Note 1 – Organization
Gratry International Growth Fund (the ‘‘Fund’’) was organized as a diversified series of Investment Managers Series Trust, a Delaware statutory trust (the “Trust”) which is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s primary investment objective is to seek long-term capital appreciation. The Fund is authorized to offer two classes of shares, the Investor Class (currently not available for purchase) and the Institutional Class. The Fund commenced investment operations on June 28, 2013.
The shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights as to voting, redemptions, dividends and liquidation, subject to the approval of the Trustees. Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses on investments are allocated to each class of shares in proportion to their relative shares outstanding. Shareholders of a class that bears distribution and service expenses under the terms of a distribution plan have exclusive voting rights to that distribution plan.
Note 2 – Accounting Policies
The following is a summary of the significant accounting policy consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.
(a) Valuation of Investments
The Fund values equity securities at the last reported sale price on the principal exchange or in the principal over the counter (“OTC”) market in which such securities are traded, as of the close of regular trading on the NYSE on the day the securities are being valued or, if there are no sales, at the mean between the last available bid and asked prices on that day. Securities traded on the NASDAQ are valued at the NASDAQ Official Closing Price (“NOCP”). Debt securities are valued at the mean between the last available bid and asked prices for such securities, or if such prices are not available, at the bid price obtained from at least one broker-dealer or at prices for securities of comparable maturity, quality and type. All other types of securities, including restricted securities and securities for which market quotations are not readily available, are valued at fair value as determined in accordance with procedures established in good faith by the Board of Trustees. Short-term securities with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value.
A Fund’s assets are valued at their fair market value. If a market quotation is not readily available for a portfolio security, the security will be valued at fair value (the amount which the Fund might reasonably expect to receive for the security upon its current sale) as determined in good faith by the Fund’s advisor, subject to review and approval by the Valuation Committee, pursuant to procedures adopted by the Board of Trustees. The actions of the Valuation Committee are subsequently reviewed by the Board at its next regularly scheduled board meeting. The Valuation Committee meets as needed. The Valuation Committee is comprised of all the Trustees but action may be taken by any one of the Trustees.
Foreign securities traded in countries outside the U.S. are fair valued by utilizing the quotations of an independent pricing service. The pricing service uses statistical analyses and quantitative models to adjust local prices using factors such as subsequent movement and changes in the prices of indexes, securities and exchange rates in other markets in determining fair value as of the time the Fund calculates the NAVs. The Board reviews the independent third party fair valuation analysis report quarterly.
Gratry International Growth Fund
NOTES TO FINANCIAL STATEMENTS – Continued
November 30, 2013 (Unaudited)
(b) Investment Transactions, Investment Income and Expenses
Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the identified cost basis. Dividend income is recorded net of applicable withholding taxes on the ex-dividend date and interest income is recorded on an accrual basis. Withholding taxes on foreign dividends have been provided for in accordance with the company’s understanding of the applicable country’s tax rules and rates. Discounts or premiums on debt securities are accreted or amortized to interest income over the lives of the respective securities using the effective interest method. Expenses incurred by the Trust with respect to more than one fund are allocated in proportion to the net assets of each fund except where allocation of direct expenses to each fund or an alternative allocation method can be more appropriately made.
(c) Foreign Currency Translation
The Fund’s records are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the reporting period. The currencies are translated into U.S. dollars by using the exchange rates quoted prior to when the Fund’s net asset value is next determined. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions.
The Fund does not isolate that portion of its net realized and unrealized gains and losses on investments resulting from changes in foreign exchange rates from the impact arising from changes in market prices. Such fluctuations are included with net realized and unrealized gain or loss from investments and foreign currency.
Net realized foreign currency transaction gains and losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the differences between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency translation gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rates.
(d) Federal Income Taxes
The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its net investment income and any net realized gains to its shareholders. Therefore, no provision is made for federal income or excise taxes. Due to the timing of dividend distributions and the differences in accounting for income and realized gains and losses for financial statement and federal income tax purposes, the fiscal year in which amounts are distributed may differ from the year in which the income and realized gains and losses are recorded by the Fund.
Accounting for Uncertainty in Income Taxes
(the “Income Tax Statement”) requires an evaluation of tax positions taken (or expected to be taken) in the course of preparing a Fund’s tax returns to determine whether these positions meet a “more-likely-than-not” standard that, based on the technical merits, have a more than fifty percent likelihood of being sustained by a taxing authority upon examination. A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations.
The Income Tax Statement requires management of the Fund to analyze tax positions taken in the prior three open tax years, if any, and tax positions expected to be taken in the Fund’s current tax year, as defined by the IRS statute of limitations for all major jurisdictions, including federal tax authorities and certain state tax authorities. As of and during the period June 28, 2013 (commencement of operations) through November 30, 2013, the Fund did not have a liability for any unrecognized tax benefits. The Fund has no examination in progress and is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
Gratry International Growth Fund
NOTES TO FINANCIAL STATEMENTS – Continued
November 30, 2013 (Unaudited)
(e) Distributions to Shareholders
The Fund will make distributions of net investment income and capital gains, if any, at least annually. Distributions to shareholders are recorded on the ex-dividend date. The amount and timing of distributions are determined in accordance with federal income tax regulations, which may differ from GAAP.
The character of distributions made during the year from net investment income or net realized gain may differ from the characterization for federal income tax purposes due to differences in the recognition of income, expense and gain (loss) items for financial statement and tax purposes. Where appropriate, reclassifications between net asset accounts are made for such differences that are permanent in nature.
Note 3 – Investment Advisory and Other Agreements
The Trust, on behalf of the Fund, entered into an Investment Advisory Agreement (the “Agreement”) with Gratry & Company, LLC (the “Advisor”). Under the terms of the Agreement, the Fund pays a monthly investment advisory fee to the Advisor at the annual rate of 0.70% of the Fund’s average daily net assets. The Advisor has contractually agreed to waive its fees and, if necessary, to absorb expenses of the Fund to ensure that total annual fund operating expenses (excluding, as applicable, taxes, leverage interest, brokerage commissions, dividend expenses on short sales, acquired fund fees and expenses as determined in accordance with Form N-1A, expenses incurred in connection with any merger or reorganization, or extraordinary expenses such as litigation expenses) do not exceed 1.45% and 1.20% of the average daily net assets of the Fund’s Investor Class and Institutional Class shares, respectively, until September 30, 2014.
For the period June 28, 2013 (commencement of operations) through November 30, 2013, the Advisor waived all of its advisory fees and absorbed other expenses totaling $92,674. The Advisor may recover from the Fund fees and/or expenses previously waived and/or absorbed, if the Fund’s expense ratio, including the recovered expenses, falls below the expense limit at which they were waived. The Advisor is permitted to seek reimbursement from the Fund for a period of three fiscal years following the fiscal year in which such reimbursements occurred. At November 30, 2013, the amount of these potentially recoverable expenses was $92,674. The Advisor may recapture all or a portion of this amount no later than May 31, 2017.
IMST Distributors, LLC serves as the Fund’s distributor; UMB Fund Services, Inc. (“UMBFS”), serves as the Fund’s fund accountant and co-administrator; and Mutual Fund Administration Corporation (“MFAC”) serves as the Fund’s other co-administrator. UMBFS also serves as the Fund’s transfer agent and UMB Bank, n.a., an affiliate of UMBFS, serves as the Fund’s custodian.
Certain trustees and officers of the Trust are employees of UMBFS or MFAC. The Fund does not compensate trustees and officers affiliated with the Fund’s co-administrators. For the period June 28, 2013 (commencement of operations) through November 30, 2013, the Fund’s allocated fees incurred for Trustees who are not affiliated with the Fund’s co-administrators are reported on the Statement of Operations.
Cipperman & Co. provides Chief Compliance Officer (“CCO”) services to the Trust. The Fund’s allocated fees incurred for CCO services for the period June 28, 2013 (commencement of operations) through November 30, 2013, are reported on the Statement of Operations.
Gratry International Growth Fund
NOTES TO FINANCIAL STATEMENTS – Continued
November 30, 2013 (Unaudited)
Note 4 – Federal Income Taxes
At November 30, 2013, gross unrealized appreciation and depreciation of investments owned by the Fund, based on cost for federal income tax purposes were as follows:
|
Cost of investments
|
|
$
|
1,155,722
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
83,624
|
|
|
Gross unrealized depreciation
|
|
|
(7,336
|
)
|
|
Net unrealized appreciation on investments
|
|
$
|
76,288
|
|
Note 5 – Redemption Fees
The Fund may impose a redemption fee of 1.00% of the total redemption amount on all shares redeemed within 30 days of purchase. For for the period June 28, 2013 (commencement of operations) through November 30, 2013, the Fund received $0 in redemption fees.
Note 6 –
Investment Transactions
For the period June 28, 2013 (commencement of operations) through November 30, 2013, purchases and sales of investments, excluding short-term investments, were $1,191,465 and $150,481, respectively.
Note 7 – Distribution Plan
The Trust, on behalf of the Fund, has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act that allows the Fund to pay distribution fees for the sale and distribution of its Investor Class shares. The Plan provides for the payment of a distribution fee at the annual rate of up to 0.25% of average daily net assets attributable to Investor Class shares, payable to IMST Distributors, LLC. Institutional Class shares are not subject to any distribution fees under the Plan.
For the period June 28, 2013 (commencement of operations) through November 30, 2013, there were no distribution fees incurred by the fund.
Note 8 – Shareholder Servicing Plan
The Trust, on behalf of the Fund, has adopted a Shareholder Servicing Plan (the “Plan”) to pay a fee at an annual rate of up to 0.10% of average daily net assets of shares serviced by shareholder servicing agents who provide administrative and support services to their customers.
For the period June 28, 2013 (commencement of operations) through November 30, 2013, shareholder servicing fees incurred are disclosed on the Statement of Operations.
Note 9 – Indemnifications
In the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund expects the risk of loss to be remote.
Gratry International Growth Fund
NOTES TO FINANCIAL STATEMENTS – Continued
November 30, 2013 (Unaudited)
Note 10 – Fair Value Measurements and Disclosure
Fair Value Measurements and Disclosures
defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure about fair value measurements. It also provides guidance on determining when there has been a significant decrease in the volume and level of activity for an asset or liability, when a transaction is not orderly, and how that information must be incorporated into a fair value measurement.
Under
Fair Value Measurements and Disclosures
, various inputs are used in determining the value of the Fund’s investments. These inputs are summarized into three broad Levels as described below:
|
|
·
|
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.
|
|
|
·
|
Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
|
|
|
·
|
Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
|
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different Levels of the fair value hierarchy. In such cases, for disclosure purposes, the Level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest Level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used, as of November 30, 2013, in valuing the Fund’s assets carried at fair value:
|
|
|
Level 1
|
|
|
Level 2
*
|
|
|
Level 3
*
|
|
|
Total
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
$
|
71,698
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
71,698
|
|
|
Consumer Discretionary
|
|
|
133,793
|
|
|
|
-
|
|
|
|
-
|
|
|
|
133,793
|
|
|
Consumer Staples
|
|
|
82,825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,825
|
|
|
Energy
|
|
|
105,034
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,034
|
|
|
Financials
|
|
|
248,079
|
|
|
|
-
|
|
|
|
-
|
|
|
|
248,079
|
|
|
Health Care
|
|
|
189,116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189,116
|
|
|
Industrials
|
|
|
190,211
|
|
|
|
-
|
|
|
|
-
|
|
|
|
190,211
|
|
|
Materials
|
|
|
27,013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,013
|
|
|
Technology
|
|
|
38,038
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,038
|
|
|
Utilities
|
|
|
27,562
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,562
|
|
|
Short-Term Investments
|
|
|
118,641
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118,641
|
|
|
Total Investments
|
|
$
|
1,232,010
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,232,010
|
|
|
*
|
The Fund did not hold any Level 2 or Level 3 securities at period end.
|
Gratry International Growth Fund
NOTES TO FINANCIAL STATEMENTS – Continued
November 30, 2013 (Unaudited)
Transfers are recognized at the end of the reporting period. There were no transfers at period end.
Note 11 – Disclosures about Offsetting Assets and Liabilities
Disclosures about Offsetting Assets and Liabilities
require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance requires retrospective application for all comparative periods presented. Management has evaluated the impact on the financial statement disclosures and determined that there is no effect.
Board Consideration of Investment Advisory Agreement
(Unaudited)
At an in-person meeting held on June 19-20, 2013, the Board of Trustees (the “
Board
”) of Investment Managers Series Trust (the “
Trust
”), including the trustees who are not “interested persons” of the Trust (the “
Independent Trustees
”) as defined in the Investment Company Act of 1940, as amended (the “
1940 Act
”), reviewed and unanimously approved the Investment Advisory Agreement (the “
Advisory
Agreement
”) between the Trust and Gratry & Company LLC (the “
Investment Advisor
”) with respect to the Gratry International Growth Fund series of the Trust (the “
Fund
”) for an initial two-year term. In approving the Advisory Agreement, the Board of Trustees, including the Independent Trustees, determined that approval of the Advisory Agreement is in the best interests of the Fund and its shareholders.
Background
In advance of the meeting, the Board received information about the Fund and the Advisory Agreement from the Investment Advisor and from Mutual Fund Administration Corporation and UMB Fund Services, Inc., the Trust’s co-administrators, certain portions of which are discussed below. The materials, among other things, included information about the Investment Advisor’s organization and financial condition; information regarding the background and experience of relevant personnel who would be providing services to the Fund and their compensation structure; the composite performance of the Investment Advisor’s international growth equity strategy (the “
Portfolio
”); reports comparing the proposed advisory fee and the estimated total expenses of the Fund compared to those of a group of comparable funds (the “
Peer Group
”) selected by Morningstar, Inc. from its Foreign Large Growth universe (the “
Expense Universe
”); and information about the Investment Advisor’s policies and procedures, including its code of ethics and compliance manual. The Board also received a memorandum from the independent legal counsel to the Independent Trustees discussing the legal standards under the 1940 Act and other applicable law for their consideration of the proposed Advisory Agreement. Before voting on the Advisory Agreement, the Independent Trustees met in a private session with counsel at which no representatives of the Investment Advisor were present
.
In approving the Advisory Agreement, the Board and the Independent Trustees considered a variety of factors, including those discussed below. In their deliberations, the Board and the Independent Trustees did not identify any particular factor that was controlling, and each Trustee may have attributed different weights to the various factors. The Board reviewed the materials and various matters concerning the Investment Advisor and the Fund.
Nature, Extent and Quality of Services
In reviewing the proposed investment advisory agreement for the proposed Fund, the Board discussed, among other things, the nature, extent and quality of the services to be provided by the Investment Advisor with respect to the Fund, as well as the qualifications, experience and responsibilities of the personnel who would be involved in the activities of the Fund. The Board also considered information previously provided to them regarding the performance of the Portfolio, which commenced September 30, 1997. The Board noted that the composite total returns of the Portfolio (net of fees) had exceeded the returns of the MSCI World ex-U.S. Index for the three-, five- and ten-year and since inception periods ended December 31, 2012. Based on its review, the Board and the Independent Trustees concluded that the Investment Advisor would have the capabilities, resources and personnel necessary to manage the Fund and that the Investment Advisor would provide the Fund with a reasonable potential for good investment results
.
Advisory Fee and Expense Ratio
The Board considered information included in the meeting materials regarding the proposed investment advisory fees and estimated total expenses of the Fund. With respect to the advisory fees proposed to be paid by the Fund, the Board noted that the meeting materials indicated that the advisory fees (gross of fee waivers by the Investment Advisor) were lower than the median advisory fees of funds in the Peer Group and the Expense Universe. The Board also noted that the Fund’s proposed advisory fee was within the range of the Investment Advisor’s advisory fees for separate accounts managed using the same strategy that would be used to manage the Fund. In considering the estimated total expenses to be paid by the Fund, the Board observed that the total expenses (net of fee waivers) were higher than the Peer Group median by one basis point and the Expense Universe median by 13 basis points. The Board noted, however, that the Fund’s estimated assets for its first year of operations were significantly lower than the average net asset sizes of funds in the Peer Group and the Expense Universe. The Board and the Independent Trustees concluded that the proposed compensation payable to the Investment Advisor under the Advisory Agreement would be fair and reasonable in light of the services proposed to be provided by the Investment Advisor to the Fund.
Gratry International Growth Fund
SUPPLEMENTAL INFORMATION (Unaudited)
Profitability and Economies of Scale
The Board also considered information relating to the estimated profitability to the Investment Advisor of its relationship with the Fund in its first year of operations taking into account estimated assets of $50 million, and noted that the Investment Advisor anticipated waiving a portion of its advisory fee during that year. The Board concluded that the estimated profitability of the Investment Advisor in the first year of the Fund’s operations was reasonable. The Board also noted that the potential benefits received by the Investment Advisor as a result of its relationship with the Fund would include not only the advisory fees paid to the Investment Advisor, but also the benefits of any deeper relationship with broker-dealers executing transactions on behalf of the Fund and any favorable publicity arising in connection with the Fund’s performance. The Board also noted that during the Fund’s startup period the Fund’s asset levels would likely be too low to achieve significant economies of scale and that any such economies would be considered in the future as the Fund’s assets grow.
Conclusion
Based on these and other factors, the Board and the Independent Trustees concluded that approval of the Advisory Agreement is in the best interests of the Fund and its shareholders and accordingly, approved the Advisory Agreement.
Gratry International Growth Fund
EXPENSE EXAMPLE
For the Period Ended November 30, 2013 (Unaudited)