YOU MAY OBTAIN A COPY OF THE FUND’S MOST RECENT SEMI-ANNUAL REPORT TO SHAREHOLDERS, FREE OF CHARGE, BY VISITING THE FUND’S WEBSITE AT WWW.AURORAHORIZONS.COM, BY WRITING TO THE FUND, C/O U.S. BANCORP FUND SERVICES, LLC, P.O. BOX 701, MILWAUKEE, WI 53201, OR BY CALLING (TOLL-FREE) 1-800-443-2862.
THE ADVISER AND ITS ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement dated February 21, 2013 (the “Advisory Agreement”), between the Trust, on behalf of the Fund, and the Adviser, a Delaware limited liability company headquartered at 300 North LaSalle Street, 52nd Floor, Chicago, Illinois 60654, the Adviser serves as the investment adviser to the Fund. The Advisory Agreement was last submitted for approval by the shareholders of the Fund on March 27, 2013. The Advisory Agreement continues in effect for an initial period of two years, and subsequently from year to year only if such continuance is specifically approved at least annually by the Board of Trustees or by vote of a majority of the Fund’s outstanding voting securities, and by the vote of a majority of trustees of the Trust who are not parties to the Advisory Agreement or interested persons of any such party, at a meeting called for the purpose of voting on the Advisory Agreement. The Advisory Agreement is terminable
without penalty (i) by the Trust, on behalf of the Fund, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund
,
upon 60 days’ written notice to the Adviser; and (ii) by the Adviser upon 60 days’ written notice to the Fund. The Advisory Agreement provides that it will automatically terminate in the event of its “assignment,” as defined in the Investment Company Act of 1940, as amended (the “1940 Act”).
The Advisory Agreement provides that the Adviser, in the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of its obligations or duties under the Advisory Agreement, will not be subject to liability to the Trust or the Fund or any shareholder of the Fund for any act or omission in the course of, or in connection with, rendering services under the Advisory Agreement or for any losses that may be sustained in the purchase, holding or sale of any security by the Fund. Further, the Adviser indemnifies the Trust and the Fund, and their respective shareholders, directors, officers, and employees, against any costs, expense, claim, loss, liability, judgment, fine, settlement or damage (including reasonable legal and other expenses) (“Losses”) arising out of any claim, demands, actions, suits or proceedings asserted or threatened to be asserted by any third party (“Proceedings”) in so far as such Loss arises out of or is based upon the willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties of the Adviser in the performance of its duties under the Advisory Agreement. In addition, the Trust and the Fund indemnify the Adviser, and its officers, directors, partners, agents, employees, controlling persons, shareholders and affiliated persons, against any and all Losses from any Proceeding arising from the Adviser’s providing services under the Advisory Agreement.
The Fund compensates the Adviser for its services at the annual rate of 2.00% of its average daily net assets. From the Fund’s management fees, the Adviser pays each of the Fund’s sub-advisers a sub-advisory fee. The Adviser currently utilizes eleven sub-advisers. Not all of the sub-advisers may be actively managing assets for the Fund at all times. Under the Advisory Agreement, the Adviser monitors the performance of the sub-advisers on an ongoing basis. Factors the Adviser considers with respect to each sub-adviser include, among others:
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the sub-adviser’s performance during various time periods and market cycles;
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the sub-adviser’s reputation, experience, investment philosophy and policies; and
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the sub-adviser’s training of its principals and key personnel.
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Each sub-adviser serves pursuant to a separate sub-advisory agreement between the Adviser and the sub-adviser under which the sub-adviser manages a portion of the Fund’s investment portfolio allocated to it by the Adviser, and provides related compliance and record-keeping services.
BOARD APPROVAL AND EVALUATION OF THE NEW SUB-ADVISORY AGREEMENTS
At a meeting of the Board of Trustees held on October 24, 2013 (the “October 2013 Meeting”), the Board of Trustees, including a majority of the trustees who are not “interested persons” of the Trust within the meaning of the 1940 Act (the “Independent Trustees”), reviewed the various factors relevant to its consideration of the investment sub-advisory agreement between the Adviser and Ionic Capital Management LLC (“Ionic”) (the “Ionic Sub-Advisory Agreement”) and the investment sub-advisory agreement between the Adviser and Atlantic Investment Management, Inc. (“Atlantic”) (the “Atlantic Sub-Advisory Agreement”, and together with the Ionic Sub-Advisory Agreement, the “Sub-Advisory Agreements”) and the Board of Trustees’ legal responsibilities related to such consideration. After analysis and discussions of the factors identified below, the Board of Trustees, including a majority of the Independent Trustees, approved the Sub-Advisory Agreements, each for an initial two-year term.
CONSIDERATION OF THE IONIC SUB-ADVISORY AGREEMENT
Nature, Extent and Quality of Services Provided by Ionic to the Fund:
The Trustees considered the nature, extent and quality of services to be provided by Ionic to the Fund. The Trustees considered Ionic’s specific responsibilities in all aspects of day-to-day management of a portion of the Fund’s assets, as well as the qualifications, experience and responsibilities of Bart Baum, Adam Radosti and Daniel Stone, each of whom would serve as a portfolio manager for the segment of the Fund’s assets managed by Ionic, and other key personnel at Ionic. The Trustees concluded that Ionic had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing its duties under the Ionic Sub-Advisory Agreement and that the nature, overall quality and extent of the management services to be provided to the Fund were satisfactory and reliable.
Investment Performance of Ionic
:
In assessing the portfolio management services to be provided by Ionic, the Trustees considered the qualifications, background and experience of the portfolio managers and the performance of a private fund managed by Ionic using a similar strategy to that which would be applied to Ionic’s segment of the Fund, with the exception that the private fund invests in a significant number of over-the-counter derivatives that Ionic does not anticipate investing in for the segment of the Fund it will manage. The Trustees concluded that the Fund and its shareholders were likely to benefit from Ionic’s management.
Costs of Services Provided and Profitability to be Realized
: The Trustees reviewed and considered the sub-advisory fees payable by the Adviser to Ionic under the Ionic Sub-Advisory Agreement. Since Ionic’s sub-advisory fees would be paid by the Adviser, the overall advisory fee paid by the Fund would not be directly affected by Ionic’s sub-advisory fee. Consequently, the Trustees did not consider the costs of services to be provided by Ionic or its profitability from its relationship with the Fund because the Trustees did not consider these factors as relevant. Based on all these factors, the Trustees concluded that the sub-advisory fees to be paid to Ionic by the Adviser were reasonable in light of the services to be provided under the Ionic Sub-Advisory Agreement.
Extent of Economies of Scale to be Realized
: Since the sub-advisory fees payable to Ionic would not be paid by the Fund, the Trustees did not consider whether the sub-advisory fees should reflect any potential economies of scale that might be realized as the Fund’s assets increase.
Benefits Derived from the Relationship with the Fund
: The Trustees considered the direct and indirect benefits that could be received by Ionic from its association with the Fund. The Trustees concluded that the benefits that Ionic may receive appear to be reasonable, and in many cases benefit the Fund.
The recommendation to hire Ionic was made by the Adviser in the ordinary course of its ongoing evaluation of its sub-advisers. Importantly, the recommendation to hire Ionic to manage a portion of the Fund’s assets was based on an evaluation of Ionic’s performance during various time periods and market cycles, Ionic’s reputation, experience, investment philosophy and policies, and Ionic’s training of its principals and key personnel among others factors, including the Adviser’s analysis that Ionic’s investment strategy is complementary to the investment strategies of the Fund’s other sub-advisers.
Conclusions
: The Trustees considered all of the foregoing factors. In considering the Ionic Sub-Advisory Agreement, the Trustees did not identify any one factor as all important, but rather considered all of these factors collectively in light of the Fund’s surrounding circumstances. Based on this review, the Trustees, including a majority of the Independent Trustees, approved the Ionic Sub-Advisory Agreement, including the sub-advisory fees, as being in the best interest of the Fund and its shareholders.
CONSIDERATION OF THE ATLANTIC SUB-ADVISORY AGREEMENT
Nature, Extent and Quality of Services Provided by Atlantic to the Fund:
The Trustees considered the nature, extent and quality of services to be provided by Atlantic to the Fund. The Trustees considered Atlantic’s specific responsibilities in all aspects of day-to-day management of a portion of the Fund’s assets, as well as the qualifications, experience and responsibilities of Alexander Roepers, who would serve as the portfolio manager for the segment of the Fund’s assets managed by Atlantic, and other key personnel at Atlantic. The Trustees concluded that Atlantic had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing its duties under the Atlantic Sub-Advisory Agreement and that the nature, overall quality and extent of the management services to be provided to the Fund were satisfactory and reliable.
Investment Performance of Atlantic
: In assessing the portfolio management services to be provided by Atlantic, the Board considered the qualifications, background and experience of the portfolio manager and the performance of private funds managed by Atlantic using separate strategies, the combination of which would be applied by Atlantic in a single strategy and incorporated in Atlantic’s segment of the Fund. The Trustees concluded that the Fund and its shareholders were likely to benefit from Atlantic’s management.
Costs of Services Provided and Profitability to be Realized
: The Trustees reviewed and considered the sub-advisory fees payable by the Adviser to Atlantic under the Atlantic Sub-Advisory Agreement. Since Atlantic’s sub-advisory fees would be paid by the Adviser, the overall advisory fee paid by the Fund would not be directly affected by Atlantic’s sub-advisory fee. Consequently, the Trustees did not consider the costs of services to be provided by Atlantic or its profitability from its relationship with the Fund because the Trustees did not consider these factors as relevant. Based on all these factors, the Trustees concluded that the sub-advisory fees to be paid to Atlantic by the Adviser were reasonable in light of the services to be provided under the Atlantic Sub-Advisory Agreement.
Extent of Economies of Scale to be Realized
: Since the sub-advisory fees payable to Atlantic would not be paid by the Fund, the Trustees did not consider whether the sub-advisory fees should reflect any potential economies of scale that might be realized as the Fund’s assets increase.
Benefits Derived from the Relationship with the Fund
: The Trustees considered the direct and indirect benefits that could be received by Atlantic from its association with the Fund. The Trustees concluded that the benefits that Atlantic may receive appear to be reasonable, and in many cases benefit the Fund.
The recommendation to hire Atlantic was made by the Adviser in the ordinary course of its ongoing evaluation of its sub-advisers. Importantly, the recommendation to hire Atlantic to manage a portion of the Fund’s assets was based on an evaluation of Atlantic’s performance during various time periods and market cycles, Atlantic’s reputation, experience, investment philosophy and policies, and Atlantic’s training of its principals and key personnel, among others factors, including the Adviser’s analysis that Atlantic’s investment strategy is complementary to the investment strategies of the Fund’s other sub-advisers.
Conclusions
: The Trustees considered all of the foregoing factors. In considering the Atlantic Sub-Advisory Agreement, the Trustees did not identify any one factor as all important, but rather considered all of these factors collectively in light of the Fund’s surrounding circumstances. Based on this review, the Trustees, including a majority of the Independent Trustees, approved the Atlantic Sub-Advisory Agreement, including the sub-advisory fees, as being in the best interest of the Fund and its shareholders.
INFORMATION REGARDING THE SUB-ADVISORY AGREEMENTS
The sub-advisory fees each sub-adviser receives for its services to the Fund are paid from the Adviser’s management fees. For the fiscal period ended August 31, 2013, for its services under the investment advisory agreement with the Trust, the Adviser received a management fee of 2.00% of the average net assets of the Fund, computed daily and payable monthly. The Adviser has contractually committed to waive its management fees and/or reimburse expenses of the Fund to ensure that Total Annual Fund Operating Expenses (exclusive of front-end or contingent deferred loads, taxes, leverage, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, dividends or interest expenses on short positions, acquired fund fees and expenses or extraordinary expenses such as litigation) do not exceed 2.85%, 3.60% and 2.60% of the Fund’s average annual net assets for Class A shares, Class C shares and Class Y shares, respectively, through at least March 27, 2016.
For the fiscal period ended August 31, 2013, the Fund paid the Adviser $1,092,384.37. The fees paid to sub-advisers are individually negotiated between the Adviser and each sub-adviser and may vary. The aggregate sub-advisory fees paid by the Adviser to the Fund’s sub-advisers for the fiscal period ended August 31, 2013, were $377,972.48 or 0.69% of net assets.
The Sub-Advisory Agreements were approved by the Board of Trustees at the October 2013 Meeting, each for an initial term of two years. Thereafter, continuance of each Sub-Advisory Agreement will require annual approval by the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Fund, and by the vote of a majority of the Trustees who are not parties to the Sub-Advisory Agreements or interested persons of any such party. The Ionic Sub-Advisory Agreement is terminable without penalty (i) by the Trust, on behalf of the Fund, by the Board of Trustees, by the Adviser or by the vote of a majority of the outstanding voting securities of the Fund, upon 60 days’ written notice to Ionic, and (ii) by Ionic upon 60 days’ written notice to the Fund and the Adviser. The Atlantic Sub-Advisory Agreement is terminable without penalty (i) by the Trust, on behalf of the Fund, by the Board of Trustees, by the Adviser or by the vote of a majority of the outstanding voting securities of the Fund, upon 60 days’ written notice to Atlantic, and (ii) by Atlantic upon 60 days’ written notice to the Fund and the Adviser. Each Sub-Advisory Agreement provides that it will terminate automatically in the event of its “assignment” within the meaning of the 1940 Act, except as otherwise provided by applicable law or the exemptive order.
The terms of each Sub-Advisory Agreement are substantially similar to the sub-advisory agreements between the Adviser and the other sub-advisers of the Fund. Each Sub-Advisory Agreement provides that the relevant sub-adviser, among other duties, will make all investment decisions for the respective portions of the Fund’s assets allocated to it as described in the Fund’s prospectus. Ionic and Atlantic, subject to the supervision of the Board of Trustees and the Adviser, will each conduct an ongoing program of investment, evaluation, and, if appropriate, sale and reinvestment of the respective portion of the Fund’s assets allocated to it. Ionic and Atlantic also will each perform certain other administrative and compliance-related functions in connection with the management of its allocated portion of the Fund’s assets.
The Sub-Advisory Agreements each provide that the Adviser will compensate Ionic and Atlantic on the basis of current net assets of that portion of the Fund’s portfolio allocated to Ionic and Atlantic, respectively. The Adviser compensates Ionic and Atlantic from the management fees that it receives from the Fund. Ionic and Atlantic generally will each pay all expenses it incurs in connection with its activities under the respective Sub-Advisory Agreement, other than the costs of the Fund’s portfolio securities and other investments.
INFORMATION ABOUT IONIC CAPITAL MANAGEMENT, LLC
Ionic is a Delaware limited liability company with principal offices located at 366 Madison Avenue, 9
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Floor, New York, New York 10017, and is an SEC-registered investment adviser. Ionic commenced operations in 2006 and serves as the investment manager for a number of related private investment funds and separately managed investment vehicles. As of January 31, 2014, Ionic had approximately $4,069 million in regulatory assets under management. Ionic’s sole member is Ionic Capital Management Holdings, L.P., whose general partner is Ionic Holdco GP, LLC, and whose limited partners are Bart Baum, Adam Radosti and Daniel Stone. For more information on Ionic’s principal executive officers and directors, please see Schedule A.
Other Investment Companies Advised or Sub-Advised by Ionic.
Ionic
does not currently act as an adviser or sub-adviser to any registered investment companies
having similar investment objectives and policies to those of the Fund.
INFORMATION ABOUT ATLANTIC INVESTMENT MANAGEMENT, INC.
Atlantic is a Delaware corporation with principal offices located at 666 Fifth Avenue, 34th Floor, New York, New York 10103, and is an SEC-registered investment adviser. Atlantic commenced operations in 1988 and provides discretionary, individualized investment advisory services to private investment funds (generally structured as pooled investment vehicles) and certain institutional separately managed accounts. As of January 31, 2014, Atlantic had approximately $2,100 million in regulatory assets under management. Alexander J. Roepers is the principal owner of Atlantic. For more information on Atlantic’s principal executive officers and directors, please see Schedule A.
Other Investment Companies Advised or Sub-Advised by Atlantic.
Atlantic
does not currently act as an adviser or sub-adviser to any registered investment companies
having similar investment objectives and policies to those of the Fund.
AFFILIATED BROKERAGE COMMISSIONS
For the fiscal period ended August 31, 2013, the Fund paid $312 (or 0.21% of the Fund’s aggregate brokerage commissions paid) in brokerage commissions to Kovitz Securities LLC. Kovitz Securities LLC is a broker-dealer under common control with Kovitz Investment Group, LLC, a sub-adviser to the Fund.
ADDITIONAL INFORMATION ABOUT AURORA HORIZONS FUND
ADMINISTRATOR
U.S. Bancorp Fund Services, LLC, located at 615 East Michigan Street, Milwaukee, WI 53202, serves as the administrator of the Fund.
PRINCIPAL UNDERWRITER
NGAM Distribution, L.P. located at 399 Boylston Street, Boston, Massachusetts 02116, serves as distributor and principal underwriter for the Fund.
TRANSFER AGENT
U.S. Bancorp Fund Services, LLC, located at 615 East Michigan Street, Milwaukee, WI 53202, provides transfer agency services to the Fund.
CUSTODIAN
U.S. Bank N.A., Custody Operations, located at 1555 North River Center Drive, Suite 302, Milwaukee, WI 53212, provides custody services for the Fund.
FINANCIAL INFORMATION
The Fund’s most recent semi-annual report is available on request, without charge, by writing to Aurora Horizons Fund, c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201 or calling (toll-free) 1-800-443-2862.
RECORD OF BENEFICIAL OWNERSHIP
Please see Schedule B for more information on the beneficial ownership of the Fund.