Notes to Financial Statements
December 31, 2013 (Unaudited)
1. Organization
The Touchstone Strategic Trust (the “Trust”)
is registered under the Investment Company Act of 1940, as amended, (the “1940 Act”), as an open-end management investment
company. The Trust was established as a Massachusetts business trust pursuant to a Declaration of Trust dated November 18, 1982.
The Trust consists of eighteen funds including the following five funds (individually, a “Fund”, and collectively,
the “Funds”):
Touchstone Capital Growth Fund (“Capital Growth Fund”)
Touchstone International Small Cap Fund (“International
Small Cap Fund”)
Touchstone Mid Cap Value Opportunities Fund (“Mid
Cap Value Opportunities Fund”) Touchstone Small Cap Value Opportunities Fund (“Small Cap Value Opportunities Fund”)
Touchstone Value Fund (“Value Fund”)
Each Fund is an open-end, diversified management
investment company, with the exception of the Capital Growth Fund and Value Fund, each of which is an open-end, non-diversified
management investment company.
The Declaration of Trust permits the Trust
to issue an unlimited number of shares of beneficial interest of each Fund. The Funds are registered to offer the following classes
of shares: Class A shares, Class C shares, Class Y shares, and Institutional Class shares. The assets of each Fund are segregated,
and a shareholder’s interest is limited to the Fund in which shares are held. The Funds’ prospectus provides a description
of each Fund’s investment goals, policies, and strategies along with information on the classes of shares currently being
offered.
2. Significant Accounting Policies
The following is a summary of the Funds’ significant accounting
policies:
Security valuation and fair value measurements
—
All investments in securities are recorded at their estimated fair value. The Funds define the term “market value”,
as used throughout this report, as the estimated fair value. The Funds use various methods to measure fair value of their portfolio
securities on a recurring basis. Generally accepted accounting principles in the United States (“U.S. GAAP”) establish
a hierarchy that prioritizes inputs to valuation methods. These inputs are summarized in the three broad levels listed below:
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•
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Level 1 –
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quoted prices in active markets for identical securities
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•
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Level 2 –
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other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
|
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•
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Level 3 –
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significant unobservable inputs (including a Fund’s own assumptions in determining the fair value of investments)
|
The inputs or methodology used for valuing
securities are not necessarily an indication of the risk associated with investing in those securities. For example, money market
instruments are valued using amortized cost, in accordance with rules under the 1940 Act. Generally, amortized cost approximates
the current fair value of a security, but since the value is not obtained from a quoted price in an active market, such securities
are reflected as Level 2.
The aggregate value by input level, as
of December 31, 2013, for each Fund’s investments, as well as a reconciliation of assets for which significant unobservable
inputs (Level 3) were used in determining value, if applicable, is included in each Fund’s Portfolio of Investments or Tabular
Presentation, which also includes a breakdown of the Fund’s investments by geographic or sector allocation. The Funds did
not hold any Level 3 categorized securities during the six months ended December 31, 2013.
Notes to Financial Statements (Unaudited)
(Continued)
All transfers in and out of the levels
are recognized at the value at the end of the period. During the six months ended December 31, 2013, there were no transfers between
Levels 1, 2 and 3 for all Funds except as shown in the Portfolio of Investments for the International Small Cap Fund.
The Funds’ portfolio securities are
valued as of the close of the regular session of trading on the New York Stock Exchange (“NYSE”) (currently 4:00 p.m.,
Eastern time). Portfolio securities traded on stock exchanges are valued at the last sale price, and to the extent these securities
are actively traded, they are categorized in Level 1 of the fair value hierarchy. Portfolio securities quoted by NASDAQ are valued
at the NASDAQ Official Closing Price (“NOCP”). Securities not traded on a particular day, or for which the last sale
price is not readily available, are valued at their last broker-quoted bid prices as obtained from one or more of the major market
makers for such securities by an independent pricing service and are categorized in Level 2. Money market instruments and other
debt securities with a remaining maturity of less than 60 days are valued at amortized cost, which approximates market value and
are categorized in Level 2. While this method provides consistency in valuation (and may only be used if it approximates market
value), it may result in periods during which value, as determined by amortized cost, is higher or lower than the price that would
be received if the Fund sold the investment. Securities for which market quotations or the NOCP are not readily available are fair
valued as determined by or under the direction of the Board of Trustees and are categorized in Level 3. Shares of open-end mutual
funds in which the Funds invest are valued at their respective net asset values (“NAV”) as reported by the underlying
funds and are categorized in Level 1. The prices for foreign securities are reported in local currency and translated into U.S.
dollars using currency exchange rates.
Level 2 Valuation—
Securities
mainly traded on a non-U.S. exchange are generally valued according to the preceding closing values on that exchange. However,
if an event that may change the value of a security occurs after the time that the closing value on the non-U.S. exchange was determined,
but before the close of regular trading on the NYSE, the security may be priced based on fair value. This may cause the value of
the security on the books of the Fund to be significantly different from the closing value on the non-U.S. exchange and may affect
the calculation of the NAV of the Funds. Any debt securities held by the Funds for which market quotations are not readily available
are generally priced at their most recent bid prices as obtained from one or more of the major market makers for such securities.
Level 3 Valuation—
Securities
held by the Funds that do not have readily available market quotations, or securities for which the available market quotations
are not reliable, are priced at their fair values using procedures approved by the Fund’s Board of Trustees.
The Funds may use fair value pricing under the following circumstances,
among others:
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•
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If the value of a security has been materially affected by events occurring
before the Funds’ pricing time but after the close of the primary markets on which the security is traded.
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•
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If the exchange on which a portfolio security is principally traded
closes early or if trading in a particular portfolio security was halted during the day and did not resume prior to the Funds’
NAV calculation.
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•
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If a security is so thinly traded that reliable market quotations are
unavailable due to infrequent trading.
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•
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If the validity of market quotations is not reliable.
|
Investment companies—
Certain
Funds may invest in securities of other investment companies, including exchange traded funds (“ETFs”), open-end funds,
and closed-end funds. Open-end funds are investment companies that issue new shares continuously and redeem shares daily. Closed-end
funds are investment companies that typically issue a fixed number of shares that trade on a securities exchange or over-the-counter.
An ETF is an investment company that typically seeks to track the performance of an index by holding in its portfolio shares of
all the companies, or a representative sample of the companies, that are components of a particular index.
Notes to Financial Statements
(Unaudited) (Continued)
ETFs are traded on a securities
exchange based on their market value. The risks of investment in other investment companies typically reflect the risks of
the types of securities in which investment companies invest. Investments in ETFs and closed-end funds are subject to the
additional risk that their shares may trade at a premium or discount to their NAV. When a Fund invests in another investment
company, shareholders of the Fund indirectly bear their proportionate share of the other investment company’s fees and
expenses, including operating, registration, trustee, licensing and marketing, as well as their share of the Funds’
fees and expenses.
Foreign currency translation —
The books and records
of the Funds are maintained in U.S. dollars and translated into U.S. dollars on the following basis:
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(1)
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market value of investment securities, assets and liabilities
at the current rate of exchange on the valuation date; and
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(2)
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purchases and sales of investment securities, income
and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions.
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The Funds do not isolate that portion of gains and losses on
investments in equity securities that is due to changes in the foreign exchange rates from that which is due to changes in market
prices of equity securities.
Portfolio securities loaned —
Each Fund may lend its portfolio securities. Lending portfolio securities exposes a Fund to the risk that the borrower may
fail to return the loaned securities or may not be able to provide additional collateral or that the Funds may experience delays
in recovery of the loaned securities or loss of rights in the collateral if the borrower fails financially. To minimize these risks,
the borrower must agree to maintain cash collateral with the Funds’ custodian. The loaned securities are secured by collateral
valued at least equal, at all times, to the market value of the securities loaned plus accrued interest, if any. When the collateral
falls below specified amounts, the lending agent will use its best effort to obtain additional collateral on the next business
day to meet required amounts under the security lending agreement. The cash collateral is reinvested by the Funds’ custodian
into an approved investment vehicle.
As of December 31, 2013, the following Funds loaned securities
and received collateral as follows:
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Market
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Market
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Value of
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Value of
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Securities
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Collateral
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Fund
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Loaned
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Received
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Capital Growth Fund
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$
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4,447,708
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$
|
4,542,285
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International Small Cap Fund
|
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4,513,344
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|
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4,761,045
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Mid Cap Value Opportunities Fund
|
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5,386,956
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5,496,576
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Small Cap Value Opportunities Fund
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14,706,434
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14,907,695
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All collateral received as cash is received, held and administered
by the Funds’ custodian for the benefit of the Funds in the applicable custody account or other account established for the
purpose of holding collateral.
Funds participating in securities lending
receive compensation in the form of fees. The Funds retain the interest or dividends on the investment of any cash received as
collateral. The Funds also continue to receive interest or dividends on the securities loaned.
Unrealized gain or loss on the market value
of the securities loaned that may occur during the term of the loan is recognized by the Funds. The Funds have the right under
the lending agreement to recover the securities from the borrower on demand.
Share valuation —
The NAV
per share of each class of shares of each Fund is calculated daily by dividing the total value of a Fund’s assets attributable
to that class, less liabilities attributable to that class, by the number of outstanding shares of that class.
Notes to Financial Statements
(Unaudited) (Continued)
The maximum offering price per share of
Class A shares of the Funds is equal to the NAV per share plus a sales load equal to 6.10% of the net asset value (or 5.75% of
the offering price). There is no sales load on purchases of $1 million or more of Class A shares. The maximum offering price per
share of Class C, Class Y, and Institutional Class shares of the Funds is equal to the NAV per share.
The redemption price per share of each
class of shares of the Funds is generally equal to the NAV per share. However, Class A redemptions that were part of a no load
$1 million subscription may be subject to a contingent deferred sales charge (“CDSC”) of up to 1% if redeemed within
a one-year period from the date of purchase. Additionally, purchases of Class C shares of the Funds are subject to a CDSC of 1.00%
of the original purchase price if redeemed within a one-year period from the date of purchase.
Investment income —
Dividend
income from securities is recognized on the ex-dividend date, net of foreign withholding taxes, if any, which are reduced by any
amounts reclaimable by the Funds, where applicable. Interest income is recorded on the basis of interest accrued, premium amortized
and discount accreted
Distributions to shareholders —
Each Fund intends to distribute to its shareholders substantially all of its income and capital gains. Each Fund, except the
Value Fund, declares and distributes net investment income, if any, annually, as a dividend to shareholders. The Value Fund declares
and distributes net investment income, if any, semi-annually, as a dividend to shareholders. Each Fund makes distributions of capital
gains, if any, at least annually, net of applicable capital loss carryforwards. Income distributions and capital gain distributions
are determined in accordance with income tax regulations. Recognition of the Funds’ net investment income that invest in
underlying funds is affected by the timing of dividend declarations by underlying funds.
Allocations —
Investment income
earned, realized capital gains and losses, and unrealized appreciation and depreciation for a Fund are allocated daily to each
class of shares based upon its proportionate share of total net assets of the Fund. Class-specific expenses are charged directly
to the class incurring the expense. Common expenses, which are not attributable to a specific class, are allocated daily to each
class of shares based upon their proportionate share of total net assets of the Fund. Expenses not directly billed to a Fund are
allocated proportionally among all Funds in the Trust, and, if applicable, in Touchstone Investment Trust, Touchstone Institutional
Funds Trust, Touchstone Variable Series Trust, Touchstone Funds Group Trust and Touchstone Tax-Free Trust (collectively with the
Trust,“Touchstone Fund Complex”), daily in relation to net assets of each Fund or another reasonable measure.
Security transactions —
Security transactions are
reflected for financial reporting purposes as of the trade date. Realized gains and losses on sales of portfolio securities are
calculated using the identified cost basis.
Estimates —
The preparation
of financial statements in conformity with U.S. GAAP 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 during the reporting period. Actual results could differ from those estimates.
3. Investment Transactions
Investment transactions (excluding short-term investments and
U.S. Government securities) were as follows for the six months ended December 31, 2013:
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International
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Mid Cap Value
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Capital Growth
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Small Cap
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Opportunities
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|
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Fund
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Fund
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|
|
Fund
|
|
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Purchases of investment securities
|
|
$
|
31,019,651
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|
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$
|
45,728,946
|
|
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$
|
237,510,898
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|
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Proceeds from sales and maturities
|
|
$
|
41,446,030
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|
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$
|
39,851,988
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|
|
$
|
211,204,192
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|
Notes to Financial Statements
(Unaudited) (Continued)
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Small Cap
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Value
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Opportunities
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Value
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Fund
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Fund
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Purchases of investment securities
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$
|
45,773,568
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|
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$
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30,538,222
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|
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Proceeds from sales and maturities
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|
$
|
47,439,883
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|
|
$
|
38,805,709
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|
There were no purchases or proceeds from sales and maturities
of U.S. government securities by the Funds for the six months ended December 31, 2013.
4. Transactions with Affiliates and Other Related Parties
Certain officers of the Trust are also
officers of Touchstone Advisors, Inc. (the “Advisor”), Touchstone Securities, Inc. (the “Underwriter”)
or BNY Mellon Investment Servicing (U.S.) Inc. (“BNY Mellon”), the Sub-Administrator and Transfer Agent to the Funds.
Such officers receive no compensation from the Trust. The Advisor and the Underwriter are each wholly-owned, indirect subsidiaries
of Western & Southern Financial Group, Inc.
Management & Expense Limitation Agreements
The Advisor provides general investment
supervisory services for the Funds, under terms of an advisory agreement (the “Advisory Agreement”). Under the Advisory
Agreement, each Fund pays the Advisor a fee, which is computed and accrued daily and paid monthly, at an annual rate based on average
daily net assets of each Fund as shown in the table below.
|
Touchstone Capital Growth Fund
|
0.70% on the first $300 million
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0.685% on the next $200 million
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0.675% on the next $500 million
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0.625% on the next $500 million
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0.575% on the next $500 million
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0.525% of such assets over $2 billion
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Touchstone International Small Cap Fund
|
0.95% on the first $300 million
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|
0.90% on the next $200 million
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0.85% on the next $250 million
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0.80% on the next $250 million
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0.75% on the next $500 million
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0.70% on the next $500 million
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0.65% of such assets over $2 billion
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Touchstone Mid Cap Value Opportunities Fund
|
0.85% on the first $300 million
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0.80% on the next $200 million
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0.75% of such assets over $500 million
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Touchstone Small Cap Value Opportunities Fund
|
0.95% on the first $300 million
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0.90% on the next $200 million
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0.85% of such assets over $500 million
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|
Touchstone Value Fund
|
0.65%*
|
*Prior to August 23, 2013, the Fund
paid 0.75% on the first $300 million, 0.73% on the next $200 million, 0.72% on the next $250 million, 0.70% on the next $250 million,
0.68% on the next $500 million, 0.67% on the next $500 million, and 0.66% of such assets over $2 billion.
Notes to Financial Statements
(Unaudited) (Continued)
The Advisor has entered into investment sub-advisory agreements
with the following parties (each, a “Sub-Advisor”):
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Ashfield Capital Partners, LLC
|
Lee Munder Capital Group LLC
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|
Capital Growth Fund
|
Mid Cap Value Opportunities Fund*
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Barrow, Hanley, Mewhinney & Strauss, LLC
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Thompson Siegel & Walmsley LLC
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Value Fund
|
Small Cap Value Opportunities Fund
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Copper Rock Capital Partners LLC
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International Small Cap Fund
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*Effective November 22, 2013, Lee Munder Capital Group LLC
became the sub-advisor of the Mid Cap Value Opportunities Fund; prior to November 22, 2013, Thompson Siegel & Walmsley LLC
was the sub-advisor
.
The Advisor, not the Funds, pays the sub-advisory fees to each
Sub-Advisor.
The Advisor entered into an expense
limitation agreement (the “Expense Limitation Agreement”) to contractually limit operating expenses of the Funds,
excluding: dividend expenses on short sales; interest; taxes; brokerage commissions; other expenditures which are capitalized
in accordance with GAAP; the cost of “Acquired Fund Fees and Expenses”, if any; and other extraordinary expenses
not incurred in the ordinary course of business. The maximum operating expense limit in any year with respect to the Funds is
based on a percentage of the average daily net assets of the Funds. The Advisor has agreed to separately waive class-level
expenses, advisory and administration fees, and to reimburse expenses in order to maintain the following expense limitations
for the Funds:
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Institutional
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Termination
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Class A
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Class C
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Class Y
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Class
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Date
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Capital Growth Fund
|
|
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1.25
|
%
|
|
|
2.00
|
%
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|
|
1.00
|
%
|
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0.90
|
%
|
|
|
October 30, 2014
|
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International Small Cap Fund
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1.55
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%
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2.30
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%
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1.30
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%
|
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1.05
|
%
|
|
|
April 16, 2014
|
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International Small Cap Fund
|
|
|
1.55
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%
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|
|
2.30
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%
|
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|
1.30
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%
|
|
|
1.18
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%
|
|
|
October 30, 2014
|
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|
Mid Cap Value Opportunities Fund
|
|
|
1.29
|
%
|
|
|
2.04
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%
|
|
|
1.04
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%
|
|
|
0.89
|
%
|
|
|
October 30, 2014
|
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Small Cap Value Opportunities Fund
|
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|
1.50
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%
|
|
|
2.25
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%
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1.25
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%
|
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1.10
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%
|
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|
October 30, 2014
|
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Value Fund*
|
|
|
1.08
|
%
|
|
|
1.83
|
%
|
|
|
0.83
|
%
|
|
|
0.68
|
%
|
|
|
October 30, 2014
|
|
* Prior to September 10, 2013 the expense limitation for
Class A, Class C, Class Y and Institutional Class Shares were 1.00%, 1.75%, 0.75% and 0.65%, respectively.
Where multiple caps are in effect, the lower of the two amounts
will apply.
During the six months ended December 31, 2013, the Advisor or
its affiliates waived investment advisory fees and administration fees or reimbursed expenses, including distribution fees, of
the Funds as follows:
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Other
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Investment
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Operating
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Advisory
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Administration
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Expenses
|
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Fees Waived
|
|
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Fees Waived
|
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Reimbursed
|
|
|
Capital Growth Fund
|
|
$
|
—
|
|
|
$
|
37,614
|
|
|
$
|
70,809
|
|
|
International Small Cap Fund
|
|
|
38,399
|
|
|
|
101,941
|
|
|
|
21,106
|
|
|
Mid Cap Value Opportunities Fund
|
|
|
7,931
|
|
|
|
121,898
|
|
|
|
23,524
|
|
|
Small Cap Value Opportunities Fund
|
|
|
—
|
|
|
|
42,480
|
|
|
|
24,536
|
|
|
Value Fund
|
|
|
70,167
|
|
|
|
294,489
|
|
|
|
56,584
|
|
Notes to Financial Statements
(Unaudited) (Continued)
Under the terms of the Expense Limitation
Agreement, the Advisor is entitled to recover, subject to approval by the Funds’ Board of Trustees, such amounts waived or
reimbursed for a period of up to three years from the year in which the Advisor reduced its compensation or assumed expenses for
the Funds. No recoupment will occur unless a Fund’s operating expenses are below the expense limitation amount.
As of December 31, 2013, the Advisor may seek recoupment of
previously waived fee and reimbursed expenses as follows:
|
|
|
Expiration
|
|
|
Expiration
|
|
|
Expiration
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Capital Growth Fund
|
|
$
|
118,022
|
|
|
$
|
283,205
|
|
|
$
|
106,807
|
|
|
International Small Cap Fund
|
|
|
99,781
|
|
|
|
346,008
|
|
|
|
159,478
|
|
|
Mid Cap Value Opportunities Fund
|
|
|
90,213
|
|
|
|
271,865
|
|
|
|
143,645
|
|
|
Small Cap Value Opportunities Fund
|
|
|
59,559
|
|
|
|
132,190
|
|
|
|
64,555
|
|
|
Value Fund
|
|
|
81,083
|
|
|
|
897,689
|
|
|
|
383,233
|
|
The Advisor did not recoup any amounts it previously waived
or reimbursed during the six months ended December 31, 2013.
ADMINISTRATION AGREEMENT
The Advisor entered into
an Administration Agreement with the Trust, whereby the Advisor is responsible for: supplying executive and
regulatory compliance services; supervising the preparation of tax returns; coordinating the preparation of reports to
shareholders and reports to, and filings with, the Securities and Exchange Commission and state securities authorities, as
well as materials for meetings of the Board of Trustees; calculating the daily NAV per share; and maintaining the financial
books and records of each Fund. For its services, the Advisor receives an annual fee of 0.20% on the first $6 billion of the
aggregate average daily net assets of the Touchstone Fund Complex (excluding Touchstone Institutional Money Market
Fund,Touchstone Institutional Funds Trust, and Touchstone Variable Series Trust); 0.16% of the next $4 billion of aggregate
average daily net assets; and 0.12% of the aggregate average daily net assets of all such assets in excess of $10 billion.
The fee is allocated among the funds of the Touchstone Fund Complex (excluding Touchstone Institutional Money Market Fund,
Touchstone Institutional Funds Trust, and Touchstone Variable Series Trust) on the basis of relative daily net assets.
The Advisor has engaged BNY Mellon as the
Sub-Administrator to the Trust. BNY Mellon provides administrative and accounting services to the Trust and is compensated
directly by the Advisor, not the Trust.
TRANSFER AGENT AGREEMENT
Under the terms of the Transfer Agent Agreement
between the Trust and BNY Mellon, BNY Mellon maintains the records of each shareholder’s account, answers shareholders’
inquiries concerning their accounts, processes purchases and redemptions of each Fund’s shares, acts as dividend and distribution
disbursing agent and performs other shareholder service functions. For these services, BNY Mellon receives a monthly fee per shareholder
account from each Fund. In addition, each Fund pays out-of-pocket expenses incurred by BNY Mellon, including, but not limited to,
postage and supplies.
PLANS OF DISTRIBUTION AND SHAREHOLDER SERVICING FEE ARRANGEMENTS
The Trust has adopted distribution plans
pursuant to Rule 12b-1 under the 1940 Act for each class of shares it offers that are subject to 12b-1 distribution fees. The plans
allow each Fund to pay distribution and other fees for the sale and distribution of its shares and for services provided to shareholders.
Under the Class A plan,
Notes to Financial Statements
(Unaudited) (Continued)
each Fund offering Class A shares pays
an annual fee of up to 0.25% of average daily net assets that are attributable to Class A shares. Under the Class C plan, each
Fund offering Class C shares pays an annual fee of up to 1.00% of average daily net assets that are attributable to Class C shares
(of which up to 0.75% is a distribution fee and up to 0.25% is a shareholder servicing fee).
UNDERWRITING AGREEMENT
The Underwriter is the Funds’ principal
underwriter and, as such, acts as exclusive agent for distribution of the Funds’ shares. Under the terms of the Underwriting
Agreement between the Trust and the Underwriter, the Underwriter earned the following from underwriting and broker commissions
on the sale of Class A shares of the Funds listed below during the six months ended December 31, 2013:
|
|
|
Amount
|
|
|
Capital Growth
|
|
$
|
196
|
|
|
International Small Cap Fund
|
|
|
859
|
|
|
Mid Cap Value Opportunities Fund
|
|
|
2,745
|
|
|
Small Cap Value Opportunities Fund
|
|
|
681
|
|
|
Value Fund
|
|
|
1,501
|
|
In addition, the Underwriter collected CDSC on the redemption
of Class C shares of the Funds listed below during the year ended December 31, 2013:
|
|
|
Amount
|
|
|
Touchstone International Small Cap Fund
|
|
$
|
10
|
|
|
Touchstone Value Fund
|
|
|
75
|
|
AFFILIATED INVESTMENTS
Each Fund may invest in the Touchstone
Institutional Money Market Fund, subject to compliance with several conditions set forth in an exemptive order received by the
Trust from the SEC. To the extent that the Funds are invested in the Touchstone Institutional Money Market Fund, the Advisor and
Administrator will be paid additional fees from the Touchstone Institutional Money Market Fund that will not be waived or reimbursed.
A summary of each Fund’s investment, as applicable, in
the Touchstone Institutional Money Market Fund for the six months ended December 31, 2013, is as follows:
|
|
|
Share Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
Value
|
|
|
|
|
06/30/13
|
|
|
Purchases
|
|
|
Sales
|
|
|
12/31/13
|
|
|
Dividends
|
|
|
12/31/13
|
|
|
Capital Growth Fund
|
|
|
1,639,168
|
|
|
|
13,457,388
|
|
|
|
(13,695,188
|
)
|
|
|
1,401,368
|
|
|
$
|
133
|
|
|
$
|
1,401,368
|
|
|
International Small Cap Fund
|
|
|
699,197
|
|
|
|
24,516,940
|
|
|
|
(22,503,342
|
)
|
|
|
2,712,795
|
|
|
|
149
|
|
|
|
2,712,795
|
|
|
Mid Cap Value Opportunities Fund
|
|
|
7,005,605
|
|
|
|
35,531,496
|
|
|
|
(42,537,101
|
)
|
|
|
—
|
|
|
|
487
|
|
|
|
—
|
|
|
Small Cap Value Opportunities Fund
|
|
|
2,374,756
|
|
|
|
27,354,265
|
|
|
|
(25,745,720
|
)
|
|
|
3,983,301
|
|
|
|
187
|
|
|
|
3,983,301
|
|
|
Value Fund
|
|
|
8,753,580
|
|
|
|
29,406,632
|
|
|
|
(34,226,941
|
)
|
|
|
3,933,271
|
|
|
|
443
|
|
|
|
3,933,271
|
|
Notes to Financial Statements
(Unaudited) (Continued)
5. Federal Tax Information
Federal income tax —
It is
each Fund’s policy to continue to comply with the special provisions of the Internal Revenue Code applicable to regulated
investment companies. As provided therein, in any fiscal year in which a Fund so qualifies and distributes at least 90% of its
investment company taxable income, the Fund (but not the shareholders) will be relieved of federal income tax on the income distributed.
It is each Fund’s policy to distribute all of its taxable income and accordingly, no provision for income taxes has been
made.
In order to avoid imposition of the excise
tax applicable to regulated investment companies, it is also each Fund’s intention to declare and pay as dividends in each
calendar year at least 98% of its investment company taxable income (earned during the calendar year) and 98.2% of its net realized
capital gains (earned during the twelve months ending October 31) plus undistributed amounts from prior years.
The tax character of distributions paid for the year ended June
30, 2013, period ended June 30, 2012 and year ended March 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
Capital Growth
|
|
|
Small Cap
|
|
|
|
|
Fund
|
|
|
Fund
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2012
|
|
|
From ordinary income
|
|
$
|
218,632
|
|
|
$
|
31,849
|
|
|
$
|
215,362
|
|
|
$
|
1,525,830
|
|
|
$
|
802,324
|
|
|
$
|
1,842,301
|
|
|
Total Distributions
|
|
$
|
218,632
|
|
|
$
|
31,849
|
|
|
$
|
215,362
|
|
|
$
|
1,525,830
|
|
|
$
|
802,324
|
|
|
$
|
1,842,301
|
|
|
|
|
Mid Cap Value
|
|
|
Small Cap Value
|
|
|
|
|
Opportunities
|
|
|
Opportunities
|
|
|
|
|
Fund
|
|
|
Fund
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2012
|
|
|
From ordinary income
|
|
$
|
8,052,985
|
|
|
$
|
627,574
|
|
|
$
|
2,171,072
|
|
|
$
|
1,230,862
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
From long-term capital gains
|
|
$
|
9,165,979
|
|
|
$
|
3,418,930
|
|
|
$
|
11,225,590
|
|
|
$
|
9,185,252
|
|
|
$
|
2,691,474
|
|
|
$
|
5,495,825
|
|
|
Total Distributions
|
|
$
|
17,218,964
|
|
|
$
|
4,046,504
|
|
|
$
|
13,396,662
|
|
|
$
|
10,416,114
|
|
|
$
|
2,691,474
|
|
|
$
|
5,495,825
|
|
|
|
|
Value
|
|
|
|
|
Fund
|
|
|
|
|
Year Ended
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2012
|
|
|
From ordinary income
|
|
$
|
9,968,846
|
|
|
$
|
1,228,217
|
|
|
$
|
2,287,808
|
|
|
From long-term capital gains
|
|
|
5,851,644
|
|
|
|
—
|
|
|
|
—
|
|
|
Total Distributions
|
|
$
|
15,820,490
|
|
|
$
|
1,228,217
|
|
|
$
|
2,287,808
|
|
The following information is computed on a tax basis for each
item as of June 30, 2013:
|
|
|
|
|
|
International
|
|
|
Mid Cap Value
|
|
|
|
|
Capital
|
|
|
Small Cap
|
|
|
Opportunities
|
|
|
|
|
Growth Fund
|
|
|
Fund
|
|
|
Fund
|
|
|
Tax cost of portfolio investments
|
|
$
|
120,067,429
|
|
|
$
|
96,698,381
|
|
|
$
|
113,824,625
|
|
|
Gross unrealized appreciation
|
|
|
54,949,721
|
|
|
|
18,909,364
|
|
|
|
18,688,220
|
|
|
Gross unrealized depreciation
|
|
|
(1,124,224
|
)
|
|
|
(2,709,768
|
)
|
|
|
(3,061,173
|
)
|
|
Net portfolio unrealized appreciation (depreciation)
|
|
|
53,825,497
|
|
|
|
16,199,596
|
|
|
|
15,627,047
|
|
|
Net other unrealized appreciation (depreciation)
|
|
|
—
|
|
|
|
(6,612
|
)
|
|
|
—
|
|
|
Accumulated capital and other losses
|
|
|
(24,221,746
|
)
|
|
|
(26,090,771
|
)
|
|
|
(3,299,947
|
)
|
Notes to Financial Statements
(Unaudited) (Continued)
|
|
|
|
|
|
International
|
|
|
Mid Cap Value
|
|
|
|
|
Capital
|
|
|
Small Cap
|
|
|
Opportunities
|
|
|
|
|
Growth Fund
|
|
|
Fund
|
|
|
Fund
|
|
|
Post-October and qualified late-year losses
|
|
|
(309,640
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Undistributed Ordinary Income
|
|
|
67,522
|
|
|
|
1,229,932
|
|
|
|
—
|
|
|
Undistributed long-term capital gains
|
|
|
—
|
|
|
|
—
|
|
|
|
10,145,290
|
|
|
Accumulated earnings (deficit)
|
|
$
|
29,361,633
|
|
|
$
|
(8,667,855
|
)
|
|
$
|
22,472,390
|
|
|
|
|
Small Cap Value
|
|
|
|
|
|
|
|
Opportunities
|
|
|
Value
|
|
|
|
|
Fund
|
|
|
Fund
|
|
|
Tax cost of portfolio investments
|
|
$
|
100,433,155
|
|
|
$
|
280,563,947
|
|
|
Gross unrealized appreciation
|
|
|
19,185,061
|
|
|
|
63,763,179
|
|
|
Gross unrealized depreciation
|
|
|
(3,628,559
|
)
|
|
|
(2,869,684
|
)
|
|
Net unrealized appreciation (depreciation)
|
|
|
15,556,502
|
|
|
|
60,893,495
|
|
|
Accumulated capital and other losses
|
|
|
(1,829,031
|
)
|
|
|
(35,330,432
|
)
|
|
Undistributed ordinary income
|
|
|
6,545,981
|
|
|
|
—
|
|
|
Undistributed long-term capital gains
|
|
|
7,601,239
|
|
|
|
—
|
|
|
Accumulated earnings (deficit)
|
|
$
|
27,874,691
|
|
|
$
|
25,563,063
|
|
The difference between the tax cost of portfolio investments
and the financial statement cost is primarily due to wash sale loss deferrals and passive foreign investment company (“PFIC”)
adjustments.
As of June 30, 2013, the Funds had the following capital loss
carryforwards for federal income tax purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
|
|
|
No
|
|
|
|
|
|
|
|
Short Term Expiring On
|
|
|
Expiration
|
|
|
Expiration
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
Short Term*
|
|
|
Long Term*
|
|
|
Total
|
|
|
Capital Growth Fund**
|
|
$
|
5,765,572
|
|
|
$
|
3,960,100
|
|
|
$
|
14,496,074
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,221,746
|
|
|
International Small Cap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund**
|
|
|
10,436,336
|
|
|
|
4,523,327
|
|
|
|
4,884,304
|
|
|
|
—
|
|
|
|
6,246,804
|
|
|
|
—
|
|
|
|
26,090,771
|
|
|
Mid Cap Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opportunities Fund**
|
|
|
—
|
|
|
|
—
|
|
|
|
3,299,947
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,299,947
|
|
|
Small Cap Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opportunities Fund**
|
|
|
1,829,031
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,829,031
|
|
|
Value Fund**,^
|
|
|
—
|
|
|
|
—
|
|
|
|
31,829,885
|
|
|
|
3,500,547
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,330,432
|
|
*The Regulated Investment Company Modernization
Act of 2010 (the “Act”) was enacted on December 22, 2010. The Act makes changes to several tax rules impacting the
Funds. The provisions of the Act were effective for the Funds’ since the fiscal year ended June 30, 2012. Although the Act
provides several benefits, including the unlimited carryover of future capital losses, there may be a greater likelihood that all
or a portion of each Fund’s pre-enactment capital loss carryovers may expire without being utilized due to the fact that
post-enactment capital losses must be utilized before pre-enactment capital loss carryovers may be utilized. Under the Act, new
capital losses may now be carried forward indefinitely, and retain the character of the original loss as compared with pre-enactment
law, where capital losses could be carried forward for up to eight years, and carried forward as short-term capital losses, irrespective
of the character of the original loss.
**Utilization may be limited by current income tax regulations.
^ Value Fund’s ability to utilize the capital loss
carryforwards is limited, under Internal Revenue Services regulations. $25,021,131 was written off due to limitations.
The capital loss carryforwards may be utilized in future years
to offset net realized capital gains, if any, prior to distributing such gains to shareholders.
The Funds have analyzed their tax positions
taken on federal income tax returns for all open tax years (tax years ended March 31, 2010 through June 30, 2013) and have concluded
that no provision for income tax is required in their financial statements.
Notes to Financial Statements
(Unaudited) (Continued)
As of December 31, 2013, the Trust had the following federal
tax cost resulting in net unrealized appreciation (depreciation) as follow:
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
|
Federal Tax
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Appreciation
|
|
|
Fund
|
|
Cost
|
|
|
Appreciation
|
|
|
Depreciation
|
|
|
(Depreciation)
|
|
|
Capital Growth Fund
|
|
$
|
123,987,051
|
|
|
$
|
80,153,198
|
|
|
$
|
(631,308
|
)
|
|
$
|
79,521,890
|
|
|
International Small Cap Fund
|
|
|
107,666,320
|
|
|
|
34,863,210
|
|
|
|
(1,334,026
|
)
|
|
|
33,529,184
|
|
|
Mid Cap Value Opportunities Fund
|
|
|
155,768,967
|
|
|
|
6,876,735
|
|
|
|
(1,570,732
|
)
|
|
|
5,306,003
|
|
|
Small Cap Value Opportunities Fund
|
|
|
117,881,292
|
|
|
|
32,447,913
|
|
|
|
(2,495,847
|
)
|
|
|
29,952,066
|
|
|
Value Fund
|
|
|
271,269,644
|
|
|
|
98,858,874
|
|
|
|
(245,986
|
)
|
|
|
98,612,888
|
|
6. Commitments and Contingencies
The Funds indemnify the Trust’s
officers and Trustees for certain liabilities that might arise from their performance of their duties to the Funds.
Additionally, in the normal course of business, the Funds enter into contracts that contain a variety of representations and
warranties and which provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown,
as this would involve future claims that may be made against the Funds. However, based on experience, the Funds expect the
risk of loss to be remote.
7. Risks Associated with Foreign Investments
Some of the Funds may invest in the securities
of foreign issuers. Investing in securities issued by companies whose principal business activities are outside the U.S. may involve
significant risks not present in domestic investments. For example, there is generally less publicly available information about
foreign companies, particularly those not subject to the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice
comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitations on the removal of funds
or other assets of the Fund, political or financial instability or diplomatic and other developments which could affect such investments.
Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the U.S., and securities
of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities
of comparable U.S. companies. In general, there is less overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the U.S.
8 Risks Associated with Concentration
Certain funds may invest a high percentage
of their assets in specific sectors of the market in order to achieve a potentially greater investment return. As a result, the
Funds may be more susceptible to economic, political, and regulatory developments in a particular sector of the market, positive
or negative, and may experience increased volatility on the Fund’s NAV and magnified effect on the total return.
9. Fund Mergers
At a meeting held on March 13, 2012, the
Board of Trustees of the Trust approved an Agreement and Plan of Reorganization (the “Plan”) providing for the transfer
of all assets and liabilities of the Fifth Third Disciplined Large Cap Value Fund and the Fifth Third All Cap Value Fund (each,
an “Acquired Fund”), each a series of the Fifth Third Funds (“Fifth Third”), to the Touchstone Value Fund,
(the “Acquiring Fund”). The tax-free mergers took place on September 10, 2012.
Notes to Financial Statements
(Unaudited) (Continued)
The following is a summary of shares outstanding, net assets,
net asset value per share, and unrealized appreciation immediately before and after the reorganization:
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
Before Reorganization
|
|
|
Reorganization
|
|
|
|
|
Fifth Third
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disciplined
|
|
|
Fifth Third
|
|
|
Touchstone
|
|
|
Touchstone
|
|
|
|
|
Large Cap
|
|
|
All Cap
|
|
|
Value
|
|
|
Value
|
|
|
|
|
Value Fund
|
|
|
Value Fund
|
|
|
Fund
|
|
|
Fund
|
|
|
Class A *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
1,419,797
|
(A)
|
|
|
3,514,789
|
(B)
|
|
|
245,017
|
|
|
|
5,179,603
|
|
|
Net Assets
|
|
$
|
10,274,502
|
|
|
$
|
25,435,080
|
|
|
$
|
1,773,081
|
|
|
$
|
37,482,663
|
|
|
Net Asset Value
|
|
$
|
7.24
|
(A)
|
|
$
|
7.24
|
(B)
|
|
$
|
7.24
|
|
|
$
|
7.24
|
|
|
Class C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
39,232
|
(C)
|
|
|
341,354
|
(D)
|
|
|
366
|
|
|
|
380,953
|
|
|
Net Assets
|
|
$
|
283,871
|
|
|
$
|
2,469,899
|
|
|
$
|
2,651
|
|
|
$
|
2,756,421
|
|
|
Net Asset Value
|
|
$
|
7.24
|
(C)
|
|
$
|
7.24
|
(D)
|
|
$
|
7.24
|
|
|
$
|
7.24
|
|
|
Class Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
20,691,815
|
(E)
|
|
|
5,255,988
|
(F)
|
|
|
6,754,404
|
|
|
|
32,702,207
|
|
|
Net Assets
|
|
$
|
150,150,006
|
|
|
$
|
38,140,140
|
|
|
$
|
49,013,423
|
|
|
$
|
237,303,569
|
|
|
Net Asset Value
|
|
$
|
7.26
|
(E)
|
|
$
|
7.26
|
(F)
|
|
$
|
7.26
|
|
|
$
|
7.26
|
|
|
Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
—
|
|
|
|
—
|
|
|
|
10,340,227
|
|
|
|
10,340,227
|
|
|
Net Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
74,892,668
|
|
|
$
|
74,892,668
|
|
|
Net Asset Value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.24
|
|
|
$
|
7.24
|
|
|
Fund Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding
|
|
|
13,906,702
|
|
|
|
3,991,534
|
|
|
|
17,340,014
|
|
|
|
48,602,989
|
|
|
Net Assets
|
|
$
|
160,708,379
|
|
|
$
|
66,045,119
|
|
|
$
|
125,681,823
|
|
|
$
|
352,435,321
|
|
|
Unrealized Depreciation
|
|
$
|
(13,753,975
|
)
|
|
$
|
(7,038,724
|
)
|
|
$
|
(28,894,804
|
)
|
|
$
|
(49,687,503
|
)
|
|
|
(A)
|
Reflects a 1.5919:1 reverse stock split on Class A
Shares and a 1.6123:1 reverse stock split on Class B Shares which occurred on the date of reorganization, September 10, 2012.
|
|
|
(B)
|
Reflects a 2.2762:1 reverse stock split on Class A
Shares and a 2.1413:1 reverse stock split on Class B Shares which occurred on the date of reorganization, September 10, 2012.
|
|
|
(C)
|
Reflects a 1.5725:1 reverse stock split which occurred
on the date of reorganization, September 10, 2012.
|
|
|
(D)
|
Reflects a 2.1338:1 reverse stock split which occurred
on the date of reorganization, September 10, 2012.
|
|
|
(E)
|
Reflects a 1.5929:1 reverse stock split which occurred
on the date of reorganization, September 10, 2012.
|
|
|
(F)
|
Reflects a 2.3023:1 reverse stock split which occurred
on the date of reorganization, September 10, 2012.
|
|
|
*
|
The Acquired Funds had Class B shares outstanding
immediately prior to the reorganization, which were exchanged for Class A shares of the Acquiring Fund.
|
Assuming the reorganization had been completed on July 1, 2012,
the results of operations for the Value Fund for the year ended June 30, 2013 would have been as follows:
|
|
|
Touchstone
|
|
|
|
|
Value
|
|
|
|
|
Fund
|
|
|
Net investment income
|
|
$
|
7,031,003
|
|
|
Net realized and unrealized gain on investments
|
|
$
|
87,588,530
|
|
|
Net increase in asset from operations
|
|
$
|
94,619,533
|
|
10. Litigation
In January 2012, the Old Mutual Mid-Cap
Fund (which reorganized into the TS&W Mid-Cap Value Fund in March 2009 and reorganized into the Touchstone Mid Cap Value Opportunities
Fund in April 2012) was served with a summons and complaint in an action brought by Edward S. Weisfelner, as Trustee of the LB
Notes to Financial Statements
(Unaudited) (Continued)
Creditor Trust, in the case captioned
Weisfelner v. Fund 1, et al. (U.S. Bankruptcy Court, Southern District of New York, Adv. Pro No. 10-4609) (the
“Action”). The Action alleges that, under state law, all payments made to shareholders in the December 2007
leveraged buyout of Lyondell Chemical Company were made, by means of intentional and constructive fraudulent transfer and
seeks to recover all those payments. The amount sought to be disgorged is what the Fund received in payments in connection
with the leveraged buyout, $3,784,800. The Fund (along with thousands of other defendants) has filed a joinder to the
currently pending motion to dismiss and awaits the court’s ruling on that motion. The path the litigation will follow
(including whether it will proceed at all) depends on the outcome of that ruling; it is uncertain when that ruling will come
down, however. At this nascent stage of the litigation, it is not possible to assess likely outcome. The Fund is currently
assessing the case and has not yet determined the potential effect, if any, on its net asset value.
11. Subsequent Events
At a joint meeting of the Board of
Trustees (the “Board”) of Touchstone Strategic Trust (“TST”) and Touchstone Funds Group Trust
(“TFGT”), held on November 21, 2013, the Board, approved a reorganization of the Touchstone Mid Cap Value
Opportunities Fund (the “Mid Cap Value Opportunities Fund”), a series of TST, into the Touchstone Mid Cap Value
Fund (the “Mid Cap Value Fund”), a series of TFGT, pursuant to an agreement and plan of reorganization. The Mid
Cap Value Opportunities Fund will liquidate by transferring substantially all of its assets and liabilities to the Mid Cap
Value Fund. The reorganization is expected to occur on or about March 24, 2014.
Other Items
(Unaudited)
Proxy Voting Guidelines
The Sub-Advisors are responsible for exercising
the voting rights associated with the securities purchased and held by the Funds. A description of the policies and procedures
that the Sub-Advisors use in fulfilling this responsibility is available as an appendix to the most recent Statement of Additional
Information, which can be obtained without charge by calling toll free 1.800.543.0407 or by visiting the Touchstone website at
www.touchstoneinvestments.com or on the Securities and Exchange Commission’s (the “Commission”) website www.sec.gov.
Information regarding how those proxies were voted during the most recent twelve-month period ended June 30 is also available without
charge by calling toll free 1.800.543.0407 or on the Commission’s website at www.sec.gov.
Quarterly Portfolio Disclosure
The Trust files a complete listing of portfolio
holdings for each Fund as of the end of the first and third quarters of each fiscal year on Form N-Q. The complete listing (i)
is available on the Commission’s website; (ii) may be reviewed and copied at the Commission’s Public Reference Room
in Washington, DC; (iii) will be made available to shareholders upon request by calling 1.800.543.0407; or (iv) can be obtained
on the Touchstone website at www.touchstoneinvestments.com. Information on the operation of the Public Reference Room may be obtained
by calling 1.800.SEC.0330.
Schedule of Shareholder Expenses
As a shareholder of the Funds, you incur
two types of costs: (1) transaction costs, including reinvested dividends or other distributions; and (2) ongoing costs, including
investment advisory fees; distribution (12b-1) fees; and other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at
the beginning of the period and held for the entire period (July 1, 2013 through December 31, 2013).
Actual Expenses
The first line for each share class of
a Fund in the table below provides information about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading entitled “Expenses Paid During the six months ended December 31, 2013” to estimate the expenses
you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class of
a Fund in the table below provides information about hypothetical account values and hypothetical expenses based on the Funds’
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 balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in
the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the second line of the table below 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.
Other Items
(Unaudited)
(Continued)
Schedule of Shareholder Expenses (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Net Expense
|
|
|
Beginning
|
|
|
Ending
|
|
|
Paid During
|
|
|
|
|
|
|
|
Ratio
|
|
|
Account
|
|
|
Account
|
|
|
the Six Months
|
|
|
|
|
|
|
|
Annualized
|
|
|
Value
|
|
|
Value
|
|
|
Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
July 1,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2013
|
|
|
2013
|
|
|
2013
|
|
|
2013*
|
|
|
Touchstone Capital Growth Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Actual
|
|
|
|
1.25
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,217.30
|
|
|
$
|
6.99
|
|
|
Class A
|
|
|
Hypothetical
|
|
|
|
1.25
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,018.90
|
|
|
$
|
6.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C
|
|
|
Actual
|
|
|
|
2.00
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,213.30
|
|
|
$
|
11.16
|
|
|
Class C
|
|
|
Hypothetical
|
|
|
|
2.00
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,015.12
|
|
|
$
|
10.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class Y
|
|
|
Actual
|
|
|
|
1.00
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,219.00
|
|
|
$
|
5.59
|
|
|
Class Y
|
|
|
Hypothetical
|
|
|
|
1.00
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,020.16
|
|
|
$
|
5.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
Actual
|
|
|
|
0.90
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,219.60
|
|
|
$
|
5.04
|
|
|
Institutional Class
|
|
|
Hypothetical
|
|
|
|
0.90
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,020.67
|
|
|
$
|
4.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Touchstone International Small Cap Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Actual
|
|
|
|
1.55
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,186.10
|
|
|
$
|
8.54
|
|
|
Class A
|
|
|
Hypothetical
|
|
|
|
1.55
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,017.39
|
|
|
$
|
7.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C
|
|
|
Actual
|
|
|
|
2.30
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,182.00
|
|
|
$
|
12.65
|
|
|
Class C
|
|
|
Hypothetical
|
|
|
|
2.30
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,013.61
|
|
|
$
|
11.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class Y
|
|
|
Actual
|
|
|
|
1.23
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,187.70
|
|
|
$
|
6.78
|
|
|
Class Y
|
|
|
Hypothetical
|
|
|
|
1.23
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,019.00
|
|
|
$
|
6.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
Actual
|
|
|
|
1.05
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,189.30
|
|
|
$
|
5.79
|
|
|
Institutional Class
|
|
|
Hypothetical
|
|
|
|
1.05
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,019.91
|
|
|
$
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Touchstone Mid Cap Value Opportunities Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Actual
|
|
|
|
1.29
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,141.30
|
|
|
$
|
6.96
|
|
|
Class A
|
|
|
Hypothetical
|
|
|
|
1.29
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,018.70
|
|
|
$
|
6.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C
|
|
|
Actual
|
|
|
|
2.04
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,136.30
|
|
|
$
|
10.98
|
|
|
Class C
|
|
|
Hypothetical
|
|
|
|
2.04
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,014.92
|
|
|
$
|
10.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class Y
|
|
|
Actual
|
|
|
|
1.00
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,143.80
|
|
|
$
|
5.40
|
|
|
Class Y
|
|
|
Hypothetical
|
|
|
|
1.00
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,020.16
|
|
|
$
|
5.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
Actual
|
|
|
|
0.89
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,143.50
|
|
|
$
|
4.81
|
|
|
Institutional Class
|
|
|
Hypothetical
|
|
|
|
0.89
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,020.72
|
|
|
$
|
4.53
|
|
Other Items
(Unaudited)
(Continued)
Schedule of Shareholder Expenses (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Net Expense
|
|
|
Beginning
|
|
|
Ending
|
|
|
Paid During
|
|
|
|
|
|
|
|
Ratio
|
|
|
Account
|
|
|
Account
|
|
|
the Six Months
|
|
|
|
|
|
|
|
Annualized
|
|
|
Value
|
|
|
Value
|
|
|
Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
July 1,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2013
|
|
|
2013
|
|
|
2013
|
|
|
2013*
|
|
|
Touchstone Small Cap Value Opportunities Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Actual
|
|
|
|
1.50
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,254.40
|
|
|
$
|
8.52
|
|
|
Class A
|
|
|
Hypothetical
|
|
|
|
1.50
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,017.64
|
|
|
$
|
7.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C
|
|
|
Actual
|
|
|
|
2.25
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,250.70
|
|
|
$
|
12.76
|
|
|
Class C
|
|
|
Hypothetical
|
|
|
|
2.25
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,013.86
|
|
|
$
|
11.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class Y
|
|
|
Actual
|
|
|
|
1.18
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,256.80
|
|
|
$
|
6.71
|
|
|
Class Y
|
|
|
Hypothetical
|
|
|
|
1.18
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,019.26
|
|
|
$
|
6.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
Actual
|
|
|
|
1.10
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,257.30
|
|
|
$
|
6.26
|
|
|
Institutional Class
|
|
|
Hypothetical
|
|
|
|
1.10
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,019.66
|
|
|
$
|
5.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Touchstone Value Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Actual
|
|
|
|
1.05
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,136.00
|
|
|
$
|
5.65
|
|
|
Class A
|
|
|
Hypothetical
|
|
|
|
1.05
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,019.91
|
|
|
$
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C
|
|
|
Actual
|
|
|
|
1.80
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,130.80
|
|
|
$
|
9.67
|
|
|
Class C
|
|
|
Hypothetical
|
|
|
|
1.80
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,016.13
|
|
|
$
|
9.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class Y
|
|
|
Actual
|
|
|
|
0.80
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,136.90
|
|
|
$
|
4.31
|
|
|
Class Y
|
|
|
Hypothetical
|
|
|
|
0.80
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,021.17
|
|
|
$
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class
|
|
|
Actual
|
|
|
|
0.67
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,138.00
|
|
|
$
|
3.61
|
|
|
Institutional Class
|
|
|
Hypothetical
|
|
|
|
0.67
|
%
|
|
$
|
1,000.00
|
|
|
$
|
1,021.83
|
|
|
$
|
3.41
|
|
* Expenses are equal to the Fund's annualized expense ratio,
multiplied by the average account value over the period, multiplied by [184/365] (to reflect the one-half year period).
Advisory and Sub-Advisory Agreement Approval Disclosure
At a meeting held on November 21,
2013, the Board of Trustees (the “Board” or “Trustees”) of the Touchstone Strategic Trust (the
“Trust”), and by a separate vote, the Independent Trustees of theTrust, approved the continuance of the
Investment Advisory Agreement between the Trust and the Advisor with respect to each Fund of the Trust, and the continuance
of the Sub-Advisory Agreement between the Advisor and each Fund’s respective Sub-Advisor with the exception of the
Sub-Advisory Agreements relating to Touchstone Capital Growth Fund and Touchstone Mid Cap Value Opportunities Fund. The
Sub-Advisory Agreement relating to Touchstone Capital Growth Fund was not up for renewal because it had been approved in
November 2012 for an initial two-year period. Also at the November 21, 2013 meeting, the Board, and by a separate vote, the
Independent Trustees initially approved a new Sub-Advisory Agreement between the Advisor and Lee Munder Capitol Group, LLC
(“Lee Munder”) relating to Touchstone Mid Cap Value Opportunities (the “New Sub-Advisory
Agreement”).
In determining whether to approve the
continuation of the Investment Advisory Agreement and the Sub-Advisory Agreements and the New Sub-Advisory Agreement, the
Advisor furnished information necessary for a majority of the Independent Trustees to make the determination that the
continuance of the Investment Advisory Agreement and each Sub-Advisory Agreement and the initial approval of the New
Sub-Advisory Agreement were in the best interests of the respective Funds and their shareholders. The information provided to
the Board included:
Other Items
(Unaudited)
(Continued)
(1) industry data comparing advisory fees
and expense ratios of comparable investment companies; (2) comparative performance information; (3) the Advisor’s and its
affiliates’ revenues and costs of providing services to the Funds; and (4) information about the Advisor’s, Sub-Advisors’
and Lee Munder’s personnel. Prior to voting, the Independent Trustees reviewed the proposed continuance of the Investment
Advisory Agreement and the Sub-Advisory Agreements and the proposed approval of the New Sub-Advisory Agreement with management
and experienced independent legal counsel and received materials from such counsel discussing the legal standards for their consideration
of the proposed continuation of the Investment Advisory Agreement and each Sub-Advisory Agreement and the proposed approval of
the New Sub-Advisory Agreement. The Independent Trustees also reviewed the proposed continuation of the Investment Advisory Agreement
and each Sub-Advisory Agreement and the proposed approval of the New Sub-Advisory Agreement with independent legal counsel in private
sessions at which no representatives of management were present.
In approving the Funds’ Investment
Advisory Agreement, the Board considered various factors, among them: (1) the nature, extent and quality of services provided to
the Funds, including the personnel providing such services; (2) the Advisor’s compensation and profitability; (3) a comparison
of fees and performance with other advisers; (4) economies of scale; and (5) the terms of the Investment Advisory Agreement. The
Board’s analysis of these factors is set forth below. The Independent Trustees were advised by independent legal counsel
throughout the process.
Nature, Extent and Quality of Advisor
Services
. The Board considered the level and depth of knowledge of the Advisor, including the professional experience and qualifications
of senior personnel. In evaluating the quality of services provided by the Advisor, the Board took into account its familiarity
with the Advisor’s senior management through Board meetings, discussions and reports during the preceding year. The Board
also took into account the Advisor’s compliance policies and procedures. The quality of administrative and other services,
including the Advisor’s role in coordinating the activities of the Funds’ other service providers, was also considered.
The Board also considered the Advisor’s relationship with its affiliates and the resources available to them, as well as
any potential conflicts of interest.
The Board discussed the Advisor’s
effectiveness in monitoring the performance of each Sub-Advisor, and the Advisor’s timeliness in responding to performance
issues. The Board considered the Advisor’s process for monitoring each of the Sub-Advisors, which includes an examination
of both qualitative and quantitative elements of the Sub-Advisor’s organization, personnel, procedures, investment discipline,
infrastructure and performance. The Board considered that the Advisor conducts regular on-site compliance visits with each Sub-Advisor,
during which the Advisor examines a wide variety of factors, such as the financial condition of the Sub-Advisor, the quality of
the Sub-Advisor’s systems, the effectiveness of the Sub-Advisor’s disaster recovery programs, trade allocation and
execution procedures, compliance with the Sub-Advisor’s policies and procedures, results of regulatory examinations and any
other factors that might affect the quality of services that the Sub-Advisor provides to the applicable Fund. The Board noted that
the Advisor’s compliance monitoring processes also include quarterly reviews of compliance reports, and that any issues arising
from such reports and the Advisor’s compliance visits to the Sub-Advisors are reported to the Board.
The Trustees concluded that they were satisfied with the nature,
extent and quality of services provided to each Fund by the Advisor under the Investment Advisory Agreement.
Advisor’s Compensation and
Profitability
. The Board took into consideration the financial condition and profitability of the Advisor and its
affiliates and the direct and indirect benefits derived by the Advisor and its affiliates from the Advisor’s
relationship with the Funds. The information considered by the Board included operating profit margin information for the
Advisor’s business as a whole. The Board noted that the Advisor had waived a portion of advisory fees and
administrative fees and/or reimbursed expenses in order to limit the Funds’ net operating expenses. The Board also
noted that the Advisor pays the Sub-Advisors’ sub-advisory fees out of
Other Items
(Unaudited)
(Continued)
the advisory fees the Advisor
receives from the Funds. The Board reviewed the profitability of the Advisor’s relationship with the Funds both before
and after tax expenses, and also considered whether the Advisor has the financial wherewithal to continue to provide services
to the Funds, noting the ongoing commitment of the Advisor’s parent company with respect to providing support and
resources as needed. The Board also considered that the Funds’ distributor, an affiliate of the Advisor, receives Rule
12b-1 distribution fees from the Funds and receives a portion of the sales charges on sales or redemptions of certain classes
of shares. The Board also noted that the Advisor derives benefits to its reputation and other benefits from its association
with the Funds.
The Board recognized that the Advisor should
be entitled to earn a reasonable level of profits in exchange for the level of services it provides to each Fund and the entrepreneurial
risk that it assumes as Advisor. Based upon their review, the Trustees concluded that the Advisor’s and its affiliates’
level of profitability, if any, from their relationship with each Fund was reasonable and not excessive.
Expenses and Performance
. The Board
compared the respective advisory fees and total expense ratios for each of the Funds with various comparative data, including the
median and average advisory fees and total expense ratios of each Fund’s respective peer group. The Board also considered,
among other data, the Funds’ respective performance results during the six-month, twelve-month and thirty-six-month periods
ended June 30, 2013 and noted that the Board reviews on a quarterly basis detailed information about each Fund’s performance
results, portfolio composition and investment strategies. The Board also took into account current market conditions and their
effect on the Funds’ performance.
The Board also considered the effect of
each Fund’s growth and size on its performance and expenses. The Board noted that the Advisor had waived a portion of the
fees and/or reimbursed expenses of the Funds in order to reduce those Funds’ respective operating expenses to targeted levels.
The Board noted that the sub-advisory fees under the Sub-Advisory Agreement with respect to each Fund were paid by the Advisor
out of the advisory fees it receives from the Fund and considered the impact of such sub-advisory fees on the profitability of
the Advisor. In reviewing the respective expense ratios and performance of each of the Funds, the Board also took into account
the nature, extent and quality of the services provided to the Funds by the Advisor and its affiliates.
The Board considered, among other data, the specific factors
and related conclusions set forth below with respect to each Fund:.
Touchstone Capital Growth Fund
.
The Fund’s advisory fee and total expense ratio (net of applicable expense waivers and reimbursements) were at the median
of its peer group. The Board noted that the Advisor was currently waiving a portion of the Fund’s fees. The Fund’s
performance for the six-month period ended June 30, 2013 was in the 5
th
quintile of its peer group. The Fund’s
performance for the twelve- and thirty-six-month periods ended June 30, 2013 was in the 4
th
quintile of its peer group.
The Board noted management’s discussion of the Fund’s performance, management’s continued monitoring of the
Fund and its plans with respect to the Fund. Based upon their review, the Trustees concluded that appropriate action was being
taken to address the Fund’s performance, and that the advisory fee was reasonable in light of the services received by the
Fund from the Advisor and the other factors considered.
Touchstone International Small Cap
Fund
. The Fund’s advisory fee and total expense ratio (net of applicable expense waivers and reimbursements) were below
the median of its peer group. The Board noted that the Advisor was currently waiving a portion of the Fund’s fees. The Fund’s
performance for the six- and twelve-month periods ended June 30, 2013 was in the 2
nd
quintile of its peer group. The
Fund’s performance for the thirty-six-month period ended June 30, 2013 was in the 4
th
quintile of its peer group.
The Board noted management’s discussion of the Fund’s performance and management’s continued monitoring of the
Fund. Based upon their review,
Other Items
(Unaudited)
(Continued)
the Trustees concluded appropriate action
was being taken to address the Fund’s performance, and that the advisory fee was reasonable in light of the services received
by the Fund from the Advisor and the other factors considered.
Touchstone Mid Cap Value Opportunities
Fund
. The Fund’s advisory fee and total expense ratio (net of applicable expense waivers and reimbursements) were above
the median and at the median of its peer group, respectively. The Board noted that the Advisor was currently waiving a portion
of the Fund’s fees. The Fund’s performance for the six-, twelve- and thirty-six-month periods ended June 30, 2013
was in the 1st quintile of its peer group. The Board took into account the pending resignation of the Fund’s current sub-advisor
and that the Advisor was recommending that the Fund be merged into the Touchstone Mid Cap Value Fund in 2014 and that Lee Munder
manage the combined fund using the investment strategies it currently uses to manage the Touchstone Mid Cap Value Fund. The Board
also reviewed the performance of the Touchstone Mid Cap Value Fund. The Touchstone Mid Cap Value Fund’s performance for
the six- and twelve-month periods ended June 30, 2013 was in the 3rd quintile, while its performance for the thirty-six month
period ended June 30, 2013 was in the 4th quintile. Based upon their review, the Trustees concluded that the replacement of the
Fund’s current sub-advisor by Lee Munder was appropriate given the comparative performance records of the Fund and Touchstone
Mid Cap Value Fund, and that the advisory fee was reasonable in light of the services received by the Fund from the Advisor and
the other factors considered.
Touchstone Small Cap Value Opportunities
Fund
. The Fund’s advisory fee and total expense ratio (net of applicable expense waivers and reimbursements) were above
the median of its peer group. The Board noted that the Advisor was currently waiving a portion of the Fund’s fees. The Fund’s
performance for the six-month period ended June 30, 2013 was in the 2
nd
quintile of its peer group. The Fund’s
performance for the twelve-month period ended June 30, 2013 was in the 3
rd
quintile of its peer group, and the Fund’s
performance for the thirty-six-month period ended June 30, 2013 was in the 4
th
quintile of its peer group. The Board
noted management’s discussion of the Fund’s performance, including its relatively strong recent performance. Based
upon their review, the Trustees concluded that the Fund’s overall performance was satisfactory relative to the performance
of funds with similar investment objectives and relevant indices, and that the advisory fee was reasonable in light of the services
received by the Fund from the Advisor and the other factors considered.
Touchstone Value Fund
. The Fund’s
advisory fee and total expense ratio (net of applicable expense waivers and reimbursements) were above the median and below the
median of its peer group, respectively. The Board noted that the Advisor was currently waiving a portion of the Fund’s fees.
The Fund’s performance for the six- and thirty-six-month periods ended June 30, 2013 was in the 2
nd
quintile
of its peer group. The Fund’s performance for the twelve-month period ended June 30, 2013 was in the 3
rd
quintile
of its peer group. Based upon their review, the Trustees concluded that the Fund’s overall performance was satisfactory
relative to the performance of funds with similar investment objectives and relevant indices, and that the advisory fee was reasonable
in light of the services received by the Fund from the Advisor and the other factors considered
Economies of Scale
. The Board
considered the effect of each Fund’s current size and potential growth on its performance and expenses. The Board took
into account management’s discussion of the Funds’ advisory fee structure. The Board considered the effective
advisory fees under the Investment Advisory Agreement as a percentage of assets at different asset levels and possible
economies of scale that might be realized if the assets of each Fund increase. The Board noted that the advisory fee
schedules for some of the Funds contain breakpoints that would reduce the respective advisory fee rate on assets above
specified levels as the respective Fund’s assets increased and considered the necessity of adding breakpoints with
respect to the Fund that did not currently have such breakpoints in its advisory fee schedule. The Board determined that
adding breakpoints at specified levels to the advisory fee schedule of the Fund that currently did not have such breakpoints
was not appropriate at that time. The Board also noted that if a Fund’s assets increase over time, the Fund might
realize other economies of scale if assets increase proportionally more than certain other expenses. The Board also
considered the fact
Other Items
(Unaudited)
(Continued)
that, under the Investment Advisory Agreement,
the advisory fee payable to the Advisor by a Fund was reduced by the total sub-advisory fee paid by the Advisor to the Fund’s
Sub-Advisor. With respect to Touchstone Mid Cap Value Opportunities Fund, the Board took into account that if the Fund was merged
with Touchstone Mid Cap Value Fund, that merger was expected to result in greater economies of scale for both Funds following the
merger.
Conclusion
. In considering the
renewal of the Funds’ Investment Advisory Agreement, the Board, including the Independent Trustees, did not identify
any single factor as controlling, and each Trustee may have attributed different weights to the various factors. TheTrustees
evaluated all information available to them on a Fund-by-Fund basis, and their determinations were made separately with
respect to each Fund. The Board reached the following conclusions regarding the Funds’ Investment Advisory Agreement
with the Advisor, among others: (a) the Advisor demonstrated that it possesses the capability and resources to perform the
duties required of it under the Investment Advisory Agreement; (b) the Advisor maintains an appropriate compliance program;
(c) the overall performance of each Fund is satisfactory relative to the performance of funds with similar investment
objectives and relevant indices; or, as discussed above, is being addressed; and (d) each Fund’s advisory fee is
reasonable in light of the services received by the Fund from the Advisor and the other factors considered. Based on their
conclusions, the Trustees determined with respect to each Fund that continuation of the Investment Advisory Agreement was in
the best interests of the Fund and its shareholders.
In approving the
Funds’ respective Sub-Advisory Agreements, the Board considered various factors with respect to each Fund and the
applicable Sub-Advisory Agreement, among them: (1) the nature, extent and quality of services provided to the Fund, including
the personnel providing such services; (2) the Sub-Advisor’s compensation; (3) a comparison of the sub-advisory fee
and performance with other advisers; and (4) the terms of the Sub-Advisory Agreement. With respect to the New
Sub-Advisory Agreement relating to Touchstone Mid CapValue Opportunities, the Board considered, among other factors: (1) the
nature, extent and quality of services to be provided by Lee Munder, including the personnel who would be providing such
services; (2) Lee Munder’s proposed compensation; (3) Lee Munder’s past performance with respect to Touchstone
Mid Cap Value Fund; and (4) the terms of the New Sub-Advisory Agreement. The Board’s analysis of these factors is set
forth below. The Independent Trustees were advised by independent legal counsel throughout the process.
Nature, Extent and Quality of
Services Provided; Investment Personnel
. The Board considered information provided by the Advisor regarding the services
provided by each Sub-Advisor, including information presented periodically throughout the previous year.The Board noted that,
on a periodic basis, the Board meets with portfolio managers of the Sub-Advisors to discuss their respective performance and
investment processes and strategies. With respect to Lee Munder, the Board also noted its familiarity with the firm owing to
Lee Munder’s management of the Touchstone Mid Cap Value Fund. The Board also considered each Sub-Advisor’s level
of knowledge and investment style. The Board reviewed the experience and credentials of the applicable investment personnel
who are responsible for managing the investment of portfolio securities with respect to the Funds. The Board also noted each
Sub-Advisor’s brokerage practices.
Sub-Advisor’s Compensation, Profitability
and Economies of Scale
. The Board also took into consideration the financial condition of each Sub-Advisor, including Lee Munder,
and any indirect benefits derived by each Sub-Advisor and its affiliates from the Sub-Advisor’s relationship with the Funds.
In considering the profitability to each Sub-Advisor of its relationship with the Funds, the Board noted the undertaking of the
Advisor to maintain expense limitations for the Funds and also noted that the sub-advisory fees under the Sub-Advisory Agreements
were paid by the Advisor out of the advisory fees that it receives under the Investment Advisory Agreement and are negotiated at
arm’s-length. As a consequence, the profitability to each Sub-Advisor of its relationship with a Fund was not a substantial
factor in the Board’s deliberations. For similar reasons, the Board did not consider the potential economies of scale in
each Sub-Advisor’s management of the applicable Fund to be a substantial factor in its consideration, although the Board
noted that the sub-advisory fee schedule for some
Other Items
(Unaudited)
(Continued)
of the Funds, including the proposed sub-advisory
fee for the Touchstone Mid Cap Value Opportunities Fund, contained breakpoints that would reduce the sub-advisory fee rate on assets
above specified levels as the applicable Fund’s assets increased.
Sub-Advisory Fees and Fund
Performance
. The Board considered that each Fund pays an advisory fee to the Advisor and that the Advisor pays the
sub-advisory fee to the Sub-Advisor out of the advisory fee it receives from the respective Fund. The Board also compared the
sub-advisory fees paid by the Advisor to fees charged by each Sub-Advisor, including Lee Munder, to manage comparable
institutional separate accounts. The Board considered the amount retained by the Advisor and the sub-advisory fee paid to
each Sub-Advisor with respect to the various services provided by the Advisor and the Sub-Advisor. The Board also noted that
the Advisor negotiated the sub-advisory fee with each of the Sub-Advisors at arm’s-length. The Board reviewed the
sub-advisory fee for each Fund in relation to various comparative data, including the median and average sub-advisory fees of
each Fund’s peer group, and considered the following information:
Touchstone International Small Cap
Fund
. The Fund’s sub-advisory fee was below the median of its peer group. Based upon their review, the Trustees concluded
that the sub-advisory fee was reasonable in light of the services received by the Fund from the Sub-Advisor and the other factors
considered.
Touchstone Mid Cap Value Opportunities
Fund
. The Board took into account that the proposed sub-advisory fee to be paid to Lee Munder by the Advisor under the New
Sub-Advisory Agreement was identical to the current sub-advisory fee Lee Munder was paid for managing the Touchstone Mid Cap Value
Fund. The Touchstone Mid Cap Value Fund’s sub-advisory fee was above the median of its peer group. Based upon their review,
the Trustees concluded that the proposed sub-advisory fee was reasonable in light of the services to be received by the Fund from
Lee Munder.
Touchstone Small Cap Value Opportunities
Fund
. The Fund’s sub-advisory fee was above the median of its peer group. Based upon their review, the Trustees concluded
that the sub-advisory fee was reasonable in light of the services received by the Fund from the Sub-Advisor and the other factors
considered.
Touchstone Value Fund
. The Fund’s
sub-advisory fee was below the median of its peer group. Based upon their review, the Trustees concluded that the sub-advisory
fee was reasonable in light of the services received by the Fund from the Sub-Advisor and the other factors considered.
Conclusion
. In considering the
renewal of the Sub-Advisory Agreement with respect to each Fund and the initial approval of the New Sub-Advisory Agreement
with respect to Touchstone Mid Cap Value Opportunities Fund, the Board, including the Independent Trustees, did not identify
any single factor as controlling, and each Trustee may have attributed different weights to the various factors. The Board
reached the following conclusions regarding each Sub-Advisory Agreement and the New Sub-Advisory Agreement, among others: (a)
the Sub-Advisor is qualified to manage each Fund’s assets in accordance with the Fund’s investment goals and
policies; (b) the Sub-Advisor maintains an appropriate compliance program; (c) the overall performance of each Fund is
satisfactory relative to the performance of funds with similar investment objectives and relevant indices or, as discussed
above, is being addressed; (d) each Fund’s sub-advisory fee is reasonable in light of the services received by the Fund
from the Sub-Advisor and the other factors considered; and (e) the Sub-Advisor’s investment strategies are appropriate
for pursuing the investment goals of each Fund. Based on its conclusions, the Board determined that approval of the
Sub-Advisory Agreement with respect to each Fund and the New Sub-Advisory Agreement with respect to Touchstone Mid Cap Value
Opportunities Fund was in the best interests of the Fund and its shareholders.
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PRIVACY PROTECTION POLICY
We Respect Your Privacy
Thank you for your decision to invest with
us. Touchstone and its affiliates have always placed a high value on the trust and confidence our clients place in us. We believe
that confidence must be earned and validated through time. In today’s world, when technology allows the sharing of information
at light speeds, trust must be reinforced by our sincere pledge to take the steps necessary to ensure that the information you
share with us is treated with respect and confidentiality.
Our Pledge to Our Clients
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We
collect only the information we need to service your account and administer our business.
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We
are committed to keeping your information confidential and we place strict limits and controls on the use and sharing of your
information.
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We
make every effort to ensure the accuracy of your information.
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We Collect the Following Nonpublic Personal Information About
You:
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Information
we receive from you on or in applications or other forms, correspondence, or conversations, including, but not limited to, your
name, address, phone number, social security number, assets, income and date of birth; and
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Information
about your transactions with us, our affiliates, or others, including, but not limited to, your account number and balance, payment
history, parties to transactions, cost basis information, and other financial information.
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Categories of Information We Disclose and Parties to Whom
We Disclose
We do not disclose any nonpublic personal information about
our current or former clients to nonaffiliated third parties, except as required or permitted by law.
We Place Strict Limits and Controls on the Use and Sharing
of Your Information
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We
restrict access to nonpublic personal information about you to authorized employees who need the information to administer your
business.
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We
maintain physical, electronic and procedural safeguards that comply with federal standards to protect this information.
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We
do not disclose any nonpublic personal information about our current or former clients to anyone, except as required or permitted
by law or as described in this document.
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We
will not sell your personal information to anyone.
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We May Provide Information to Service Your Account
Sometimes it is necessary to provide
information about you to various companies such as transfer agents, custodians, broker-dealers and marketing service firms to
facilitate the servicing of your account. These organizations have a legitimate business need to see some of your personal
information in order for us to provide service to you. We may disclose to these various companies the information that we
collect as described above. We require that these companies, including our own subsidiaries and affiliates, strictly maintain
the confidentiality of this information and abide by all applicable laws. Companies within our corporate family that may
receive this information are financial service providers and insurance companies. We do not permit these associated companies
to sell the information for their own purposes, and we never sell our customer information.
This policy is applicable to the following
affiliated companies: Touchstone Funds Group Trust, Touchstone Investment Trust, Touchstone Strategic Trust, Touchstone Tax-Free
Trust, Touchstone Variable Series Trust, Touchstone Institutional Funds Trust, Touchstone Securities, Inc.,* and W&S Brokerage
Services, Inc.
* Touchstone Securities, Inc. serves as the underwriter to
the Touchstone Funds.
A Member of Western & Southern Financial Group
®
The Privacy Protection Policy is not
part of the Semi-Annual Report.
Touchstone Investments
Distributor
Touchstone Securities, Inc.*
303 Broadway
Cincinnati, Ohio 45202-4203 800.638.8194
www.touchstoneinvestments.com
Investment Advisor
Touchstone Advisors, Inc.*
303 Broadway
Cincinnati, Ohio 45202-4203
Transfer Agent
BNY Mellon Investment Servicing (US) Inc.
4400 Computer Drive
Westborough, MA 01581
Shareholder Service
800.543.0407
* A Member of Western & Southern Financial Group
