NOTES TO FINANCIAL STATEMENTS
1.
ORGANIZATION
Copeland Risk Managed Dividend Growth Fund (the Domestic Fund) is a non-diversified series of Copeland Trust (the Trust) and Copeland International Risk Managed Dividend Growth Fund (the International Fund) is a diversified series of the Trust. The Trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act) as an open-end management investment company. The Trust was organized as a statutory trust on September 10, 2010 under the laws of the State of Delaware. The investment objective of each fund is to seek long-term capital appreciation and income while preserving capital.
The Funds currently offer Class A, Class C and Class I shares. Domestic Funds Class A shares commenced operations on December 28, 2010, Class C shares commenced operations on January 5, 2012 and Class I shares commenced operations on March 1, 2013. International Funds Class A, Class C and Class I shares commenced operations on December 17, 2012. Class A shares are offered at net asset value plus a maximum sales charge of 5.75%. Purchases of $1,000,000 or more may be subject to a maximum contingent deferred sales charge of 1.00% on shares redeemed within 18 months. Class C and Class I shares are offered at net asset value. Each class represents an interest in the same assets of the Funds and classes are identical except for differences in their sales charge structures and ongoing service and distribution charges. All classes of shares have equal voting privileges except that each class has exclusive voting rights with respect to its service and/or distribution plans. The Funds income, expenses (other than class specific distribution fees) and realized and unrealized gains and losses are allocated proportionately each day based upon the relative net assets of each class.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the Funds in preparation of their financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses for the period. Actual results could differ from those estimates.
Security Valuation
The Funds securities are valued at the last sale price on the exchange in which such securities are primarily traded, as of the close of business on the day the securities are being valued. In the absence of a sale on the primary exchange, such securities shall be valued at the last bid on the primary exchange. NASDAQ traded securities are valued using the NASDAQ Official Closing Price (NOCP). Investments valued in currencies other than the U.S. dollar are converted to U.S. dollars using exchange rates obtained from pricing services.
If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith by the adviser in accordance with procedures approved by the Trusts Board of Trustees (the Board) and evaluated by the Board as to the reliability of the fair value method used. The procedures consider, among others, the following factors to determine a securitys fair value: the nature and pricing history (if any) of the security; whether any dealer quotations for the security are available; and possible valuation methodologies that could be used to determine the fair value of the security.
The Funds utilize various methods to measure the fair value of its investments on a recurring basis. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of input are:
Level 1
Unadjusted quoted prices in active markets for identical assets and liabilities that the Funds have the ability to access.
Level 2
Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an
Copeland Funds
NOTES TO FINANCIAL STATEMENTS
(Continued)
inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3
Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Funds own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables summarize the inputs used as of November 30, 2013 for the Funds assets measured at fair value:
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Copeland Risk Managed Dividend Growth Fund
|
Assets
|
Level 1
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Level 2
|
Level 3
|
Total
|
Common Stock *
|
$ 499,592,961
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$ -
|
$ -
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$ 499,592,961
|
Short-term Investment
|
6,192,051
|
-
|
-
|
6,192,051
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Total:
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$ 505,785,013
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$ -
|
$ -
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$ 505,785,013
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|
|
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Copeland International Risk Managed Dividend Growth Fund
|
Assets
|
Level 1
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Level 2
|
Level 3
|
Total
|
Common Stock *
|
$ 2,596,958
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$ 7,736,877
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$ -
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$ 10,333,835
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Short-term Investment
|
268,729
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-
|
-
|
268,729
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Total:
|
$ 2,865,687
|
$ 7,736,877
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$ -
|
$ 10,602,564
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The Funds did not hold any Level 3 securities during the period.
There were no transfers into or out of Level 1 and Level 2 during the current period presented. It is the Funds policy to record transfers into or out of Level 1 and 2 at the end of the reporting period.
* Please refer to the Portfolio of Investments for Industry Classification.
Securities in which the International Fund invests may be traded in markets that close before 4:00 p.m. Eastern Time (ET). In order to capture the developments that occur between the close of the foreign markets and 4:00 p.m. ET, the International Fund utilizes fair value prices as provided by an independent pricing vendor on a daily basis for those securities traded on a foreign exchange.
Security Transactions and Investment Income
Investment security transactions are accounted for on a trade date basis. Cost is determined and gains and losses are based upon the specific identification method for both financial statement and federal income tax purposes. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Purchase discounts and premiums on securities are accreted and amortized over the life of the respective securities.
Copeland Funds
NOTES TO FINANCIAL STATEMENTS
(Continued)
Federal Income Taxes
The Funds intend to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and will distribute all of its taxable income, if any, to shareholders. Accordingly, no provision for Federal income taxes is required in the financial statements.
The Funds recognize the tax benefits of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. Management has analyzed the Funds tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions related to the open tax years (2011-2012) or expected to be taken in the Funds 2013 tax return. The Funds identify their major tax jurisdictions as U.S. Federal and foreign jurisdictions where the Funds may make significant investments; however, the Funds are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
Foreign Currency
The accounting records of the Funds are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency, and income receipts and expense payments are translated into U.S. dollars using the prevailing exchange rate at the London market close. Purchases and sales of securities are translated into U.S. dollars at the contractual currency rates established at the approximate time of the trade. Net realized gains and losses on foreign currency transactions represent net gains and losses from currency realized between the trade and settlement dates on securities transactions and the difference between income accrued versus income received. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities.
Forward Currency Contracts
As foreign securities are purchased, the International Fund generally enters into forward currency exchange contracts in order to hedge against foreign currency exchange rate risks. The market value of the contract fluctuates with changes in currency exchange rates. The contract is marked-to-market daily and the change in market value is recorded by the Funds as an unrealized gain or loss. As foreign securities are sold, a portion of the contract is generally closed and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses from contract transactions are included as a component of net realized gains (losses) from foreign currency transactions in the Statements of Operations. For the period ended November 30, 2013, International Fund had a net realized loss of $34,551 on forward currency contracts.
Concentration of Risk
Investing in securities of foreign issuers and currency transactions may involve certain considerations and risks not typically associated with investments in the United States. These risks include revaluation of currencies, adverse fluctuations in foreign currency values and possible adverse political, social and economic developments, including those particular to a specific industry, country or region. These conditions could cause the securities and their markets to be less liquid and prices more volatile than those of comparable U.S. companies and U.S. government securities.
Distributions to Shareholders
Distributions from investment income, if any, are declared and paid annually and are recorded on the ex-dividend date. Prior to April 1, 2013, the Domestic Fund made distributions of net investment income, if any, on a quarterly basis. The Funds will declare and pay net realized capital gains, if any, annually. The character of income and gains to be distributed is determined in accordance with income tax regulations, which may differ from GAAP. These book/tax differences are considered either temporary (i.e., deferred losses, capital loss carry forwards) or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences do not require classification.
Expenses
Expenses of the Trust that are directly identifiable to a specific Fund are charged to that Fund. Expenses, which are not readily identifiable to a specific Fund, are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expense and the relative sizes of the funds in the Trust.
Copeland Funds
NOTES TO FINANCIAL STATEMENTS
(Continued)
Indemnification
The Funds indemnify its officers and trustees for certain liabilities that may arise from the performance of their duties to the Trust. Additionally, in the normal course of business, the Funds enter into contracts that contain a variety of representations and warranties and which provide general indemnities. The Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss due to these warranties and indemnities to be remote.
3.
ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Advisory Fees
Subject to the authority of the Board, the adviser is responsible for management of the Funds investment portfolios. Pursuant to the Management Agreement (the Management Agreement), investment advisory services are provided to the Funds by Copeland Capital Management, LLC (the Adviser). Under the terms of the Management Agreement, the Adviser receives monthly fees calculated at an annual rate of 1.00% and 1.10% for the Domestic Fund and the International Fund, respectively, of the average daily net assets of each Fund. For the period ended November 30, 2013, the Adviser earned advisory fees of $3,851,532 and $24,185 for the Domestic Fund and International Fund, respectively, before the effect of the Expense Limitation Agreement.
The Adviser, pursuant to an Expense Limitation Agreement (the Agreement) has contractually agreed to reduce its fees and/or absorb expenses of the Fund, at least until March 31, 2015, to ensure that Net Annual Operating Expenses (excluding any front-end or contingent deferred loads, brokerage fees and commissions, acquired fund fees and expenses, borrowing costs such as interest and dividend expense on securities sold short, taxes and extraordinary expenses such as litigation) will not exceed 1.45%, 2.20% and 1.30% of the Domestic Fund average daily net assets for Class A, Class C and Class I shares, respectively and 1.60%, 2.35% and 1.45% of the International Fund average daily net assets for Class A, Class C and Class I shares, respectively. The Agreement will allow the Adviser, subject to certain conditions, to recover amounts previously reimbursed for operating expenses to the Funds to the extent that the Funds expense ratios fall below the above indicated expense limitations. The amounts that can be recovered will be limited to the difference between the actual expense ratio and the amount of the expense limitation. Under such agreement, the Adviser can only recover such amounts for a period of up to three years. For the period ended November 30, 2013, the Adviser waived fees/reimbursed expenses of $368,688 and $198,253 for the Domestic Fund and International Fund, respectively. As of November 30 2013, the cumulative expenses subject to recapture amounted to $1,016,372 and $198,253 for the Domestic Fund and International Fund, respectively, and will expire on November 30 of the years indicated below.
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Copeland Risk Managed Dividend Growth Fund
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2014
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2015
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2016
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|
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$327,957
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$319,727
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$368,688
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|
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|
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Copeland International Risk Managed Dividend Growth Fund
|
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2016
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|
|
|
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$198,253
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Pursuant to separate servicing agreements with GFS, the Funds pays GFS fees for providing administration, fund accounting, transfer agency and custody administration services to the Funds.
In addition, certain affiliates of GFS provide ancillary services to the Funds as follows:
Northern Lights Compliance Services, LLC (NLCS) -
NLCS, an affiliate of GFS, provides a Chief Compliance Officer to the Trust, as well as related compliance services, pursuant to a consulting agreement between NLCS and the Trust. Under the terms of such agreement, NLCS receives fees from the Funds.
Copeland Funds
NOTES TO FINANCIAL STATEMENTS
(Continued)
GemCom, LLC (GemCom) -
GemCom, an affiliate of GFS, provides EDGAR conversion and filing services as well as print management services for the Fund on an ad-hoc basis. For the provision of these services, GemCom receives fees from the Funds.
Distributor
The Board has adopted Distribution Plans and Agreements for each Fund (collectively the Plan) pursuant to Rule 12b-1 under the 1940 Act. The Plan provides that a monthly service and/or distribution fee is calculated by each Fund at an annual rate of 0.25% and 1.00% (of which up to 0.75% is a distribution fee and up to 0.25% is a service fee) of the average daily net assets attributable to Class A shares and Class C shares, respectively and is paid to Northern Lights Distributors, LLC (the Distributor), to provide compensation for ongoing distribution-related activities or services and/or maintenance of the Funds shareholder accounts, not otherwise required to be provided by the Adviser. The Plan is a compensation plan, which means that compensation is provided regardless of 12b-1 expenses incurred. For the period ended November 30, 2013, the 12b-1 fees accrued amounted to $869,905 and $359,329 for the Domestic Fund for Class A and Class C shares, respectively and $3,423 and $2,398 for the International Fund for Class A and Class C shares, respectively.
The Board has adopted non-Rule 12b-1 shareholder service plans (collectively, the Shareholder Service Plan) for the Class I shares of each Fund. The Shareholder Service Plan permits the Funds to pay brokers, financial intermediaries and others an annual fee of 0.10% of each Funds average daily net assets attributable to the Class I shares for shareholder support and/or administrative services, not otherwise provided by the Trusts transfer agent. For the year ended November 30, 2013 neither Fund accrued or paid any fees associated with the Shareholder Service Plan.
The Adviser may enter into selling agreements or shareholder service agreements with broker-dealers and other financial intermediaries. Under those agreements, the Adviser pays such entities based on the aggregate net asset value of the Class A shares, Class C shares and Class I shares, as applicable, owned of record or beneficially by the broker-dealers or financial intermediaries customers. The Adviser may then recover from the Distributor all or a portion of the amounts paid by the Adviser to such broker-dealers or financial intermediaries under the Plan with respect to the Class A and Class C shares and under the Shareholder Service Plan for the Class I shares.
The Distributor acts as the Funds principal underwriter in a continuous public offering of the Funds shares. For the period ended November 30, 2013, the Distributor received $697,258 in underwriting commissions for sales of Class A shares, of which $93,070 was retained by the principal underwriter or other affiliated broker-dealers for the Domestic Fund and $39,945 in underwriting commissions for sales of Class A shares, of which $5,826 was retained by the principal underwriter or other affiliated broker-dealers for the International Fund.
Trustees
Each Trustee who is not affiliated with the Trust or Adviser receives (i) a base annual retainer of $19,000, (ii) $12,000 for attendance at four regularly scheduled Board meetings, (iii) $4,000 for attendance at two regularly scheduled Audit Committee meetings, (iv) $750 and $2,500 per each additional telephonic or in person meeting, respectively, and (v) reimbursement for any reasonable expenses incurred attending the meetings. For carrying out his additional responsibilities, the independent Chairman of the Board receives an additional $9,500 per year. The foregoing compensation will be paid in quarterly payments.
The interested persons who serve as Trustees of the Trust receive no compensation for their services as Trustees. None of the executive officers receive compensation from the Trust.
4.
INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from the sale of securities, other than U.S. Government securities and short-term investments, for the period ended November 30, 2013 amounted to $234,584,411 and $147,591,602, respectively for the Domestic Fund and $11,961,130 and $1,726,667, respectively for the International Fund.
Copeland Funds
NOTES TO FINANCIAL STATEMENTS
(Continued)
5.
DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF CAPITAL
The tax character of fund distributions paid for the year ended November 30, 2013 and November 30, 2012 was as follows:
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For the period ended November 30, 2013:
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Ordinary
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Long-Term
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Portfolio
|
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Income
|
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Capital Gains
|
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Total
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Risk Managed Dividend Growth
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$ 1,292,471
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$ 321,221
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$ 1,613,692
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International Risk Managed
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-
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-
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-
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|
|
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|
|
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For the period ended November 30, 2012:
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|
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Ordinary
|
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Long-Term
|
|
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Portfolio
|
|
Income
|
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Capital Gains
|
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Total
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Risk Managed Dividend Growth
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$ 2,833,810
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|
$ -
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|
$ 2,833,810
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As of November 30, 2013, the components of accumulated earnings/(deficit) on a tax basis were as follows:
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|
|
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|
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Undistributed
|
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Undistributed
|
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Post October Loss
|
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Unrealized
|
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Total
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|
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Ordinary
|
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Long-Term
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and
|
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Appreciation/
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Accumulated
|
Portfolio
|
|
Income
|
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Capital Gains
|
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Late Year Loss
|
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(Depreciation)
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Earnings/(Deficits)
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Risk Managed Dividend Growth
|
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$ 4,419,904
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$ 11,050,504
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$ -
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$ 99,105,527
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|
$ 114,575,935
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International Risk Managed
|
|
-
|
|
112
|
|
(6,445)
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|
91,370
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|
85,037
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The difference between book basis and tax basis unrealized appreciation, undistributed net investment income, and accumulated net realized gain/(loss) from investments is primarily attributable to the tax deferral of losses on wash sales and adjustments related to publicly traded partnerships.
Late year losses incurred after December 31 within the fiscal year are deemed to arise on the first business day of the following fiscal year for tax purposes. The International Risk Managed Fund incurred and elected to defer such capital losses of $6,445.
Permanent book and tax differences, primarily attributable to the book/tax basis treatment of foreign currency gains/(losses), net operating losses, and adjustments related to publicly traded partnerships, resulted in reclassification for the period ended November 30, 2013 as follows:
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Paid
|
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Undistributed
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Undistributed
|
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In
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Ordinary
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Long-Term
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Portfolio
|
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Capital
|
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Income (Loss)
|
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Gains (Loss)
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Risk Managed Dividend Growth
|
|
$ 53
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$ 253,108
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$ (253,161)
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International Risk Managed
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(2,792)
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(14,170)
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16,962
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6.
FINANCIAL HIGHLIGHTS
The Funds calculated per share income using the average share method. After giving effect to the net income distributed to shareholders, the balance of the Funds performance for the period was attributed to net realized and unrealized gains from securities. For the period ended November 30, 2013, net realized and unrealized gains were $3.17, $3.15 and $2.29 on a per share basis for Class A, Class C and Class I, respectively for the Domestic Fund and $0.97, $0.98 and $0.96 on a per share basis for Class A, Class C and Class I, respectively for the International Fund. Net realized and unrealized gains were $87,474,181, $9,041,642 and $423,277 for Class A, Class C and Class I, respectively for the Domestic Fund. Net realized and unrealized gains were $46,385, $8,183 and $19,952 for Class A, Class C and Class I, respectively for the International Fund.
Copeland Funds
NOTES TO FINANCIAL STATEMENTS
(Continued)
7.
REDEMPTION FEES
The Funds may assess a short-term redemption fee of 1.00% of the total redemption amount if shareholders sell their shares after holding them for less than 30 days or if shares are redeemed for failure to maintain the Funds minimum account balance requirement. The redemption fee is paid directly to the Funds. For the period ended November 30, 2013, the Domestic Fund assessed $10,496, $1,095, and $44 in redemption fees for Class A, Class C and Class I shares, respectively. The International Fund assessed $10 and $9 in redemption fees for Class A, and Class I shares, respectively.
8.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 related to disclosures about offsetting assets and liabilities. In January 2013, the FASB issued ASU No. 2013-01 which gives additional clarification to ASU 2011-11. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. Management is currently evaluating the impact these amendments may have on the Funds financial statements
9.
SUBSEQUENT EVENTS
Subsequent events after the date of the Statement of Assets and Liabilities have been evaluated through the date the financial statements were issued. Management has concluded that there is no impact requiring adjustment or disclosure in the financial statements.