STATEMENT OF ADDITIONAL INFORMATION
(
http://advisor.wilshire.com
)
April 2, 2013
This Statement of Additional Information (“SAI”) provides supplementary information for the investment portfolios of Wilshire Mutual Funds, Inc. (the “Company”): Large Company Growth Portfolio, Large Company Value Portfolio, Small Company Growth Portfolio, Small Company Value Portfolio, Wilshire 5000 Index
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Fund and Wilshire International Equity Fund (each a “Portfolio” and collectively the “Portfolios”).
This SAI is not a prospectus. This SAI should be read in conjunction with the prospectus for the Investment Class Shares and Institutional Class Shares of the Portfolios dated April 2, 2013 and is incorporated by reference in its entirety into the prospectus. The financial statements contained in the Portfolios’ annual report for the fiscal year ended December 31, 2012, are incorporated by reference into this SAI. You can obtain free copies of the prospectus and annual and semi-annual reports by contacting us at: Wilshire Mutual Funds, Inc., c/o DST Systems, P.O. Box 219512, Kansas City, MO 64121-9512, or calling 1-888-200-6796.
TABLE OF CONTENTS
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THE PORTFOLIOS
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3
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INVESTMENT POLICIES AND RISKS
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3
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DISCLOSURE OF PORTFOLIO HOLDINGS
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9
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INVESTMENT RESTRICTIONS
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10
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DIRECTORS AND OFFICERS
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11
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PRINCIPAL HOLDERS OF SECURITIES
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18
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INVESTMENT ADVISORY AND OTHER SERVICES
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24
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CODE OF ETHICS
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48
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PROXY VOTING POLICY AND PROCEDURES
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49
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PORTFOLIO TRANSACTIONS
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49
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NET ASSET VALUE
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51
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PURCHASE OF PORTFOLIO SHARES
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51
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REDEMPTION OF PORTFOLIO SHARES
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52
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SHAREHOLDER SERVICES
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53
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DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXES
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54
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OTHER INFORMATION
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59
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FINANCIAL STATEMENTS
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60
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APPENDIX A – PROXY VOTING POLICIES
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61
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THE PORTFOLIOS
The Company is a diversified, open-end investment management company that currently offers shares of a number of series and classes, including the Investment Class Shares and Institutional Class Shares for each of the Portfolios. The Company also offers other classes of shares of the Wilshire 5000 Index
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Fund (the “Index Fund”) in separate prospectuses and statements of additional information. Wilshire Associates Incorporated (“Wilshire”) is the investment adviser for the Portfolios. Cornerstone Capital Management LLC (“Cornerstone”), Los Angeles Capital Management and Equity Research, Inc. (“Los Angeles Capital”), NWQ Investment Management Company, LLC (“NWQ”), PanAgora Asset Management, Inc. (“PanAgora”), Pzena Investment Management, LLC (“Pzena”), Ranger Investment Management, L.P. (“Ranger”), Systematic Financial Management, L.P. (“Systematic”), Thomas White International Ltd. (“Thomas White”) and Victory Capital Management Inc. (“Victory” and together with Cornerstone, Los Angeles Capital, NWQ, PanAgora, Pzena, Ranger, Systematic and Thomas White, the “Subadvisers”) each have entered into an agreement with Wilshire to serve as a subadviser to at least one of the Portfolios. Terms not defined in this SAI have the meanings assigned to them in the prospectus.
INVESTMENT POLICIES AND RISKS
The Portfolios may invest in the investments described below, except as otherwise indicated.
U.S. Government Securities.
Each Portfolio may purchase securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, which include U.S. Treasury securities of various interest rates, maturities and times of issuance. Some obligations issued or guaranteed by U.S. government agencies and instrumentalities 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 Treasury, by discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality, or by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. While the U.S. government provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Money Market Instruments.
Each Portfolio may invest in money market instruments, including certificates of deposit, time deposits, bankers’ acceptances and other short-term obligations issued by domestic banks, foreign subsidiaries or branches of domestic banks, domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions.
A certificate of deposit is a negotiable certificate requiring a bank to repay funds deposited with it for a specified period of time.
A time deposit is a non-negotiable deposit maintained in a banking institution for a specified period of time at a stated interest rate. A Portfolio will only invest in time deposits of domestic banks that have total assets in excess of one billion dollars. Time deposits held by the Portfolios will not benefit from insurance administered by the Federal Deposit Insurance Corporation.
A bankers’ acceptance is a credit instrument requiring a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. Other short-term bank obligations in which the Portfolios may invest may include uninsured, direct obligations bearing fixed, floating or variable interest rates. With respect to such securities issued by foreign branches and subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, a Portfolio may be subject to additional investment risks that are different in some respects from those incurred by a Portfolio which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, possible seizure or nationalization of foreign deposits, the possible imposition of foreign withholding taxes on interest income, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions which may adversely affect the payment of principal and interest on these securities.
Repurchase Agreements.
In a repurchase agreement, a Portfolio buys, and the seller agrees to repurchase, a security at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thus determines the yield during the purchaser’s holding period, while the seller’s obligation to repurchase is secured by the value of the underlying security. A repurchase agreement involves risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon a Portfolio’s ability to dispose of the underlying securities. The Company’s custodian or sub-custodian will hold in a segregated account the securities acquired by a Portfolio under a repurchase agreement. Repurchase agreements are considered, under the Investment Company Act of 1940, as amended (the “1940 Act”), to be loans by the Portfolios. To try to reduce the risk of loss on a repurchase agreement, the Portfolios will enter into repurchase agreements only with domestic banks with total assets in excess of one billion dollars, only with respect to securities of the type in which a Portfolio may invest, and will require that additional securities be deposited with the custodian or sub-custodian if the value of the securities purchased decreases below the repurchase price.
Lending Portfolio Securities.
The Portfolios may seek additional income by lending their securities on a short-term basis to banks, brokers and dealers. A Portfolio may return a portion of the interest earned to the borrower or a third party which is unaffiliated with the Company and acting as a “placing broker.”
The Securities and Exchange Commission (the “SEC”) currently requires that the following lending conditions must be met: (1) a Portfolio must receive at least 100% collateral from the borrower (cash, U.S. government securities, or irrevocable bank letters of credit); (2) the borrower must increase the collateral whenever the market value of the loaned securities rises above the level of such collateral; (3) a Portfolio must be able to terminate the loan at any time; (4) a Portfolio must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) a Portfolio may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Company’s Board of Directors (the “Board”) must be able to terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs.
Even though loans of portfolio securities are collateralized, a risk of loss exists if an institution that borrows securities from a Portfolio breaches its agreement with the Portfolio and the Portfolio is delayed or prevented from recovering the collateral.
Zero Coupon Securities.
Each Portfolio, except the Index Fund, may invest in zero coupon U.S. Treasury securities, which are Treasury notes and bonds that have been stripped of their unmatured interest coupons, the coupons themselves, and receipts or certificates representing interests in such stripped debt obligations and coupons. Each such Portfolio also may invest in zero coupon securities issued by corporations and financial institutions which constitute a proportionate ownership of the issuer’s pool of underlying U.S. Treasury securities. A zero coupon security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The amount of the discount fluctuates with the market price of the security. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond more to changes in interest rates than non-zero coupon securities with similar maturities and credit qualities.
Commercial Paper and Other Short-term Corporate Obligations.
Each Portfolio may invest in commercial paper and other short-term corporate obligations. Commercial paper is a short-term, unsecured promissory note issued to finance short-term credit needs. The commercial paper purchased by a Portfolio will consist only of direct obligations which, at the time of their purchase, are: (a) rated at least Prime-1 by Moody’s Investors Service, Inc., A-1 by Standard & Poor’s Ratings Group or F-1 by Fitch Ratings; (b) issued by companies having an outstanding unsecured debt issue rated at least Aa3 by Moody’s Investors Service, Inc. or AA- by Standard & Poor’s Ratings Group or Fitch Ratings; or (c) if unrated, determined by Wilshire or the Subadvisers to be of comparable quality.
These instruments include variable amount master demand notes, which are obligations that permit a Portfolio to invest at varying rates of interest pursuant to direct arrangements between a Portfolio, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. Because they are direct lending arrangements between the lender and borrower, such instruments generally will not be traded, and there generally is no
established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. If these obligations are not secured by letters of credit or other credit support arrangements, a Portfolio’s right to redeem its investment depends on the ability of the borrower to pay principal and interest on demand. In connection with floating and variable rate demand obligations, Wilshire and the Subadvisers will consider, on an ongoing basis, earning power, cash flow and other liquidity ratios of the borrower, and the borrower’s ability to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and a Portfolio may invest in them only if at the time of an investment the borrower meets the criteria set forth above for other commercial paper issuers.
Derivatives.
Each Portfolio may invest, to a limited extent, in “derivatives.” These are financial instruments which derive their performance at least in part, from the performance of an underlying asset, index or interest rate. The derivatives the Portfolios may use are currently comprised of stock index futures and options. The Portfolios may invest in derivatives for a variety of reasons, including to hedge against certain market risks, to provide a substitute for purchasing or selling particular securities or to increase potential income gain. Derivatives may provide a cheaper, quicker or more specifically focused way for a Portfolio to invest than “traditional” securities.
Although the Index Fund does not currently intend to invest in derivatives, it reserves the right to do so in the future. Normally, less than 5% of a Portfolio’s net assets would be invested in derivatives.
Derivatives permit a Portfolio to increase, decrease or change the level of risk to which its securities are exposed in much the same way as a Portfolio can increase, decrease or change the risk of its investments by making investments in specific securities. However, derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative and a Portfolio as a whole. Under certain market conditions, they can increase the volatility of a Portfolio’s net asset value (“NAV”), decrease the liquidity of a Portfolio’s investments and make more difficult the accurate pricing of a Portfolio’s shares.
In addition, derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could have a large potential impact on a Portfolio’s performance. If a Portfolio invests in derivatives at inappropriate times or judges market conditions incorrectly, such investments may lower a Portfolio’s return or result in a loss. A Portfolio also could experience losses if its derivatives were poorly correlated with its other investments, or if a Portfolio were unable to liquidate its position because of an illiquid secondary market. The market for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for derivatives.
When required by the SEC, a Portfolio will set aside permissible liquid assets in a segregated account to cover its obligations relating to its purchase of derivatives. To maintain this required cover, a Portfolio may have to sell portfolio securities at disadvantageous prices or times. Derivatives may be purchased on established exchanges (“exchange-traded” derivatives) or through privately negotiated transactions (“over-the-counter” derivatives). Exchange-traded derivatives generally are guaranteed by the clearing agency which is the issuer or counterparty to such derivatives. This guarantee usually is supported by a daily payment system operated by the clearing agency in order to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty credit risk associated with derivatives purchased on an exchange. By contrast, no clearing agency guarantees over-the-counter derivatives. Therefore, each party to an over-the-counter derivative transaction bears the risk that the counterparty will default. Accordingly, a Subadviser will consider the creditworthiness of counterparties to over-the-counter derivative transactions in the same manner as it would review the credit quality of a security to be purchased by a Portfolio. Over-the-counter derivatives are less liquid than exchange-traded derivatives since the other party to the transaction may be the only investor with sufficient understanding of the derivative to be interested in bidding for it.
Futures Transactions.
A Portfolio may enter into futures contracts on particular securities or stock indices in U.S. domestic markets, such as the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange. A futures contract is an agreement in which one party agrees to deliver to the other an
amount of cash equal to a specific dollar amount times the difference between the value of a specific stock or stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of securities is made.
Engaging in these transactions involves risk of loss to a Portfolio which could affect the value of such Portfolio’s net assets adversely. Although each Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance exists that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting a Portfolio to substantial losses.
Successful use of futures by a Portfolio also is subject to the ability of the Subadvisers to predict correctly movements in the direction of the relevant market and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the position being hedged and the price movements of the futures contract. For example, if a Portfolio uses futures to hedge against the possibility of a decline in the market value of securities held in its portfolio and the prices of such securities instead increase, a Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. Furthermore, if in such circumstances as Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. A Portfolio may have to sell such securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and published positions of the SEC, a Portfolio may be required to segregate cash or liquid assets in connection with its futures transactions in an amount generally equal to the value of the contract. The segregation of such assets will have the effect of limiting a Portfolio’s ability otherwise to invest those assets.
A notice of eligibility for exclusion from the definition of the term “commodity pool operator” has been filed with the National Futures Association with respect to each Fund. On February 9, 2012, the Commodity Futures Trading Commission (“CFTC”) adopted amendments to its rules that became effective on December 31, 2012. A fund that seeks to claim the exclusion after December 31, 2012 is limited in its ability to use futures and options on futures or commodities or engage in swap transactions. If a Portfolio was no longer able to claim the exclusion, Wilshire would be required to register as a “commodity pool operator” on behalf of the Portfolios and Wilshire would be subject to regulation under the Commodity Exchange Act.
Options.
A Portfolio may write covered call options, buy put options, buy call options and write secured put options on particular securities or securities indices such as the Wilshire 5000 Index
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or the S&P 500 Index. Options trading is a highly specialized activity which entails greater than ordinary investment risks. A call option for a particular security gives the purchaser of the option the right to buy, and a writer the obligation to sell, the underlying security at the stated exercise price at any time prior to the expiration of the option, regardless of the market price of the security. The premium paid to the writer is in consideration for undertaking the obligations under the option contract. A put option for a particular security gives the purchaser the right to sell the underlying security at the stated exercise price at any time prior to the expiration date of the option, regardless of the market price of the security.
Options on stock indices are similar to options on specific securities, except that, rather than the right to take or make delivery of the specific security at a specific price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of that stock index is greater than, in the case of a call option, or less than, in the case of a put option, the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to
deliver this amount. Unlike options on specific securities, all settlements of options on stock indices are in cash, and gain or loss depends on general movements in the stocks included in the index rather than price movements in particular stock.
Other Derivatives.
A Portfolio may take advantage of opportunities in the area of futures contracts and any other derivatives which presently are not contemplated for use by the Portfolio or which currently are not available but which may be developed, to the extent such opportunities are both consistent with the Portfolio’s investment objective and legally permissible for the Portfolio. Before entering into such transactions or making any such investment, the Company will provide appropriate disclosure in its prospectus or SAI.
Foreign Securities.
Each Portfolio may include securities of foreign issuers that trade on U.S. exchanges. These investments may include American Depository Receipts (“ADRs”). ADRs may be sponsored by the foreign issuer or may be unsponsored. Unsponsored ADRs are organized independently and without the cooperation of the foreign issuer of the underlying securities. As a result, available information regarding the issuer may not be as current as for sponsored ADRs, and the prices of unsponsored ADRs may be more volatile than if they were sponsored by the issuers of the underlying securities. For purposes of a Portfolio’s investment policies, investments in ADRs will be deemed to be investments in the equity securities representing the securities of foreign issuers into which they may be converted. Investments in foreign securities have additional risks, including future political and economic developments, possible imposition of withholding taxes on income payable on the securities, the possible establishment of currency exchange controls, adoption of other foreign governmental restrictions and possible seizure or nationalization of foreign assets.
Preferred Stock.
The Index Fund may invest up to 5% of its assets in preferred stock. Preferred stock, unlike common stock, offers a stated dividend rate payable from a corporation’s earnings. Such preferred stock dividends may be cumulative or noncumulative, participating or auction rate. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative feature when interest rates decline. Dividends on some preferred stock may be “cumulative,” requiring all or a portion of prior unpaid dividends to be paid before dividends are paid on the issuer’s common stock. Preferred stock also generally has a preference over common stock on the distribution of a corporation’s assets in the event of liquidation of the corporation, and may be “participating,” which means that it may be entitled to a dividend exceeding the stated dividend in certain cases. The rights of preferred stocks on the distribution of a corporation’s assets in the event of a liquidation are generally subordinate to the rights associated with a corporation’s debt securities.
Convertible Securities.
The Index Fund may invest up to 5% of its assets in convertible securities when it appears to Los Angeles Capital that it may not be prudent to be fully invested in common stocks. The Wilshire International Equity Fund (the “International Fund”) may invest in convertible securities. Convertible securities may include corporate notes or preferred stock but are ordinarily long-term debt obligations of the issuers convertible at stated exchange rates into common stock of the issuers. As with all debt securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. Convertible securities generally offer lower interest or dividend yields than nonconvertible securities of similar quality. However, when the market price of the common stock underlying a convertible security exceeds the conversion price, the price of the convertible security tends to reflect the value of the underlying common stock. As the market price of the underlying common stock declines, the convertible security tends to trade increasingly on a yield basis, and thus may not depreciate to the same extent as the underlying common stock. Convertible securities rank senior to common stocks in an issuer’s capital structure and are consequently of higher quality and entail less risk than the issuer’s common stock, although 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.
Warrants and Rights.
The Index Fund may invest up to 5% of its assets in warrants and rights. The International Fund may invest in warrants and rights. Warrants are options to purchase equity securities at a specified price valid for a specific period of time. Their prices do not necessarily move parallel to the prices of the underlying securities. Rights are similar to warrants, but generally are shorter in duration and are distributed by the issuer directly to its shareholders. Warrants and rights have no voting rights, receive no dividends and have no rights to the assets of the issuer.
Exchange-Traded Funds (“ETFs”).
The International Fund and the Large Company Growth Portfolio may invest in shares of ETFs. ETFs are derivative securities whose value tracks a well-known securities index or basket of securities. A Fund’s investments in ETFs are subject to its limitations on investments in other investment companies. The shares of an ETF may be purchased on an exchange or may be assembled in a block (typically 50,000 shares) known as a creation unit and redeemed in kind for a portfolio of the underlying securities (based on the ETF’s NAV) together with a cash payment generally equal to accumulated dividends as of the date of redemption. Conversely, a creation unit may be purchased from the ETF by depositing a specified portfolio of the ETF’s underlying securities, as well as a cash payment generally equal to accumulated dividends of the securities (net of expenses) up to the time of deposit. A Portfolio’s ability to redeem creation units may be limited by the 1940 Act, which provides that an ETF will not be obligated to redeem shares held by a Portfolio in an amount exceeding 1% of its total outstanding securities during any period of less than 30 days. In addition to the advisory and operational fees a Portfolio bears directly in connection with its own operation, a Portfolio would also bear its pro rata portion of each ETF’s advisory and operational expenses.
Impact of Large Redemptions and Purchases of Portfolio Shares.
From time to time, shareholders of a Portfolio (which may include affiliated registered investment companies that invest in a Portfolio) may make relatively large redemptions or purchases of Portfolio shares. These transactions may cause a Portfolio to have to sell securities or invest additional cash, as the case may be. While it is impossible to predict the overall impact of these transactions over time, there could be adverse effects on a Portfolio’s performance to the extent that the Portfolio may be required to sell securities or invest cash at times when it would not otherwise do so. These transactions could also accelerate the realization of taxable income if sales of securities resulted in capital gains or other income and could also increase transaction costs, which may impact a Portfolio’s expense ratio and adversely affect a Portfolio’s performance.
Recent Market Events Risk.
Over the past several years, events in the financial sector have resulted in an unusually high degree of volatility in the financial markets and the economy at large. Both domestic and international equity and fixed income markets have been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected. It is uncertain how long these conditions will continue.
These market conditions have resulted in fixed-income instruments experiencing unusual liquidity issues, increased price volatility and, in some case, credit downgrades and increased likelihood of default. These events have reduced the willingness and ability of some lenders to extend credit, and have made it more difficult for borrowers to obtain financing on attractive terms, if at all. As a result, the values of many types of securities have been reduced, including, but not limited to, mortgage-backed, asset-backed and corporate debt securities.
The U.S. federal government and certain foreign central banks have acted to calm credit markets and increase confidence in the U.S. and world economies. Certain of these entities have injected liquidity into the markets and taken other steps in an effort to stabilize the market and grow the economy. The ultimate effect of these efforts is, of course, not yet known. Withdrawal of this support or other policy changes by governments or central banks, could negatively affect the value and liquidity of certain securities.
The situation in financial markets has resulted in calls for increased regulation, and the need of many financial institutions for government help has given lawmakers and regulators new leverage. The U.S. government, the Federal Reserve, the Treasury, the Commission, the CFTC, the Federal Deposit Insurance Corporation and other U.S. governmental and regulatory bodies have taken actions in response to the economic events of the past few years. These actions include, but are not limited to, the enactment by the United States Congress of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, which imposes a new regulatory framework over the U.S. financial services industry and the consumer credit markets in general, as well as requiring sweeping new regulations by the Commission, the CFTC and other regulators. Given the broad scope, sweeping nature, and relatively recent enactment of some of these statutes and regulatory measures, the potential impact they could have on securities held by the Funds currently is unknown. There can be no assurance that these measures will not have an adverse effect on the value or marketability of securities held by the Portfolios. Furthermore, no assurance can be made that the U.S. government or any U.S. regulatory body (or other authority or regulatory body) will refrain from taking further legislative or regulatory action.
Because the situation in the markets is widespread and largely unprecedented, it may be unusually difficult to identify both risks and opportunities using past models of the interplay of market forces, or to predict the duration of these market events.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Board has adopted a Dissemination of Portfolio Information Policy (the “Policy”) regarding the disclosure by Wilshire and the Subadvisers of information about the portfolio holdings and characteristics of each Portfolio. Pursuant to the Policy, such information may be made available to the general public by posting on the Company’s website on the first business day following the 20th calendar day after each month end. Other than such disclosure, no portfolio holdings information may be disclosed to any third party except for the following disclosures: (a) to the Company’s administrator, custodian, legal counsel, independent registered public accounting firm and other service providers to enable them to fulfill their responsibilities to the Company; (b) to the Board; (c) to third parties (e.g., broker-dealers) for the purpose of analyzing or trading portfolio securities; (d) to rating agencies and companies that collect and maintain information about mutual funds, subject to confidentiality requirements; (e) as required by law, including in regulatory filings with the SEC; (f) to shareholders of the Company and others, provided such information is publicly available (e.g., posted on the Company’s internet website or included in a regulatory filing); (g) to third parties for purposes of effecting in-kind redemptions of securities to facilitate orderly redemption of Portfolio assets and to minimize impact on remaining Portfolio shareholders; or (h) as approved by the Chief Compliance Officer of the Company (the “CCO”). Any disclosure made pursuant to item (h) above will be reported to the Board at its next quarterly meeting.
The Company, Wilshire and/or the Subadvisers have ongoing business arrangements with the following entities which involve making portfolio holdings information available to such entities as an incidental part of the services they provide to the Company: (i) the Company’s administrator and custodian pursuant to fund accounting and custody agreements, respectively, under which the Company’s portfolio holdings information is provided daily on a real-time basis; (ii) MSCI Institutional Shareholder Services (“ISS”) and Investor Responsibility Research Center, Inc., pursuant to proxy voting agreements under which the portfolio holdings information of certain Portfolios is provided daily, on a real-time basis; and (iii) the Company’s independent registered public accounting firm and legal counsel to whom the Company provides portfolio holdings information as needed with no lag time.
The release of information is subject to confidentiality requirements. None of the Company, Wilshire, the Subadvisers or any other person receives compensation or any other consideration in connection with such arrangements (other than the compensation paid by the Company to such entities for the services provided by them to the Company). In the event of a conflict between the interests of Portfolio shareholders and those of the Company, Wilshire, the Company’s principal underwriter, or any of their affiliated persons, the CCO will make a determination in the best interests of the Company’s shareholders, and will report such determination to the Board at the end of the quarter in which such determination was made.
INVESTMENT RESTRICTIONS
The investment restrictions described below, along with each Portfolio’s investment objective, are fundamental policies of each Portfolio, and cannot be changed without the approval of a majority of the Portfolio’s outstanding voting shares (as defined by the 1940 Act). All percentage limitations apply only at the time of the transaction. Subsequent changes in value or in a Portfolio’s total assets will not result in a violation of the percentage limitations, with the exception of the limitation on borrowing. No Portfolio may:
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Invest in commodities, except that a Portfolio may purchase and sell options, forward contracts, and futures contracts, including those relating to indices, and options on futures contracts or indices.
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Purchase, hold or deal in real estate or oil, gas or other mineral leases or exploration or development programs, but a Portfolio may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate.
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Borrow money, except for temporary or emergency (not leveraging) purposes in an amount up to 33 1/3% of the value of a Portfolio’s total assets (including the amount borrowed) based on the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. When borrowings exceed 5% of the value of a Portfolio’s total assets, the Portfolio will not make any additional investments. For purposes of this investment restriction, the entry into options, forward contracts, or futures contracts, including those relating to indices and options on futures contracts or indices, will not constitute borrowing.
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Make loans to others, except through the purchase of debt obligations and entry into repurchase agreements. However, each Portfolio may lend its portfolio securities in an amount not to exceed 33 1/3% of the value of its total assets, including collateral received for such loans. Any loans of portfolio securities will be made according to guidelines established by the SEC and the Board.
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Act as an underwriter of securities of other issuers, except to the extent a Portfolio may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities.
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Invest more than 25% of its assets in the securities of issuers in any single industry, provided there will be no limitation on the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities.
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Invest more than 5% of its assets in the obligations of any single issuer, except that up to 25% of the value of a Portfolio’s total assets may be invested, and securities issued or guaranteed by the U.S. government, or its agencies or instrumentalities may be purchased, without regard to any such limitation.
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With respect to 75% of a Portfolio’s assets, hold more than 10% of the outstanding voting securities of any single issuer.
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Issue any senior security (as defined in Section 18(f) of the 1940 Act), except to the extent that the activities permitted in investment restrictions No. 1 and 3 may be deemed to give rise to a senior security.
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With respect to the investment restriction on borrowing, in the event that asset coverage falls below 33 1/3% of its total assets, a Portfolio shall, within three days thereafter (not including Sundays and holidays), reduce the amount of its borrowings to an extent that the asset coverage of such borrowings shall be at least 33 1/3% of its total assets.
All swap agreements and other derivative instruments that were not classified as commodities or commodity contracts prior to July 21, 2010 are not deemed to be commodities or commodity contracts for purposes of restriction No. 1 above.
The following investment restrictions are non-fundamental and may be changed by a vote of a majority of the Company’s Board. No Portfolio may:
|
|
1.
|
Invest in the securities of a company for the purpose of exercising management or control, but a Portfolio will vote the securities it owns in its portfolio as a shareholder in accordance with its views.
|
|
|
2.
|
Enter into repurchase agreements providing for settlement in more than seven days after notice or purchase securities which are illiquid, if, in the aggregate, more than 15% of the value of a Portfolio’s net assets would be so invested.
|
|
|
3.
|
Purchase securities of other investment companies, except to the extent permitted under the 1940 Act or those received as part of a merger or consolidation.
|
In addition, as a non-fundamental policy of the International Fund, the International Fund may not invest in the securities of other registered open-end investment companies or in registered trusts in reliance on Sections 12(d)(1)(F) and 12(d)(1)(G) of the 1940 Act but may otherwise invest in the securities of other investment companies to the extent permitted under the 1940 Act or the rules and regulations thereunder or by guidance regarding, interpretations of, or exemptive orders under, the 1940 Act or the rules and regulations thereunder published by appropriate regulatory authorities.
DIRECTORS AND OFFICERS
The Board, five of six of whom are not considered “interested persons” of the Company within the meaning of the 1940 Act (the “Independent Directors”), has responsibility for the overall management and operations of the Company. The Board establishes the Company’s policies and meets regularly to review the activities of the officers, who are responsible for day-to-day operations of the Company.
Set forth below are the names of the Directors and executive officers of the Company, their ages, business addresses, positions and terms of office, their principal occupations during the past five years, and other directorships held by them, including directorships in public companies. The address of each Director and officer is 1299 Ocean Avenue, Suite 700, Santa Monica, CA 90401.
|
Name and Age
|
Position Held with the Company
|
Term of Office
(1)
and Length of Time Served
|
Principal Occupations During the Past Five Years
|
Number of Funds/ Funds in Complex Overseen by Director
|
Other Directorships
Held by Director
Over the Past Five Years
|
|
NON-INTERESTED DIRECTORS
|
|
Margaret M. Cannella, 61
|
Director
|
Since 2011
|
Adjunct Professor, Columbia Business School; Managing Director, Head, Global Credit Research and Corporate Strategy, JP Morgan Securities (2007 to 2009)
|
15
|
Wilshire Variable Insurance Trust, Inc. (9 Funds); Schroder Series Trust; Schroder Global Series Trust; Schroder Capital Funds (Delaware); CHF Finance International (for profit joint venture of the World Bank and CHF); Advanced Pierre Foods; Princeton-in-Asia
|
|
Name and Age
|
Position Held with the Company
|
Term of Office
(1)
and Length of Time Served
|
Principal Occupations During the Past Five Years
|
Number of Funds/ Funds in Complex Overseen by Director
|
Other Directorships
Held by Director
Over the Past Five Years
|
|
Roger A. Formisano, 64
|
Director
|
Since 2002
|
Vice President, University Medical Foundation, (2006 to Present); formerly Director, The Center for Leadership and Applied Business, UW-Madison School of Business; Principal, R.A. Formisano & Company, LLC
|
15
|
Integrity Mutual Insurance Company, Unity Health Insurance Company, Wilshire Variable Insurance Trust (9 Funds)
|
|
Edward Gubman, 61
|
Director
|
Since 2011
|
Founder and Principal, Strategic Talent Solutions (2004 to Present); Consultant, Gubman Consulting (2001 to 2003); Account Manger and Global Practice Leader, Hewitt Associates (1983 to 2000)
|
15
|
Wilshire Variable Insurance Trust (9 Funds)
|
|
Suanne K. Luhn, 58
|
Director
|
Since 2008
|
Retired; formerly Chief Compliance Officer, Bahl & Gaynor (investment adviser) (1990 to 2006)
|
15
|
Wilshire Variable Insurance Trust (9 Funds)
|
|
George J. Zock, 62
|
Director, Chairperson of the Board
|
Since 2006
|
Independent Consultant; Consultant, Horace Mann Service Corporation (2004 to 2005); Executive Vice President, Horace Mann Life Insurance Company and Horace Mann Service Corporation (1997 to 2003)
|
15
|
Wilshire Variable Insurance Trust (9 Funds)
|
|
INTERESTED DIRECTOR
|
|
Victor Zhang, 40
(2)
|
Director
Vice President
|
Since 2012
Since 2009
|
President, (Since 2012),Chief Investment Officer of Wilshire Funds Management; Chairman of Investment Committee, Wilshire Associates Incorporated (Since 2006); Director of Investments, Harris myCFO LLC (2001 to 2006)
|
6
|
N/A
|
|
OFFICERS
|
|
Jason Schwarz, 38
|
President
|
Since 2012
|
Managing Director, Wilshire Associates Incorporated (Since 2005); Head of Wilshire Funds Management’s Client Service, Sales, Marketing and Distribution functions (Since 2005)
|
N/A
|
N/A
|
|
Helen Webb-Thompson, 44
|
Chief Compliance Officer
Vice President
|
Since 2013
Since 2008
|
Managing Director, Wilshire Associates Incorporated (Since 2003); Associate Director, First Quadrant, L.P. (2001 to 2003); Chief Investment Accountant, Financial Controller, Company Secretary, Associate Director, Compliance Officer (1996 to 2003), First Quadrant Limited
|
N/A
|
N/A
|
|
Name and Age
|
Position Held with the Company
|
Term of Office
(1)
and Length of Time Served
|
Principal Occupations During the Past Five Years
|
Number of Funds/ Funds in Complex Overseen by Director
|
Other Directorships
Held by Director
Over the Past Five Years
|
|
Reena S. Lalji, 41
|
Secretary
|
Since 2009
|
Managing Director and General Counsel, Wilshire Associates Incorporated (Since 2009); Senior Counsel, Royal Bank of Canada (2003 to 2008)
|
N/A
|
N/A
|
|
Nathan R. Palmer, 36
|
Vice President
|
Since 2011
|
Vice President, Wilshire Funds Management (Since 2011); Senior Investment Management Associate, Convergent Wealth Advisors (2009 to 2010); Director of Public Markets, Investment Office, California Institute of Technology (2008 to 2009). Treasury Manager, Retirement Investments, Intel Corporation (2004 to 2008)
|
N/A
|
N/A
|
|
James E. St. Aubin, 35
|
Vice President
|
Since 2009
|
Senior Portfolio Manager in Wilshire’s Funds Management Group (Since 2008); Senior Consultant at Ibbotson Associates – a division Morningstar Inc. (2004 to 2008)
|
N/A
|
N/A
|
|
Michael Wauters, 47
|
Treasurer
|
Since 2009
|
Chief Financial Officer, Wilshire Associates Incorporated (Since 2012); Controller, Wilshire Associates Incorporated (2009 to 2012); Assistant Vice President- Financial Operations, Pacific Life Insurance Company (2000 to 2009)
|
N/A
|
N/A
|
|
(1)
|
Each Director serves until the next shareholders’ meeting (and until the election and qualification of a successor), or until death, resignation, removal or retirement which takes effect no later than May 1 following his or her 70th birthday. Officers are elected by the board on an annual basis to serve until their successors have been elected and qualified.
|
|
(2)
|
Mr. Zhang is an interested Director due to his positions at Wilshire.
|
Qualifications and Experience
The following is a summary of the experience, qualifications, attributes and skills of each Director that support the conclusion, as of the date of this SAI, that each Director should serve as a Director in light of the Company’s business and structure. Each Director also has considerable familiarity with the Wilshire family of investment companies (by service on the Board of the Company and Wilshire Variable Insurance Trust (the “Trust”)), the Adviser and distributor, and their operations, as well as the special regulatory requirements governing regulated investment companies and the special responsibilities of investment company directors as a result of his or her substantial prior service as a Director of the Company. References to the qualifications, attributes and skills of Directors are pursuant to requirements of the SEC, do not constitute holding out of the Board or any Director as having any special expertise and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.
Margaret M. Cannella.
Ms. Cannella has served as a Director of the Company since 2011 and is chairperson of the Investment Committee since 2012. She has also served as a Board member of other funds in the Wilshire Funds complex since 2011. Ms. Cannella is retired from JPMorgan Securities, Inc., where she served as Managing Director and Head of Global Credit Research and Equity and Credit Strategy from 2007 to 2009,
Managing Director and Head of US Equity and Equity Research from 2005 to 2007, and Managing Director and Head of US Credit Research from 1998 to 2004. Prior to joining JPMorgan Securities, Inc., Ms. Cannella served as Managing Director and Head of Global Research at Citigroup. Ms. Cannella currently serves on the Board of Trustees of Schroder Series Trust, Schroder Global Series Trust and Schroder Capital Funds (Delaware). Ms. Cannella is also currently on the Board of Directors of Pierre Foods, a portfolio company of Oaktree Capital Partners, where she serves as Audit Committee chair, and she is a member of the Board of Directors of CHF Finance International, a for profit joint venture of the World Bank and CHF that provides micro finance lending. Ms. Cannella is also past Chair of Women in Leadership at Princeton University, and past Chair and current Trustee of Princeton-in-Asia. Ms. Cannella has been a member of the Council on Foreign Relations since 1999. She also serves as an adjunct professor at Columbia Business School and designs and teaches credit markets development programs at JPMorgan and the Federal Reserve Bank.
Roger A. Formisano.
Mr. Formisano has served as Director of the Company since 2006 and is chairperson of the Audit Committee. He also has served as a board member of other funds in the Wilshire funds complex since 2002. Mr. Formisano is Vice President of the University Medical Foundation, University of Wisconsin, and Founder and Principal of R.A. Formisano & Company, LLC. He also serves on the Boards of Integrity Mutual Insurance Company and Unity Health Insurance Company. Previously, Mr. Formisano was a Professor and Director of the Center for Leadership and Applied Business at the University of Wisconsin - School of Business and was Chief Operating Officer from 1992 to 1999 of United Wisconsin Services (UWZ), a NYSE listed company. The Board of the Company has determined that Mr. Formisano is an “audit committee financial expert” as defined by the SEC.
Edward Gubman, PhD.
Mr. Gubman has served as a Director of the Company since 2011 and chairperson of the Valuation Committee since 2012. He has also served as a Board member of other funds in the Wilshire funds complex since 2011. Mr. Gubman is a founding partner of Strategic Talent Solutions, a consulting firm that helps executives with leadership development, talent management and employee engagement. Prior to founding Strategic Talent Solutions in 2004, Mr. Gubman served as a consultant with his own firm, Gubman Consulting, from 2001 to 2003 where he consulted with clients on leadership and talent management. Mr. Gubman worked at Hewitt Associates from 1983 to 2000 in Account Management and as Global Practice Leader where he specialized in talent management and organizational effectiveness. Mr. Gubman is the author of The Talent Solution: Aligning Strategy and People to Create Extraordinary Business Results and The Engaging Leader: Winning with Today’s “Free Agent” Workforce. He is also the Executive Editor of People & Strategy, The Journal of the Human Resource Planning Society since 2008 and is a lecturer in executive education, MBA, MILR and physician leadership programs at The University of Chicago, Cornell University, The University of Dayton, Indiana University, Northwestern University, the University of Minnesota and the University of Wisconsin. From 2009 to the present, Mr. Gubman has served as a Board member, Assistant Treasurer and Chair of the Personnel Committee of the Jewish Family Service of the Desert, and in 2008 served as Advisor to the Presidential Transition Team on the Social Security Administration and as a committee member, National Policy Committee on Retirement Security from 2007 to 2008. Mr. Gubman has served as Chair of the Publications Committee, of The Human Resource Planning Society since 2008, and as a Board member of The Human Resource Planning Society from 2005 to 2008.
Suanne K. Luhn.
Ms. Luhn has served as Director of the Company since 2008. She also has served as a board member of other funds in the Wilshire funds complex since 2008. From 1990 to 2006, she served as Chief Compliance Officer at Bahl & Gaynor, an investment advisory firm. Ms. Luhn served as a portfolio manager from 1983 to 1990, first at Baldwin United Company and later at Scudder, Stevens & Clark, Inc., where she was Director, Socially Responsive Investment Team, Member, Scudder Insurance Asset Management and Member, Institutional Fixed Income Portfolio Management. Ms. Luhn also has experience as Director of Municipal Institutional Sales for Seasongood & Mayer and as Head Trader for Equity and Fixed Income for Scudder, Stevens & Clark, Inc. Ms. Luhn has an MBA in finance.
Victor Zhang.
Mr. Zhang has served as a Director of the Company since 2012. He is also a member of the Valuation Committee. Mr. Zhang joined Wilshire in 2006 and is President and Chief Investment Officer of Wilshire Funds Management and serves as chair of the Wilshire Associates Incorporated Investment Committee. Mr. Zhang has over 16 years of industry experience in asset allocation. Prior to joining Wilshire, he served as Director of Investments and held other senior investment positions with the multi-family office firm Harris myCFO LLC, a subsidiary of Bank of Montreal. Previous to Harris myCFO, Mr. Zhang was a consultant with the global services firm Ernst & Young, LLP. He earned his BA in Business Economics from the University of California, Los Angeles.
George J. Zock.
Mr. Zock has served as Director of the Company and chairperson of the Board since 2006. He is chairperson of the Nominating Committee. Mr. Zock also has served as a board member of other funds in the Wilshire funds complex since 1996 and was a board member of the predecessor funds to those funds from 1995 to 1996. Mr. Zock, a certified public accountant, is currently an independent consultant and is a member of the Illinois CPA Society. Mr. Zock has held senior executive positions with the Horace Mann Life Insurance Company and Horace Mann Service Corporation, serving as Executive Vice President from 1997 to 2003.
Leadership Structure
The Company’s Board of Directors manages the business affairs of the Company. The Directors establish policies and review and approve contracts and their continuance. The Directors regularly request and/or receive reports from the Adviser, the Company’s other service providers and the Company’s Chief Compliance Officer. The Board is comprised of six Directors, five of whom (including the chairperson) are independent Directors. The independent chairperson, who serves as a spokesperson for the Board, is primarily responsible for facilitating communication among the Directors and between the Board and the officers and service providers of the Company and presides at meetings of the Board. In conjunction with the officers and legal counsel, the independent chairperson develops agendas for Board meetings that are designed to be relevant, prioritized, and responsive to Board concerns. The Board has established four standing committees. The Audit Committee is responsible for monitoring the funds’ accounting policies, financial reporting and internal control system; monitoring the work of the funds’ independent accountants and providing an open avenue of communication among the independent accountants, fund management and the Board. The Nominating Committee is primarily responsible for the identification and recommendation of individuals for Board membership and for overseeing the administration of the Company’s Governance Guidelines and Procedures. The Valuation Committee oversees the activities of the Adviser’s Pricing Committee and fair values Fund securities. The Investment Committee monitors performance of the Funds and the performance of the Adviser and subadvisers. The Company’s day-to-day operations are managed by the Adviser and other service providers. The Board and the committees meet periodically throughout the year to review the Company’s activities, including, among others, fund performance, valuation matters and compliance with regulatory requirements, and to review contractual arrangements with service providers. The Board has determined that the Company’s leadership structure is appropriate given the number, size and nature of the funds in the fund complex.
Risk Oversight
Consistent with its responsibility for oversight of the Company and its Funds, the Board, among other things, oversees risk management of each Fund’s investment program and business affairs directly and through the committee structure that it has established. Risks to the Funds include, among others, investment risk, credit risk, liquidity risk, valuation risk and operational risk, as well as the overall business risk relating to the Funds. The Board has adopted, and periodically reviews, policies and procedures designed to address these risks. Under the overall supervision of the Board, the Adviser and other services providers to the Funds also have implemented a variety of processes, procedures and controls to address these risks. Different processes, procedures and controls are employed with respect to different types of risks. These processes include those that are embedded in the conduct of regular business by the Board and in the responsibilities of officers of the Company and other service providers.
The Board requires senior officers of the Company, including the President, Treasurer and Chief Compliance Officer (“CCO”), to report to the full Board on a variety of matters at regular and special meetings of the Board and its committees, as applicable, including matters relating to risk management. The Treasurer also reports regularly to the Audit Committee on the Company’s internal controls and accounting and financial reporting policies and practices. The Audit Committee also receives reports from the Company’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Board meets with the Company’s CCO, including separate meetings with the independent Directors in executive session, to discuss issues related to portfolio compliance and, on at least an annual basis, receives a report from the CCO regarding the effectiveness of the Company’s compliance program. In addition, the Investment Committee receives reports from the Adviser on the performance of the Funds and the Valuation Committee receives valuation reports and minutes from the Adviser’s Pricing Committee meetings. The Board also receives reports from the Company’s primary service providers on a periodic or regular basis, including the Adviser and subadvisers to the Funds as well as the Company’s custodian, administrator/fund accounting agent, distributor and transfer agent. The Board also requires the Adviser to report to the Board on other matters relating to risk management on a regular and as-needed basis.
Committees
The Board has four standing committees—an Audit Committee, a Nominating Committee, an Investment Committee, and a Valuation Committee.
The Audit Committee held four meetings in 2012. The current members of the Audit Committee, all of whom are Independent Directors, include Messrs. Formisano (chairperson), Gubman and Zock.
The Nominating Committee held four meetings in 2012. The current members of the Nominating Committee, all of whom are Independent Directors, include Messrs. Zock (chairperson) and Formisano and Ms. Luhn. Pursuant to the Company’s Governance Procedures, shareholders may submit suggestions for Board candidates to the Nominating Committee, which will evaluate candidates for Board membership by forwarding their correspondence by U.S. mail or courier service to the Company’s Secretary for the attention of the Chairperson of the Nominating Committee.
The Investment Committee held four meetings in 2012. The current members of the Investment Committee, all of whom are Independent Directors, include Ms. Cannella (chairperson), Mr. Gubman and Ms. Luhn.
The Valuation Committee held four meetings in 2012. The current members of the Valuation Committee, two of whom are Independent Directors, include Messrs. Gubman (chairperson) and Zhang and Ms. Cannella. Messrs. Formisano and Zock and Ms. Luhn serve as alternates.
Directors’ Holdings of Portfolio Shares
The following table sets forth the dollar range of equity securities beneficially owned by each Director in each Portfolio as of December 31, 2012, as well as the aggregate dollar range in all registered investment companies overseen by the Director within the family of investment companies.
Directors Who are Not “Interested Persons” of the Company
|
|
Dollar Range of Equity Securities in the Large Company Growth Portfolio
|
Dollar Range of Equity Securities in the Large Company Value Portfolio
|
Dollar Range of Equity Securities in the Small Company Growth Portfolio
|
Dollar Range of Equity Securities in the Small Company Value Portfolio
|
Dollar Range of Equity Securities in the Index Fund
|
Dollar Range
of Equity
Securities in the International Fund
|
Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Director within the Family of Investment Companies
|
|
Margaret M. Cannella
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
|
Roger A. Formisano
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
|
Edward Gubman
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
|
Suanne K. Luhn
|
None
|
None
|
None
|
None
|
None
|
$10,001 – 50,000
|
$10,001 – 50,000
|
|
George J. Zock
|
None
|
None
|
None
|
None
|
$1 – 10,000
|
$1 – 10,000
|
$1 – 10,000
|
Directors Who are “Interested Persons” of the Company
|
|
Dollar Range of Equity Securities
in the Large Company Growth Portfolio
|
Dollar Range of Equity Securities
in the Large Company Value Portfolio
|
Dollar Range of Equity Securities
in the Small Company Growth Portfolio
|
Dollar Range of Equity Securities
in the Small Company Value Portfolio
|
Dollar Range of Equity Securities
in the Index Fund
|
Dollar Range
of
Equity
Securities
in the
International Fund
|
Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen
by Director within the Family of Investment Companies
|
|
Victor Zhang
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
As of December 31, 2012, the Directors and officers of the Company did not hold in the aggregate, directly and beneficially, more than 1% of the outstanding shares of any class of any Portfolio.
Compensation
Prior to January 1, 2013, the Company and the Trust together paid each Independent Director an annual retainer of $14,000, an annual additional Board chair retainer of $12,000, a Board in-person meeting fee of $1,500, a Board telephonic meeting fee of $1,000, an annual Committee member retainer of $4,000, an annual Committee chairperson retainer of $8,000 in lieu of the Committee member retainer of $4,000, and a Committee telephonic meeting fee of $500.
Effective January 1, 2013, the Company and the Trust together pay each Independent Director an annual retainer of $18,000, an annual additional Board chair retainer of $12,000, a Board in-person meeting fee of $2,000, a Board telephonic meeting fee of $1,000, an annual Committee member retainer of $8,000 and a Committee telephonic meeting fee of $500.
The table below sets forth the compensation paid to the Independent Directors of the Company for the 12 months ended December 31, 2012. The Company does not compensate any of the officers or the Interested Director.
|
|
Aggregate Compensation From the Company
|
Pension Retirement Benefits Accrued as Part of Company Expenses
|
Estimated Annual
Benefits Upon
Retirement
|
Total Compensation from the Company and the Fund Complex*
|
|
Margaret M. Cannella
|
$13,877
|
N/A
|
N/A
|
$30,167
|
|
Roger A. Formisano
|
$14,030
|
N/A
|
N/A
|
$30,500
|
|
Edward Gubman
|
$13,723
|
N/A
|
N/A
|
$29,833
|
|
Suanne K. Luhn
|
$12,190
|
N/A
|
N/A
|
$26,500
|
|
George J. Zock
|
$19,550
|
N/A
|
N/A
|
$42,500
|
|
*
|
This is the total amount compensated to the Director for his or her service on the Board and the board of any other investment company in the fund complex. “Fund Complex” means two or more registered investment companies that hold themselves out as related companies for purposes of investment and investor services, or have a common investment adviser or are advised by affiliated investment advisers.
|
PRINCIPAL HOLDERS OF SECURITIES
Listed below are the names and addresses of those shareholders who owned beneficially or of record 5% or more of the outstanding Investment Class Shares or Institutional Class Shares of a Portfolio as of March 28, 2013. Shareholders who have the power to vote a large percentage of shares of a particular Portfolio may be in a position to control a Portfolio and determine the outcome of a shareholder meeting. A shareholder who owns, directly or indirectly, 25% or more of a Portfolio’s voting securities may be deemed to be a “control person,” as defined by the 1940 Act.
LARGE COMPANY GROWTH PORTFOLIO
Investment Class
|
|
|
|
Charles Schwab & Co.
|
52.04%
|
|
Attn: Mutual Funds
|
|
|
Reinvest Account
|
|
|
101 Montgomery Street
|
|
|
San Francisco, CA 94104
|
|
|
|
|
|
Horace Mann Life Insurance Company
|
21.74%
|
|
1 Horace Mann Plaza
|
|
|
Springfield, IL 62715
|
|
LARGE COMPANY GROWTH PORTFOLIO
Institutional Class
|
|
|
|
Horace Mann Life Insurance Company
|
19.20%
|
|
1 Horace Mann Plaza
|
|
|
Springfield, IL 62715
|
|
|
|
|
|
Charles Schwab & Co.
|
11.41%
|
|
Attn: Mutual Funds
|
|
|
Reinvest Account
|
|
|
101 Montgomery Street
|
|
|
San Francisco, CA 94104
|
|
|
Kansas City, MO 64199-3366
|
|
LARGE COMPANY VALUE PORTFOLIO
Investment Class
|
|
|
|
Horace Mann Life Insurance Company
|
69.79%
|
|
1 Horace Mann Plaza
|
|
|
Springfield, IL 62715
|
|
|
|
|
|
TD Ameritrade Inc
|
12.81%
|
|
FEBO of our Clients
|
|
|
PO Box 226
|
|
|
Omaha, NE 68103-2226
|
|
LARGE COMPANY VALUE PORTFOLIO
Institutional Class
|
|
|
|
TD Ameritrade Inc.
|
14.97%
|
|
FEBO Our Clients
|
|
|
PO Box 2226
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
|
Pershing LLC
|
9.91%
|
|
1 Pershing Plz
|
|
|
Jersey City, NJ 07399-0002
|
|
|
|
|
|
First Clearing, LLC
|
9.55%
|
|
2801 Market St.
|
|
|
St. Louis, MO 63103-2523
|
|
|
|
|
|
First Clearing, LLC
|
5.45%
|
|
2801 Market St
|
|
|
St. Louis, MO 63103-2523
|
|
SMALL COMPANY GROWTH PORTFOLIO
Investment Class
|
|
|
|
Horace Mann Life Insurance Company Separate Account
|
43.14%
|
|
1 Horace Mann Plaza
|
|
|
Springfield, IL 62715
|
|
|
|
|
|
Charles Schwab & Co.
|
17.93%
|
|
Attn: Mutual Funds
|
|
|
Reinvest Account
|
|
|
101 Montgomery St.
|
|
|
San Francisco, CA 94104
|
|
SMALL COMPANY GROWTH PORTFOLIO
Institutional Class
|
|
|
|
NFS LLC FEBO
|
52.21%
|
|
Linda M McCants
|
|
|
James R McCants
|
|
|
1480 Tarver Rd
|
|
|
Davisboro GA 31018-5178
|
|
|
|
|
|
NFS LLC FBO
|
45.51%
|
|
FMT CO CUST IRA
|
|
|
FBO Julene Marie Siegel
|
|
|
PO Box 160
|
|
|
Banks OR 97106-0160
|
|
SMALL COMPANY VALUE PORTFOLIO
Investment Class
|
|
|
|
Horace Mann Life Insurance Company Separate Account
|
47.52%
|
|
1 Horace Mann Plaza
|
|
|
Springfield, IL 62715
|
|
|
|
|
|
Charles Schwab & Co.
|
16.49%
|
|
Mutual Funds Dept.
|
|
|
Reinvest Account
|
|
|
101 Montgomery St.
|
|
|
San Francisco, CA 94104
|
|
|
|
|
|
TD Ameritrade Inc
|
10.79%
|
|
FEBO our clients
|
|
|
7 Easton Oval
|
|
|
Columbus, OH 43219-6010
|
|
SMALL COMPANY VALUE PORTFOLIO
Institutional Class
|
|
|
|
TD Ameritrade Inc
|
25.54%
|
|
FEBO our clients
|
|
|
PO Box 2226
|
|
|
Omaha, NE 68103-2226
|
|
|
NFS LLC FBO
|
21.69%
|
|
FMT CO Cust IRAollover
|
|
|
FBO Kalpana M Sheth
|
|
|
6 Longview Dr
|
|
|
Holmdel, NJ 07733-1642
|
|
|
|
|
|
NFS LLC FBO
|
21.15%
|
|
FMT CO Cust IRA Rollover
|
|
|
FBO Madhu N Sheth
|
|
|
6 Longview Dr
|
|
|
Holmdel, NJ 07733-1642
|
|
|
|
|
|
NFS LLC FBO
|
9.71%
|
|
FMT CO Cust IRA
|
|
|
FBO William B Mcintyre Jr
|
|
|
8900 E Jefferson Ave Apt 1420
|
|
|
Detroit, MI 48214-2974
|
|
|
|
|
|
Merrill Lynch Pierce Fenner & Smith
|
6.58%
|
|
For the Sole Benefit of its Customers
|
|
|
4800 Deer Lake Dr E
|
|
|
Jacksonville, FL 32246-6484
|
|
|
|
|
|
NFS LLC FEBO
|
5.73%
|
|
Doug Graber
|
|
|
Lisa Graber
|
|
|
6434 Marble Ln
|
|
|
Castle Rock, CO 80108-7871
|
|
|
|
|
|
Charles Schwab & Co
|
5.43%
|
|
Mutual Fund Dept
|
|
|
101 Montgomery St
|
|
|
San Francisco, CA 94104-4151
|
|
WILSHIRE 5000 INDEX
SM
FUND
Investment Class
|
|
|
|
Charles Schwab & Co
|
33.81%
|
|
Attn Mutual Funds
|
|
|
101 Montgomery St
|
|
|
San Francisco, CA 94104-4151
|
|
|
Horace Mann Life Insurance
|
19.24%
|
|
Company Separate Account
|
|
|
1 Horace Mann Plz
|
|
|
Springfield, IL 62715-0002
|
|
|
|
|
|
TD Ameritrade Inc
|
7.13%
|
|
FEBO our clients
|
|
|
PO Box 2226
|
|
|
Omaha, NE 68103-2226
|
|
WILSHIRE 5000 INDEX
SM
FUND
Institutional Class
|
|
|
|
Genworth Financial Trust Company
|
53.17%
|
|
FBO Genworth Financial Wealth Management
|
|
|
3200 N Central Ave Ste 700
|
|
|
Phoenix, AZ 85012-2468
|
|
|
|
|
|
Horace Mann Life Insurance
|
36.62%
|
|
Company Separate Account
|
|
|
1 Horace Mann Plz
|
|
|
Spring field, IL 62715-0002
|
|
WILSHIRE INTERNATIONAL EQUITY FUND
Investment Class
|
|
|
|
VIT Balanced Fund
|
99.79%
|
|
C/O SEI
|
|
|
1 Freedom Valley Dr
|
|
|
Oak, PA 19456-9989
|
|
WILSHIRE INTERNATIONAL EQUITY FUND
Institutional Class
|
|
|
|
VIT Equity Fund
|
99.80%
|
|
C/O SEI
|
|
|
101 Montgomery St
|
|
|
1 Freedom Valley Dr
|
|
|
Oaks, PA 19456-9989
|
|
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser and Subadvisers
Wilshire is the investment adviser to the Portfolios pursuant to an Investment Advisory Agreement dated April 1, 2002 as amended December 31, 2011 (the “Advisory Agreement”). Wilshire is controlled by Dennis A. Tito who beneficially owns a majority of the outstanding shares of Wilshire.
Pursuant to subadvisory agreements with Wilshire dated January 11, 2013, April 1, 2002, as amended, and January 25, 2007, respectively, Cornerstone, Los Angeles Capital, and Victory each manage a portion of the Large Company Growth Portfolio.
Pursuant to subadvisory agreements with Wilshire dated April 1, 2002, as amended, December 23, 2004, as amended, and September 20, 2007, respectively, Los Angeles Capital, Pzena, and Systematic each manage a portion of the Large Company Value Portfolio.
Pursuant to subadvisory agreements with Wilshire dated April 1, 2002, as amended, and September 19, 2007, respectively, Los Angeles Capital and Ranger each manage a portion of the Small Company Growth Portfolio.
Pursuant to subadvisory agreement with Wilshire dated April 1, 2002, as amended, and August 4, 2005, as amended from time to time, respectively, Los Angeles Capital and NWQ each manage a portion of the Small Company Value Portfolio.
Pursuant to a subadvisory agreement with Wilshire dated April 1, 2002, as amended, Los Angeles Capital manages the Index Fund.
Pursuant to subadvisory agreements with Wilshire dated April 1, 2013, Thomas White and PanAgora each manage a portion of the International Fund.
Investment Advisory Agreements and Fees
For the services provided and the expenses assumed pursuant to the Investment Advisory Agreement, the Adviser receives a fee based on each Portfolio’s average daily net assets, computed daily and payable monthly, at the following annual rates:
|
|
Rate on the First $1 Billion
of Portfolio Assets
|
Rate on Portfolio Assets in
Excess of $1 Billion
|
|
Large Company Growth Portfolio
|
0.75%
|
0.65%
|
|
Large Company Value Portfolio
|
0.75%
|
0.65%
|
|
Small Company Growth Portfolio
|
0.85%
|
0.75%
|
|
Small Company Value Portfolio
|
0.85%
|
0.75%
|
|
Wilshire 5000 Index Fund
|
0.10%
|
0.07%
|
|
Wilshire International Equity Fund
|
1.00%
|
0.90%
|
Wilshire has entered into contractual expense limitation agreements with the Small Company Growth Portfolio, the Small Company Value Portfolio and the International Fund to waive a portion of its management fees to limit expenses of such Portfolios (excluding taxes, brokerage expenses, dividend expenses on short securities, and extra-ordinary expenses) to 1.50% and 1.25% of average daily net assets for Investment Class Shares and Institutional Class Shares, respectively. These agreements to limit expenses continue through at least April 30, 2014. Wilshire may recoup the amount of any management fee waived within three years after the year in which Wilshire waived the expenses if the recoupment does not exceed the existing expense limitation. For the fiscal years ended December 31, 2010, 2011 and 2012, the advisory fees for each Portfolio payable to Wilshire, the reductions attributable to fee waivers, the net fees paid with respect to the Portfolios, and the corresponding percentages of average net assets (net of waivers), were as follows:
2010
|
|
|
|
|
|
|
|
Large Company Growth Portfolio
|
$1,373,807
|
$0
|
$0
|
$1,373,807
|
0.75%
|
|
Large Company Value Portfolio
|
$243,456
|
$0
|
$0
|
$243,456
|
0.75%
|
|
Small Company Growth Portfolio
|
$57,059
|
$48,745
|
$0
|
$8,314
|
0.12%
|
|
Small Company Value Portfolio
|
$95,879
|
$41,705
|
$0
|
$54,174
|
0.48%
|
|
Wilshire 5000 Index
SM
Fund
|
$155,101
|
$0
|
$0
|
$155,101
|
0.10%
|
|
Wilshire International Equity Fund
|
$1,949,291
|
$63,981
|
$8,803
|
$1,894,113
|
0.97%
|
2011
|
|
|
|
|
|
|
|
Large Company Growth Portfolio
|
$1,386,320
|
$0
|
$0
|
$1,386,320
|
0.75%
|
|
Large Company Value Portfolio
|
$255,301
|
$0
|
$0
|
$255,301
|
0.75%
|
|
Small Company Growth Portfolio
|
$64,047
|
$39,597
|
$0
|
$24,450
|
0.32%
|
|
Small Company Value Portfolio
|
$87,118
|
$41,395
|
$0
|
$45,723
|
0.45%
|
|
Wilshire 5000 Index
SM
Fund
|
$160,411
|
$0
|
$0
|
$160,411
|
0.10%
|
|
Wilshire International Equity Fund
|
$1,850,689
|
$75,863
|
$0
|
$1,774,826
|
0.96%
|
2012
|
|
|
|
|
|
|
|
Large Company Growth Portfolio
|
$1,393,647
|
$0
|
$0
|
$1,393,647
|
0.75%
|
|
Large Company Value Portfolio
|
$298,212
|
$0
|
$0
|
$298,212
|
0.75%
|
|
Small Company Growth Portfolio
|
$59,919
|
$34,426
|
$0
|
$25,493
|
0.36%
|
|
Small Company Value Portfolio
|
$76,593
|
$30,950
|
$0
|
$45,643
|
0.01%
|
|
Wilshire 5000 Index
SM
Fund
|
$160,525
|
$0
|
$0
|
$160,525
|
0.10%
|
|
Wilshire International Equity Fund
|
$1,764,013
|
$48,140
|
$14,634
|
$1,730,507
|
0.98%
|
The Advisory Agreement provides that Wilshire will act as the investment adviser to each Portfolio, and may recommend to the Board one or more subadvisers to manage one or more Portfolios or portions thereof. Upon appointment of a subadviser, Wilshire will review, monitor and report to the Board regarding the performance and investment procedures of the subadviser, and assist and consult the subadviser in connection with the investment program of the relevant Portfolio.
The Advisory Agreement provides that Wilshire shall exercise its best judgment in rendering the services to be provided to the Portfolios under the Advisory Agreement. Wilshire is not liable under the Advisory Agreement for any error of judgment or mistake of law or for any loss suffered by the Portfolios. Wilshire is not protected, however, against any liability to the Portfolios or its shareholders to which Wilshire would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties under the Advisory Agreement, or by reason of Wilshire’s reckless disregard of its obligations and duties under the Advisory Agreement.
The Advisory Agreement will continue in force unless sooner terminated as provided in certain provisions contained in the Advisory Agreement. It is terminable with respect to any Portfolio without penalty on 60 days’ notice by the Board, by vote of a majority of a Portfolio’s outstanding shares (as defined in the 1940 Act), or on at least 90 days’ notice by Wilshire. The Advisory Agreement terminates in the event of its assignment (as defined in the 1940 Act).
Investment Subadvisory Agreements and Fees
Pursuant to the subadvisory agreements with each of the Subadvisers (the “Subadvisory Agreements”), the fees payable to a Subadviser with respect to a Portfolio are paid exclusively by Wilshire and not directly by the stockholders of the Portfolio. The Subadvisers are independent contractors, and may act as investment advisers to other clients. Wilshire may retain one or more other subadvisers with respect to any portion of the assets of any Portfolio other than the portions to be managed by the respective Subadvisers.
No Subadviser will be liable to Wilshire, the Company or any stockholder of the Company for any error of judgment, mistake of law, or loss arising out of any investment, or for any other act or omission in the performance by the Subadviser of its duties, except for liability resulting from willful misfeasance, bad faith, negligence (gross negligence, in the case of NWQ and Pzena) or reckless disregard of its obligations. Each Subadviser will indemnify and defend Wilshire, the Company, and their representative officers, directors, employees and any person who controls Wilshire for any loss or expense arising out of or in connection with any claim, demand, action, suit or proceeding relating to any material misstatement or omission in the Company’s registration statement, any proxy statement, or any communication to current or prospective investors in any Portfolio, if such misstatement or omission was made in reliance upon and in conformity with written information furnished by the Subadviser to Wilshire or the Portfolios.
The Subadvisory Agreements with NWQ, Pzena, and Victory were approved for an initial period ended August 31, 2008. The Subadvisory Agreements with Thomas White and PanAgora were approved for an initial period ending August 31, 2014. The Subadvisory Agreement for Cornerstone was approved for an initial period ending August 31, 2014. The Subadvisory Agreement with Los Angeles Capital as amended, was approved to continue for the period ending August 31, 2014. After its initial term, each Subadvisory Agreement will continue in force from year to year with respect to a Portfolio so long as it is specifically approved for a Portfolio at least annually in the manner required by the 1940 Act.
For the fiscal years ended December 31, 2010, 2011 and 2012, the aggregate subadvisory fees paid by Wilshire with respect to each Portfolio, and the corresponding percentage of net average assets, were as follows:
2010
|
|
Aggregate Subadvisory
Fees Paid
|
|
|
Large Company Growth Portfolio
|
$978,186
|
0.28%
|
|
Large Company Value Portfolio
|
$170,556
|
0.38%
|
|
Small Company Growth Portfolio
|
$45,116
|
0.33%
|
|
Small Company Value Portfolio
|
$68,167
|
0.36%
|
|
Wilshire 5000 Index
SM
Fund
(1)
|
$106,153
|
0.05%
|
|
Wilshire International Equity Fund
|
$126,312
|
0.57%
|
2011
|
|
Aggregate Subadvisory
Fees Paid
|
|
|
Large Company Growth Portfolio
|
$555,734
|
0.33%
|
|
Large Company Value Portfolio
|
$152,602
|
0.48%
|
|
Small Company Growth Portfolio
|
$16,980
|
0.25%
|
|
Small Company Value Portfolio
|
$24,681
|
0.28%
|
|
Wilshire 5000 Index
SM
Fund
|
$73,830
|
0.05%
|
|
Wilshire International Equity Fund
|
$719,179
|
0.42%
|
2012
|
|
Aggregate Subadvisory
Fees Paid
|
|
|
Large Company Growth Portfolio
|
$555,009
|
0.30%
|
|
Large Company Value Portfolio
|
$174,082
|
0.39%
|
|
Small Company Growth Portfolio
|
$7,049
|
0.10%
|
|
Small Company Value Portfolio
|
$9,011
|
0.09%
|
|
Wilshire 5000 Index
SM
Fund
|
$64,386
|
0.04%
|
|
Wilshire International Equity Fund
|
$660,216
|
0.38%
|
Portfolio Managers
The following paragraphs provide certain information with respect to the portfolio managers of each Portfolio as identified in the prospectus and the material conflicts of interest that may arise in connection with their management of the investments of a Portfolio, on the one hand, and the investments of other client accounts for which they may have primary responsibility. Certain other potential conflicts of interest with respect to use of affiliated brokers, personal trading and proxy voting are discussed below under “Portfolio Transactions,” “Code of Ethics” and “Proxy Voting Policy and Procedures.”
Cornerstone
Cornerstone’s portion of the Large Company Growth Portfolio (the “Portfolio”) is managed by an investment team led by Thomas G. Kamp, CFA. Mr. Kamp is also responsible for the day-to-day management of other registered investment companies, other pooled investment vehicles and other advisory accounts. As of December 31, 2012, information on these other accounts is as follows:
Thomas G. Kamp, CFA
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed With Performance Based Advisory Fee
|
Total Assets With Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies
|
4
|
$840.3
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
10
|
$896.9
|
1
|
$4.3
|
|
Other Accounts
|
21
|
$859.2
|
0
|
$0
|
Conflicts that Exist as a Result of Managing Other Accounts
As an investment adviser and fiduciary, Cornerstone owes its clients and Portfolio shareholders an undivided duty of loyalty. Cornerstone recognizes that conflicts of interest are inherent in its business and accordingly has developed policies and procedures (including oversight monitoring) reasonably designed to detect, manage and mitigate the effects of actual or potential conflicts of interest in the area of employee personal trading, managing multiple accounts for multiple clients, including the Portfolio, and allocating investment opportunities. Investment professionals, including portfolio managers and research analysts, are subject to the above-mentioned policies and oversight monitoring to ensure that all clients are treated equitably. Cornerstone places the interests of its clients first and expects all of its employees to meet their fiduciary duties.
Time Management.
The management of multiple funds and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of the Portfolio and/or other accounts. Cornerstone seeks to manage such competing interests for the time and attention of a portfolio manager by having a portfolio manager focus on a particular investment discipline. Most other accounts managed by the portfolio manager are managed using the same investment model that is used in connection with the management of the Portfolio.
Employee Personal Trading.
Cornerstone has adopted a Code of Ethics that is designed to detect and prevent conflicts of interest when its investment professionals and other personnel own, buy or sell securities which may be owned by, or bought or sold for, clients. Personal securities transactions by an employee may raise a potential conflict of interest when an employee owns or trades in a security that is owned or considered for purchase or sale by a client, or recommended for purchase or sale by an employee to a client. Subject to the reporting requirements and other limitations of its Code of Ethics, Cornerstone permits its employees to engage in personal securities transactions, and also allows them to acquire investments in the Portfolio. Cornerstone’s Code of Ethics requires disclosure of all personal accounts and maintenance of brokerage accounts with designated broker-dealers approved by Cornerstone.
Managing Multiple Accounts for Multiple Clients.
Cornerstone has compliance policies and oversight monitoring in place to address conflicts of interest relating to the management of multiple accounts for multiple clients. Conflicts of interest may arise when an investment professional has responsibilities for the investments of more than one account because the investment professional may be unable to devote equal time and attention to each account. The investment professional for each client may have responsibilities for managing all or a portion of the investments of multiple accounts with a common investment strategy, including pension plans, separate accounts, collective trusts and charitable foundations. Among other things, Cornerstone’s policies and procedures provide for the prompt dissemination to investment professionals of initial or changed investment recommendations by analysts so that investment professionals are better able to develop investment strategies for all accounts they manage. In addition, investment decisions by investment professionals are reviewed for the purpose of maintaining uniformity among similar accounts and ensuring that accounts are treated equitably. No client accounts currently feature a performance fee, so there is no incentive to favor such accounts. Investment professional compensation reflects a broad contribution in multiple dimensions to long-term investment success for our clients and is not tied specifically to the performance of any particular client’s account, nor is it directly tied to the level or change in level of assets under management.
Allocating Investment Opportunities.
Cornerstone has policies and procedures intended to address conflicts of interest relating to the allocation of investment opportunities. These policies and procedures are designed to ensure that information relevant to investment decisions is disseminated promptly within its portfolio management teams and investment opportunities are allocated equitably among different clients. The investment professionals at Cornerstone routinely are required to select and allocate investment opportunities among accounts. Portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar accounts, which minimizes the potential for conflicts of interest relating to the allocation of investment opportunities. Nevertheless, investment opportunities may be allocated differently among accounts due to the particular characteristics of an account, such as size of the account, cash position, tax status, risk tolerance and investment restrictions or for other reasons. Cornerstone’s procedures are also designed to prevent potential conflicts of
interest that may arise when managing multiple accounts, including the prompt dissemination to investment professionals of any initial or changed investment recommendations by analysts; the aggregation of orders to facilitate best execution for all accounts; price averaging for all aggregated orders; objective allocation for limited investment opportunities (e.g., on a rotational basis) to ensure fair and equitable allocation among accounts; and limitations on short sales of securities.
Broker Selection.
With respect to securities transactions for the Portfolio, Cornerstone determines which broker to use to execute each order, consistent with its duty to seek best execution of the transaction. However, with respect to certain other accounts (such as separate accounts), Cornerstone may be limited by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these cases, Cornerstone may place separate, non-simultaneous, transactions for the Portfolio and another account which may temporarily affect the market price of the security or the execution of the transaction, or both, to the detriment of the Portfolio or the other account.
Compensation
The following describes the structure and method of calculating the portfolio manager’s compensation. Cornerstone offers all employees a competitive base salary plus a variable annual bonus (incentive compensation). The firm has established a bonus pool which is used to compensate employees for their contributions to the success of specific investment products and the overall organization. On a periodic basis, each employee is evaluated and the management team makes the final determination of the amount to be allocated to each individual. Cornerstone’s portfolio manager for the Portfolio is an owner of Cornerstone. His compensation consists of a competitive base salary, a discretionary bonus determined by Cornerstone, and the portfolio manager’s share of overall firm profits. The portfolio manager’s bonus is determined by a number of factors. One factor is performance of a fund relative to expectations for how a fund should have performed, given its objectives, policies, strategies and limitations, and the market environment during the measurement period. This performance factor is not based on the value of assets held in a fund’s portfolio. The performance factor depends on how the portfolio manager performs relative to the fund’s benchmark and the fund’s peer group, over various time periods. Additional factors include the portfolio manager’s contributions to the investment management function overall, contributions to the development of other investment professionals and supporting staff, and overall contributions to strategic planning and decisions for Cornerstone.
As of December 31, 2012, Mr. Kamp did not own any shares of the Large Company Growth Portfolio.
Los Angeles Capital
Los Angeles Capital manages the Index Fund and a portion of the Large Company Growth Portfolio, Large Company Value Portfolio, Small Company Growth Portfolio and Small Company Value Portfolio. Los Angeles Capital is a subchapter S corporation wholly owned by working principals. Los Angeles Capital is primarily owned by Thomas D. Stevens, Hal W. Reynolds, Stuart K. Matsuda and David R. Borger. Thomas D. Stevens, CFA - Chairman and President, Principal; Hal W. Reynolds, CFA - Chief Investment Officer, Principal; and Daniel E. Allen, CFA - Director of Global Equities, Principal, are the senior portfolio managers for the Index Fund and portion of the Large Company Growth Portfolio, Large Company Value Portfolio, Small Company Growth Portfolio and Small Company Value Portfolio. The table below includes details regarding the number of registered investment companies, other pooled investment vehicles, and other accounts managed by Mr. Stevens, Mr. Reynolds, and Mr. Allen, total assets under management for each type of account, and total assets in each type of account with performance-based advisory fees, as of December 31, 2012.
Thomas D. Stevens, CFA; Hal W. Reynolds, CFA; and Daniel E. Allen, CFA
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed With Performance Based Advisory Fee
|
Total Assets With Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies
|
13
|
$2,974
|
1
|
$1,400
|
|
Other Pooled Investment Vehicles
|
4
|
$1,250
|
3
|
$1,123
|
|
Other Accounts
|
27
|
$5,920
|
6
|
$3,683
|
As of December 31, 2012, Los Angeles Capital managed 48 portfolios, most of which have minimal overlap with other accounts with respect to investment mandates, and which use 24 different benchmarks. Although certain of Los Angeles Capital’s accounts may have common benchmarks, the accounts typically have different risk profiles, cost budgets, or alpha targets, which result in differing investment portfolios.
While each client account will be managed individually, Los Angeles Capital will, at any given time, purchase and/or sell the same securities for many accounts. When appropriate, Los Angeles Capital will aggregate the same transactions in the same securities. Clients in an aggregated transaction will receive the same execution price per share, which will reflect an average of prices if the order is executed in multiple trades, and will be charged a pro-rata share of the total commission charge. However, where a client has directed that a specific broker be used to execute transactions, or, if a client designates a specific order strategy (e.g., market-on-close, market-on-open, VWAP, TWAP, etc.), such transactions may not be aggregated with other orders entered at the same time in the same security, with the result that commission rates and execution prices for such client may differ from those obtained on the aggregated transaction. In general, an aggregated transaction may enable Los Angeles Capital to obtain a discounted commission charge and a more favorable execution price. If an executing broker is unable to fill an aggregated transaction completely and only partially completes the aggregated trade, Los Angeles Capital will allocate the partially filled transaction to clients participating in the aggregated transaction on a pro-rata basis, subject to adjustments for additional factors, including the cash availability within individual accounts and the maintenance of appropriate portfolio sector weightings.
Los Angeles Capital executes purchase and sale orders on behalf of client accounts through its approved brokerage relationships. These orders may be executed through electronic communication networks, alternative trading systems, or other similar execution systems which are governed by the SEC. These transactions meet the requirements of ERISA Section 408(b)(16).
In selecting brokers and negotiating commissions for trade execution, the firm’s general guiding principle is to obtain the best execution at the most favorable price. However, in accordance with SEC recommendations and the CFA Institute Soft Dollar Standards, Los Angeles Capital will consider the following factors in evaluating a broker’s capability to provide best execution: the broker’s financial condition, the broker’s responsiveness to the investment manager, the commission rate or spread involved, and the range of services offered by the broker. Additionally, Los Angeles Capital recommends that its traders consider whichever of the following factors might be relevant in selecting a broker for a specific transaction:
|
|
•
|
Quality of overall execution services provided by the broker/dealer;
|
|
|
•
|
Promptness and accuracy of electronic execution reports;
|
|
|
•
|
Ability and willingness to promptly resolve and correct errors;
|
|
|
•
|
Ability to commit capital to facilitate principal transactions;
|
|
|
•
|
Specific expertise the broker/dealer may have in executing trades for the particular type of security or basket of securities;
|
|
|
•
|
Quality of electronic and algorithmic trading strategies;
|
|
|
•
|
Participation in client commission recapture programs; and
|
|
|
•
|
Willingness to accrue and pay for approved soft dollar products.
|
These criteria are relevant components of the broker’s ability to obtain the most favorable total cost under the particular circumstances at any given time.
Since client portfolios have different investment strategies, objectives, restrictions, constraints, startup dates and overlapping benchmark constituents, it is possible that Los Angeles Capital may be purchasing or holding a security for one client, and selling the same security for another client. Additionally, it is possible for the firm to purchase or sell the same security for different accounts during the same trading day but at differing execution prices. This is because trade waves created using the Wave Optimization algorithms are specific to each traded account and use live prices as a primary wave creation determinant. A wave traded for one account at a particular time in the day may have a different profit/loss profile (trade decision variable) than a wave traded for another account at a different time in the day, but the same stock may be traded as part of both waves, resulting in different trade execution prices.
In the event that the trades in a client’s managed account coincide or overlap with a proprietary Los Angeles Capital account, or a pooled account with proprietary assets in excess of 2%, it is Los Angeles Capital’s policy to trade the client managed account(s) first and the account(s) with proprietary interests last. If feasible, and if the impact on liquidity and market impact is determined to be inconsequential, Los Angeles Capital may trade client managed accounts in conjunction with proprietary interests. Similarly traded names would receive the same execution price per share and will be subject to the procedures outlined above with respect to “aggregated transactions.”
The level of client fees or receivables will never enter the order priority decision making process by Los Angeles Capital or its traders. Los Angeles Capital and its traders will strive to capture as much profit as possible, based upon a benchmark that reflects the firm’s desire to minimize implementation shortfall. Los Angeles Capital believes this “frictionless” benchmark serves as the most stringent measure of market impact and opportunity cost as the firm applies its investment ideas.
Los Angeles Capital’s senior portfolio managers, including Messrs. Stevens, Reynolds and Allen, are principals of Los Angeles Capital and are compensated based on Los Angeles Capital’s profits rather than on performance of particular accounts. Messrs. Stevens, Reynolds and Allen’s compensation consists of a base salary, profit sharing, which vests over a four year period, and distribution of Los Angeles Capital’s profits. Messrs. Stevens, Reynolds and Allen manage 10 accounts with performance fee arrangements which, depending upon performance, may increase the revenues of the firm.
As of December 31, 2012, Messrs. Stevens, Reynolds and Allen did not own shares of any of the Portfolios.
NWQ
Phyllis G. Thomas, CFA, is the portfolio manager of NWQ’s portion of the Small Company Value Portfolio. The table below includes details regarding the number of registered investment companies, other pooled investment vehicles and other accounts managed by Ms. Thomas, total assets under management for each type of account, and total assets in each type of account with performance-based advisory fees, as of December 31, 2012:
Phyllis G. Thomas
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed With Performance Based Advisory Fee
|
Total Assets With Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies
|
3
|
$211.2
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
1
|
$64.8
|
0
|
$0
|
|
Other Accounts
|
1,497
|
$997.3
|
0
|
$0
|
Conflicts of Interest
NWQ has an investment philosophy and operating belief which seeks to manage each account in a particular strategy alike. Conflicts of interest may include, but are not limited to:
|
|
•
|
The management of multiple accounts may result in the portfolio manager devoting unequal time and attention to the management of each account. NWQ seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most accounts managed by a portfolio manager in a particular investment strategy are managed using the same investment models.
|
|
|
•
|
If a portfolio manager identifies a limited investment opportunity, which may be suitable for more than one account, an account may not be able to take full advantage of that opportunity due to its limited availability (i.e. an allocation of filled purchase or sale orders across all eligible accounts.) To deal with these situations, NWQ has adopted procedures for allocating limited opportunities across multiple accounts.
|
|
|
•
|
In the event a client has directed certain brokerage activities, NWQ may place separate, non-simultaneous transactions for certain accounts which may temporarily affect the market price of the security or the execution of the transaction, or both, to the detriment of other accounts.
|
|
|
•
|
The appearance of a conflict of interest may arise where NWQ has an incentive, such as a performance-based management fee, which relates to the management of some accounts, where a portfolio manager has day-to-day management responsibilities. However, again, NWQ has an operating belief/philosophy which seeks to manage all accounts alike.
|
NWQ has adopted certain compliance procedures which are designed to address these types of conflicts. However, there is no guarantee that such procedures will detect each and every situation in which a conflict arises.
Broker Selection & Evaluation
NWQ maintains trading relationships with a wide variety of full-service and execution rate brokers, direct access and electronic destinations that are utilized in the implementation of its trading strategy. Consideration is given to the providers of natural liquidity and execution quality. NWQ continuously evaluates new technologies and ideas to ensure we have access to as many liquidity points as we feel necessary to be fully represented in the marketplace.
In seeking the most favorable execution for clients, the Trading Desk takes into consideration not only the available prices and rates of brokerage commissions (when applicable), but also other relevant factors, including, but not limited to, execution capabilities, market impact, clearance and settlement capabilities, financial strength and stability, efficiency of execution and error resolution and research services provided by the broker or dealer which are expected to enhance our portfolio management capabilities, without having to demonstrate that such factors are of a direct benefit to any particular client account. NWQ also considers the nature of the security being
traded, the size of the transaction, the desired timing of the transaction, and the activity existing and expected in the market for the particular security. The process is subjective, and certain trades are more difficult to execute than others.
Compensation
NWQ offers a highly competitive compensation structure with the purpose of attracting and retaining the most talented investment professionals. These professionals are rewarded through a combination of cash and long-term incentive compensation as determined by the firm’s executive committee. Total cash compensation (TCC) consists of both a base salary and an annual bonus that can be a multiple of the base salary. The firm annually benchmarks TCC to prevailing industry norms with the objective of achieving competitive levels for all contributing professionals.
Available bonus pool compensation is primarily a function of the firm’s overall annual profitability, and in the interest of employee and client interest alliance, NWQ’s bonus pool will be augmented should the firm outperform its benchmarks on a 1, 2 and 3 year basis. Individual bonuses are based primarily on the following:
|
|
•
|
Overall performance of client portfolios
|
|
|
•
|
Objective review of stock recommendations and the quality of primary research
|
|
|
•
|
Subjective review of the professional’s contributions to portfolio strategy, teamwork, collaboration, and work ethic
|
To further strengthen its incentive compensation package and to create an even stronger alignment with the long-term success of the firm, NWQ provides a number of other incentive opportunities through long-term employment contracts with senior executives, retention agreements, and an equity incentive plan with non-solicitation and non-compete provisions for participating employees. The equity incentive plan provides meaningful equity to employees which is similar to restricted stock and options and which vests over the next 5 to 7 years. Equity incentive plans allowing key employees of NWQ to participate in the firm’s growth over time have been in place since Nuveen’s acquisition of NWQ.
As of December 31, 2012, Ms. Thomas did not own any shares in the Small Company Value Portfolio.
PanAgora
The ownership interest includes two outside corporate entities and PanAgora employees. The PanAgora Management Equity Plan offers up to 20% ownership in the firm through restricted stock and options and was implemented on March 25, 2008. Assuming all employee stock and options are issued and exercised, the outside ownership would be approximately 66% with Power Financial Corporation through its affiliates Great West Life/Putnam Investments and 14% with Nippon Life Insurance Company.
Putnam Investments, LLC owns approximately 80% of the outstanding voting stock of PanAgora indirectly through its wholly owned subsidiary, Putnam U.S. Holdings I, LLC. The principal business of Putnam Investments is money management. The remainder of PanAgora’s voting stock (20%) is held by Nippon Life Insurance Company (“Nippon Life”). The principal businesses of Nippon Life are insurance (primarily life insurance) and investment management. Great-West, a subsidiary of Power Financial Corporation (“Power Financial”), owns Putnam Investments, LLC.
Great-West is a Canadian financial services holding company with interests in the life insurance, health insurance, retirement, savings, and reinsurance businesses. Power Financial, an international management and holding company of financial services businesses, owns approximately 70.6% of the voting shares of Great-West Power Corporation of Canada, a diversified international management and holding company, owns approximately 66.4% of the voting securities of Power Financial. The Honorable Paul Desmarais, Sr., through a group of private holding companies which he controls, has voting control of Power Corporation of Canada.
The address of Mr. Desmarais, Power Corporation of Canada, and Power Financial is 751 Victoria Square, Montreal, Quebec H2Y 2J3. The address of Great-West is 100 Osborne Street North, Winnipeg, Manitoba, R3C 3A5. The address of all Putnam entities is One Post Office Square, Boston, MA 02109.
William G. Zink, David Liddell and Randall Yarlas, portfolio managers of PanAgora’s portion of the Wilshire International Equity Fund (the “International Fund”), are primarily responsible for the day-to-day management of other registered investment companies and other pooled investment vehicles. As of December 31, 2012, information on these other accounts is as follows:
William G. Zink
|
|
Number of Accounts Managed
|
Total Assets Managed (in millions)
|
Number of Accounts Managed for which Advisory Fee is Performance-Based
|
Assets Managed for which Advisory Fee is Performance-Based (in millions)
|
|
Registered Investment Companies
|
2
|
$54.8
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
5
|
$981.8
|
0
|
$0
|
|
Other Advisory Accounts
|
20
|
$2,586.1
|
0
|
$0
|
David Liddell and Randall Yarlas
|
|
Number of Accounts Managed
|
Total Assets Managed (in millions)
|
Number of Accounts Managed for which Advisory Fee is Performance-Based
|
Assets Managed for which Advisory Fee is Performance-Based (in millions)
|
|
Registered Investment Companies
|
2
|
$54.8
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
2
|
$440.9
|
1
|
$304.9
|
|
Other Advisory Accounts
|
2
|
$423.7
|
1
|
$406.7
|
Conflicts of Interest.
The portfolio managers’ management of other accounts may give rise to potential conflicts of interest in connection with their management of the International Fund’s investments, on the one hand, and the investments of the other accounts, on the other. The other accounts include retirement plans and separately managed accounts, as well as incubated accounts. The other accounts might have similar investment objectives as the International Fund or hold, purchase or sell securities that are eligible to be held, purchased or sold by the International Fund. While the portfolio managers’ management of other accounts may give rise to the following potential conflicts of interest, PanAgora does not believe that the conflicts, if any, are material or, to the extent any such conflicts are material, PanAgora believes that it has designed policies and procedures to manage those conflicts in an appropriate way.
A potenial conflict of interest may arise as a result of the portfolio managers’ day-to-day management of the International Fund. Because of their positions with the International Fund, the portfolio managers know the size, timing and possible market impact of International Fund trades. It is theoretically possible that the portfolio managers could use this information to the advantage of other accounts they manage and to the possible detriment of the International Fund. However, PanAgora has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.
A potential conflict of interest may arise as a result of the portfolio managers’ management of the International Fund and other accounts, which, in theory, may allow them to allocate investment opportunities in a way that favors other accounts over the International Fund. This conflict of interest may be exacerbated to the extent that PanAgora or the portfolio managers receive, or expect to receive, greater compensation from their management of accounts other than the International Fund. Notwithstanding this theoretical conflict of interest, it is PanAgora’s policy to manage each account based on its investment objectives and related restrictions and, as discussed above, PanAgora has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time and in a manner consistent with each account’s investment objectives and related restrictions. For example, while the portfolio managers may buy for other accounts securities that differ in identity or quantity from securities bought for the International Fund, such securities might not be suitable for the International Fund given its investment objective and related restrictions.
Compensation.
PanAgora’s compensation package consists of base salary, a performance-based bonus, and equity incentives. Base salary and the performance bonus account for the majority of an employee’s remuneration. All investment professionals and senior executives receive industry competitive salaries (based on an annual benchmarking study) and are rewarded with meaningful performance-based annual bonuses.
All employees of the firm are evaluated by comparing their performance against tailored and specific objectives. These goals are developed and monitored through the cooperation of employees and their immediate supervisors. The performance bonus elements may comprise cash and/or equity incentives at the discretion of management. PanAgora does not have any fixed targets relating to those elements.
As of December 31, 2012, Messrs. Zink, Liddell and Yarlas beneficially owned no securities of the International Fund.
Pzena
Richard S. Pzena, John P. Goetz and Antonio DeSpirito, III manage Pzena’s portion of the Large Company Value Portfolio on behalf of Pzena. The tables below include details regarding the number of registered investment companies, other pooled investment vehicles and other accounts managed by each of Messrs. Pzena, Goetz and DeSpirito, III, total assets under management for each type of account, and total assets in each type of account with performance-based advisory fees, as of December 31, 2012:
Richard S. Pzena
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed with Performance-Based Advisory Fee
|
Total Assets with Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies:
|
8
|
$5,615
|
0
|
$0
|
|
Other Pooled Investment Vehicles:
|
35
|
$563
|
0
|
$0
|
|
Other Accounts:
|
145
|
$4,153
|
5
|
$592
|
John P. Goetz
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed with Performance-Based Advisory Fee
|
Total Assets with Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies:
|
8
|
$6,534
|
1
|
$31
|
|
Other Pooled Investment Vehicles:
|
19
|
$2,642
|
1
|
$192
|
|
Other Accounts:
|
85
|
$4,553
|
3
|
$186
|
Antonio DeSpirito
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed with Performance-Based Advisory Fee
|
Total Assets with Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies:
|
5
|
$5,512
|
0
|
$0
|
|
Other Pooled Investment Vehicles:
|
24
|
$542
|
0
|
$0
|
|
Other Accounts:
|
110
|
$2,849
|
3
|
$544
|
Conflicts of interest may arise in managing a portion of the Large Company Value Portfolio’s portfolio investments, on the one hand, and the portfolios of Pzena’s other clients and/or accounts (together “Accounts”), on the other. Set forth below is a brief description of some of the material conflicts that may arise and Pzena’s policy or procedure for handling them. Although Pzena has designed such procedures to prevent and address conflicts, there is no guarantee that such procedures will detect every situation in which a conflict arises.
The management of multiple Accounts inherently means there may be competing interests for the portfolio management team’s time and attention. Pzena seeks to minimize this by utilizing one investment approach (i.e., classic value investing), and by managing all Accounts on a product-specific basis. Thus, all large cap value Accounts, whether they be mutual fund accounts, institutional accounts or individual accounts, are managed using the same investment discipline, strategy and proprietary investment model as the Large Company Value Portfolio.
If the portfolio management team identifies a limited investment opportunity that may be suitable for more than one Account, the Large Company Value Portfolio may not be able to take full advantage of that opportunity. However, Pzena has adopted procedures for allocating portfolio transactions across Accounts so that each Account is treated fairly. First, all orders are allocated among portfolios of the same or similar mandates at the time of trade creation/initial order preparation. Factors affecting allocations include availability of cash to existence of client imposed trading restrictions or prohibitions, and the tax status of the account. Changes to the allocations made at the time of the creation of the order are only implemented if there is a partial fill for an order. Depending upon the size of the execution, Pzena may choose to allocate the executed shares pro rata, or on a random basis. As with all trade allocations, each Account generally receives pro rata allocations of any new issue or IPO security that is appropriate for its investment objective. Permissible reasons for excluding an Account from an otherwise acceptable IPO or new issue investment include the Account having FINRA restricted person status, lack of available cash to make the purchase, or a client-imposed trading prohibition on IPOs or on the business of the issuer.
With respect to securities transactions for the Accounts, Pzena determines which broker to use to execute each order, consistent with its duty to seek best execution. Pzena will bunch or aggregate like orders where doing so will be beneficial to the Accounts. However, with respect to certain Accounts, Pzena may be limited by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these
cases, Pzena may place separate, non-simultaneous, transactions for the Large Company Value Portfolio and another Account which may temporarily affect the market price of the security or the execution of the transaction to the detriment of one or the other.
Conflicts of interest may arise when members of the portfolio management team trade personally in securities investments made or to be made for the Large Company Value Portfolio or other Accounts. To address this, Pzena has adopted a written Code of Business Conduct and Ethics designed to prevent and detect personal trading activities that may interfere or conflict with client interests or its current investment strategy.
Proxy voting for the Large Company Value Portfolio and the other Accounts’ securities holdings may also pose certain conflicts. Pzena has identified the following areas of concern: (1) where Pzena manages the assets of a publicly traded company, and also holds that company’s or an affiliated company’s securities in one or more Accounts; (2) where Pzena manages the assets of a proponent of a shareholder proposal for a company whose securities are in one or more Accounts; (3) where Pzena has a client relationship with an individual who is a corporate director, or a candidate for a corporate directorship of a public company whose securities are in one or more client portfolios; and (4) where a Pzena officer, director or employee, or an immediate family member thereof is a corporate director, or a candidate for a corporate directorship of a public company whose securities are in one or more client portfolios. For purposes hereof, an immediate family member shall be a spouse, child, parent, or sibling. Pzena’s proxy policies provide for various methods of dealing with these and any other conflict scenarios subsequently identified, including notifying clients and seeking their consent or instructions on how to vote, and deferring to the recommendation of an independent third party where a conflict exists.
Pzena manages some Accounts under performance-based fee arrangements. Pzena recognizes that this type of incentive compensation creates the risk for potential conflicts of interest. This structure may create an inherent pressure to allocate investments having a greater potential for higher returns to accounts of those clients paying the higher performance fee. To attempt to prevent conflicts of interest associated with managing accounts with different compensation structures, Pzena generally requires portfolio decisions to be made on a product specific basis. Pzena also requires pre-allocation of all client orders based on specific fee-neutral criteria. Additionally, Pzena requires average pricing of all aggregated orders. Finally, Pzena has adopted a policy prohibiting portfolio managers (and all employees) from placing the investment interests of one client or a group of clients with the same investment objectives above the investment interests of any other client or group of clients with the same or similar investment objectives.
Portfolio managers and other investment professionals at Pzena are compensated through a combination of fixed base salary, performance bonus and equity ownership, if appropriate due to superior performance. Pzena avoids a compensation model that is driven by individual security performance, as this can lead to short-term thinking which is contrary to the firm’s value investment philosophy. The portfolio managers’ bonuses are not specifically dependent upon the performance of the Large Company Value Portfolio relative to the performance of the Portfolio’s benchmark. For investment professionals, Pzena examines such things as effort, efficiency, ability to focus on the correct issues, stock modeling ability, and ability to successfully interact with company management. However, Pzena always looks at the person as a whole and the contributions that they have made and are likely to make in the future. The time frame Pzena examines for bonus compensation is annual. Longer-term success is required for equity ownership consideration. Ultimately, equity ownership is the primary tool used by Pzena for attracting and retaining the best people. All shares are voting shares (i.e., not phantom stock).
As of December 31, 2012, Messrs. Pzena, Goetz and DeSpirito did not own any shares of the Large Company Value Portfolio.
Ranger
W. Conrad Doenges, portfolio manager of Ranger’s portion of the Small Company Growth Portfolio, is primarily responsible for the day-to-day management of other pooled investment vehicles and other advisory accounts. As of December 31, 2012, information on these other accounts is as follows:
W. Conrad Doenges
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed With Performance Based Advisory Fee
|
Total Assets With Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies
|
7
|
$589.13
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
9
|
$241.73
|
0
|
$0
|
|
Other Accounts
|
28
|
$640.78
|
0
|
$0
|
Conflicts of Interest
Ranger recognizes that there are conflicts of interests which are common to the investment industry and/or specific to Ranger, and implements policies and procedures which seek to mitigate such conflicts. As a fiduciary, Ranger has an affirmative duty to act in the best interests of its clients and to make full and fair disclosure of material facts, particularly where Ranger’s interests may conflict with those of its clients. Ranger’s compliance program requires each employee to act with integrity, competence, diligence, respect, and in an ethical manner when dealing with current and prospective clients, other employees and colleagues in the investment profession, and other participants in the global capital markets. Ranger expects employees to place the interests of clients above their own personal interest and to avoid any actual or potential conflicts of interest.
Multiple Clients
Ranger manages client accounts other than the Small Company Growth Portfolio. An inherent conflict to an advisor managing more than one client account is the potential for one client to receive less time, attention or investment opportunity than another client with either more assets under management or a more lucrative fee structure. Ranger’s compliance program addresses this potential conflict by requiring that orders for securities are aggregated and allocated on a pro rata basis in accordance with each account’s investment guidelines as determined exclusively by Ranger’s portfolio manager or his designee. Differences in allocation proportions may occur due to tax considerations, avoidance of odd lots or de minimis numbers of shares, and investment strategies of the accounts. In order to verify compliance with these policies and procedures, Ranger conducts regular reviews of the order allocation process.
As a general matter, Ranger believes that aggregation and pro rata allocation of orders for multiple client accounts is consistent with its duty to seek best execution for its clients. However, in any case in which Ranger believes that aggregation and pro rata allocation of a client order is not consistent with its duty to seek best execution, it will not affect the transaction on an aggregated basis
Personal Trading
Potential conflicts of interest may exist with respect to the personal trading activities of an advisor’s employee in relation to trading on behalf of such advisor’s clients. An employee trading securities in his or her account prior to trading the same security on behalf of clients (commonly known as “front-running”) is an example of such a conflict. To mitigate this conflict, Ranger prohibits employees from purchasing individual securities for their personal accounts. Employees are required to receive pre-clearance from Ranger’s Chief Compliance Officer prior to selling an individual security owned in a personal account they may have obtained prior to either their employment or adoption of Ranger’s current Personal Trading Policy.
Soft Dollars
Ranger seeks to employ a soft dollar policy that falls within the safe harbor established by Section 28(e) of the Securities Exchange Act of 1934. Ranger’s use of soft dollar credits to pay for research and brokerage products or services that might otherwise be borne by Ranger. Accordingly, there is a potential conflict of interest between a
client’s interests in obtaining best execution and Ranger’s receipt of and payment for research through brokerage allocations as described above. To the extent Ranger obtains brokerage and research services that it otherwise would acquire at its own expense, Ranger may have incentive to place a greater volume of transactions or pay higher commissions than would otherwise be the case.
Research services, as that term is used in Section 28(e)(3), may include both services generated internally by a broker’s own research staff and services obtained by the broker from a third party research firm. The research services obtained may include a broad variety of financial and related information and services, including written or oral research and information relating to the economy, industries or industry segments, a specific company or group of companies, software or written financial data, electronic or other quotations or market information systems, financial or economic programs or seminars, or other similar services or information Ranger believes enhances its advisory functions and services. The soft dollar research Ranger obtains normally benefits many accounts rather than just the one(s) for which the order is being executed, and Ranger may not use all research in connection with the account(s) which paid commissions to the broker providing the research.
Generally, Ranger will attempt to place portfolio transactions with broker dealers who, in its opinion, provide the best combination of price and execution (including brokerage commissions). However, Ranger may pay a broker dealer a commission for effecting a transaction in excess of commission charged by another broker or dealer as long as Ranger makes a good faith determination that the amount of commission is reasonable in relation to the value of the brokerage and research services provided by the broker-dealer.
To mitigate potential conflict of interest posed by soft dollar usage, Ranger implements compliance procedures to actively monitor soft dollar usage in context to its best execution policy. In addition, Ranger maintains an internal allocation procedure to identify those brokers who provided it with research and execution services that Ranger considers useful to its investment decision making process.
Ranger’s portfolio managers receive a salary, as well as a performance based bonus, which may potentially be multiples of an employee’s salary. The portfolio managers and sector managers with ownership also receive a profits interest which is a function of Ranger’s profitability after all operating expenses including bonuses.
Bonuses are a function of Ranger’s revenues, asset growth, how well the overall portfolio has performed, a team member’s contribution to the client service function, input to the investment process and willingness to work in a team environment.
If a portfolio manager should leave the firm, Ranger will, depending on the circumstances, either repurchase that individual’s profit interest in the firm, the value of which is based on a predetermined formula, or divest the employee of such ownership interest.
Ranger also tries to promote employee stability through 401(k) matching and an excellent healthcare package.
As of December 31, 2012, W. Conrad Doenges beneficially owned no securities of the Small Company Growth Portfolio.
Systematic
Systematic’s team of portfolio managers responsible for the day-to-day management of a portion of the Large Company Value Portfolio is comprised of D. Kevin McCreesh, Chief Investment Officer, and Ronald Mushock, Portfolio Manager. Mr. McCreesh and Mr. Mushock are both Managing Partners of Systematic and are primarily responsible for the day-to-day management of other registered investment companies, other pooled investment vehicles and other advisory accounts.
As of December 31, 2012, information on these other accounts is as follows:
D. Kevin McCreesh
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed With Performance Based Advisory Fee
|
Total Assets With Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies
|
4
|
$1,000
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
4
|
$111
|
0
|
$0
|
|
Other Accounts
|
66
|
$2,257
|
1
|
$335
|
Ronald Mushock
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed With Performance Based Advisory Fee
|
Total Assets With Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies
|
10
|
$1,983
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
2
|
$162
|
0
|
$0
|
|
Other Accounts
|
284
|
$4,176
|
1
|
$76
|
Compensation
Certain Systematic employees share equity ownership with AMG as Partners, which may serve to incentivize Systematic’s investment professionals to perform successfully. The compensation package for portfolio managers, D. Kevin McCreesh and Ronald Mushock, both of whom are Managing Partners, consists of a fixed base salary and a share of the firm’s profits based on each partner’s respective individual ownership position in Systematic. Total compensation is influenced by Systematic’s overall profitability, and therefore is based in part on the aggregate performance of all of Systematic’s portfolios. Portfolio managers are not compensated based solely on the performance of, or the value of assets held in, any product managed by Systematic. Moreover, the portfolio managers are provided with a benefits package, including health insurance, and participation in a company 401(K) plan, comparable to that received by other Systematic employees.
Potential Conflicts of Interest
Portfolio managers of Systematic oversee the investment of various types of accounts in the same strategy, such as mutual funds, pooled investment vehicles and separate accounts for individuals and institutions. The simultaneous management of these diverse accounts and specific client circumstances may create perceived conflicts of interest related to differences in the investment management fees charged and unequal time and attention devoted to certain accounts. However, Systematic recognizes its affirmative duty to treat all accounts fairly and equitably over time and maintains a series of controls in furtherance of this goal.
Generally, portfolio managers apply investment decisions to all accounts utilizing a particular strategy on a pro-rata basis, while also accounting for varying client circumstances, including client objectives and preferences, instructions, restrictions, account size, cash availability and current specific needs.
Nevertheless, during the normal course of managing assets for multiple clients of different types and asset levels, portfolio managers may encounter conflicts of interest that could, if not properly addressed, be harmful to one or more of our clients. Those of a material nature that are encountered most frequently involve, without limitation, investment security selection, employee personal securities trading, proxy voting and the allocation of investment opportunities. To mitigate these potential conflicts and ensure its clients are not negatively impacted by the
adverse actions of Systematic or its employees, Systematic has implemented a series of policies and procedures that are overseen by compliance professionals and, in Systematic’s view, reasonably designed to prevent and detect conflicts.
For example, Systematic’s Code of Ethics restricts employees’ personal securities trading, forbids employees from giving, soliciting or accepting inappropriate gifts and entertainment and requires employees to receive explicit approval prior to serving as a board member or officer of a public company or rendering outside investment advice. Additionally, to effectively remove conflicts of interest related to voting proxies for accounts that have delegated such authority to Systematic, Systematic has a Proxy Voting Policy that provides for an independent third-party proxy voting agent, which agent’s pre-determined voting policy guidelines Systematic has adopted. Systematic’s Allocation and Aggregation and Trade Error Correction policies similarly seek to reduce potential conflicts of interest by promoting the fair and equitable allocation of investment opportunities among client accounts over time and the consistent resolution of trading errors.
Notably, Affiliated Managers Group, Inc. (NYSE: AMG), a publicly traded asset management company, holds a majority interest in Systematic through AMG’s wholly-owned subsidiary, Titan NJ LP Holdings LLC. Systematic operates independently as a separate, autonomous affiliate of AMG, which has equity investments in a group of investment management firms including Systematic. The AMG Affiliates do not formulate advice for Systematic’s clients and do not, in Systematic’s view, present any potential conflict of interest with Systematic’s clients.
As of December 31, 2012, Messrs. McCreesh and Mushock beneficially owned no securities of the Large Company Value Portfolio.
Thomas White
Thomas White, located at 440 S. LaSalle Street, Suite 3900, Chicago, Illinois 60605 had approximately $1.962 billion in assets under management as of December 31, 2012. Thomas S. White, Jr. owns more than 75% of the shares of Thomas White. Day to day management of the International Fund is the responsibility of portfolio managers Thomas S. White, Jr., Douglas M. Jackman, CFA, Wei Li, Ph.D, CFA and Jinwen Zhang, Ph.D, CFA. Messrs. White, Jackman, and Li and Ms. Zhang are primarily responsible for the day-to-day management of other registered investment companies, other pooled investment vehicles and other advisory accounts. As of December 31, 2012, information on these other accounts is as follows:
Thomas S. White, Jr.
|
|
Number of Accounts Managed
|
Total Assets Managed (in millions)
|
Number of Accounts Managed for which Advisory Fee is Performance-Based
|
Assets Managed for which Advisory Fee is Performance-Based (in millions)
|
|
Registered investment companies
|
3
|
$736.8
|
0
|
$0
|
|
Other pooled investment vehicles
|
4
|
$260.0
|
1
|
$162.3
|
|
Other advisory accounts
|
737
|
$965.4
|
1
|
$49.7
|
Wei Li, CFA, Ph.D, Jinwen Zhang CFA, Ph.D. and Douglas M. Jackman, CFA
|
|
Number of Accounts Managed
|
Total Assets Managed (in millions)
|
Number of Accounts Managed for which Advisory Fee is Performance-Based
|
Assets Managed for which Advisory Fee is Performance-Based (in millions)
|
|
Registered investment companies
|
0
|
$0
|
0
|
$0
|
|
Other pooled investment vehicles
|
4
|
$260.0
|
1
|
$162.3
|
|
Other advisory accounts
|
737
|
$965.4
|
1
|
$49.7
|
Conflicts of Interest
At times, Thomas White’s management of other accounts potentially could conflict with the interests of the International Fund. That may occur whether the investment strategies of the other accounts are the same as, or different from, the International Fund’s investment objectives and strategies. For example, the team may need to allocate investment opportunities between the International Fund and another account having similar objectives or strategies, or may need to execute transactions for another account that could have a negative impact on the value of securities held by the International Fund. In addition, similar accounts managed by the Thomas White team may have different cash flow requirements which may result in differences in the timing of the buying or selling of the same security across portfolios. Not all accounts advised by Thomas White have the same management fee. If the management fee structure of another account is more advantageous to Thomas White than the fee structure of the International Fund, Thomas White could have an incentive to favor the other account. At various times, the team may manage other accounts with investment objectives and strategies that are similar to those of the International Fund, or may manage accounts with investment objectives and strategies that are different from those of the International Fund.
Compensation
Thomas White has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures, which it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, Thomas White monitors a variety of areas, including compliance with account investment guidelines and restrictions, the allocation of initial public offerings and other similar investment opportunities, and compliance with Thomas White’s Code of Ethics and with the applicable compliance programs under the 1940 Act and the Investment Advisers Act of 1940.
Messrs. White’s, Jackman’s and Li’s and Ms. Zhang’s compensation is based on a competitive, fixed salary paid by Thomas White, and a discretionary bonus based on Thomas White’s overall economic performance. Compensation is not based on either the International Fund’s pre-tax or post-tax performance or the value of assets held in the International Fund’s portfolio.
As of December 31, 2012, Thomas S. White, Douglas M. Jackman, Wei Li and Jinwen Zhang beneficially owned no securities of the International Fund.
Victory
Erick F. Maronak, Scott R. Kefer, Jason E. Dahl and Michael Koskuba, portfolio managers of Victory’s portion of the Large Company Growth Portfolio are also primarily responsible for the day-to-day management of a registered investment company and other advisory accounts. As of December 31, 2012, information on these other accounts is as follows:
Erick F. Maronak, Scott R. Kefer, Jason E. Dahl and Michael Koskuba
|
|
Total # of Accounts Managed
|
|
# of Accounts Managed With Performance Based Advisory Fee
|
Total Assets With Performance-Based Advisory Fee (millions)
|
|
Registered Investment Companies
|
2
|
$602.4
|
0
|
$0
|
|
Other Pooled Investment Vehicles
|
2
|
$98.3
|
0
|
$0
|
|
Other Accounts
|
53
|
$921.4
|
0
|
$0
|
According to Victory, there are no material conflicts of interest between the portfolio managers’ management of a portion of the Large Company Growth Portfolio’s investments and the investments of the other accounts Victory manages. The portfolio managers at Victory typically manage multiple portfolios using a substantially similar investment strategy as the Fund. The management of multiple portfolios may give rise to potential conflicts of interest. Victory Capital Management Inc. has developed policies and procedures designed to reasonably mitigate and manage the potential conflicts of interest that may arise from side-by-side account management. Accounts participating in the same strategy are block traded to ensure that no account receives preferential treatment and to ensure consistency. In addition, all qualifying accounts participate in a composite and are, therefore, monitored for deviation via monthly composite reporting. Also, Victory has adopted trade allocation procedures that require equitable allocation of trade orders for a particular security among participating accounts.
Each Victory portfolio manager receives a base salary plus an annual incentive bonus for managing a portion of the Large Company Growth Portfolio, other investment companies and other accounts. A Victory portfolio manager’s base salary is dependent on the manager’s level of experience and expertise. Victory monitors each manager’s base salary relative to salaries paid for similar positions with peer firms by reviewing data provided by various consultants that specialize in competitive salary information.
A Victory portfolio manager’s annual incentive bonus is based on the manager’s individual and investment performance results. Victory establishes a “target” incentive for each portfolio manager based on the manager’s level of experience and expertise in the manager’s investment style. This target is set at a percentage of base salary, generally ranging from 40% to 150%. Individual performance is based on balanced scorecard objectives established annually during the first quarter of the fiscal year, and is assigned a 50% weighting. Individual performance metrics include portfolio structure and positioning as determined by a consultant, research, asset growth, client retention, presentation skills, marketing to prospective clients and contribution to KeyCorp’s corporate philosophy and values, such as leadership and teamwork. Investment performance is based on investment performance of the Victory portfolio manager’s accounts relative to a selected peer group(s), and is assigned a 50% weighting. The overall performance results of all similarly-managed investment companies, pooled investment vehicles and other accounts are compared to the performance information of a peer group of similarly-managed competitors, as supplied by third party analytical agencies. The Victory manager’s performance versus the peer group then determines the final incentive amount, which generally ranges from zero to 150% of the “target,” depending on results. For example, performance in an upper decile may result in an incentive bonus that is 150% of the “target” while below-average performance may result in an incentive bonus as low as zero. Performance results for a Victory manager are based on the composite performance of all accounts managed by that Victory manager on a combination of one, three and five year rolling performance. Composite performance is calculated on a pre-tax basis and does not reflect applicable fees.
The Victory portfolio managers may participate either in Victory’s long-term incentive plan, the results for which are based on Victory’s business results (the “Victory Incentive Plan”), or may receive options on KeyCorp common stock (the “KeyCorp Incentive Plan”), or both. Eligibility for participation in these Victory incentive programs depends on the Victory manager’s performance and seniority. Mr. Maronak, Mr. Kefer, Mr. Dahl and Mr. Koskuba participate in the Victory Incentive Plan and the KeyCorp Incentive Plan.
As of December 31, 2012, Messrs. Maronak, Kefer, Dahl and Koskuba did not own any shares of the Large Company Growth Portfolio.
SEC Exemptive Order
The SEC has issued an order (the “Order”) to Wilshire and the Company exempting them from the 1940 Act requirement to submit to stockholders new or materially amended subadvisory agreements for their approval, and reducing the amount of disclosure required to be provided regarding the fees paid to subadvisers. The Order provides that Wilshire may identify, retain and compensate subadvisers that are not “affiliated persons” of Wilshire as defined in the 1940 Act, to manage all or portions of the Portfolios. Wilshire is responsible for, among other things: setting each Portfolio’s investment strategy and structure; selecting subadvisers; ongoing monitoring and evaluation of subadvisers; implementing procedures to ensure that subadvisers comply with the Portfolios’ investment objectives, policies and guidelines/restrictions; terminating subadvisers; and reallocating assets among subadvisers. Wilshire may allocate portions of each Portfolio’s assets among multiple subadvisers with complementary management styles and securities selection disciplines; monitor the performance of each portion of a Portfolio and each Portfolio as a whole; and terminate subadvisers to the extent necessary to achieve the overall objective of the Portfolios. Wilshire’s criteria for termination of a subadviser include (but are not limited to) departure of key personnel; acquisition by a third-party; change in or departure from investment style; inadequate investment processes that could result in inconsistent security selection, valuation or compliance; and the inability over time to maintain above-average performance.
The Order was granted subject to, among other things, the following conditions: (1) prior to becoming effective with respect to a Portfolio, the stockholders of such Portfolio would approve operation of such Portfolio in the manner described above (the stockholders of the Portfolios approved such operation on March 29, 2002); (2) a Portfolio’s prospectus would describe the Order; (3) if a new subadviser were retained or a subadvisory agreement were materially amended, Wilshire would furnish the relevant stockholders within 90 days all the information that would have been provided in a proxy statement soliciting approval of the subadvisory agreement, except for certain fee information; (4) the majority of the Board would be independent, and new Independent Directors would be nominated by such existing Independent Directors; (5) in approving any change in subadviser, the Board would find that such change is in the best interests of a Portfolio and its stockholders; (6) Wilshire would provide the Board with information about its profitability with respect to a Portfolio on a quarterly basis; (7) whenever a subadviser is retained or terminated, Wilshire would provide an analysis of the effect of the change on its profitability; (8) no Director or officer of the Company or Wilshire would own any interest in any subadviser, subject to certain exceptions; and (9) the Independent Directors of the Company would engage independent counsel to represent them.
Services Agreement
Administrator.
The Company has entered into an Administration Agreement, dated May 30, 2008, with SEI Investments Global Funds Services (“SEI” or “Administrator”), a Delaware statutory trust. SEI is located at One Freedom Valley Drive, Oaks, PA 19456, and is an affiliate of the Distributor. SEI Investments Management Corporation, a wholly-owned subsidiary of SEI Investments Company, is the owner of all beneficial interest in the Administrator. SEI Investment Management Corporation, and its subsidiaries and affiliates, including the Administrator, are leading providers of portfolio evaluation services, fund accounting systems, and brokerage and information services to financial institutions, institutional investors and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
Under the Administration Agreement, the Administrator provides the Company with portfolio accounting services, administration services and certain other services as may be required by the Company. The Administrator prepares tax returns, reports to the Portfolios’ shareholders, and reports and filings with the SEC and state securities authorities; prepares ongoing compliance updates; provides consultation to the Company with respect to regulatory matters, including monitoring regulatory and legislative developments that may affect a Portfolio; assists in the preparation of quarterly board materials; and generally assists in all aspect of a Portfolio’s operations, other than providing legal or investment advice. The Administrator is paid an asset based fee for these services, subject to certain minimums.
The following table describes the administration fees paid by each Portfolio to SEI for the years ended December 31, 2010, December 31, 2011 and December 31, 2012:
2010
|
|
Administration Fee Payable
|
|
|
|
Large Company Growth Portfolio
|
$128,222
|
$0
|
$128,222
|
|
Large Company Value Portfolio
|
$22,722
|
$0
|
$22,722
|
|
Small Company Growth Portfolio
|
$4,699
|
$0
|
$4,699
|
|
Small Company Value Portfolio
|
$7,877
|
$0
|
$7,877
|
|
Wilshire 5000 Index
SM
Fund
|
$108,571
|
$0
|
$108,571
|
|
Wilshire International Equity Fund
|
$136,346
|
$0
|
$136,346
|
2011
|
|
Administration Fee Payable
|
|
|
|
Large Company Growth Portfolio
|
$129,390
|
$0
|
$129,390
|
|
Large Company Value Portfolio
|
$23,828
|
$0
|
$23,828
|
|
Small Company Growth Portfolio
|
$5,274
|
$0
|
$5,274
|
|
Small Company Value Portfolio
|
$7,175
|
$0
|
$7,175
|
|
Wilshire 5000 Index
SM
Fund
|
$112,287
|
$0
|
$112,287
|
|
Wilshire International Equity Fund
|
$129,548
|
$0
|
$129,548
|
2012
|
|
Administration Fee Payable
|
|
|
|
Large Company Growth Portfolio
|
$130,074
|
$0
|
$130,074
|
|
Large Company Value Portfolio
|
$27,833
|
$0
|
$27,833
|
|
Small Company Growth Portfolio
|
$4,934
|
$0
|
$4,934
|
|
Small Company Value Portfolio
|
$6,308
|
$0
|
$6,308
|
|
Wilshire 5000 Index
SM
Fund
|
$112,367
|
$0
|
$112,367
|
|
Wilshire International Equity Fund
|
$123,481
|
$0
|
$123,481
|
Expenses
All expenses incurred in the operation of the Company are borne by the Company, except to the extent specifically assumed by SEI, Wilshire or the Distributor. The expenses borne by the Company include taxes; interest; brokerage fees and commissions, if any; fees of Directors who are not officers, directors, employees or holders of 5% or more of the outstanding voting securities of SEI, Wilshire or the Distributor or any of their affiliates; SEC fees; state Blue Sky qualification fees; advisory and administration fees; charges of custodians; transfer and dividend disbursing agents’ fees; certain insurance premiums; industry association fees; outside auditing and legal expenses; costs of maintaining the Company’s existence; costs of independent pricing services; costs attributable to investor services (including, without limitation, telephone and personnel expenses); costs of shareholders’ reports and meetings; costs of preparing and printing prospectuses and SAIs for regulatory purposes and for distribution to existing shareholders; and any extraordinary expenses. Expenses attributable to a particular series or class of shares are charged against the assets of that series or class. Other expenses of the Company are allocated among the Portfolios on a basis determined by Wilshire, subject to supervision by the Board, including, but not limited to, proportionately in relation to the net assets of each Portfolio.
Distributor.
Pursuant to a Distribution Agreement dated May 30, 2008, SEI Investments Distribution Co., One Freedom Valley Drive, Oaks, Pennsylvania 19456, is the distributor (the “Distributor”) for the continuous offering of shares of the Company and acts as agent of the Portfolios in the sale of their shares. The Distribution Agreement provides that the Distributor will use its best efforts to distribute the Portfolios’ shares.
The Distribution Agreement continues in effect from year to year so long as such continuance is approved at least annually by a vote of the Board of Directors of the Company, including the Directors who are not interested persons of the Company and who have no direct or indirect financial interest in the Distribution Agreement. The Distribution Agreement automatically terminates in the event of its assignment and may be terminated with respect to a Portfolio at any time without penalty by the Company or by the Distributor upon 60 days’ notice. Termination by the Company with respect to a Portfolio may be by vote of a majority of the Board of Directors, including a majority of the Directors who are not interested persons of the Company and who have no direct or indirect financial interest in the Distribution Agreement, or a “majority of the outstanding voting securities” of a Portfolio, as defined under the 1940 Act. The Distribution Agreement may not be amended with respect to a Portfolio to increase the fee to be paid by the Portfolio without approval by a majority of the outstanding voting securities of such Portfolio and all material amendments must in any event be approved by the Board of Directors in the manner described above with respect to the continuation of the Distribution Agreement.
For the fiscal years ended December 31, 2010, December 31, 2011 and December 31, 2012, the Distributor received the following in distribution fees from the Portfolios:
|
|
|
|
Large Company Growth Portfolio
|
$267,241
|
|
Large Company Value Portfolio
|
$78,046
|
|
Small Company Growth Portfolio
|
$13,074
|
|
Small Company Value Portfolio
|
$27,763
|
|
Wilshire 5000 Index
SM
Fund
|
$261,349
|
|
Wilshire International Equity Fund
|
$226,271
|
|
|
|
|
Large Company Growth Portfolio
|
$262,674
|
|
Large Company Value Portfolio
|
$82,757
|
|
Small Company Growth Portfolio
|
$15,902
|
|
Small Company Value Portfolio
|
$25,333
|
|
Wilshire 5000 Index
SM
Fund
|
$267,304
|
|
Wilshire International Equity Fund
|
$213,227
|
|
|
|
|
Large Company Growth Portfolio
|
$259,752
|
|
Large Company Value Portfolio
|
$97,293
|
|
Small Company Growth Portfolio
|
$16,186
|
|
Small Company Value Portfolio
|
$22,386
|
|
Wilshire 5000 Index
SM
Fund
|
$262,935
|
|
Wilshire International Equity Fund
|
$198,205
|
Service and Distribution Plan
The Service and Distribution Plan (the “Plan”) of the Company adopted pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder was approved as to the Investment Class Shares of the Portfolios by vote of the majority of both (a) the Directors of the Company and (b) those Independent Directors who have no direct or indirect financial interest in the operation of the Plan or any agreement related to it, in each case cast in person at a meeting called for the purpose of voting on the Plan.
The Investment Class shares of each of the Portfolios reimburses the Distributor for its distribution and shareholder services expenses (the “Distribution Fee”) at an annual rate of up to 0.25% of the average daily net assets of each such Portfolio attributable to Investment Class shares. The Distribution Fee is accrued daily and paid monthly or at such other intervals as the Directors of the Company shall determine.
The Plan will continue in effect with respect to the Investment Class Shares of a Portfolio only so long as such continuance is specifically approved at least annually by votes of the majority (or whatever other percentage may, from time to time, be required by Section 12(b) of the 1940 Act or the rules and regulations thereunder) of both (a) the Directors of the Company and (b) the Independent Directors, cast in person at a meeting called for the purpose of voting on the Plan. The Plan may not be amended in any material respect unless such amendment is approved by votes of the majority (or whatever other percentage may, from time to time, be required by Section 12(b) of the 1940 Act or the rules and regulations thereunder) of both (a) the Directors of the Company and (b) the Independent Directors, cast in person at a meeting called for the purpose of voting on the Plan, and may not be amended to increase materially the amount to be spent thereunder without such approvals and approval by vote of at least a majority (as defined in the 1940 Act) of the outstanding shares of the Investment Class Shares of a Portfolio. The Plan may be terminated at any time with respect to the Investment Class Shares of a Portfolio by vote of a majority of the Independent Directors or by vote of a majority (as defined in the 1940 Act) of the outstanding Investment Class Shares of a Portfolio. Amounts spent on behalf of the Investment Class Shares of each Portfolio pursuant to such Plan during the fiscal year ended December 31, 2012 are set forth below.
|
Portfolio
|
Printing
|
Advertising
|
Compensation to Broker Dealers
|
Compensation to Sales Personnel
|
Other
|
Reimbursements
|
Total
|
|
Large Company Growth Portfolio
|
$804
|
$64
|
$251,743
|
$11,060
|
—
|
$(3,920)
|
$259,751
|
|
Large Company Value Portfolio
|
$311
|
$21
|
$94,757
|
$4,101
|
$93
|
$(1,990)
|
$97,293
|
|
Small Company Growth Portfolio
|
$54
|
$5
|
$13,223
|
$718
|
$2,196
|
$(9)
|
$16,187
|
|
Small Company Value Portfolio
|
$69
|
$6
|
$20,331
|
$943
|
$1,223
|
$(186)
|
$22,386
|
|
Wilshire 5000 Index
SM
Fund
|
$821
|
$67
|
$240,466
|
$11,154
|
$7,063
|
$(139)
|
$259,432
|
|
Wilshire International Equity Fund
|
$612
|
$53
|
$197,798
|
$8,523
|
$37
|
$(8,819)
|
$198,204
|
Shareholder Servicing Plan
Each Portfolio has adopted a shareholder services plan for both its Investment Class Shares and Institutional Class Shares to pay the expenses associated with certain shareholder servicing arrangements with third parties. Payments of such fees to any such shareholder service provider may be made by the Investment Class Shares and Institutional Class Shares annually of up to 0.20% and 0.15%, respectively, of a Portfolio’s average net assets attributable to the shares held by such service provider.
Custodian
Northern Trust Company (“Northern Trust”), 50 S. LaSalle Street, Chicago, Illinois 60603, serves as custodian of the assets of the Fund. Under the Custody Agreement, Northern Trust maintains the Fund’s securities, administers the purchases and sales of portfolio securities, collects interest and dividends and other distributions made on portfolio securities and performs other ministerial duties as outlined in the Custody Agreement.
Transfer Agent
DST Systems, Inc. (“DST”), 333 W. 11th Street, Kansas City, MO 64105, serves as the Company’s transfer agent and dividend disbursing agent.
Counsel
Vedder Price P.C., 222 North LaSalle Street, Chicago, IL 60601, serves as legal counsel to the Company and the Independent Directors.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA 19103-7042, serves as the Company’s independent registered public accounting firm.
CODE OF ETHICS
The Board has adopted a joint Code of Ethics for the Company and Wilshire, pursuant to Rule 17j-1 under the 1940 Act (the “Code”). The Code restricts the investing activities of Company officers, Directors and advisory persons, and, as described below, imposes additional, more onerous restrictions on Portfolio investment personnel.
Each person covered by the Code is prohibited from purchasing or selling any security which, to such person’s knowledge, is being purchased or sold (as the case may be), or is being considered for purchase or sale, by a Portfolio. Investment personnel are subject to additional restrictions such as a ban on acquiring securities in an
initial public offering, “blackout periods” which prohibit trading by investment personnel of a Portfolio within periods of trading by a Portfolio in the same security, and a ban on short-term trading in securities. Investment personnel are required to pre-clear any personal securities investment (with limited exceptions, such as government securities) and must comply with ongoing requirements concerning recordkeeping and disclosure of personal securities investments. The pre-clearance requirement and associated procedures are designed to identify any prohibition or limitation applicable to a proposed investment.
In addition, each Subadviser has adopted codes of ethics under Rule 17j-1 under the 1940 Act. These codes permit personnel, subject to the conditions of the code, to invest in securities including securities that may be purchased or held by the Portfolios.
PROXY VOTING POLICY AND PROCEDURES
The Subadvisers have been delegated the responsibility for voting the Portfolios’ proxies pursuant to the Investment Subadvisory Agreements. Each Subadviser votes proxies according to proxy voting policies, which are described below. Wilshire monitors the Subadvisers’ compliance with their stated policies and reports to the Board annually on any proxies that were not voted in accordance with a Subadviser’s stated policy and any circumstances in which a conflict of interest was identified and how the proxies were voted.
The Company is required to file an annual report of each proxy voted with respect to portfolio securities of each Portfolio during the twelve-month period ended June 30 on Form N-PX not later than August 31 of each year. Information regarding how Wilshire or each Subadviser voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available no later than August 31 of each year (i) without charge, upon request, by calling 1-888-200-6796, or (ii) on the SEC’s website at www.sec.gov.
Certain information regarding the proxy voting policies of the Subadvisers is summarized in Appendix A.
PORTFOLIO TRANSACTIONS
Each Subadviser supervises the placement of orders for the purchase or sale of portfolio securities on behalf of the portion of each Portfolio it serves. In this capacity, each Subadviser allocates portfolio transactions among broker-dealers in the best judgment of the Subadviser and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected may include those that provide statistical data, investment information, economic facts and opinions to the Subadvisers. Information so received is in addition to and not in lieu of services required to be performed by the Subadvisers and their fees are not reduced by the receipt of such supplemental information. Such information may be useful to the Subadvisers in serving both the Portfolios and other clients which they advise and, conversely, supplemental information obtained by the placement of business of other clients may be useful to the Subadvisers in carrying out their obligations to the Portfolios. Brokers also are selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. When transactions are executed in the over-the-counter market, the Portfolios will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Each Subadviser has procedures in place to monitor best execution. Neither Wilshire nor any of the Subadvisers considers the sale of each Portfolio’s shares in selecting brokers to effect Portfolio transactions.
Although each Subadviser makes investment decisions for a Portfolio independently from those of its other accounts, investments of the kind made by a Portfolio may often also be made by such other accounts. When a Subadviser buys or sells the same security at substantially the same time on behalf of a Portfolio and one or more other accounts managed by that Subadviser, it allocates available investments by such means as, in its judgment,
result in fair treatment. Each Subadviser aggregates orders for purchases and sales of securities of the same issuer on the same day among the Portfolio and its other managed accounts, and the price paid to or received by the Portfolio and those accounts is the average obtained in those orders. In some cases, such aggregation and allocation procedures may affect adversely the price paid or received by the Portfolio or the size of the position purchased or sold by the Portfolio.
Portfolio turnover may vary from year to year, as well as within a year. Under normal market conditions, each Portfolio’s turnover rate generally will not exceed 80%. High turnover rates, generally as a result of fluctuating market conditions, are likely to result in comparatively greater brokerage expenses. Recognizing this, each Subadviser attempts to minimize the cost per share of trading while at the same time implementing only those trades necessary to maintain the proper style exposure.
To the extent directed by management of the Fund in writing, the Adviser will direct or suggest to the subadviser to execute purchases and sales of portfolio securities for the Fund through brokers or dealers designated by management of the Fund to the Adviser for the purpose of providing direct benefits to the Fund, subject to subadviser seeking best execution. However, brokerage commissions or transaction costs in such transactions may be higher, and the Fund may receive less favorable prices, than those which a subadviser could obtain from another broker or dealer, in order to obtain such benefits for the Fund. For the fiscal year ended December 31, 2012, at Wilshire’s request, the Company’s subadvisers directed approximately $78,316,722 of transactions to implement a brokerage commission recapture program. These transactions generated $50,733 in commissions of which approximately $22,216 was retained by the Distributor and $28,517 was returned to the Portfolios to offset Portfolio operating expenses.
For the fiscal years ended December 31, 2012, 2011 and 2010, each Portfolio paid total brokerage commissions as follows:
|
|
|
|
|
|
Large Company Growth Portfolio
|
$142,440
|
$209,757
|
$269,214
|
|
Large Company Value Portfolio
|
$44,549
|
$47,349
|
$47,913
|
|
Small Company Growth Portfolio
|
$13,282
|
$16,832
|
$18,640
|
|
Small Company Value Portfolio
|
$14,120
|
$22,763
|
$37,691
|
|
Wilshire 5000 Index
SM
Fund
|
$5,128
|
$17,702
|
$25,404
|
|
Wilshire International Equity Fund
|
$297,060
|
$456,323
|
$774,169
|
As of December 31, 2012, each Portfolio held the following securities of their regular brokers or dealers as follows:
|
|
|
|
Large Company Growth Portfolio
|
None
|
|
Large Company Value Portfolio
|
|
|
JP Morgan
|
$1,341,524
|
|
Citigroup
|
$1,162,906
|
|
Morgan Stanley
|
$333,116
|
|
Goldman Sachs
|
$312,522
|
|
Small Company Growth Portfolio
|
None
|
|
Small Company Value Portfolio
|
None
|
|
Brokers or Dealers
|
Market Value
|
|
Wilshire 5000 Index
SM
Fund
|
|
|
JP Morgan Chase
|
$1,816,357
|
|
Citigroup
|
$1,259,590
|
|
Goldman Sachs
|
$631,422
|
|
Bank of New York Mellon Corp
|
$306,164
|
|
Morgan Stanley
|
$295,404
|
|
Wilshire International Equity Fund
|
|
|
JP Morgan Chase & Co
|
$3,565,527
|
|
Citigroup
|
$1,170,976
|
|
Goldman Sachs
|
$510,240
|
NET ASSET VALUE
The NAV per share of each class of each Portfolio is calculated as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. ET, on each day the NYSE is open for trading.
Each Portfolio sells and redeems its shares at NAV per share, without a sales or redemption charge. No minimum purchase or redemption amounts apply. The daily NAV of each Portfolio’s shares is determined by dividing the net assets by the number of outstanding shares. Net assets are equal to the total assets of a Portfolio less its liabilities. The price at which a purchase is effected is based on the next calculated NAV after the order is received by the Portfolio. A security listed or traded on a domestic exchange is valued at its last sales price on the exchange where it is principally traded. In the absence of a current quotation, the security is valued at the mean between the last bid and asked prices on the exchange. Securities traded over-the-counter (other than on National Association of Securities Dealers Automated Quotation “NASDAQ”) in the U.S. are valued at the last current sale price. If there are no such sales, the most recent bid quotation is used. Securities quoted on the NASDAQ System, for which there have been sales, are valued at the NASDAQ Official Closing Price. If there are no such sales, the value is the bid quotation. Equity securities primarily traded on a foreign exchange or market are valued daily at the price, which is an estimate of the fair value price, as provided by an independent pricing service. Foreign securities are converted to U.S. dollars using exchange rates at the close of the NYSE. In the event market quotations are not readily available, securities are valued according to procedures established by the Board or are valued at fair value as determined in good faith by the Pricing Committee, whose members include at least two representatives of the Adviser, one of whom is an officer of the Company, or the Company’s Valuation Committee. Securities whose values are considered unreliable because a significant valuation event has occurred may be valued at fair value by the Pricing Committee or the Valuation Committee.
Debt securities that have a remaining maturity of 60 days or less are valued at prices supplied by the Company’s pricing agent, if available, and otherwise are valued at amortized cost. Under the amortized cost method of valuation, the security is initially valued at cost. Then, the Company assumes a constant proportionate amortization in value until maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the security. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price that would be received upon the sale of the security. When market quotations are not available, securities are valued at fair value as discussed above.
PURCHASE OF PORTFOLIO SHARES
The following information supplements and should be read in conjunction with the section in the prospectus entitled “How to Buy Portfolio Shares.” The Company does not have any arrangements with any person to permit frequent purchases and redemptions of Portfolio’s shares.
Transactions Through Securities Dealers.
Portfolio shares may be purchased and redeemed through securities dealers, which may charge a transaction fee for such services. Some dealers will place the Portfolios’ shares in an account with their firm. Dealers also may require that the customer invest more than the minimum investment, the customer not request redemption checks to be issued in the customer’s name, the customer not purchase fractional shares, or other conditions.
There is no sales or service charge to individual investors by the Company or by the Distributor, although investment dealers, banks and other institutions may make reasonable charges to investors for their services. The services provided and the applicable fees are established by each dealer or other institution acting independently of the Company. The Company understands that these fees may be charged for customer services including, but not limited to, same-day investment of client funds; same-day access to client funds; advice to customers about the status of their accounts, yield currently being paid or income earned to date; provision of periodic account statements showing security and money market positions; and assistance with inquiries related to their investment. Any such fees may be deducted from the investor’s account monthly and on smaller accounts could constitute a substantial portion of any distribution by the Portfolios. Small, inactive, long-term accounts involving monthly service charges may not be in the best interest of investors. Investors should be aware that they may purchase shares of the Portfolios directly through the Distributor without any maintenance or service charges, other than those described above.
In-Kind Purchases.
Payments for each Portfolio’s shares may, at the discretion of the Company, be made in the form of securities which are permissible investments for a Portfolio. For further information about this form of payment, please contact DST. Generally, securities which are accepted by the Company as payment for a Portfolio’s shares will be valued using a Portfolio’s procedures for valuing its own shares at the time a Portfolio’s NAV is next determined after receipt of a properly completed order. All dividends, interest, subscription or other rights pertaining to such securities will become the property of a Portfolio and must be delivered to a Portfolio upon receipt from the issuer. The Company will require that (1) it will have good and marketable title to the securities received by it; (2) the securities are in proper form for transfer to a Portfolio and are not subject to any restriction on sale by a Portfolio under the Securities Act of 1933, as amended, or otherwise; and (3) a Portfolio receives such other documentation as the Company may, in its discretion, deem necessary or appropriate. Investors may realize a gain or loss for federal income tax purposes on the securities that are used for such a payment.
REDEMPTION OF PORTFOLIO SHARES
The following information supplements and should be read in conjunction with the section in the prospectus entitled “How to Sell Portfolio Shares.”
Wire Redemption Privilege.
By using this privilege, the investor authorizes DST to act on wire or telephone redemption instructions from any person representing himself or herself to be the investor, and reasonably believed by DST to be genuine. Ordinarily, the Company will initiate payment for shares redeemed pursuant to this Privilege on the next business day after receipt if DST receives the redemption request in proper form. Redemption proceeds will be transferred by Federal Reserve wire only to the commercial bank account specified by the investor on the Account Application or Shareholder Services Form, or to a correspondent bank if the investor’s bank is not a member of the Federal Reserve System. Fees ordinarily are imposed by such bank and usually are borne by the investor. Immediate notification by the correspondent bank to the investor’s bank is necessary to avoid a delay in crediting the funds to the investor’s bank account.
To change the commercial bank or account designated to receive wire redemption proceeds, a written request must be sent to DST. This request must be signed by each shareholder, with each signature guaranteed as described below under “Signatures.”
Signatures.
Written redemption requests must be signed by each shareholder, including each holder of a joint account. Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if you redeem more than $50,000, your address of record has changed in the last 60 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the
original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization. Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. Please contact Shareholder Services at 1-888-200-6796 for more information. The Fund participates in the Paperless Legal Program. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation.
Redemption Commitment.
The Company reserves the right to make payments in whole or in part in securities or other assets in case of an emergency or any time a cash distribution would impair the liquidity of a Portfolio to the detriment of the existing shareholders. In such event, the securities would be readily marketable, to the extent available, and would be valued in the same manner as a Portfolio’s investment securities are valued. If the recipient sold such securities, brokerage charges would be incurred. Receipt of such securities is a taxable event for federal income tax purposes.
Suspension of Redemptions.
The Company may suspend the right of redemption with respect to any Portfolio or postpone the date of payment (a) during any period when the NYSE is closed (other than customary weekend and holiday closings), (b) when trading in the markets a Portfolio ordinarily utilizes is restricted, or when an emergency exists as determined by the SEC so that disposal of the investments or determination of its NAV is not reasonably practicable, or (c) for such other periods as the SEC by order may permit to protect the shareholders.
New York Stock Exchange Closings.
The holidays (as observed) on which the NYSE is closed currently are: New Year’s Day, Presidents’ Day, Rev. Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
SHAREHOLDER SERVICES
The following information supplements and should be read in conjunction with the section in the prospectus entitled “Shareholder Information.”
Exchanges.
By using the Telephone Exchange Privilege, you authorize DST to act on telephonic instructions from any person representing himself or herself to be you and reasonably believed by DST to be genuine. Telephone exchanges may be subject to limitations as to the amount involved or the number of telephone exchanges permitted.
To establish a personal retirement plan by exchange, shares of a Portfolio being exchanged must have a value of at least the minimum initial investment required for a Portfolio into which the exchange is being made. For Keogh Plans, IRAs and IRAs set up under a Simplified Employee Pension Plan (“SEP-IRAs”) with only one participant, the minimum initial investment is $750. To exchange shares held in corporate plans, 403(b)(7) Plans and SEP-IRAs with more than one participant, the minimum initial investment is $100 if the plan has at least $2,500 invested among the Portfolios of the Company. To exchange shares held in personal retirement plans, the shares exchanged must have a current value of at least $100.
The exchange service is available to shareholders residing in any state in which shares of a Portfolio being acquired may legally be sold. Shares may be exchanged only between accounts having identical names and other identifying designations.
The Company reserves the right to reject any exchange request in whole or in part. The exchange service may be modified or terminated at any time upon notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXES
The following is intended to be a general summary of certain federal income tax consequences of investing in the Portfolios. It is not intended as a complete discussion of all such consequences or a discussion of circumstances applicable to certain types of shareholders. Investors are therefore advised to consult their tax advisers before making an investment decision.
Regulated Investment Companies
The Company’s management believes that each Portfolio qualified as a “regulated investment company” under the Internal Revenue Code of 1986, as amended (the “IRC”), for the fiscal year ended December 31, 2012 and intends to meet the same qualifications for the fiscal year ending December 31, 2013. Qualification as a regulated investment company relieves a Portfolio from any liability for federal income taxes to the extent that its earnings are distributed in accordance with the applicable provisions of the IRC. The term “regulated investment company” does not imply the supervision of management or investment practices or policies by any government agency.
As a regulated investment company, a Portfolio will not be liable for federal income tax provided it distributes all of its income and gains currently. Qualification as a regulated investment company under the IRC requires, among other things, that each Portfolio (a) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such securities or currencies, and net income derived from interests in qualified publicly traded partnerships; (b) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of the Portfolio’s assets is represented by cash, cash items, U.S. government securities, securities of other regulated investment companies, and other securities (for purposes of this calculation generally limited, in respect of any one issuer, to an amount not greater than 5% of the market value of the Portfolio’s assets and 10% of the outstanding voting securities of such issuer) and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies), of two or more issuers (other than the securities of other regulated investment companies) which the Portfolio controls and which are determined to be engaged in the same, similar or related trades or businesses, or of one or more qualified publicly traded partnerships; and (c) distribute each taxable year at least 90% of its investment company taxable income (which includes dividends, interest, and net short-term capital gains in excess of net long-term capital losses) determined without regard to the deduction for dividends paid.
Because the Index Fund is established in part as an investment for certain insurance variable annuity contracts, the IRC imposes additional diversification requirements on the Fund. Generally, these requirements are that at each calendar quarter end or within 30 days thereafter no more than 55% of the value of the Fund’s total assets may be in any one investment, no more than 70% of the value in any two investments, no more than 80% of the value in any three investments, and no more than 90% of the value in any four investments.
A Portfolio generally will be subject to a nondeductible federal excise tax of 4% to the extent that it does not meet certain minimum distribution requirements as of the end of each calendar year. To avoid the tax, a Portfolio must distribute during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income for the calendar year, (2) at least 98.2% of its capital gains in excess of its capital losses (and adjusted for certain ordinary losses) for the twelve-month period ending on October 31 of the calendar year, and (3) all undistributed ordinary income and capital gain net income for previous years. The Portfolios intend to make timely distributions of their income in compliance with these requirements and anticipate that they will not be subject to the excise tax.
Dividends paid by a Portfolio from ordinary income, and distributions of a Portfolio’s net realized short-term capital gains, are generally taxable for federal income tax purposes to its shareholders as ordinary income. Certain distributions to corporate shareholders will be eligible for the 70% dividends received deduction, and distributions to individual and other noncorporate shareholders will be eligible for taxation at long-term capital gain rates, to the extent that the income of the Portfolios is derived from certain qualifying dividends. Dividend income earned by a Portfolio will be so eligible only if a Portfolio has satisfied certain holding period and other requirements. In addition, the shareholder must meet certain holding period and other requirements with respect to his or her Portfolio shares. After the end of its taxable year, each Portfolio will send to its shareholders a written notice designating the amount of any distributions made during such year which may be taken into account by its shareholders for purposes of such provisions of the IRC. Net capital gain distributions are not eligible for the dividends received deduction or qualified dividend income treatment.
Under the IRC, any distributions designated as being made from net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses) are taxable to a Portfolio’s shareholders as long-term capital gains, regardless of the holding period of the shares held by such shareholders. Such distributions of net capital gains will be designated by each Portfolio as a capital gains distribution in a written notice to its shareholders. The maximum federal income tax rate applicable to long-term capital gains is 20% for individual and other noncorporate shareholders. Corporate shareholders are taxed on long-term capital gains at the same rates as ordinary income. Dividends and distributions are taxable whether received in cash or reinvested in additional shares of a Portfolio.
A dividend or distribution will be treated as paid on December 31 of the calendar year if it is declared by a Portfolio in October, November, or December of that year to shareholders of record on a date in such a month and paid by the Portfolio during January of the following year. Such dividends or distributions will be taxable to shareholders (other than those not subject to federal income tax) in the calendar year in which the dividends or distributions are declared, rather than the calendar year in which the dividends or distributions are received.
The sale, exchange or redemption of shares of a Portfolio may give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable disposition of shares of a Portfolio will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received (or deemed received) by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares of a Portfolio will be disallowed if other shares of the Portfolio or other substantially identical stock or securities are acquired (including through reinvestment of dividends) within 30 days before or after the disposition. In such a case, the basis of the newly purchased stock or securities will be adjusted to reflect the disallowed loss. A shareholder’s ability to utilize capital losses may be limited by the IRC.
For taxable years beginning after December 31, 2012, an additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Portfolio and net gains from redemptions or other taxable dispositions of Portfolio shares) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount.
Any dividend or distribution paid shortly after an investor’s purchase may have the effect of reducing the aggregate NAV of his or her shares below the cost of his or her investment. Such a dividend or distribution would be a return on investment in an economic sense and subject to federal income tax. This is referred to as “buying a dividend.”
Hedging Transactions
Ordinarily, gains and losses realized from portfolio transactions will be treated as a capital gain or loss. All or a portion of the gain realized from engaging in “conversion transactions” may be treated as ordinary income under Section 1258 of the IRC. “Conversion transactions” are defined to include certain futures, option and “straddle” transactions, transactions marketed or sold to produce capital gains, or transactions described in Treasury Regulations to be issued in the future.
Under Section 1256 of the IRC, a gain or loss realized by a Portfolio from certain financial futures transactions will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Gain or loss will arise upon the sale or lapse of such futures as well as from closing transactions. In addition, any such futures positions that are open at the end of a Portfolio’s taxable year will be treated as sold for their then fair market value, resulting in additional gain or loss to the Portfolio characterized in the manner described above.