NOTES TO FINANCIAL STATEMENTS (Unaudited)
October 31, 2012
1.
ORGANIZATION
CMG
Absolute Return Strategies Fund (“Absolute Fund”) and CMG Tactical Equity
Strategy Fund (“Tactical Fund”)(collectively, the “Funds”) are each a series of
shares of beneficial interest of the Northern Lights Fund Trust (the “Trust”), a
Delaware statutory trust organized on January 19, 2005. The Funds are
registered under the Investment Company Act of 1940, as amended, (the “1940
Act”), as non-diversified, open-end management investment companies.
The
Funds currently offer Class A and Class I shares. Class C shares were offered by
the Absolute Fund at net asset value through August 31, 2012. On August 15,
2012, the Board of Trustees of Northern Lights Fund Trust voted to suspend the
sale of Class C Shares of the Absolute Fund and outstanding Class C shares were
exchanged for Class A shares of the Fund as of August 31, 2012. The Tactical
Fund also offers the Manager Class shares. Class A shares are offered at net
asset value plus a maximum sales charge of 5.75%. Class I and Manager Class
shares are offered at net asset value. Each class represents an interest in the
same assets of the Funds and classes are identical except for differences in
their sales charge structures and ongoing service and distribution charges. All
classes of shares have equal voting privileges except that each class has
exclusive voting rights with respect to its service and/or distribution plans.
The Funds’ income, expenses (other than class specific distribution fees) and
realized and unrealized gains and losses are allocated proportionately each day
based upon the relative net assets of each class. The investment objective of
Absolute Fund is to generate absolute return. Class A and Class C of Absolute
Fund commenced operations on May 1, 2009. Class I of Absolute Fund commenced
operations on October 20, 2011. The investment objective of Tactical Fund is
to generate capital appreciation in rising and falling markets. Class A and
Class I of Tactical Fund commenced operations on February 28, 2012. The Manager
Class of Tactical Fund commenced operations on August 30, 2012.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
following is a summary of significant accounting policies followed by the Funds
in preparation of the financial statements. These policies are in conformity
with accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
Security Valuation
– Securities listed on an exchange are valued at the last
reported sale price at the close of the regular trading session of the exchange
on the business day the value is being determined, or in the case of securities
listed on NASDAQ, at the NASDAQ Official Closing Price (“NOCP”). In the absence
of a sale, such securities shall be valued at the last bid price on the day of
valuation. Exchange traded futures are valued at the settlement price
determined by the exchange. The Funds may invest in portfolios of open-end or
closed-end investment companies (the “underlying funds”). Open-end funds are
valued at their respective net asset values as reported by such investment
companies. The underlying funds value securities in their portfolios for which
market quotations are readily available at their market values (generally the
last reported sale price) and all other securities and assets at their fair
value by the methods established by the Boards of the underlying funds
.
The shares of many closed-end investment companies, after their initial public
offering, frequently trade at a price per share, which is different than the net
asset value per share. The difference represents a market premium or market
discount of such shares. There can be no assurances that the market discount or
market premium on shares of any closed-end investment company purchased by the
Funds will not change. Short-term debt obligations having 60 days or less
remaining until maturity, at time of purchase, are valued at amortized cost,
provided each such valuations represent fair value.
CMG Funds
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
October 31, 2012
A
Fund may hold securities, such as private placements, interests in commodity
pools, other non-traded securities or temporarily illiquid securities, for which
market quotations are not readily available or are determined to be unreliable.
These securities will be valued at their fair market value as determined using
the “fair value” procedures approved by the Board. The Board has delegated
execution of these procedures to a fair value team composed of one or more
officers from each of the (i) Trust, (ii) administrator, and (iii) adviser
and/or sub-adviser. The team may also enlist third party consultants such
as an audit firm or financial officer of a security issuer on an as-needed basis
to assist in determining a security-specific fair value. The Board reviews
and ratifies the execution of this process and the resultant fair value prices
at least quarterly to assure the process produces reliable results.
Fair Value Team and Valuation Process -
The applicable investments are
valued collectively via inputs from the fair value team. For example, fair
value determinations are required for the following securities: (i)
securities for which market quotations are insufficient or not readily available
on a particular business day (including securities for which there is a short
and temporary lapse in the provision of a price by the regular pricing source),
(ii) securities for which, in the judgment of the adviser or sub-adviser, the
prices or values available do not represent the fair value of the instrument.
Factors which may cause the adviser or sub-adviser to make such a judgment
include, but are not limited to, the following: only a bid price or an asked
price is available; the spread between bid and asked prices is substantial; the
frequency of sales; the thinness of the market; the size of reported trades; and
actions of the securities markets, such as the suspension or limitation of
trading; (iii) securities determined to be illiquid; (iv) securities with
respect to which an event that will affect the value thereof has occurred since
the closing prices were established on the principal exchange on which they are
traded, but prior to a Fund’s calculation of its net asset value.
Specifically, interests in commodity pools or managed futures pools are valued
on a daily basis by reference to the closing market prices of each futures
contract or other asset held by a pool, as adjusted for pool expenses.
Restricted or illiquid securities, such as private placements or non-traded
securities are valued via inputs from the adviser or sub-adviser based upon the
current bid for the security from two or more independent dealers or other
parties reasonably familiar with the facts and circumstances of the security
(who should take into consideration all relevant factors as may be appropriate
under the circumstances). If the adviser or sub-adviser is unable to
obtain a current bid from such independent dealers or other independent parties,
the fair value team shall determine the fair value of such security using the
following factors: (i) the type of security; (ii) the cost at date of purchase;
(iii) the size and nature of the Fund's holdings; (iv) the discount from market
value of unrestricted securities of the same class at the time of purchase and
subsequent thereto; (v) information as to any transactions or offers with
respect to the security; (vi) the nature and duration of restrictions on
disposition of the security and the existence of any registration rights; (vii)
how the yield of the security compares to similar securities of companies of
similar or equal creditworthiness; (viii) the level of recent trades of similar
or comparable securities; (ix) the liquidity characteristics of the security;
(x) current market conditions; and (xi) the market value of any securities into
which the security is convertible or exchangeable.
Each
Fund utilizes various methods to measure the fair value of most of its
investments on a recurring basis. GAAP establishes a hierarchy that prioritizes
inputs to valuation methods. The three levels of input are:
Level 1
– Unadjusted quoted prices in active markets for identical assets
and liabilities that the Funds have the ability to access.
Level 2
– Observable inputs other than quoted prices included in Level 1 for
the asset or liability, either directly or indirectly. These inputs may include
quoted prices for the identical instrument in an inactive market, prices for
similar instruments, interest rates, prepayment speeds, credit risk, yield
curves, default rates and similar data.
Level 3
– Unobservable inputs for the asset or liability, to the extent
relevant observable inputs are not available, representing the Funds’ own
assumptions about the assumptions a market participant would use in valuing the
asset or liability, and would be based on the best information available.
The
availability of observable inputs can vary from security to security and is
affected by a wide variety of factors, including, for example, the type of
security, whether the security is new and not yet established in the
marketplace, the liquidity of markets, and other characteristics particular to
the security. To the extent that valuation is based on models or inputs that are
less observable or
CMG Funds
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
October 31, 2012
unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised in determining fair
value is greatest for instruments categorized in Level 3.
The
inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, for disclosure purposes, the level in the fair
value hierarchy within which the fair value measurement falls in its entirety,
is determined based on the lowest level input that is significant to the fair
value measurement in its entirety.
The
inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. The
following tables summarize the inputs used as of October 31, 2012 for the Funds’
assets and liabilities measured at fair value:
Absolute Fund:
|
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Assets*
|
|
|
|
|
|
Mutual Funds
|
$ 27,744,793
|
$ -
|
$ -
|
$ 27,744,793
|
|
Short-Term Investments
|
11,093,258
|
14,407,019
|
-
|
25,500,277
|
|
Total Assets
|
$ 38,838,051
|
$ 14,407,019
|
$ -
|
$ 53,245,070
|
|
Liabilities*
|
|
|
|
|
|
Derivative Instruments**
|
$ 76,103
|
$ -
|
$ -
|
$ 76,103
|
|
Total Liabilities
|
$ 76,103
|
$ -
|
$ -
|
$ 76,103
|
Tactical Fund:
|
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Assets*
|
|
|
|
|
|
Bonds & Notes
|
$ -
|
$ 1,815,717
|
$ -
|
$ 1,815,717
|
|
Short-Term Investments
|
51,651,204
|
8,999,190
|
-
|
60,650,394
|
|
Total Assets
|
$ 51,651,204
|
$ 10,814,907
|
$ -
|
$ 62,466,111
|
* Refer to Portfolio of Investments for industry classification.
**Derivative instruments include cumulative unrealized loss on futures contracts
open at October 31, 2012.
The Funds did not hold any Level 3 securities during the year.
There were no transfers between Level 1 and Level 2 during the current period
presented. It is the Funds’ policy to record transfers into or out of Level 1
and Level 2 at the end of the reporting period.
Security Transactions and Investment Income
–
Investment security transactions are accounted for on a trade date basis.
Cost is determined and gains and losses are based upon the specific
identification method for both financial statement and federal income tax
purposes. Dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis. Purchase discounts and premiums on
securities are accreted and amortized over the life of the respective
securities.
Derivatives Disclosure
–
Fair Values of Derivative Instruments in the Funds as of October 31, 2012:
CMG Funds
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
October 31, 2012
Absolute Fund:
|
|
|
|
|
|
|
Statements of Assets and Liabilities
|
|
Liability Derivatives
|
|
Contract Type/
|
|
|
|
|
|
Primary Risk Exposure
|
|
Balance Sheet Location
|
|
Value
|
|
|
|
|
|
|
|
Futures on
foreign currency
|
|
Payables,
Net Assets -
|
|
|
|
contracts
|
|
Unrealized
Depreciation
|
|
$ (76,103)*
|
|
|
|
|
|
|
|
|
|
|
|
$ (76,103)
|
|
|
|
|
|
|
*Derivative instruments include cumulative unrealized loss on futures contracts
open at October 31, 2012.
The effect of Derivative Instruments on the Statements of Operations for the six
months ended October 31, 2012:
Absolute Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Statement of
|
|
|
|
|
|
Unrealized
|
|
Operations
|
|
|
|
Realized Gain
|
|
Appreciation or
|
|
Contract Type/
|
|
Location of Gain or (Loss) On
|
|
or (Loss) on
|
|
(Depreciation)
|
|
Primary Risk Exposure
|
|
Derivatives
|
|
Derivatives
|
|
on Derivatives
|
|
Futures on
foreign currency
|
|
Net realized
gain (loss) on future contracts/ Net change in
|
|
|
|
|
|
contracts
|
|
unrealized
appreciation (depreciation) on futures contracts
|
|
$ (557,825)
|
|
$ 585,655
|
|
|
|
|
|
|
|
|
|
Futures on
equity
|
|
Net realized
gain (loss) on future contracts/ Net change in
|
|
|
|
|
|
contracts
|
|
unrealized
appreciation (depreciation) on futures contracts
|
|
(480,755)
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$ (1,038,580)
|
|
$ 585,655
|
Tactical Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Statement of
|
|
|
|
|
|
Unrealized
|
|
Operations
|
|
|
|
Realized Gain
|
|
Appreciation or
|
|
Contract Type/
|
|
Location of Gain or (Loss) On
|
|
or (Loss) on
|
|
(Depreciation)
|
|
Primary Risk Exposure
|
|
Derivatives
|
|
Derivatives
|
|
on Derivatives
|
|
Futures on
equity
|
|
Net realized
loss on future contracts/ Net change in
|
|
|
|
|
|
contracts
|
|
unrealized
depreciation on futures contracts
|
|
$ (2,704,247)
|
|
$ -
|
The
derivative instruments outstanding as of October 31, 2012 as disclosed in the
Portfolio of Investments and the amounts of realized and changes in unrealized
gains and losses on derivative instruments during the period as disclosed in the
Statements of Operations serve as indicators of the volume of derivative
activity for the Funds.
Futures Contracts
– The Funds are subject to foreign currency exchange rate
and interest rate risk in the normal course of pursuing their investment
objectives. To manage foreign currency risk, the Funds may purchase or sell
futures contracts. Upon entering into a futures contract with a broker, the
Funds are required to deposit in a segregated account a specified amount of cash
or U.S. government securities. Futures contracts are valued daily and
unrealized gains or losses are recorded in a “variation margin” account.
Periodically, the Funds receive from or pay to the broker a
CMG Funds
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
October 31, 2012
specified amount of cash based upon changes in the variation margin account.
When a contract is closed, the Funds recognize a realized gain or loss.
Futures contracts have market risks, including the risk that the change in the
value of the contract may not correlate with changes in the value of the
underlying securities. With futures contracts, there is minimal counterparty
credit risk to the Funds since futures are exchange traded and the exchange’s
clearinghouse, as counterparty to all exchange traded futures, guarantees the
futures against default. Futures contracts outstanding at year end are included
in the Funds’ Portfolio of Investments.
Expenses –
Expenses of the Trust that are directly identifiable to a
specific Fund are charged to that Fund. Expenses, which are not readily
identifiable to a specific Fund, are allocated in such a manner as deemed
equitable, taking into consideration the nature and type of expense and the
relative sizes of the funds in the Trust.
Federal Income Taxes
– The Funds intend to continue to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and will distribute all of their taxable income,
if any, to shareholders. Accordingly, no provision for Federal income taxes is
required in the financial statements.
The
Funds recognize the tax benefits of uncertain tax positions only when the
position is “more likely than not” to be sustained assuming examination by tax
authorities. Management has analyzed the Funds’ tax positions, and has
concluded that no liability for unrecognized tax benefits should be recorded
related to uncertain tax positions on returns filed for open tax years
(2010-2011) or expected to be taken in the Funds’ 2012 tax returns. The Funds
identified their major tax jurisdictions as U.S. Federal, Nebraska and foreign
jurisdictions where the Funds make significant investments; however, the Funds
are not aware of any tax positions for which it is reasonably possible that the
total amounts of unrecognized tax benefits will change materially in the next
twelve months.
Distributions to Shareholders
– Distributions from investment income and net
realized capital gains, if any, are declared and paid at least annually and are
recorded on the ex-dividend date. The character of income and gains to be
distributed is determined in accordance with income tax regulations, which may
differ from GAAP. These “book/tax” differences are considered either temporary
(e.g., deferred losses, mark-to-market on open Section 1256 contracts) or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the composition of net assets based on
their federal tax-basis treatment; temporary differences do not require
reclassification.
Indemnification –
The Trust indemnifies its officers and trustees for
certain liabilities that may arise from the performance of their duties to the
Trust. Additionally, in the normal course of business, the Funds enter into
contracts that contain a variety of representations and warranties and which
provide general indemnities. The Funds’ maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made
against the Funds that have not yet occurred. However, based on experience, the
risk of loss due to these warranties and indemnities appears to be remote.
3.
ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Advisory Fees
– Pursuant to the Investment Advisory Agreement (the “Advisory
Agreement”), investment advisory services are provided to the Funds by CMG
Capital Management Group, Inc. (the “Adviser”). Under the terms of the Advisory
Agreement, the Adviser receives monthly fees calculated at an annual rate of
1.75% and 1.50% of the average daily net assets of the Absolute Fund and
Tactical Fund, respectively. For the six months ended October 31, 2012, the
Adviser earned advisory fees of $634,105 for the Absolute Fund and $222,880 for
the Tactical Fund. The Adviser has voluntarily agreed to waive its management
fee for the Manager Class of the Tactical Fund. The Adviser voluntarily waived
$122,804 of its advisory fee. The Adviser manages a portion of the Funds’
portfolio directly and allocates the remaining balance of the Funds’ assets
among the Funds’ sub-advisers. The Funds’ sub-advisers are Anchor Capital
Management Group, Inc. (through August 17, 2012), Scotia Partners, Ltd. and
Traub Capital Management, LLC. The Adviser pays each sub-adviser a portion of
its advisory fee. The Funds have employed Gemini Fund Services, LLC (“GFS”) to
provide administration, fund accounting and transfer agent services. A Trustee
and certain officers of the Funds are also officers of GFS, and are not paid any
fees directly by the Funds for serving in such capacities.
CMG Funds
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
October 31, 2012
The
Adviser has contractually agreed to reduce its fees and/or absorb expenses of
the Funds, at least until August 31, 2013, to ensure that Net Annual Fund
Operating Expenses for each class of shares (exclusive of any front-end or
contingent deferred sales loads, distribution and shareholder servicing (12b-1)
fees, taxes, interest, brokerage commissions, dividend expense on securities
sold short, acquired or underlying fund fees and expenses, or extraordinary
expenses such as litigation or reorganization costs) will not exceed 2.50% of
the Absolute Fund’s average daily net assets of Class A and Class I attributable
to such class of shares and 1.85%, 1.85% and 0.60% of the Tactical Fund’s
average daily net assets of Class A, Class I and Manager Class, respectively,
attributable to such class of shares. During the period ended October 31, 2012,
$0 and $55,325 was waived by the Adviser for the Absolute Fund and Tactical
Fund, respectively.
Advisory fee waivers or expense reimbursements are subject to possible
recoupment from the Funds in future years on a rolling three year basis (within
the three years after the fees have been waived or reimbursed) if such
recoupment can be achieved within the foregoing expense limits. As of October
31, 2012, $93,993 of fee waivers or expense reimbursements was subject to
recapture by the Adviser for the Tactical Fund which expire in 2015.
Distributor
– The distributor of the Funds is Northern Lights Distributors,
LLC (the “Distributor”), an affiliate of GFS. The Board of Trustees of the
Northern Lights Fund Trust has adopted, on behalf of the Funds, a Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
“Plan”), as amended, to pay for certain distribution activities and shareholder
services. Under the Plan, the Funds may pay up to 0.40% and for Class A and
1.00% for Class C, respectively, per year of its average daily net assets for
such distribution and shareholder service activities. During the six months
ended October 31, 2012, $75,906 and $26,323 were accrued under the Plan for the
Absolute Fund and Tactical Fund, respectively.
The
Distributor acts as the Funds’ principal underwriter in a continuous public
offering of the Fund’s shares. For the six months ended October 31, 2012, the
Distributor received underwriter commissions of $11,204 for sales of Class A
shares, of which $1,529 was retained by the principal underwriter or other
affiliated broker-dealers.
Trustees
– Effective April 1, 2012, with the approval of the Board, each
Fund pays its pro rata share of a total fee of $21,500 per quarter for the
Northern Lights Fund Trust to each Trustee who is not affiliated with the Trust
or Adviser. Previously, each Fund paid its pro rata share of a total fee of
$17,500 per quarter for the Northern Lights Fund Trust to each Trustee who is
not affiliated with the Trust or Adviser. Each Fund also pays the chairperson of
the Audit committee and the Lead Independent Trustee a pro rata share of an
additional $2,500 per quarter. The “interested persons” who serve as Trustees of
the Trust receive no compensation for their services as Trustees. None of
the executive officers receive compensation from the Trust.
Pursuant to separate servicing agreements with GFS, the Funds pay GFS customary
fees for providing administration, fund accounting and transfer agency services
to the Funds. GFS provides a Principal Executive Officer and a Principal
Financial Officer to the Funds.
In addition, certain affiliates of GFS provide ancillary services to the Funds
as follows:
Northern Lights Compliance Services, LLC (“NLCS”) – NLCS, an affiliate of GFS,
provides a Chief Compliance Officer to the Trust, as well as related compliance
services, pursuant to a consulting agreement between NLCS and the Trust. Under
the terms of such agreement, NLCS receives customary fees from the Funds.
GemCom, LLC (“GemCom”) – GemCom, an affiliate of GFS, provides EDGAR conversion
and filing services as well as print management services for the Funds on an
ad-hoc basis. For the provision of these services, GemCom receives customary
fees from the Funds.
CMG Funds
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
October 31, 2012
4.
INVESTMENT TRANSACTIONS
The
cost of purchases and proceeds from the sale of securities, other than
short-term investments and U.S. Government securities, for the six months ended
October 31, 2012 amounted to $570,200,142 and $598,567,440, respectively, for
the Absolute Fund and $1,821,412 and $0, respectively, for the Tactical Fund.
5.
DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF CAPITAL
The tax character of
distributions for the period ended April 30, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
Long-Term
|
|
Return
|
|
|
|
|
|
Income
|
|
Capital Gain
|
|
of Capital
|
|
Total
|
|
Absolute
Fund
|
|
$ 3,399,067
|
|
$ 9,054
|
|
$ 3,632,950
|
|
$ 7,041,071
|
|
Tactical
Fund
|
|
-
|
|
-
|
|
-
|
|
$ -
|
As of April 30, 2012,
the components of accumulated earnings/ (deficit) on a tax basis were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
|
|
Undistributed
|
|
Post-October
|
|
Capital
|
|
Unrealized
|
|
Total
|
|
|
|
Ordinary
|
|
Long-Term
|
|
& Late
|
|
Loss Carry
|
|
Appreciation/
|
|
Accumulated
|
|
|
|
Income
|
|
Gains
|
|
Year Losses
|
|
Forwards
|
|
(Depreciation)
|
|
Earnings/(Deficits)
|
|
Absolute
Fund
|
|
$ -
|
|
$ -
|
|
$ (187,490)
|
|
$ -
|
|
$ (87,206)
|
|
$ (274,696)
|
|
Tactical
Fund
|
|
-
|
|
-
|
|
(328,674)
|
|
-
|
|
-
|
|
(328,674)
|
The difference
between book basis and tax basis unrealized appreciation for the Absolute Fund
is primarily attributable to the tax deferral of losses on wash sales and
mark-to-market on open futures contracts.
Late year losses
incurred after December 31 within the fiscal year are deemed to arise on the
first business day of the following fiscal year for tax purposes. The Funds
incurred and elected to defer such late year losses as follows:
|
|
|
|
|
|
|
Late Year
|
|
|
|
Losses
|
|
Absolute
Fund
|
|
$ 187,490
|
|
Tactical
Fund
|
|
9,965
|
Capital losses
incurred after October 31 within the fiscal year are deemed to arise on the
first business day of the following fiscal year for tax purposes. The Tactical
Fund incurred and elected to defer such capital losses of $318,709.
Permanent book and
tax differences for the Absolute Fund, primarily attributable to the reclass of
net operating losses and partnership adjustments, resulted in reclassification
for the period ended April 30, 2012 as follows: a decrease in accumulated net
investment losses of $1,215,252 and a decrease in accumulated net realized gains
from security transactions of $1,215,252.
6.
UNDERLYING INVESTMENT IN OTHER INVESTMENT COMPANIES
The Tactical Fund
currently invests a portion of its assets in Federated Prime Cash Obligation
Fund, (the “Federated Fund”). The Tactical Fund may redeem its investment from
the Federated Fund at any time if the Adviser determines that it is in the best
interest of the Tactical Fund and its shareholders to do so.
CMG Funds
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
October 31, 2012
The performance of
the Tactical Fund may be directly affected by the performance of the Federated
Fund . The financial statements of the Federated Fund, including the portfolio
of investments, can be found at www.federatedinvestors.com or the Security and
Exchange Commission’s website
www.sec.gov
and should be read in
conjunction with the Tactical Fund’s financial statements. As of October 31,
2012 the percentage of the Tactical Fund’s net assets invested in the Federated
Fund was 79.13%.
7.
NEW ACCOUNTING PRONOUNCEMENTS
In
December 2011, FASB issued ASU No. 2011-11 related to disclosures about
offsetting assets and liabilities. The amendments in this ASU require an entity
to disclose information about offsetting and related arrangements to enable
users of its financial statements to understand the effect of those arrangements
on its financial position. The ASU is effective for annual reporting periods
beginning on or after January 1, 2013, and interim periods within those annual
periods. The guidance requires retrospective application for all comparative
periods presented. Management is currently evaluating the impact this amendment
may have on the Funds’ financial statements.
8.
SUBSEQUENT EVENTS
The
Funds are required to recognize in the financial statements the effects of all
subsequent events that provide additional evidence about conditions that existed
at the date of the Statements of Assets and Liabilities. For non-recognized
subsequent events that must be disclosed to keep the financial statements from
being misleading, the Funds are required to disclose the nature of the event as
well as an estimate of its financial effect, or a statement that such an
estimate cannot be made. Management has determined that there were no
subsequent events to report through the issuance of these financial statements.
CMG Funds
EXPENSE EXAMPLE (Unaudited)
October 31, 2012
As a shareholder of the CMG Absolute Return Strategies Fund and CMG Tactical
Equity Strategy Fund, you incur ongoing costs, including management fees;
distribution and/or service (12b-1) fees; and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the CMG Absolute Return Strategies Fund and CMG Tactical Equity Strategy Fund
and to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from May 1, 2012 through October 31, 2012.
Actual Expenses
The “Actual Expenses” line in the table below provides information about actual
account values and actual expenses. You may use the information below, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the table under the heading entitled “Expenses Paid During Period” to
estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The “Hypothetical” line in the table below provides information about
hypothetical account values and hypothetical expenses based on the CMG Absolute
Return Strategies Fund and CMG Tactical Equity Strategy Fund’s actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Funds’ actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balances or expenses you paid for
the period. You may use this information to compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder reports of
other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as front-end
or contingent deferred sales charges (loads). Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
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Actual
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Hypothetical
(5% return before expenses)
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Class A
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Funds Annualized Expense Ratio
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Beginning Account Value 5/1/12
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Ending Account Value 10/31/12
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Expenses Paid During Period*
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Ending
Account Value
10/31/12
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Expenses
Paid During Period*
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CMG Absolute Return Strategies Fund
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2.61%
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$1,000.00
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$1,002.10
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$13.19
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$1,012.02
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$13.26
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CMG Tactical Equity Strategy Fund
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2.25%
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$1,000.00
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$901.70
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$10.78
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$1,013.86
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$11.42
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Class I
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CMG Absolute Return Strategies Fund
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2.17%
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$1,000.00
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$1,004.30
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$10.97
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$1,014.26
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$11.02
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CMG Tactical Equity Strategy Fund
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1.85%
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$1,000.00
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$902.90
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$8.87
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$1,015.88
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$9.40
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Manager Class
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CMG Tactical Equity Strategy Fund
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0.51%
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$1,000.00
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$965.10
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$0.85**
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$1,022.63
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$2.60
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* Expenses are equal to the average account value over the period, multiplied by
the Funds’ annualized expense ratio, multiplied
by the number of days in
the six-month period ended October 31, 2012 (184) divided by the number of days
in the fiscal year (365).
** Expenses are equal to the average account value over the period, multiplied
by the Funds’ annualized expense ratio, multiplied
by the number of days
in the period ended October 31, 2012 (62) divided by the number of days in the
fiscal year (365).
Renewal
of Advisory Agreement- CMG Absolute Return Strategies Fund*
In connection with the December 14, 2011 meeting of the Board of Trustees (the
“Board” or the “Trustees”) of the Northern Lights Fund Trust (the “Trust”),
including a majority of the Trustees who are not interested persons of the Trust
or interested persons to the investment advisory agreement, discussed the
renewal of an investment advisory agreement between CMG Capital Management
Group, Inc. (the “Adviser”) and the Trust, on behalf of the CMG Absolute Return
Strategies Fund (the “Fund”).
Nature, Extent and Quality of Services.
The Trustees then discussed the nature of the firm’s operations, the
quality of the adviser’s compliance infrastructure and the experience of its
fund management personnel. The Board then reviewed financial information for
the firm provided by the adviser. The Trustees concluded that the adviser had
provided a level of service consistent with the Board’s expectations.
Performance
.
The Board then considered the past performance of the Fund and compared the
Fund’s performance with that of its benchmark index and the performance of a
peer group of similarly managed funds. The Board noted that the Fund had
outperformed the S&P 500 Index for the 3- and 6-month periods ended October 31,
2011, but had underperformed the HFRI Macro Systematic Diversified Index and
peer group average for the since inception period. The Board also considered
the past performance of a composite of the adviser’s accounts using certain
strategies related to the Fund and composites of accounts of each sub-adviser
with respect to the strategies employed for the Fund. The Board concluded that
the Fund’s performance was acceptable.
Fees and
Expenses.
The Board then considered the advisory fees paid by the Fund and
the Fund’s expense ratio and compared the fees and expenses to those of a peer
group of similarly managed funds. The Board noted that the Fund’s advisory fee
was significantly higher than the average for funds in Morningstar’s
Multi-Alternative Category; however, the Board considered that, unlike many
funds in the category, CMG’s adviser actively manages the selection of the
Fund’s sub-advisers, which each receive 0.50% from the adviser. The Board
further noted that the adviser expected to terminate the sub-advisory agreement
for one of the Fund’s sub-advisers in the near future based on the sub-adviser’s
performance. The Board considered that CMG effectively earns 1.25% for the
selection, oversight, and management of the Fund’s sub-advisers. The Board also
considered that the Fund’s advisory fee is lower than the fees charged by the
adviser for its separate accounts. Additionally, the Board considered the fees
charged by three of the sub-advisers for separate accounts or other funds that
they manage. The Trustees concluded that the Fund’s advisory fee, as well as
the overall expense ratio, was reasonable.
Profitability
. The Board considered the anticipated profits to be realized
by the adviser in connection with the operation of the Fund and whether the
amount of profit is a fair entrepreneurial profit for the management of the
Fund. They also considered that there were no ancillary profits to be realized
by the Adviser from other activities related to the Fund. The Board discussed
at length with counsel what level of profitability was determined to not be
excessive based on published case law and the reports of investment advisers
that are public companies. The Trustees concluded that because of the expense
limitation agreement and expected asset levels, the Board was satisfied that the
adviser’s level of profitability from its relationship with the Fund would not
be excessive.
Economies of Scale
. The Board
considered whether there will be economies of scale with respect to the
management of the Fund and whether there is potential for realization of any
further economies of scale. The Trustees noted that because of the Fund’s size,
economies of scale were unlikely to be realized in the near future and
consequently, were not a relevant consideration at this time.
Conclusion.
Having requested and
received such information from the adviser as the Board believed to be
reasonably necessary to evaluate the terms of the Investment Advisory Agreement,
and as assisted by the advice of independent counsel, the Board, including the
Independent Trustees, concluded that the advisory fee is reasonable and that
approval of the agreement for an additional year is in the best interests of the
Trust and the shareholders of the Fund.
Renewal of Sub-Advisory Agreements*
In connection with a regular meeting held
on December 14, 2011, the Board of the Trust discussed the renewal of
sub-advisory agreement between Anchor Capital Management Group, Inc, Scotia
Partners, LTD. and Traub Capital Management, LLC (each a “Sub-Adviser”,
collectively, the “Sub-Advisers”) and the Adviser to manage CMG Absolute Return
Strategies Fund (the “Sub-Advisory Agreements”). In considering the Sub-Advisory
Agreements, the Board received materials specifically relating to the
Sub-Advisory Agreements.
Nature, Extent and Quality of Services
.
The Trustees discussed the extent of each Sub-Advisers’ operations, the quality
of each Sub-Advisers’ compliance infrastructure and the experience of their
fund management personnel. The Trustees concluded that each Sub-Adviser has
the ability to provide a level of service consistent with the Board's
expectations.
Performance
. The Board, including
the Independent Trustees, considered the past performance of the Fund and
compared the performance of its benchmark index and a peer group of similarly
managed funds. The Board also considered the past performance of a composite of
each sub-adviser with respect to the strategies employed for the Fund. The Board
concluded that the Fund’s performance was acceptable.
Fees and Expenses.
The Board
considered the sub-advisory fees paid by the Adviser to each Sub-Adviser. The
Trustees also considered the sub-advisory fees charged by Anchor and Scotia for
their respective separate accounts and Traub for management of a separate fund
in the Trust. The Trustees, including the Independent Trustees, concluded that
the Fund’s sub-advisory fees, as well as its overall expense ratio, were
reasonable.
Economies of Scale
. The Board
considered whether there will be economies of scale in respect of the management
of the Fund and whether there is potential for realization of any further
economies of scale. After discussion, it was the consensus of the Board that,
based on the current size of the Fund, economies of scale was not a relevant
consideration at this time.
Profitability
.
The Board considered the profits realized by the Sub-Advisers in connection
with the operation of the Fund and whether the amount of profit is a fair
entrepreneurial profit for the management of the Fund. They also considered the
profits realized by the Sub-Advisers from other activities related to the Fund.
The Board discussed appropriate levels of profitability with counsel. The
Trustees, including the Independent Trustees, concluded that because of the
Fund’s expense limitation agreement and its asset levels, they were satisfied
that in each case the Sub-Adviser’s level of profitability from its relationship
with the Fund is not excessive.
Conclusion.
Having requested and
received such information from the Sub-Advisers as the Board believed to be
reasonably necessary to evaluate the renewal of the Sub-Advisory Agreements, and
as assisted by the advice of independent counsel, the Board, including the
Independent Trustees, concluded that the Sub-Advisory fee structures are fair
and reasonable, and that renewal of the Sub-Advisory Agreements is in the best
interests of the Trust and the Fund’s shareholders.
Subsequent Event Note:
Following the December
14, 2011 renewal of the sub-advisory agreement between Anchor Capital Management
Group, Inc. (“Anchor”) and CMG Capital Management Group, Inc. (the “Adviser”)
(the “Sub-Advisory Agreement”), on or about August 17, 2012 Anchor and the
Adviser terminated their relationship with respect to the Sub-Advisory Agreement
and the Fund. Accordingly, Anchor is no longer managing any portion of the
assets of the CMG Absolute Return Strategies Fund (the “Fund”), and the Adviser
does not expect to allocate any of the Fund’s assets to Anchor to manage in the
future. All references to “Anchor” have been removed from the Fund’s prospectus
and SAI. The Fund is now advised by the Adviser and sub-advised by Scotia
Partners, LTD. and Traub Capital Management, LLC, pursuant to sub-advisory
agreements approved by the Board on December 14, 2011.
* Due
to the timing of the contract renewal schedule, these deliberations may or may
not relate to the current performance results of the Fund.
Approval of Advisory Agreement –CMG Tactical Equity Strategy Fund*
In connection with the November 18, 2011 meeting of the Board of Trustees (the
“Board” or the “Trustees”) of the Northern Lights Fund Trust (the “Trust”),
including a majority of the Trustees who are not interested persons of the Trust
or interested persons to the investment advisory agreement, discussed the
approval of an investment advisory agreement between CMG Capital Management
Group, Inc. (CMG or the “Adviser”) and the Trust, and the approval of an
investment sub-advisory agreement between CMG and Scotia Partners, Ltd.
(“Scotia” or the “Sub-Adviser”), each on behalf of the CMG Tactical Equity
Strategy Fund (the “Fund”).
Nature, Extent and Quality of Services.
The Trustees reviewed that the
Adviser previously had provided the Trustees with materials related to its
proposed advisory agreement with NLFT, including information on the firm's
investment strategies executed for its existing clients, including CMG Absolute
Return Strategies Fund. A presentation was given by a representative of the
Adviser regarding the Fund's investment strategies. The Trustees discussed the
nature of the Adviser's operations, the quality of its compliance infrastructure
and the experience of its fund management personnel, including experience
advising an existing NLFT Fund using the same Sub-Adviser. The Board reviewed
financial information provided by the Adviser in the Board materials. The
Trustees concluded that the Adviser has the ability to provide a level of
service consistent with the Board's expectations.
Performance
. Because the Adviser has not yet begun advising the Fund,
the Trustees could not consider the investment performance. Additionally, the
Board noted that the prior performance of CMG Absolute Return Strategies Fund
does not provide meaningful investment performance information because the
strategy is not comparable to that of the Fund. The Board also noted that the
Adviser did not have accounts that are substantially similar to the proposed
Fund to provide investment performance information. The Board concluded the
proposed investment strategy and the Adviser's investment process suggests it is
qualified to manage the Fund.
Fees and Expenses.
The Board noted that the Adviser would charge a 1.50%
annual advisory fee for the Fund, based on the average net assets of the Fund.
The Trustees concluded that the Fund's advisory fee, while slightly above
average, is in a range of reasonable fees when compared to a group of similar
mutual funds that employ a long/short equity strategy. The Trustees further
noted that because the Adviser will employ a Sub-Adviser at its own expense and
employ a tactical approach which may command a significant amount of the
Adviser’s resources no identical fund comparison was available but that the
proposed advisory fees were acceptable in light of the quality of the services
the Fund expected to receive from the Adviser and indirectly from the
Sub-Adviser. The Board also noted the Fund's projected total expenses, after
taking into account the effect of an expense limitation to be provided by the
Adviser, were very near the average of fees when compared to the level of fees
paid by a reference group of other similarly managed mutual funds.
Economies of Scale
. The Board considered whether there will be economies
of scale with respect to the management of the Fund. It was the consensus of
the Board that based on the anticipated size of Fund for the initial two years
of its Advisory Agreement, economies of scale was not a relevant consideration
at this time.
Profitability
. The Board considered the profits to be realized by the
Adviser in connection with the operation of the Fund, based on materials
provided to the Board, and whether the amount of profit is a fair
entrepreneurial profit for the management of the Fund. They also considered
that there were no ancillary profits to be realized by the Adviser from other
activities related to the Fund. The Trustees also noted that any forecast of
profits is speculative. The Trustees concluded that because of the Fund's
expected asset level, the potential impact of the expense limitation provided by
the Adviser, the additional expenses to be incurred by the Adviser related to
the Sub-Adviser, the Board was satisfied that the Adviser's level of
profitability from its relationship with the Fund would not be excessive.
Conclusion.
In the course of their deliberations, the Trustees did not
identify any particular information or factor that was all important or
controlling. Based on the Trustees' deliberations and their evaluation of the
information described above, the Board, including all of the Independent
Trustees, approved the Advisory Agreement and concluded that the advisory fees
are reasonable in light of such services and expenses and such other matters as
the Trustees have considered to be relevant in the exercise of their reasonable
judgment.
Approval of Sub-Advisory Agreement –Scotia Partners, Ltd.*
Nature, Extent and Quality of Services.
The Trustees noted that the
Sub-Adviser previously had provided the Trustees with materials related to its
proposed sub-advisory agreement with CMG, including information on the firm's
investment strategies executed for its existing clients, including CMG Absolute
Return Strategies Fund. The Trustees discussed the nature of the Sub-Adviser's
operations, the quality of its compliance infrastructure and the experience of
its fund management personnel, including sub-advising CMG Absolute Return
Strategies Fund. The Board reviewed financial information provided by the
Sub-Adviser in the Board materials. The Trustees concluded that the Sub-Adviser
has the ability to provide a level of sub-advisory service consistent with the
Board's expectations.
Performance
. Because the Sub-Adviser has not yet begun advising the
Fund, the Trustees could not consider the investment performance. However, the
Board considered past performance of the Sub-Adviser using the equity long/short
strategy to be employed for the Fund. The Board concluded that the past
performance summary appeared to be reasonably representative of the other
accounts managed by the Sub-Adviser and demonstrates above-index historical
performance. The Trustees agreed that the Sub-Adviser's past performance
suggests it is qualified to serve as Sub-Adviser to the Fund.
Fees and Expenses.
The Board noted that the Adviser would pay the
Sub-Adviser a 0.50% annual advisory fee based on the average net assets of the
Fund. The Trustees noted that the sub-advisory fee was within a range of
reasonable fees and the Trustees concluded that the sub-advisory fee, as well as
the Fund's overall expense ratio, was acceptable in light of the quality of the
services the Fund expected to receive from the Sub-Adviser.
Economies of Scale
. The Board considered whether there will be economies
of scale with respect to the management of the Fund and whether there is
potential for realization of any further economies of scale. It was the
consensus of the Board that based on the anticipated size of Fund for the
initial two years of the sub-advisory advisory agreement, economies of scale was
not a relevant consideration at this time.
Profitability
. The Board considered the profits to be realized by the
Sub-Adviser in connection with the operation of the Fund, based on materials
provided to the Board, and whether the amount of profit is a fair
entrepreneurial profit for the sub-advisory management of the Fund. The
Trustees also noted that any forecast of profits is speculative. The Trustees
concluded that because of the Fund's expected asset level, the Board was
satisfied that the Sub-Adviser's level of profitability from its relationship
with the Fund would not be excessive.
Conclusion.
In the course of their deliberations, the Trustees did not
identify any particular information or factor that was all important or
controlling. Based on the Trustees' deliberations and their evaluation of the
information described above, the Board, including all of the Independent
Trustees, approved the sub-advisory agreement and concluded that the
sub-advisory fee is reasonable in light of such services and expenses and such
other matters as the Trustees have considered to be relevant in the exercise of
their reasonable judgment.
* Due
to the timing of the contract renewal schedule, these deliberations may or may
not relate to the current performance results of the Fund.
PRIVACY NOTICE
NORTHERN LIGHTS FUND TRUST
Rev. August 2011
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FACTS
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WHAT DOES NORTHERN LIGHTS
FUND TRUST DO WITH YOUR PERSONAL INFORMATION?
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Why?
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Financial companies choose how they share your
personal information. Federal law gives consumers the right to
limit some, but not all sharing. Federal law also requires us to
tell you how we collect, share, and protect your personal
information. Please read this notice carefully to understand what
we do.
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What?
|
The types of personal
information we collect and share depends on the product or service
that you have with us. This information can include:
·
Social Security number and wire transfer instructions
·
account transactions and transaction history
·
investment experience and purchase history
When you are
no longer
our customer, we continue to share
your information as described in this notice.
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How?
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All financial companies need to share
customers’ personal information to run their everyday business. In
the section below, we list the reasons financial companies can share
their customers’ personal information; the reasons Northern Lights
Fund Trust chooses to share; and whether you can limit this sharing.
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Reasons we can share your
personal information:
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Does
Northern Lights Fund Trust share information?
|
Can you
limit this sharing?
|
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For our everyday business
purposes -
such as to process your transactions, maintain your
account(s), respond to court orders and legal investigations, or
report to credit bureaus.
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YES
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NO
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For our marketing purposes -
to offer our products and
services to you.
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NO
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We don’t share
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For joint marketing with other financial companies.
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NO
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We don’t share
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For our affiliates’ everyday business purposes -
information
about your transactions and records.
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NO
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We don’t share
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For our affiliates’ everyday business purposes -
information
about your credit worthiness.
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NO
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We don’t share
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For nonaffiliates to market to you
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NO
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We don’t share
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QUESTIONS?
|
Call 1-402-493-4603
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PRIVACY NOTICE
NORTHERN LIGHTS FUND TRUST
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What we
do
:
|
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How
does
Northern Lights Fund Trust
protect my personal information?
|
To
protect your personal information from unauthorized access and use,
we use security measures that comply with federal law. These
measures include computer safeguards and secured files and
buildings.
Our
service providers are held accountable for adhering to strict
policies and procedures to prevent any misuse of your nonpublic
personal information.
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How
does
Northern Lights Fund Trust
collect my personal information?
|
We collect your personal information, for example, when you
·
open an account or deposit money
·
direct us to buy securities or direct us to sell your securities
·
seek advice about your investments
We also collect your personal information from others, such as
credit bureaus, affiliates, or other companies.
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Why
can’t I limit all sharing?
|
Federal law gives you the right to limit only:
·
sharing for affiliates’ everyday business purposes – information
about your creditworthiness.
·
affiliates from using your information to market to you.
·
sharing for nonaffiliates to market to you.
State laws and individual companies may give you additional rights
to limit sharing.
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Definitions
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Affiliates
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Companies
related by common ownership or control. They can be financial and
nonfinancial companies.
·
Northern Lights Fund Trust has no affiliates.
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Nonaffiliates
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Companies
not related by common ownership or control. They can be financial
and nonfinancial companies.
·
Northern Lights Fund Trust does not share with nonaffiliates so
they can market to you.
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Joint marketing
|
A formal
agreement between nonaffiliated financial companies
that
together market financial products or services to you.
·
Northern Lights Fund Trust does not jointly market
.
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CMG FUNDS
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Adviser
|
CMG Capital Management Group, Inc.
1000 Continental Drive, Suite 570
King of Prussia, Pennsylvania 19406
|
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Administrator
|
Gemini Fund Services, LLC
17605 Wright Street, Suite 2
Omaha, NE 68130
|
How to Obtain Proxy Voting Information
Information regarding how the Funds vote proxies relating to portfolio
securities for the 12 month period ended June 30
th
as well as a
description of the policies and procedures that the Funds used to determine how
to vote proxies is available without charge, upon request, by calling
1-866-CMG-9456 or by referring to the Securities and Exchange Commission’s
(“SEC”) website at
http://www.sec.gov
.
How to Obtain 1
st
and 3
rd
Fiscal Quarter Portfolio
Holdings
The Funds file their complete schedule of portfolio holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q. Form N-Q is
available on the SEC’s website at
http://www.sec.gov
and may be reviewed
and copied at the SEC’s Public Reference Room in Washington, DC
(1-800-SEC-0330). The information on Form N-Q is available without charge, upon
request, by calling 1-866-CMG-9456.
CMG Funds
17605 Wright Street •Suite 2 • Omaha, NE 68130
1-866-CMG-9456