Form 485BPOS FundX Investment Trust
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Filed with the U.S. Securities and Exchange Commission on January 26, 2023
1933 Act Registration File No. 333-194652
1940 Act File No. 811- 22951
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | [ | X | ] | ||||||||||||||
| Pre-Effective Amendment No. | [ | ] | |||||||||||||||
| Post-Effective Amendment No. | 29 | [ | X | ] | |||||||||||||
and/or
| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | [ | X | ] | ||||||||||||||
| Amendment No. | 30 | [ | X | ] | |||||||||||||
(Check appropriate box or boxes.)
(Exact Name of Registrant as Specified in Charter)
2020 East Financial Way, Suite 100
Glendora, CA 91741
(Address of Principal Executive Offices, including Zip Code)
Registrant’s Telephone Number, including Area Code: (626) 914-7363
| Jeff Smith | ||
| FundX Investment Group | ||
| 101 Montgomery Street, Suite 2400 | ||
| San Francisco, CA 94104 | ||
(Name and Address of Agent for Service)
Copy to:
| Steven G. Cravath, Esq. | ||
| Cravath & Associates, LLC | ||
| 19809 Shady Brook Way | ||
| Gaithersburg, MD 20879 | ||
It is proposed that this filing will become effective (check appropriate box)
| [ | ] | immediately upon filing pursuant to paragraph (b) | |||||||||
| [ | X | ] | On January 30, 2023 pursuant to paragraph (b) | ||||||||
| [ | ] | 60 days after filing pursuant to paragraph (a)(1) | |||||||||
| [ | ] | on (date) pursuant to paragraph (a)(1) | |||||||||
| [ | ] | 75 days after filing pursuant to paragraph (a)(2) | |||||||||
| [ | ] | on (date) pursuant to paragraph (a)(2) of Rule 485. | |||||||||
If appropriate, check the following box:
| [ | ] | This post-effective amendment designates a new effective date for a previously filed post- effective amendment. | |||||||||
Explanatory Note: This Post-Effective Amendment No. 29 to the Registration Statement of the FundX Investment Trust (the “Trust”) to update certain information contained in the prospectus (Part A) and statement of additional information (Part B) relating to the series of the Trust.
One Capital Management, LLC
FundX Flexible Income Fund – INCMX
FundX Conservative Upgrader Fund – RELAX
FundX Sustainable Impact Fund - SRIFX
PROSPECTUS
These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
SUMMARY SECTION This important section summarizes the Funds’ investments, risks, fees and past performance. | ||||||||||||||
MORE ABOUT THE FUNDS’ INVESTMENT OBJECTIVES, STRATEGIES AND RISKS This section provides details about the Funds’ investment strategies and risks. | ||||||||||||||
MANAGEMENT OF THE FUNDS Review this section for information about the organizations and people who oversee the Funds. | ||||||||||||||
SHAREHOLDER INFORMATION This section explains how shares are valued and how to purchase and sell shares. | ||||||||||||||
DISTRIBUTIONS AND TAXES This section generally describes when you may receive dividend distributions and the tax consequences. | ||||||||||||||
FINANCIAL HIGHLIGHTS Review this section for details on selected financial statements of the Funds. | ||||||||||||||
SUMMARY SECTION
| FundX Flexible Income Fund | |||||
| Maximum Sales Charge (Load) Imposed on Purchases | |||||
| Maximum Deferred Sales Charge (Load) | |||||
| Redemption Fee | |||||
| Exchange Fee | |||||
| Maximum Account Fee | |||||
Annual Fund Operating Expenses(1) (expenses that you pay each year as a percentage of the value of your investment) | |||||
| Management Fee | % | ||||
| Distribution (Rule 12b-1) Fees | |||||
| Other Expenses | % | ||||
Acquired Fund (Underlying Fund) Fees and Expenses(2) | % | ||||
| Total Annual Fund Operating Expenses | % | ||||
| Expense Reduction/Reimbursement | - | % | |||
Total Annual Fund Operating Expenses After Expense Reduction/Reimbursement(3) | % | ||||
(1)One Capital Management, LLC (the “Advisor”) has contractually agreed to reduce its fees and/or pay the Flexible Income Fund’s expenses (excluding Acquired Fund Fees and Expenses, interest expense in connection with investment activities, taxes and extraordinary expenses) in order to limit Total Annual Fund Operating Expenses After Expense Reduction/Reimbursement for shares of the Flexible Income Fund to 0.99% of the Fund’s average net assets (the “Expense Cap”). The Expense Cap will remain in effect at least until January 31, 2024 . A reimbursement may be requested by the Advisor for fee reductions and/or expense payments made within the prior three years if the aggregate amount actually paid by the Fund toward operating expenses for such period (taking into account any reimbursement) does not exceed the lesser of the Expense Cap in place at the time of waiver or at the time of reimbursement. To the extent that the Fund incurs expenses excluded from the Expense Cap, net operating expenses of the Fund may be higher than the Expense Cap. The Expense Cap may be terminated at any time after January 31, 2024, by the Trust’s Board of Trustees upon 60-day notice to the Advisor, or by the Advisor with the consent of the Board.
(2)The Total Annual Fund Operating Expenses for the Fund do not correlate to the Ratio of Expenses to Average Net Assets provided in the Financial Highlights section of the statutory prospectus, which reflects the operating expenses of the Fund and does not include Acquired Fund Fees and Expenses.
(3)Additionally, U.S. Bank Global Fund Services rebates a portion of fees from certain Underlying Funds for processing transactions. If such amounts were reflected in this table, the Total Annual Fund Operating Expenses would have been 0.08%.
1 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||
FundX Flexible Income Fund | $ | $ | $ | $ | ||||||||||
The Flexible Income Fund is a fund-of-funds and as such invests primarily in no-load and load-waived mutual funds, including ETFs (“Underlying Funds”). The Underlying Funds, in turn, invest primarily in individual securities such as common stocks and corporate or government bonds.
| Because markets change, the Advisor actively manages the Fund’s portfolio using a proprietary investment strategy called Upgrading, which seeks to capture global market trends. The Advisor invests in the Underlying Funds that it considers to be in sync with current market leadership. The Advisor sells an Underlying Fund when it believes that the Underlying Fund is no longer performing in sync with current market leadership or if a new Underlying Fund is judged more attractive than a current holding. | ||||||||||||||
| Upgrading | ||||||||||||||
When a fund begins to lag its peers, the Advisor redeems the shares and directs the proceeds to a better performing alternative. The Advisor classifies the pool of Underlying Funds into five risk/return categories: 1.Sector Equity Underlying Funds 2.Aggressive Equity Underlying Funds 3.Core Equity Underlying Funds 4.Total Return Underlying Funds 5.Bond Underlying Funds | ||||||||||||||
| Under normal market conditions, the Flexible Income Fund will invest predominately in Bond Underlying Funds of varying maturity, credit | ||||||||||||||
| quality (including high-yield securities, or “junk bonds”) and regional exposure. The Fund attempts to take advantage of bond market leadership trends by targeting those areas of the bond market that are excelling in the current market environment. The Fund aims to control downside risk by limiting exposure to more volatile areas of the bond market. The Flexible Income Fund may purchase, without limit, shares of Underlying Funds that invest in domestic and international corporate or government bonds. | ||||||||||||||
To a lesser extent the Flexible Income Fund may also invest a portion of its assets in Total Return Underlying Funds, which may employ a wide variety of investment strategies, including blending equity securities with fixed income instruments, and techniques designed to provide steady returns with dampened volatility, such as market neutral, long/short, and arbitrage strategies. Because Total Return Underlying Funds are not fully invested in bonds, these funds typically have less credit and interest rate risk.
Flexible Income Depending on the Advisor’s perception of the bond market, the Fund will shift among bond funds of varying maturity, credit quality and regional exposure. | See “More about the Funds’ Investment Objectives, Strategies and Risks – The Advisor’s Process for Classifying the Underlying Funds” for more information on this system. | |||||||
2 | ||||||||
An investment in the Flexible Income Fund entails risk. The Flexible Income Fund cannot guarantee that it will meet its investment objective. Since the price of the Underlying Funds that the Flexible Income Fund holds may fluctuate, the value of your investment may fluctuate and you could lose all or a portion of your investment in the Flexible Income Fund. The following risks could affect the value of your investment:
•General Market Risk – General market risk is the risk that the value of a Fund’s shares will fluctuate based on the performance of the securities held by the Underlying Funds it owns. These fluctuations may cause a security to be worth less than its cost when originally purchased or less than it was worth at an earlier time.
•Management Risk – Management risk describes the Flexible Income Fund’s ability to meet its investment objective based on the Advisor’s success or failure to implement investment strategies for the Flexible Income Fund.
•Foreign Securities Risk – The Underlying Funds held by the Flexible Income Fund may have significant investments in foreign securities. Foreign securities risk entails risk relating to political, social and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices.
•Leverage Risk – Some Underlying Funds may borrow money for leveraging and will incur interest expense. Leverage is investment exposure which exceeds the initial amount invested. Leverage can cause the portfolio to lose more than the principal amount invested. Leverage can magnify the portfolio’s gains and losses and therefore increase its volatility.
•Interest Rate and Credit Risk – Interest rates may rise resulting in a decrease in the value of the securities held by the Underlying Funds or may fall resulting in an increase in the value of such securities. There is the possibility of heightened volatility, reduced liquidity and valuation difficulties that may impact fixed income markets.
•High-Yield Securities (Junk Bond) Risk – The value of fixed-income securities held by the Underlying Funds that are rated below investment grade are subject to additional risk factors such as increased possibility of default, illiquidity of the security and changes in value based on public perception of the issuer. High-Yield Securities are speculative and issuers of high yield securities may have reduced capacity to repay interest and principal.
•ETF Trading Risk – Because the Flexible Income Fund invests in ETFs, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a discount to its net asset value (“NAV”), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which the ETFs trade, which may impact a Fund’s ability to sell its shares of an ETF.
•Portfolio Turnover Risk – To the extent the Flexible Income Fund invests in ETFs, it may be subject to the risks of having a high portfolio turnover rate. High portfolio turnover involves correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities.
•Upgrading Strategy Risk – The Flexible Income Fund employs an Upgrading strategy whereby it continually seeks to invest in the top-performing securities at a given time. When investment decisions are based on near-term performance, however, the Flexible Income Fund may be exposed to the risk of buying Underlying Funds immediately following a sudden, brief surge in performance that may be followed by a subsequent drop in market value.
•Underlying Funds Risk – The risks associated with the Flexible Income Fund include the risks related to each Underlying Fund in which the Flexible Income Fund invests. Although the Flexible Income Fund seeks to reduce the risk of your investment by diversifying among mutual funds and ETFs that invest in bonds and, in some cases, stocks, there are inherent risks of investing in various asset classes. The Fund must also pay its pro rata portion of an investment company’s fees and expenses.
•Market Events Risk. Local, regional, or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a significant impact on the market generally and on specific securities. Periods of market volatility may occur in
3 | ||||||||
FundX Flexible Income Fund – INCMX
Calendar Year Total Return as of December 31
| Best and Worst Quarters | ||||||||
| - | ||||||||
4 | ||||||||
| 1 Year | 5 Years | 10 Years | |||||||||
| FundX Flexible Income Fund – INCMX | |||||||||||
| - | - | ||||||||||
| - | - | ||||||||||
| - | - | ||||||||||
| - | |||||||||||
Investment Advisor
One Capital Management, LLC is the investment advisor to the Flexible Income Fund.
Portfolio Managers
| Name | Title | Managed the Fund Since | ||||||
| Janet Brown | Portfolio Manager | 2002 (the Fund’s inception) | ||||||
| Martin DeVault | Portfolio Manager | 2002 (the Fund’s inception) | ||||||
| Sean McKeon | Portfolio Manager | 2002 (the Fund’s inception) | ||||||
Purchase and Sale of Fund Shares
You may purchase, exchange or redeem Flexible Income Fund shares on any business day by written request via mail (FundX Flexible Income Fund, c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701), by wire transfer, by telephone at 1-866-455-FUND [3863], or through a financial intermediary. Purchases and redemptions by telephone are only permitted if you previously established these options on your account. The minimum initial and subsequent investment amounts are shown in the table below.
5 | ||||||||
Minimum Investments
To Open Your Account | To Add to Your Account | |||||||
| Regular Accounts | $1,000 | $100 | ||||||
| Retirement Accounts | $1,000 | $100 | ||||||
| Automatic Investment Accounts | $500 | $100 | ||||||
Tax Information
The FundX Flexible Income Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Tax-deferred arrangements may be taxed later upon withdrawal of monies from those accounts.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Flexible Income Fund through a broker-dealer or other financial intermediary (such as a bank), the Flexible Income Fund may pay for account servicing and the Advisor may pay the intermediary for the sale of Flexible Income Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Flexible Income Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
6 | ||||||||
SUMMARY SECTION
| FundX Conservative Upgrader Fund | |||||
| Maximum Sales Charge (Load) Imposed on Purchases | |||||
| Maximum Deferred Sales Charge (Load) | |||||
| Redemption Fee | |||||
| Exchange Fee | |||||
| Maximum Account Fee | |||||
Annual Fund Operating Expenses(1) (expenses that you pay each year as a percentage of the value of your investment) | |||||
| Management Fee | % | ||||
| Distribution (Rule 12b-1) Fees | |||||
| Other Expenses | % | ||||
Acquired Fund (Underlying Fund) Fees and Expenses(2) | % | ||||
Total Annual Fund Operating Expenses(3) | % | ||||
(1)One Capital Management, LLC (the “Advisor”) has contractually agreed to reduce its fees and/or pay the Conservative Upgrader Fund’s expenses (excluding Acquired Fund Fees and Expenses, interest expense in connection with investment activities, taxes and extraordinary expenses) in order to limit Total Annual Fund Operating Expenses After Expense Reduction/Reimbursement for shares of the Conservative Upgrader Fund to 1.35% of the Fund’s average net assets (the “Expense Cap”). The Expense Cap will remain in effect at least until January 31, 2024 . A reimbursement may be requested by the Advisor for fee reductions and/or expense payments made within the prior three years if the aggregate amount actually paid by the Fund toward operating expenses for such period (taking into account any reimbursement) does not exceed the lesser of the Expense Cap in place at the time of waiver or at the time of reimbursement. To the extent that the Fund incurs expenses excluded from the Expense Cap, net operating expenses of the Fund may be higher than the Expense Cap. The Expense Cap may be terminated at any time after January 31, 2024, by the Trust’s Board of Trustees upon 60-day notice to the Advisor, or by the Advisor with the consent of the Board.
(2)The Total Annual Fund Operating Expenses for the Fund do not correlate to the Ratio of Expenses to Average Net Assets provided in the Financial Highlights section of the statutory prospectus, which reflects the operating expenses of the Fund and does not include Acquired Fund Fees and Expenses.
(3)Additionally, U.S. Bank Global Fund Services rebates a portion of fees from certain Underlying Funds for processing transactions. If such amounts were reflected in this table, the Total Annual Fund Operating Expenses After Expense Reduction/Reimbursement would have been 0.05%.
7 | ||||||||
| 1 Year | 3 Years | 5 Years | 10 Years | |||||||||||
FundX Conservative Upgrader Fund | $ | $ | $ | $ | ||||||||||
The Conservative Fund is a fund-of-funds and as such invests primarily in no-load and load-waived mutual funds, including ETFs (“Underlying Funds”). The Underlying Funds, in turn, invest primarily in individual securities such as common stocks and corporate or government bonds.
| Because markets change, the Advisor actively manages the Fund’s portfolio using a proprietary investment strategy called Upgrading, which seeks to capture global market trends. The Advisor invests in the Underlying Funds that it considers to be in sync with current market leadership. The Advisor sells an Underlying Fund when it believes that the Underlying Fund is no longer performing in sync with current market leadership or if a new Underlying Fund is judged more attractive than a current holding. | Upgrading | |||||||||||||
When a fund begins to lag its peers, the Advisor redeems the shares and directs the proceeds to a better performing alternative. The Advisor classifies the pool of Underlying Funds into five risk/return categories: 1.Sector Equity Underlying Funds 2.Aggressive Equity Underlying Funds 3.Core Equity Underlying Funds 4.Total Return Underlying Funds 5.Bond Underlying Funds | ||||||||||||||
| Under normal market conditions, the Conservative Fund may invest in Core Equity Underlying Funds, which generally invest in diversified | ||||||||||||||
| portfolios of equity securities of well-established U.S. and foreign companies with a wide range of market capitalizations. Core Equity Underlying Funds may also invest in fixed income securities. Core Equity Underlying Funds allow the Fund to participate in broad stock market leadership trends, such as the rotation between growth and value stocks, large- and small-cap stocks, and international and domestic stocks. The Conservative Fund may purchase, without limit, shares of Underlying Funds that invest in domestic, international and global securities. | ||||||||||||||
The Conservative Fund may also invest in Total Return and Bond Underlying Funds which are less aggressive. Total Return Underlying Funds may employ a wide variety of investment strategies, including blending equity securities with fixed income instruments, and techniques designed to provide steady returns with dampened volatility, such as market neutral, long/short, and arbitrage strategies. Because Total Return Underlying Funds are not fully invested in bonds, these funds typically have less credit and interest-rate risk. Bond Underlying Funds invest in fixed income securities of varying maturity, credit quality (including high-yield securities, or “junk bonds”) and regional exposure. The Fund attempts to take advantage of bond market leadership trends by targeting those areas of the bond market that are excelling in the current market environment. The Conservative Fund aims to control downside risk by limiting exposure to more volatile areas of the bond market. Investments in Total Return and Bond Underlying Funds are intended to reduce the risk and potential volatility of the Core Equity Underlying Funds, although there can be no assurance that Bond Underlying Funds will be able to moderate risk in this manner. Bond Underlying Funds attempt to cushion stock market volatility.
8 | ||||||||
An investment in the Conservative Fund entails risk. The Conservative Fund cannot guarantee that it will meet its investment objective. Since the price of the Underlying Funds that the Conservative Fund holds may fluctuate, the value of your investment may fluctuate and you could lose all or a portion of your investment in the Conservative Fund. The following risks could affect the value of your investment:
•General Market Risk – General market risk is the risk that the value of a Fund’s shares will fluctuate based on the performance of the securities held by the Underlying Funds it owns. These fluctuations may cause a security to be worth less than its cost when originally purchased or less than it was worth at an earlier time.
•Management Risk – Management risk describes the Conservative Fund’s ability to meet its investment objective based on the Advisor’s success or failure to implement investment strategies for the Conservative Fund.
•Foreign Securities Risk – The Underlying Funds held by the Conservative Fund may have significant investments in foreign securities. Foreign securities risk entails risk relating to political, social and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices.
•Leverage Risk – Some Underlying Funds may borrow money for leveraging and will incur interest expense. Leverage is investment exposure which exceeds the initial amount invested. Leverage can cause the portfolio to lose more than the principal amount invested. Leverage can magnify the portfolio’s gains and losses and therefore increase its volatility.
•Small Company Risk – The Underlying Funds may invest in securities of small companies, which involves greater volatility than investing in larger and more established companies.
•Sector Emphasis Risk – Some of the Underlying Funds may have particular emphasis in one or more sectors, subjecting that Underlying Fund to sector emphasis risk. Sector emphasis risk is the possibility that a certain sector may underperform other sectors or the market as a whole.
•Interest Rate and Credit Risk – Interest rates may rise resulting in a decrease in the value of the securities held by the Underlying Funds or may fall resulting in an increase in the value of such securities.
•High-Yield Securities (Junk Bond) Risk – The value of fixed-income securities held by the Underlying Funds that are rated below investment grade are subject to additional risk factors such as increased possibility of default, illiquidity of the security and changes in value based on public perception of the issuer. High-Yield Securities are speculative and issuers of high yield securities may have reduced capacity to repay interest and principal.
•ETF Trading Risk – Because the Conservative Fund invests in ETFs, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a discount to its net asset value (“NAV”), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which the ETFs trade, which may impact a Fund’s ability to sell its shares of an ETF.
•Portfolio Turnover Risk – To the extent the Conservative Fund invests in ETFs, it may be subject to the risks of having a high portfolio turnover rate. High portfolio turnover involves correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities.
•Upgrading Strategy Risk – The Conservative Fund employs an Upgrading strategy whereby it continually seeks to invest in the top-performing securities at a given time. When investment decisions are based on near-term performance, however, the Conservative Fund may be exposed to the risk of buying Underlying Funds immediately following a sudden, brief surge in performance that may be followed by a subsequent drop in market value.
•Underlying Funds Risk – The risks associated with the Conservative Fund include the risks related to each Underlying Fund in which the Conservative Fund invests. Although the Conservative Fund seeks to reduce the risk of your investment by diversifying among mutual funds and ETFs that invest in stocks and, in some cases, bonds, there are inherent risks of investing in various asset classes. The Fund must also pay its pro rata portion of an investment company’s fees and expenses.
9 | ||||||||
10 | ||||||||
FundX Conservative Upgrader Fund - RELAX
Calendar Year Total Return as of December 31
| Best and Worst Quarters | ||||||||
| - | ||||||||
| 1 Year | 5 Years | 10 Years | |||||||||
| FundX Conservative Upgrader Fund – RELAX | |||||||||||
| - | |||||||||||
| - | |||||||||||
| - | |||||||||||
| - | |||||||||||
| - | |||||||||||
| - | |||||||||||
| - | |||||||||||
*The inception date of the Morningstar Global Markets Large-Mid Cap Index is November 15, 2016, and the performance inception date of the index is June 30, 1998. Returns prior to the inception date have been synthetically calculated by the index provider.
11 | ||||||||
Investment Advisor
One Capital Management, LLC is the investment advisor to the Conservative Fund.
Portfolio Managers
| Name | Title | Managed the Fund Since | ||||||
| Janet Brown | Portfolio Manager | 2002 (the Fund’s inception) | ||||||
| Martin DeVault | Portfolio Manager | 2002 (the Fund’s inception) | ||||||
| Sean McKeon | Portfolio Manager | 2002 (the Fund’s inception) | ||||||
Purchase and Sale of Fund Shares
You may purchase, exchange or redeem Conservative Fund shares on any business day by written request via mail (FundX Conservative Upgrader Fund, c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701), by wire transfer, by telephone at 1-866-455-FUND [3863], or through a financial intermediary. Purchases and redemptions by telephone are only permitted if you previously established these options on your account. The minimum initial and subsequent investment amounts are shown in the table below.
Minimum Investments
To Open Your Account | To Add to Your Account | |||||||
| Regular Accounts | $1,000 | $100 | ||||||
| Retirement Accounts | $1,000 | $100 | ||||||
| Automatic Investment Accounts | $500 | $100 | ||||||
Tax Information
The Conservative Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Tax-deferred arrangements may be taxed later upon withdrawal of monies from those accounts.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Conservative Fund through a broker-dealer or other financial intermediary (such as a bank), the Conservative Fund may pay for account servicing and the Advisor may pay the intermediary for the sale of Conservative Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Conservative Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
12 | ||||||||
SUMMARY SECTION
| FundX Sustainable Impact Fund | |||||
| Maximum Sales Charge (Load) Imposed on Purchases | |||||
| Maximum Deferred Sales Charge (Load) | |||||
| Redemption Fee | |||||
| Exchange Fee | |||||
| Maximum Account Fee | |||||
Annual Fund Operating Expenses(2) (expenses that you pay each year as a percentage of the value of your investment) | |||||
| Management Fee | % | ||||
| Distribution (Rule 12b-1) Fees | |||||
Other Expenses(1) | % | ||||
Acquired Fund (Underlying Fund) Fees and Expenses(1) | % | ||||
| Total Annual Fund Operating Expenses | % | ||||
| Fee Waiver and/or Expense Reimbursement | - | % | |||
Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement(3) | % | ||||
(1)Other Expenses and Acquired Fund (Underlying Fund) Fees and Expenses are based on estimated amounts for the current fiscal year.
(2)One Capital Management, LLC (the “Advisor”) has contractually agreed to reduce its fees and/or pay the Sustainable Impact Fund’s expenses (excluding Acquired Fund Fees and Expenses, taxes and extraordinary expenses) in order to limit Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement for shares of the Sustainable Impact Fund to 1.35% of the Sustainable Impact Fund’s average net assets (the “Expense Cap”). The Expense Cap will remain in effect at least until January 31, 2024 . A reimbursement may be requested by the Advisor for fee reductions and/or expense payments made within the prior three years if the aggregate amount actually paid by the Sustainable Impact Fund toward operating expenses for such period (taking into account any reimbursement) does not exceed the lesser of the Expense Cap in place at the time of waiver or at the time of reimbursement. To the extent that the Sustainable Impact Fund incurs expenses excluded from the Expense Cap, net operating expenses of the Sustainable Impact Fund may be higher than the Expense Cap. The Expense Cap may be terminated at any time after January 31, 2024, by the Trust’s Board of Trustees upon 60-day notice to the Advisor, or by the Advisor with the consent of the Board.
(3)Additionally, U.S. Bank Global Fund Services rebates a portion of fees from certain Underlying Funds for processing transactions. If such amounts were reflected in this table, the Total Annual Fund Operating Expenses After Expense Reduction/Reimbursement would have been 0.04%.
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||
FundX Sustainable Impact Fund | $ | $ | $ | $ | ||||||||||
13 | ||||||||
The Sustainable Impact Fund is a fund-of-funds, which invests in mutual funds and ETFs (“Underlying Funds”). Sustainable impact investing incorporates non-financial performance indicators that measure a company’s management of risks associated with environmental sustainability, social concerns, and corporate governance (“ESG Factors”) in an effort to generate long-term competitive investment performance and positive societal impact. These ESG Factors include, but are not limited to:
| Environmental | Social | Governance | ||||||
1.climate change 2.carbon footprint 3.resource exploitation 4.pollution and waste 5.deforestation 6.water usage 7.renewable energy 8.conservation | 1.working conditions, wage policies 2.corporate diversity policies 3.racial and gender diversification 4.human rights and child labor policies 5.employee relations 6.effect on local communities 7.health and safety | 1.executive pay 2.accountability 3.bribery and corruption 4.political lobbying and donations 5.board diversity and structure 6.tax strategies | ||||||
The Sustainable Impact Fund seeks to invest substantially all and, under normal circumstances, at least 80% of its net assets, plus borrowings for investment purposes, in sustainable impact investments. Sustainable impact investments are the following:
•Underlying Funds that self-identify as socially responsible impact (“SRI”) funds or environmental, social and governance (“ESG”) funds (collectively, “ESG Funds”); and
•Underlying Funds that have a better-than-average Portfolio Sustainability Rating (“Sustainability Rating”), as calculated by Morningstar, as described below.
ESG Funds
The Advisor employs a process of assessing Underlying Funds that self-identify as ESG Funds. The Advisor reviews an Underlying Fund’s policies, actions and effectiveness with respect to the Underlying Fund’s use of proxy votes and access to corporate management. The Advisor evaluates how an Underlying Fund uses proxy votes and access to corporate management to improve resource utilization, reign in excessive executive compensation, address climate change and other environmental, social and governance concerns. This process may include interviews with an Underlying Fund’s management and an examination of an Underlying Fund’s proxy voting records, prospectus and other published reports. The Advisor approves a select group of these ESG Funds for potential inclusion in the Sustainable Impact Fund’s portfolio regardless of their Morningstar Portfolio Sustainability Rating (the “ESG Rating”).
Morningstar Portfolio Sustainability Rating
Morningstar, an independent investment research firm specializing in mutual fund analysis, provides the Advisor with Morningstar Portfolio Sustainability Ratings on a monthly basis. The Advisor uses the data provided by Morningstar to screen Underlying Funds and identify those that have a base currency in U.S. dollars and have a better-than-average Sustainability Rating.
The Morningstar Sustainability Rating is a measure of the financially material environmental, social and governance (“ESG”) risks in a mutual fund or ETF portfolio. The Morningstar Portfolio Sustainability Rating is assigned to mutual funds and ETFs and is calculated based on underlying company-level environmental, social and governance (“ESG”) scores and company involvement in ESG related controversies. Morningstar’s methodology incorporates ESG scores on more than 9,000 companies globally, which are evaluated based on ESG Factors such as those described above.
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The Morningstar Sustainability Rating is the result of a three-step process. First, Morningstar calculates the Morningstar Portfolio Sustainability Score for every portfolio reported within the trailing 12 months. Second, it uses these scores to calculate a portfolio’s Morningstar Historical Portfolio Sustainability Score. Third, it assigns a Morningstar Sustainability Rating for a portfolio based on its Morningstar Historical Portfolio Sustainability Score relative to its Morningstar Global Category.
To receive a Sustainability Rating, at least 67% of an Underlying Fund’s portfolio assets under management must have a company-level ESG Risk Rating. The company-level ESG Risk Rating measures the degree to which a company’s economic value may be at risk driven by ESG issues. To be considered material to the risk rating, an ESG issue must have a potentially substantial impact on the economic value of a company and therefore on the risk-return profile of an investment in the company. The ESG issues that are material vary across industry groups and companies. The ESG Risk Rating is an indicator of a company’s material ESG risks measured on the same scale across all economic sectors. For example, a company may be evaluated based on how it addresses a changing regulatory environment, measures and manages its carbon footprint, controls executive compensation, and/or monitors and encourages diversity among firm leadership.
The Advisor’s methodology in selecting funds aligns with changes made to Morningstar’s methodology in November 2019. The Advisor will periodically evaluate Morningstar’s services in relation to other third-party data service providers. The Advisor may determine it is appropriate to change its current third-party data provider when the Advisor becomes aware that an alternative provider can offer sustainability data that is either more timely, has more comprehensive coverage, offers more effective analysis or offers substantially better pricing for comparable service.
Upgrading Strategy
Underlying Funds that meet one of the two selection criteria described above, are then further considered for investment in the portfolio of the Sustainable Impact Fund based on the Advisor’s Upgrading process. The Advisor applies a performance-and risk-based ranking system to Underlying Funds and selects investments for the Sustainable Impact Fund based on these rankings. The Advisor first classifies Underlying Funds by risk, separating the most aggressive Underlying Funds from the most conservative Underlying Funds. Next, the Advisor ranks Underlying Funds by recent returns and invests in top performers. Underlying Funds that are no longer top performers or fail to maintain an above-average ESG Rating are sold and replaced with other top performing Underlying Funds. The Advisor to the Sustainable Impact Fund calls this process Upgrading and believes that this process will help the Sustainable Impact Fund adapt to changing markets. The Advisor’s Underlying Fund rankings are updated monthly.
An investment in the Sustainable Impact Fund entails risk. The Sustainable Impact Fund cannot guarantee that it will meet its investment objective. Since the price of the Underlying Funds that the Sustainable Impact Fund holds may fluctuate, the value of your investment may fluctuate and you could lose all or a portion of your investment in the Sustainable Impact Fund. The following risks could affect the value of your investment:
•Sustainable Impact Investing Policy (ESG Factors) Risk – The Sustainable Impact Fund’s sustainable impact investment policy, which incorporates an analysis of environmental, social and corporate governance factors, could cause the Sustainable Impact Fund to perform differently compared to similar funds that do not have such a policy. This sustainable impact investment policy, which involves screening Underlying Funds using Morningstar Portfolio Sustainability and ESG Scores, may result in the Sustainable Impact Fund foregoing opportunities to buy certain Underlying Funds when it might otherwise be advantageous to do so, or selling its holdings in certain Underlying Funds
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for sustainable impact investment reasons when it might be otherwise disadvantageous for it to do so. The Advisor monitors an Underlying Fund’s holdings based on the latest publicly available information. The delay in obtaining public information regarding an Underlying Fund’s holdings could result in the Sustainable Impact Fund holding an Underlying Fund that no longer meets the Sustainable Impact Fund’s environmental, social and corporate governance investment criteria.
•General Market Risk – General market risk is the risk that the value of the Sustainable Impact Fund’s shares will fluctuate based on the performance of the securities held by the Underlying Funds it owns. These fluctuations may cause a security to be worth less than its cost when originally purchased or less than it was worth at an earlier time.
•Third-Party Data Risk – The Sustainable Impact Fund’s investment process will depend upon the use of Morningstar Portfolio Sustainability and ESG Scores that are provided to the Advisor by an independent third-party source. There is no guarantee that the Morningstar Portfolio Sustainability and ESG Scores will be accurate. There is a risk that the Sustainable Impact Fund may at times hold Underlying Funds that do not meet the Advisor’s threshold for ESG Ratings. The Sustainable Impact Fund’s performance may be negatively impacted in certain markets as a result of its reliance on Morningstar Portfolio Sustainability and ESG Scores and ESG Ratings. The Morningstar Portfolio Sustainability and ESG Scores provided by Morningstar may be based on less than 100% of an Underlying Fund’s portfolio holdings. There is a risk that portfolio holdings of an Underlying Fund that are not incorporated into available Morningstar Portfolio Sustainability and ESG Scores may not meet the Sustainable Impact Fund’s sustainable investment policy. There can be no assurance that reliance on any particular Underlying Fund’s Morningstar Portfolio Sustainability and ESG Scores will be profitable for the Sustainable Impact Fund.
•Management Risk – Management risk describes the Sustainable Impact Fund’s ability to meet its investment objective based on the Advisor’s success or failure to implement investment strategies for the Sustainable Impact Fund.
•Foreign Securities Risk – The Underlying Funds held by the Sustainable Impact Fund may have significant investments in foreign securities. Foreign securities risk entails risk relating to political, social and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices.
•Emerging Markets Risk – In addition to the foreign securities risks mentioned above, emerging markets are generally more volatile and less liquid.
•Derivative Risk – Some Underlying Funds may use derivative instruments which derive their value from the value of an underlying asset, currency or index. The value of derivatives may rise or fall more rapidly than other investments and it is possible to lose more than the initial amount invested.
•Leverage Risk – Some Underlying Funds may borrow money for leveraging and will incur interest expense. Leverage is investment exposure which exceeds the initial amount invested. Leverage can cause the portfolio to lose more than the principal amount invested. Leverage can magnify the portfolio’s gains and losses and therefore increase its volatility.
•Short Sales Risk – The Underlying Funds may engage in short sales which could cause an Underlying Fund’s investment performance to suffer if it is required to close out a short position earlier than it had intended.
•Small Company Risk – The Underlying Funds may invest in securities of small companies, which involves greater volatility than investing in larger and more established companies.
•Sector Emphasis Risk – Some of the Underlying Funds may have particular emphasis in one or more sectors, subjecting those Underlying Funds to sector emphasis risk. Sector emphasis risk is the possibility that a certain sector may underperform other sectors or the market as a whole.
•ETF Trading Risk – Because the Sustainable Impact Fund invests in ETFs, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a discount to its net asset value (“NAV”), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which the ETFs trade, which may impact the Sustainable Impact Fund’s ability to sell its shares of an ETF.
•Portfolio Turnover Risk – To the extent the Sustainable Impact Fund invests in ETFs, it may be subject to the risks of having a high portfolio turnover rate. High portfolio turnover involves correspondingly greater expenses to the Sustainable Impact Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities.
•Upgrading Strategy Risk – The Sustainable Impact Fund employs an Upgrading strategy whereby it continually seeks to invest in the top-performing securities at a given time. When investment decisions are based on near-term performance, however, the Sustainable Impact Fund may be exposed to the risk of buying Underlying Funds immediately following a sudden, brief surge in performance that may be followed by a subsequent drop in market value.
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•Underlying Funds Risk – The risks associated with the Sustainable Impact Fund include the risks related to each Underlying Fund in which the Sustainable Impact Fund invests. Although the Sustainable Impact Fund seeks to reduce the risk of your investment by diversifying among mutual funds and ETFs that invest in stocks and, in some cases, bonds, there are inherent risks of investing in various asset classes. The Sustainable Impact Fund must also pay its pro rata portion of an investment company’s fees and expenses.
•Market Events Risk. Local, regional, or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a significant impact on the market generally and on specific securities. Periods of market volatility may occur in response to pandemics or other events outside of our control. These types of events could adversely affect the Fund’s performance. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, public health events, terrorism, technology and data interruptions, natural disasters, and other circumstances in one or more countries or regions could be highly disruptive to, and have profound impacts on, global economies or markets. As a result, whether or not a fund invests in securities of issuers located in or has significant exposure to the countries directly affected, the value and liquidity of a fund’s investments may go down. Securities markets may also be susceptible to market manipulation or other fraudulent trade practices, which could disrupt the orderly functioning of these markets or adversely affect the value of securities traded in these markets, including a fund’s securities.
FundX Sustainable Impact Fund – SRIFX
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Investment Advisor
One Capital Management, LLC is the investment advisor to the Sustainable Impact Fund.
Portfolio Managers
Name | Title | Managed the Sustainable Impact Fund Since | ||||||
| Janet Brown | Portfolio Manager | 2017 (the Sustainable Impact Fund’s inception) | ||||||
| Martin DeVault | Portfolio Manager | 2017 (the Sustainable Impact Fund’s inception) | ||||||
| Sean McKeon | Portfolio Manager | 2017 (the Sustainable Impact Fund’s inception) | ||||||
Purchase and Sale of Fund Shares
You may purchase, exchange or redeem Sustainable Impact Fund shares on any business day by written request via mail (FundX Sustainable Impact Fund, c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701), by wire transfer, by telephone at 1-866-455-FUND [3863], or through a financial intermediary. Purchases and redemptions by telephone are only permitted if you previously established these options on your account. The minimum initial and subsequent investment amounts are shown in the table below.
Minimum Investments
To Open Your Account | To Add to Your Account | |||||||
| Regular Accounts | $1,000 | $100 | ||||||
| Retirement Accounts | $1,000 | $100 | ||||||
| Automatic Investment Accounts | $500 | $100 | ||||||
Tax Information
The Sustainable Impact Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Tax-deferred arrangements may be taxed later upon withdrawal of monies from those accounts.
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Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Sustainable Impact Fund through a broker-dealer or other financial intermediary (such as a bank), the Sustainable Impact Fund may pay for account servicing and the Advisor may pay the intermediary for the sale of Sustainable Impact Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Sustainable Impact Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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MORE ABOUT THE FUNDS’ INVESTMENT
OBJECTIVES, STRATEGIES AND RISKS
OBJECTIVES, STRATEGIES AND RISKS
Investment Objectives
Please refer to the Summary Section for each Fund in the front of this Prospectus for each Fund’s investment objective. Each Fund’s investment objective is non-fundamental and may therefore be changed, without shareholder approval, upon a 60-day written notice to a Fund’s shareholders.
Changes in Policy. The Sustainable Impact Fund will not change its investment policy of investing at least 80% of its net assets, plus borrowings for investment purposes, in sustainable impact investments, without first providing shareholders with at least 60 days’ prior written notice and changing the Sustainable Impact Fund’s name.
Principal Investment Strategies
Advisor’s General Approach to Managing the FundX Upgrader Funds
In selecting investments for the Funds’ portfolios, the Advisor employs its proprietary Upgrading investment strategy. The Advisor believes that the best investment returns can be attained by continually moving assets into what it determines to be the current top-performing Underlying Funds within a given risk class.
The Advisor’s Upgrading strategy is designed to be a logical system of investing in top Underlying Funds while they are performing well, and then moving to others when the Advisor believes the original choices are no longer the best. The Advisor selects Underlying Funds that it believes offer above-average prospects for achieving each Fund’s goal of either capital growth or capital preservation and believes such Underlying Funds can be identified through current performance.
The Advisor has used this Upgrading investment strategy to manage accounts since 1969. The Advisor believes Upgrading can provide an effective way to successfully participate in a broad range of investment opportunities as they develop.
The Advisor believes that investing in other mutual funds and ETFs will provide the Funds with opportunities to achieve greater diversification of portfolio securities and investment techniques than the Funds could achieve by investing directly in individual portfolio securities. With respect to the Sustainable Impact Fund, ESG Funds offer the added benefit of management engagement by actively leveraging shareholder voting power to affect changes in corporate policy.
Since 1976, the Advisor has published NoLoad FundX, a monthly newsletter that provides information on an Upgrading strategy similar to the strategies utilized by the Funds. Although the Underlying Funds purchased for the Funds will generally also be highly ranked in the Advisor’s proprietary ranking system, the Advisor may also invest in funds not included in the newsletter, such as institutional or other mutual funds that are not available to the general public, but are available to the Advisor.
Underlying Funds in which the Flexible Income Fund and Conservative Fund Invest
Each of the Funds seeks to achieve its investment objectives by investing primarily in no-load and load-waived mutual funds, including ETFs, which are referred to as the Underlying Funds. Each Fund will invest primarily in Underlying Funds that have an investment objective similar to the Fund’s or that otherwise are permitted investments under the Fund’s investment policies described herein. Nevertheless, the Underlying Funds purchased by a Fund likely will have certain investment policies and use certain investment practices that may be different from those of the Fund and not described here. These other policies and practices may subject the Underlying Funds’ assets to varying or greater degrees of risk.
The Advisor’s Upgrading strategy classifies Underlying Funds according to risk, based primarily on their historical performance with emphasis on their downside records. As its secondary selection process, the Advisor then scores and ranks the Underlying Funds on recent total returns.
The Advisor selects a diversified portfolio of Underlying Funds using its Upgrading Strategy. When needed, the Advisor may also sell Underlying Funds in order to take profits or raise cash. The Advisor utilizes options to both raise cash and to put cash to work. Options can also be used to potentially provide downside protection.
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The ESG Strategy Utilized by the Sustainable Impact Fund
The Sustainable Impact Fund is a fund-of-funds. Sustainable impact investing incorporates non-financial performance indicators that measure a company’s management of risks associated with environmental sustainability, social concerns, and corporate governance in an effort to generate long-term competitive investment performance and positive societal impact. These ESG Factors include, but are not limited to:
| Environmental | Social | Governance | ||||||
•climate change •carbon footprint •resource exploitation •pollution and waste •deforestation •water usage •renewable energy •conservation | •working conditions, wage policies •corporate diversity policies •racial and gender diversification •human rights and child labor policies •employee relations •effect on local communities •health and safety | •executive pay •accountability •bribery and corruption •political lobbying and donations •board diversity and structure •tax strategies | ||||||
The Sustainable Impact Fund seeks to invest substantially all and, under normal circumstances, at least 80% of its net assets, plus borrowings for investment purposes, in sustainable impact investments. Sustainable impact investments are the following:
•Underlying Funds that self-identify as ESG Funds; and
•Underlying Funds that have a better-than-average Portfolio Sustainability Rating (“Sustainability Rating”), as calculated by Morningstar, as described below.
ESG Funds
The Advisor employs a process of assessing Underlying Funds that self-identify as ESG Funds. The Advisor reviews an Underlying Fund’s policies, actions and effectiveness with respect to the Underlying Fund’s use of proxy votes and access to corporate management. The Advisor evaluates how an Underlying Fund uses proxy votes and access to corporate management to improve resource utilization, reign in excessive executive compensation, address climate change and other environmental, social and governance concerns. This process may include interviews with an Underlying Fund’s management and an examination of an Underlying Fund’s proxy voting records, prospectus and other published reports. The Advisor approves a select group of these ESG Funds for potential inclusion in the Sustainable Impact Fund’s portfolio regardless of their Morningstar Portfolio Sustainability Rating.
Morningstar Portfolio Sustainability Rating
Morningstar, an independent investment research firm specializing in mutual fund analysis, provides the Advisor with Morningstar Portfolio Sustainability Ratings on a monthly basis. The Advisor uses the data provided by Morningstar to screen Underlying Funds and identify those that have a base currency in U.S. dollars and have a better-than-average Sustainability Rating.
The Morningstar Sustainability Rating is a measure of the financially material environmental, social and governance (“ESG”) risks in a mutual fund or ETF portfolio. The Morningstar Portfolio Sustainability Rating is assigned to mutual funds and ETFs and is calculated based on underlying company-level environmental, social and governance (“ESG”) scores and company involvement in ESG related controversies. Morningstar’s methodology incorporates ESG scores on more than 9,000 companies globally, which are evaluated based on ESG Factors such as those described above.
The Morningstar Sustainability Rating is the result of a three-step process. First, Morningstar calculates the Morningstar Portfolio Sustainability Score for every portfolio reported within the trailing 12 months. Second, it uses these scores to calculate a portfolio’s Morningstar Historical Portfolio Sustainability Score. Third, it assigns a Morningstar Sustainability Rating for a portfolio based on its Morningstar Historical Portfolio Sustainability Score relative to its Morningstar Global Category.
To receive a Sustainability Rating, at least 67% of an Underlying Fund’s portfolio assets under management must have a company-level ESG Risk Rating. The company-level ESG Risk Rating measure the degree to which a company’s economic value may be at risk driven by ESG issues. To be considered material to the risk rating, an ESG issue must have a potentially
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substantial impact on the economic value of a company and therefore on the risk-return profile of an investment in the company. The ESG issues that are material vary across industry groups and companies. The ESG Risk Rating is an indicator of a company’s material ESG risks measured on the same scale across all economic sectors. For example, a company may be evaluated based on how it addresses a changing regulatory environment, measures and manages its carbon footprint, controls executive compensation, and/or monitors and encourages diversity among firm leadership.
These company-level ESG scores are based on a series of indicators that measure preparedness, disclosure and performance. Preparedness indicates whether a company has identified ESG issues specific to its business and industry and has put policies in place to address those ESG issues. Disclosure assesses whether company reporting meets international best practices standards and is transparent with respect to most material ESG issues. Performance measures how effective companies have been in managing ESG risks.
The Advisor’s methodology in selecting funds aligns with changes made to the Morningstar’s methodology in November, 2019. The Advisor will periodically evaluate Morningstar’s services in relation to other third-party data providers’ services. The Advisor may determine it is appropriate to change its current third-party data provider when the Advisor becomes aware that an alternative provider can offer sustainability data that is either more timely, has more comprehensive coverage, offers more effective analysis or offers substantially better pricing for comparable service.
Upgrading Strategy for the Sustainable Impact Fund
Underlying Funds that meet one of the two selection criteria described above, are then further considered for investment in the portfolio of the Sustainable Impact Fund based on the Advisor’s Upgrading process. The Advisor applies a performance-and risk-based ranking system to Underlying Funds and selects investments for the Sustainable Impact Fund based on these rankings. The Advisor first classifies Underlying Funds by risk, separating the most aggressive Underlying Funds from the most conservative Underlying Funds. Next, the Advisor ranks Underlying Funds by recent returns and invests in top performers. Underlying Funds that are no longer top performers or fail to maintain an above-average ESG Rating are sold and replaced with other top performing Underlying Funds. The Advisor to the Sustainable Impact Fund calls this process Upgrading and believes that this process will help the Sustainable Impact Fund adapt to changing markets. The Advisor’s Underlying Fund rankings are updated monthly.
Impact through Active Engagement
A number of ESG Funds have active engagement policies that include the voting of proxies, filing shareholder resolutions and engaging in direct dialogue with senior corporate management. The Advisor may at times invest in Underlying Funds that employ such active engagement strategies, which the Advisor believes greatly enhance the potential impact of the Sustainable Impact Fund.
The Advisor’s Process for Classifying the Underlying Funds in which the FundX Upgrader Funds Invest
The Advisor utilizes proprietary risk classes to categorize Underlying Funds in which it invests. These are: Sector Equity Underlying Funds, Aggressive Equity Underlying Funds, Core Equity Underlying Funds, Total Return Underlying Funds and Bond Underlying Funds. Using broad categories allows the Advisor to have a full range of investment opportunities available to the Funds. For instance, rather than isolating international funds from domestic, the Advisor groups them with other funds with similar downside risk. The intent is to allow the best funds to rise to the top, whatever their investment approach may be. Occasionally, some overlap may occur. An Aggressive Equity Underlying Fund may exhibit no more volatility than a typical Core Equity Underlying Fund. Furthermore, the Advisor may re-classify Underlying Funds when new information indicates such change is appropriate. Generally, under normal circumstances, the Sustainable Impact Fund seeks to invest predominantly in Underlying Funds classified as Core Equity Underlying Funds, and to a lesser extent the Sustainable Impact Fund may invest in Underlying Funds from the other risk classes. The descriptions below provide a realistic indication of what might be expected from a fund in each classification.
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| Sector Equity Funds | Sector Equity Underlying Funds include equity funds that focus on specific industries or market sectors in the hopes of achieving above-average returns. International funds in this group may concentrate in a particular country or region, including emerging markets or economies not considered mature. These funds mostly hold common stocks, but may contain convertible bonds or other instruments and they may use investing techniques such as leveraging, margin, short positions or use of derivative instruments such as options or futures in ways that may lead to increased volatility. The Advisor considers emerging markets countries to be those defined by the Morgan Stanley Capital International (“MSCI”) Emerging Markets Index. | ||||
| Aggressive Equity Funds | Aggressive Equity Underlying Funds include equity funds invested in small- or mid-sized companies, but may also include large-cap stocks. Many of these funds may lack diversification by focusing on a few industry sectors or concentrating their portfolios in a few individual holdings, in the hopes of achieving above-average returns. Many of these funds have a history of greater-than-market-level volatility. International funds may concentrate in a particular region, including emerging markets or economies not considered mature. These funds mostly hold common stocks, but may contain convertible bonds or other instruments. The Advisor considers emerging markets countries to be those defined by the MSCI Emerging Markets Index. | ||||
| Core Equity Funds | Core Equity Underlying Funds are generally comprised of diversified equity portfolios invested in well-established companies. Such portfolios may include some fixed-income instruments such as bonds, convertibles, preferred stock or cash and may have flexibility to move to large cash positions. International (foreign) or global (foreign and domestic) funds tend to invest in larger companies in mature economies (e.g., Europe & Japan). | ||||
| Total Return (or Balanced) Funds | Total Return Underlying Funds may employ a wide variety of investment strategies, including blending equity securities with fixed income instruments, and techniques designed to provide steady returns with dampened volatility, such as market neutral long/short, and arbitrage strategies. Because Total Return Underlying Funds are not fully invested in bonds, these funds typically have less credit and interest rate risk. Often these funds hold income-generating instruments, such as bonds, to lower portfolio volatility. Some of these funds may use derivative instruments such as futures, put options or short selling to a limited extent to lessen volatility. | ||||
| Bond/Fixed-Income Funds | Bond Underlying Funds have a primary objective of current income and preservation of capital. These funds are divided into sub-categories of fixed-income securities based on credit quality, duration and maturity. It is not the Advisor’s intention to purchase funds to achieve a particular tax result. Bond Underlying Funds attempt to cushion market volatility. | ||||
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Additional Information about the FundX Upgrader Funds’ Investments
Underlying Funds Operate Independently of FundX Upgrader Funds. The Funds are independent from any of the Underlying Funds in which they invest and have little voice in or control over the investment practices, policies or decisions of those Underlying Funds. If a Fund disagrees with those practices, policies or decisions, it may have no choice other than to liquidate its investment in that Underlying Fund, which may entail losses.
FundX Upgrader Funds May Not be Able to Sell Underlying Funds Readily. An Underlying Fund may limit a Fund’s ability to sell its shares of the Underlying Fund at certain times. In these cases, such investments will be considered illiquid and subject to a Fund’s overall limit on illiquid securities. For example, no Underlying Fund is required to redeem any of its shares owned by a Fund in an amount exceeding 1% of the Underlying Fund’s shares during any period of less than 30 days. As a result, to the extent that a Fund owns more than 1% of an Underlying Fund’s shares, a Fund may not be able to redeem those shares promptly in the event of adverse market conditions or other considerations. (This limitation does not apply to a Fund’s holdings of shares of ETFs, which are not redeemed through the ETF itself, but which can be sold by a Fund on a securities exchange in a secondary market transaction.)
An Underlying Fund May Invest In Similar Securities of Another Underlying Fund. Also, the investment advisors of the Underlying Funds in which a Fund invests may simultaneously pursue inconsistent or contradictory courses of action. For example, one Underlying Fund may be purchasing securities of the same issuer whose securities are being sold by another Underlying Fund, with the result that a Fund would incur an indirect brokerage expense without any corresponding investment or economic benefit.
Underlying Fund Expenses. Furthermore, the Funds will normally invest only in Underlying Funds that do not impose up-front sales loads, deferred sales loads, distribution fees of more than 0.25% or redemption fees. If a Fund invests in an Underlying Fund that normally charges an up-front sales load, it may use available sales load waivers and quantity discounts to eliminate the sales load. However, this policy does not preclude the Funds from investing in Underlying Funds with sales related expenses, redemption fees or service fees in excess of 0.25%.
High Portfolio Turnover. Each Fund is actively managed and has no restrictions on portfolio turnover. Each Fund may at times experience an annual portfolio turnover rate substantially in excess of 200% on a regular basis. A high portfolio turnover rate (100% or more) may result in the realization and distribution of higher capital gains to Fund shareholders and may mean a higher tax liability. A high portfolio turnover rate may also lead to higher transaction costs, which could negatively affect a Fund’s performance.
Temporary Defensive Strategies. For temporary defensive purposes under abnormal market or economic conditions, a Fund may hold all or a portion of its assets in money market instruments, money market funds or U.S. government repurchase agreements. A Fund may also invest in such instruments at any time to maintain liquidity or pending selection of investments in accordance with its policies. To the extent a Fund is invested in such defensive instruments, the Fund may not achieve its investment objective, on account of following a temporary defensive strategy being inconsistent with a Fund’s principal investment strategy. Taking a temporary defensive strategy is inconsistent with a Fund’s principal investment strategies.
SEC Limitations of FundX Upgrader Funds’ Investments in Other Investments Companies. Up to 25% of a Fund’s assets may be invested in shares of a single Underlying Fund; however, each Fund intends to limit its investments in Underlying Funds in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”), or with certain terms and conditions of applicable exemptive orders issued by the Securities and Exchange Commission (“SEC”) and approved by the Board. A Fund may invest in
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Underlying Funds that are permitted to invest more than 25% of their assets in a single industry and may also invest in Underlying Funds that are themselves non-diversified.
A Fund may invest in the securities of other registered investment companies, including exchange-traded funds (“ETFs”), money market funds and other mutual funds, subject to the limitations of the 1940 Act, and subject to such investments being consistent with the overall objective and policies of the Fund.
As a fund-of-funds, each Fund relies on Section 12(d)(1)(F) of the 1940 Act that permits each Fund to invest in unaffiliated funds subject to certain guidelines including that each Fund (together with its affiliated funds) may acquire no more than 3% of the outstanding voting securities of the unaffiliated fund. Generally, Section 12(d)(1) of the 1940 Act (and the rules thereunder) restricts investments by registered investment companies in securities of other registered investment companies, including the Underlying Funds. The acquisition of shares of the Underlying Funds by each Fund is therefore subject to the restrictions of Section 12(d)(1) of the 1940 Act, except as may be permitted by any exemptive orders obtained by the Underlying Funds that permits registered investment companies such as each Fund to invest in the Underlying Fund beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including that each Fund enter into an agreement with the Underlying Fund regarding the terms of the investment.
Principal Risks
Although the Funds principally invest in any number of Underlying Funds, this investment strategy does not eliminate investment risk. Therefore, there is no assurance that the Funds will achieve their investment objectives. Since the prices of securities in the Underlying Funds may fluctuate, the value of your investment in the Funds may fluctuate and you could lose money. The following list sets forth more information about the principal risks that apply to the Funds. The following risks apply to each Fund unless otherwise noted.
General Market Risk – The Funds’ assets will be invested in Underlying Funds that themselves invest primarily in equity securities. The value of your investment in each Fund depends on the value of the Underlying Funds it owns. In turn, the value of an Underlying Fund depends on the market value of the equity securities in which it has invested. General market risk is the risk that the market value of a security may fluctuate, sometimes rapidly and unpredictably. These fluctuations may cause a security to be worth less than its cost when originally purchased or less than it was worth at an earlier time. General market risk may affect a single issuer, industry, sector of the economy or the market as a whole.
Management Risk – Management risk describes a Fund’s ability to meet its investment objective based on the Advisor’s success or failure to implement investment strategies for the Fund. The value of your investment in a Fund is subject to the investment strategies used by the Underlying Funds in selecting investments, including the ability of the investment advisory organizations that manage the Underlying Funds in assessing economic conditions and investment opportunities, and may not result in an increase in the value of your investment or in overall performance equal to other investments. If the Advisor’s investment strategies do not produce the expected results, your investment could be diminished or even lost.
Upgrading Strategy Risk – The Funds employ an Upgrading strategy whereby they continually seek to invest in the top-performing funds at a given time. When investment decisions are based on near-term performance, however, the Funds may be exposed to the risk of buying Underlying Funds immediately following a sudden, brief surge in performance that may be followed by a subsequent drop in market value. Furthermore, focusing on current market leaders may expose the Funds to concentration risk.
Small Company Risk – The Conservative Fund and the Sustainable Impact Fund may invest in Underlying Funds that invest in small capitalization companies. As a result, your investment will be
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subject to small company risk. Small company risk is the risk that, due to limited product lines, markets or financial resources, dependence on a relatively small management group or other factors, small companies may be more vulnerable than larger companies to adverse business or economic developments. Securities of small companies are generally less liquid and more volatile than securities of larger companies or the market averages. In addition, small companies may not be as well-known to the investing public as large companies, may not have institutional ownership and may have only cyclical, static or moderate growth prospects. In addition, the performance of an Underlying Fund may be adversely affected during periods when the smaller capitalization stocks are out-of-favor with investors. Under normal market conditions, the Advisor intends to hold small company funds only when small company stocks are outperforming large company stocks.
Interest Rate and Credit Risk – The Underlying Funds comprising the Flexible Income Fund and the Conservative Fund’s portfolios may hold bonds and other fixed-income securities. Underlying Funds of this type invest a portion of their assets in bonds, notes and other fixed-income and convertible securities, as well as preferred stock. Generally, the value of a fixed-income portfolio will decrease when interest rates rise and increase when interest rates fall. Therefore, an Underlying Fund’s NAV will fluctuate in response to changes in interest rates. The longer the duration of a bond, the more a change in interest rates affects the bond’s price. Short-term and long-term interest rates may not move the same amount and may not move in the same direction. It is likely there will be less governmental action in the near future to maintain low interest rates, or that governmental actions will be less effective in maintaining low interest rates. The negative impact on fixed income securities from the resulting rate increases for that and other reasons could be swift and significant, including falling market values and reduced liquidity. Substantial redemptions from bond and other income funds may worsen that impact. Other types of securities also may be adversely affected from an increase in interest rates. In addition to interest rate risk, changes in the creditworthiness of an issuer of fixed-income securities and the market’s perception of that issuer’s ability to repay principal and interest when due can also affect the value of fixed-income securities held by an Underlying Fund.
High-Yield Securities (Junk Bonds) Risk – The Flexible Income Fund and the Conservative Fund may invest in Underlying Funds that focus their investments in securities rated below investment grade. Fixed‑income securities receiving the lowest investment grade rating may have speculative characteristics, and, like securities rated below investment grade, when compared to higher-grade securities, may have a weakened capacity to make principal and interest payments in adverse economic conditions or other circumstances. High-yield, high risk and lower-rated securities are subject to additional risk factors, such as increased possibility of default, decreased liquidity and fluctuations in value due to public perception of the issuer of such securities.
Foreign Securities Risk – One or more Underlying Funds may invest in the securities of foreign companies. As a result, such Underlying Fund would be subject to foreign securities risk. Foreign securities risk entails risk relating to political, social and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices. Securities that are denominated in foreign currencies are subject to the further risk that the value of the foreign currency will fall in relation to the U.S. dollar and/or will be affected by volatile currency markets or actions of U.S. and foreign governments or central banks.
Emerging Markets Risk – In addition to developed markets, the Sustainable Impact Fund may invest in Underlying Funds may invest in emerging markets, which are markets of countries in the initial stages of industrialization and that generally have low per capita income. In addition to the risks of foreign securities in general, countries in emerging markets are generally more volatile and can have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries and securities markets that trade a small number of issues, which could reduce liquidity. Additional risks of emerging markets include differences in nationalization, embargo, expropriation and
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acts of war. In addition, clearance and settlement procedures may be different in foreign countries and, in certain markets, on certain occasions; such procedures have been unable to keep pace with the volume of securities transactions, thus making it difficult to conduct such transactions. The Underlying Funds may be required to establish special custody or other arrangements before making certain investments in those countries.
Non-Diversification Risk – While the Funds themselves are diversified, some of the Underlying Funds may invest in a limited number of issuers and therefore, may be non-diversified. Because such an Underlying Fund focuses its investments in a limited number of issuers, its NAV and total return may fluctuate or decline more in times of weaker markets than a more diversified mutual fund.
Sector Emphasis Risk – It is anticipated that the Conservative Fund and the Sustainable Impact Fund will invest in Underlying Funds with focused investments or that have a particular emphasis on one or more sectors. In the case of an Underlying Fund that focuses its investments in a particular industry or sector, events may occur that impact that industry or sector more significantly than the stock market as a whole. Furthermore, each industry or sector possesses particular risks that may not affect other industries or sectors.
Short Sales Risk – Some of the Underlying Funds in which the Sustainable Impact Fund invest will engage in short sales, which may cause an Underlying Fund’s investment performance to suffer if it is required to close out a short position earlier than it had intended. This would occur if the lender required such Underlying Fund to deliver the securities it borrowed at the commencement of the short sale and it was unable to borrow the securities from other securities lenders. Furthermore, until an Underlying Fund replaces a security borrowed, or sold short, it must pay to the lender amounts equal to any dividends that accrue during the period of the short sale. This could cause a Fund’s performance to suffer to the extent it invests in such an Underlying Fund.
Leverage Risk – Some Underlying Funds may borrow money for leveraging. Interest expenses may exceed the income from the assets purchased with such borrowings. While the interest obligation resulting from borrowing will be fixed (although they may fluctuate with changing market rates of interest depending on the terms of the relevant agreement), the NAV per share of the Underlying Fund will tend to increase more when its portfolio securities increase in value and to decrease more when its portfolio assets decrease in value than would otherwise be the case if it did not borrow funds.
Underlying Funds Risk – The risks associated with the Funds include the risks related to each Underlying Fund in which the Funds invest. Although the Funds seek to reduce the risk of your investment by diversifying among mutual funds and ETFs that invest in stocks and, in some cases, bonds, there are inherent risks of investing in various asset classes as described throughout this section. For instance, there are market risks related to stocks and, in some cases, bonds, as well as the risks of investing in a particular Underlying Fund, such as risks related to the particular investment management style and that the Underlying Fund may underperform other similarly managed funds. To the extent that an Underlying Fund actively trades its securities, the Funds will experience a higher-than-average portfolio turnover ratio and increased trading expenses, and may generate higher short-term capital gains. Investments in the Funds result in greater expenses to you than if you were to invest directly in the Underlying Funds. Additionally, because the Underlying Funds may be managed using different investment styles, the Funds could experience overlapping security transactions. For example, one Underlying Fund could take a long position in a security, while another Underlying Fund is taking a short position in the same security, thereby effectively canceling out the effect of either position. Similarly, one Underlying Fund may be purchasing securities at the same time other portfolio managers may be selling those same securities. This may lead to higher transaction expenses and may generate higher short-term capital gains compared to a Fund using a single investment management style. Finally, there
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can be no assurance that any mutual fund, including an Underlying Fund, will achieve its investment objective.
ETF Trading Risk – Because the Funds invest in ETFs, they are subject to additional risks that do not apply to conventional funds, including the risk that the market price of the ETF’s shares may trade at a discount to their NAV. Also, an active secondary trading market for an ETF’s shares may not develop or be maintained, or trading of an ETF’s shares may be halted if the listing exchange deems such action appropriate. This could lead to a lack of market liquidity, thereby forcing a Fund to sell its shares in an Underlying Fund for less than the shares’ NAV. Further, an ETF’s shares may be delisted from the securities exchange on which they trade. ETFs are also subject to the risks of the underlying securities or sectors the ETF is designed to track.
Portfolio Turnover Risk – As funds-of-funds, the FundX Upgrader Funds do not typically pay transaction costs, such as commissions when buying and selling mutual funds. However, to the extent a Fund buys and sells ETFs, it may be subject to certain transactions costs. High portfolio turnover involves correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a Fund’s shareholders. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s performance. All of the Funds have portfolio turnover rates in excess of 100%.
Sustainable Impact Investing Policy (ESG Factors) Risk – The Sustainable Impact Fund’s sustainable impact investment policy, which incorporates an analysis of environmental, social and corporate governance factors, could cause the Sustainable Impact Fund to perform differently compared to similar funds that do not have such a policy. This sustainable impact investment policy, which involves screening Underlying Funds using Morningstar Portfolio Sustainability and ESG Scores, may result in the Sustainable Impact Fund foregoing opportunities to buy certain Underlying Funds when it might otherwise be advantageous to do so, or selling its holdings of certain Underlying Funds for sustainable impact investment reasons when it might be otherwise disadvantageous for it to do so. The Advisor monitors an Underlying Fund’s holdings based on publicly available information. The delay in obtaining public information regarding an Underlying Fund’s holdings could result in the Sustainable Impact Fund holding an Underlying Fund that no longer meets the Sustainable Impact Fund’s environmental, social and corporate governance investment criteria.
Third-Party Data Risk – The Sustainable Impact Fund’s investment process will depend upon the use of Morningstar Portfolio Sustainability and ESG Scores that are provided to the Advisor by an independent third-party source. There is no guarantee that the Morningstar Portfolio Sustainability and ESG Scores will be accurate. There is a risk that the Sustainable Impact Fund may at times hold Underlying Funds that do not meet the Advisor’s threshold for ESG Ratings. The Sustainable Impact Fund’s performance may be negatively impacted in certain markets as a result of its reliance on Morningstar Portfolio Sustainability and ESG Scores and ESG Ratings. The Morningstar Portfolio Sustainability and ESG Scores provided by Morningstar may be based on less than 100% of an Underlying Fund’s portfolio holdings. There is a risk that portfolio holdings of an Underlying Fund that are not incorporated into available Morningstar Portfolio Sustainability and ESG Scores may not meet the Sustainable Impact Fund’s sustainable investment policy. There can be no assurance that reliance on any particular Underlying Fund’s Morningstar Portfolio Sustainability and ESG Scores will be profitable for the Sustainable Impact Fund.
Market Events Risk. Local, regional, or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a significant impact on the market generally and on specific securities. Periods of market volatility may occur in response to pandemics or other events outside of our control. These types of events could adversely affect the Fund’s
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performance. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, public health events, terrorism, technology and data interruptions, natural disasters, and other circumstances in one or more countries or regions could be highly disruptive to, and have profound impacts on, global economies or markets. As a result, whether or not a fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of a fund’s investments may go down. Securities markets may also be susceptible to market manipulation or other fraudulent trade practices, which could disrupt the orderly functioning of these markets or adversely affect the value of securities traded in these markets, including a fund’s securities.
The COVID-19 pandemic caused substantial market disruption and dislocation around the world, including in the United States. There have been periods of extreme volatility, and periods where there have been no buyers for certain securities. Some sectors of the economy and individual issuers have experienced particularly large losses. The pandemic has reduced liquidity of particular investments and asset classes; resulted in significant disruptions to business operations, including business closures; strained healthcare systems; disrupted supply chains, consumer demand and employee availability; and restricted travel. These conditions may continue for an extended period of time, or worsen. The pandemic may result in a sustained domestic or global economic downturn or recession. Developing or emerging market countries may be more adversely impacted. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, may not be fully known.
A worldwide increase in inflation began in mid-2021, with many countries seeing their highest inflation rates in decades. This has been attributed to various causes, including pandemic-related economic dislocation; post-pandemic consumer demand for goods and services; and the fiscal and monetary stimulus provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic. Unexpected recovery in demand through 2021 ultimately led to historic and broad supply shortages (including chip shortages and energy shortages) amid increasing consumer demand. Worldwide construction sectors were also hit.
The Russian invasion of Ukraine further exacerbated the situation, increasing global oil prices, natural gas, fertilizer, and food prices. Higher gasoline prices were a major contributor to inflation. Central banks responded by aggressively increasing interest rates. The Federal Reserve raised the federal funds rate seven times in 2022 in its efforts to tame inflation, bringing the fed rate to a range of 4.25%-4.50%. The Fed’s rate rises may affect demand in interest-rate-sensitive sectors of the market.
Moving into 2023, global markets continued to face headwinds due to persistent inflation, and weakness in corporate profits as consumer confidence remained low. The consensus view was that a recession, although likely mild, would likely hit both sides of the Atlantic even if inflation had peaked. During a recession, businesses usually experience decreased demand for their products or services. As a result, they may cut back on production, which could lead to layoffs and reduced consumer spending. The market’s reaction to such actions may result in higher volatility in asset prices, which may affect the value and liquidity of the Funds’ holdings. Other infectious illness outbreaks in the future may result in similar impacts.
Portfolio Holdings Information
A description of the Funds’ policies and procedures with respect to disclosure of their portfolio holdings is available in the Funds’ Statement of Additional Information (“SAI”) and on the Funds’ website at www.fundxfunds.com.
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MANAGEMENT OF THE FUNDS
Investment Advisor
One Capital Management, LLC is the investment advisor to the Funds. Prior to February 4, 2022, the Funds’ investment advisor was FundX Investment Group, LLC. The Advisor is located at 13075 Townsgate Road, Suite 350, Westlake Village, California 91361. As of December 31, 2022, the Advisor had approximately $4.9 billion in assets under management. The Advisor supervises each Fund’s investment activities and determines which investments are purchased and sold by the Funds. The Advisor also furnishes each Fund with office space and certain administrative services and provides most of the personnel needed by the Funds. Under an investment advisory agreement with the Funds, each Fund compensates the Advisor for its investment advisory services as shown in the table below. For the fiscal year ended September 30, 2022, the following net management fees were paid as a percentage of average daily net assets. The “net” management fee reflects the amount received because the Advisor was required to waive a portion, or in some cases all, of its fees pursuant to the expense limitation agreement described below:
| Annual Advisory Fee | Net Advisory Fee Received (after waivers or recoupments) | |||||||
| FundX Flexible Income Fund | 0.70% | 0.66% | ||||||
| FundX Conservative Upgrader Fund | 1.00% on assets up to $500 million, 0.90% on assets between $500 million and $750 million, 0.80% on assets between $750 million and $1 billion, and 0.70% on assets over $1 billion. | 1.00% | ||||||
| FundX Sustainable Impact Fund | 1.00% on assets up to $500 million, 0.90% on assets between $500 million and $750 million, 0.80% on assets between $750 million and $1 billion, and 0.70% on assets over $1 billion. | 0.82% | ||||||
A discussion regarding the basis of the Board’s approval of the investment advisory agreement with the Advisor is available in the Funds’ Annual Report to shareholders for the most recent period ended September 30.
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Fund Expenses
Each Fund is responsible for its own operating expenses. The Advisor has contractually agreed to reduce its fees and/or pay expenses of each Fund to ensure that Total Annual Fund Operating Expenses After Expense Reduction/Reimbursement will not exceed certain Expense Caps. The Expense Cap for each of the Funds, except for the Flexible Income Fund, is 1.35% of the average daily net assets. For the Flexible Income Fund the Expense Cap is 0.99%, of the average daily net assets. The Expense Caps exclude front-end or contingent deferred loads, taxes, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization, portfolio transaction expenses or extraordinary expenses such as litigation. Any reduction in advisory fees or payment of expenses made by the Advisor is subject to reimbursement by a Fund to the Advisor if requested by the Advisor, and if the Board approves such reimbursement within the following three years. This reimbursement may be requested by the Advisor if the aggregate amount actually paid by a Fund toward operating expenses for such period (taking into account any reimbursements) does not exceed the lesser of the Expense Caps in place at the time of waiver or at the time of reimbursement. The Advisor is permitted to be reimbursed for fee reductions and/or expense payments made in the prior three years. Each Fund must pay its current ordinary operating expenses before the Advisor is entitled to any reimbursement of fees and/or expenses. The Operating Expenses Limitation Agreement is in effect at least until January 31, 2024.
U.S. Bank Global Fund Services receives fees from certain Underlying Funds for processing transactions between the Fund and the Underlying Funds and for servicing the Underlying Funds’ account with the Fund. U.S. Bank Global Fund Services rebates a portion of these fees to the Funds through a reduction in custodial, transfer agency, fund administration and fund accounting fees. For the fiscal year ended September 30, 2022, U.S. Bank Global Fund Services rebated the following fee amounts:
| Amount of Fees Rebated by U.S. Bank Global Fund Services as a % of Average Net Assets | |||||
| FundX Flexible Income Fund | 1.49% | ||||
| FundX Conservative Upgrader Fund | 1.97% | ||||
| FundX Sustainable Impact Fund | 1.79% | ||||
Service Fees and Other Third Party Payments
The Funds may pay service fees to Financial Intermediaries, including affiliates of the Advisor, for sub-administration, sub-transfer agency and other shareholder services associated with shareholders whose shares are held of record in omnibus, other group accounts or accounts traded through registered securities clearing agents.
The Advisor, out of its own resources, and without additional cost to the Funds or their shareholders, may provide additional cash payments or non-cash compensation to Financial Intermediaries who sell shares of the Funds. Such payments and compensation are in addition to service fees paid by the Fund. These additional cash payments are generally made to intermediaries that provide shareholder servicing, marketing support and/or access to sales meetings, sales representatives and management representatives of the intermediary. Cash compensation may also be paid to intermediaries for inclusion of the Funds on a sales list, including a preferred or select sales list, in other sales programs or as an expense reimbursement in cases where the intermediary provides shareholder services to the Funds’ shareholders. The Advisor may also pay cash compensation in the form of finders fees that vary depending on the dollar amount of the shares sold.
The Trust
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Prior to the close of business on August 1, 2014, each Fund, except the Sustainable Impact Fund, was a series of Professionally Managed Portfolios. As of the close of business on August 1, 2014, each Fund, except the Sustainable Impact Fund, was reorganized into a new Trust, the FundX Investment Trust (the “Trust”). The business of the Trust and each Fund is managed under the oversight of the Funds’ Board of Trustees. Additional information about the Board, as well as the Trust’s executive officers, may be found in the Funds’ SAI.
Portfolio Managers
Investment decisions for each of the Funds are made by an investment committee consisting of senior portfolio managers and experienced investment professionals within the Advisor’s organization. No one person is solely responsible for the day-to-day management of a Fund’s portfolio. The members of the investment committee are listed in the table below.
| Name | Title | Tenure with the Advisor* | ||||||
| Janet Brown | Portfolio Manager | 1978 | ||||||
| Martin DeVault | Portfolio Manager | 1992 | ||||||
| Sean McKeon | Portfolio Manager | 1990 | ||||||
* The Advisor to the Funds was FundX Investment Group, LLC from 2001 – 2022 and is One Capital Management, LLC from 2022 – present.
Each member of the investment committee is jointly and primarily responsible for the day-to-day management of the Funds’ portfolios. There is no lead portfolio manager. There are no limitations or restrictions on any one portfolio manager’s role relative to the other portfolio managers on the investment committee. Each portfolio manager generally serves as a research analyst. The investment committee discusses investment ideas and the overall structure of a portfolio using the Upgrading investment strategy. Investment decisions are then made collectively by the investment committee.
The Funds’ SAI provides additional information about the portfolio managers’ compensation, other accounts they manage and their ownership of securities in the Funds.
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SHAREHOLDER INFORMATION
Pricing Fund Shares
A fund’s share price is known as its NAV. The NAV is determined by dividing the value of a Fund’s securities (consisting primarily of shares of other mutual funds), cash and other assets, minus all liabilities, by the number of shares outstanding ((assets – liabilities) / number of shares = NAV). The NAV takes into account the expenses and fees of a Fund, including management, administration and other fees, which are accrued daily. A Fund’s share price is calculated as of the close of regular trading (generally 4:00 p.m., Eastern time) on each day that the New York Stock Exchange (“NYSE”) is open for business.
All shareholder transaction orders received in good order (as described below under “Buying Fund Shares”) by the Fund’s transfer agent, U.S. Bancorp Fund Services, LLC (“Transfer Agent”), or an authorized financial intermediary by the close of regular trading on the NYSE will be processed at that day’s NAV. Transaction orders received after the close of regular trading on the NYSE will receive the next day’s NAV. The Funds do not determine the NAV of their shares on any day when the NYSE is not open for trading, such as weekends and certain national holidays as disclosed in the SAI (even if there is sufficient trading in its portfolio securities on such days to materially affect the NAV per share). In such cases, fair value determinations may be made as described below under procedures adopted by the Board.
Fair Value Pricing
The assets of each Fund consist primarily, if not exclusively, of shares of Underlying Funds valued at their respective NAVs. The prospectuses for the Underlying Funds should explain the circumstances under which they will use fair value pricing, as well as the effects of using fair value pricing. There may be situations when a Fund is unable to receive an NAV from an Underlying Fund. In such case, shares of an Underlying Fund will be valued at their fair market value as determined in good faith under procedures adopted by the Board. The NAV of a Fund will fluctuate with the value of the securities held by the Underlying Funds in which it principally invests.
There can be no assurance that the Funds can purchase or sell a share of an Underlying Fund at the price used to calculate the Funds’ NAVs. In the case of fair valued Underlying Fund shares, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a the present value of a share of an Underlying Fund. Fair valuations generally remain unchanged until new information becomes available. Consequently, changes in the fair valuation of shares of an Underlying Fund may be less frequent and of greater magnitude than changes in the price of a Fund valued by an independent pricing service, or based on market quotations.
Buying Fund Shares
To open an account, you must make a minimum initial investment as listed in the table below.
Minimum Investments
To Open Your Account | To Add to Your Account | |||||||
| Regular Accounts | $1,000 | $100 | ||||||
| Retirement Accounts | $1,000 | $100 | ||||||
| Automatic Investment Accounts | $500 | $100 | ||||||
You may purchase shares of a Fund by completing an account application. Your order will not be accepted until the account application is received by the Transfer Agent. Shares are purchased at the NAV
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next determined after the Transfer Agent receives your order in good order. “Good order” means your purchase request includes: (1) the name of the Fund, (2) the dollar amount of shares to be purchased, (3) your purchase application or investment stub, and (4) a check payable to “Name of Appropriate Fund.” Account applications will not be accepted unless they are accompanied by payment in U.S. dollars, drawn on a U.S. financial institution. The Funds will not accept payment in cash or money orders. In addition, to prevent check fraud, the Funds will not accept third party checks, Treasury checks, credit card checks, traveler’s checks or starter checks for the purchase of shares. The Funds are unable to accept post-dated checks or any conditional order or payment. If your payment is returned for any reason, your purchase will be canceled and a $25 fee will be assessed against your account. You will also be responsible for any losses suffered by the Funds as a result. The Funds do not issue share certificates. The Funds reserve the right to reject any purchase in whole or in part. These minimums can be changed or waived by the Advisor at any time.
The Funds reserve the right to reject any purchase order, in whole or in part, if such rejection is in a Fund’s best interest. For example, a purchase order may be refused if, in the Advisor’s opinion, it is so large it would disrupt the management of a Fund or would not otherwise be in the best interest of long-term shareholders.
Shares of the Funds have not been registered for sale outside of the United States. The Funds generally do not sell shares to investors residing outside the United States, even if they are United States citizens or lawful permanent residents, except to investors with United States military APO or FPO addresses.
USA PATRIOT Act
The USA PATRIOT Act of 2001 requires financial institutions, including the Funds, to adopt certain policies and programs to prevent money laundering activities, including procedures to verify the identity of customers opening new accounts. When completing a new account application, you will be required to supply the Funds your full name, date of birth, social security number and permanent street address to assist the Funds in verifying your identity. If you are opening the account in the name of a legal entity (e.g., partnership, limited liability company, business trust, corporate, etc.), you must also supply the identity of the beneficial owners. Mailing addresses containing only a P.O. Box will not be accepted. Until such verification is made, a Fund may temporarily limit transactions or close an account if it is unable to verify a shareholder’s identity. As required by law, the Funds may employ various procedures, such as comparing the information to fraud databases or requesting additional information or documentation from you, to ensure that the information supplied by you is correct.
If a Fund does not have a reasonable belief of the identity of a shareholder, the account will be rejected or the shareholder will not be allowed to perform a transaction on the account until such information is received. In the rare event that the Transfer Agent is unable to verify your identity, the Fund reserves the right to redeem your account at the current day’s net asset value.
By Mail
To purchase shares by mail, simply complete and sign the enclosed account application and mail it, along with a check made payable to the name of the Fund for which you wish to invest to the address listed below.
To make subsequent investments, write your account number on a check made payable to the applicable Fund and mail it together with the most recent confirmation statement received from the Transfer Agent in the envelope provided with your statement or send to the address listed below.
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Regular Mail [Name of Fund] c/o U.S. Bank Global Fund Services P.O. Box 701 Milwaukee, WI 53201-0701 | Overnight Delivery [Name of Fund] c/o U.S. Bank Global Fund Services 615 E. Michigan Street, Third Floor Milwaukee, WI 53202 | ||||
NOTE: The Funds do not consider the U.S. Postal Service or other independent delivery services to be their agents. Therefore, deposit in the mail or with such services, or receipt at U.S. Bancorp Fund Services, LLC post office box, of purchase orders or redemption requests does not constitute receipt by the transfer agent of the Funds. Receipt of purchase orders or redemption requests is based on when the order is received at the Transfer Agent’s offices.
By Telephone
You automatically have the ability to make telephone and/or internet purchases, redemptions or exchanges, unless you specifically decline. You may purchase additional shares of the Fund by calling toll free at 1‑866‑455‑FUND [3863]. Telephone orders, in amounts of $100 or more, will be accepted via electronic funds transfer from your pre-designated bank account through the Automated Clearing House (“ACH”) network. You must have banking information established on your account and your account must be open for at least 7 business days prior to making a purchase by telephone. Only bank accounts held at domestic institutions that are ACH members may be used for telephone transactions. If your order is received prior to 4:00 p.m., Eastern time, on a day when the NYSE is open, shares will be purchased at the NAV calculated on that day. For security reasons, requests by telephone will be recorded. During periods of high market activity, you may encounter higher than usual wait times. Please allow sufficient time to ensure that you will be able to complete your telephone transaction prior to market close. If you are unable to contact the Fund by telephone, you may make your purchase request in writing. Once a telephone transaction has been placed, it cannot be cancelled or modified after the close of regular trading on the NYSE (generally, 4:00 p.m., Eastern time).
By Internet
Initial Investment
To make an initial purchase of a Fund’s shares, log on to www.fundxfunds.com and complete the online application. After accepting the terms of the online application, elect to have your investment amount debited from your account that you identified on your account application.
Subsequent Investment
Log on to www.fundxfunds.com. If you completed the online application and accepted the terms of conducting transactions online, simply follow the instructions by entering your User ID and password and selecting the transaction you wish to perform. Your purchase proceeds will be debited from your financial institution account identified on your account application.
Note: You should be aware that there may be delays, malfunctions or other inconveniences associated with the Internet. There also may be times when the website is unavailable for Fund transactions or other purposes. Should this happen, you should consider performing transactions by another method.
The Transfer Agent employs procedures to confirm that transactions entered through the Internet are genuine. These procedures include passwords, encryption and other precautions reasonably designed to protect the integrity, confidentiality and security of shareholder information. In order to conduct transactions on the website, you will need your account number, Taxpayer Identification Number, username and password. Neither the Funds nor their agents will be liable for any loss, liability, cost or
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expense for following instructions communicated through the Funds’ website, including fraudulent or unauthorized instructions.
By Wire
Initial Investment
If you are making an initial investment in the Funds, before you wire funds, please contact the Transfer Agent by phone at 1-866-455‑FUND [3863] to make arrangements with a telephone customer service representative to submit your completed account application via mail, overnight delivery or facsimile. Upon receipt of your completed application, your account will be established and a service representative will contact you to provide your new account number and wiring instructions. If you do not receive this information within one business day, you may call the Transfer Agent at 1-866-455-FUND [3863].
Once your account has been established, you may then contact your bank to initiate the wire using the instructions you were given. Prior to sending the wire, please call the Transfer Agent at 1-866-455‑FUND [3863] to advise of your wire to ensure proper credit upon receipt. Your bank must include the name of the Fund you are purchasing, your account number and your name so your wire can be correctly applied.
Subsequent Investment
If you are making a subsequent purchase, your bank should wire funds as indicated below. Before each wire purchase, please contact the Transfer Agent at 1-866-455‑FUND [3863] to advise them of your intent to wire funds. It is essential that your bank include complete information about your account in all wire instructions. If you have questions about how to invest by wire, you may call the Transfer Agent. Your bank may charge you a fee for sending a wire to a Fund.
Your bank should transmit available funds by wire in your name to:
| U.S. Bank National Association | |||||
| 777 E. Wisconsin Ave. | |||||
| Milwaukee, WI 53202 | |||||
| ABA #: 075000022 | |||||
| Credit: | U.S. Bancorp Fund Services, LLC | ||||
| Account #: | 112-952-137 | ||||
| FFC: | [Name of Fund] | ||||
| Shareholder Registration | |||||
| Shareholder Account Number | |||||
Wired funds must be received prior to 4:00 p.m., Eastern time to be eligible for same day pricing. The Funds and U.S. Bank N.A., the Funds’ custodian, are not responsible for the consequences of delays resulting from the banking or Federal Reserve wire system or from incomplete wiring instructions.
Through a Financial Intermediary
You may buy and sell shares of a Fund through certain financial intermediaries and their agents that have made arrangements with the Fund and are authorized to buy and sell shares of the Fund (collectively, “Financial Intermediaries”). Your order will be priced at the applicable Fund’s NAV next computed after it is received by a Financial Intermediary and accepted by the Fund. A Financial Intermediary may hold your shares in an omnibus account in the Financial Intermediary’s name and maintains your individual ownership records. The Funds may pay Financial Intermediaries for maintaining individual ownership records as well as providing other shareholder services. Financial Intermediaries may charge fees for the services they provide to you in connection with processing your transaction order or maintaining your account with them. Financial Intermediaries are responsible for placing your order correctly and
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promptly with a Fund, forwarding payment promptly, as well as ensuring that you receive copies of the Funds’ Prospectus. If you transmit your order to these Financial Intermediaries before the close of regular trading (generally 4:00 p.m., Eastern time) on each day that the NYSE is open for business, your order will be priced at the Fund’s NAV next computed after it is received by the Financial Intermediary. Investors should check with their Financial Intermediary to determine if it is subject to these arrangements.
Automatic Investment Plan
For your convenience, the Funds offer an Automatic Investment Plan (“AIP”). Under the AIP, after your initial minimum investment, you authorize a Fund to withdraw the amount that you wish to invest from your personal bank account on a monthly or quarterly basis. If no option is selected, the frequency will default to monthly. The AIP requires a minimum investment of $100. If you wish to participate in the AIP, please complete the “Automatic Investment Plan” section on the account application or call the Funds at 1-866-455‑FUND [3863] for assistance. In order to participate in the AIP, your bank or financial institution must be a member of the ACH network.
The Funds may terminate or modify this privilege at any time. You may change your investment amount or terminate your participation in the AIP at any time by notifying the Transfer Agent by telephone or in writing, at least five days prior to the effective date of the next transaction. If your bank rejects your payment, the Fund’s transfer agent will charge a $25 fee to your account.
Retirement Plan
The Funds offer an individual retirement account (“IRA”) plan. You may obtain information about opening an IRA by calling 1-866-455‑FUND [3863]. There may be special distribution requirements for a retirement account, such as required distributions or mandatory Federal income tax withholdings. With regard to IRA accounts where U.S. Bank is the custodian, you may be charged a $25 fee for transferring assets to another custodian or for closing a retirement account. Other fees and expenses of maintaining your account(s) may be charged to you or your account. Please refer to the Funds’ Custodial Account Agreement for further fee information. Fees charged by institutions may vary. If you wish to open another type of retirement plan, please contact your Financial Intermediary.
Asset Allocation/Re-Allocation Program
To participate in the Asset Re-Allocation Program, you must complete the “Asset Re-Allocation Program” section of the account application or contact the Transfer Agent in writing. This program allows direct shareholders to assign their account to a pre-defined model based on their risk/return objectives. The model allocations automatically rebalance on a quarterly basis. Your investments will be allocated and rebalanced on a quarterly basis between funds according to your investment goals. The Funds may terminate or modify this privilege at any time. You may change or terminate your participation in the program at any time by notifying the Transfer Agent by telephone or in writing. Requests to invest or redeem outside of your pre‑defined model will terminate your participation in the program. Exercising the re-allocation privilege could consist of two transactions: a sale of shares in one Fund and the purchase of shares in another. As a result, there may be tax consequences of the re-allocation. A shareholder could realize short- or long-term capital gains or losses.
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Selling (Redeeming) Fund Shares
In general, orders to sell or “redeem” shares may be placed either directly with the Funds or with your Financial Intermediary. You may redeem part or all of your Fund shares at the next determined NAV after a Fund receives your order. You should request your redemption prior to the close of the NYSE, generally 4:00 p.m., Eastern time, to obtain that day’s closing NAV. Redemption requests received after the close of the NYSE will be treated as though received on the next business day.
By Mail
You may redeem your shares by simply sending a written request to the Transfer Agent at the address listed below. Please provide the name of the Fund, your account number and state the number of shares or dollar amount you would like redeemed. The letter should be signed by all of the shareholders whose names appear on the account registration and include signature guarantees, if applicable. (Please see “Account and Transaction Policies” below). Redemption requests will not become effective until all documents have been received in good order by the Funds. “Good order” means your redemption request includes: (1) the name of the Fund, (2) the number of shares or dollar amount to be redeemed, (3) the account number and (4) signatures by all of the shareholders whose names appear on the account registration. The Funds may require additional documentation for the sale of shares by a corporation, partnership, agent or fiduciary or a surviving joint owner. Shareholders should contact the Fund for further information concerning documentation required for redemption of Fund shares.
Shareholders who have an IRA must indicate on their written redemption request whether to withhold federal income tax. Redemption requests failing to indicate an election to have tax withheld will generally be subject to a 10% withholding tax.
You should send your redemption request to:
Regular Mail [Name of Fund] c/o U.S. Bank Global Fund Services P.O. Box 701 Milwaukee, WI 53201-0701 | Overnight Delivery [Name of Fund] c/o U.S. Bank Global Fund Services 615 E. Michigan Street, Third Floor Milwaukee, WI 53202 | ||||
NOTE: The Funds do not consider the U.S. Postal Service or other independent delivery services to be their agents. Therefore, deposit in the mail or with such services, or receipt at U.S. Bancorp Fund Services, LLC post office box, of purchase orders or redemption requests does not constitute receipt by the transfer agent of the Funds. Receipt of purchase orders or redemption requests is based on when the order is received at the Transfer Agent’s offices.
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By Telephone
You automatically have the ability to make telephone purchases, redemptions or exchanges, unless you specifically decline. If you have a retirement account, you may redeem shares by telephone. Investors will be asked whether or not to withhold taxes from any distribution. During periods of high market activity, you may encounter higher than usual wait times. Please allow sufficient time to ensure that you will be able to complete your telephone transaction prior to market close. If you are unable to contact the Fund by telephone, you may make your redemption request in writing. Once a telephone transaction has been placed, it cannot be canceled or modified after the close of regular trading on the NYSE (generally, 4:00 p.m., Eastern time).
You may redeem up to $100,000 in shares by calling the Transfer Agent at 1-866-455‑FUND [3863] prior to the close of trading on the NYSE, generally 4:00 p.m., Eastern time. Redemption proceeds will be sent on the next business day to the mailing address that appears on the Funds’ records. Per your request, redemption proceeds may be wired or may be sent by electronic funds transfer through the ACH network to your pre‑designated bank account. The minimum amount that may be wired is $1,000. Wire charges, if any, will be deducted from your redemption proceeds on a complete or share certain redemption. In the case of a partial or dollar certain redemption, the wire fee will be deducted from the remaining account balance. There is no charge to have redemption proceeds sent via ACH; however, credit may not be available in your bank account for 2-3 days. Telephone redemptions cannot be made if you notify the Transfer Agent of a change of address within 30 calendar days before the redemption request. If you wish to redeem shares within 30 calendar days of an address change, you should submit a written request to the Transfer Agent with your signature(s) guaranteed.
Prior to executing instructions received to redeem shares by telephone, the Funds and the Transfer Agent will use reasonable procedures to confirm that the telephone instructions are genuine. The telephone call may be recorded and the caller may be asked to verify certain personal identification information. If the Funds and the Transfer Agent follow these procedures, they will not be liable for any loss, expense or cost arising out of any telephone transaction request that is reasonably believed to be genuine. This includes any fraudulent or unauthorized requests. If an account has more than one owner or authorized person, the Fund will accept telephone instructions from any one owner or authorized person. The Funds may change, modify or terminate these privileges at any time upon at least a 60-day notice to shareholders.
By Internet
Log on to www.fundxfunds.com. If you completed the online application and accepted the terms of conducting transactions online, simply follow the instructions and select the transaction you wish to perform. Your redemption proceeds will be credited to your financial institution account identified on your account application.
Note: The Transfer Agent will use reasonable procedures to confirm that the internet instructions are genuine. For example, the Transfer Agent requires proof of your identification, such as a Taxpayer Identification Number or username and password, before we will act on instructions received by telephone or the internet. If the Funds or their agents follow these procedures, they cannot be held liable for any loss, expense or cost arising out of any internet redemption request that is reasonably believed to be genuine. This includes fraudulent or unauthorized requests. The Funds may change, modify or terminate these internet redemption privileges at any time upon at least a 60-day notice to shareholders. Once an internet transaction has been placed, it cannot be canceled or modified.
Through a Financial Intermediary
You may redeem Fund shares through your Financial Intermediary. Redemptions made through a Financial Intermediary may be subject to procedures established by that institution. Your Financial Intermediary is responsible for sending your order to the Funds and for crediting your account with the
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proceeds. For redemption through Financial Intermediaries, orders will be processed at the NAV per share next determined after receipt of the order by the financial intermediary. Please keep in mind that your Financial Intermediary may charge additional fees for its services.
Systematic Withdrawal Plan
You may redeem shares of your Fund through a Systematic Withdrawal Plan (“SWP”). Under the SWP, you may choose to receive a specified dollar amount, generated from the redemption of shares in your account, on a monthly, quarterly or annual basis. You may establish a SWP on any account and in any amount you choose. If you elect this method of redemption, the applicable Fund will send a check to your address of record, or will send the payment via electronic funds transfer through the ACH network, directly to your bank account. For payment through the ACH network, your bank must be an ACH member and your bank account information must be maintained on your Fund account. The SWP may be terminated at any time by the Funds. You may also elect to terminate your participation in the SWP at any time by contacting the Transfer Agent at least five days prior to the next withdrawal. If you wish to establish a Systematic Withdrawal Plan, please contact the Transfer Agent by telephone at 1-866-455-FUND [3863].
A withdrawal under the SWP involves a redemption of shares and may result in a gain or loss for federal income tax purposes. In addition, if the amount withdrawn exceeds the dividends credited to your account, your account ultimately may be depleted.
Account and Transaction Policies
Before selling recently purchased shares, please note that if the Transfer Agent has not yet collected payment for the shares you are selling, it may delay sending the proceeds until the payment is collected, which may take up to 15 calendar days from the purchase date. This delay will not apply if you purchased your shares via wire payment.
Proceeds. The Funds typically send redemption proceeds on the next business day (a day when the NYSE is open for normal business) after the redemption request is received in good order and prior to market close, regardless of whether the redemption proceeds are sent via check, wire, or automated clearing house (ACH) transfer. Under unusual circumstances, the Funds may suspend redemptions, or postpone payment for up to seven days, as permitted by federal securities law.
The Funds typically expect that they will hold cash or cash equivalents to meet redemption requests. The Funds may also use the proceeds from the sale of portfolio securities to meet redemption requests if consistent with the management of the Funds. In situations in which investment holdings in cash or cash equivalents are not sufficient to meet redemption requests or when the sale of portfolio securities is not sufficient to meet redemption requests, the Funds will typically borrow money through their line of credit. These redemption methods will be used regularly and may also be used in stressed market conditions.
Tools to Discourage Disruptive Short-Term Transactions
The Board has adopted a policy regarding excessive trading. The Funds discourage excessive, short-term trading and other abusive trading practices that may disrupt portfolio management strategies and harm performance. The Funds take steps to reduce the frequency and effect of these activities in the Funds. These steps may include, among other things, monitoring trading activity, or using fair value pricing when appropriate, under procedures as adopted by the Board, when the Advisor determines current market prices are not readily available. As approved by the Board, these techniques may change from time to time as determined by the Funds in their sole discretion.
In an effort to discourage abusive trading practices and minimize harm to the Funds and their shareholders, each Fund reserves the right, in its sole discretion, to reject any purchase order or exchange
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request, in whole or in part, for any reason (including, without limitation, purchases by persons whose trading activity in the Funds’ shares are believed by the Advisor to be harmful to the Funds or whether the shareholder has conducted four round trip transactions within a 12-month period) and without prior notice. The Funds seek to exercise their judgment in implementing these tools to the best of their ability in a manner that they believe is consistent with shareholder interests. Except as noted in the Prospectus, the Funds apply all restrictions uniformly in all applicable cases.
Although these efforts are designed to discourage abusive trading practices, these tools cannot eliminate the possibility that such activity will occur. Due to the complexity and subjectivity involved in identifying abusive trading activity and the volume of shareholder transactions the Funds handle, there can be no assurance that the Funds’ efforts will identify all trades or trading practices that may be considered abusive. In particular, since the Funds receive purchase and sale orders through Financial Intermediaries that use group or omnibus accounts, the Funds cannot always detect frequent trading. However, the Funds will work with Financial Intermediaries as necessary to discourage shareholders from engaging in abusive trading practices and to impose restrictions on excessive trades. In this regard, the Funds have entered into information sharing agreements with Financial Intermediaries pursuant to which these intermediaries are required to provide to the Funds, at their request, certain information relating to their customers investing in the Funds through non-disclosed or omnibus accounts. The Funds will use this information to attempt to identify abusive trading practices. Financial Intermediaries are contractually required to follow any instructions from the Funds to restrict or prohibit future purchases from shareholders that are found to have engaged in abusive trading in violation of the Funds’ policies. However, the Funds cannot guarantee the accuracy of the information provided to them from Financial Intermediaries and cannot ensure that they will always be able to detect abusive trading practices that occur through non-disclosed and omnibus accounts. As a consequence, the Funds’ ability to monitor and discourage abusive trading practices in omnibus accounts may be limited.
Low Balance Accounts
Each Fund may redeem the shares in your account if the value of your account is less than $1,000 as a result of redemptions you have made, but not as a result of a decline in the NAV of a Fund or for market reasons. This does not apply to retirement plans. You will be notified that the value of your account is less than $1,000 before a Fund makes an involuntary redemption. You will then have 30 days in which to make an additional investment to bring the value of your account to at least $1,000 before a Fund takes any action.
Signature Guarantees
A signature guarantee may be required for certain redemption requests. A signature guarantee assures that your signature is genuine and protects you from unauthorized account redemptions.
A signature guarantee, from either a Medallion program member or a non-Medallion program member, of each owner is required in the following situations:
•For all redemption requests in excess of $100,000;
•When a redemption request is received by the Transfer Agent and the account address has changed within the last 30 calendar days;
•If ownership is being changed on your account;
•When redemption proceeds are payable or sent to any person, address or bank account not on record.
In addition to the situations described above, the Fund(s) and /or the Transfer Agent may require a signature guarantee in other instances based on the facts and circumstances relative to the particular situation. The Advisor also reserves the right to waive the signature guarantee requirement based upon the circumstances. Signature guarantees will generally be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies
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and savings associations, as well as from participants in the New York Stock Exchanges Medallion Signature Program and the Securities Transfer Agents Medallion Program (“STAMP”). A notary public is not an acceptable signature guarantor.
Non financial transactions including establishing or modifying certain services on an account may require a signature guarantee, signature verification from a Signature Validation Program member, or other acceptable form of authentication from a financial institution source.
Householding
In an effort to decrease costs, the Funds will start reducing the number of duplicate prospectuses, and other similar documents you receive by sending only one copy of each to those addresses shared by two or more accounts. Call toll-free at 1-866-455‑FUND [3863] to request individual copies of these documents or if your shares are held through a Financial Intermediary please contact them directly. The Funds will begin sending individual copies 30 days after receiving your request. This policy does not apply to account statements.
Electronic Delivery
You may sign up to receive your shareholder statements electronically at www.fundxfunds.com. You may change your delivery preference and resume receiving these documents through the mail at any time by updating your electronic delivery preferences on www.fundxfunds.com or contacting the Funds at 1‑866‑455‑FUND [3863].
Unclaimed Property
Your mutual fund account may be transferred to your state of residence if no activity occurs within your account during the “inactivity period” specified in your state’s abandoned property laws.
Lost Shareholder
It is important that the Fund maintain a correct address for each investor. An incorrect address may cause an investor’s account statements and other mailings to be returned to the Fund. Based upon statutory requirements for returned mail, the Funds will attempt to locate the investor or rightful owner of the account. If the Funds are unable to locate the investor, then they will determine whether the investor’s account can legally be considered abandoned. The period of time before an account would be considered lost or unclaimed varies by state. The Funds are legally obligated to escheat (or transfer) abandoned property to the appropriate state’s unclaimed property administrator in accordance with statutory requirements. The investor’s last known address of record determines which state has jurisdiction. Investors with a state residence in Texas have the ability to designate a representative to receive legislatively required unclaimed property due diligence notifications. Please contact the Texas Comptroller of Public Accounts for further information.
How to Exchange Fund Shares
Shareholders of record, including financial institutions and intermediaries, may exchange shares of a Fund for shares of another FundX Fund on any business day by contacting the Transfer Agent directly. This exchange privilege may be changed or canceled by a Fund at any time upon a 60-day written notice to its shareholders. Exercising the exchange privilege consists of two transactions: a sale of shares in one Fund and the purchase of shares in another. As a result, there are generally tax consequences of the exchange. A shareholder could realize short- or long-term capital gains or losses. An exchange request received prior to the close of the NYSE will be made at that day’s closing NAV.
You may also exchange shares of any or all of an investment in the Funds for the Fidelity Money Market Fund. This Exchange Privilege is a convenient way for you to buy shares in a money market fund in order to respond to changes in your goals or market conditions. There is no fee associated with exchanging into the Fidelity Money Market Fund. Before exchanging into the Fidelity Money Market Fund, you should
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read its prospectus. To obtain the Fidelity Money Market Fund’s prospectus and the necessary exchange authorization forms, call the Transfer Agent at 1-866-455‑FUND [3863]. This exchange privilege does not constitute an offering or recommendation on the part of the Funds or the Advisor of an investment in the Fidelity Money Market Fund.
You may exchange your shares by notifying the Transfer Agent by telephone or in writing. Exchanges may be made in amounts of $1,000 or more and are generally made only between identically registered accounts unless a shareholder sends written instructions with a signature guarantee requesting otherwise. You should give your account number and the number of shares or dollar amount to be exchanged. The letter should be signed by all of the shareholders whose names appear on the account registration. If you did not decline telephone options, you may also exchange Fund shares by calling the Transfer Agent at 1-866-455‑FUND [3863] prior to the close of trading on the NYSE, generally 4:00 p.m., Eastern time, on any day the NYSE is open for regular trading. If you are exchanging shares by telephone, you will be subject to certain identification procedures that are listed under the “Selling (Redeeming) Fund Shares” section.
DISTRIBUTION AND TAXES
Dividends and Distributions
The Funds will make distributions of dividends and capital gains, if any, at least annually, typically in January, taxable in the prior year. Each Fund may make additional payments of dividends or distributions if it deems it desirable at another time during any year.
All distributions reduce the NAV of a Fund’s shares by the amount of the distribution. If you purchase shares prior to a distribution, the distribution will be taxable to you even though economically it may represent a return of part of your investment.
All distributions will be reinvested in Fund shares unless you choose one of the following options: (1) receive dividends in cash, while reinvesting capital gain distributions in additional Fund shares; (2) receive capital gain distribution in cash, while reinvesting dividends, or (3) receive all distributions in cash. In addition, if you elect to receive distributions in cash and the U.S. Postal Service cannot deliver your check, or if a check remains uncashed for six months, the Funds reserve the right to reinvest the distribution check in your account at the applicable Fund’s then current NAV and to reinvest all subsequent distributions. Distributions made by each Fund will be taxable to shareholders whether received in additional shares or in cash. If you wish to change your distribution option, write or call the Transfer Agent at least five days prior to the record date of the distribution.
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Taxes
Each Fund has elected and intends to continue to qualify to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As regulated investment companies, the Funds will not be subject to federal income tax if they distribute all or substantially all of their income as required by the tax law and satisfy certain other requirements that are described in the SAI. Each Fund intends to make distributions of ordinary income and capital gains. In general, Fund distributions are taxable to you (unless your investment is through a qualified retirement plan that does not invest with borrowed money), as either ordinary income or capital gain. Dividends and Fund distributions of short-term capital gains are taxable to you as ordinary income. Fund distributions of long-term capital gain are taxable as long-term capital gain regardless of how long you have held your shares. A portion of the ordinary income dividends paid to you by a Fund may constitute qualified dividends eligible for taxation at long-term capital gain rates for individual shareholders or for the dividends-received deduction for corporate shareholders, provided certain requirements are met. You will be taxed in the same manner whether you receive your dividends and capital gain distributions in cash or reinvest them in additional Fund shares. Qualified dividend income, the amount of which will be reported to you by a Fund, is currently taxed at a maximum rate of 20%. Lower rates may apply for taxpayers in the Federal lower income tax brackets.
Ordinary dividends generally consist of a Fund’s investment company taxable income (which includes, among other items, a Fund’s income derived from dividends, taxable interest, and the excess of net short-term capital gains over net long-term capital losses), and capital gain dividends generally consist of a Fund’s net capital gain (which is the excess of net long-term capital gains over net short-term capital losses).
The sale of assets by a Fund, such as the sale of Underlying Funds, may result in the realization of taxable gain or loss by the Fund. The amount of such gain or loss will depend on the difference between a Fund’s adjusted tax basis for the assets being sold and the amount realized from the sale. Such gain or loss will generally be long-term capital gain or loss if a Fund held the assets for more than one year prior to their sale, and short-term capital gain or loss if the Fund held the assets for one year or less prior to their sale. High portfolio turnover thus could result in: (1) increased net short-term capital gain realized by a Fund and distributed to you as ordinary dividends; and (2) increased net long-term capital gain realized by a Fund and distributed to you as capital gain dividends. As described above, the actual impact of high portfolio turnover will depend on specific facts related to the value of a Fund’s assets, a Fund’s adjusted tax basis for such assets when they are sold, and the length of time that a Fund held such assets before they were sold.
Each year, you will receive a statement that shows the tax status of distributions you received the previous year. Distributions declared in October, November, or December, but paid in January are taxable as if they were paid in December.
If you sell or exchange your Fund shares, it is considered a taxable event for you. Depending on the purchase price and the sale price of the shares you exchange or sell, and any other adjustments to your tax basis for your shares, you may have a gain or a loss on the transaction. You are responsible for any tax liabilities generated by your transaction.
By law, each Fund must withhold as backup withholding a percentage of your taxable distributions and redemption proceeds if you do not provide your correct social security or taxpayer identification number and certify that you are not subject to backup withholding, or if the IRS instructs the Funds to do so.
Shareholders whose adjusted gross income for a year exceeds $200,000 for single filers, $125,000 for married individuals filing separately, or $250,000 for married joint filers generally are subject to a Medicare tax of 3.8% on dividends and capital gains.
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Federal law requires that mutual fund companies report their shareholders’ cost basis, gain/loss, and holding period to the Internal Revenue Service on the Funds’ shareholders’ Form 1099-B when “covered” securities are sold. Covered securities are any regulated investment company and/or dividend reinvestment plan shares acquired on or after January 1, 2012.
The Funds have chosen average cost as the standing (default) tax lot identification method for all shareholders. A tax lot identification method is the way the Funds will determine which specific shares are deemed to be sold when there are multiple purchases on different dates at differing net asset values, and the entire position is not sold at one time. The Funds’ standing tax lot identification method is the method covered shares will be reported on your Form 1099-B if you do not select a specific tax lot identification method. You may choose a method different than the Funds’ standing method and will be able to do so at the time of your purchase or upon the sale of covered shares. Please refer to the appropriate Internal Revenue Service regulations or consult your tax advisor with regard to your personal circumstances.
For those securities defined as “covered” under current Internal Revenue Service cost basis tax reporting regulations, the Funds are responsible for maintaining accurate cost basis and tax lot information for tax reporting purposes. The Funds are not responsible for the reliability or accuracy of the information for those securities that are not “covered.” The Funds and their service providers do not provide tax advice. You should consult independent sources, which may include a tax professional, with respect to any decisions you may make with respect to choosing a tax lot identification method.
At the time that this prospectus is being prepared, various administrative and legislative changes to the federal tax laws are under consideration, but it is not possible at this time to determine whether any of these changes will take place or what the changes might entail.
Additional information concerning the taxation of the Fund and its shareholders is contained in the SAI. Taxes are not the primary consideration of the Funds in making their investment decisions. Because everyone’s tax situation is unique, always consult your tax professional about federal, state, local or foreign tax consequences of an investment in the Funds.
INDEX DESCRIPTIONS
The Bloomberg US Aggregate Bond Index (formerly known as the Barclays Capital Aggregate Bond Index) is a market value-weighted index that tracks the daily price and total return performance of fixed-rate, publicly placed, dollar-denominated and non-convertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year of final maturity. Returns include reinvested dividends, but reflect no deduction for fees, expenses or taxes.
The ICE BofA US 3-Month US Treasury Bill Index is comprised of a single U.S. Treasury Bill issue purchased at the beginning of each month and held for a full month, at which time that issue is sold and rolled into a newly selected issue. The issue selected each month is that having a maturity date closest to, but not beyond 90 days from the rebalance date.
The Standard & Poor’s 500® Index is an unmanaged index generally representative of the market for the stocks of large sized U.S. companies.
The Morningstar Global Market Large-Mid Cap Index encompasses the top 97% of stocks by market capitalization and includes 45 countries across both developed and emerging markets. The index provides a meaningful global view across market capitalization, sectors, and regions.
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Direct investment in an index is not possible.
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FINANCIAL HIGHLIGHTS
The Funds have adopted the Financial Statements of the Predecessor Funds. The following tables show the Funds’ financial performance for the fiscal years shown. Certain information reflects financial results for a single Fund share. “Total return” shows how much your investment in a Fund would have increased or decreased during each period, assuming you had reinvested all dividends and distributions. This information was audited by Tait, Weller & Baker LLP, the Funds’ Independent Registered Public Accounting Firm. Their report and the Funds’ financial statements are included in the Funds’ most recent Annual Report to shareholders.
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| INCMX | FLEXIBLE INCOME FUND | ||||
| Fixed Income | |||||
| FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each year | ||||||||||||||||||||||||||||||||
| Year Ended September 30, | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||
| Net asset value, beginning of year | $ | 28.60 | $ | 26.92 | $ | 28.13 | $ | 28.50 | $ | 29.16 | ||||||||||||||||||||||
| INCOME FROM INVESTMENT OPERATIONS: | ||||||||||||||||||||||||||||||||
Net investment income (1) (2) | 0.68 | 0.60 | 0.49 | 0.60 | 0.84 | |||||||||||||||||||||||||||
| Net realized and unrealized gain (loss) on investments | (3.71) | 1.70 | (1.12) | 0.35 | (0.48) | |||||||||||||||||||||||||||
| Total from investment operations | (3.03) | 2.30 | (0.63) | 0.95 | 0.36 | |||||||||||||||||||||||||||
| LESS DISTRIBUTIONS: | ||||||||||||||||||||||||||||||||
| From net investment income | (0.64) | (0.62) | (0.58) | (1.32) | (1.02) | |||||||||||||||||||||||||||
| From net realized gain | — | — | — | — | — | |||||||||||||||||||||||||||
| Total distributions | (0.64) | (0.62) | (0.58) | (1.32) | (1.02) | |||||||||||||||||||||||||||
| Net asset value, end of year | $ | 24.93 | $ | 28.60 | $ | 26.92 | $ | 28.13 | $ | 28.50 | ||||||||||||||||||||||
| Total return | (10.85) | % | 8.63 | % | (2.32) | % | 3.66 | % | 1.25 | % | ||||||||||||||||||||||
| RATIOS/SUPPLEMENTAL DATA: | ||||||||||||||||||||||||||||||||
| Net assets, end of year (millions) | $ | 67.4 | $ | 90.1 | $ | 85.3 | $ | 97.4 | $ | 99.9 | ||||||||||||||||||||||
RATIO OF EXPENSES TO AVERAGE NET ASSETS (3): | ||||||||||||||||||||||||||||||||
| Before fees recaptured/waived and expenses absorbed | 1.03% (4) | 1.00% (4) | 1.01% (4) | 1.01% (4) | 0.98% (4) | |||||||||||||||||||||||||||
After fees recaptured/waived and expenses absorbed (5) | 0.99% (4) | 0.99% (4) | 0.99% (4) | 1.00% (4) | 0.99% (4) | |||||||||||||||||||||||||||
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (3): | ||||||||||||||||||||||||||||||||
| Before fees recaptured/waived and expenses absorbed | 2.37% (4) | 2.10% (4) | 1.75% (4) | 2.14% (4) | 2.95% (4) | |||||||||||||||||||||||||||
After fees recaptured/waived and expenses absorbed (6) | 2.41% (4) | 2.11% (4) | 1.77% (4) | 2.15% (4) | 2.94% (4) | |||||||||||||||||||||||||||
| Portfolio turnover rate | 158 | % | 73 | % | 262 | % | 180 | % | 105 | % | ||||||||||||||||||||||
(1)Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests.
(2)Calculated using the average shares outstanding method.
(3)Does not include expenses of investment companies in which the Fund invests.
(4)Includes interest expense of $246 or 0.00%, $367 or 0.00%, $1,916 or 0.00%, $10,082 or 0.01% and $1,173 or 0.00% of average net assets for the years ended September 30, 2022, September 30, 2021, September 30, 2020, September 30, 2019 and September 30, 2018, respectively.
(5)Including credits for expenses paid indirectly, the ratio of expenses to average net assets would have been 0.91%, 0.96%, 0.98%, 0.97% and 0.98%, for the years ended September 30, 2022, September 30, 2021, September 30, 2020, September 30, 2019 and September 30, 2018, respectively. (Note 3)
(6)Including credits for expenses paid indirectly, the ratio of net investment income to average net assets would have been 2.49%, 2.13%, 1.78%, 2.18% and 2.95%, for the years ended September 30, 2022, September 30, 2021, September 30, 2020, September 30, 2019 and September 30, 2018, respectively. (Note 3)
48 | ||||||||
| RELAX | CONSERVATIVE UPGRADER FUND | ||||
| Balanced Fund | |||||
| FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each year | ||||||||||||||||||||||||||||||||
| Year Ended September 30, | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 (1) | 2018 | ||||||||||||||||||||||||||||
| Net asset value, beginning of year | $ | 47.79 | $ | 41.43 | $ | 40.43 | $ | 41.40 | $ | 40.41 | ||||||||||||||||||||||
| INCOME (LOSS) FROM INVESTMENT OPERATIONS: | ||||||||||||||||||||||||||||||||
Net investment income (loss) (2) (3) | 0.33 | (0.06) | 0.19 | 0.27 | 0.26 | |||||||||||||||||||||||||||
| Net realized and unrealized gain (loss) on investments | (5.09) | 6.60 | 2.20 | 0.63 | 4.01 | |||||||||||||||||||||||||||
| Total from investment operations | (4.76) | 6.54 | 2.39 | 0.90 | 4.27 | |||||||||||||||||||||||||||
| LESS DISTRIBUTIONS: | ||||||||||||||||||||||||||||||||
| From net investment income | (0.68) | (0.18) | (0.46) | (0.16) | (0.52) | |||||||||||||||||||||||||||
| From net realized gain | (7.33) | — | (0.93) | (1.71) | (2.76) | |||||||||||||||||||||||||||
| Total distributions | (8.01) | (0.18) | (1.39) | (1.87) | (3.28) | |||||||||||||||||||||||||||
| Net asset value, end of year | $ | 35.02 | $ | 47.79 | $ | 41.43 | $ | 40.43 | $ | 41.40 | ||||||||||||||||||||||
| Total return | (12.60) | % | 15.83 | % | 5.99 | % | 28.84 | % | 11.22 | % | ||||||||||||||||||||||
| RATIOS/SUPPLEMENTAL DATA: | ||||||||||||||||||||||||||||||||
| Net assets, end of year (millions) | $ | 67.8 | $ | 89.6 | $ | 83.4 | $ | 99.3 | $ | 60.1 | ||||||||||||||||||||||
RATIO OF EXPENSES TO AVERAGE NET ASSETS (4): | ||||||||||||||||||||||||||||||||
| Before fees waived and expenses absorbed | 1.35% (5) | 1.31% (5) | 1.33% (5) | 1.35% (5) | 1.35% (5) | |||||||||||||||||||||||||||
After fees waived and expenses absorbed (6) | 1.35% (5) | 1.31% (5) | 1.35% (5) | 1.35% (5) | 1.35% (5) | |||||||||||||||||||||||||||
RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS (4): | ||||||||||||||||||||||||||||||||
| Before fees waived and expenses absorbed | 0.76% (5) | (0.16)% (5) | 0.48% (5) | 0.66% (5) | 0.61% (5) | |||||||||||||||||||||||||||
After fees waived and expenses absorbed (7) | 0.76% (5) | (0.16)% (5) | 0.46% (5) | 0.66% (5) | 0.61% (5) | |||||||||||||||||||||||||||
| Portfolio turnover rate | 144 | % | 84 | % | 172 | % | 151 | % | 92 | % | ||||||||||||||||||||||
(1)On July 26, 2019, shares of the FundX Tactical Upgrader Fund were reorganized into shares of the FundX Conservative Upgrader Fund. Activity after July 26, 2019 reflects the Funds’ combined operations.
(2)Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests.
(3)Calculated using the average shares outstanding method.
(4)Does not include expenses of investment companies in which the Fund invests.
(5)Includes interest expense of $364 or 0.00%, $152 or 0.00%, $3,077 or 0.00%, $1,536 or 0.00% and $734 or 0.00% of average net assets for the years ended September 30, 2022, September 30, 2021, September 30, 2020, September 30, 2019 and September 30, 2018, respectively.
(6)Including credits for expenses paid indirectly, the ratio of expenses to average net assets would have been 1.30%, 1.28%, 1.33%, 1.32% and 1.31%, for the years ended September 30, 2022, September 30, 2021, September 30, 2020, September 30, 2019 and September 30, 2018, respectively. (Note 3)
(7)Including credits for expenses paid indirectly, the ratio of net investment income (loss) to average net assets would have been 0.81%, (0.13)%, 0.48%, 0.69% and 0.65%, for the years ended September 30, 2022, September 30, 2021, September 30, 2020, September 30, 2019 and September 30, 2018, respectively. (Note 3)
49 | ||||||||
| SRIFX | SUSTAINABLE IMPACT FUND | ||||
| Global Growth and Impact Fund | |||||
| FINANCIAL HIGHLIGHTS For a capital share outstanding throughout the year | ||||||||||||||||||||||||||||||||
| Year Ended September 30, | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||
| Net asset value, beginning of year | $ | 36.14 | $ | 33.27 | $ | 27.80 | $ | 31.67 | $ | 27.52 | ||||||||||||||||||||||
| INCOME FROM INVESTMENT OPERATIONS: | ||||||||||||||||||||||||||||||||
Net investment loss (1) (2) | (0.12) | (0.39) | (0.23) | (0.15) | (0.18) | |||||||||||||||||||||||||||
| Net realized and unrealized gain (loss) on investments | (4.58) | 4.23 | 5.77 | 0.17 | 4.84 | |||||||||||||||||||||||||||
| Total from investment operations | (4.70) | 3.84 | 5.54 | 0.02 | 4.66 | |||||||||||||||||||||||||||
| LESS DISTRIBUTIONS: | ||||||||||||||||||||||||||||||||
| From net investment income | — | — | — | — | (0.40) | |||||||||||||||||||||||||||
| From net realized gain | (10.02) | (0.97) | (0.07) | (3.89) | (0.11) | |||||||||||||||||||||||||||
| Total distributions | (10.02) | (0.97) | (0.07) | (3.89) | (0.51) | |||||||||||||||||||||||||||
| Net asset value, end of year | $ | 21.42 | $ | 36.14 | $ | 33.27 | $ | 27.80 | $ | 31.67 | ||||||||||||||||||||||
| Total return | (20.37) | % | 11.56 | % | 20.01 | % | 2.49 | % | 17.12 | % | ||||||||||||||||||||||
| RATIOS/SUPPLEMENTAL DATA: | ||||||||||||||||||||||||||||||||
| Net assets, end of year (millions) | $ | 15.1 | $ | 25.5 | $ | 21.9 | $ | 20.3 | $ | 19.7 | ||||||||||||||||||||||
RATIO OF EXPENSES TO AVERAGE NET ASSETS (3): | ||||||||||||||||||||||||||||||||
| Before fees waived and expenses absorbed | 1.53% (4) | 1.45% (4) | 1.52% (4) | 1.52% (4) | 1.55% (4) | |||||||||||||||||||||||||||
| After fees waived and expenses absorbed | 1.35% (4) (5) | 1.35% (4) (5) | 1.35% (4) (5) | 1.36% (4) (5) | 1.35% (4) | |||||||||||||||||||||||||||
RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS (3): | ||||||||||||||||||||||||||||||||
| Before fees waived and expenses absorbed | (0.64)% (4) | (1.19)% (4) | (0.96)% (4) | (0.72)% (4) | (0.81)% (4) | |||||||||||||||||||||||||||
| After fees waived and expenses absorbed | (0.46)% (4) (6) | (1.09)% (4) (6) | (0.79)% (4) (6) | (0.56)% (4) (6) | (0.61)% (4) | |||||||||||||||||||||||||||
| Portfolio turnover rate | 209 | % | 154 | % | 156 | % | 190 | % | 161 | % | ||||||||||||||||||||||
*The FundX Sustainable Impact Fund was incepted March 31, 2017.
(1)Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests.
(2)Calculated using the average shares outstanding method.
(3)Does not include expenses of investment companies in which the Fund invests.
(4)Includes interest expense of $918 or 0.00%, $8 or 0.00%, $587 or 0.01%, $2,387 or 0.01% and $32 or 0.00% of average net assets for the years ended September 30, 2022, September 30, 2021, September 30, 2020, September 30, 2019 and September 30, 2018, respectively.
(5)Including credits for expenses paid indirectly, the ratio of expenses to average net assets would have been 1.31%, 1.33%, 1.34% and 1.35% for the years ended September 30, 2022, September 30, 2021, September 30, 2020 and September 30, 2019. (Note 3)
(6)Including credit for expenses paid indirectly, the ratio of net investment loss to average net assets would have been (0.41)%, (1.06)%, (0.78)% and (0.55)% for the years ended September 30, 2022, September 30, 2021, September 30, 2020 and September 30, 2019. (Note 3)
50 | ||||||||
PRIVACY NOTICE
The Funds collect non‑public information about you from the following sources:
•Information we receive about you on applications or other forms,
•Information you give us orally, and
•Information about your transactions with us or others.
We do not disclose any non-public personal information about our shareholders or former shareholders without the shareholder’s authorization, except as permitted by law or in response to inquiries from governmental authorities. We may share information with affiliated parties and unaffiliated third parties with whom we have contracts for servicing the Fund. We will provide unaffiliated third parties with only the information necessary to carry out their assigned responsibility. We maintain physical, electronic and procedural safeguards to protect your non-public personal information and require third parties to treat your non-public information with the same high degree of confidentiality.
In the event that you hold shares of a Fund through a financial intermediary, including, but not limited to, a broker-dealer, bank or trust company, the privacy policy of your financial intermediary would govern how your nonpublic personal information would be shared with unaffiliated third parties.
51 | ||||||||
FundX Flexible Income Fund – INCMX
FundX Conservative Upgrader Fund – RELAX
FundX Sustainable Impact Fund – SRIFX
You can find more information about the Funds in the following documents:
•Statement of Additional Information (“SAI”): The SAI of the Funds provides more detailed information about the investments and techniques of the Fund and certain other additional information. A current SAI is on file with the SEC and is herein incorporated by reference into this Prospectus. It is legally a part of the Prospectus.
•Annual and Semi-annual Reports: Additional information about the Funds’ investments is available in the Funds’ Annual and Semi-annual Reports to shareholders. In the Funds’ Annual Report, you will find a discussion of market conditions and investment strategies that significantly affected each Fund’s performance during its last fiscal year.
You can obtain free copies of these documents, request other information, or make general inquiries about the Funds by contacting the Funds at:
FundX Upgrader Funds
c/o U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, WI 53201‑0701
Telephone: 1-866-455‑FUND [3863]
www.fundxfunds.com
Shareholder Reports and other information about the Funds are also available:
‑ Free of charge from the Fund’s website at www.fundxfunds.com.
‑ Free of charge from the SEC’s EDGAR database on the SEC’s website at http://www.sec.gov.
‑ For a fee, by email request at [email protected]
(1940 Act File Number 811‑22951)
52 | ||||||||
STATEMENT OF ADDITIONAL INFORMATION
January 30, 2023
FundX Flexible Income Fund – INCMX
FundX Conservative Upgrader Fund – RELAX
FundX Sustainable Impact Fund – SRIFX
101 Montgomery Street, Suite 2400
San Francisco, California 94104
(415) 986-7979
This Statement of Additional Information (“SAI”) is not a prospectus and it should be read in conjunction with the Prospectus dated January 30, 2023, as may be revised, of the FundX Flexible Income Fund (“Flexible Income Fund”), the FundX Conservative Upgrader Fund (“Conservative Fund”), and the FundX Sustainable Impact Fund (“Sustainable Impact Fund”) (each a “Fund,” collectively, the “Funds”), advised by One Capital Management, LLC (the “Advisor”), series of FundX Investment Trust (the “Trust”). A copy of the Funds’ Prospectus is available by calling the number listed above or 1-866-455-FUND [3863] or on the Funds’ website at www.fundxfunds.com.
The Funds’ most recent Annual Report to shareholders is a separate document available, without charge, upon request by calling 1-866-455-FUND [3863]. The financial statements, accompanying notes and report of independent registered public accounting firm appearing in the Annual Report are incorporated into this SAI by reference to the Funds’ Annual Report dated September 30, 2022 as filed with the Securities and Exchange Commission (“SEC”).
TABLE OF CONTENTS
2
THE TRUST
The Trust is a Delaware Statutory trust organized on March 18, 2014, and is registered with the SEC as an open-end management investment company. The Trust’s Agreement and Declaration of Trust permits the Trust’s Board of Trustees (the “Board”) to issue an unlimited number of full and fractional shares of beneficial interest, without par value, which may be issued in any number of series. The Board may from time-to-time issue other series, the assets and liabilities of which will be separate and distinct from any other series. The Trust consists of various series that represent separate investment portfolios, each of which are discussed in this SAI.
The Declaration of Trust also provides for indemnification and reimbursement of expenses out of a Fund’s assets for any shareholder held personally liable for obligations of a Fund or the Trust. The Declaration of Trust provides that the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of a Fund or the Trust and satisfy any judgment thereon. All such rights are limited to the assets of a Fund. The Declaration of Trust further provides that the Trust may maintain appropriate insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Trust, its shareholders, trustees, officers, employees and agents to cover possible tort and other liabilities. However, the activities of the Trust as an investment company would not likely give rise to liabilities in excess of the Trust’s total assets. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance exists and a Fund itself is unable to meet its obligations.
As a Delaware statutory trust, the Trust is subject to Delaware law, including the Delaware Statutory Trust Act. The Delaware Statutory Trust Act provides that a shareholder of a Delaware statutory trust shall be entitled to the same limitation of personal liability extended to shareholders of Delaware corporations, and the Declaration of Trust further provides that no shareholder of the Trust shall be personally liable for the obligations of the Trust or of any series or class thereof except by reason of his or her own acts or conduct.
Each of the Funds in the Trust, except the Sustainable Impact Fund, are the successors in interest to certain funds having the same names and investment objectives that were included as series of another investment company, Professionally Managed Portfolios (the “PMP Trust”) and that were also advised by the Funds’ investment advisor (the “Predecessor Funds”). On August 1, 2014, the shareholders of each of the Predecessor Funds approved the reorganization of the Predecessor Funds with and into their corresponding series of the Trust (the “Successor Funds”) and effective as of the close of business on August 1, 2014, the assets and liabilities of each of the Predecessor Funds were transferred to the Trust in exchange for shares of each of the applicable Successor Funds.
The FundX Flexible Income Fund commenced operations on August 4, 2014 as successor to the FundX Flexible Income Fund, a series of the Trust for Professionally Managed Portfolios. The predecessor FundX Flexible Income Fund commenced operations on July 1, 2002.
The FundX Conservative Upgrader Fund commenced operations on August 4, 2014 as successor to the FundX Flexible Conservative Upgrader Fund, a series of the Trust for Professionally Managed Portfolios. The predecessor FundX Conservative Upgrader Fund commenced operations on July 1, 2002.
The FundX Sustainable Impact Fund commenced operations on March 31, 2017.
The Funds’ Prospectus and this SAI are a part of the Trust’s Registration Statement filed with the SEC. Copies of the Trust’s complete Registration Statement may be obtained from the SEC upon payment of the prescribed fee or may be accessed free of charge at the SEC’s website at www.sec.gov.
3
INVESTMENT POLICIES AND RISKS
The following information supplements the discussion of the Funds’ investment policies and risks as set forth in their Prospectus. Each Fund seeks to achieve its investment objective by investing primarily in no-load and load-waived mutual funds, including exchange-traded funds (“ETFs”) (“Underlying Funds”). The Underlying Funds may use the techniques described below or other techniques not declared herein. There can be no guarantee that any Fund’s objective will be attained.
Each Fund is diversified (as described in fundamental investment restriction 7 under “Fundamental Investment Restrictions” in this SAI). Under applicable federal securities laws, the diversification of a mutual fund’s holdings is measured at the time the fund purchases a security.
Whenever an investment policy or limitation states a maximum percentage of a Fund’s assets that may be invested in any security, either directly or via the Underlying Funds in which a Fund invests, or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will be determined immediately after and as a result of a Fund’s acquisition or sale of such security or other asset. Accordingly, except with respect to borrowing, any subsequent change in values, net assets or other circumstances will not be considered when determining whether an investment complies with a Fund’s investment policies and limitations. In addition, if a bankruptcy or other extraordinary event occurs concerning a particular investment by a Fund, the Fund may receive stock, real estate or other investments that a Fund would not, or could not, buy. If this happens, the Fund would sell such investments as soon as practicable while trying to maximize the return to its shareholders.
Market and Regulatory Risks
Legal, tax and regulatory changes could occur that may adversely affect the Funds and their ability to pursue their investment strategies and/or increase the costs of implementing such strategies. The U.S. government, the Federal Reserve, the Treasury, the SEC, the Commodity Futures Trading Commission (the “CFTC”), the Federal Deposit Insurance Corporation and other governmental and regulatory bodies have in the past taken actions in order to prevent or lessen the impact of financial crises. The impact such actions have on securities held by the Funds is unknown. There can be no assurance that such measures will not have an adverse effect on the value or marketability of securities held by the Funds. Furthermore, no assurance can be made that the U.S. government or any U.S. regulatory body (or other authority or regulatory body) will not take future legislative or regulatory action in response to economic instability or otherwise, and the effect of such actions, if taken, cannot be known.
Pursuant to CFTC Rule 4.5 under the Commodity Exchange Act (“CEA”), advisers that manage funds (including fund of funds) which invest in commodity futures, options and swaps, including securities futures, broad-based stock index futures and financial futures contracts (“Commodity Instruments”), must either (i) register as a commodity pool operator and become subject to registration and regulation under the CEA and the CFTC, or (ii) significantly limit their investments in Commodity Instruments in order to claim an exemption from Registration (the “Rule 4.5 exemption”). The Funds have claimed no-action relief from CFTC registration available to fund of funds. As a result, the Funds will not be required to register as commodity pool operators (“CPOs”), if ever, until at least six months after the CFTC issues new guidance with respect to the CPO registration obligations of fund of funds. If the Advisor is required to register as a CPO as a result of a Fund’s activities, the Fund will be subject to additional regulation as a CPO, including oversight by the CFTC (each Fund is already subject to regulation as in investment company under the 1940 Act and oversight by the SEC) and will likely incur additional costs and expenses associated with such regulation and oversight. If the Advisor is required to file the Rule 4.5 exemption, a Fund will be more limited in the future in its ability to use Commodity Instruments that in the past and these limitations may have a negative impact on the ability of the Advisor to manage the Fund, and on the Fund’s performance.
4
Recent Economic Events
The outbreak of COVID-19, an infectious respiratory illness caused by a novel coronavirus, resulted in a global pandemic beginning in 2020 that led to travel restrictions, disruptions of healthcare systems, prolonged quarantines, supply chain disruptions, lower consumer demand, layoffs, ratings downgrades, defaults and other significant economic impacts. Certain markets have experienced temporary closures, extreme volatility, severe losses, reduced liquidity and increased trading costs. Liquidity for many instruments has been greatly reduced for periods of time. These events have, and may continue to have, an impact on the Funds and their investment holdings and could impact the Funds’ ability to purchase or sell securities. These circumstances may continue and may adversely affect the value and liquidity of each Fund’s investments. Fallout from this public health crisis may exacerbate other pre-existing political, social and economic risks in the U.S. and globally. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. Interest rates have been at historically low levels. Governments and central banks, including the Federal Reserve in the U.S., have taken extraordinary and unprecedented actions to support local and global economies and the financial markets. These actions have resulted in significant expansion of public debt, including in the U.S. The impact of these measures will not be known for some time. The consequence of high public debt, including its future impact on the economy and securities markets, likewise may not be known for some time.
A worldwide increase in inflation began in mid-2021, with many countries seeing their highest inflation rates in decades. This has been attributed to various causes, including pandemic-related economic dislocation; post-pandemic consumer demand for goods and services; and the fiscal and monetary stimulus provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic. Unexpected recovery in demand through 2021 ultimately led to historic and broad supply shortages (including chip shortages and energy shortages) amid increasing consumer demand. Worldwide construction sectors were also hit.
The Russian invasion of Ukraine further exacerbated the situation, increasing global oil prices, natural gas, fertilizer, and food prices. Higher gasoline prices were a major contributor to inflation. Central banks responded by aggressively increasing interest rates. The Federal Reserve raised the federal funds rate seven times 2022 in its efforts to tame inflation, bringing the fed rate to a range of 4.25%-4.50%. The Fed’s rate rises may affect demand in interest-rate-sensitive sectors of the market.
Moving into 2023, global markets continued to face headwinds due to persistent inflation and weakness in corporate profits as consumer confidence remained low. The consensus view was that a recession, although likely mild, would likely hit both sides of the Atlantic even if inflation had peaked. During a recession, businesses usually experience decreased demand for their products or services. As a result, they may cut back on production, which could lead to layoffs and reduced consumer spending. The market’s reaction to such actions may result in higher volatility in asset prices, which may affect the value and liquidity of the Funds’ holdings. Other infectious illness outbreaks in the future may result in similar impacts.
Other Investment Companies
Each Fund pursues its investment objective by investing in shares of other open-end investment companies. As a shareholder of another investment company, a Fund bears, along with other shareholders, its pro rata portion of the other investment company’s expenses, including advisory fees, and such fees and other expenses will be borne indirectly by a Fund’s shareholders. These expenses would be in addition to the advisory and other expenses that a Fund bears directly in connection with its own operations. Each Fund currently intends to limit its investments in Underlying Funds in accordance with the Investment Company Act of 1940, as amended, (the “1940 Act”) or with certain terms and conditions of applicable exemptive orders issued by the SEC and approved by the Board. This prohibition may prevent a Fund from allocating its investment in the manner the Advisor considers optimal.
5
Section 12(d)(1) of the 1940 Act restricts investments by registered investment companies in securities of other registered investment companies. The acquisition of shares by the Funds in other registered investment companies is therefore subject to the restrictions of Section 12(d)(1) of the 1940 Act and the rules thereunder, except as may be permitted by an exemptive order obtained by the other registered investment companies that permits the Funds to invest in the other registered investment companies beyond the limits of Section 12(d)(1) and the rules thereunder, subject to certain terms and conditions, including that the Funds enter into an agreement with the other registered investment companies regarding the terms of the investment.
Through their investment in shares of the Underlying Funds, the Funds may invest in the following types of investments, each of which is subject to certain risks, as discussed below.
Exchange-Traded Funds
The Funds may also invest in ETFs. ETFs are typically open-end investment companies that are bought and sold on a national securities exchange and seek to replicate the performance, before fees and expenses, of an underlying index of securities. An ETF is similar to a traditional mutual fund, but trades at different prices during the day on a security exchange like a stock. Similar to investments in other investment companies discussed above, the Fund’s investments in ETFs will involve duplication of advisory fees and other expenses since the Fund will be investing in another investment company. In addition, the Fund’s investment in ETFs is also subject to its limitations on investments in investment companies discussed above. To the extent the Fund invests in ETFs which focus on a particular market segment or industry, the Fund will also be subject to the risks associated with investing in those sectors or industries. The shares of the ETFs in which the Fund will invest will be listed on a national securities exchange and the Fund will purchase or sell these shares on the secondary market at its current market price, which may be more or less than its NAV. Investors in the Fund should be aware that ETFs that seek to replicate a particular benchmark index are subject to “tracking risk,” which is the risk that an ETF will not be able to replicate exactly the performance of the index it tracks.
As purchasers of ETF shares on the secondary market, a Fund will be subject to the market risk associated with owning any security whose value is based on market price. ETF shares historically have tended to trade at or near their NAV, but there is no guarantee that they will continue to do so. Unlike traditional mutual funds, shares of an ETF may be purchased and redeemed directly from the ETFs only in large blocks (typically 50,000 shares or more) and only through participating organizations that have entered into contractual agreements with the ETF. The Funds do not expect to enter into such agreements and therefore will not be able to purchase and redeem their ETF shares directly from the ETF.
Equity Securities
Common stocks, preferred stocks and convertible securities are examples of equity securities in which the Underlying Funds may invest. All investments in equity securities are subject to market risks that may cause their prices to fluctuate over time. Historically, the equity markets have moved in cycles and the value of the securities in a Fund’s portfolio may fluctuate substantially from day to day. Owning an equity security can also subject a Fund to the risk that the issuer may discontinue paying dividends.
To the extent a Fund invests in the equity securities of small or mid-sized companies, through its investments in Underlying Funds, it will be exposed to the risks of smaller sized companies. Small and mid-sized companies may have narrower markets for their goods and/or services and may have more limited managerial and financial resources than larger, more established companies. Furthermore, such companies may have limited product lines, or services, markets, or financial resources or may be dependent on a small management group. In addition, because these stocks may not be well-known to the investing public, do not have significant institutional ownership and are typically followed by fewer security analysts, there will normally be less publicly available information concerning these securities compared to what is available for
6
the securities of larger companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by a Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Common Stock
Through their investment in shares of Underlying Funds, the Funds may invest in common stocks. Common stock represents a proportionate share of the ownership of a company and its value is based on the success of the company’s business, any income paid to stockholders, the value of its assets, and general market conditions. In addition to the general risks set forth above, investments in common stocks are subject to the risk that in the event a company in which a Fund invests is liquidated, the holders of preferred stock and creditors of that company will be paid in full before any payments are made to the Fund as a holder of common stock. It is possible that all assets of that company will be exhausted before any payments are made to the Fund.
Preferred Stock
Through their investment in shares of Underlying Funds, the Funds may invest in preferred stock. Preferred stocks are equity securities that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. A preferred stock is a blend of the characteristics of a bond and common stock. It can offer the higher yield of a bond, but does not have the seniority of a bond. Unlike common stock, a preferred stock’s participation in the issuer’s growth may be limited. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer.
Convertible Securities and Warrants
Through their investment in shares of Underlying Funds, the Funds may invest in convertible securities. Convertible securities are securities (such as debt securities or preferred stock) that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities generally entail less risk than investments in the issuer’s common stock. However, the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. In addition to the general risk associated with equity securities discussed above, the market value of convertible securities is also affected by prevailing interest rates, the credit quality of the issuer and any call provisions. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock.
An Underlying Fund may invest in warrants. A warrant gives the holder the right to purchase, at any time during a specified period, a predetermined number of shares of common stock at a fixed exercise price. Unlike convertible debt securities or preferred stock, warrants do not pay a dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors and failure of the price of the underlying security to reach the exercise price (in which event the Underlying Fund will not exercise the warrant and will lose its entire investment therein).
Fixed-Income Securities
Through their investment in shares of the Underlying Funds, the Funds may invest in fixed-income securities which include traditional debt securities issued by corporations, such as bonds and debentures and debt securities that are convertible into common stock and interests. Fixed-income securities that will be eligible for purchase by an Underlying Fund include investment grade and high-yield corporate debt securities.
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Investment grade securities are those rated BBB or better by Standard & Poor’s® (“S&P®”) Ratings Group or Baa or better by Moody’s Investors Services©, Inc. (“Moody’s”) or their equivalent. Securities rated BBB by S&P® are considered investment grade, but Moody’s considers securities rated Baa to have speculative characteristics. High-yield securities, or “junk bonds,” are rated less than investment grade.
High-yield debt securities generally offer a higher current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress that could adversely affect their ability to make payments of interest and principal and increase the possibility of default.
The market for high-yield debt securities is generally thinner and less active than that for higher quality securities, which may limit an Underlying Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and investor perceptions, whether based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market.
Ratings of debt securities represent the rating agencies’ opinions regarding the securities’ quality, but are not a guarantee of quality and may be reduced after an Underlying Fund has acquired the security. If a security’s rating is reduced while it is held by an Underlying Fund, the Underlying Fund’s investment advisor will consider whether the Underlying Fund should continue to hold the security, but is not required to dispose of it. Credit ratings attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events. As a result, an issuer’s current financial conditions may be better or worse than the rating indicates. The ratings for debt securities are described in Appendix A.
Fixed-income securities with longer maturities generally entail greater risk than those with shorter maturities.
Asset-Backed Securities
Through their investment in shares of Underlying Funds, the Funds may have some exposure to certain types of asset-backed securities. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a specially created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic bonds, backed by credit card receivables.
The value of an asset-backed security is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement has been exhausted.
Mortgage-Backed Securities
Through their investment in shares of Underlying Funds, the Funds may have some exposure to mortgage-backed securities. A mortgage-backed security is a type of pass-through security, which is a security
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representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of mortgage-backed securities, the ownership interest is in a pool of mortgage loans.
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 Funds’ 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. Owing largely to the foregoing, 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.
Mortgage-backed securities are most commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae” or “GNMA”), Federal National Mortgage Association (“Fannie Mae” or “FNMA”), Federal Home Loan Banks (“FHLB”) or Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a publicly owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest only by FNMA. The FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provides certain guarantees. Pass-through securities issued by the FHLMC are guaranteed as to timely payment of principal and interest only by the FHLMC.
Some of these obligations are supported by the full faith and credit of the U.S. Treasury; others are supported by the right of the issuer to borrow from the U.S. Treasury; others are supported by the discretionary authority of the U.S. government to purchase the agency’s obligations; still others, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. government would provide financial support to U.S. government-sponsored instrumentalities if it is not obligated to do so by law.
Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly or indirectly guaranteed by the U.S. government. The average life of a mortgage-backed security is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal invested far in advance of the maturity of the mortgages in the pool.
Collateralized mortgage obligations (“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are interests in a trust composed of Mortgage Assets and all references in this section to CMOs include multi-class pass-through securities. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semiannual basis. The principal and interest payments on
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the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.
Stripped mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions from a pool of mortgage assets. A common type of SMBS will be structured so that one class receives some of the interest and most of the principal from the mortgage assets, while the other class receives most of the interest and the remainder of the principal. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily or entirely of principal payments is generally unusually volatile in response to changes in interest rates.
Investment in mortgage-backed securities poses several risks, including among others, prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and perhaps its yield. Whether a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the refinancing process and local economic conditions. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of time the security is expected to be outstanding and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and the Fund invested in such securities wishing to sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that the Fund may not receive all or part of its principal because the issuer or credit enhancer has defaulted on its obligations. Obligations issued by U.S. government-related entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government. The performance of private label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the “pass-through” payments may, at times, be difficult.
Foreign Investments and Currencies
Through their investment in shares of the Underlying Funds, the Funds may invest in the securities of foreign issuers (“foreign securities”), including in sponsored and unsponsored American Depositary Receipts (“ADRs”).
Investing in foreign securities involves certain risks not ordinarily associated with investments in securities of domestic issuers. Foreign securities markets have, for the most part, substantially less volume than the U.S. markets and securities of many foreign companies are generally less liquid and their prices more volatile than securities of U.S. companies. There is generally less government supervision and regulation of foreign exchanges, brokers and issuers than in the United States. The rights of investors in certain foreign countries may be more limited than those of shareholders of U.S. issuers and an Underlying Fund may have greater difficulty taking appropriate legal action to enforce its rights in a foreign court than in a U.S. court. Investing in foreign securities also involves risks associated with government, economic, monetary, and fiscal policies (such as the adoption of protectionist trade measures); possible foreign withholding taxes on dividends and interest payable to an Underlying Fund; possible taxes on trading profits; and inflation,
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interest rates, economic expansion or contraction, and global or regional political, economic or banking crises. Furthermore, there is the risk of possible seizure, nationalization or expropriation of the foreign issuer or foreign deposits and the possible adoption of foreign government restrictions such as exchange controls. Also, foreign issuers are not necessarily subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic issuers and as a result, there may be less publicly available information on such foreign issuers than is available from a domestic issuer.
In addition, an Underlying Fund may invest in foreign securities of companies that are located in developing or emerging markets. Investing in securities of issuers located in emerging markets may pose greater risks not typically associated with investing in more established markets such as increased risk of social, political and economic instability. Emerging market countries typically have smaller securities markets than developed countries and therefore less liquidity and greater price volatility than more developed markets. Securities traded in emerging markets may also be subject to risks associated with the lack of modern technology, poor infrastructures, the lack of capital base to expand business operations and the inexperience of financial intermediaries, custodians and transfer agents. Emerging market countries are also more likely to impose restrictions on the repatriation of an investor’s assets and, even where there is no outright restriction on repatriation, the mechanics of repatriations may delay or impede an Underlying Fund’s ability to obtain possession of its assets. As a result, there may be an increased risk or price volatility associated with an Underlying Fund’s investments in emerging market countries, which may be magnified by currency fluctuations.
From time to time, an Underlying Fund may invest a significant portion of its assets in the securities of a single country or region. Substantial investment in a single country or region will subject an Underlying Fund, and therefore the Funds to a greater extent, to the risks associated with investments in that region or country. An Underlying Fund will also be subject to the risks that its return will be more dependent on the economic performance of that country or region than a fund that is not so concentrated.
Dividends and interest payable on an Underlying Fund’s foreign securities may be subject to foreign withholding tax. An Underlying Fund may also be subject to foreign taxes on its trading profits. Some countries may also impose a transfer or stamp duty on certain securities transactions. The imposition of these taxes will increase the cost to an Underlying Fund of investing in those countries that impose these taxes. To the extent such taxes are not offset by credits or deductions available to shareholders in a Fund under U.S. tax law, they will reduce the net return to a Fund’s shareholders.
To the extent an Underlying Fund invests in securities denominated in foreign currencies, the Underlying Fund will be subject to the risk that a change in the value of any such currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of the Underlying Fund’s assets denominated in that currency. Investing in foreign denominated securities may also result in transaction costs incurred in connection with conversions between various currencies. In addition, only a limited market currently exists for hedging transactions relating to currencies in certain emerging markets and securities transactions undertaken in foreign markets may not be settled promptly, subjecting an Underlying Fund to the risk of fluctuating currency exchange rates pending settlement.
Underlying Funds may invest in ADRs. ADRs represent receipts typically issued by a U.S. bank or trust company which evidence ownership of underlying securities of foreign issuers. Although the underlying securities are denominated in a foreign currency, ADR prices are denominated in U.S. dollars although the underlying securities are denominated in a foreign currency. ADRs may be listed on a national securities exchange or may be traded in the over-the-counter market. Investments in ADRs involve risks similar to direct investment in the underlying foreign security. Unsponsored ADRs are organized independently of the issuer of the underlying security and without its cooperation. Available information about the issuer of the
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unsponsored ADR may not be current or as readily available as for sponsored ADRs and therefore the prices of unsponsored ADRs may be more volatile than for sponsored ADRs.
Debt Securities
Through their investment in shares of the Underlying Funds, the Funds may invest in corporate and U.S. government debt securities. Corporate debt securities include, but are not limited to, debt obligations offered by public or private corporations either registered or unregistered. The market value of such securities may fluctuate in response to interest rates and the creditworthiness of the issuer. The Funds may invest in debt securities that are non-investment grade or are in default.
U.S. government debt securities include direct obligations of the U.S. government and obligations issued by U.S. government agencies and instrumentalities. Although certain securities issued by the U.S. government, its agencies or instrumentalities are backed by the full faith and credit of the U.S. government, others are supported only by the credit of that agency or instrumentality. There is no guarantee that the U.S. government will provide support to such agencies or instrumentalities and such securities may involve risk of loss of principal and interest. In addition, a security backed by the U.S. Treasury or the full faith and credit of the U.S. government is guaranteed only as to the timely payment of interest and principal when held to maturity. The current market prices for such securities are not guaranteed and will fluctuate. Certain U.S. government agency securities or securities of U.S. government-sponsored entities are backed by the right of the issuer to borrow from the U.S. Treasury, or are supported only by the credit of the issuer or instrumentality. While the U.S. government provides financial support to those U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so and those securities are neither guaranteed nor issued by the U.S. government. In the case of securities backed by the full faith and credit of the U.S. government, shareholders are primarily exposed to interest rate risk.
Leverage through Borrowing
The Underlying Funds may borrow money for leveraging or other purposes. Leveraging creates an opportunity for increased net income but, at the same time, creates special risk considerations. Since substantially all of an Underlying Fund’s assets fluctuate in value, while the interest obligation resulting from a borrowing will be fixed by the terms of the Underlying Fund’s agreement with its lender, the net asset value (“NAV”) per share of the Underlying Fund will tend to increase more when its portfolio securities increase in value and to decrease more when its portfolio assets decrease in value than would otherwise be the case if the Underlying Fund did not borrow funds. Leveraging will also create interest expenses for an Underlying Fund which can exceed the income from the assets retained. To the extent the income derived from securities purchased with borrowed funds exceeds the interest an Underlying Fund will have to pay, such 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 an Underlying Fund will be less than if leveraging were not used and, therefore, the amount available for distribution to stockholders as dividends will be reduced.
In addition, interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds. Under adverse market conditions, an Underlying Fund might have to sell portfolio securities to meet interest or principal payments at a time when fundamental investment considerations would not favor such sales.
Fund Borrowing
The Funds are authorized to borrow money from time-to-time for temporary, extraordinary or emergency purposes or for clearance of transactions in amounts not to exceed 33 1/3% of the value of a Fund’s total assets at the time of such borrowings. A Fund will not borrow for investment purposes. When borrowing, a Fund will be subject to risks similar to those listed above in the section “Leverage Through Borrowing.”
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When-Issued Securities
An Underlying Fund may from time-to-time purchase securities on a “when-issued” basis. The price of such securities, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for the when‑issued securities take place at a later date. Normally, the settlement date occurs within one month of the purchase; during the period between purchase and settlement, no payment is made by the Underlying Fund to the issuer and no interest accrues to the Underlying Fund. To the extent that assets of the Underlying Fund are held in cash pending the settlement of a purchase of securities, the Underlying Fund would earn no income. At the time an Underlying Fund makes the commitment to purchase a security on a when-issued basis, it will record the transaction and reflect the value of the security in determining its NAV. The market value of the when-issued securities may be more or less than the purchase price. The Advisor does not believe that an Underlying Fund’s NAV or income will be adversely affected by the purchase of securities on a when-issued basis. Underlying Funds normally segregate liquid assets equal in value to commitments for when-issued securities, which reduces, but does not eliminate, leverage because the Underlying Fund will be able to make use of those segregated assets until settlement occurs.
Options and Futures
Underlying Funds may invest in options on equities, debt and stock indices (collectively, “options”). Underlying Funds may also invest in futures contracts and options on futures contracts (collectively, “futures”). Underlying Funds may make these investments as a substitute for a comparable market position in the underlying security, to attempt to hedge or limit the exposure of its position, to create a synthetic money market position for certain tax-related purposes and to effect closing transactions.
The use of futures and options (collectively, “Financial Instruments”) is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission. In addition, an Underlying Fund’s ability to use Financial Instruments will be limited by tax considerations.
The use of Financial Instruments involves special considerations and risks which include, but are not limited to, the following:
(1)Successful use of most Financial Instruments depends upon the investment advisor’s ability to predict movements of the overall securities markets, which requires different skills than predicting changes in the prices of individual securities. The ordinary spreads between prices in the cash and futures markets, due to the differences in the natures of those markets, are subject to distortion. Due to the possibility of distortion, a correct forecast of stock market trends by an investment advisor may still not result in a successful transaction. The investment advisor may be incorrect in its expectations as to the extent of market movements or the time span within which the movements will take place which, thus, may result in the strategy being unsuccessful.
(2)Options and futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(3)As described below, an Underlying Fund might be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (e.g., Financial Instruments other than purchased options). If an Underlying
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Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair the Underlying Fund’s ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that an Underlying Fund sell a portfolio security at a disadvantageous time. An Underlying Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the transaction (the “counter-party”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to an Underlying Fund.
Assets used as cover or held in an account cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of an Underlying Fund’s assets to cover or hold in accounts could impede portfolio management or the Underlying Fund’s ability to meet redemption requests or other current obligations.
(4)Losses may arise due to unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by an Underlying Fund on options transactions.
Options on Securities and Securities Indices
Underlying Funds normally will purchase call options in anticipation of an increase in the market value of securities of the type in which it may invest or a positive change in the currency in which such securities are denominated. The purchase of a call option would entitle the Underlying Fund, in return for the premium paid, to purchase specified securities or a specified amount of a foreign currency at a specified price during the option period. The Underlying Fund normally purchases put options in anticipation of a decrease in the market value of securities of the type in which it may invest or a negative change in the currency in which such securities are denominated. The purchase of a put option would entitle an Underlying Fund, in return for the premium paid, to sell specified securities or a specified amount of a foreign currency at a specified price during the option period.
The Underlying Fund may purchase and sell options traded on U.S. and foreign exchanges. Although the Underlying Fund will generally purchase only those options for which there appears to be an active secondary market, there can be no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time. For some options, no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that the Underlying Fund would have to exercise its options in order to realize any profit and would incur transaction costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for a variety of reasons including: (i) insufficient trading interest in certain options; (ii) restrictions on opening transactions or closing transactions imposed by an exchange; (iii) the imposition of trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances which interrupt normal operations on an exchange; (v) inadequate facilities of an exchange or the Options Clearing Corporation to handle current trading volume at all times; or (vi) discontinuance of option trading (or of a particular class or series of options) in the future by one or more exchanges for economic or other reasons, in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
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The Underlying Fund may write (i.e., sell) covered put and call options on securities, securities indices and currencies in which they may invest. A covered call option involves the Underlying Fund giving another party, in return for a premium, the right to buy specified securities owned by the Underlying Fund at a specified future date and price set at the time of the contract. A covered call option serves as a partial hedge against a price decline of the underlying security. However, by writing a covered call option, the Underlying Fund gives up the opportunity, while the option is in effect, to realize gain from any price increase (above the option exercise price) in the underlying security. In addition, the Underlying Fund’s ability to sell the underlying security is limited while the option is in effect unless the Underlying Fund effects a closing purchase transaction.
The Underlying Funds may also write covered put options that give the holder of the option the right to sell the underlying security to the Underlying Fund at the stated exercise price. The Underlying Fund will receive a premium for writing a put option, but will be obligated for as long as the option is outstanding to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise. In order to “cover” put options it has written, the Underlying Fund will cause its custodian to segregate cash, cash equivalents, U.S. government securities or other liquid equity or debt securities with at least the value of the exercise price of the put options.
There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of the Options Clearing Corporation inadequate, and result in the institution by an exchange of special procedures that may interfere with the timely execution of the Underlying Fund’s option orders.
Futures and Options on Futures
Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security or currency at a specified future time 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. Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (contracts traded on the same exchange, on the same underlying security or index, and with the same delivery month). If an offsetting purchase price is less than the original sale price, an Underlying Fund realizes a capital gain; if it is more, the Underlying Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, an Underlying Fund realizes a capital gain; if it is less, the Underlying Fund realizes a capital loss. The transaction costs must also be included in these calculations. Underlying Funds may use futures contracts and related options for bona fide hedging purposes, such as to offset changes in the value of securities held or expected to be acquired or be disposed of or to minimize fluctuations in foreign currencies.
An index futures contract is a bilateral agreement 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 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 securities comprising the index is made; generally contracts are closed out prior to their expiration date.
In order to avoid leveraging and related risks, when an Underlying Fund invests in futures contracts, the Underlying Fund will cover positions 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 and that amount will be marked-to-market on a daily basis.
There are risks associated with these activities, including the following: (i) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets
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and movements in interest rates; (ii) there may be an imperfect or lack of correlation between the changes in market value of the securities held and the prices of futures and options on futures; (iii) there may not be a liquid secondary market for a futures contract or option; (iv) trading restrictions or limitations may be imposed by an exchange; and (iv) government regulations may restrict trading in futures contracts and options on futures.
Underlying Funds may buy and sell futures contracts and related options to manage exposure to changing interest rates and securities prices. Some strategies reduce an Underlying Fund’s exposure to price fluctuations, while others tend to increase market exposure. Futures and options on futures can be volatile instruments and involve certain risks that could negatively impact the Underlying Fund’s return. No price is paid upon entering into futures contracts. Instead, an Underlying 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 future position varies (a process known as “marked to market”). The margin is in the nature of performance bond or good-faith deposit on a futures contract. Futures and options on futures are taxable instruments.
Swap Contracts
Types of Swaps
Swaps are a specific type of over-the-counter (“OTC”) derivative involving privately negotiated agreements with a trading counter-party. An Underlying Fund may use (i) long equity swap contracts – where the Underlying Fund pays a fixed rate plus the negative performance, if any, and receives the positive performance, if any, of an index or basket of securities; (ii) short equity swap contracts – where the Underlying Fund receives a fixed rate plus the negative performance, if any, and pays the positive performance of an index or basket of securities; and (iii) contracts for differences – equity swaps that contain both a long and short equity component.
Uses
An Underlying Fund may use swaps for (i) traditional hedging purposes – short equity swap contracts used to hedge against an equity risk already present in the Underlying Fund; (ii) anticipatory purchase hedging purposes – where an Underlying Fund anticipates significant cash purchase transactions and enters into long equity swap contracts to obtain market exposure until such a time where direct investment becomes possible or can be made efficiently; (iii) anticipatory redemption hedging purposes – where an Underlying Fund expects significant demand for redemptions; (iv) direct investment – where an Underlying Fund purchases (particularly long equity swap contracts) in place of investing directly in securities; and (v) risk management – where an Underlying Fund uses equity swap contracts to adjust the weight of an Underlying Fund to a level the Underlying Fund’s investment advisor feels is the optimal exposure to individual markets, sectors and equities.
Risks Associated With Recent Economic Events
The U.S. credit markets have experienced exceptionally low volatility and disruption, due in part to accommodative monetary policies from global central banks. As the Fed and other central banks remove such accommodation and raise interest rates, instability in the credit markets may make it more difficult for a number of issuers of debt securities to obtain financing or refinancing for their investment or lending activities or operations. In particular, because of volatile conditions in the credit markets, issuers of debt securities may be subject to increased cost for debt, tightening underwriting standards and reduced liquidity for loans they make, securities they purchase and securities they issue. These developments may increase the volatility of the value of securities owned by a Fund. These developments may also make it more difficult for a Fund to accurately value its securities or to sell its securities on a timely basis. These developments may also adversely affect the broader economy, which in turn may adversely affect the ability of issuers of securities owned by a Fund to make payments of principal and interest when due, lead to lower
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credit ratings of issuers and increased defaults by issuers. Such developments could, in turn, reduce the value of securities owned by a Fund and adversely affect the net asset value (“NAV”) of its shares.
The Dodd-Frank Act significantly revises and expanded the rulemaking, supervisory and enforcement authority of federal bank, securities and commodities regulators. These regulations imposed significant costs and burdens on funds but also helped improve investor confidence and reduce some of the systemic risks that contributed to the financial crisis of 2008-2009. The current administration has been scaling back regulations and considering measures to soften or potentially even repeal the Dodd-Frank Act. This may reduce costs and boost innovation, but it may also increase the risks of future crisis. In addition, the recent European debt situation and related financial restructuring efforts have contributed to the instability in global credit markets. The strength and duration of any economic recovery will be impacted by the European debt situation and the reaction to any efforts to address the situation.
Limitations on Use
There is generally no limit on the use of swaps except to the extent such swaps are subject to the liquidity requirements of an Underlying Fund.
Risks Related to Swaps
Swaps may relate to stocks, bonds, interest rates, currencies or currency exchange rates and related indices. An Underlying Fund can use swaps for many purposes, including hedging and investment gain. An Underlying Fund may also use swaps as a way to efficiently adjust its exposure to various securities, markets and currencies without having to actually sell current assets and purchase different ones. The use of swaps involves risks different from, or greater than, the risks associated with investing directly in securities and other more traditional investments. An Underlying Fund’s investment advisor may also fail to use swaps effectively. For example, such investment advisor may choose to hedge or not to hedge at inopportune times which may adversely affect an Underlying Fund’s performance.
Swaps are subject to a number of risks. Since their value is calculated and derived from the value of other assets, instruments or references, there is greater risk that the swap contract will be improperly valued. Valuation, although based on current market pricing data, is typically done by the counter-party to the swap contract. If the counter-party to a swap contract does not make timely principal interest or settle payments when due, or otherwise fulfill its obligations, an Underlying Fund could lose money on its investment.
Swaps also involve the risk that changes in the value of the swaps may not correlate perfectly with relevant assets, rates or indices they are designed to hedge or to closely track. Liquidity risk exists when particular investments are difficult to purchase or sell due to a limited market or to legal restrictions, such that an Underlying Fund may be prevented from selling particular securities at the price at which it values them. An Underlying Fund is subject to liquidity risk, particularly with respect to the use of swaps. Also, suitable swaps transactions may not be available in all circumstances, and there can be no assurance that an Underlying Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial.
Illiquid Securities
Typically, an Underlying Fund may invest up to 15% of its net assets in securities that at the time of purchase are illiquid.
Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placement or restricted securities and are purchased directly from the issuer or in the secondary market.
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Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation.
The Investment Company Act of 1940 provides that an Underlying Fund, whose shares are purchased by a Fund, is obliged to redeem shares held by the Fund only in an amount up to 1% of the Underlying Fund’s outstanding securities during any period of less than 30 days (unless the SEC has issued other exemptive relief). Thus, shares of an Underlying Fund held by a Fund in excess of 1% of the Underlying Fund’s outstanding securities may be considered not readily marketable securities; that, together with other such securities, may not exceed 15% of the Fund’s net assets. (This limitation does not apply to a Fund’s holdings of shares of ETFs, which are not redeemed through the ETF itself, but which can be sold by a Fund on a securities exchange in a secondary market transaction.) However, because each Fund has elected to reserve the right to pay redemption requests by a distribution of securities from a Fund’s portfolio, instead of in cash, these holdings may be treated as liquid. In some cases, an Underlying Fund may make a redemption payment to a Fund by distributing securities from its portfolio instead of cash. Thus, it is possible that such Fund could hold securities distributed by an Underlying Fund until such time as the Advisor determines it is appropriate to dispose of such securities. Disposing of such securities could cause a Fund to incur additional costs.
Restricted Securities
An Underlying Fund may invest in securities that are subject to restrictions on resale because they have not been registered under the Securities Act. These securities are sometimes referred to as private placements. Although securities which may be resold only to “qualified institutional buyers” in accordance with the provisions of Rule 144A under the Securities Act are technically considered “restricted securities,” an Underlying Fund may purchase Rule 144A securities without regard to the limitation on investments in illiquid securities described above in the “Illiquid Securities” section, provided that a determination is made that such securities have a readily available trading market. An Underlying Fund may also purchase certain commercial paper issued in reliance on the exemption from regulations in Section 4(2) of the Securities Act (“4(2) Paper”). An Underlying Fund’s investment advisor will determine and monitor the liquidity of Rule 144A securities and 4(2) Paper.
Limitations on the resale of restricted securities may have an adverse effect on the marketability of portfolio securities and the Underlying Fund might be unable to dispose of restricted securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemption requirements. The Underlying Fund might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
Securities Lending
An Underlying Fund may lend its portfolio securities in order to generate additional income. Securities may be loaned to broker-dealers, major banks or other recognized domestic institutional borrowers of securities. Generally, an Underlying Fund may lend portfolio securities to securities broker-dealers or financial institutions if: (1) the loan is collateralized in accordance with applicable regulatory requirements including collateralization continuously at no less than 100% by marking to market daily; (2) the loan is subject to termination by the Underlying Fund at any time; (3) the Underlying Fund receives reasonable interest or fee payments on the loan, as well as any dividends, interest, or other distributions on the loaned securities; (4) the Underlying Fund is able to exercise all voting rights with respect to the loaned securities; and (5) the loan will not cause the value of all loaned securities to exceed one-third of the value of the Underlying Fund’s assets.
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Short Sales
An Underlying Fund may seek to hedge investments or realize additional gains through short sales. In a short sale, the Underlying Fund sells a security it does not own, in anticipation of a decline in the market value of the security. To complete the transaction, an Underlying Fund must borrow the security to make delivery to the buyer. The Underlying Fund is then obligated to replace the security borrowed by purchasing it at the market price at or prior to the time of replacement. The price at such time may be more or less than the price at which the security was sold by an Underlying Fund. An Underlying Fund will incur a loss on a short sale if the price of the security increases between the date of the short sale and the date on which the Underlying Fund replaces the borrowed security. An Underlying Fund will realize a gain if the security declines in price between those dates. The amount of any gain will be decreased and the amount of any loss increased by the amount of the premium, dividends, interest or expenses the Underlying Fund may be required to pay in connection with the short sale.
Typically an Underlying Fund will segregate liquid assets, which are marked-to-market daily, equal to the difference between the market value of the securities sold short at the time they were sold short and any assets required to be deposited with the broker in connection with the short sale (not including the proceeds from the short sale).
Short-Term Investments
The Funds and Underlying Funds may invest in any of the following securities and instruments:
Certificates of Deposit, Bankers’ Acceptances and Time Deposits
The Funds and Underlying Funds may acquire certificates of deposit, bankers’ acceptances and time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning in effect that the bank unconditionally agrees to pay the face value of the instrument on maturity. Certificates of deposit and bankers’ acceptances acquired by the Funds will be dollar-denominated obligations of domestic banks, savings and loan associations or financial institutions, which, at the time of purchase, have capital, surplus and undivided profits in excess of $100 million (including assets of both domestic and foreign branches), based on latest published reports or less than $100 million if the principal amount of such bank obligations are fully insured by the U.S. government.
In addition to purchasing certificates of deposit and bankers’ acceptances, to the extent permitted under their investment objective and policies stated above and in its prospectus, the Funds and Underlying Funds may make interest-bearing time or other interest-bearing deposits in commercial or savings banks. Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of time at a specified interest rate.
Commercial Paper and Short-Term Notes
The Funds and Underlying Funds may invest a portion of their assets in commercial paper and short-term notes. Commercial paper consists of unsecured promissory notes issued by corporations. Issues of commercial paper and short-term notes will normally have maturities of less than nine months and fixed rates of return, although such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the time of purchase “A-2” or higher by Standard & Poor’s Ratings Group, “Prime-1” or “Prime-2” by Moody’s Investors Service, Inc., or similarly rated by another nationally recognized statistical rating organization or, if unrated, will be determined by the Advisor to be of comparable quality. These rating symbols are described in Appendix B.
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Money Market Mutual Funds
The Funds and Underlying Funds may invest in money market mutual funds in connection with their management of daily cash positions or as a temporar