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 No. 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.
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of SCA Absolute Return Fund and SCA Directional Fund and
Board of Trustees of Northern Lights Fund Trust
We have audited the accompanying statements of assets and liabilities of SCA Absolute Return Fund and SCA Directional Fund, each a series of shares of beneficial interest of Northern Lights Fund Trust (the
“Funds”
), including the portfolios of investments, as of June 30, 2013, the related statements of operations for the year then ended, and the statements of changes in net assets and the financial highlights for the year then ended and for the period September 8, 2011 (commencement of operations) through June 30, 2012. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of June 30, 2013 by correspondence with the custodian, brokers or other appropriate parties, or by other appropriate auditing procedures where responses by brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of SCA Absolute Return Fund and SCA Directional Fund, as of June 30, 2013, the results of their operations for the year then ended, and the changes in their net assets and their financial highlights for the year then ended and for the period September 8, 2011 (commencement of operations) through June 30, 2012, presented in conformity with accounting principles generally accepted in the United States of America.
![[F9SCADRAFTOPINION002.JPG]](http://content.edgar-online.com/edgar_conv_img/2013/09/09/0000910472-13-003764_F9SCADRAFTOPINION002.JPG)
BBD, LLP
Philadelphia, Pennsylvania
August 28, 2013
SCA FUNDS
SUPPLEMENTAL INFORMATION (Unaudited)
June 30, 2013
This chart provides information about the Trustees and Officers who oversee the Fund. Officers elected by the Trustees manage the day
‐
to
‐
day operations of the Fund and execute policies formulated by the Trustees. The address of each Trustee and Officer is 17605 Wright Street, Suite 2, Omaha, Nebraska 68130 unless otherwise noted.
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
Name, Address and Year of Birth
|
Position/Term of Office*
|
Principal Occupation
During the Past Five Years
|
Number of Portfolios in Fund Complex**
Overseen by Trustee
|
Other Directorships held by Trustee During the Past Five Years
|
|
Anthony J. Hertl
^
1950
|
Trustee
Since 2005; Chairman of the Board since 2013.
|
Consultant to small and emerging businesses (since 2000).
|
98
|
AdvisorOne Funds (12 portfolios) (2004-2013); Ladenburg Thalmann Alternative Strategies Fund (since June 2010); Satuit Capital Management Trust; The Z-Seven Fund, Inc. (2007 – May, 2010), Greenwich Advisers Trust (2007- February 2011), Global Real Estate Fund (2008-2011), The World Funds Trust (since 2010) and Northern Lights Variable Trust (since 2006)
|
|
Gary W. Lanzen
^
1954
|
Trustee
Since 2005
|
President, Orizon Investment Counsel, Inc. (2000-2006); Chief Investment Officer (2000 -2010); Founder and Partner, Orizon Group, Inc. (a financial services company) (2000-2006).
|
98
|
AdvisorOne Funds (12 portfolios) (since 2003);
Ladenburg Thalmann Alternative Strategies Fund (2010-2011); Northern Lights Variable Trust (since 2006)
|
|
Mark H. Taylor
^
1964
|
Trustee
Since 2007
|
Andrew D. Braden Professor of Accounting and Auditing, Weatherhead School of Management, Case Western Reserve University (since 2009); John P. Begley Endowed Chair in Accounting, Creighton University (2002 – 2009); Former member of the AICPA Auditing Standards Board, AICPA (2008-2011).
|
111
|
Ladenburg Thalmann Alternative Strategies Fund (since 2010); Lifetime Achievement Mutual Fund, Inc. (LFTAX) (Director and Audit Committee Chairman) (2007-2012); NLFT III (since February 2012); Northern Lights Variable Trust (since 2007)
|
|
John V. Palancia
1954
|
Trustee
Since 2011
|
Retired (since 2011). Formerly, Director of Futures Operations, Merrill Lynch, Pierce, Fenner & Smith Inc. (1975-2011).
|
111
|
Northern Lights Variable Trust (since 2011); NLFT III (since February 2012); Ladenburg Thalmann Alternative Strategies Fund (since 2012)
|
SCA FUNDS
SUPPLEMENTAL INFORMATION (Unaudited)(Continued)
June 30, 2013
Interested Trustees and Officers
|
|
|
|
|
|
Name, Address and Year of Birth
|
Position/Term of Office*
|
Principal Occupation
During the Past Five Years
|
Number of Portfolios in Fund Complex **
Overseen by Trustee
|
Other Directorships held by Trustee During the Past Five Years
|
|
Michael Miola***
^
1952
|
Trustee
Since 2005; Chairman of the Board 2005-2013.
|
Co-Owner and Co-Managing Member of NorthStar Financial Services Group, LLC; Manager of Gemini Fund Services, LLC; Orion Adviser Services, LLC, CLS Investments, LLC, GemCom, LLC and Northern Lights Compliance Services, LLC (since 2003); Director of Constellation Trust Company (since 2004).
|
98
|
AdvisorOne Funds (12 portfolios) (2003-2012); Ladenburg Thalmann Alternative Strategies Fund (since 2010); Northern Lights Variable Trust (since 2006)
|
|
Andrew Rogers
80 Arkay Drive
Hauppauge, NY 11788
1969
|
President
Since 2006
|
Chief Executive Officer, Gemini Fund Services, LLC (since 2012); President and Manager, Gemini Fund Services, LLC (2006 - 2012); Formerly Manager, Northern Lights Compliance Services, LLC (2006 – 2008); and President and Manager, GemCom LLC (2004 - 2011).
|
N/A
|
N/A
|
|
Kevin E. Wolf
80 Arkay Drive
Hauppauge, NY 11788
1969
|
Treasurer
Since 2006
|
President, Gemini Fund Services, LLC (since 2012); Director of Fund Administration, Gemini Fund Services, LLC (2006 - 2012); and Vice-President, GemCom, LLC (since 2004).
|
N/A
|
N/A
|
|
James P. Ash
80 Arkay Drive
Hauppauge, NY 11788
1976
|
Secretary
Since 2011
|
Senior Vice President, Gemini Fund Services, LLC (since 2012); Vice President, Gemini Fund Services, LLC (2011 - 2012); Director of Legal Administration, Gemini Fund Services, LLC (2009 - 2011); Assistant Vice President of Legal Administration, Gemini Fund Services, LLC (2008 - 2011).
|
N/A
|
N/A
|
|
Lynn Bowley
1958
|
Chief Compliance Officer
Since 2007
|
Compliance Officer of Northern Lights Compliance Services, LLC (since 2007); Vice President of Investment Support Services for Mutual of Omaha Companies (2002 – 2006).
|
N/A
|
N/A
|
* The term of office for each Trustee and officer listed above will continue indefinitely until the individual resigns or is removed.
** The term “Fund Complex” includes the Northern Lights Fund Trust (“NLFT”), Northern Lights Fund Trust III (“NLFT III”) and the Northern Lights Variable Trust (“NLVT”).
*** Michael Miola is an “interested person” of the Trust as that term is defined under the 1940 Act, because of his affiliation with Gemini Fund Services, LLC, (the Trust’s Administrator, Fund Accountant, Transfer Agent) and Northern Lights Distributors, LLC (the Fund’s Distributor).
^ These Trustees were named in the SEC order instituting settled administrative proceedings against Northern Lights Compliance Services, LLC, Gemini Fund Services, LLC and certain Trustees.
The Fund’s Statement of Additional Information includes additional information about the Trustees and is available free of charge, upon request, by calling toll-free at 1-855-282-1100.
The SCA Funds
EXPENSE EXAMPLES
(Unaudited)
June 30, 2013
As a shareholder of the Funds you incur ongoing costs, including management fees, distribution and/or service (12b-1 fees) fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. Please note, the expenses shown in the tables are meant to highlight ongoing costs only and do not reflect any transactional costs.
This example is based on an investment of $1,000 invested for the period of time as indicated in the table below.
Actual Expenses
: The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during the period.
Hypothetical Examples for Comparison Purposes
: The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Funds’ actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds’ actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs which may be applicable to your account. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
|
|
|
|
|
|
|
Beginning
Account Value (1/1/13)
|
Ending Account Value (6/30/13)
|
Annualized
Expense Ratio
|
Expenses Paid During the Period*
(1/1/13 to
6/30/13)
|
|
Actual
|
|
|
|
|
|
SCA Absolute Return Fund
|
$1,000.00
|
$1,007.00
|
3.11%
|
$15.48
|
|
SCA Directional Fund
|
$1,000.00
|
$1,041.70
|
3.15%
|
$15.95
|
|
Hypothetical
(5% return before expenses)
|
|
|
|
|
|
SCA Absolute Return Fund
|
$1,000.00
|
$1,009.37
|
3.11%
|
$15.49
|
|
SCA Directional Fund
|
$1,000.00
|
$1,009.17
|
3.15%
|
$15.69
|
*Expenses Paid During Period are equal to the Funds’ annualized expense ratio multiplied by the average account value over the period, multiplied by 181 days and divided by 365 (to reflect the number of days in the period ended June 30, 2013).
The SCA Funds
ADDITIONAL INFORMATION (Unaudited)
FACTORS CONSIDERED BY THE INDEPENDENT TRUSTEES IN RENEWAL OF THE INVESTMENT ADVISORY AGREEMENT
SCA Absolute Return Fund and SCA Directional Fund (Adviser – Genesis Capital, LLC)*
In connection with the regular meeting held on June 19 and 20, 2013, the Board of Trustees (the “Trustees” or the “Board”) of the Northern Lights Fund Trust (the “Trust”), including a majority of the Trustees who are not “interested persons,” as that term is defined in the Investment Company Act of 1940, as amended, discussed the renewal of an investment advisory agreement (the “Advisory Agreement”) between Genesis Capital, LLC (“Genesis”) and the Trust, with respect to the SCA Absolute Return Fund (“SCA Absolute”) and SCA Directional Fund (“SCA Directional”) (each a “Fund” and collectively referred to as the “Funds”). In considering the renewal of the Advisory Agreement, the Board received materials specifically relating to the Advisory Agreement.
Counsel assisted the Trustees throughout the Advisory Agreement review process. The Board relied upon the advice of Counsel and their own business judgment in determining the material factors to be considered in evaluating the Advisory Agreement and the weight to be given to each such factor. The conclusions reached by the Trustees were based on a comprehensive evaluation of all of the information provided and were not the result of any one factor. Moreover, each Trustee may have afforded different weight to the various factors in reaching his conclusions with respect to the Advisory Agreement.
Nature, Extent and Quality of Services.
The Trustees noted that over the course of the Trustees’ relationship with Genesis, Genesis has consistently demonstrated its commitment to the Funds, and has responded well to Board feedback. They noted that Genesis has recently hired a new head of marketing and is working with a new sales force to boost sales of the Funds’ shares. The Trustees considered that Genesis was formed by Strategic Capital Group (“SCG”) to be the manager of a family of hedge fund of funds and these two mutual funds. Managing approximately $119 million in assets mostly through 2 mutual funds, Genesis believes it has the advantage of leveraging the intellectual capital of SCG which is an integrated investment management firm servicing high net worth individuals, family offices, foundations and endowments. In reviewing the key personnel responsible for servicing the Funds, the Trustees acknowledged they have extensive experience managing large pools of capital, portfolio design and construction, asset allocation, alternative investments, and estate planning and determined that they have the skills and attributes required to service and manage the Funds. The Trustees considered the services Genesis provides to the Funds, including the identification, research and analysis of investments, due diligence and supervision of sub-advisers, and allocation of the Fund’s capital among various investment strategies. They also considered, in an effort to generate returns with less volatility to equities, Genesis manages both Funds in a multi-strategy, diversified approach which is monitored daily. The Trustees considered that, with respect to compliance monitoring, Genesis monitors compliance to the Funds’ investment limitations and prospectus by utilizing an investment committee to review each trade prior to execution in order to detect possible exceptions. The Trustees also reviewed and considered the SEC deficiency letter and related affiliate litigations and confirmed with representatives of Genesis that the SEC’s deficiencies do not relate to the Funds or any investment made by the Funds. They noted Genesis and its affiliates have retained outside counsel and an independent consulting firm to assist them in addressing the SEC’s concerns, which the Trustees believe demonstrates their commitment to compliance. During its presentation, representatives of Genesis also explained that Genesis expects the matters raised in the recent SEC exam will be resolved favorably and will not impact its ability to manage the Funds. After further discussion, the Trustees concluded, based on their previous experience with Genesis and its recognized commitment to the Funds, they are satisfied Genesis will continue to provide a high level of service to the Funds for the benefit of the shareholders.
Performance.
SCA Absolute Fund
. The Trustees reviewed the Fund’s performance over the last one year (0.09%) and since inception in September 2011 (1.28%), noting that it outperformed the peer group averages (0.04% and -0.63%, respectively), but underperformed the Morningstar US OE Multi-Alternative category averages (2.82% and 2.75%) and its benchmark index (3.50% and 2.24%) for each period. They further noted that current Fund performance is not indicative of a full market cycle and Genesis is working to add quality sub-advisers to improve performance. The Trustees concluded that the Fund’s performance is acceptable and Genesis is taking positive steps to improve performance.
SCA Directional Fund
. The Trustees concluded that the performance of the Directional Fund since inception in September 2011 (4.29%) is favorable when compared to the US OE Multi-Alternative Morningstar US category (2.75%) the peer group (2.59%) averages and the HFRX Equity Hedge Index (2.99%). They considered the Fund has also outperformed the peer group average (1.10%) for the one year ended March 31st with returns of 2.73%, but underperformed the category average (2.82%) and index (6.02%) over the same period. They also considered the Fund’s performance compared to the equity markets generally, and the negative impact on returns related to Genesis’s focus on reduced volatility. The Trustees concluded that the performance of the Fund has been reasonable.
Fees and Expenses.
SCA Absolute Return
. The Trustees noted the Fund’s contractual advisory fee of 1.95% is higher than the average advisory fee charged by funds in its peer group (1.44%) and its Morningstar category (1.05%); however, it is within the range of fees charged by both the peer group (0.25% to 2.75%) and the category (0% to 2.75%). They also considered that some of the other funds in the peer group are quite large, which may impact the advisory fee, and after fee waiver the advisory fee paid during the prior fiscal year was 1.53%. After discussion, the Trustees concluded the advisory fee was within the range of reasonable.
SCA Directional Fund
. The Trustees noted the Fund’s advisory fee of 1.95% is higher than the advisory fee charged by funds in its peer group (1.51%) and its Morningstar category (1.05%); however, it is within the range of fees charged by both the peer group (0% to 2.30%) and the category (up to 2.75%). They considered that some of the other funds in the peer group are quite large, which may impact the advisory fee and after fee waiver, the advisory fee paid during the prior fiscal year was 1.52%. After discussion, the Trustees concluded the fee was within the range of reasonable.
Economies of Scale.
The Trustees considered the economies of scale and noted that Genesis agreed in its written response to the Board to consider breakpoints when asset levels for a Fund have reached $250 million for the Fund. They further noted Genesis intends to renew the Funds’ expense cap agreement for the upcoming year. After further discussion, the Trustees concluded that shareholders are benefiting from the expense cap and breakpoints are not necessary at this time.
Profitability.
The Trustees reviewed the profitability analysis for each Fund provided by Genesis. They noted Genesis realized a profit in connection with its relationship with each Fund, but that in each case such profit was reasonable, in terms of percentage of revenue and actual dollars. The Trustees concluded Genesis’s profitability was reasonable.
Conclusion.
Having requested and received such information from Genesis as the Trustees believed to be reasonably necessary to evaluate the terms of the Advisory Agreement, and as assisted by the advice of independent counsel, the Trustees concluded that the advisory fee structure is reasonable and that renewal of the Advisory Agreement is in the best interests the shareholders of the SCA Absolute Return Fund and the SCA Directional Fund.
SCA Absolute Return Fund and SCA Directional Fund
(Sub-Adviser – Coe Capital Management, LLC)*
In connection with the regular meeting on June 19 and 20, 2013 the Board of the Trust, including the Independent Trustees, discussed the renewal of a sub-advisory agreement (the “Coe Sub-Advisory Agreement”) between Genesis and Coe Capital Management, LLC (“Coe”), with respect to the Funds. The Trustees noted that the Sub-Adviser previously had provided the Trustees with materials related to the proposed renewal of the Coe Sub-Advisory Agreement.
Nature, Extent and Quality of Services.
The Trustees noted that with $370 million in assets under management, Coe is a research driven organization with a history of providing investment research and advisory services to high net worth individuals and families. The Trustees examined the background information of the key investment personnel and were satisfied with their overall experience and expertise in portfolio management, trading, research, finance, operations, and compliance. They noted Genesis is responsible for providing its brand of research and trading in managing their allocated portion of each Fund’s capital which will be run pari passu to other accounts managed by Coe. The Trustees considered that by using its robust bottom up research, Genesis employs a long/short domestic strategy of small and mid-cap U.S. companies to generate returns with reduced volatility by identifying material deviations between in house modeling and analysts’ expectations. Coe reported using several tools to manage risk, such as a lower net exposure to the market through the use of sector specific ETFs to hedge sector risk and a reliance on their strong stock research process. The Trustees considered the sub-adviser will monitor compliance to investment limitations and the prospectus by using and reviewing several pre-trade compliance checks in addition to the review of the previous day’s trade reconciliations for proper allocation and Coe reported no material compliance or litigation issues since the last contract approval. The Trustees concluded they are satisfied with the experience and robust research capabilities of the sub-adviser and is comfortable they will continue to deliver high quality service to the Funds for the shareholders.
Performance.
SCA Absolute Return Fund
. The Trustees reviewed the sub-adviser’s contribution to Fund performance since Coe began managing the Fund, noting that the performance (2.77%) has added positively to the Fund’s performance (1.19%) over the period. The Trustees considered the relatively short period of performance presented but noted the sub-adviser had developed and implemented a strategy that positively impacts Fund performance. After discussion, the Trustees concluded the period of time Coe has managed the Fund is too short for a full evaluation of performance relative to the benchmark, but the sub-adviser’s performance appeared acceptable.
SCA Direction Fund
. The Trustees reviewed the sub-adviser’s contribution to Fund performance since Coe began managing the Fund, noting that the performance (4.03%) has added positively to the Fund’s performance (3.51%) over the period. The Trustees considered the relatively short period of performance presented but noted the sub-adviser had developed and implemented a strategy that positively impacts Fund performance. After discussion, the Trustees concluded the period of time Coe has managed the Fund is too short for a full evaluation of performance relative to the benchmark, but the sub-adviser’s performance appeared acceptable.
Fees and Expenses.
The Trustees noted the sub-adviser receives 1.00% for its services to the Funds. They considered Coe’s significance to each Fund’s strategy and further noted the fee is the same as the 1.00% charged to the sub-adviser’s other clients. After discussion, in consideration of the significance of the sub-adviser’s role in each Fund’s strategy, the Trustees concluded the advisory fee charged each Fund is reasonable.
Economies of Scale.
The Trustees considered whether there will be economies of scale with respect to the management of the Funds. The Trustees agreed that this was an adviser level issue and should be considered with respect to the overall advisory contract, taking into consideration the impact of the sub-advisory expense. After discussion, it was the consensus of the Trustees that lack of breakpoints was acceptable.
Profitability.
The Trustees reviewed the profitability analysis provided by the sub-adviser and noted it had realized a modest profit in terms of actual dollars, and a notable profit in terms of percentage of revenue with respect to its services to each Fund. They considered the profit realized in connection with Coe’s relationship with the Funds is less than it would have received from its typical managed account client. After discussion, the Trustees concluded the sub-adviser’s profitability with respect to each Fund was not unreasonable.
Conclusion.
Having requested and received such information from the sub-adviser as the Trustees believed to be reasonably necessary to evaluate the terms of the Coe Sub-Advisory Agreement, and as assisted by the advice of independent counsel, the Trustees concluded that the sub-advisory fee structure is reasonable and that renewal of the Coe Sub-Advisory Agreement is in the best interests the shareholders of each the SCA Absolute Return Fund and the SCA Directional Fund.
SCA Absolute Return Fund and SCA Directional Fund
(Sub-Adviser – Phineus Partners, LP)*
In connection with the regular meeting on June 19 and 20, 2013 the Board of the Trust, including the Independent Trustees, discussed the renewal of a sub-advisory agreement (the “Phineus Sub-Advisory Agreement”) between Genesis and Phineus Partners, LP (“Phineus”), with respect to the Funds. The Trustees noted that the Sub-Adviser previously had provided the Trustees with materials related to the proposed renewal of the Sub-Advisory Agreement.
Nature, Extent and Quality of Services.
The Trustees noted that Phineus was founded in 2002 and currently manages approximately $132 million in assets, providing discretionary advisory services and portfolio management services to pooled investment vehicles, offshore investment funds; U.S. investment limited partnerships, and separately managed accounts. They also reviewed the key personnel responsible for servicing the Funds and determined they have experience and expertise in global long/short equity strategies with a focus on technology, communications and media sectors, research, portfolio management, trading, and compliance. The Trustees considered that the sub-adviser employs a fundamental and disciplined investment approach in the construction of a long/short equity portfolio that meets the investment objectives and guidelines in the case of each Fund. Phineus reported, and the Trustees discussed, it follows its hedge fund strategy of investing in securities in “knowledge based” sectors aimed to seek high absolute returns with an equal concern for capital appreciation and capital preservation. The Trustees viewed with satisfaction that the sub-adviser has an audited track record of more than 10 years of positive performance. The Trustees also viewed as a positive how the sub-adviser takes a serious holistic approach to portfolio risk management examining industry and sector warning signs such as investment styles, outsized returns, excessive inflows, crowded positions, and similar themes. With respect to compliance, the Trustees noted Phineus utilizes the more standardized risk outputs relating to market risk, credit risk, and liquidity risk, and the sub-adviser’s CCO has responsibility for monitoring compliance and regulatory matters and has access to a real-time trading and P&L reporting function to ensure the Funds are in compliance with their investment limitations and prospectus as agreed with the Fund’s adviser. While there has been no material compliance or litigation issues reported, the Trustees noted that the sub-adviser had an SEC examination that included some weaknesses which the sub-adviser took seriously and addressed promptly to the satisfaction of the Trustees. The Trustees concluded they are satisfied with the overall approach Phineus takes to run their advisory firm and believes they will continue to provide a high level of quality service to the Funds, which will benefit the shareholders.
Performance.
SCA Absolute Return Fund
.
The Trustees reviewed the sub-adviser’s contribution to Fund performance over the last one year and since inception noting it has added positively to the Fund’s performance since inception with returns of 2.035% but slightly underperformed the Fund’s overall performance over the last year at 2.50% return compared to the Fund’s return of 2.73%. They further noted the sub-adviser’s returns are below the HFRX Equity Hedge Index. The Trustees considered that the relatively short period of performance presented make comparisons less meaningful, but noted the sub-adviser’s returns contributed positively to the Fund’s overall performance. After discussion, the Trustees concluded the sub-adviser’s performance was acceptable.
SCA Directional Fund
.
The Trustees noted the sub-adviser detracted from the Fund’s overall performance for the one year and since inception, returning 2.50% for the one year and 1.54% since inception, with Fund returns of 2.73% and 2.23%, respectively, for the same periods. They noted Phineus follows the investment strategy of another fund it manages, and while its performance has not been strong recently, the Voyager Fund has frequently been ranked as a top performing fund by Barclay Hedge and Bloomberg over the past 5 years. The Trustees concluded that the performance of Phineus for the Fund was not unreasonable.
Fees and Expenses.
The Trustees noted the sub-adviser receives 1.00% for its service to each of the Funds. They considered that the fee was on the low end of fees charged by Phineus to its other clients which range from 1.00% - 2.00%, noting that these may also include performance fees. After discussion, the Trustees concluded that the sub-advisory fee for each Fund is reasonable.
Economies of Scale.
The Trustees considered whether there will be economies of scale with respect to the management of the Funds. They discussed the fact that based on the small allocation of Fund assets actually managed by Phineus, it is unlikely that the sub-adviser is realizing economies of scale in managing the Funds. The Trustees agreed that this was an adviser level issue and should be considered with respect to the overall advisory contract, taking into consideration the impact of the sub-advisory expense. After discussion, it was the consensus of the Trustees that the lack of breakpoints was acceptable.
Profitability.
The Trustees reviewed the profitability analysis provided by the sub-adviser. They noted the sub-adviser realized a profit in connection with its relationship to the SCA Absolute Fund and the SCA Directional Fund, but determined both were far from excessive. The Trustees concluded the sub-adviser’s profitability was reasonable.
Conclusion.
Having requested and received such information from Phineus as the Trustees believed to be reasonably necessary to evaluate the terms of the Phineus Sub-Advisory Agreement, and as assisted by the advice of independent counsel, the Trustees concluded that the sub-advisory fee structure is reasonable and that renewal of the Phineus Sub-Advisory Agreement is in the best interests the shareholders of each of the SCA Funds.
SCA Absolute Return Fund and SCA Directional Fund
(Sub-Adviser – SeaBridge Investment Advisors, LLC)*
In connection with the regular meeting on June 19 and 20, 2013 the Board of the Trust, including the Independent Trustees, discussed the renewal of a sub-advisory agreement (the “SeaBridge Sub-Advisory Agreement”) between Genesis and SeaBridge Investment Advisors, LLC (“SeaBridge”), with respect to the Funds. The Trustees noted that the Sub-Adviser previously had provided the Trustees with materials related to the proposed renewal of the SeaBridge Sub-Advisory Agreement.
Nature, Extent and Quality of Services
. The Trustees noted that SeaBridge was founded in 1996, and currently manages $1.5 billion in assets while specializing in building and actively managing customized portfolios of listed global equities for individuals and institutional clients along with managing four main investment strategies. The Trustees reviewed the background information of the key investment personnel responsible for servicing the Funds and recognizes their years of financial experience with some prestigious institutions and their experience in performing portfolio management, compliance, research, and analysis. The Trustees noted that by using their research and fundamental analytical approach to produce data based on set criteria, the sub-adviser constructs and maintains each Fund’s portfolio seeking to generate positive absolute returns with less volatility than traditional equity markets. The Trustees recognize that not all risk mitigation processes are perfect, and the sub-adviser addresses several risks associated with managing a portfolio notably investment risk, management risk, and operational risk and have adequate plans and resources in place to implement if necessary. With respect to compliance, the Trustees noted the sub-adviser deals with monitoring compliance to investment limitations and the prospectus using trade program reports to perform pre-trade reviews and consult with their CCO when necessary prior to trade execution to ensure the trades are compliant. They considered SeaBridge has had no material compliance or litigation issues to report since the previous contract approval. The Trustees concluded it is satisfied with the sub-adviser’s solid infrastructure and is also satisfied they will continue providing a high level of service to the Funds which will benefit the shareholders.
Performance.
SCA Absolute Return Fund
. The Trustees reviewed the sub-adviser’s contribution to Fund performance over the last one year and since inception noting it has added positively to the Fund’s performance with returns for the portion of the portfolio it manages of 17.89% over the last year and 20.00% since inception. They further noted the sub-adviser has provided returns above with the Fund’s benchmark, the HFRX Global Hedge Fund Index (3.50% for one year and 3.25% since inception), and the sub-adviser’s benchmark, S&P 500 (14% for one year and 11.31% since inception).
SCA Directional Fund
. The Trustees noted a similarly strong performance from SeaBridge on the Directional Fund, with one year returns of 17.80% (compared to 2.73% for the Fund as a whole) and 19.91% since inception (2.23% for the Fund as a whole). SeaBridge also outperformed the Fund’s benchmark and the sub-adviser’s S&P 500 benchmark for both periods. The Trustees concluded the sub-adviser’s performance for each of the Funds for the period was excellent.
Fees and Expenses.
The Trustees noted the sub-adviser receives 0.72% for its service to the Funds. They considered that the fee is lower than the standard fee charged by SeaBridge to its other clients, and equal to the average fee for all its discretionary fee-paying accounts. After discussion, the Trustees concluded that the sub-advisory fee paid to SeaBridge with respect to each of the SCA Funds is reasonable.
Economies of Scale.
The Trustees considered whether there will be economies of scale with respect to the management of the Funds. The Trustees agreed that this was an adviser level issue and should be considered with respect to the overall advisory contract, taking into consideration the impact of the sub-advisory expense. After discussion, it was the consensus of the Trustees that the lack of breakpoints was acceptable.
Profitability.
The Trustees reviewed the profitability analysis provided by the sub-adviser. They noted the sub-adviser realized a modest profit in connection with its relationship to each of the Funds, but concluded it was reasonable and not excessive.
Conclusion.
Having requested and received such information from the sub-adviser as the Trustees believed to be reasonably necessary to evaluate the terms of the SeaBridge Sub-Advisory Agreement, and as assisted by the advice of independent counsel, the Trustees concluded that the sub-advisory fee structure is reasonable and that renewal of the SeaBridge Sub-Advisory Agreement is in the best interests the shareholders of each of the SCA Funds.
SCA Absolute Return Fund and SCA Directional Fund
(Sub-Adviser – Tiburon Capital Management, LLC)*
In connection with the regular meeting on June 19 and 20, 2013 the Board of the Trust, including the Independent Trustees, discussed the approval of a sub-advisory agreement (the “Tiburon Sub-Advisory Agreement”) between Genesis and Tiburon Capital Management, LLC (“Tiburon”), with respect to the Funds. The Trustees noted that the Tiburon Sub-Adviser previously had provided the Trustees with materials related to the proposed renewal of the Tiburon Sub-Advisory Agreement.
Nature, Extent and Quality of Services.
The Trustees noted
Tiburon was founded in 2009 by the former portfolio manager of a major hedge fund manager and purchased by Gray & Company in October 2012; the sub-adviser specializes in managing event-driven investment strategies seeking consistent, absolute returns with limited correlation to debt and equity markets. The Trustees reviewed the background of the key investment personnel and were satisfied with their years of experience in managing hedge funds and alternative investments along with expertise in research, accounting, operations, and compliance. The Trustees acknowledged the sub-adviser utilized their research on a complex strategy focused on securities of distressed, stressed and/or out of favor companies and special situations in order to take advantage of market inefficiencies. The Trustees noted that since this is a complex strategy, the sub-adviser developed enhanced practices around their policies and procedures, analytical process, comprehensive monitoring and portfolio construction and strategy allocation to assist with risk mitigation, to which the Trustees acknowledged as a positive aspect. They noted that since the acquisition by Gray & Co., the firm has created a formal Alternative Investment Committee comprised of senior investment professionals and support staff who’s primary objective is the continuous evaluation of the investment program, strategy, assess risk factors and conduct due diligence to improve results. While there were no material compliance or litigation issues reported, the Trustees noted the SEC performed an exam during the first quarter of 2013, and as of this review, there has been no SEC correspondence to review. The Trustees concluded they are satisfied with the investment personnel background and experience and expertise of Tiburon and its capability of continuing to provide a high level of quality service to the Funds and their shareholders.
Performance.
SCA Absolute Return Fund
. The Trustees reviewed Tiburon’s contribution to Fund performance over the period since Tiburon began managing assets for the Fund, noting it has added positively with returns of 3.99% since it was retained in April 2012. They further noted the sub-adviser has provided returns above the Fund’s benchmark, the HFRX Global Hedge Fund Index (3.25%) but below the sub-adviser’s benchmark, the HFRI Event Driven Index (7.89%). The Trustees considered the relatively short period of performance presented, but noted the sub-adviser’s contribution has been strong. After discussion, the Trustees concluded the sub-adviser’s performance was a positive contribution to the Fund.
SCA Directional Fund
. The Trustees noted Tiburon’s performance in managing a portion of the Direction also contributed to the overall performance of the Fund (3.88% since April 2012) and Tiburon outperformed the Fund’s benchmark, the HFRX Global Hedge Fund Index during the same period (3.25%). The Trustees concluded that while Tiburon underperformed the sub-adviser’s benchmark, the HFRI event Driven Index return of 7.89%, Tiburon’s performance contributed positively to the Fund over the short time period.
Fees and Expenses.
The Trustees noted the sub-adviser receives 1.00% for its service to each of the Funds. They considered that the fee is below the fees charged by Tiburon to its other clients of 2.00% with a 20% performance fee. After discussion, the Trustees concluded that the sub-advisory fee is reasonable.
Economies of Scale.
The Trustees considered whether there will be economies of scale with respect to the management of the Funds. The Trustees agreed that this was an adviser level issue and should be considered with respect to the overall advisory contract, taking into consideration the impact of the sub-advisory expense. After discussion, it was the consensus of the Trustees that the lack of breakpoints was acceptable.
Profitability.
The Trustees reviewed the profitability analysis provided by the sub-adviser. They noted the sub-adviser realized a negligible profit in connection with its relationship to each of the Funds, both in terms of percentage of revenue and actual dollars. After a brief discussion, the Trustees concluded the sub-adviser’s profitability was reasonable with respect to each of the SCA Funds.
Conclusion.
Having requested and received such information from the sub-adviser as the Trustees believed to be reasonably necessary to evaluate the terms of the Tiburon Sub-Advisory Agreement, and as assisted by the advice of independent counsel, the Trustees concluded that the sub-advisory fee structure is reasonable and that renewal of the Tiburon Sub-Advisory Agreement on behalf of each Fund is in the best interests the shareholders of the SCA Funds.
SCA Absolute Return Fund and SCA Directional Fund (Sub-Adviser – V2 Capital, LLC)*
In connection with the regular meeting on May 21 and 22, 2013 the Board of the Trust, including the Independent Trustees, discussed the approval of a sub-advisory agreement (the “V2 Sub-Advisory Agreement”) between Genesis and V2 Capital, LLC (“V2”), with respect to the Funds. The Trustees noted that the Sub-Adviser previously had provided the Trustees with materials related to its proposed Sub-Advisory Agreement.
Nature, Extent and Quality of Services.
The Trustees noted V2 was founded in 2004, specializing in managing equity based strategies combined with proprietary option overlay strategies seeking total return with less volatility than the market and currently has approximately $252 million in assets under management for SMA clients and a hedge fund. The Trustees reviewed background information provided on the key professionals responsible for servicing the Fund and noted the management team’s long history together and the individuals’ varied experience including experience as a market maker and as an adviser to a hedge fund, and past positions at financial institutions, asset management firms, and a CPA firm. They noted V2 will provide SCA Funds with its full complement of services which include research, trading, compliance and analysis of positions and hedges. They considered that V2 indicated it will manage all assets of the Fund pari-passu to the V2 Hedged Equity Strategy and has agreed to implement certain mutual fund compliance oversight. The Trustees noted V2 would address compliance to investment guidelines by monitoring trading and reporting through the review of daily reports by its compliance personnel. The Trustees concluded V2’s experience and stability of its key personnel is a good indication can provide a level of high quality service to the Fund and shareholders consistent with the Board’s expectations.
Performance.
Because V2 had not yet begun providing sub-advisory services to the Fund, the Trustees considered the performance of its Hedged Equity Strategy. They noted the strategy’s positive performance over the last one year and since inception in 2010, but noted it had underperformed the S&P 500 (29.27% versus 36.45%) since inception, but outperformed a hedge fund index since inception, which returned 8.43% over the period. They considered, however, the performance shown is net of fees and that the returns would improve under the Fund’s lower fee structure. The Trustees discussed the consistent positive returns noting V2 was able to obtain this consistency with less volatility as compared to the overall market. After discussion, the Trustees concluded that based on the lower risk strategy, the returns are reasonable.
Fees & Expenses.
The Trustees noted V2 proposed to charge a 1% sub-advisory fee in connection with its services to the Fund. They considered the fee represents a “preferred rate” relative to the fees charged to its other accounts, which is also 1%, but includes a 15% performance fee. After discussion, the Trustees concluded that the proposed fee is reasonable.
Profitability.
The Trustees reviewed the profitability analysis provided by V2 and noted modest anticipated profits for the first year in terms of estimated actual dollars to be earned. After discussion, the Trustees concluded that profits would not be unreasonable.
Economies of Scale.
The Trustees considered whether there will be economies of scale with respect to the management of the Fund. The Trustees agreed that this was an adviser level issue and should be considered with respect to the overall advisory contract, taking into consideration the impact of the sub-advisory expense. After discussion, it was the consensus of the Trustees that based on the expense cap in place in connection with the advisory agreement, the lack of breakpoints was acceptable.
Conclusion.
Having requested and received such information from the Sub-Adviser as the Trustees believed to be reasonably necessary to evaluate the terms of the V2 Sub-Advisory Agreement, and as assisted by the advice of independent counsel, the Trustees concluded that the sub-advisory fee structure is reasonable and that approval of the V2 Sub-Advisory Agreement is in the best interests the shareholders of the Funds.
*Due to the timing of the contract renewal schedule, these deliberations may or may not relate to the current performance results of the Funds.
PRIVACY NOTICE
NORTHERN LIGHTS FUND TRUST
Rev. August 2011
|
|
|
FACTS
|
WHAT DOES NORTHERN LIGHTS FUND TRUST DO WITH YOUR PERSONAL INFORMATION?
|
|
|
|
Why?
|
Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some, but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do.
|
|
|
|
What?
|
The types of personal information we collect and share depends on the product or service that you have with us. This information can include:
·
Social Security number and wire transfer instructions
·
account transactions and transaction history
·
investment experience and purchase history
When you are
no longer
our customer, we continue to share your information as described in this notice.
|
|
|
|
How?
|
All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons Northern Lights Fund Trust chooses to share; and whether you can limit this sharing.
|
|
|
|
|
Reasons we can share your personal information:
|
Does Northern Lights Fund Trust share information?
|
Can you limit this sharing?
|
|
For our everyday business purposes -
such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus.
|
YES
|
NO
|
|
For our marketing purposes -
to offer our products and services to you.
|
NO
|
We don’t share
|
|
For joint marketing with other financial companies.
|
NO
|
We don’t share
|
|
For our affiliates’ everyday business purposes -
information about your transactions and records.
|
NO
|
We don’t share
|
|
For our affiliates’ everyday business purposes -
information about your credit worthiness.
|
NO
|
We don’t share
|
|
For nonaffiliates to market to you
|
NO
|
We don’t share
|
|
|
|
QUESTIONS?
|
Call 1-402-493-4603
|
PRIVACY NOTICE
NORTHERN LIGHTS FUND TRUST
|
|
|
What we do
:
|
|
How does
Northern Lights Fund Trust
protect my personal information?
|
To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.
Our service providers are held accountable for adhering to strict policies and procedures to prevent any misuse of your nonpublic personal information.
|
|
How does
Northern Lights Fund Trust
collect my personal information?
|
We collect your personal information, for example, when you
·
open an account or deposit money
·
direct us to buy securities or direct us to sell your securities
·
seek advice about your investments
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies.
|
|
Why can’t I limit all sharing?
|
Federal law gives you the right to limit only:
·
sharing for affiliates’ everyday business purposes – information about your creditworthiness.
·
affiliates from using your information to market to you.
·
sharing for nonaffiliates to market to you.
State laws and individual companies may give you additional rights to limit sharing.
|
|
|
|
Definitions
|
|
Affiliates
|
Companies related by common ownership or control. They can be financial and nonfinancial companies.
·
Northern Lights Fund Trust has no affiliates.
|
|
Nonaffiliates
|
Companies not related by common ownership or control. They can be financial and nonfinancial companies.
·
Northern Lights Fund Trust does not share with nonaffiliates so they can market to you.
|
|
Joint marketing
|
A formal agreement between nonaffiliated financial companies
that together market financial products or services to you.
·
Northern Lights Fund Trust does not jointly market
.
|
How to Obtain Proxy Voting Information
Information regarding how the Fund votes proxies relating to portfolio securities during the most recent 12-month period ending June 30th as well as a description of the policies and procedures that the Fund used to determine how to vote proxies is available without charge, upon request, by calling 1-855-282-1100 or by referring to the Securities and Exchange Commission’s (“SEC”) website at
http://www.sec.gov.
How to Obtain 1
st
and 3
rd
Fiscal Quarter Portfolio Holdings
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC’s website at
http://www.sec.gov
and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC (1-800-SEC-0330). The information on Form N-Q is available without charge, upon request, by calling 1-855-282-1100
Investment Adviser
Genesis Capital, LLC
7191 Wagner Way NW, Suite 302
Gig Harbor, WA 98335
Administrator
Gemini Fund Services, LLC
80 Arkay Drive
Hauppauge, NY 11788
