
SWAPS AND DERIVATIVES. As a result of entering into swap or derivative
agreements, a Fund may make or receive periodic net payments. A Fund may also
make or receive a payment when a swap or derivative is terminated prior to
maturity through an assignment of the swap, derivative or other closing
transaction. Periodic net payments will generally constitute ordinary income or
deductions, while termination of a swap or derivative will generally result in
capital gain or loss (which will be a long-term capital gain or loss if the Fund
has been a party to a swap or derivative for more than one year). With respect
to certain types of swaps or derivatives, a Fund may be required to currently
recognize income or loss with respect to future payments on such swaps or
derivatives or may elect under certain circumstances to mark such swaps or
derivatives to market annually for tax purposes as ordinary income or loss.
Rules governing the tax aspects of swap or derivative agreements are not
entirely clear in certain respects. Accordingly, while each Fund intends to
account for such transactions in a manner it deems appropriate, the IRS might
not accept such treatment. If it did not, the status of the Fund as a RIC might
be affected. The Funds intend to monitor developments in this area. Certain
requirements that must be met under the Code in order for each Fund to qualify
as a RIC may limit the extent to which a Fund will be able to engage in swap
agreements and certain derivatives.
STRADDLES. Section 1092 deals with the taxation of straddles which also may
affect the taxation of options in which a Fund may invest. Offsetting positions
held by a Fund involving certain derivative instruments, such as options,
futures and forward currency contracts, may be considered, for federal income
tax purposes, to constitute "straddles." Straddles are defined to include
offsetting positions in actively traded personal property. In certain
circumstances, the rules governing straddles override or modify the provisions
of Section 1256, described above. If a Fund is treated as entering into a
straddle and at least one (but not all) of its positions in derivative contracts
comprising a part of such straddles is governed by Section 1256, then such
straddle could be characterized as a "mixed straddle." A Fund may make one or
more elections with respect to mixed straddles. Depending on which election is
made, if any, the results with respect to a Fund may differ. Generally, to the
extent the straddle rules apply to positions established by a Fund, losses
realized by it may be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle rules, short-term
capital loss on straddle positions may be characterized as long-term capital
loss, and long-term capital gain may be characterized as short-term capital
gain. In addition, the existence of a straddle may affect the holding period of
the offsetting positions and cause such sales to be subject to the "wash sale"
and "short sale" rules. As a result, the straddle rules could cause
distributions that would otherwise constitute "qualified dividend income" to
fail to satisfy the applicable holding period requirements, described below, and
therefore to be taxed as ordinary income. Further, a Fund may be required to
capitalize, rather than deduct currently, any interest expense and carrying
charges applicable to a position that is part of a straddle. Because the
application of the straddle rules may affect the character and timing of gains
and losses from affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to the situation where a Fund had not engaged in such transactions.
104
In circumstances where a Fund has invested in certain pass-through entities, the
amount of long-term capital gain that it may recognize from certain derivative
transactions with respect to interests in such pass-through entities is limited
under the Code's constructive ownership rules. The amount of long-term capital
gain is limited to the amount of such gain a Fund would have had if it directly
invested in the pass-through entity during the term of the derivative contract.
Any gain in excess of this amount is treated as ordinary income. An interest
charge is imposed on the amount of gain that is treated as ordinary income.
CONSTRUCTIVE SALES. Certain rules may affect the timing and character of gain if
a Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If a Fund enters into certain
transactions (including a short sale, an offsetting notional principal contract,
a futures or forward contract, or other transactions identified in Treasury
regulations) in property while holding an appreciated financial position in
substantially identical property, it will be treated as if it had sold and
immediately repurchased the appreciated financial position and will be taxed on
any gain (but not loss) from the constructive sale. The character of gain from a
constructive sale will depend upon a Fund's holding period in the appreciated
financial position. Loss from a constructive sale would be recognized when the
position was subsequently disposed of, and its character would depend on a
Fund's holding period and the application of various loss deferral provisions of
the Code.
In addition, if the appreciated financial position is itself a short sale or
such a contract, acquisition of the underlying property or substantially
identical property by a Fund will be deemed a constructive sale. The foregoing
will not apply, however, to a Fund's transaction during any taxable year that
otherwise would be treated as a constructive sale if the transaction is closed
within 30 days after the end of that year and such Fund holds the appreciated
financial position unhedged for 60 days after that closing (i.e., at no time
during that 60-day period is such Fund's risk of loss regarding the position
reduced by reason of certain specified transactions with respect to
substantially identical or related property, such as having an option to sell,
being contractually obligated to sell, making a short sale or granting an option
to buy substantially identical stock or securities).
WASH SALES. A Fund may in certain circumstances be impacted by special rules
relating to "wash sales." In general, the wash sale rules prevent the
recognition of a loss by a Fund from the disposition of stock or securities at a
loss in a case in which identical or substantially identical stock or securities
(or an option to acquire such property) is or has been acquired by it within 30
days before or 30 days after the sale.
SHORT SALES. A Fund may make short sales of securities. Short sales may increase
the amount of short-term capital gain realized by a Fund, which is taxed as
ordinary income when distributed to its shareholders. Short sales also may be
subject to the "Constructive Sales" rules, discussed above.
TAX CREDIT BONDS. If a Fund holds (directly or indirectly) one or more "tax
credit bonds" (defined below) on one or more specified dates during a Fund's
taxable year, and it satisfies the minimum distribution requirement, it may
elect for U.S. federal income tax purposes to pass through to shareholders tax
credits otherwise allowable to it for that year with respect to such tax credit
bonds. A tax credit bond is defined in the Code as a "qualified tax credit bond"
(which includes a qualified forestry conservation bond, a new clean renewable
energy bond, a qualified energy conservation bond, or a qualified zone academy
bond, each of which must meet certain requirements specified in the Code), a
"build America bond" (which includes certain qualified bonds issued before
January 1, 2011) or certain other bonds specified in the Code. If a Fund were to
make an election, a shareholder of such Fund would be required to include in
income and would be entitled to claim as a tax credit an amount equal to a
proportionate share of such credits. Certain limitations may apply on the extent
to which the credit may be claimed.
105
PASSIVE FOREIGN INVESTMENT COMPANIES. A Fund may invest in a non-U.S.
corporation, which could be treated as a passive foreign investment company
("PFIC") or become a PFIC under the Code. A PFIC is generally defined as a
foreign corporation that meets either of the following tests: (1) at least 75%
of its gross income for its taxable year is income from passive sources (such as
interest, dividends, certain rents and royalties, or capital gains); or (2) an
average of at least 50% of its assets produce, or are held for the production
of, such passive income. If a Fund acquires any equity interest in a PFIC, such
Fund could be subject to federal income tax and interest charges on "excess
distributions" received from the stock of the PFIC held by it or on any gain
from the sale of such equity interest in the PFIC (collectively "PFIC income"),
plus interest thereon even if such Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
such Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent it distributes that income to its shareholders. A
Funds distributions of PFIC income will be taxable as ordinary income even
though, absent the application of the PFIC rules, some portion of the
distributions may have been classified as capital gain.
A Fund will not be permitted to pass through to its shareholders any credit or
deduction for taxes and interest charges incurred with respect to a PFIC.
Payment of this tax would therefore reduce a Fund's economic return from its
investment in PFIC shares. To the extent a Fund invests in a PFIC, it may elect
to treat the PFIC as a "qualified electing fund" ("QEF"), then instead of the
tax and interest obligation described above on excess distributions, such Fund
would be required to include in income each taxable year its pro rata share of
the QEF's annual ordinary earnings and net capital gain. As a result of a QEF
election, a Fund would likely have to distribute to its shareholders an amount
equal to the QEF's annual ordinary earnings and net capital gain to satisfy the
Code's minimum distribution requirement described herein and avoid imposition of
the Excise Tax even if the QEF did not distribute those earnings and gain to
such Fund. In most instances it will be very difficult, if not impossible, to
make this election because of certain requirements in making the election.
A Fund may elect to "mark-to-market" its stock in any PFIC. "Marking-to-market,"
in this context, means including in ordinary income each taxable year the
excess, if any, of the fair market value of the PFIC stock over such Fund's
adjusted basis therein as of the end of that year. Pursuant to the election, a
Fund also may deduct (as an ordinary, not capital, loss) the excess, if any, of
its adjusted basis in the PFIC stock over the fair market value thereof as of
the taxable year-end, but only to the extent of any net mark-to-market gains
with respect to that stock it included in income for prior taxable years under
the election. A Fund's adjusted basis in its PFIC stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder. In either case, a Fund may be required to recognize taxable income
or gain without the concurrent receipt of cash.
106
FOREIGN CURRENCY TRANSACTIONS. Foreign currency gains and losses realized by a
Fund in connection with certain transactions involving foreign
currency-denominated debt instruments, certain options, futures contracts,
forward contracts, and similar instruments relating to foreign currency, foreign
currencies, and foreign currency-denominated payables and receivables are
subject to Section 988 of the Code, which causes such gains and losses to be
treated as ordinary income or loss and may affect the amount and timing of
recognition of such Fund's income. In some cases elections may be available that
would alter this treatment, but such elections could be detrimental to a Fund by
creating current recognition of income without the concurrent recognition of
cash. If a foreign currency loss treated as an ordinary loss under Section 988
were to exceed a Fund's investment company taxable income (computed without
regard to such loss) for a taxable year the resulting loss would not be
deductible by it or its shareholders in future years. The foreign currency
income or loss will also increase or decrease a Fund's investment company income
distributable to its shareholders.
FOREIGN TAXATION. Income received by a Fund from sources within foreign
countries may be subject to foreign withholding and other taxes. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. If more than 50% of a Fund's total assets at the close of any taxable
year consist of stock or securities of foreign corporations and it meets the
distribution requirements described above, such Fund may file an election (the
"pass-through election") with the IRS pursuant to which shareholders of the Fund
would be required to (i) include in gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by the Fund even though not actually received by such shareholders; and (ii)
treat such respective pro rata portions as foreign income taxes paid by them.
Each shareholder will be notified within 60 days after the close of each Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his or her total foreign
source taxable income. For this purpose, if the pass-through election is made,
the source of a Fund's income will flow through to shareholders. The limitation
on the foreign tax credit is applied separately to foreign source passive
income, and to certain other types of income. Shareholders may be unable to
claim a credit for the full amount of their proportionate share of the foreign
taxes paid by a Fund. Various limitations, including a minimum holding period
requirement, apply to limit the credit and deduction for foreign taxes for
purposes of regular federal tax and alternative minimum tax.
REITS. A Fund may invest in REITs. Investments in REIT equity securities may
require a Fund to accrue and distribute taxable income without the concurrent
receipt of cash. To generate sufficient cash to make the requisite
distributions, a Fund may be required to sell securities in its portfolio
(including when it is not advantageous to do so) that it otherwise would have
continued to hold. A Fund's investments in REIT equity securities may at other
times result in such Fund's receipt of cash in excess of the REIT's earnings; if
such Fund distributes these amounts, these distributions could constitute a
return of capital to its shareholders for federal income tax purposes. Dividends
received by a Fund from a REIT generally will not constitute qualified dividend
income.
107
A Fund may invest in REITs that hold residual interests in REMICs or taxable
mortgage pools (TMPs), or such REITs may themselves constitute TMPs. Under an
IRS notice, and Treasury regulations that have yet to be issued but may apply
retroactively, a portion of a Fund's income from a REIT that is attributable to
the REIT's residual interest in a REMIC or a TMP (referred to in the Code as an
"excess inclusion") will be subject to federal income tax in all events. This
notice also provides, and the regulations are expected to provide, that excess
inclusion income of RICs, such as the Funds, will be allocated to shareholders
of such RICs in proportion to the dividends received by such shareholders, with
the same consequences as if the shareholders held the related REMIC residual
interest or invested in the TMP directly. As a result, a Fund may not be a
suitable investment for certain tax-exempt-shareholders. See "Tax-Exempt
Shareholders."
DISTRIBUTIONS. Distributions paid out of a Fund's current and accumulated
earnings and profits (as determined at the end of the year), whether reinvested
in additional shares or paid in cash, are generally taxable and must be reported
by each shareholder who is required to file a federal income tax return.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first be treated as a
return of capital up to the amount of a shareholder's tax basis in his or her
Fund shares and then as capital gain.
For federal income tax purposes, distributions of investment company taxable
income are generally taxable as ordinary income, and distributions of gains from
the sale of investments that a Fund owned for one year or less will be taxable
as ordinary income. Distributions designated by a Fund as "capital gain
dividends" (distributions from the excess of net long-term capital gain over
short-term capital losses) will be taxable to shareholders as long-term capital
gain regardless of the length of time they have held their shares of such Fund.
Such dividends do not qualify as dividends for purposes of the dividends
received deduction described below. Noncorporate shareholders of a Fund may be
eligible for the 15% long-term capital gain rate applicable to distributions of
"qualified dividend income" received by such noncorporate shareholders in
taxable years beginning before January 1, 2011. It is currently unclear whether
Congress will extend this provision for tax years beginning on or after January
1, 2011. A distribution from a Fund will be treated as qualified dividend income
and therefore eligible for the 15% rate to the extent that it receives dividend
income from taxable domestic corporations and certain qualified foreign
corporations, provided that certain holding periods and other requirements are
met. A corporate shareholder of a Fund may be eligible for the dividends
received deduction on such Fund's distributions attributable to dividends
received by such Fund from domestic corporations, which, if received directly by
the corporate shareholder, would qualify for such a deduction. For eligible
corporate shareholders, the dividends received deduction may be subject to
certain reductions, and a distribution by a Fund attributable to dividends of a
domestic corporation will be eligible for the deduction only if certain holding
period and other requirements are met. Not later than 60 days after the close of
each calendar year, each Fund will inform shareholders of the federal income tax
status of its dividends and distributions including the portion of such
dividends, if any, that qualifies as long-term capital gain.
108
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions, and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders are urged and advised to consult their own tax
advisors for more information.
PURCHASES OF FUND SHARES. Prior to purchasing shares in a Fund, the impact of
dividends or distributions which are expected to be or have been declared, but
not paid, should be carefully considered. Any dividend or distribution declared
shortly after a purchase of shares of a Fund prior to the record date will have
the effect of reducing the per share net asset value by the per share amount of
the dividend or distribution, and to the extent the distribution consists of the
Fund's taxable income, the purchasing shareholder will be taxed on the taxable
portion of the dividend or distribution received even though some or all of the
amount distributed is effectively a return of capital.
SALES, EXCHANGES OR REDEMPTIONS. Upon the disposition of shares of a Fund
(whether by redemption, sale or exchange), a shareholder may realize a capital
gain or loss. Such capital gain or loss will be long-term or short-term
depending upon the shareholder's holding period for the shares. The capital gain
will be long-term if the shares were held for more than 12 months and short-term
if held for 12 months or less. Any loss realized on a disposition will be
disallowed under the "wash sale" rules to the extent that the shares disposed of
by the shareholder are replaced by the shareholder within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of shares
held by the shareholder for six months or less will be treated as a long-term
capital loss to the extent of any distributions of capital gain dividends
received by the shareholder and disallowed to the extent of any distributions of
exempt-interest dividends received by the shareholder with respect to such
shares. Capital losses are generally deductible only against capital gains
except that individuals may deduct up to $3,000 of capital losses against
ordinary income.
BACKUP WITHHOLDING. Each Fund generally is required to withhold, and remit to
the U.S. Treasury, subject to certain exemptions, an amount equal to 28% of all
distributions and redemption proceeds paid or credited to a shareholder of such
Fund if (i) the shareholder fails to furnish such Fund with the correct taxpayer
identification ("TIN") certified under penalties of perjury, (ii) the
shareholder fails to provide a certified statement that the shareholder is not
subject to backup withholding, or (iii) the IRS or a broker has notified such
Fund that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. If the backup withholding provisions are
applicable, any such distributions or proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Backup withholding is not an additional tax. Any amounts withheld may be
credited against a shareholder's U.S. federal income tax liability.
109
STATE AND LOCAL TAXES. State and local laws often differ from federal income tax
laws with respect to the treatment of specific items of income, gain, loss,
deduction and credit.
Many states grant tax-free status to dividends paid to shareholders from
interest earned on direct obligations of the U.S. government, subject in some
states to minimum investment requirements that must be met by a Fund. Investment
in GNMA and Fannie Mae securities, banker's acceptances, commercial paper, and
repurchase agreements collateralized by U.S. government securities do not
generally qualify for such tax-free treatment. The rules on exclusion of this
income are different for corporate shareholders.
SHAREHOLDERS ARE URGED AND ADVISED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
STATE AND LOCAL TAX RULES AFFECTING INVESTMENTS IN THE FUNDS.
NON-U.S. SHAREHOLDERS. Distributions made to non-U.S. shareholders attributable
to net investment income generally are subject to U.S. federal income tax
withholding at a 30% rate (or such lower rate provided under an applicable
income tax treaty). Notwithstanding the foregoing, if a distribution described
above is effectively connected with the conduct of a trade or business carried
on by a non-U.S. shareholder within the United States (or, if an income tax
treaty applies, is attributable to a permanent establishment in the United
States), federal income tax withholding and exemptions attributable to foreign
persons will not apply and such distribution will be subject to the federal
income tax, reporting and withholding requirements generally applicable to U.S.
persons described above.
Under U.S. federal tax law, a non-U.S. shareholder is not, in general, subject
to federal income tax or withholding tax on capital gains (and is not allowed a
deduction for losses) realized on the sale of shares of a Fund, capital gain
dividends, and, with respect to taxable years beginning before January 1, 2010,
short-term capital gain dividends, provided that such Fund obtains a properly
completed and signed certificate of foreign status, unless (i) such gains or
distributions are effectively connected with the conduct of a trade or business
carried on by the non-U.S. shareholder within the United States (or, if an
income tax treaty applies, are attributable to a permanent establishment in the
United States of the non-U.S. shareholder); (ii) in the case of an individual
non-U.S. shareholder, the shareholder is present in the United States for a
period or periods aggregating 183 days or more during the year of the sale and
certain other conditions are met; or (iii) the shares of such Fund constitute
U.S. real property interests (USRPIs), as described below.
For taxable years beginning before January 1, 2010, non-U.S. shareholders are
also exempt from federal income tax withholding on distributions designated by a
Fund as interest-related dividends. Interest-related dividends are generally
attributable to a RIC's net interest income earned on certain debt obligations
and paid to non-U.S. shareholders. In order to qualify as an interest-related
dividend a Fund must designate a distribution as such in a written notice mailed
to its shareholders not later than 60 days after the close of its taxable year.
110
Distributions of a Fund when at least 50% of its assets are USRPIs, as defined
in the Code and Treasury regulations, to the extent the distributions are
attributable to gains from sales or exchanges of USRPIs (including gains on the
sale or exchange of shares in certain "U.S. real property holding corporations,"
which may include certain REITs, among other entities, and certain REIT capital
gain dividends) generally will cause a non-U.S. shareholder to treat such gain
as income effectively connected to a trade or business within the United States,
subject to tax at the graduated rates applicable to U.S. shareholders. Such
distributions may be subject to U.S. withholding tax and may require the
non-U.S. shareholder to file a U.S. federal income tax return.
Subject to the additional rules described herein, federal income tax withholding
will apply to distributions attributable to dividends and other investment
income distributed by a Fund. The federal income tax withholding rate may be
reduced (and, in some cases, eliminated) under an applicable tax treaty between
the United States and the non-U.S. shareholder's country of residence or
incorporation. In order to qualify for treaty benefits, a non-U.S. shareholder
must comply with applicable certification requirements relating to its foreign
status (generally by providing a Fund with a properly completed Form W-8BEN).
ALL NON-U.S. SHAREHOLDERS ARE URGED AND ADVISED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF AN INVESTMENT IN A FUND.
TAX-EXEMPT SHAREHOLDERS. A tax-exempt shareholder could realize unrelated
business taxable income ("UBTI") by virtue of its investment in a Fund due to
such Fund's investments and if shares in such Fund constitute debt financed
property in the hands of the tax-exempt shareholder within the meaning of Code
Section 514(b).
It is possible that a tax-exempt shareholder of a Fund will also recognize UBTI
if the Fund recognizes "excess inclusion income" (as described above) derived
from direct or indirect investments in REMIC residual interests or TMPs.
Furthermore, any investment in a residual interest of a CMO that has elected to
be treated as a REMIC can create complex tax consequences, especially if a Fund
has state or local governments or other tax-exempt organizations as
shareholders.
In addition, special tax consequences apply to charitable remainder trusts
(CRTs) that invest in RICs that invest directly or indirectly in residual
interests in REMICs or in TMPs. ALL TAX-EXEMPT SHAREHOLDERS ARE URGED AND
ADVISED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF AN
INVESTMENT IN A FUND.
TAX SHELTER REPORTING REGULATIONS. Under Treasury regulations, if a shareholder
recognizes a loss of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder, the shareholder must file with the
IRS a disclosure statement on Form 8886. The fact that a loss is reportable
under these regulations does not affect the legal determination of whether the
taxpayer's treatment of the loss is proper. Shareholders should consult their
own tax advisors to determine the applicability of these regulations in light of
their individual circumstances.
111
SHAREHOLDERS ARE URGED AND ADVISED TO CONSULT THEIR OWN TAX ADVISOR WITH RESPECT
TO THE TAX CONSEQUENCES OF AN INVESTMENT IN A FUND INCLUDING, BUT NOT LIMITED
TO, THE APPLICABILITY OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AFFECTING THE
PARTICULAR SHAREHOLDER AND TO POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER
TAX LAWS.
PORTFOLIO TRANSACTIONS
The Advisor and each Sub-Advisor are authorized to select brokers and dealers to
effect securities transactions for the Funds. Each will seek to obtain the most
favorable net results by taking into account various factors, including price,
commission, size of the transactions and difficulty of executions, the firm's
general execution and operational facilities and the firm's risk in positioning
the securities involved. While the Advisor and each Sub-Advisor generally seek
reasonably competitive spreads or commissions, a Fund will not necessarily be
paying the lowest spread or commission available. The Advisor and each
Sub-Advisor seek to select brokers or dealers that offer a Fund best price and
execution or other services that benefit the Funds.
The Advisor and each Sub-Advisor may, consistent with the interests of the
Funds, select brokers on the basis of the research services provided to the
Advisor and the Sub-Advisor. Such services may include analyses of the business
or prospects of a company, industry or economic sector, or statistical and
pricing services. Information so received by the Advisor and each Sub-Advisor
will be in addition to and not in lieu of the services required to be performed
by the Advisor and the Sub-Advisor under the Advisory Agreement or applicable
Sub-Advisory Agreement, respectively. If, in the judgment of the Advisor and
each Sub-Advisor, a Fund or other accounts managed by the Advisor and the
Sub-Advisor will be benefited by supplemental research services, the Advisor and
the Sub-Advisor are authorized to pay brokerage commissions to a broker
furnishing such services that are in excess of commissions that another broker
may have charged for effecting the same transaction. These research services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software used in security
analyses; and providing portfolio performance evaluation and technical market
analyses. The expenses of the Advisor and each Sub-Advisor will not necessarily
be reduced as a result of the receipt of such supplemental information, such
services may not be used exclusively, or at all, with respect to a Fund or
account generating the brokerage, and there can be no guarantee that the Advisor
or the Sub-Advisor will find all of such services of value in advising that
Fund.
The Funds may execute brokerage or other agency transactions through brokers
that may be deemed "affiliates" under the 1940 Act, the Securities Exchange Act
of 1934 and rules promulgated by the SEC. Under these provisions, an affiliated
broker is permitted to receive commissions that do not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts that are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." The Trustees, including those who are not "interested persons" of the
Trust, have adopted procedures for evaluating the reasonableness of commissions
paid to the affiliated brokers and will review these procedures periodically.
112
It is not the Funds' practice to allocate brokerage or principal business on the
basis of sales of its shares made through broker-dealers, and in no event may
the Advisor or a Sub-Advisor directly or indirectly compensate a broker for
promoting Fund shares with payments from Fund portfolio transactions. In
addition, notwithstanding anything to the contrary in the Advisory Agreement or
any Sub-Advisory Agreement, neither the Advisor nor any Sub-Advisor may consider
the sale of Fund shares in selecting among executing broker-dealers. The Funds
may direct transactions to certain brokers in order to reduce brokerage
commissions through a commission recapture program offered by Frank Russell
Securities, Inc.
For the fiscal years ended September 30, 2008 and 2009 the Trust's portfolio
turnover rates were as follows:
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
--------------------------------
FUND 2009 2008
--------------------------------------------------------------------------------
Intermediate Fixed Income Fund 125% 62%
--------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund 15% 56%
--------------------------------------------------------------------------------
Short Duration Fixed Income Fund 79% 25%
--------------------------------------------------------------------------------
Healthcare and Biotechnology Fund 162% 127%
--------------------------------------------------------------------------------
Small Cap Value Opportunities Fund 215% 222%
--------------------------------------------------------------------------------
Sands Capital Select Growth Fund 50% 39%
--------------------------------------------------------------------------------
Mid Cap Fund 187% 157%
--------------------------------------------------------------------------------
The portfolio turnover rates for the Capital Appreciation Fund, Core Plus Fixed
Income Fund, Emerging Markets Equity Fund, Global Equity Fund, Global Real
Estate Fund, International Fixed Income Fund, Large Cap Relative Value Fund,
Market Neutral Equity Fund, Mid Cap Value Fund, Small Cap Core Fund and Focused
Equity Fund are not included because the Funds had not commenced operations
prior to September 30, 2009.
The portfolio turnover rate for the Intermediate Fixed Income Fund increased
significantly from 2008 to 2009 due to a change in the sub-advisor of the Fund.
The new sub-advisor changed the portfolio of the Fund to fit its investment
style.
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the portfolio turnover rate for
the Premium Yield Equity Fund was as follows:
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
--------------------------------
FUND 2008 2009
--------------------------------------------------------------------------------
Premium Yield Equity Fund 181% 30%
--------------------------------------------------------------------------------
113
The portfolio turnover rate for the Premium Yield Equity Fund decreased
significantly from 2008 to 2009 due to a change in the economic conditions of
the marketplace.
For the fiscal years ended December 31, 2007, the period from January 1, 2008
through September 30, 2008, and the fiscal year ended September 30, 2009, the
International Growth Fund's portfolio turnover rates were as follows:
--------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
---------------------------------------
FUND 2007 2008 2009
--------------------------------------------------------------------------
International Growth Fund 91% 35% 37%
--------------------------------------------------------------------------
For the fiscal years ended December 31, 2008 and December 31, 2009, the
Predecessor Mazama Fund's portfolio turnover rates were as follows:
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
--------------------------
FUND 2008(1) 2009
--------------------------------------------------------------------------------
Predecessor Mazama Fund 200%
--------------------------------------------------------------------------------
(1) The Predecessor Mazama Fund commenced operations on January 30, 2008.
The brokerage commissions paid by the Trust for the fiscal years ended September
30, 2007, 2008 and 2009 were as follows:
----------------------------------------------------------------------------------------
TOTAL DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
-----------------------------------------------------
FUND 2007 2008 2009
----------------------------------------------------------------------------------------
Intermediate Fixed Income Fund N/A N/A N/A
----------------------------------------------------------------------------------------
Ultra Short Duration Fixed
Income Fund N/A N/A N/A
----------------------------------------------------------------------------------------
Short Duration Fixed Income Fund N/A N/A N/A
----------------------------------------------------------------------------------------
Small Cap Value Opportunities
Fund $806,018 $812,822 $810,506
----------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund $122,502 $131,592 $155,805
----------------------------------------------------------------------------------------
Sands Capital Select Growth Fund $187,632 $209,016 $338,702
----------------------------------------------------------------------------------------
Mid Cap Fund $1,151,097 $1,456,517 $1,121,893
----------------------------------------------------------------------------------------
The brokerage commissions for the Capital Appreciation Fund, Core Plus Fixed
Income Fund, Emerging Markets Equity Fund, Global Equity Fund, Global Real
Estate Fund, International Fixed Income Fund, Large Cap Relative Value Fund,
Market Neutral Equity Fund, Mid Cap Value Fund, Small Cap Core Fund and Focused
Equity Fund are not included because the Funds had not commenced operations
prior to September 30, 2009.
114
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the brokerage commissions paid by
the Premium Yield Equity Fund were as follows:
--------------------------------------------------------------------------------------------
TOTAL DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
--------------------------------------------------------
FUND 2008 2009
--------------------------------------------------------------------------------------------
Premium Yield Equity Fund $101,639 $28,351
--------------------------------------------------------------------------------------------
For the fiscal year ended December 31, 2007, the period from January 1, 2008
through September 30, 2008, and the fiscal year ended September 30, 2009, the
International Growth Fund paid the following brokerage commissions:
---------------------------------------------------------------------------------------------
TOTAL AMOUNT OF BROKERAGE
COMMISSIONS PAID
----------------------------------------------------------
FUND 2007 2008 2009
---------------------------------------------------------------------------------------------
International Growth Fund $2,174 $8,509 $14,149
---------------------------------------------------------------------------------------------
For the fiscal years ended December 31, 2008 and December 31, 2009, the
Predecessor Mazama Fund paid the following brokerage commissions:
--------------------------------------------------------------------------------------------
TOTAL DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
--------------------------------------------------------
FUND 2008(1) 2009
--------------------------------------------------------------------------------------------
Predecessor Mazama Fund $92,798 $
--------------------------------------------------------------------------------------------
(1) Commissions paid from the commencement date of the Predecessor Mazama Fund
(January 30, 2008) through December 31, 2008.
The brokerage commissions paid by the Trust to the Distributor for the fiscal
years ended September 30, 2007, 2008 and 2009 were as follows:
--------------------------------------------------------------------------
TOTAL DOLLAR AMOUNT OF BROKERAGE
COMMISSIONS PAID TO THE DISTRIBUTOR
---------------------------------------
FUND 2007 2008 2009
--------------------------------------------------------------------------
Intermediate Fixed Income Fund N/A N/A N/A
--------------------------------------------------------------------------
Ultra Short Duration Fixed
Income Fund N/A N/A N/A
--------------------------------------------------------------------------
Short Duration Fixed Income Fund N/A N/A N/A
--------------------------------------------------------------------------
Sands Capital Select Growth Fund N/A N/A N/A
--------------------------------------------------------------------------
Small Cap Value Opportunities
Fund N/A $750 N/A
--------------------------------------------------------------------------
Healthcare and Biotechnology Fund $7,553 $21,793 $5,305
--------------------------------------------------------------------------
Mid Cap Fund $1,521 $2,709 $1,547
--------------------------------------------------------------------------
115
The brokerage commissions paid to the Distributor for the Capital Appreciation
Fund, Core Plus Fixed Income Fund, Emerging Markets Equity Fund, Global Equity
Fund, Global Real Estate Fund, International Fixed Income Fund, Large Cap
Relative Value Fund, Market Neutral Equity Fund, Mid Cap Value Fund, Small Cap
Core Fund and Focused Equity Fund are not included because the Funds had not
commenced operations prior to September 30, 2009.
For the period from its inception (December 3, 2007) through September 30, 2008,
and the fiscal year ended September 30, 2009, the brokerage commissions paid to
the Distributor by the Premium Yield Equity Fund were as follows:
--------------------------------------------------------------------------------------------
TOTAL DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID TO
THE DISTRIBUTOR
--------------------------------------------------------
FUND 2008 2009
--------------------------------------------------------------------------------------------
Premium Yield Equity Fund $319 $299
--------------------------------------------------------------------------------------------
For the fiscal year ended December 31, 2007, the period from January 1, 2008
through September 30, 2008, and the fiscal year ended September 30, 2009, the
International Growth Fund paid the following brokerage commissions to the
Distributor:
--------------------------------------------------------------------------------------------
TOTAL DOLLAR AMOUNT OF BROKERAGE
COMMISSIONS PAID TO THE DISTRIBUTOR
--------------------------------------------------------
FUND 2007 2008 2009
--------------------------------------------------------------------------------------------
International Growth Fund $0 $0 $1,432
--------------------------------------------------------------------------------------------
During the fiscal year ended December 31, 2009, the amount of brokerage
transactions and related commissions for the Predecessor Mazama Fund directed to
brokers due to research services provided were as follows:
BROKERAGE BROKERAGE
TRANSACTIONS COMMISSIONS
Predecessor Mazama Fund $ $
The total amount of securities of regular Broker/Dealers held by each Fund for
the fiscal year ended September 30, 2009 were as follows:
116
------------------------------------------------------------------------------------------------------------
TOTAL AMOUNT OF
SECURITIES HELD BY
FUND NAME OF BROKER/DEALER FUND TYPE OF SECURITY
------------------------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Bank of America $1,007,659 Debt
Income Fund
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund Morgan Stanley $584,461 Debt
------------------------------------------------------------------------------------------------------------
Suntrust $269,373 Debt
------------------------------------------------------------------------------------------------------------
Bank of America $522,189 Debt
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
International Growth Fund Credit Suisse $632,796 Equity
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund Bank of America $715,410 Debt
------------------------------------------------------------------------------------------------------------
Citigroup $1,454,073 Debt
------------------------------------------------------------------------------------------------------------
Deutsch Bank $215,834 Debt
------------------------------------------------------------------------------------------------------------
Goldman Sachs $1,874,490 Debt
------------------------------------------------------------------------------------------------------------
Jefferies Group $529,184 Debt
------------------------------------------------------------------------------------------------------------
JPMorgan $696,994 Debt
------------------------------------------------------------------------------------------------------------
Key Bank $336,678 Debt
------------------------------------------------------------------------------------------------------------
Merrill Lynch $713,469 Debt
------------------------------------------------------------------------------------------------------------
Morgan Stanley $584,757 Debt
------------------------------------------------------------------------------------------------------------
Wachovia $575,239 Debt
------------------------------------------------------------------------------------------------------------
The total amount of securities of regular Broker/Dealers held by the Predecessor
Mazama Fund for the fiscal year ended December 31, 2009 were as follows:
TOTAL AMOUNT OF
SECURITIES HELD
FUND NAME OF BROKER/DEALER BY FUND YPE OF SECURITY
---- --------------------- ------- ---------------
Predecessor Mazama Fund Goldman Sachs Group, Inc. $
DISCLOSURE OF PORTFOLIO HOLDINGS
The Touchstone Funds have adopted policies and procedures for disclosing the
Funds' portfolio holdings to any person requesting this information. These
policies and procedures are monitored on an on-going basis by the Board of
Trustees through periodic reporting by the Funds' Chief Compliance Officer. The
Chief Compliance Officer will report any material violations immediately to the
Board of Trustees and will report any immaterial violations to the Board at the
next quarterly meeting. No compensation will be received by a Fund, the Advisor,
or any other party in connection with the disclosure of information about
portfolio securities.
117
The procedures prohibit the disclosure of portfolio holdings except under the
following conditions:
1) A request made by a Sub-Advisor for a Fund (or that portion of a
Fund) that it manages;
2) A request by executive officers of the Advisor for routine oversight
and management purposes;
3) For use in preparing and distributing routine shareholder reports,
including disclosure to the Funds' independent registered public
accounting firm, typesetter and printer. Routine shareholder reports
are filed as of the end of each calendar quarter with the SEC within
60 days after the quarter end and routine shareholder reports are
distributed to shareholders within 60 days after the six-month
period. The Funds provide their full holdings to their registered
public accounting firm annually, as of the end of their fiscal year,
within one to ten business days after fiscal year end. The Funds
provide their full holdings to their typesetter at least 30 days
after the end of the calendar quarter. The Funds provide their full
holdings to their printer at least 45 days after the six-month
period.
o The Funds (except the Sands Capital Select Growth Fund) provide
their top ten holdings on their publicly available website and to
market data agencies monthly, as of the end of a calendar month, at
least seven business days after month end.
o The Funds (except the Sands Capital Select Growth Fund) provide
their full holdings on their publicly available website, and to
market data agencies, their typesetter and printer, quarterly, as of
the end of a calendar quarter, at least fifteen days after quarter
end.
o The Sands Capital Select Growth Fund provides its full holdings on
its publicly available website and to market data agencies monthly,
as of the end of a month, at least sixty days after month-end.
o The Sands Capital Select Growth Fund provides its top five holdings
on its publicly available website and to market data agencies
quarterly, as of the end of a calendar quarter, at least seven
business days after quarter end.
o The Sands Capital Select Growth Fund provides its full holdings to
its typesetter and printer quarterly, as of the end of a calendar
quarter, at least fifteen days after quarter end.
You may access the public website at www.TouchstoneInvestments.com.
Employees of the Advisor and the Funds' Sub-Advisor that are access persons
under the Funds' Code of Ethics have access to Fund holdings on a regular basis,
but are subject to confidentiality requirements and trading prohibitions in the
Code of Ethics. In addition, custodians of the Funds' assets and the Funds'
accounting services agent, each of whose agreements contains a confidentiality
provision (which includes a duty not to trade on non-public information), have
access to the current Fund holdings on a daily basis.
The Chief Compliance Officer is authorized to determine whether disclosure of a
Fund's portfolio securities is for a legitimate business purpose and is in the
best interests of the Fund and its shareholders. Any conflict between the
interests of shareholders and the interests of the Advisor, the Distributor, or
any affiliates, will be reported to the Board, which will make a determination
that is in the best interests of shareholders.
118
VOTING
Each whole share shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional share shall be entitled to a proportionate
fractional vote. Shares issued by each Fund have no preemptive, conversion, or
subscription rights. Voting rights are not cumulative. Each Fund, as a separate
series of the Trust, votes separately on matters affecting only that Fund.
Shareholders of each Class of each Fund will vote separately on matters
pertaining solely to that Fund or that Class. As a Delaware statutory trust, the
Trust is not required to hold annual meetings of shareholders, but approval will
be sought for certain changes in the operation of the Trust and for the election
of Trustees under certain circumstances.
In addition, a Trustee may be removed by the remaining Trustees or by
shareholders at a special meeting called upon written request of shareholders
owning at least 10% of the outstanding shares of the Trust. In the event that
such a meeting is requested, the Trust will provide appropriate assistance and
information to the shareholders requesting the meeting.
Where the Trust's Prospectus or Statement of Additional Information state that
an investment limitation or a fundamental policy may not be changed without
shareholder approval, such approval means the vote of (i) 67% or more of the
affected Fund's shares present at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the affected Fund's outstanding shares, whichever is less.
DESCRIPTION OF SHARES
The Trust's Declaration of Trust authorizes the issuance of an unlimited number
of Funds and shares of each Fund. Each share of a Fund represents an equal
proportionate interest in that Fund with each other share. Upon liquidation,
shares are entitled to a pro rata share in the net assets of the Fund, after
taking into account additional distribution and shareholder servicing expenses
attributable to the Class A, Class C and Class Z Shares. Shareholders have no
preemptive rights. The Declaration of Trust provides that the Trustees of the
Trust may create additional series of shares or separate classes of funds. All
consideration received by the Trust for shares of any portfolio or separate
class and all assets in which such consideration is invested would belong to
that portfolio or separate class and would be subject to the liabilities related
thereto. Share certificates representing shares will not be issued.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a Delaware statutory trust.
The Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for obligations of the Trust, and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by or on behalf of the Trust or the Trustees, and because the
Declaration of Trust provides for indemnification out of the Trust property for
any shareholder held personally liable for the obligations of the Trust.
119
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisers, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with the Trust
unless it is determined in the manner provided in the Declaration of Trust that
they have not acted in good faith in the reasonable belief that their actions
were in the best interests of the Trust. However, nothing in the Declaration of
Trust shall protect or indemnify a Trustee against any liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to Rule
17j-1 under the 1940 Act. In addition, the Advisor, each Sub-Advisor and
Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of
Ethics apply to the personal investing activities of Trustees, officers, and
certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are
designed to prevent unlawful practices in connection with the purchase or sale
of securities by access persons. Under each Code of Ethics, access persons are
permitted to invest in securities (including securities that may be purchased or
held by a Fund), but are required to report their personal securities
transactions for monitoring purposes. In addition, certain access persons are
required to obtain approval before investing in initial public offerings or
private placements. Copies of these Codes of Ethics are on file with the SEC,
and are available to the public.
PROXY VOTING
The Board of Trustees of the Trust has delegated responsibility for decisions
regarding proxy voting for securities held by each Fund to the Sub-Advisor(s).
Generally, Sub-Advisors will vote such proxies in accordance with their
respective proxy voting policies and procedures, which are included in Appendix
B to this SAI. The Board of Trustees may periodically review each Fund's proxy
voting record. Information about how the Funds voted proxies relating to their
portfolio securities during the most recent 12-month period ended July 27 is
available by August 31st of that year without charge, upon request by calling
1-800-543-0407 or by writing to the Trust at Touchstone Funds Group Trust, P.O.
Box 5354, Cincinnati, OH 45201-5354. Each Fund's Form N-PX (its voting record)
will also be available on the SEC's website at www.sec.gov and on the Touchstone
website at www.TouchstoneInvestments.com.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
120
As of May 7, 2010, the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owners) of 5% or more of
the shares of each Fund. The Trust believes that most of the shares referred to
below were held by the persons indicated in accounts for their fiduciary,
agency, or custodial customers.
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Intermediate Fixed Income Fund Hertrus & Co. 95.49%
Institutional shares PO Box 445
Hershey, PA 17033
------------------------------------------------------------------------------------------------------------------------------------
Ultra Short Duration Fixed Income Fund Charles Schwab & Co. 58.95%
Class Z 101 Montgomery St
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
NFS LLC US Bank National 14.85%
1555 N Rivercenter Drive Suite 302
Milwaukee, WI 53212
------------------------------------------------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund Class Z Charles Schwab & Co. 87.56%
101 Montgomery St
San Francisco, CA 94101-4151
------------------------------------------------------------------------------------------------------------------------------------
Short Duration Fixed Income Fund Class Y MLPF & S 94.23%
For the Sole Benefit of its Customers
4800 Deer Lake Dr. East-3nd Floor
Jacksonville, FL 32246
------------------------------------------------------------------------------------------------------------------------------------
Sands Capital Select Growth Fund Class Z Charles Schwab & Co. Inc. 27.81%
For the Benefit of its Customers
101 Montgomery St.
San Francisco, CA 94104-4122
------------------------------------------------------------------------------------------------------------------------------------
Citigroup Global Markets Inc. 18.39%
333 West 34th Street, 3rd Floor
New York, NY 10001
------------------------------------------------------------------------------------------------------------------------------------
Pershing LLC 9.36%
1 Pershing Plaza
Jersey City, NJ 07399
------------------------------------------------------------------------------------------------------------------------------------
Genworth Financial Trust Co. 6.38%
3200 N Central Ave 7th Floor
Phoenix, AZ 85012
------------------------------------------------------------------------------------------------------------------------------------
Sands Capital Select Growth Fund Class Y Charles Schwab & Co. Inc. 14.95%
4500 Cherry Creek Dr. S. Fl. 3
Denver, CO 80209
------------------------------------------------------------------------------------------------------------------------------------
The Vanguard Fiduciary Trust Co. 57.19%
PO Box 2600 VM 613
Valley Forge, PA 19482
------------------------------------------------------------------------------------------------------------------------------------
Saxon and Co 13.86%
PO Box 7780-1888
Philadelphia, PA 19182
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Fund Class Y Patterson & Co Omnibus Cash/Cash 79.39%
1525 West WT Harris Blvd
Charlotte, NC 28288-0001
------------------------------------------------------------------------------------------------------------------------------------
121
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Patterson & Co Omnibus Rein/Rein 16.28%
1525 West WT Harris Blvd
Charlotte, NC 28288-0001
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Fund Class A Raymond James & Associates Inc. 7.83%
FBO Raymond James
PO Box 14407
Saint Petersburg, FL
------------------------------------------------------------------------------------------------------------------------------------
UBS Financial Services Inc. for benefit of Jeffrey 19.52%
D Glidden
326 Sargent Road
Boxborough, MA 01719
------------------------------------------------------------------------------------------------------------------------------------
W Kirk Marshall 7.14%
35000 Division STE 5
Richmond, MI 48062
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Fund Class C Raymond James & Associates Inc. 7.67%
FBO John E Rockhill
1900 Tarpon LN
Vero Beach, FL 32960
------------------------------------------------------------------------------------------------------------------------------------
Raymond James & Associates Inc. 8.10%
FBO Beth Anne Thomas
8144 Davington Drive
Dublin, OH 43017
------------------------------------------------------------------------------------------------------------------------------------
LPL Financial Services 5.45%
9785 Towne Center Drive
San Diego, CA 92121
------------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley 16.13%
Joan M Wall
11820 Berlin TPK
Lovettsville, VA 20180
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Fund Class Z MG Trust Company 5.67%
OPKO Health Inc.
Suite 300 Denver, CO 80202
------------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 14.00%
4500 Cherry Creek Dr. S. Fl. 3
Denver, CO 80209
------------------------------------------------------------------------------------------------------------------------------------
TD Ameritrade for the benefit of our customers 6.14%
PO Box 2226
Omaha, NE 68103
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Opportunities Fund Class Z Charles Schwab & Co. Inc. 38.38%
4500 Cherry Creek Dr. S. Fl. 3
Denver, CO 80209
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services Corp 17.65%
For the Exclusive Benefit of Our Customers
4 Manhattanville Road
Purchase, NY 10577
------------------------------------------------------------------------------------------------------------------------------------
122
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund Class A Charles Schwab & Co. Inc. 30.81%
4500 Cherry Creek Dr. S. Fl. 3
Denver, CO 80209
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services Corp 13.13%
For the Exclusive Benefit of Our Customers
100 Magellan Way
Covington, KY 41015-1987
------------------------------------------------------------------------------------------------------------------------------------
MLPF & S 7.37%
For the Sole Benefit of its Customers
4800 Deer Lake Dr. East-3nd Floor
Jacksonville, FL 32246
------------------------------------------------------------------------------------------------------------------------------------
Perching LLC 12.40%
1 Pershing Plaza
Jersey City, NJ 07399
------------------------------------------------------------------------------------------------------------------------------------
Healthcare and Biotechnology Fund Class C MLPF & S 58.91%
For the Sole Benefit of its Customers
4800 Deer Lake Dr. East-2nd Floor
Jacksonville, FL 32246
------------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 6.83%
Special Custody Account
101 Montgomery St.
San Francisco, CA 94104-4122
------------------------------------------------------------------------------------------------------------------------------------
Premium Yield Equity Fund Class A Western & Southern Life Insurance 51.97%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Financial Group 27.77%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Perching LLC 5.90%
1 Pershing Plaza
Jersey City, NJ 07399
------------------------------------------------------------------------------------------------------------------------------------
Premium Yield Equity Fund Class C Western & Southern Life Insurance 6.34%
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
MLPF & S 9.83%
For the Sole Benefit of its Customers
4800 Deer Lake Dr. East-2nd Floor
Jacksonville, FL 32246
------------------------------------------------------------------------------------------------------------------------------------
Premium Yield Equity Fund Class Y National Financial Services LLC 90.69%
200 Liberty St 1 World Fincl
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
MLPF & S 8.45%
For the Sole Benefit of its Customers
4800 Deer Lake Dr. East-2nd Floor
Jacksonville, FL 32246
------------------------------------------------------------------------------------------------------------------------------------
123
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
International Growth Fund Class A Western & Southern Life Insurance 54.87%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 23.91%
Navellier Reinvest
101 Montgomery St.
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
International Growth Fund Class C Robert W. Baird Co. 47.54%
777 East Wisconsin Ave.
Milwaukee, WI 53202
------------------------------------------------------------------------------------------------------------------------------------
MLPF & S 10.72%
For the Sole Benefit of its Customers
4800 Deer Lake Dr. East-2nd Floor
Jacksonville, FL 32246
------------------------------------------------------------------------------------------------------------------------------------
First Clearing LLC 14.42%
1506 River RO Drive
Tuscaloosa, AL 35406
------------------------------------------------------------------------------------------------------------------------------------
Trust TR 10.34%
Jane Noschang TTEE
4916 Boomer Rd
Cincinnati, OH 45247
------------------------------------------------------------------------------------------------------------------------------------
Raymond James for benefit of Donna C Herndo 12.80%
12215 Montford Rd
Orange, VA 22960
------------------------------------------------------------------------------------------------------------------------------------
International Growth Fund Class Y MLPF & S 60.10%
For the Sole Benefit of its Customers
4800 Deer Lake Dr. East-2nd Floor
Jacksonville, FL 32246
------------------------------------------------------------------------------------------------------------------------------------
Touchstone Advisors Seed Account 39.90%*
303 Broadway Suite 1100
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund Class A National Financial Services Corp 5.19%
For the Exclusive Benefit of Duber Family Found
6601 Elgin Ln.
Bethesda, MD 20817
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services Corp 7.92%
For the Exclusive Benefit of David H Haffenreffe
9000 Meredith Pl
Beverly Hills, CA 90210
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services Corp 5.11%
For the Exclusive Benefit of All Saints Episcopal
18 Olive Ave
Rehoboth Bch, DE 19971
------------------------------------------------------------------------------------------------------------------------------------
124
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund Class C Western & Southern Life Insurance Co. 42.46%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Raymond James FBO Cathy A Savares 15.98%
23 Magnolia Dunes Cir
Saint Augustine, FL 32080
------------------------------------------------------------------------------------------------------------------------------------
Hilliard Lyons Cust for David G Cornwell 9.25%
2290 Middlesex
Columbus, OH 43220
------------------------------------------------------------------------------------------------------------------------------------
First Clearing LLC 18.92%
2801 Market Street
Saint Louis, MO 63103
------------------------------------------------------------------------------------------------------------------------------------
Raymond James FBO Richard Huette 7.86%
6362 Muir Woods Drive
Mobile, AL 36693
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund Class Y Western & Southern Life Insurance Co. 80.67%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services 15.34%
200 Liberty St. 1 World Financial
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund Institutional Western & Southern Life Insurance Co. 100.00%*
Shares 400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Core Plus Fixed Income Fund Class C Charles Schwab & Co. Inc. 58.76%
101 Montgomery St.
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Financial Group 7.10%
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Core Plus Fixed Income Fund Class Y National Financial Services LLC 68.20%
200 Liberty St 1 World Financial
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Financial Group 18.22%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Janney Montgomery Scott LLC 9.06%
1801 Market Street
Philadelphia, PA 19103
------------------------------------------------------------------------------------------------------------------------------------
Core Plus Fixed Income Fund Institutional Western & Southern Financial Group 47.46%*
Shares 400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
125
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Capinco C/O US Bank NA 44.81%
PO Box 1787
Milwaukee, WI 53201
------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Equity Fund Class A LPL Financial Services FBO Customer Accounts 17.75%
PO Box 509046
San Diego, CA 92150
------------------------------------------------------------------------------------------------------------------------------------
Emerging Market Equity Fund Class C RBC Capital Markets Corp. FBO American Nephrolo 12.24%
East Holly Ave Box 56
Pitman, NJ 08071
------------------------------------------------------------------------------------------------------------------------------------
First Clearing LLC 26.14%
2801 Market Street
Saint Louis, MO 63103
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Financial Group 5.09%
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Emerging Market Equity Fund Class Y National Financial Services LLC 28.17%
200 Liberty St 1 World Financial
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 27.07%
101 Montgomery St.
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Financial Group 7.80%
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
First Clearing LLC 19.87%
2801 Market Street
Saint Louis, MO 63103
------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Equity Fund Institutional Western & Southern Financial Group 37.94%*
Shares 400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
UBS Financial Services for the benefit of Memorial 42.87%
Health Se
17360 Brookhurst St
Fountain Valley, CA 92708
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services LLC 19.19%
200 Liberty St 1 World Financial
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
Global Equity Fund Class A Western & Southern Life Insurance Co. 16.14%
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 5.50%
101 Montgomery St.
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
126
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Pershing LLC 65.48%
1 Pershing Plaza
Jersey City, NJ 07399
------------------------------------------------------------------------------------------------------------------------------------
Global Equity Fund Class C Western & Southern Life Insurance Co. 100.00%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Global Equity Fund Class Y Western & Southern Life Insurance Co. 89.19%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services LLC 10.81%
200 Liberty St 1 World Financial
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
Global Equity Fund Institutional Shares Western & Southern Life Insurance Co. 100.00%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Global Real Estate Fund Class A Western & Southern Financial Group 10.01%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Foliofn Investments Inc 81.21%
8180 Greensboro Drive
8th Floor
Mclean, VA 22102
------------------------------------------------------------------------------------------------------------------------------------
Global Real Estate Fund Class C Western & Southern Financial Group 95.94%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Global Real Estate Fund Class Y Western & Southern Financial Group 92.46%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Global Real Estate Fund Institutional Shares Western & Southern Financial Group 99.48%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund Class A Michael L Cox 6.55%
Marsha B Cox
130 Reed St.
Mcclure, OH 43534
------------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 6.08%
101 Montgomery St.
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Financial Group 40.46%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
127
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
D A Davidson Co. Inc. for the benefit of John D 23.42%
Peterson
Box 5015
Great Falls, MT 59403
------------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund Class C Western & Southern Financial Group 70.38%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
LPL Financial 17.49%
9785 Towne Centre Drive
San Diego, CA 92121
------------------------------------------------------------------------------------------------------------------------------------
Morgan Keegan for benefit of Susan D Selecman 12.13%
2005 Breakers Point
Knoxville, TN 37922
------------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund Class Y Western & Southern Financial Group 66.98%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund Western & Southern Financial Group 100.00%*
Institutional Shares 400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Large Cap Relative Value Fund Class A Charles Schwab & Co. Inc. 7.64%
101 Montgomery St.
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
Brian D Gibson 7.42%
Larry D Gibson
1030 White Ave
Fremont, OH 43420
------------------------------------------------------------------------------------------------------------------------------------
LPL Financial Services FBO Customer Account 9.76%
PO Box 509046
San Diego, CA 92150
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Life Insurance Co. 23.78%
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Brenda L Mulcahy 9.89%
Larry D Gibson
1226 Stilwell Ave
Fremont, OH 43420
------------------------------------------------------------------------------------------------------------------------------------
Large Cap Relative Value Fund Class C Western & Southern Life Insurance Co. 47.20%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Raymond James Association FBO Paula L Ashcraf 44.45%
4833 Greentree Rd.
Lebanon, OH 45036
------------------------------------------------------------------------------------------------------------------------------------
128
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Large Cap Relative Value Fund Class Y Western & Southern Life Insurance Co. 100.00%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Large Cap Relative Value Fund Institutional Western & Southern Life Insurance Co. 100.00%*
Shares 400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Market Neutral Equity Fund Class A First Clearing LLC 10.84%
2801 Market Street
Saint Louis, MO 63103
------------------------------------------------------------------------------------------------------------------------------------
Janney Montgomery Scott LLC 30.83%
1801 Market Street
Philadelphia, PA 19103
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Financial Group 20.43%
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Pershing LLC 11.50%
1 Pershing Plaza
Jersey City, NJ 07399
------------------------------------------------------------------------------------------------------------------------------------
Morgan Keegan for benefit of James D Plaspohl 5.83%
PO Box 1780
Rincon, GA 31326
------------------------------------------------------------------------------------------------------------------------------------
Market Neutral Fund Class C Western & Southern Financial Group 67.30%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Janney Montgomery Scott LLC 10.26%
1801 Market Street
Philadelphia, PA 19103
------------------------------------------------------------------------------------------------------------------------------------
First Clearing LLC 15.61%
8114 Bunker Drive
Orland Park, IL 60462
------------------------------------------------------------------------------------------------------------------------------------
Market Neutral Fund Class Y Western & Southern Financial Group 99.91%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Core Fund Class C Pershing LLC 6.53%
1 Pershing Plaza
Jersey City, NJ 07399
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Core Fund Class Y Charles Schwab & Co. Inc. 60.35%
101 Montgomery St.
San Francisco, CA 94104
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services LLC 32.03%
200 Liberty St 1 World Financial
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
129
------------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PERCENTAGE OF
FUND OF BENEFICIAL OWNER FUND'S SHARES
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Core Fund Institutional Shares Charles Schwab & Co. Inc. 33.14%
101 Montgomery St.
San Francisco, CA 94101
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Life Insurance Co. 33.16%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
SEI Private Trust Co 19.51%
One Freedom Valley Drive
Oaks, PA 19456
------------------------------------------------------------------------------------------------------------------------------------
Mitra Co for benefit of Marshall Ilsley 14.36%
11270 West Park Place Suite 40
Milwaukee, WI 5322
------------------------------------------------------------------------------------------------------------------------------------
Pitcairn Trust Company 8.68%
Reinvest
165 Township Line Rd
Jenkintown, PA 19046
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund Class A Raymond James for benefit of Marilyn Cole 11.04%
19047 Wings Lane
Salesville, OH 43778
------------------------------------------------------------------------------------------------------------------------------------
Pershing LLC 33.16%
1 Pershing Plaza
Jersey City, NJ 07399
------------------------------------------------------------------------------------------------------------------------------------
First Clearing LLC 5.43%
2801 Market Street
Saint Louis, MO 63103
------------------------------------------------------------------------------------------------------------------------------------
Western & Southern Life Insurance Co. 25.72%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund Class C Western & Southern Life Insurance Co. 96.86%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund Class Y Western & Southern Life Insurance Co. 35.11%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
National Financial Services LLC 63.48%
200 Liberty St 1 World Fincl
New York, NY 10281
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund Institutional Shares Western & Southern Life Insurance Co. 100.00%*
400 Broadway
Cincinnati, OH 45202
------------------------------------------------------------------------------------------------------------------------------------
130
*May be deemed to control a class or Fund because it owned beneficially more
than 25% of the outstanding shares as of May 7, 2010. As a result, those persons
or organizations could have the ability to take action with respect to a Fund
without the consent or approval of other shareholders.
As of May 7, 2010, the Trustees and officers of the Trust as a group owned of
record or beneficially less than 1% of the outstanding shares of the Trust and
of each Fund (or class thereof).
As of May 7, 2010, the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owners) of 5% or more of
the shares of the Predecessor Mazama Fund.
-------------------------------------------------------------------------
US Bank 11.63%
P.O. Box 1787
Milwaukee, WI 53201
-------------------------------------------------------------------------
Western & Southern Financial Group 47.03%*
400 Broadway Street
Cincinnati, OH 45202-3341
-------------------------------------------------------------------------
Pershing LLC 39.53%
P.O. Box 2052
Jersey City, NJ 07303
-------------------------------------------------------------------------
*May be deemed to control the Fund because it owned beneficially more than 25%
of the outstanding shares as of May 7, 2010. As a result, those persons or
organizations could have the ability to take action with respect to the Fund
without the consent or approval of other shareholders. Western & Southern
Financial Group is a corporation organized under the laws of Ohio and is a
wholly-owned subsidiary of Western-Southern Mutual Holding Company.
CUSTODIAN
Brown Brothers Harriman & Co. ("BBH"), 40 Water Street, Boston, Massachusetts
02109, is the Trust's custodian. BBH acts as the Trust's depository, safe keeps
its portfolio securities, collects all income and other payments with respect
thereto, disburses money as instructed and maintains records in connection with
its duties.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Trust's independent registered public accounting firm, Ernst & Young LLP
audits the Trust's annual financial statements. Ernst & Young LLP is located at
312 Walnut Street Cincinnati, OH 45202.
LEGAL COUNSEL
Pepper Hamilton LLP, located at 3000 Two Logan Square, Eighteenth and Arch
Streets, Philadelphia, Pennsylvania, 19103, serves as counsel to the Trust.
131
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended September 30, 2009, including
the Report of Ernst & Young LLP, independent registered public accounting firm,
are included in the most recent Annual Report to Shareholders and are
incorporated into this SAI by reference. The financial statements with respect
to the Predecessor Mazama Fund for the fiscal year ended December 31, 2009,
including the notes thereto and the report of Ernst & Young LLP, included in the
Predecessor Mazama Fund's annual report for the fiscal year ended December 31,
2009, are incorporated by reference into this SAI. No other parts of the
Predecessor Fund's annual report is hereby incorporated by reference. The Annual
Report may be obtained free of charge by calling the Trust at 1-800-543-0407 or
by writing to Touchstone Funds Group Trust, P.O. Box 5354, Cincinnati, OH 45202.
You may also obtain the Annual or Semi-Annual Reports, as well as other
information about the Touchstone Funds Group Trust, from the EDGAR Database on
the SEC's website at http://www.sec.gov.
132
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
Moody's Investors Service, Inc. ("Moody's"), Standard &Poor's(R) ("S&P") and
Fitch Ratings, Inc. ("Fitch") are private services that provide ratings of the
credit quality of debt obligations. A description of the ratings assigned by
Moody's, S&P(R) and Fitch are provided below. These ratings represent the
opinions of these rating services as to the quality of the securities that they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. The Advisor and/or Sub-Advisor
attempts to discern variations in credit rankings of the rating services and to
anticipate changes in credit ranking. However, subsequent to purchase by the
Fund, an issue of securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. In that event, the
Advisor and/or Sub-Advisor will consider whether it is in the best interest of
the Fund to continue to hold the securities.
Moody's credit ratings must be construed solely as statements of opinion and not
as statements of fact or recommendations to purchase, sell or hold any
securities.
An S&P issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). The opinion evaluates
the obligor's capacity and willingness to meet its financial commitments as they
come due, and may assess terms, such as collateral security and subordination,
which could affect ultimate payment in the event of default. It takes into
consideration the creditworthiness of guarantors, insurers or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The issue credit rating is not a
recommendation to purchase, sell or hold a financial obligation inasmuch as it
does not comment as to market price or suitability for a particular investor.
Fitch credit ratings are an opinion on the relative ability of an entity to meet
financial commitments, such as interest, preferred dividends, and repayment of
principal, insurance claims or counterparty obligations. Fitch credit ratings
are used by investors as indications of the likelihood of receiving their money
back in accordance with the terms on which they invested. Fitch's credit-ratings
cover the global spectrum of corporate, sovereign (including supra-national and
sub-national), financial, bank, insurance, municipal and other public finance
entities and the securities or other obligations they issue, as well as
structured finance securities backed by receivables or other financial assets.
SHORT-TERM CREDIT RATINGS
Moody's
Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted.
A-1
Moody's employs the following:
"P-1" - Issuers (or supporting institutions) rated Prime-1 have a superior
ability to repay short-term debt obligations.
"P-2" - Issuers (or supporting institutions) rated Prime-2 have a strong ability
to repay short-term debt obligations.
"P-3" - Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
"NP" - Issuers (or supporting institutions) rated Not Prime do not fall within
any of the Prime rating categories.
Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
S&P
An S&P short-term issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation
having an original maturity of no more than 365 days, including commercial
paper. The following summarizes the rating categories used by S&P for short-term
issues:
"A-1" - Obligations are rated in the highest category and indicate that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. Ratings of "B-1," "B-2," and "B-3" may be assigned to indicate
finer distinctions within the "B" category. The obligor currently has the
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
"B-1" - Obligations are regarded as having significant speculative
characteristics, but the obligor has a relatively stronger capacity to meet its
financial commitments over the short-term compared to other speculative - grade
obligors.
A-2
"B-2" - Obligations are regarded as having significant speculative
characteristics and the obligor has an average speculative - grade capacity to
meet its financial commitments over the short-term compared to other speculative
- grade obligors.
"B-3" - Obligations are regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its
financial commitments over the short-term compared to other speculative - grade
obligors.
"C" - Obligations are currently vulnerable to nonpayment and are dependent upon
favorable business, financial and economic conditions for the obligor to meet
its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
Local Currency and Foreign Currency Risks - Country risk considerations are a
standard part of S&P's analysis for credit ratings on any issuer or issue.
Currency of repayment is a key factor in this analysis. An obligor's capacity to
repay foreign currency obligations may be lower than its capacity to repay
obligations in its local currency due to the sovereign government's own
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Fitch
A short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity or security stream, and relates to
the capacity to meet financial obligations in accordance with the documentation
governing the relevant obligation. Short-Term Ratings are assigned to
obligations whose initial maturity is viewed as "short term" based on market
convention. Typically, this means up to 13 months for corporate, structured and
sovereign obligations, and up to 36 months for obligations in U.S. public
finance markets. The following summarizes the rating categories used by Fitch
for short-term obligations:
"F1" - Securities possess the highest short-term credit quality. This
designation indicates the strongest intrinsic capacity for timely payment of
financial commitments; may have an added "+" to denote any exceptionally strong
credit feature.
"F2" - Securities possess good short-term credit quality. This designation
indicates good intrinsic capacity for timely payment of financial commitments.
"F3" - Securities possess fair short-term credit quality. This designation
indicates that the intrinsic capacity for timely payment of financial
commitments is adequate.
A-3
"B" - Securities possess speculative short-term credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
heightened vulnerability to near term adverse changes in financial and economic
conditions.
"C" - Securities possess high short-term default risk. This designation
indicates that default is a real possibility.
"RD" (Restricted default) - This designation indicates an entity that has
defaulted on one or more of its financial commitments, although it continues to
meet other financial obligations. Applicable to entity ratings only.
"D" (Default) - This designation indicates a broad-based default event for an
entity, or the default of a specific short-term obligation.
Specific limitations relevant to the Short-Term Ratings scale include:
o The ratings do not predict a specific percentage of default
likelihood over any given time period.
o The ratings do not opine on the market value of any issuer's
securities or stock, or the likelihood that this value may change.
o The ratings do not opine on the liquidity of the issuer's securities
or stock.
o The ratings do not opine on the possible loss severity on an
obligation should an obligation default.
o The ratings do not opine on any quality related to an issuer or
transaction's profile other than the agency's opinion on the
relative vulnerability to default of the rated issuer or obligation.
LONG-TERM CREDIT RATINGS
Moody's
Moody's long-term obligation ratings are opinions of the relative credit risk of
fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings use Moody's Global Scale and reflect both the likelihood
of default and any financial loss suffered in the event of default.
The following summarizes the ratings used by Moody's for long-term debt:
"Aaa" - Obligations rated "Aaa" are judged to be of the highest quality, with
minimal credit risk.
"Aa" - Obligations rated "Aa" are judged to be of high quality and are subject
to very low credit risk.
"A" - Obligations rated "A" are considered upper-medium grade and are subject to
low credit risk.
A-4
"Baa" - Obligations rated "Baa" are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
"Ba" - Obligations rated "Ba" are judged to have speculative elements and are
subject to substantial credit risk.
"B" - Obligations rated "B" are considered speculative and are subject to high
credit risk.
"Caa" - Obligations rated "Caa" are judged to be of poor standing and are
subject to very high credit risk.
"Ca" - Obligations rated "Ca" are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
"C" - Obligations rated "C" are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal or
interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
classification from "Aa" through "Caa." The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
S&P
Issue credit ratings are based, in varying degrees, on the following
considerations:
o Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;
o Nature of and provisions of the obligation;
o Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an
assessment of relative seniority or ultimate recovery in the event of default.
Junior obligations are typically rated lower than senior obligations, to reflect
the lower priority in bankruptcy, as noted above. (Such differentiation may
apply when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company obligations.)
The following summarizes the ratings used by S&P for long-term issues:
"AAA" - An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
A-5
"AA" - An obligation rated "AA" differs from the highest-rated obligations only
to a small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C" - A "C" rating is assigned to obligations that are currently highly
vulnerable to nonpayment, obligations that have payment arrearages allowed by
the terms of the documents, or obligations of an issuer that is the subject of a
bankruptcy petition or similar action which have not experienced a payment
default. Among others, the "C" rating may be assigned to subordinated debt,
preferred stock or other obligations on which cash payments have been suspended
in accordance with the instrument's terms.
"D" - An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payment
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
A-6
Plus (+) or minus (-) - The ratings from "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories.
"N.R." - This indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that S&P does not rate a
particular obligation as a matter of policy.
Local Currency and Foreign Currency Risks - Country risk considerations are a
standard part of S&P's analysis for credit ratings on any issuer or issue.
Currency of repayment is a key factor in this analysis. An obligor's capacity to
repay foreign currency obligations may be lower than its capacity to repay
obligations in its local currency due to the sovereign government's own
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Fitch
Ratings of individual securities or financial obligations of a corporate issuer
address relative vulnerability to default on an ordinal scale. In addition, for
financial obligations in corporate finance, a measure of recovery given default
on that liability is also included in the rating assessment.
The following summarizes long-term ratings used by Fitch:
"AAA" - Securities considered to be highest credit quality. "AAA" ratings denote
the lowest expectation of credit risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable events.
"AA" - Securities considered to be very high credit quality. "AA" ratings denote
expectations of very low credit risk. They indicate very strong capacity for
timely payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
"A" - Securities considered to be high credit quality. "A" ratings denote
expectations of low credit risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more
vulnerable to adverse business or economic conditions than is the case for
higher ratings.
"BBB" - Securities considered to be good credit quality. "BBB" ratings indicate
that expectations of credit risk are currently low. The capacity for payment of
financial commitments is considered adequate but adverse business or economic
conditions are more likely to impair this capacity.
"BB" - Securities considered to be speculative. "BB" ratings indicate an
elevated vulnerability to credit risk, particularly in the event of adverse
changes in business or economic conditions over time; however, business or
financial alternatives may be available to allow financial commitments to be
met.
A-7
"B" - Securities considered to be highly speculative. "B" ratings indicate that
material credit risk is present.
"CCC" - Securities have substantial credit risk. "CCC" ratings indicate that
substantial credit risk is present.
"CC" - Securities have very high levels of credit risk. "CC" ratings indicate
very high levels of credit risk.
"C" - Securities have exceptionally high levels of credit risk. "C" indicates
exceptionally high levels of credit risk.
Defaulted obligations typically are not assigned "D" ratings, but are instead
rated in the "B" to "C" rating categories, depending upon their recovery
prospects and other relevant characteristics. This approach better aligns
obligations that have comparable overall expected loss but varying vulnerability
to default and loss.
Note: The modifiers "+" or "-" may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the "AAA"
obligation rating category, or to corporate or public finance obligation ratings
in the categories below "B."
Specific limitations relevant to the corporate obligation rating scale include:
o The ratings do not predict a specific percentage of default
likelihood or expected loss over any given time period.
o The ratings do not opine on the market value of any issuer's
securities or stock, or the likelihood that this value may change.
o The ratings do not opine on the liquidity of the issuer's securities
or stock.
o The ratings do not opine on the suitability of an issuer as a
counterparty to trade credit.
o The ratings do not opine on any quality related to an issuer's
business, operational or financial profile other than the agency's
opinion on its relative vulnerability to default and relative
recovery should a default occur.
NOTES TO SHORT-TERM AND LONG-TERM CREDIT RATINGS
Moody's
Watchlist: Moody's uses the Watchlist to indicate that a rating is under review
for possible change in the short-term. A rating can be placed on review for
possible upgrade ("UPG"), on review for possible downgrade ("DNG"), or more
rarely with direction uncertain ("UNC"). A credit is removed from the Watchlist
when the rating is upgraded, downgraded or confirmed.
Rating Outlooks: A Moody's rating outlook is an opinion regarding the likely
direction of a rating over the medium term. Where assigned, rating outlooks fall
into the following four categories: Positive ("POS"), Negative ("NEG"), Stable
("STA") and Developing ("DEV" -- contingent upon an event). In the few instances
where an issuer has multiple outlooks of differing directions, an "(m)" modifier
(indicating multiple, differing outlooks) will be displayed, and Moody's written
research will describe any differences and provide the rationale for these
differences. A "RUR" (Rating(s) Under Review) designation indicates that the
issuer has one or more ratings under review for possible change, and thus
overrides the outlook designation. When an outlook has not been assigned to an
eligible entity, "NOO" (No Outlook) may be displayed.
A-8
S&P
Creditwatch: CreditWatch highlights the potential direction of a short- or
long-term rating. It focuses on identifiable events and short-term trends that
cause ratings to be placed under special surveillance by S&P's analytical staff.
These may include mergers, recapitalizations, voter referendums, regulatory
action or anticipated operating developments. Ratings appear on CreditWatch when
such an event or a deviation from an expected trend occurs and additional
information is necessary to evaluate the current rating. A listing, however,
does not mean a rating change is inevitable, and whenever possible, a range of
alternative ratings will be shown. CreditWatch is not intended to include all
ratings under review, and rating changes may occur without the ratings having
first appeared on CreditWatch. The "positive" designation means that a rating
may be raised; "negative" means a rating may be lowered; and "developing" means
that a rating may be raised, lowered or affirmed.
Rating Outlook: An S&P rating outlook assesses the potential direction of a
long-term credit rating over the intermediate term (typically six months to two
years). In determining a rating outlook, consideration is given to any changes
in the economic and/or fundamental business conditions. An outlook is not
necessarily a precursor of a rating change or future CreditWatch action.
o "Positive" means that a rating may be raised.
o "Negative" means that a rating may be lowered.
o "Stable" means that a rating is not likely to change.
o "Developing" means a rating may be raised or lowered.
Fitch
Rating Watch: Rating Watches indicate that there is a heightened probability of
a rating change and the likely direction of such a change. These are designated
as "Positive," indicating a potential upgrade, "Negative," for a potential
downgrade, or "Evolving," if ratings may be raised, lowered or affirmed.
However, ratings that are not on Rating Watch can be raised or lowered without
being placed on Rating Watch first if circumstances warrant such an action. A
Rating Watch is typically event-driven and, as such, it is generally resolved
over a relatively short period. The event driving the Watch may be either
anticipated or have already occurred, but in both cases, the exact rating
implications remain undetermined. The Watch period is typically used to gather
further information and/or subject the information to further analysis.
Additionally, a Watch may be used where the rating implications are already
clear, but where a triggering event (e.g. shareholder or regulatory approval)
exists. The Watch will typically extend to cover the period until the triggering
event is resolved, or its outcome is predictable with a high enough degree of
certainty to permit resolution of the Watch.
A-9
Rating Watches can be employed by all analytical groups and are applied to the
ratings of individual entities and/or individual instruments. At the lowest
categories of speculative grade ("CCC", "CC" and "C") the high volatility of
credit profiles may imply that almost all ratings should carry a Watch. Watches
are nonetheless only applied selectively in these categories, where a committee
decides that particular events or threats are best communicated by the addition
of the Watch designation.
Rating Outlook: Timing is informative but not critical to the choice of a Watch
rather than an Outlook. A discrete event that is largely clear and the terms of
which are defined, but which will not happen for more than six months - such as
a lengthy regulatory approval process - would nonetheless likely see ratings
placed on Watch rather than a revision to the Outlook.
An Outlook revision may, however, be deemed more appropriate where a series of
potential event risks has been identified, none of which individually warrants a
Watch but which cumulatively indicate heightened probability of a rating change
over the following one to two years.
A revision to the Outlook may also be appropriate where a specific event has
been identified, but where the conditions and implications of that event are
largely unclear and subject to high execution risk over an extended period - for
example a proposed, but politically controversial, privatization.
MUNICIPAL NOTE RATINGS
Moody's
Moody's uses three rating categories for short-term municipal obligations that
are considered investment grade. These ratings are designated as Municipal
Investment Grade ("MIG") and are divided into three levels - "MIG-1" through
"MIG-3". In addition, those short-term obligations that are of speculative
quality are designated "SG", or speculative grade. MIG ratings expire at the
maturity of the obligation. The following summarizes the ratings used by Moody's
for these short-term obligations:
A-10
"MIG-1" - This designation denotes superior credit quality. Excellent protection
is afforded by established cash flows, highly reliable liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2" - This designation denotes strong credit quality. Margins of protection
are ample, although not as large as in the preceding group.
"MIG-3" - This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
In the case of variable rate demand obligations ("VRDOs"), a two-component
rating is assigned; a long- or short-term debt rating and a demand obligation
rating. The first element represents Moody's evaluation of the degree of risk
associated with scheduled principal and interest payments. The second element
represents Moody's evaluation of the degree of risk associated with the ability
to receive purchase price upon demand ("demand feature"), using a variation of
the MIG rating scale, the Variable Municipal Investment Grade or "VMIG" rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is
designated "NR", e.g., "Aaa/NR" or "NR/VMIG-1".
VMIG rating expirations are a function of each issue's specific structural or
credit features.
"VMIG-1" - This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
"VMIG-2" - This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
"VMIG-3" - This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
"SG" - This designation denotes speculative-grade credit quality. Demand
features rated in this category may be supported by a liquidity provider that
does not have an investment grade short-term rating or may lack the structural
and/or legal protections necessary to ensure the timely payment of purchase
price upon demand.
S&P
An S&P U.S. municipal note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
A-11
o Amortization schedule--the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
o Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to pay
principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit a satisfactory capacity to
pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity to
pay principal and interest.
Fitch
Fitch uses the same ratings for municipal securities as described above for
other short-term credit ratings.
A-12
B-5
APPENDIX B - PROXY VOTING POLICIES
TURNER INVESTMENT PARTNERS, INC.
PROXY VOTING POLICY AND PROCEDURES
Turner Investment Partners, Inc., as well as its investment advisory affiliate,
Turner Investment Management LLC (collectively, "Turner"), act as fiduciaries in
relation to their clients and the assets entrusted by them to their management.
Where the assets placed in Turner's care include shares of corporate stock, and
except where the client has expressly reserved to itself or another party the
duty to vote proxies, it is Turner's duty as a fiduciary to vote all proxies
relating to such shares.
Duties with Respect to Proxies:
Turner has an obligation to vote all proxies appurtenant to shares of corporate
stock owned by its client accounts in the best interests of those clients. In
voting these proxies, Turner may not be motivated by, or subordinate the
client's interests to, its own objectives or those of persons or parties
unrelated to the client. Turner will exercise all appropriate and lawful care,
skill, prudence and diligence in voting proxies, and shall vote all proxies
relating to shares owned by its client accounts and received by Turner. Turner
shall not be responsible, however, for voting proxies that it does not receive
in sufficient time to respond.
Delegation to Proxy Voter Services:
In order to carry out its responsibilities in regard to voting proxies, Turner
must track all shareholder meetings convened by companies whose shares are held
in Turner client accounts, identify all issues presented to shareholders at such
meetings, formulate a principled position on each such issue and ensure that
proxies pertaining to all shares owned in client accounts are voted in
accordance with such determinations.
Consistent with these duties, Turner has delegated certain aspects of the proxy
voting process to Institutional Shareholder Services, and its Proxy Voter
Services (PVS) subsidiary. PVS is a separate investment adviser registered under
the Investment Advisers Act of 1940, as amended. Under an agreement entered into
with Turner, PVS has agreed to vote proxies in accordance with recommendations
developed by PVS and overseen by Turner, except in those instances where Turner
has provided it with different direction.
PVS's voting recommendations typically favor the interests of the
shareholder/owner rather than a company's management. Turner's long-standing
practice has been to follow voting guidelines of this type. Although Turner has
not chosen PVS or its services for this reason, its engagement of PVS could be
interpreted as helpful to maintaining or attracting clients or potential clients
supportive of shareholder/owner rights. In this respect its engagement of PVS
potentially presents a conflict of interest for Turner, which has a number of
clients concerned with shareholder/owner rights, including but not limited to
public plans and unions.
B-1
It should be emphasized that any client or potential client of Turner need not
delegate the voting of proxies to Turner (and thus indirectly to PVS as overseen
by Turner), and may instead direct its custodian or another party to undertake
this responsibility. Alternatively, a client or potential client may direct
Turner to vote following guidelines it selects rather than following the Turner
selected PVS guidelines if its preference is to follow voting guidelines that
typically favor the interests of company management. Turner will provide upon
request a copy of the current proxy voting guidelines followed by PVS to assist
you in this evaluation.
Review and Oversight:
Turner has reviewed the methods used by PVS to identify and track shareholder
meetings called by publicly traded issuers throughout the United States and
around the globe. Turner has satisfied itself that PVS operates a system
reasonably designed to identify all such meetings and to provide Turner with
timely notice of the date, time and place of such meetings. Turner has further
reviewed the principles and procedures employed by PVS in making recommendations
on voting proxies on each issue presented, and has satisfied itself that PVS's
recommendations are: (i) based upon an appropriate level of diligence and
research, and (ii) designed to further the interests of shareholders and not
serve other unrelated or improper interests. Turner, either directly or through
its duly-constituted Proxy Committee, shall review its determinations as to PVS
at least annually.
Notwithstanding its belief that PVS's recommendations are consistent with the
best interests of shareholders and appropriate to be implemented for Turner's
client accounts, Turner has the right and the ability to depart from a
recommendation made by PVS as to a particular vote, slate of candidates or
otherwise, and can direct PVS to vote all or a portion of the shares owned for
client accounts in accordance with Turner's preferences. PVS is bound to vote
any such shares subject to that direction in strict accordance with all such
instructions. Turner, through its Proxy Committee, reviews on a regular basis
the overall shareholder meeting agenda, and seeks to identify shareholder votes
that warrant further review based upon either (i) the total number of shares of
a particular company stock that Turner holds for its clients accounts, or (ii)
the particular subject matter of a shareholder vote, such as board independence
or shareholders' rights issues. In determining whether to depart from a PVS
recommendation, the Turner Proxy Committee looks to its view of the best
interests of shareholders, and provides direction to PVS only where in Turner's
view departing from the PVS recommendation appears to be in the best interests
of Turner's clients as shareholders. The Proxy Committee keeps minutes of its
determinations in this regard.
The Turner Proxy Committee has only very infrequently departed from the PVS
recommendation, and clients should expect that the PVS recommendation will be
followed for the vast majority of votes.
Conflicts of Interest:
Turner stock is not publicly traded, and Turner is not otherwise affiliated with
any issuer whose shares are available for purchase by client accounts. Further,
no Turner affiliate currently provides brokerage, underwriting, insurance,
banking or other financial services to issuers whose shares are available for
purchase by client accounts.
B-2
Where a client of Turner is a publicly traded company in its own right, Turner
may be restricted from acquiring that company's securities for the client's
benefit. Further, while Turner believes that any particular proxy issues
involving companies that engage Turner, either directly or through their pension
committee or otherwise, to manage assets on their behalf, generally will not
present conflict of interest dangers for the firm or its clients, in order to
avoid even the appearance of a conflict of interest, the Proxy Committee will
determine, by surveying the Firm's employees or otherwise, whether Turner, an
affiliate or any of their officers has a business, familial or personal
relationship with a participant in a proxy contest, the issuer itself or the
issuer's pension plan, corporate directors or candidates for directorships. In
the event that any such relationship is found to exist, the Proxy Committee will
take appropriate steps to ensure that any such relationship (or other potential
conflict of interest), does not influence Turner's or the Committee's decision
to provide direction to PVS on a given vote or issue. Further to that end,
Turner will adhere to all recommendations made by PVS in connection with all
shares issued by such companies and held in Turner client accounts, and, absent
extraordinary circumstances that will be documented in writing, will not subject
any such proxy to special review by the Proxy Committee.
As discussed above, Turner's selection of PVS may be considered a potential
conflict of interest. Turner will in all instances seek to resolve any conflicts
of interests that may arise prior to voting proxies or selecting a proxy voting
agent/research provider in a manner that reflects the best interests of its
clients.
Securities Lending:
Turner will generally not vote nor seek to recall in order to vote shares on
loan in connection with client administered securities lending programs, unless
it determines that a vote is particularly significant. Seeking to recall
securities in order to vote them even in these limited circumstances may
nevertheless not result in Turner voting the shares because the securities are
unable to be recalled in time from the party with custody of the securities, or
for other reasons beyond Turner's control. Clients that participate in
securities lending programs should expect that Turner will not frequently vote
or seek to recall in order to vote shares that are on loan.
Obtaining Proxy Voting Information:
To obtain information on how Turner voted proxies or for a copy of current PVS
guidelines, please contact:
Andrew Mark, Director of Operations
and Technology Administration
c/o Turner Investment Partners, Inc.
1205 Westlakes Drive, Suite 100
Berwyn, PA 19312
B-3
Recordkeeping:
Turner shall retain its (i) proxy voting policies and procedures; (ii)
proxy statements received regarding client statements; (iii) records or
votes it casts on behalf of clients; (iv) records of client requests for
proxy voting information, and (v) any documents prepared by Turner that
are material in making a proxy voting decision. Such records may be
maintained with a third party, such as PVS, that will provide a copy of
the documents promptly upon request.
B-4
FORT WASHINGTON INVESTMENT ADVISORS, INC.
Fort Washington's policy is to vote proxies in the best interests of the Fund at
all times. Fort Washington has adopted procedures that it believes are
reasonably designed to ensure that proxies are voted in the best interests of
the Fund in accordance with its fiduciary duties and SEC rules governing
investment advisers. Reflecting a basic investment philosophy that good
management is shareholder focused, proxy votes will generally be cast in support
of management on routine corporate matters and in support of any management
proposal that is plainly in the interest of all shareholders. Specifically,
proxy votes generally will be cast in favor of proposals that:
o maintain or strengthen the shared interests of stockholders and
management;
o increase shareholder value; and
o maintain or increase shareholder rights generally.
Proxy votes will generally be cast against proposals having the opposite effect
of the above. Where Fort Washington perceives that a management proposal, if
approved, would tend to limit or reduce the market value of the company's
securities, it will generally vote against it. Fort Washington generally
supports shareholder rights and recapitalization measures undertaken
unilaterally by boards of directors properly exercising their responsibilities
and authority, unless such measures could have the effect of reducing
shareholder rights or potential shareholder value. In cases where shareholder
proposals challenge such actions, Fort Washington's voting position will
generally favor not interfering with the directors' proper function in the
interest of all shareholders.
Fort Washington may delegate its responsibilities under its proxy voting
procedures to a third party, provided that Fort Washington retains final
authority and fiduciary responsibility for proxy voting. Fort Washington has
retained Risk Metrics to assist it in the proxy voting process and will use Risk
Metrics' proxy voting guidelines as a resource in its proxy voting.
Fort Washington will review each proxy to assess the extent, if any, to which
there may be a material conflict between it and the interests of the Fund. If
Fort Washington determines that a potential conflict may exist, it will be
reported to the Proxy Voting Committee. The Proxy Voting Committee is authorized
to resolve any conflict in a manner that is in the collective best interests of
the Fund (excluding a potential conflict). The Proxy Voting Committee may
resolve a potential conflict in any of the following manners:
o If the proposal is specifically addressed in the proxy voting
procedures, Fort Washington may vote the proxy in accordance with
these policies, provided that such pre-determined policy involves
little discretion on Fort Washington's part;
o Fort Washington may engage an independent third party to determine
how the proxy should be voted;
B-5
o Fort Washington may establish an ethical wall or other informational
barriers between the person involved in the potential conflict and
the persons making the voting decision in order to insulate the
potential conflict from the decision maker.
B-6
SANDS CAPITAL MANAGEMENT LLC
Proxy Voting Policy and Procedures
Implementation Date: November 2006
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ISSUE
Rule 206(4)-6 under the Advisers Act requires every investment adviser to adopt
and implement written policies and procedures, reasonably designed to ensure
that the adviser votes proxies in the best interest of its clients. The
procedures must address material conflicts that may arise in connection with
proxy voting. The Rule further requires the adviser to provide a concise summary
of the adviser's proxy voting process and offer to provide copies of the
complete proxy voting policy and procedures to clients upon request. Lastly, the
Rule requires that the adviser disclose to clients how they may obtain
information on how the adviser voted their proxies.
SCM votes proxies for a great majority of its clients, and therefore has adopted
and implemented this Proxy Voting Policy and Procedures.
POLICY
It is the policy of SCM to vote client proxies in the best interest of our
clients. Proxies are an asset of a client account, which should be treated by
SCM with the same care, diligence, and loyalty as any asset belonging to a
client. Consideration will be given to both the short and long term implications
of the proposal to be voted on when considering the optimal vote.
Any general or specific proxy voting guidelines provided by an advisory client
or its designated agent in writing will supersede this policy. Clients may wish
to have their proxies voted by an independent third party or other named
fiduciary or agent, at the client's cost.
PROCEDURES FOR SCM'S RECEIPT OF CLASS ACTIONS
The following procedures outline SCM's receipt of "Class Action" documents from
clients and custodians. It is SCM's position not to file these "Class Action"
documents, but if received will follow these guidelines:
If "Class Action" documents are received by SCM from the CLIENT, SCM will
gather, at the client's request, any requisite information it has and
forward to the client, to enable the client to file the "Class Action" at
the client's discretion. SCM will not file "Class Actions" on behalf of
any client.
PROXY COMMITTEE
SCM has established a Proxy Committee. The Proxy Committee consists of three
permanent members (the Chief Operating Officer, Director of Client Services,
Compliance Operations Manager) and one or more rotating members (Portfolio
Managers). The Proxy Committee meets at least annually and as necessary to
fulfill its responsibilities. A majority of the members of the Proxy Committee
constitutes a quorum for the transaction of business. The Director of Client
Services acts as secretary of the Proxy Committee and maintains a record of
Proxy Committee meetings and actions.
B-7
The Proxy Committee is responsible for (i) the oversight and administration of
proxy voting on behalf of the Adviser's clients, including developing,
authorizing, implementing and updating the Adviser's proxy voting policies and
procedures; (ii) overseeing the proxy voting process; and (iii) engaging and
overseeing any third party service provider as voting agent to receive proxy
statements and/or to provide information, research or other services intended to
facilitate the proxy voting decisions made by the Adviser. The Proxy Committee
typically reviews reports on the Adviser's proxy voting activity at least
annually and as necessary to fulfill its responsibilities.
The Proxy Committee has developed a set of criteria for evaluating proxy issues.
These criteria and general voting guidelines are set forth in the Adviser's
Proxy Voting Guidelines (the "Guidelines"), a copy of which is attached hereto
as Attachment C. The Proxy Committee may amend or supplement the Guidelines from
time to time. All Guidelines are to be applied generally and not absolutely,
such that the Adviser's evaluation of each proposal will be performed in the
context of the Guidelines giving appropriate consideration to the circumstances
of the company whose proxy is being voted.
PROCEDURES FOR IDENTIFICATION AND VOTING OF PROXIES
These proxy voting procedures are designed to enable SCM to resolve material
conflicts of interest with clients before voting their proxies.
1. SCM shall maintain a list of all clients for which it votes proxies.
The list will be maintained either in hard copy or electronically
and updated by the Director of Client Services or a designee who
will obtain proxy voting information from client agreements.
As part of the account opening procedure, The Director of Client
Services will note whether or not SCM is responsible for voting
client proxies for the new client.
2. In cases where SCM has been designated to vote client proxies, we
shall work with the client to ensure that SCM is the designated
party to receive proxy voting materials from companies or
intermediaries.
3. The Director of Client Services shall receive all proxy voting
materials and will be responsible for ensuring that proxies are
voted and submitted in a timely manner.
4. Prior to a proxy voting deadline, the appropriate Research Analyst
will make a determination as to how to vote each proxy proposal
based on his or her analysis of the proposal and the Guidelines. In
evaluating a proxy proposal, an analyst may consider information
from many sources, including management of the company, shareholder
groups and independent proxy research services.
B-8
5. SCM Staff Members will reasonably try to assess any material
conflicts between SCM's interests and those of its clients with
respect to proxy voting by considering the situations identified in
the Conflicts of Interest section of this document.
6. So long as there are no material conflicts of interest identified,
SCM will vote proxies according to the policy. SCM may also elect to
abstain from voting if it deems such abstinence in its clients' best
interests. The rationale for "abstain" votes will be documented and
the documentation will be maintained in the permanent file.
7. Upon detection of a conflict of interest, the conflict will be
brought to the attention of the Proxy Committee for resolution. See
Conflicts of Interest section for additional information.
8. SCM is not required to vote every client proxy and such should not
necessarily be construed as a violation of SCM's fiduciary
obligations. SCM shall at no time ignore or neglect its proxy voting
responsibilities. However, there may be times when refraining from
voting is in the client's best interest, such as when an adviser's
analysis of a particular client proxy reveals that the cost of
voting the proxy may exceed the expected benefit to the client.
9. The Director of Client Services and the Research Analyst will report
any attempts by SCM's personnel to influence the voting of client
proxies in a manner that is inconsistent with SCM's Proxy Policy, as
well as, any attempts by persons or entitles outside SCM seeking to
influence the voting of client proxies. Such report shall be made to
SCM's CCO, or if the CCO is the person attempting to influence the
voting, then to SCM's CEO.
10. All proxy votes will be recorded and the following information will
be maintained:
o The name of the issuer of the portfolio security;
o The exchange ticker symbol of the portfolio security;
o The Council on Uniform Securities Identification Procedures
("CUSIP") number for the portfolio security;
o The shareholder meeting date;
o The number of shares SCM is voting on firm-wide;
o A brief identification of the matter voted on;
o Whether the matter was proposed by the issuer or by a security
holder;
o Whether or not SCM cast its vote on the matter;
o How SCM cast its vote (e.g., for or against proposal, or
abstain; for or withhold regarding election of directors);
o Whether SCM cast its vote with or against management; and
o Whether any client requested an alternative vote of its proxy.
B-9
In the event that SCM votes the same proxy in two directions, it shall maintain
documentation to support its voting (this may occur if a client requires SCM to
vote a certain way on an issue, while SCM deems it beneficial to vote in the
opposite direction for its other clients) in the permanent file.
CONFLICTS OF INTEREST
Although SCM has not currently identified any material conflicts of interest
that would affect its proxy voting decisions, it is aware of the following
potential conflicts that could exist in the future:
o CONFLICT: SCM is retained by an institutional client, or is in the
process of retaining an institutional client that is affiliated with
an issuer that is held in SCM's client portfolios.
o CONFLICT: SCM retains a client, or is in the process of retaining a
client that is an officer or director of an issuer that is held in
SCM's client portfolios. The similar conflicts of interest exist in
this relationship as discussed above.
o CONFLICT: SCM's Staff Members maintain a personal and/or business
relationship (not an advisory relationship) with issuers or
individuals that serve as officers or directors of issuers. For
example, the spouse of an SCM Staff Member may be a high-level
executive of an issuer that is held in SCM's client portfolios. The
spouse could attempt to influence SCM to vote in favor of
management.
o CONFLICT: SCM or a Staff Member(s) personally owns a significant
number of an issuer's securities that are also held in SCM's client
portfolios. For any number of reasons, a Staff Member(s) may seek to
vote proxies in a different direction for his/her personal holdings
than would otherwise be warranted by the proxy voting policy. The
Staff Member(s) could oppose voting the proxies according to the
policy and successfully influence SCM to vote proxies in
contradiction to the policy.
RESOLUTION:
SCM realizes that due to the difficulty of predicting and identifying all
material conflicts, it must rely on its Staff Members to notify the Director of
Client Services and/or the CCO of any material conflict that may impair SCM's
ability to vote proxies in an objective manner. Upon such notification, the
Director of Client Services and or the CCO will notify the Proxy Committee of
the conflict.
In the event that the Proxy Committee determines that the SCM has a conflict of
interest with respect to a proxy proposal, the Proxy Committee shall also
determine whether the conflict is "material" to that proposal. The Proxy
Committee may determine on a case-by-case basis that a particular proposal does
not involve a material conflict of interest. To make this determination, the
Proxy Committee must conclude that the proposal is not directly related to the
Adviser's conflict with the issuer. If the Proxy Committee determines that a
conflict is not material, then the Adviser may vote the proxy in accordance with
the recommendation of the analyst.
B-10
In the event that the Proxy Committee determines that SCM has a material
conflict of interest with respect to a proxy proposal, SCM will vote on the
proposal in accordance with the determination of the Proxy Committee. Prior to
voting on the proposal, the Adviser may (i) contact an independent third party
(such as another plan fiduciary) to recommend how to vote on the proposal and
vote in accordance with the recommendation of such third party (or have the
third party vote such proxy); or (ii) with respect to client accounts that are
not subject to ERISA, fully disclose the nature of the conflict to the client
and obtain the client's consent as to how the Adviser will vote on the proposal
(or otherwise obtain instructions from the client as to how the proxy should be
voted).
RECORDKEEPING
SCM must maintain the documentation described in the following section for a
period of not less than five (5) years, the first two (2) years at its principal
place of business. Director of Client Services will be responsible for the
following procedures and for ensuring that the required documentation is
retained.
Client request to review proxy votes:
o Any request, whether written (including e-mail) or oral, received by
any Staff Member of SCM, must be promptly reported to the Director
of Client Services. All written requests must be retained in the
permanent file.
o The Director of Client Services will record the identity of the
client, the date of the request, and the disposition (e.g., provided
a written or oral response to client's request, referred to third
party, not a proxy voting client, other dispositions, etc.) in a
suitable place.
o Clients are permitted to request the proxy voting record for the 5
year period prior to their request.
Proxy statements received regarding client securities:
o Upon receipt of a proxy, copy or print a sample of the proxy
statement or card and maintain the copy in a central file along with
a sample of the proxy solicitation instructions.
NOTE: SCM is permitted to rely on proxy statements filed on the
SEC's EDGAR system instead of keeping its own copies.
B-11
Proxy voting records:
o Documents prepared or created by SCM that were material to making a
decision on how to vote, or that memorialized the basis for the
decision.
o Documentation or notes or any communications received from third
parties, other industry analysts, third party service providers,
company's management discussions, etc. that were material in the
basis for the decision.
DISCLOSURE
o SCM will ensure that Part II of Form ADV is updated as necessary to
reflect: (i) all material changes to the Proxy Voting Policy and
Procedures; and (ii) information about how clients may obtain
information on how SCM voted their securities.
PROXY SOLICITATION
As a matter of practice, it is SCM's policy to not reveal or disclose to any
client how SCM may have voted (or intends to vote) on a particular proxy until
after such proxies have been counted at a shareholder's meeting.
The Director of Client Services is to be promptly informed of the receipt of any
solicitation from any person to vote proxies on behalf of clients. At no time
may any Staff Member accept any remuneration in the solicitation of proxies. The
Director of Client Services shall handle all responses to such solicitations.
RESPONSIBILITY
The Director of Client Services is responsible for overseeing and implementing
this policy.
B-12
PROXY VOTING GUIDELINES
One of the primary factors SCM considers when determining the desirability of
investing in a particular company is the quality and depth of its management.
Accordingly, SCM believes that the recommendation of management on any issue
should be given substantial weight in determining how proxy issues are resolved.
As a matter of practice, SCM will vote on most issues presented in a portfolio
company proxy statement in accordance with the position of the company's
management, unless SCM determines that voting in accordance with management's
recommendation would adversely affect the investment merits of owning the stock.
However, SCM will consider each issue on its own merits, and will not support
the position of the company's management in any situation where, in SCM's
judgment, it would not be in the best interests of the client to do so.
I. THE BOARD OF DIRECTORS
A. VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees are made on a CASE-BY-CASE basis, and may consider
the following factors:
o Long-term corporate performance record relative to a market index;
o Composition of board and key board committees;
o Corporate governance provisions and takeover activity;
o Board decisions regarding executive pay;
o Director compensation;
B. DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Proposals concerning director and officer indemnification and liability
protection are evaluated on a CASE-BY-CASE basis.
C. VOTING FOR DIRECTOR NOMINEES IN CONTEST ELECTIONS
Votes in a contested election of directors are evaluated on a CASE-BY-CASE
basis, and may consider the following factors:
o long-term financial performance of the target company relative to
its industry;
o management's track record;
o background to the proxy contest;
o qualifications of director nominees (both slates);
o evaluation of what each side is offering shareholders as well as the
likelihood that the proposed objectives and goals can be met; and
o stock ownership positions.
o Size of the Board
B-13
Proposals to limit the size of the Board should be evaluated on a CASE-BY-CASE
basis.
II. AUDITORS
RATIFYING AUDITORS
We generally vote FOR proposals to ratify auditors, unless: an auditor has a
financial interest in or association with the company, and is therefore not
independent; or there is reason to believe that the independent auditor has
rendered an opinion which is neither accurate nor indicative of the company's
financial position.
III. PROXY CONTEST DEFENSES
Cumulative Voting
We vote AGAINST proposals to eliminate cumulative voting.
We vote FOR proposals to permit cumulative voting.
IV. ANTI-TAKEOVER ISSUES
We generally oppose anti-takeover measures because they reduce shareholder
rights. However, as with all proxy issues, we conduct and independent review of
each anti-takeover proposal. On occasion, we may vote with management when it is
concluded that the proposal is not onerous and would not harm clients' interests
as shareholders. Anti-takeover issues include the following:
o POISON PILLS
The "poison pill" entitles shareholders to purchase certain securities at
discount prices in the event of a change in corporate control. Such a
measure would make a potential takeover prohibitively expensive to the
acquirer.
We review on a CASE-BY-CASE basis management proposals to ratify a poison
pill.
3) FAIR PRICE PROVISIONS
Fair price provisions attempt to ensure approximately equal treatment for
all shareholders in the event of a full-scale takeover. Typically, such a
provision requires would-be acquirers that have established threshold
positions in target companies at given per-share prices to pay at least as
much if they opt for complete control, unless certain conditions are met.
B-14
We vote FOR fair price proposals, as long as the shareholder vote
requirement embedded in the provision is no more than a majority of
disinterested shares.
We vote FOR shareholder proposals to lower the shareholder vote
requirement in existing fair price provisions.
4) GREENMAIL
Proposals relating to the prohibition of "greenmail" are designed to
disallow the repurchase of stock from a person or group owning 5% or more
of the company's common stock, unless approved by the disinterested
holders of two-thirds or more of the outstanding stock. They could also
prevent the company from repurchasing any class of stock at a price more
than 5% above the current fair market price, unless an offer is made to
all shareholders.
We vote FOR proposals to adopt anti-greenmail charter or bylaw amendments
or otherwise restrict a company's ability to make greenmail payments.
We review on a CASE-BY-CASE basis anti-greenmail proposals when they are
bundled with other charter or bylaw amendments.
5) SUPERSTOCK
Another takeover defense is superstock, i.e., shares that give holders
disproportionate voting rights. For example, one company proposed
authorizing a class of preferred stock which "could be issued in a private
placement with one or more institutional investors" and "could be
designated as having voting rights which might dilute or limit the present
voting rights of the holders of common stock...." The purpose of this
additional class of stock would be to give insiders an edge in fending off
an unsolicited or hostile takeover attempt.
We will review on case-by-case basis proposals that would authorize the
creation of new classes of "superstock".
E. SUPERMAJORITY RULES
Supermajority provisions require approval by holders of minimum amounts of
the common shares (usually 75% to 80%). While applied mainly to merger
bids, supermajority rules also may be extended to cover substantive
transfers of corporate assets, liquidations, reverse splits and removal of
directors for reasons other than cause. A supermajority provision would
make it nearly impossible in some cases for shareholders to benefit from a
takeover attempt.
a. SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO APPROVE MERGERS
We vote AGAINST management proposals to require a supermajority
shareholder vote to approve mergers and other significant business
combinations.
We vote FOR shareholder proposals to lower supermajority shareholder
vote requirements for mergers and other significant business
combinations.
2. SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO AMEND THE
CHARTER OR BYLAWS
B-15
We vote AGAINST management proposals to require a supermajority
shareholder vote to approve charter and bylaw amendments.
We vote FOR shareholder proposals to lower supermajority shareholder
vote requirements for charter and bylaw amendments.
F. BOARD CLASSIFICATION
High on the agenda of defense-minded corporate executives are staggered terms
for directors, whereby only some (typically one-third) of the directors are
elected each year. The "staggered board" acts as a bar to unwelcome takeover
bids. An aggressive, affluent acquirer would need two years to gain a working
majority of directors at a company whose board members are elected to staggered
three-year terms of office.
We vote AGAINST proposals to classify the board.
We vote FOR proposals to repeal classified boards and elect all directors
annually.
IV. MISCELLANEOUS GOVERNANCE PROVISION
BUNDLED PROPOSALS
We review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals. In
this case where items are conditioned upon each other, we examine the benefits
and costs of the packages items. In instances when the joint effect of the
conditioned items is not in shareholder's best interests, we vote against the
proposals. If the combined effect is positive, we support such proposals.
V. CAPITAL STRUCTURE
A. COMMON STOCK AUTHORIZATION
We review on a CASE-BY-CASE basis proposals to increase the number of shares of
common stock authorized for issue.
B. DEBT RESTRUCTURING
We review on a CASE-BY-CASE basis proposals to increase common and/or preferred
shares and to issue shares as part of a debt restructuring plan.
VI. EXECUTIVE AND DIRECTOR COMPENSATION
In general, we vote on a CASE-BY-CASE basis on executive and director
compensation plans, including stock option plans, with the view that viable
compensation programs reward the creation of stockholder wealth.
B-16
VII. STATE OF INCORPORATION
A. VOTING ON STATE TAKEOVER STATUTES
We review on a case-by-case basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freeze-out provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, anti-greenmail
provisions and disgorgement provisions).
B. Voting on Reincorporation Proposals
Proposals to change a company's state of incorporation are examined on a
CASE-BY-CASE basis.
VIII. MERGERS AND CORPORATE RESTRUCTURINGS
A. MERGERS AND ACQUISITIONS
Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis.
B. Corporate Restructuring
Votes on corporate restructuring proposals, including minority squeezeouts,
leveraged buyout, spin-offs, liquidations and asset sales are considered on a
CASE-BY-CASE basis.
C. Spin-offs
Votes on spin-offs are considered on a CASE-BY-CASE basis.
D. Changing Corporate Name
We generally vote FOR changing the corporate name.
IX. SOCIAL AND ENVIRONMENTAL ISSUES
Consistent with its fiduciary duty to clients, SCM will vote on social issues
with a view toward promoting good corporate citizenship. However, SCM realizes
that it cannot require a portfolio company to go beyond applicable legal
requirements or put itself in a non-competitive position. Social responsibility
issues may include proposals regarding the following:
o Ecological issues, including toxic hazards and pollution of the air
and water;
o Employment practices, such as the hiring of women and minority
groups;
o Product quality and safety;
o Advertising practices;
o Animal rights, including testing, experimentation and factory
farming;
B-17
o Military and nuclear issues; and
o International politics and operations, including the world debt
crisis, infant formula, U.S. corporate activity in Northern Ireland,
and the policy of apartheid in South Africa.
We review on a CASE-BY-CASE basis proposals regarding social or environmental
issues.
B-18
MILLER/HOWARD INVESTMENTS PROXY VOTING POLICY
The Firm recognizes, as a matter of policy and as a fiduciary to our clients,
that proxy voting is a valuable right of shareholders. Proxy voting is one of
the best ways for an investor to communicate to a company his or her opinions on
management's policies. Miller/Howard Investments supports voting proxies
consistent with our financial, social, and environmental objectives. For more
information regarding these objectives, please refer to our SRI (Socially
Responsible Investing) policy.
Each proxy season, in addition to the "standard" issues placed on the ballot by
management, there may be a number of other important issues put forward by
shareholders in the form of shareholder resolutions. Shareholder resolutions can
cover a wide range of issues, such as environmental performance, workplace
diversity, the production of weapons, land mine clean up, genetically modified
foods, labor standards, and management transparency. We actively support
resolutions that target labor issues, human rights, compensation, and also those
that decrease emissions and increase renewable energy sources. The primary goal
of the shareholder resolution process is to engage management in a dialogue. We
support the right of both shareholders and stakeholders to pursue such
discussions.
PROXY ADMINISTRATION
In January 2008, Miller/Howard Investments enlisted the help of Broadridge
Investor Communication Solutions, Inc. to administer electronic proxy voting.
Using the services Broadridge provides, Miller/Howard Investments is capable of
customizing proxy reports, ballot recommendations, and research tools. Because
the issues related to proxy voting are complex and directly impact investment
values, we have chosen Broadridge to facilitate voting SRI recommendations as
provided by Glass Lewis.
Proxy voting responsibility will be determined at the opening of all new client
relationships. For those clients who have retained proxy-voting authority,
Miller/Howard Investments has no responsibility to receive, vote, or otherwise
advise voting.
Miller/Howard Investments maintains relevant records, through EDGAR and
Broadridge, including but not limited to, proxy reconciliation, ballots and
research reports. Clients can receive a history of our proxy voting record upon
request.
LIMITATIONS
The Firm will generally vote on all proxies it receives. However, Miller/Howard
Investments may refrain from voting a proxy if the shares are no longer held by
the client at the time of the meeting. Unsupervised securities, or securities
held below the line, will also be excluded.
Miller/Howard Investments will vote differently from Glass Lewis recommendations
if we believe such action is in the best interest of our clients and/or our
unique objectives.
B-19
ANNUAL REVIEW OF PROXY POLICY
On an annual basis, Miller/Howard Investments will amend or update, as
necessary, to remain consistent and current with our proxy practices. Client
interests, compliance, and regulatory requirements will be reviewed and
addressed.
DISCLOSURE:
Miller/Howard Investments discloses a summary of our proxy voting policy in our
Form ADV Part II.
B-20
NAVELLIER & ASSOCIATES PROXY VOTING POLICY
Navellier's proxy voting policies and procedures are designed to ensure that
proxies are voted in an appropriate manner. In the absence of specific voting
guidelines from the Fund, Navellier will vote proxies in a manner that is in the
best interests of the Fund, which may result in different voting results for
proxies for the same issuer. Navellier shall consider only those factors that
relate to the Fund's investment or dictated by the Fund's written instructions,
including how its vote will economically impact and affect the value of the
Fund's investment (keeping in mind that, after conducting an appropriate
cost-benefit analysis, not voting at all on a presented proposal may be in the
best interest of the Fund). Navellier has adopted specific voting policies for
voting proxies with respect to routine issues, such as board of directors,
reclassification of common stock and independent auditors. Navellier has adopted
specific voting policies for voting non-routine issues, such as mergers and
anti-greenmail provisions. The following are examples of Navellier's policies on
specific matters involving routine and non-routine issues:
o Navellier will generally vote for the election of directors (where
no corporate governance issues are implicated).
o Navellier will generally vote for proposals that maintain or
increase the rights of shareholders.
o Navellier will generally vote for management proposals for merger or
reorganization if the transaction appears to offer fair value.
If the proxy includes a routine item that implicates corporate governance
changes, a non-routine item where no specific policy applies or a conflict of
interest where no specific policy applies, Navellier may engage ISS to determine
how the proxies should be voted. If an actual or potential conflict is found to
exist, written notification of the conflict will be given to the Fund describing
Navellier's vote recommendation or requesting the Fund to vote the proxy
directly. If the Fund has not responded before the response deadline, Navellier
may engage a non-interested party to independently review Navellier's vote
recommendation if the vote is in favor of Navellier's interest, cast its vote as
recommended if the vote is against Navellier's interest or abstain from voting
if Navellier determines this to be in the best interest of the Fund.
B-21
JKMILNE ASSET MANAGEMENT PROXY VOTING POLICY
JKMilne invests exclusively in non-voting securities.
B-22
LONGFELLOW INVESTMENT MANAGEMENT CO.
Longfellow invests exclusively in non-voting securities, so they do not have a
proxy voting policy.
B-23
FARR, MILLER & WASHINGTON, LLC
PROXY VOTING POLICIES
POLICY
Farr, Miller & Washington, LLC, ("FMW") as a matter of policy and practice, has
no authority to vote proxies on behalf of its advisory clients except for
Institutional ERISA clients only on a case by case basis and also for specific
sub-advised mutual funds.
The firm may offer assistance as to proxy matters upon a client's request, but
the client always retains the proxy voting responsibility. Farr, Miller &
Washington, LLC's policy of having no proxy voting responsibility is disclosed
to clients on the investment advisory contract and Form ADV Part II.
For certain sub-advised mutual funds, FMW will have the responsibility for
voting proxies for portfolio securities consistent with the best economic
interests of the clients. As part of our voting process, FMW has retained an
independent third party proxy consultant, RiskMetrics-ISS, a fully outsourced
proxy voting service which includes delivery of holdings specific proxy research
and recommendations, automated voting with vote override options, full record
keeping and a dedicated account management team to support the service.
BACKGROUND
Proxy voting is an important right of shareholders and reasonable care and
diligence must be undertaken to ensure that such rights are properly and timely
exercised.
Investment advisers registered with the SEC, and which exercise voting authority
with respect to client securities, are required by Rule 206(4)-6 of the Advisers
Act to (a) adopt and implement written policies and procedures that are
reasonably designed to ensure that client securities are voted in the best
interests of clients, which must include how an adviser addresses material
conflicts that may arise between an adviser's interests and those of its
clients; (b) to disclose to clients how they may obtain information from the
adviser with respect to the voting of proxies for their securities; (c) to
describe to clients a summary of its proxy voting policies and procedures and,
upon request, furnish a copy to its clients; and (d) maintain certain records
relating to the adviser's proxy voting activities when the adviser does have
proxy voting authority.
RESPONSIBILITY
The CCO has the responsibility for the implementation and monitoring of our
proxy policy, practices, disclosures and record keeping. For the sub-advised
mutual fund client, the firm has delegated its responsibilities under its proxy
voting procedures to a third party. We have retained RiskMetrics-ISS ("ISS") to
assist in the process of proxy voting.
B-24
PROCEDURE
Farr, Miller & Washington, LLC has adopted procedures to implement the firm's
policy. To ensure the policy is observed, implemented properly and amended or
updated, as appropriate, FMW constantly monitors firm's activities and conducts
reviews on a periodic basis. The procedures include the following:
VOTING PROCEDURES:
Any proxy materials received on behalf of the sub-advised mutual fund client
will be forwarded or received directly by RiskMetrics-ISS;
Absent material conflicts, ISS will determine how Farr, Miller & Washington, LLC
should vote the proxy in accordance with the applicable voting guideline,
complete the proxy and vote the proxy in a timely and appropriate manner.
DISCLOSURE
Although FMW's general policy is not to accept proxy voting responsibility from
its clients except for institutional ERISA clients on a case by case basis and
specific sub-advised mutual funds, FMW provides conspicuously displayed
information in its ADV Part II summarizing the proxy voting policy and
procedures, including a statement that clients may request information regarding
how Farr, Miller & Washington, LLC voted a client's proxies, and that clients
may request a copy of these policies and procedures.
CLIENT REQUESTS FOR INFORMATION
All client requests for information regarding proxy votes, or policies and
procedures, received by any employee should be forwarded to Taylor McGowan,
Principal or the CCO, Susan Cantus.
In response to any request FMW will prepare a written response to the client
with the information requested, and as applicable will include the name of the
issuer, the proposal voted upon, and how Farr, Miller & Washington, LLC voted
the client's proxy with respect to each proposal about which client inquired.
VOTING GUIDELINES
For sub-advisers mutual funds that designate FMW as the responsible party to
vote proxies, FMW has adopted Risk Metrics-ISS 2009 US Proxy Voting Guidelines
which votes in the best economic interest of the client, as they may be amended
by ISS from time to time, to further the interest of the funds' shareholders
with respect to proxy voting matters. A current summary of the pre-determined
proxy voting guidelines adopted by FMW can be found at
www.riskmetrics.com/policy.
B-25
For the sub-advised mutual funds for which FMW vote proxies, proxies will be
voted in accordance with recommendations contained in voting guidelines prepared
by RiskMetrics-ISS, except the following:
1. The Proxy Committee may propose a particular vote cast against
RiskMetrics-ISS recommendation or may propose an abstention from
voting, if the Proxy Committee has determined that such action will
serve the best interest of clients.
2. If RiskMetrics-ISS has not made a recommendation on how a particular
proxy should be voted, the Proxy Committee will make a voting
recommendation, consistent with the best interest of the clients.
3. If RiskMetrics-ISS determines that a conflict of interest exists and
therefore is precluded from making a recommendation to a particular
vote, the Proxy Committee will make a voting recommendation,
consistent with the best interest of the clients.
The Proxy Committee (including Taylor McGowan, Principal and Susan Cantus, CCO)
has the authority to override RiskMetrics-ISS recommendations and determine how
a proxy should be voted.
CONFLICTS OF INTEREST
FMW will ensure that proxy votes are voted in the Funds' best interest and are
not affected by FMW's conflicts of interest. Proxy votes cast based upon the
recommendations of an independent third party will be cast according to a
pre-determined proxy voting policy.
Farr, Miller & Washington, LLC will identify any conflicts that exist between
the interests of the adviser and the client by reviewing the relationship of
Farr, Miller & Washington, LLC (including its employees) with the issuer of each
security to determine if Farr, Miller & Washington, LLC or any of its employees
has any financial, business or personal relationship with the issuer. The CCO
also monitors any potential conflicts of interest on a periodic basis.
If a material conflict of interest exists, the Proxy Committee will determine
whether it is appropriate to disclose the conflict to the affected clients, to
give the clients an opportunity to vote the proxies themselves, or to address
the voting issue through other objective means such as voting in a manner
consistent with a predetermined voting policy or receiving an independent third
party voting recommendation.
Farr, Miller & Washington, LLC will maintain a record of the voting resolution
of any conflict of interest.
RECORDKEEPING
Taylor McGowan or the CCO, Susan Cantus, shall retain the following proxy
records in accordance with the SEC's five-year retention requirement.
These policies and procedures and any amendments;
Each proxy statement that Farr, Miller & Washington, LLC receives; *
B-26
A record of each vote that Farr, Miller & Washington, LLC casts; *
Any document Farr, Miller & Washington, LLC created that was material to making
a decision how to vote proxies, or that memorializes that decision;
A copy of each written request from a client for information on how Farr, Miller
& Washington, LLC voted such client's proxies, and a copy of any written
response.
* FMW may satisfy this requirement by relying on RiskMetrics-ISS to make and
retain on the advisors behalf, a copy of a proxy statement and record of the
vote cast (provided FMW has obtained an undertaking from ISS to provide a copy
of the record promptly upon request).
B-27
BRADFORD & MARZEC LLC
Bradford & Marzec invests exclusively in non-voting securities, so they do not
have a proxy voting policy.
B-28
AGF INVESTMENTS AMERICA INC.
AGF Investments America Inc. (Emerging Markets Equity Fund) In absence of
specific proxy voting guidelines from the Fund, AGF will vote proxies to
maximize positive economic effect on shareholder value and to protect rights of
shareholders to the best interests the Fund. AGF's proxy voting guidelines are
not intended to dictate precisely how each issue must be voted in every
circumstance. Rather, the intention is to provide a framework defining how to
approach the voting for each issue to ensure a disciplined approach to voting
proxies. AGF may retain a third-party company to provide research or other
assistance with voting proxies, however the decision making process rests with
AGF.
AGF applies the following proxy voting guidelines for non routine matters:
EXECUTIVE COMPENSATION: Will be voted to ensure that the interests of management
and shareholders are properly aligned and positive economic shareholder value is
not compromised.
EMPLOYEE STOCK PURCHASE PLANS: strategic rationale, shareholder rights,
dilution, interest alignment and corporate governance, amongst other matters,
will be carefully evaluated.
CORPORATE RESTRUCTURINGS, MERGERS AND ACQUISITIONS: Consideration of strategic
rationale, shareholder ratification, financial implications, future economic
prospects, changes in corporate governance and their impact on shareholder
rights and other related matters shall be considered when voting. Generally,
positive economic shareholder value and preserved shareholder rights must be
anticipated.
POISON PILLS: Primary objective is to maximize positive economic effect on
shareholder value and minimal impact on shareholder rights. A decision to
abstain from voting or to vote for contentious poison pills may be in the
interest of Client Account's where short term gains timed with the disposal of
the security is anticipated.
ANY PROPOSAL AFFECTING SHAREHOLDER RIGHTS: AGF believes that certain fundamental
rights of shareholders must be protected and will generally vote in favour of
proposals that give shareholders a greater voice in the affairs of the company.
SHARE BLOCKING: AGF has sole discretion in determining whether to enter a vote
in markets in which share blocking takes place by considering whether the
potential loss resulting from the inability to trade during the blocking period
outweighs any potential gain to securityholders through executing the proxy
solicitation.
If a potential conflict should arise, AGF will vote proxies to maximize positive
economic effect on shareholder value and to protect rights of shareholders to
the best interests the Fund. If the conflict of interest arises between a
portfolio manager and an issuer, the matter will be referred to the Proxy Voting
Committee and the Committee will meet to consider the matter, and make a
determination, based upon representations to it, as to how to vote the proxy.
B-29
BEDLAM ASSET MANAGEMENT PROXY VOTING POLICY
PROXY VOTING POLICY
With the exceptions set out below, we do not usually cast votes at company
meetings.
We invest in businesses. If management is doing its job well, we leave them to
get on with it. This approach appears passive but the reality is far from the
case. We carefully monitor corporate announcements, directors' share
transactions, conflicts of interest, option policies and even relatives in the
business. We are also very interested in their public profile (such as multiple
directorships or sitting on the boards of failed banks, as bad directors have a
pattern).
Moreover, we have always talked to management (and usually their competitors
and/or suppliers) before investing in any company. This dialogue continues after
investing.
If we believe that management has gone awry and there is no evidence of them
changing strategy, we will sell the stock - our ultimate proxy vote.
We are hired to invest in good businesses on behalf of clients. Our strict and
transparent target price discipline means that we are investing to catch the
upswing in the business cycle, and to sell before inevitably it rolls over.
We do not seek to be hired as corporate activists, to change a company's
direction or board, or to lobby for it to retire or issue more shares. Prior
analysis should have already revealed their policies and whether such an
investment fits our model and disciplines.
We believe we will have failed our investors if we become locked in a prolonged
battle with the board, or are consistently spending too much of our time - for
which clients pay - involved in corporate battles.
SOME EXCEPTIONS
We intend to cast votes:-
i. To protect our investors' interests such as a management or other
buy-out at too low a price.
ii. A management request such as a special resolution.
iii. Management remuneration if the given company is performing well but
management seeks excessive rewards.
iv. A holding in excess of 2% of the issued equity, on the premise that
the larger the percentage of a company owned, the lesser the
liquidity so the higher the potential risk to our clients. Thus we
must monitor even more closely.
B-30
v. Board appointments if a proposed or current director lacks proven
competence or has a record of value destruction.
The driving principle behind any vote is the best gain for our investors on a
two year view, consistent with our modelling process.
B-31
CORNERSTONE REAL ESTATE ADVISERS LLC
PROXY VOTING POLICY
Cornerstone has adopted these proxy voting policies and procedures ("Policy") in
accordance with Rule 206(4)-6 under the Investment Advisers Act of 1940, as
amended ("Advisers Act"), and has designed the Policy to ensure compliance with
that Rule as well as with other applicable fiduciary obligations of Cornerstone
under other state and federal laws including, but not limited to, the Employee
Retirement Income Security Act of 1974, as amended. The Policy may be amended
from time to time at the sole discretion of Cornerstone.
GENERAL POLICY
Cornerstone follows this Policy for each of its clients as required by law,
unless expressly directed by a client in writing to refrain from voting that
client's proxies or to vote in accordance with the client's proxy voting
policies and procedures. Additionally, certain circumstances may exist whereby
Cornerstone is unable (or believes it to be unreasonable due to the expense of
voting) to vote a proxy. Such cases include: (1) where the expense of voting a
proxy exceeds the potential value to be gained by voting; (2) where the security
is no longer held by a client; (3) where the security is subject to a securities
lending arrangement (if any) which prohibits voting; or (4) where Cornerstone is
prohibited by law or contract from exercising its voting rights with respect to
a particular security. In such cases, Cornerstone will refrain from voting such
proxies.
In all other cases, Cornerstone's policy is to vote proxies in accordance with
the client's best interest. Cornerstone believes that the client's best interest
means the client's best economic interest over the long term -that is, the
common interest that all clients share in seeing the value of a common
investment increase over time. Clients may have differing political or social
interests, but their best economic interest is generally uniform. Additionally,
to the extent consistent with economic interests, Cornerstone considers a
company's good corporate governance to be important to proxy voting decisions.
USE of AN INDEPENDENT, THIRD-PARTY PROXY VOTING SERVICE
In order to discharge its duties under this policy, Cornerstone receives proxy
voting research, analysis and recommendations from RiskMetrics Group ("RMG",
formerly "Institutional Shareholder Services"), an independent third party.
Cornerstone generally follows the recommendations of RMG, although, in unique
circumstances, where Cornerstone has knowledge of additional information, for
example, regarding a proposed director and believes that the individual is not
suited to be a director of the respective company, Cornerstone may not follow
the recommendation of RMG. All decisions with respect to proxy voting, including
decisions to override an RMG recommendation may be made only by Cornerstone's
Proxy Administrator ("PA") in consultation with the portfolio manager(s) whose
clients hold the securities in question.
B-32
CONFLICTS OF INTEREST
Cornerstone recognizes that there may be times when its interests (or the
interests of one or more Cornerstone employees) may conflict with those of its
clients. Cornerstone will not allow a "material conflict of interest" to
interfere with its proxy voting decisions. Material conflicts of interest may
exist where: (1) the company soliciting the proxy, or a person known to be an
affiliate of such company, is a Cornerstone client or is known by the PA to be a
client of a Cornerstone affiliate; (2) the company soliciting the proxy, or a
person known to be an affiliate of such company, to the knowledge of the PA, is
being actively solicited to be a Cornerstone client or the client of a
Cornerstone'affiliate; (3) a client or client-supported interest group actively
supports a proxy proposal; or (4) Cornerstone (or a Cornerstone officer) has
personal or other business relationships with participants in proxy contests,
corporate directors or candidates for corporate directorships, or in any other
matter coming before shareholders. Where such a conflict may exist, the
Cornerstone individual in conflict shall not participate in the decision whether
or not to follow the RMG recommendation. Moreover, if Cornerstone, as a company,
has a conflict with respect to the proposed vote, it will follow the
recommendation of RMG. As discussed above, only Cornerstone's PA may determine
to override an RMG recommendation. To the extent Cornerstone's PA believes that
he or she may have a conflict of interest with respect to a potential override,
the PA will follow the RMG recommendation.
PROXY PROCEDURES
Once a client account is established for which Cornerstone has proxy voting
authority, the PA is responsible for receiving and processing proxies for
securities held in each such account and ensuring that votes are cast. With
respect to each client proxy, Cornerstone receives electronically (either
directly or through an affiliate) from RMG relevant proxy materials and RMG's
recommendations for each particular proposal. The PA logs in any proxy materials
received, matches them to the securities to be voted and confirms that the
correct amount of shares, as of the record date, is reflected on the proxy. The
PA then reviews RMG's recommendations and, unless conflicted, determines whether
to accept RMG's recommendation or override. Any ballot issue under consideration
for an override of RMG's recommendation will be forwarded to the relevant
portfolio manager(s) for review and recommendation. The PA will forward the
decision to RMG (either directly or through Cornerstone's affiliate) for
execution.
To the extent any client may instruct Cornerstone to follow the client's own
proxy voting policies with respect to that client's account, the PA is
responsible for monitoring compliance with such client policies.
RECORDKEEPING
Cornerstone's PA, either internally or through RMG, compiles and maintains
information, for each client for which Cornerstone votes proxies, showing the
issuer's name, meeting date and manner in which it voted on each proxy proposal.
Cornerstone's PA will maintain records of all proxies voted. As required by Rule
204-2 (c) under the Advisers Act, Cornerstone's proxy voting records will
include: (1) a copy of this Policy; (2) a copy of any document created by
Cornerstone that was material to making a decision how to vote proxies on behalf
of a client or that memorializes the basis for that decision; and (3) each
written client request for proxy voting records and Cornerstone's written
response to any (written or oral) client request for such records. Cornerstone
will either maintain its own proxy statements and records of votes cast or, as
permitted by Rule 204-2(c), such records may be maintained by a third-party
service provider such as RMG. To the extent that Cornerstone relies on a
third-party service provider, it will obtain from that third-party an
undertaking to provide Cornerstone with copies of such records promptly upon
request. Proxy voting records will be maintained in an easily accessible place
for five years, the first two in Cornerstone's office.
B-33
CLIENT REQUESTS FOR INFORMATION
Cornerstone will provide clients with copies of this Policy, as revised from
time to time, and will provide any client with information as to how that
client's proxies were voted.
REVIEW
This Policy will be subject to review on a periodic basis, as deemed appropriate
by cornerstone.
B-34
AUGUSTUS ASSET MANAGERS LIMITED
Augustus invests exclusively in non-voting securities, so they do not have a
proxy voting policy.
B-35
EARNEST PARTNERS LLC PROXY VOTING POLICY
Proxy Policies
The best interest of clients and plan participants (the "Client") will be the
sole consideration of EARNEST Partners (the "Sub-Advisor") when voting proxies
of portfolio companies. Each proxy issue will receive individual consideration
based on the relevant facts and circumstances. As a general rule, the
Sub-Advisor will vote against actions which would reduce the rights or options
of shareholders, reduce shareholder influence over the board of directors and
management, reduce the alignment of interests between management and
shareholders, or reduce the value of shareholders' investments. Following is a
partial list of issues that require special attention: classified boards, change
of state of incorporation, poison pills, unequal voting rights plans, provisions
requiring supermajority approval of a merger, executive severance agreements,
and provisions limiting shareholder rights.
In addition, the following will be adhered to unless the Sub-Advisor is
instructed otherwise in writing by the Client:
o The Sub-Advisor will not actively engage in conduct that involves an
attempt to change or influence the control of a portfolio company.
o The Sub-Advisor will not announce its voting intentions or the
reasons for a particular vote.
o The Sub-Advisor will not participate in a proxy solicitation or
otherwise seek proxy voting authority from any other portfolio
company shareholder.
o The Sub-Advisor will not act in concert with any other portfolio
company shareholders in connection with any proxy issue or other
activity involving the control or management of a portfolio company.
o All communications with portfolio companies or fellow shareholders
will be for the sole purpose of expressing and discussing the
Sub-Advisor's concerns for its Clients' interests and not in an
attempt to influence the control of management.
With respect to ERISA accounts, the Sub-Advisor will act prudently, solely in
the interest of plan participants and beneficiaries and for the exclusive
purpose of providing benefits to them. It is the Sub-Advisor's policy to fully
comply with all ERISA provisions regarding proxy voting for ERISA accounts and
to the extent possible, amend its policies and procedures from time to time to
reflect the Department of Labor's views of the proxy voting duties and
obligations imposed by ERISA with respect to ERISA accounts.
Proxy Procedures
The Sub-Advisor has designated a Proxy Director. The Proxy Director will
consider each issue presented on each portfolio company proxy. The circumstances
underlying each proxy issue will be given careful individual attention. The
Proxy Director will also use all available resources, including proxy evaluation
services, to assist in the analysis of proxy issues. Proxy issues presented to
the Proxy Director will be voted in accordance with the judgment of the Proxy
Director, taking into account the general policies outlined above and the
Sub-Advisor's Proxy Voting Guidelines. Therefore, it is possible that actual
votes may differ from these general policies and the Sub-Advisor's Proxy Voting
Guidelines. In the case where the Sub-Advisor has a material conflict of
interest with a Client, the Proxy Director will utilize the services of outside
third party professionals (such as Institutional Shareholder Services) to assist
in its analysis of voting issues and the actual voting of proxies to ensure that
a decision to vote the proxies was based on the Client's best interest and was
not the product of a conflict of interest. In the event the services of an
outside third party professional are not available in connection with a conflict
of interest, the Sub-Advisor will seek the advice of the Client.
B-36
A detailed description of the Sub-Advisor's specific Proxy Voting Guidelines
will be furnished upon request. You may also obtain information about how the
Sub-Advisor has voted with respect to portfolio company securities by calling,
writing, or emailing the Sub-Advisor at:
EARNEST Partners
1180 Peachtree Street NE, Suite 2300
Atlanta, GA 30309
invest@earnestpartners.com
404-815-8772
The Sub-Advisor reserves the right to change these policies and procedures at
any time without notice.
B-37
ARONSON+JOHNSON+ORTIZ, LP PROXY VOTING POLICY
OVERVIEW
ARONSON+JOHNSON+ORTIZ, LP (AJO), exercises proxy voting responsibilities on
behalf of many of its clients pursuant to express or implied authorization in
the client's investment management agreement, though some clients retain this
authority. In the case of ERISA accounts, AJO, as adviser to the plan, must vote
all proxies for the securities managed by AJO, unless the authority to vote
proxies is retained by another plan fiduciary.
Each client account is voted by the firm's Proxy Manager, and our proxy voting
is overseen by the firm's Proxy Oversight Committee. We have adopted and
implemented policies and procedures reasonably designed to ensure proxies are
voted in the best interests of clients, in accordance with our fiduciary duties
and the requirements of ERISA and of SEC Rule 206(4)-6 under the Investment
Advisers Act of 1940.
AJO uses a quantitative approach to investment management, using publicly
available data and a proprietary investment model. Our quantitative model
does not include subjective analysis of companies and their officers and
directors. Therefore, for detailed analyses of proxy issues, AJO will rely
primarily on one or more independent third-party proxy voting services, and we
will generally vote proxies in accordance with the recommendations we receive
from these services. We have procedures in place to ensure the advice we receive
is impartial and in the best interests of our clients. We vote each proxy
individually and on rare occasions we will not follow the third-party
recommendation. We will only vote against the recommendation where it is in the
portfolio's best interests to do so and where AJO has no material conflict of
interest. We rely solely on the third-party recommendations in situations where
AJO has a material conflict of interest (see "Conflicts of Interest," below).
In some instances AJO may abstain from voting a client proxy, particularly when
the effect on the client's economic interest or the value to the portfolio is
insignificant or the cost of voting the proxy outweighs the benefit to the
portfolio.
CONFLICTS OF INTEREST
Actual and potential conflicts of interest, including conflicts of interest of
our third- party proxy service, are monitored by AJO's Proxy Oversight
Committee. When a conflict is identified, the Committee first makes a
determination as to whether the conflict is material. The Committee defines a
material conflict as one reasonably likely to be viewed as important by the
average shareholder. In the case of a material AJO conflict, we will vote the
proxy in accordance with the third-party recommendation, unless the client
directs us otherwise or, in the case of an ERISA client, revokes our proxy
voting authority in writing. In the case where both AJO and our primary proxy
voting service each has a conflict of interest, the Committee will vote the
proxy in accordance with the recommendation of our secondary proxy service.
B-38
RECORD-KEEPING
AJO will maintain all required proxy voting records for five years or for such
longer time as applicable law or client guidelines require. AJO may satisfy some
of its record-keeping obligations by utilizing third-party service providers or
by relying on records available on EDGAR, the SEC's online document filing and
retention system.
VOTE DISCLOSURE
Each proxy voted by AJO for a client account is disclosed to the client
quarterly. Clients may receive additional reports of proxies voted on their
behalf by AJO by calling us collect at 215/546-7500.
AJO treats proxy votes as the property of the client and will not disclose proxy
votes to third parties.
B-39
LEE MUNDER CAPITAL GROUP LLC
1. OPERATIONAL ITEMS:
AUDITOR RATIFICATION
Generally vote FOR proposals to ratify auditors unless:
o An auditor has a financial interest in or association with the company and
is therefore not independent;
o There is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's
financial position;
o Poor accounting practices are identified such as fraud, misapplication of
GAAP and material weaknesses are identified; or
o Fees for non-audit services are excessive
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
2. BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Vote CASE-BY-CASE on director nominees examining things such as:
o Nominee's attendance at meetings;
o Long-term corporate performance and stock price;
o Composition of the board and key board committees;
o Whether a retired CEO sits on the Board;
o Number of other public company boards seats held;
o Corporate governance provisions and takeover activity;
o Board decisions regarding executive pay;
o Director compensation;
o Interlocking directorships; and
o Conflicts of Interest
INDEPENDENT CHAIR (SEPARATE CEO/CHAIR)
Generally vote FOR shareholder proposals requiring that the chairman position be
filled by an independent director unless there are substantial reasons to
recommend against the proposal, such as counterbalancing governance structure.
MAJORITY VOTE SHAREHOLDER PROPOSALS
Generally vote FOR binding resolutions requesting that the board change the
company's bylaws to stipulate that directors need to be elected with an
affirmative majority of votes cast.
PERFORMANCE/GOVERNANCE EVALUATION FOR DIRECTORS
Generally vote WITHHOLD/AGAINST on all director nominees if the board lacks
accountability and oversight, coupled with sustained poor performance relative
to peers.
B-40
3. PROXY CONTESTS:
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following:
o Management's track record;
o Background to the proxy contest;
o Qualifications of Director nominees;
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved; and
o Stock ownership positions
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses.
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES:
ADVANCED NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Vote CASE-BY-CASE on advance notice proposals, giving support to proposals that
allow shareholders to submit proposals/nominations reasonably close to the
meeting date within the broadest window possible.
POISON PILLS
Generally vote FOR shareholder proposals requesting that the company submit its
poison pill to a shareholder vote or redeem it unless the company has (1) a
shareholder approved poison pill in place or (2) the company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if shareholders have approved the
adoption of the plan or the board determines that it is in the best interest of
shareholders to adopt a pill without delay.
Generally vote FOR shareholder proposals calling for poison pills to be put to a
vote within a time period of less than one year after adoption.
Vote CASE-BY-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan.
5. MERGERS AND CORPORATE RESTRUCTURINGS:
Overall Approach - Vote CASE-BY-CASE
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction balancing various and sometimes countervailing factors
including:
o Valuation;
o Market reaction;
o Strategic rationale;
3
B-41
o Negotiations and process
o Conflicts of Interest; and
o Governance
6. STATE OF INCORPORATION:
REINCORPORATION PROPOSALS
Evaluate management or shareholder proposals to change a company's state of
incorporation on a CASE-BY-CASE basis.
7. CAPITAL STRUCTURE:
COMMON STOCK AUTHORIZATION
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance.
PREFERRED STOCK
Vote CASE-BY-CASE on proposals to increase the number of shares of preferred
stock authorized for issuance.
8. EXECUTIVE AND DIRECTOR COMPENSATION:
EQUITY COMPENSATION PLANS
Vote CASE-BY-CASE on equity-based compensation plans.
POOR PRACTICES PAY
Generally vote AGAINST or WITHHOLD from compensation committee members, CEO, and
potentially the entire board, is the company has poor compensation practices.
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY) MANAGEMENT PROPOSALS Vote
CASE-BY-CASE on management proposals for an advisory vote on executive
compensation.
EMPLOYEE STOCK PURCHASE PLANS
Vote CASE-BY-CASE on non-qualified employee stock purchase plans.
OPTION EXCHANGE PROGRAMS/RE-PRICING OPTIONS
Vote CASE-BY-CASE on management proposals seeking approval to exchange/re-price
options.
9. CORPORATE SOCIAL RESPONSIBILITY (CSR) ISSUES:
Overall Approach - Vote CASE-BY-CASE on social and environmental shareholder
proposals.
B-42
LONDON COMPANY OF VIRGINIA D/B/A THE LONDON COMPANY PROXY VOTING POLICY
I. POLICY
The London Company of Virginia (the "Adviser") acts as discretionary
investment adviser for various clients, including clients governed by the
Employee Retirement Income Security Act of 1974 ("ERISA") and registered
open-end investment companies ("mutual funds"). The Adviser's authority to
vote proxies is established through the delegation of discretionary
authority under its investment advisory contracts. Therefore, unless a
client (including a "named fiduciary" under ERISA) specifically reserves
the right, in writing, to vote its own proxies, the Adviser will vote all
proxies in a timely manner as part of its full discretionary authority
over client assets in accordance with these Policies and Procedures.
When voting proxies, the Adviser's utmost concern is that all decisions be
made solely in the best interest of the client (and for ERISA accounts,
plan beneficiaries and participants, in accordance with the letter and
spirit of ERISA). The Adviser will act in a prudent and diligent manner
intended to enhance the economic value of the assets of the client's
account.
II. PURPOSE
The purpose of these Policies and Procedures is to memorialize the
procedures and policies adopted by the Adviser to enable it to comply with
its fiduciary responsibilities to clients and the requirements of Rule
206(4)-6 under the Investment Advisers Act of 1940, as amended ("Advisers
Act"). These Policies and Procedures also reflect the fiduciary standards
and responsibilities set forth by the Department of Labor for ERISA
accounts.
III. PROCEDURES
The Advisor is ultimately responsible for ensuring that all proxies
received by the Adviser are voted in a timely manner and in a manner
consistent with the Adviser's determination of the client's best
interests. Although many proxy proposals can be voted in accordance with
the Adviser's established guidelines (see Section V. "Guidelines" below),
the Adviser recognizes that some proposals require special consideration
which may dictate that the Adviser makes an exception to the Guidelines.
The Adviser will vote the recommendation of Institutional Shareholder
Services (ISS) on all proxy votes, unless otherwise directed by the
Portfolio Managers.
A. CONFLICTS OF INTEREST
Where a proxy proposal raises a material conflict between the
Adviser's interests and a client's interest, including a mutual fund
client, the Adviser will resolve such a conflict in the manner
described below:
1. VOTE IN ACCORDANCE WITH THE GUIDELINES. To the extent that the
Adviser has little or no discretion to deviate from the
Guidelines with respect to the proposal in question, the
Adviser shall vote in accordance with such pre-determined
voting policy.
2. OBTAIN CONSENT OF CLIENTS. To the extent that the Adviser has
discretion to deviate from the Guidelines with respect to the
proposal in question, the Adviser will disclose the conflict
to the relevant clients and obtain their consent to the
proposed vote prior to voting the securities. The disclosure
to the client will include sufficient detail regarding the
matter to be voted on and the nature of the Adviser's conflict
that the client would be able to make an informed decision
regarding the vote. If a client does not respond to such a
conflict disclosure request or denies the request, the Adviser
will abstain from voting the securities held by that client's
account.
B-43
3. CLIENT DIRECTIVE TO USE AN INDEPENDENT THIRD PARTY.
Alternatively, a client may, in writing, specifically direct
the Adviser to forward all proxy matters in which the Adviser
has a conflict of interest regarding the client's securities
to an identified independent third party for review and
recommendation. Where such independent third party's
recommendations are received on a timely basis, the Adviser
will vote all such proxies in accordance with such third
party's recommendation. If the third party's recommendations
are not timely received, the Adviser will abstain from voting
the securities held by that client's account.
The Advisor will review the proxy proposal for conflicts of interest
as part of the overall vote review process. All material conflict of
interest so identified by the Adviser will be addressed as described
above in this Section III.A.
B. LIMITATIONS
In certain circumstances, in accordance with a client's investment
advisory contract (or other written directive) or where the Adviser
has determined that it is in the client's best interest, the Adviser
will not vote proxies received. The following are certain
circumstances where the Adviser will limit its role in voting
proxies:
1. CLIENT MAINTAINS PROXY VOTING AUTHORITY: Where client
specifies in writing that it will maintain the authority to
vote proxies itself or that it has delegated the right to vote
proxies to a third party, the Adviser will not vote the
securities and will direct the relevant custodian to send the
proxy material directly to the client. If any proxy material
is received by the Adviser, it will promptly be forwarded to
the client or specified third party.
2. TERMINATED ACCOUNT: Once a client account has been terminated
with the Adviser in accordance with its investment advisory
agreement, the Adviser will not vote any proxies received
after the termination. However, the client may specify in
writing that proxies should be directed to the client (or a
specified third party) for action.
3. LIMITED VALUE: If the Adviser determines that the value of a
client's economic interest or the value of the portfolio
holding is indeterminable or insignificant, the Adviser may
abstain from voting a client's proxies. The Adviser also will
not vote proxies received for securities which are no longer
held by the client's account.
4. SECURITIES LENDING PROGRAMS: When securities are out on loan,
they are transferred into the borrower's name and are voted by
the borrower, in its discretion. However, where the Adviser
determines that a proxy vote (or other shareholder action) is
materially important to the client's account, the Adviser may
recall the security for purposes of voting.
5. UNJUSTIFIABLE COSTS: In certain circumstances, after doing a
cost-benefit analysis, the Adviser may abstain from voting
where the cost of voting a client's proxy would exceed any
anticipated benefits to the client of the proxy proposal.
IV. RECORDKEEPING
In accordance with Rule 204-2 under the Advisers Act, the Adviser will
maintain for the time periods set forth in the Rule (i) these proxy voting
procedures and policies, and all amendments thereto; (ii) all proxy
statements received regarding client securities (provided however, that
the Adviser may rely on the proxy statement filed on EDGAR as its
records); (iii) a record of all votes cast on behalf of clients; (iv)
records of all client requests for proxy voting information; (v) any
documents prepared by the Adviser that were material to making a decision
how to vote or that memorialized the basis for the decision; and (vi) all
records relating to requests made to clients regarding conflicts of
interest in voting the proxy.
B-44
The Adviser will describe in its Part II of Form ADV (or other brochure
fulfilling the requirement of Rule 204-3) its proxy voting policies and
procedures and will inform clients how they may obtain information on how
the Adviser voted proxies with respect to the clients' portfolio
securities. Clients may obtain information on how their securities were
voted or a copy of the Adviser's Policies and Procedures by written
request addressed to the Adviser. The Adviser will coordinate with all
mutual fund clients to assist in the provision of all information required
to be filed by such mutual funds on Form N-PX.
V. GUIDELINES
Each proxy issue will be considered individually. The following guidelines
are a partial list to be used in voting proposals contained in the proxy
statements, but will not be used as rigid rules.
A. OPPOSE
The Adviser will generally vote against any management proposal that
clearly has the effect of restricting the ability of shareholders to
realize the full potential value of their investment. Proposals in
this category would include:
1. Issues regarding the issuer's Board entrenchment and
anti-takeover measures such as the following:
a. Proposals to stagger board members' terms;
b. Proposals to limit the ability of shareholders to call
special meetings;
c. Proposals to require super majority votes;
d. Proposals requesting excessive increases in authorized
common or preferred shares where management provides no
explanation for the use or need of these additional
shares;
e. Proposals regarding "fair price" provisions;
f. Proposals regarding "poison pill" provisions; and
g. Permitting "green mail".
2. Providing cumulative voting rights.
B. APPROVE
Routine proposals are those which do not change the structure,
bylaws, or operations of the corporation to the detriment of the
shareholders. Given the routine nature of these proposals, proxies
will nearly always be voted with management. Traditionally, these
issues include:
1. Election of auditors recommended by management, unless seeking
to replace if there exists a dispute over policies.
2. Date and place of annual meeting.
3. Limitation on charitable contributions or fees paid to
lawyers.
4. Ratification of directors' actions on routine matters since
previous annual meeting.
B-45
5. Confidential voting.
Confidential voting is most often proposed by shareholders as
a means of eliminating undue management pressure in
shareholders regarding their vote on proxy issues.
The Adviser will generally approve these proposals as
shareholders can later divulge their votes to management on a
selective basis if a legitimate reason arises.
6. Limiting directors' liability
7. Eliminate preemptive right
Preemptive rights give current shareholders the opportunity to
maintain their current percentage ownership through any
subsequent equity offerings. These provisions are no longer
common in the U.S., and can restrict management's ability to
raise new capital.
The Adviser generally approves the elimination of preemptive
rights, but will oppose the elimination of limited preemptive
rights, e.g., on proposed issues representing more than an
acceptable level of total dilution.
8. Employee Stock Purchase Plan
9. Establish 401(k) Plan
C. CASE-BY-CASE
The Adviser will review each issue in this category on a
case-by-case basis. Voting decisions will be made based on the
financial interest of the fund. These matters include:
1. Pay directors solely in stocks
2. Eliminate director mandatory retirement policy
3. Rotate annual meeting location/date
4. Option and stock grants to management and directors
5. Allowing indemnification of directors and/or officers after
reviewing the applicable laws and extent of protection
requested.
B-46
MAZAMA CAPITAL MANAGEMENT, INC.
PROXY VOTING POLICIES AND PROCEDURES
POLICY
Mazama Capital Management, Inc. ("Mazama"), as a matter of policy and as a
fiduciary to our clients, has responsibility for voting proxies for portfolio
securities consistent with the best economic interests of the clients. Our firm
maintains written policies and procedures as to the handling, research, voting
and reporting of proxy voting and makes appropriate disclosures about our firm's
proxy policies and practices. Our policy and practice includes the
responsibility to monitor corporate actions, receive and vote client proxies and
disclose any potential conflicts of interest as well as making information
available to clients about the voting of proxies for their portfolio securities
and maintaining relevant and required records.
BACKGROUND
Proxy voting is an important right of shareholders and reasonable care and
diligence must be undertaken to ensure that such rights are properly and timely
exercised. Investment advisers registered with the SEC, and which exercise
voting authority with respect to client securities, are required by Rule
206(4)-6 of the Advisers Act to (a) adopt and implement written policies and
procedures that are reasonably designed to ensure that client securities are
voted in the best interests of clients, which must include how an adviser
addresses material conflicts that may arise between an adviser's interests and
those of its clients; (b) to disclose to clients how they may obtain information
from the adviser with respect to the voting of proxies for their securities; (c)
to describe to clients a summary of its proxy voting policies and procedures
and, upon request, furnish a copy to its clients; and (d) maintain certain
records relating to the adviser's proxy voting activities when the adviser does
have proxy voting authority.
GUIDING PRINCIPLES
Proxy voting procedures must adhere to the following broad principles:
1. Voting rights have economic value and must be treated accordingly.
This means the fiduciary (Mazama) has a duty to vote proxies in
those cases where fiduciary responsibility has been delegated to
Mazama.
2. Fiduciaries must maintain documented voting policies or guidelines
to govern proxy voting decisions. 3. Fiduciaries should keep records
of proxy voting.
PROXY ADMINISTRATION
The Chief Compliance Officer ("CCO") has the responsibility for the
implementation and monitoring of our proxy voting policy, practices,
disclosures and record keeping, including outlining our voting guidelines
in our procedures. The Research Assistant is also responsible for voting
ballots for clients that have provided Mazama with voting authority. As
necessary the Research Assistant will consult with Investment Team members
to determine our firm's positions on major corporate issues and other
issues as they appear on ballots.
B-47
Mazama takes an active role in voting proxies on behalf of all accounts
for which the firm has been hired as investment manager, unless proxy
voting responsibility has been retained by the client. Generally, routine
proxies will be voted with management as indicated on the proxy.
Mazama has retained Glass Lewis ("GL"), an expert in the proxy voting and
corporate governance area, to provide proxy advisory and voting services.
These services include in-depth research, analysis, and voting
recommendations as well as vote execution, reporting, auditing and
consulting assistance for the handling of proxy voting responsibility and
corporate governance-related efforts. GL provides administrative
assistance to the proxy voting process by electronically executing the
votes while allowing Mazama to retain voting authority.
VOTING POLICIES
All proxy materials received on behalf of clients are forwarded to Glass
Lewis (GL).
1. Absent material conflicts, the CCO will determine how Mazama should
vote the proxy in accordance with applicable voting guidelines.
2. Proxy ballots for securities no longer held in client accounts will
not be voted.
Mazama generally votes in favor of routine issues. Such issues may include
but are not limited to:
1. Elect directors
2. Appoint auditors
3. Eliminate preemptive rights
4. Increase authorized shares issued
With regard to non-routine issues, Mazama considers many things including,
but not limited to:
1. Management's recommendation;
2. The recommendation of GL; and
3. Mazama's assessment as to what is best for shareholders
With regard to issues which are often included in proxies, Mazama believes
as follows:
EXECUTIVE COMPENSATION
Mazama's goal is to assure that a company's equity-based compensation plan
is aligned with shareholders' long-term interests. While we evaluate most
plans on a case-by case basis, Mazama generally opposes compensation
packages that provide what we view as excessive awards to a few senior
executives or that contain excessively dilutive stock option plans. We
generally oppose plans that give a company the ability to re-price
options.
ANTI-TAKEOVER AND CORPORATE GOVERNANCE ISSUES
Mazama generally opposes anti-takeover measures and other proposals
designed to limit the ability of shareholders to act on possible
transactions. Mazama strongly favors having only independent board members
in all sub-committees (compensation, nominating, audit, etc.) and may vote
against certain board members if they are affiliated with the company and
also members of the sub-committees. When voting on corporate governance
proposals, we will consider the dilutive impact to shareholders and the
effect on shareholder rights.
B-48
SOCIAL AND CORPORATE RESPONSIBILITY ISSUES
Mazama generally votes with a company's management on social issues unless
they have substantial economic implications for the company's business and
operations and have not been adequately addressed by management.
PROCEDURE
Mazama has adopted procedures to implement the firm's policy and reviews
to monitor and ensure the firm's policy is observed, implemented properly
and amended or updated, as appropriate, which include the following:
VOTING PROCEDURES
1. All employees will forward any proxy materials received on behalf of
clients to the CCO;
2. The CCO will determine which client accounts hold the security to
which the proxy relates;
3. Absent material conflicts, the CCO will determine how Mazama should
vote the proxy in accordance with applicable voting guidelines,
complete the proxy and vote the proxy in a timely and appropriate
manner.
DISCLOSURE
1. Mazama will provide conspicuously displayed information in its ADV
Part II summarizing this proxy voting policy and procedures,
including a statement that clients may request information regarding
how Mazama voted a client's proxies, and that clients may request a
copy of these policies and procedures.
2. The Chief Compliance Officer ("CCO") will also send a copy of this
summary to all existing clients who have previously received
Mazama's ADV Part II; or the CCO may send each client the amended
ADV Part II. Either mailing shall highlight the inclusion of
information regarding proxy voting.
CLIENT REQUESTS FOR INFORMATION
1. All client requests for information regarding proxy votes, or
policies and procedures, received by any employee should be
forwarded to the CCO.
2. In response to any request the CCO will generate written reports
using the GL Viewpoint system, and as applicable will include the
name of the issuer, the proposal voted upon, and how Mazama voted
the client's proxy with respect to each proposal about which client
inquired.
B-49
CONFLICTS OF INTEREST
1. Mazama will identify any conflicts that exist between the interests
of the adviser and the client by reviewing the relationship of
Mazama with the issuer of each security to determine if Mazama or
any of its employees has any financial, business or personal
relationship with the issuer.
2. If a material conflict of interest exists, CCO will determine
whether it is appropriate to disclose the conflict to the affected
clients, to give the clients an opportunity to vote the proxies
themselves, or to address the voting issue through other objective
means such as voting in a manner consistent with a predetermined
voting policy or receiving an independent third party voting
recommendation.
3. Mazama will maintain a record of the voting resolution of any
conflict of interest.
RECORDKEEPING
The CCO shall retain the following proxy records in accordance with the
SEC's five-year retention requirement.
1. These policies and procedures and any amendments;
2. A record of each vote that Mazama casts;
3. Any document Mazama created that was material to making a decision
how to vote proxies, or that memorializes that decision;
A copy of each written request from a client for information on how Mazama voted
such client's proxies, and a copy of any written response.
B-50
PART C. OTHER INFORMATION
ITEM 15. INDEMNIFICATION:
Article VII of the Agreement and Declaration of Trust empowers the
Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain circumstances, however, including instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustees, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable in the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS:
(1) CHARTER OF THE REGISTRANT
(a) Registrant's Agreement and Declaration of Trust dated October 25,
1993 is herein incorporated by reference to Exhibit (a)(1) of
Post-Effective Amendment No. 8 to Registrant's Registration
Statement on Form N-1A (File No. 033-70958), filed with the
Securities and Exchange Commission ("SEC") on November 24, 1998.
(b) Certificate of Amendment of Agreement and Declaration of Trust of
Corona Investment Trust dated December 11, 1993 is herein
incorporated by reference to Exhibit (a)(2) of Post-Effective
Amendment No. 8 to Registrant's Registration Statement on Form N-1A
(File No. 033-70958), filed with the SEC on November 24, 1998.
(c) Certificate of Amendment of Agreement and Declaration of Trust and
Certificate of Trust of the Solon Funds dated June 13, 1994 is
herein incorporated by reference to Exhibit (a)(3) of Post-
Effective Amendment No. 8 to Registrant's Registration Statement on
Form N-1A (File No. 033-70958), filed with the SEC on November 24,
1998.
(d) Certificate of Amendment of Agreement and Declaration of Trust dated
November 10, 1997 is herein incorporated by reference to Exhibit
(1)(d) of Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A (File No. 033-70958), filed with
the SEC on December 17, 1997.
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(e) Amended and Restated Agreement and Declaration of Trust dated
October 8, 1998 is herein incorporated by reference to Exhibit
(a)(5) of Post-Effective Amendment No. 8 to Registrant's
Registration Statement on Form N-1A (File No. 033-70958), filed with
the SEC on November 24, 1998.
(f) Certificate and Declaration of Trust dated December 10, 1998 is
herein incorporated by reference to Exhibit (a)(6) of Post-Effective
Amendment No. 10 to Registrant's Registration Statement on Form N-1A
(File No. 033-70958), filed with the SEC on January 27, 1999.
(g) Certificate of Amendment of Amended and Restated Agreement and
Declaration of Trust dated March 24, 2004 is herein incorporated by
reference to Exhibit (a)(7) of Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on May 3, 2004.
(h) Certificate of Amendment of Amended and Restated Agreement and
Declaration of Trust dated November 17, 2006 is herein incorporated
by reference to Exhibit (a)(8) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on February 1, 2007.
(2) BYLAWS OF THE REGISTRANT
Amended and Restated By-Laws of the Trust as revised November 18,
2004 are herein incorporated by reference to Exhibit (b) of
Post-Effective Amendment No. 26 to Registrant's Registration
Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed
with the SEC on April 14, 2005.
(3) VOTING TRUST AGREEMENT
Not Applicable
(4) AGREEMENT AND PLAN OF REORGANIZATION
The Agreement and Plan of Reorganization is herein incorporated by
reference to Exhibit (4) of Form N-14 (File Nos. 333-165902 and
811-08104) filed with the SEC on April 5, 2010.
(5) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Instruments Defining Rights of Security Holders are herein
incorporated by reference to Exhibit (c) of Post-Effective Amendment
No. 34 to Registrant's Registration Statement on Form N-1A (File
Nos. 002-80859 and 811-03651), filed with the SEC on September 19,
2007.
(6) INVESTMENT ADVISORY CONTRACTS
(a) Investment Advisory Agreement between the Registrant and Touchstone
Advisors, Inc. is herein incorporated by reference to Exhibit (6)(a)
of Form N-14 (File Nos. 333-165902 and 811-08104) filed with the SEC
on April 5, 2010.
(b) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Turner
Investment Partners, Inc. dated February 17, 2006 is herein
incorporated by reference to Exhibit (d)(2) of Post- Effective
Amendment No. 28 to Registrant's Registration Statement on Form N-1A
(File Nos. 002-80859 and 811-03651), filed with the SEC on September
21, 2006.
(c)(1) Addendum to Sub-Advisory Agreement between Touchstone Advisors, Inc.
and Turner Investment Partners, Inc. dated April 1, 2007 is herein
incorporated by reference to Exhibit (d)(2)(ii) of Post-Effective
Amendment No. 36 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on February
1, 2008.
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(c)(2) Addendum to Sub-Advisory Agreement between Touchstone Advisors, Inc.
and Turner Investment Partners, Inc. dated July 20, 2007 is herein
incorporated by reference to Exhibit (d)(2)(iii) of Post-Effective
Amendment No. 36 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on February
1, 2008.
(c)(3) Addendum to Sub-Advisory Agreement between Touchstone Advisors, Inc.
and Turner Investment Partners, Inc. dated May 15, 2008 is herein
incorporated by reference to Exhibit (d)(2)(iv) of Post-Effective
Amendment No. 41 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on February
1, 2009.
(d) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Sands
Capital Management dated February 17, 2006 is herein incorporated by
reference to Exhibit (d)(7) of Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A (File Nos.
002-80859 and 811-03651), filed with the SEC on September 21, 2006.
(e) Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Miller/Howard Investments Inc. dated May 20, 2008 is herein
incorporated by reference to Exhibit (d)(6) of Post-Effective
Amendment No. 40 to Registrant's Registration Statement on Form N-1A
(File Nos. 002-80859 and 811-03651), filed with the SEC on September
15, 2008.
(f) Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Navellier & Associates, Inc. dated September 29, 2008 is herein
incorporated by reference to Exhibit (d)(8) of Post-Effective
Amendment No. 41 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on February
1, 2009.
(g) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Fort
Washington Investment Advisors, Inc. dated February 20, 2009 is
herein incorporated by reference to Exhibit (d)(9) of Post-Effective
Amendment No. 43 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on May 4,
2009.
(h) Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Longfellow Investment Management Co. LLC dated February 19, 2009 is
herein incorporated by reference to Exhibit (d)(10) of
Post-Effective Amendment No. 43 to Registrant's Registration
Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed
with the SEC on May 4, 2009.
(i) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Milne
LLC (d/b/a JK Milne Asset Management) dated April 22, 2009 is herein
incorporated by reference to Exhibit (d)(10) of Post-Effective
Amendment No. 46 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on July 13,
2009.
(j) Sub-Advisory Agreement between Touchstone Advisors, Inc. and AGF
Investments America, Inc. dated October 1, 2009 is herein
incorporated by reference to Exhibit (d)(9) of Post-Effective
Amendment No. 48 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on October
15, 2009.
(k) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Farr,
Miller & Washington LLC dated October 1, 2009 is herein incorporated
by reference to Exhibit (d)(12) of Post-Effective Amendment No. 47
to Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on September 30, 2009.
(l) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Lee
Munder Investments, Ltd. dated October 1, 2009 is herein
incorporated by reference to Exhibit (d)(13) of Post-Effective
Amendment No. 47 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on September
30, 2009.
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(m) Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Cornerstone Real Estate Advisers LLC dated October 1, 2009 is herein
incorporated by reference to Exhibit (d)(14) of Post-Effective
Amendment No. 47 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on September
30, 2009.
(n) Sub-Advisory Agreement between Touchstone Advisors, Inc. and EARNEST
Partners LLC dated October 1, 2009 is herein incorporated by
reference to Exhibit (d)(15) of Post-Effective Amendment No. 47 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on September 30, 2009.
(o) Sub-Advisory Agreement between Touchstone Advisors, Inc. and London
Company of Virginia dated October 1, 2009 is herein incorporated by
reference to Exhibit (d)(16) of Post-Effective Amendment No. 47 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on September 30, 2009.
(p) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Bedlam
Asset Management PLC dated October 1, 2009 is herein incorporated by
reference to Exhibit (d)(17) of Post-Effective Amendment No. 47 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on September 30, 2009.
(q) Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Aronson+Johnson+Ortiz dated October 1, 2009 is herein incorporated
by reference to Exhibit (d)(18) of Post-Effective Amendment No. 47
to Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on September 30, 2009.
(r) Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Bradford & Marzec LLC dated October 1, 2009 is herein incorporated
by reference to Exhibit (d)(19) of Post-Effective Amendment No. 47
to Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on September 30, 2009.
(s) Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Augustus Asset Managers Limited dated October 1, 2009 is herein
incorporated by reference to Exhibit (d)(18) of Post-Effective
Amendment No. 48 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on October
15, 2009.
(t) Sub-Advisory Agreement between Touchstone Advisors, Inc. and Fort
Washington Investment Advisors, Inc. dated December 31, 2009 is
herein incorporated by reference to Exhibit (d)(19) of
Post-Effective Amendment No. 50 to Registrant's Registration
Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed
with the SEC on December 28, 2009.
(u) Form of Sub-Advisory Agreement between Touchstone Advisors, Inc. and
Mazama Capital Management, Inc. is herein incorporated by reference
to Exhibit (6)(u) of Form N-14 (File Nos. 333-165902 and 811-08104)
filed with the SEC on April 5, 2010.
(7) UNDERWRITING AND DISTRIBUTION CONTRACTS
(a) Distribution Agreement between the Registrant and Touchstone
Advisors, Inc. is herein incorporated by reference to Exhibit (e)(1)
of Post-Effective Amendment No. 28 to Registrant's Registration
Statement on Form N-1A (File Nos. 002-80859 and 811-03651), filed
with the SEC on September 21, 2006.
(b) Form of Underwriter's Dealer Agreement is herein incorporated by
reference to Exhibit (e)(2) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A (File Nos.
002-80859 and 811-03651), filed with the SEC on February 1, 2007.
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(8) BONUS OR PROFIT SHARING PLAN
Touchstone Trustee Deferred Compensation Plan is herein incorporated
by reference to Exhibit (f) of Post-Effective Amendment No. 51 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on January 28, 2010.
(9) CUSTODIAN AGREEMENTS
Custodian Agreement between the Registrant and Brown Brother
Harriman & Co. dated February 25, 2008 is herein incorporated by
reference to Exhibit (g) of Post-Effective Amendment No. 41 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on February 1, 2009.
(10) RULE 12B-1 PLAN AND RULE 18F-3 PLAN
(a) Distribution and Shareholder Services Plan for Class A Shares is
herein incorporated by reference to Exhibit (10)(a) of Form N-14
(File Nos. 333-165902 and 811-08104) filed with the SEC on April 5,
2010.
(b) Distribution and Shareholder Services Plan for Class C Shares is
herein incorporated by reference to Exhibit (10)(b) of Form N-14
(File Nos. 333-165902 and 811-08104) filed with the SEC on April 5,
2010.
(c) Shareholder Services Plan for Class Z Shares is herein incorporated
by reference to Exhibit (m)(3) of Post-Effective Amendment No. 41 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on February 1, 2009.
(d) Amended and Restated Rule 18f-3 Multiple Class Plan is herein
incorporated by reference to Exhibit (n)(1) of Post-Effective
Amendment No. 47 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on September
30, 2009.
(11) AN OPINION AND CONSENT OF COUNSEL (AS TO LEGALITY OF SECURITIES
BEING REGISTERED)
Opinion and Consent of Pepper Hamilton LLP, as to legality of
securities being registered, is herein incorporated by reference to
Exhibit (11) of Form N-14 (File Nos. 333-165902 and 811-08104) filed
with the SEC on April 5, 2010.
(12) AN OPINION AND CONSENT OF COUNSEL (AS TO CERTAIN TAX CONSEQUENCES)
Form of Tax Opinion is herein incorporated by reference to Exhibit
(12) of Form N-14 (File Nos. 333-165902 and 811-08104) filed with
the SEC on April 5, 2010.
(13) OTHER MATERIAL CONTRACTS OF THE REGISTRANT
(a) Form of Amended Administration Agreement between the Registrant
and Touchstone Advisors, Inc. is herein incorporated by reference to
Exhibit (h)(1) of Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A (File Nos. 002-80859 and
811-03651), filed with the SEC on February 1, 2007.
(b) Amended Sub-Administration Agreement between Touchstone Advisors,
Inc. and JPMorgan Chase Bank, N.A. is herein incorporated by
reference to Exhibit (h)(2) of Post-Effective Amendment No. 47 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on September 30, 2009.
(c) Addendum to Amended Sub-Administration Agreement between Touchstone
Advisors, Inc. and JPMorgan Chase Bank, N.A. is herein incorporated
by reference to Exhibit (h)(4) of Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A (File Nos.
033-70958 and 811-08104), filed with the SEC on February 1, 2008.
5
(d) Transfer Agency Agreement between the Registrant and JPMorgan Chase
Bank N.A. (fka Integrated Investment Services, Inc.) is herein
incorporated by reference to Exhibit (h)(4) of Post-Effective
Amendment No. 47 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on September
30, 2009.
(e) Addendum to Transfer Agency Agreement between the Registrant and
JPMorgan Chase Bank, N.A. is herein incorporated by reference to
Exhibit (h)(6) of Post-Effective Amendment No. 36 to Registrant's
Registration Statement on Form N-1A (File Nos. 033-70958 and
811-08104), filed with the SEC on February 1, 2008.
(f) Amended Compliance Services Agreement among the Registrant,
Touchstone Strategic Trust, Touchstone Investment Trust, Touchstone
Tax-Free Trust, Touchstone Variable Series Trust, Touchstone
Institutional Funds Trust and JPMorgan Chase Bank, N.A. is herein
incorporated by reference to Exhibit (h)(8) of Post-Effective
Amendment No. 36 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on February
1, 2008.
(g) Fidelity Bond Allocation Agreement dated April 1, 2009 is herein
incorporated by reference to Exhibit (h)(7) of Post-Effective
Amendment No. 51 to Registrant's Registration Statement on Form N-1A
(File Nos. 033-70958 and 811-08104), filed with the SEC on January
28, 2010
(h) Expense Limitation Agreement is herein incorporated by reference to
Exhibit (13(h) of Form N-14 (File Nos. 333-165902 and 811-08104)
filed with the SEC on April 5, 2010.
(i) Expense Limitation Agreement with regards to the Sands Capital
Select Growth Fund is herein incorporated by reference to Exhibit
(h)(9) of Post-Effective Amendment No. 41 to Registrant's
Registration Statement on Form N-1A (File Nos. 033-70958 and
811-08104), filed with the SEC on February 1, 2009.
(14) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Consent of Ernst & Young is filed herewith.
(15) OMITTED FINANCIAL STATEMENT
Not Applicable.
(16) POWERS OF ATTORNEY
Powers of Attorney for Phillip R. Cox, H. Jerome Lerner, Donald C.
Siekmann, Susan J. Hickenlooper and John P. Zannotti are herein
incorporated by reference to Exhibit (16) of Form N-14 (File Nos.
333-165902 and 811-08104) filed with the SEC on April 5, 2010.
(17) ADDITIONAL EXHIBITS
Not Applicable.
ITEM 17. UNDERTAKINGS:
(1) The undersigned registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act of 1933, as amended (the
"1933 Act"), the reoffering prospectus will contain the information called for
by the applicable registration form for the reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
6
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each post-effective amendment
shall be deemed to be a new registration statement for the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of them.
(3) The undersigned registrant agrees that it shall file a final executed
version of the legal and consent opinion as to tax matters as an exhibit to the
subsequent post-effective amendment to its registration statement on Form N-14
filed with the SEC upon the closing of the reorganization contemplated by this
registration statement on Form N-14.
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SIGNATURES
As required by the Securities Act of 1933, this registration statement on Form
N-14 has been signed on behalf of the registrant, in the City of Cincinnati and
State of Ohio, on the 27th day of July, 2010.
TOUCHSTONE FUNDS GROUP TRUST
By: /s/ Jill T. McGruder
--------------------------------------
Jill T. McGruder
President
As required by the Securities Act of 1933, this Registration Statement on Form
N-14 has been signed by the following persons in the capacities and on the dates
indicated.
* Trustee July 27, 2010
----------------------------
Phillip R. Cox
* Trustee July 27, 2010
----------------------------
Donald C. Siekmann
* Trustee July 27, 2010
----------------------------
H. Jerome Lerner
* Trustee July 27, 2010
----------------------------
John P. Zanotti
* Trustee July 27, 2010
----------------------------
Susan J. Hickenlooper
/s/ Jill T. McGruder Trustee and July 27, 2010
---------------------------- President
Jill T. McGruder
/s/ Terrie A. Wiedenheft Controller, July 27, 2010
---------------------------- Treasurer and
Terrie A. Wiedenheft Principal Financial
Officer
* By: /s/ Jay S. Fitton
----------------------
Jay S. Fitton
(Attorney-in-Fact Pursuant to Power of Attorney)
8
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
(14) Consent of Ernst & Young is filed herewith.
9