The SMI Funds, advised by SMI Advisory Services, are a separate business from the SMI newsletter. However, given the significant interest in the SMI Funds among newsletter readers, we thought it would be helpful for the newsletter to forward the following information from the SMI Funds regarding changes in the pipeline for a few of those funds.
The SMI Bond Fund (SMIUX) Is Closing
The SMI Bond Fund (SMIUX) will close down and cease to exist as of February 7, 2018. While there were high hopes for an SMI Bond fund when it was launched in 2015, demand for it never materialized as expected. After nearly three years of operating the fund at a loss, SMI Advisory Services determined it is no longer economically feasible to continue managing the Fund because of the Fund’s small size and the fact that it simply hasn’t been growing toward sustainability.
What Happens Now?
Shareholders may redeem Fund shares at any time prior to February 7, 2018. Any shares that have not been redeemed prior to February 7, 2018, will be redeemed automatically as of that date, with proceeds being sent to the address of record. If you own shares through a broker-dealer or other financial intermediary, redemption proceeds may be forwarded directly to the broker-dealer or other financial intermediary for deposit into your brokerage or other investment account.
It’s worth noting that the SMI Bond Fund is no longer pursuing its investment objective at this point. All holdings in the Fund’s portfolio have been liquidated, and are now being held in cash.
To Continue Having SMI Advisory Services Manage Your Bond Assets
The good news is it’s possible to continue having SMI Advisory Services manage your bond assets utilizing the same Bond Upgrading strategy formerly used to operate the SMI Bond Fund. To learn more about private account management options with SMI Advisory Services, visit smiprivateclient.com. (Note that this link will cause you to leave the SMI Newsletter website.)
Notes to Retirement-Plan Investors
If you are a retirement-plan investor and your shares are held directly with the SMI Bond Fund (as opposed to through a broker or other intermediary), you should consult your tax adviser regarding the consequences of a redemption of Fund shares. If you receive a distribution from an Individual Retirement Account (IRA) or a Simplified Employee Pension (SEP) IRA, you must roll the proceeds into another IRA within 60 days of the date of the distribution to avoid having to include the distribution in your taxable income for the year.
One easy way to address this issue is to exchange your SMI Bond Fund (SMIUX) shares for shares of a different SMI Fund prior to February 7. Even if this is only a temporary maneuver, doing so will provide additional time to initiate a rollover to another institution without a redemption event looming on February 7.
The SMI 50/40/10 Fund (SMIRX) and Conservative Allocation Fund (SMILX) Are Merging
On December 12, 2017, the Board of Trustees voted to approve an Agreement and Plan of Reorganization whereby the SMI 50/40/10 Fund (SMIRX) would be reorganized into the SMI Conservative Allocation Fund (SMILX). The Board also approved a proposal to go into effect following the Reorganization to change the name of the SMI Conservative Allocation Fund to the SMI 50/40/10 Fund and for the SMI Conservative Allocation Fund to adopt the investment strategies of the SMI 50/40/10 Fund.
Here’s the translation: If this reorganization is approved by SMIRX shareholders, the Conservative Allocation Fund will cease to exist in its current form on (or around) April 10, 2018. There will continue to be an SMILX fund, but it will effectively become the “new” SMI 50/40/10 Fund. As part of the reorganization, the current SMI 50/40/10 Fund (SMIRX) assets will become part of the current SMILX fund, and the SMIRX ticker symbol will be eliminated.
Following the reorganization, the new version of SMILX would resemble the current version of SMIRX in every way, with two very important exceptions:
- The fees of the new SMILX will be significantly lower than those of the current SMIRX. Currently, SMIRX expenses are capped at a maximum of 1.45%. SMILX has a significantly lower expense cap of just 1.15%. This will mean a significant immediate reduction in fees for those utilizing the SMI 50/40/10 strategy approach.
- To this point, the SMI 50/40/10 Fund (SMIRX) has only been available to those investing directly with the SMI Funds. In other words, it hasn’t been available for purchase on any of the popular brokerage platforms (as the other SMI Funds are). If this reorganization is approved by SMIRX shareholders, the 50/40/10 strategy will become available through all the major brokerage platforms via the SMILX ticker symbol.
Why Is This Being Done?
The current Conservative Allocation Fund has been slowly losing assets for some time. Opening the SMI Dynamic Allocation Fund (SMIDX) in 2013, which has subsequently grown to over $165 million in assets, has made the Conservative Allocation Fund partially redundant. The Advisor determined that action needed to be taken before assets in the Conservative Allocation Fund dwindled to the point that it was no longer economically feasible to maintain the fund. This led to the decision to merge it with the current SMI 50/40/10 Fund (SMIRX), with the merged version retaining the lower cost structure (and brokerage platform distribution) of the current SMILX fund ticker.
Meanwhile the SMI 50/40/10 Fund has been a hit with investors and continues to grow, but is hampered by the inability to add it to the broker platforms (due to their changing criteria since the other SMI Funds were added). Merging the two funds allows better availability for the 50/40/10 concept, while utilizing the lower-cost structure of the current SMILX fund.
For current SMIRX investors: this is very straightforward. You will be asked to return a proxy vote in March. If the proxy vote is approved by shareholders, SMIRX will merge into SMILX, and SMILX will become the new 50/40/10 fund. Your SMIRX holdings will convert automatically into SMILX holdings and you won’t have to do anything to stay invested using the 50/40/10 approach. However, your fund expenses will decrease immediately as a result of the lower expense cap, and the greater accessibility of the strategy via the broker platforms will hopefully allow the fund to grow in the future, potentially helping to reduce fees even further in the future as the fund’s assets increase.
For current SMILX investors: while these changes will not result in any formal change in the investment objective, investment adviser, or portfolio managers of your fund, you should recognize that the post-April 10 version of this fund will be following a different strategy with half of its assets.
Currently, roughly 60% of SMILX follows the Dynamic Asset Allocation strategy. Following the reorganization, roughly 50% of the “new” SMILX will continue to follow this DAA approach. However, currently 40% of SMILX is invested in bonds. This will be changing significantly, as the remaining 50% of the post-reorganization SMILX will be invested following a combination of SMI’s Stock Upgrading and Sector Rotation strategies. These two strategies are equity strategies. Switching from bonds to equities with this half of the portfolio will mean a substantial increase in risk. Current SMILX investors should consider carefully the implications of this switch, to determine whether to remain invested in the "new" SMILX after the merger.
Current SMILX shareholders have two main options:
- If you are comfortable with the changes coming to SMILX, you don’t have to do anything. You can simply leave your SMILX holdings alone, in which case they will continue to be invested in the new version of SMILX after the fund reorganization. However, you should recognize that the risk level of your investment in SMILX will be increasing as its bond holdings are replaced by the Stock Upgrading and Sector Rotation strategies.
- If you are uncomfortable with the increasing risk potential brought on by this reorganization, you have the option to sell your holdings of SMILX, either before or after the April reorganization. The Dynamic Asset Allocation strategy, which currently comprises 60% of SMILX, can be obtained directly by purchasing the SMI Dynamic Allocation Fund (SMIDX). While there is no direct SMI fund substitute for the bond portion of the current SMILX fund (due to the closing of the SMI Bond Fund), it is possible to continue having SMI Advisory Services manage your bond assets if you so choose (see the next section).
To Continue Having SMI Advisory Services Manage Your Bond Assets
It’s possible to continue having SMI Advisory Services manage your bond assets utilizing the same Bond Upgrading strategy formerly used to operate the SMI Bond Fund. To learn more about private account management options with SMI Advisory Services, visit smiprivateclient.com. (Note that this link will cause you to leave the SMI Newsletter website.)
What happens next?
Proxy materials with respect to the proposed Reorganization will be sent out to SMIRX shareholders in March 2018. Please read the proxy materials carefully, as they contain a more detailed description of the proposed Reorganization. If you are an SMIRX shareholder and receive a proxy statement, please review it and cast your vote as instructed in the materials so the SMI 50/40/10 Fund may avoid any future solicitations.
It will be crucial that current SMIRX shareholders return their proxy votes quickly so the reorganization can move forward. SMI Advisory Services wants SMI 50/40/10 investors to have better access via the broker platforms, as well as lower fund expenses, as soon as possible. So be watching for the proxy materials in March, and please return them promptly with your vote to approve the merger.
In a perfect world, there would have been enough demand to support all five of the current SMI Funds so these types of changes wouldn't be necessary. As it is, after these changes are complete, the SMI Funds lineup will be reduced from five funds to three, with the following names and ticker symbols as follows:
- The SMI Fund (SMIFX), which will follow Fund Upgrading;
- The SMI Dynamic Allocation Fund (SMIDX), which will follow Dynamic Asset Allocation (DAA);
- The SMI 50/40/10 Fund (SMILX), which will follow DAA with 50% of the portfolio, Upgrading with 40%, and Sector Rotation with 10%.
You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Funds before investing. The prospectus contains this and other information about the Funds, and should be read carefully before investing. You may obtain a current copy of the Funds' prospectus by calling 877-SMI-FUND.
The SMI Funds are distributed by Unified Financial Securities, LLC. Given the significant differences between separately managed accounts and mutual funds, investors should consider the differences in expenses, tax implications and the overall objectives between separately managed accounts and mutual fund before investing. Investing involves risk, including loss of principal. There is no guarantee that the funds will meet their investment objectives.
Per the prospectus dated 2/28/17, the gross expense ratio of the 50/40/10 fund (SMIRX) is 2.26%, and the net expense ratio is 1.95%. The Advisor contractually has agreed to waive its fee and/or reimburse expenses to the extent necessary to maintain Total Annual Fund Operating Expenses (excluding interest, taxes, brokerage commissions, other expenses which are capitalized in accordance with generally accepted accounting principles, extraordinary expenses, dividend expense on short sales, 12b-1 fees, and acquired fund fees and expenses) at 1.45% of the SMI 50/40/10 Fund's average daily net assets through February 28, 2018.
Per the prospectus dated 2/28/17, the gross expense ratio of the Conservative Allocation Fund (SMILX) is 1.66%, and the net expense ratio is 1.30%. The Advisor contractually has agreed to waive its fee and/or reimburse expenses to the extent necessary to maintain Total Annual Fund Operating Expenses (excluding interest, taxes, brokerage commissions, other expenses which are capitalized in accordance with generally accepted accounting principles, extraordinary expenses, dividend expense on short sales, 12b-1 fees, and acquired fund fees and expenses) at 1.15% of the SMI Conservative Allocation Fund's average daily net assets through February 28, 2018.