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Letter from the Chief Investment Officer
Dear Shareholders,
The global stock markets performed very well over the last 12 months (as of April 30, 2017), far exceeding long-term average returns. Moving forward, however, it would be reasonable for investors to temper return expectations, particularly for domestic stocks. Large-cap domestic stocks are more than eight years into a bull market and valuations are now above average. It should be a good time for global investors in the years ahead as non-U.S. stock markets are generally much more attractively priced.
As for recent performance, the U.S. stock market, as defined by the Russell 3000 (an index composed of the 3,000 largest U.S. stocks), gained 18.58% over the last 12 months. The S&P 500 (a proxy for large, U.S.-based companies) gained 17.92%, and smaller companies, as defined by the Russell 2000 (an index composed of the 2,000 smallest companies in the Russell 3000), gained 25.63%. These returns are well above long-term averages.
International stocks, as defined by the MSCI All-Country World Index ex-US (an index considered representative of stock markets within developed and emerging markets, excluding the U.S.) gained 13% over the last 12 months. Developed international stock markets, such as Japan and Europe, as defined by the MSCI EAFE (an index that tracks performance of international equity securities in 21 developed countries in Europe, Australasia, and the Far East) gained 12.59%. Emerging markets, such as China and Brazil, as defined by the MSCI Emerging Markets (an index that tracks performance of international equity securities in developing countries) gained 19.13%. These are also strong numbers, though international markets in general are still lagging the U.S. market by a considerable margin over the last 3-, 5- and 8-years.
As mentioned in last year’s report, this backdrop in market returns helps explain the performance of AdvisorOne portfolios. Most AdvisorOne Funds are global, multi-asset, Risk-Budgeted portfolios composed primarily of exchange traded funds (ETFs).
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Let’s review these attributes:
Risk Budgeting holds two promises:
CLS Shelter, CLS International Equity, and Milestone Treasury Obligations Funds are also risk-managed, though not specifically Risk-Budgeted.
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Performance and Outlook
The AdvisorOne Funds incorporate and articulate the CLS Investment Themes, which are currently:
Favoring growth stocks has benefited AdvisorOne portfolios in recent years, but we now believe value stocks will begin to outperform. We are therefore increasing exposure to sectors such as financials, natural resources, and international securities, particularly emerging markets. We think improved earnings growth around the globe will help value stocks and, more importantly, relative valuations are more attractive than usual.
At CLS, we rely heavily on relative valuations in our decision-making process. We first calculate an investment’s current valuation compared to the overall market’s valuation. Then we compare it to the long-term average of the same relative valuation. To illustrate, below is a current example of a prominent AdvisorOne portfolio tilt.
Currently, the valuation of emerging markets (EM) is 72% of the overall global stock market’s valuation. Since 2001, however, EM valuation has averaged 85% of the world’s valuation. So, while EM has historically been cheap, it’s very much on sale now. This is an example of an attractive investment from a relative valuation perspective, and it’s a key reason emerging markets are so heavily emphasized in AdvisorOne portfolios.
Below is a chart with data as of April 30, 2017 that illustrates these numbers. The yellow lines represent one standard deviation from the long-term average, represented by the red line. What CLS finds attractive in this data is the current valuation is below the long-term average and, secondarily, the teal-colored relative valuation line is now sloping higher. This suggests momentum now favors emerging markets.
Emerging Markets/World
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Our exposure to smart beta ETFs is considerably higher than the industry average for two reasons. First, smart beta ETFs capture the essence of active management at a fraction of the cost, and second, factor-based investing has a history of enhancing returns while helping manage risk, particularly in down markets. We believe this behavior will continue.
In closing, our return expectations for balanced portfolios are slightly muted compared to historical norms, primarily due to overvaluations in domestic stocks and bonds. We believe there may be opportunities to add value with increased exposure to international equities, by emphasizing smart beta ETFs, and through diversifying portfolios by actively managing fixed income and alternative holdings.
Thank you for your trust.
Sincerely,
This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. Individual client accounts may vary. Valuation is the measurement of the current worth of an asset or company. There is no one single method to determine valuation. CLS calculates the relative valuations consisting of a composite of the price-to-earnings ratio (P/E), price-to-book ratio (P/B), price-to-sales ratio (P/S), price to cash flow ratio (P/CF), and the price-to-dividend ratio (P/D). The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing.
2552-CLS-5/10/2017 6677-NLD-5/11/2017
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CLS Global Aggressive Equity Fund - Portfolio Summary
Portfolio Commentary
CLS Global Aggressive Equity was up 20.23% over the last year. The Fund has a Risk Budget of 110 (i.e., over time is approximately 10 percent riskier than a diversified stock portfolio consisting of 60 percent domestic equities and 40 percent international equities). Given the Fund’s Risk Budget and global breadth, regions and segments that are particularly sensitive to the global economy will have a larger impact on the Fund.
The Fund outpaced its benchmark over the last year. Outperformance can be attributed primarily to sector positioning in technology, healthcare, and financials as well as exposure to the emerging Asia region. Exposure to the energy sector was a detractor to performance.
The Fund’s notable international exposures include a tilt towards the value factor, which is favorable in an environment of a global economic recovery, smaller-capitalization European companies that can benefit from recovery in the region, and emerging Asian equities that have attractive valuations as well as some of the strongest growth in the world. International markets, while lagging the U.S. market over the last year, have had a strong start in 2017 and now have momentum to go along with their attractive valuations and improving growth prospects.
Among domestic sectors, the largest tilts are toward financials and health care allocations. We still maintain large technology allocations focused in older, more established technology companies that now pay dividends, as well as in semiconductors who produce components for an ever-expanding variety of applications. Financials have had strong performance over the last year while still maintaining attractive valuations. Healthcare is currently one of the most attractively valued sectors, but our exposure is primarily focused in the medical device and biotechnology subsectors.
Trades in recent months have focused on adding to attractively valued areas of global markets including the consumer staples sector as well as the Asia region, both developed and emerging.
Turnover for the Fund over the last 12 months was 32 percent.
You cannot invest directly in an index or benchmark.
Portfolio Composition*
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CLS Global Aggressive Equity Fund - Performance Update
Annualized Total Returns as of April 30, 2017
Growth of a $10,000 Investment
This chart illustrates a comparison of a hypothetical investment of $10,000 in the CLS Global Aggressive Equity Fund (assuming reinvestment of all dividends and distributions) versus the Fund’s benchmark index.
The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The returns shown do not reflect taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. The Fund’s total annual operating expenses, including underlying fund expenses, for the CLS Global Aggressive Equity Fund per the most recent prospectus was 1.93%. CLS has contractually agreed to limit total operating expenses at least through December 31, 2017, so that Class N Share direct expenses (not including expenses relating to dividends on short sales, interest expense, indirect fees and expenses of Underlying Funds and extraordinary or non-recurring expenses) do not exceed 1.15% of average daily net assets. The Fund’s performance over the periods shown above would have been lower had the advisor not waived fees and/or reimbursed expenses. For performance information current to the most recent month-end, please call toll-free 1-866-811-0225.
The Russell 3000® Index is a market-capitalization-weighted index that measures 98% of the investable U.S. equity market.
The MSCI ACWI (ex-US) is an index that provides a broad measure of stock performance throughout the world, with the exception of U.S.-based equities. The index includes both developed and emerging markets.
Performance of the risk budget benchmark shows how the Fund’s performance compares to an index with similar investment strategies and underlying holdings as the Fund. The risk budget benchmark consists of (i) 110% of a blended benchmark consisting of 60% of the Russell 3000® Index and 40% of the MSCI ACWI (ex-US).
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CLS Global Diversified Equity Fund - Portfolio Summary
CLS Global Diversified Equity returned 14.95% percent over the last year. The Fund has a Risk Budget of 100 (i.e., over time is approximately as risky as a diversified stock portfolio consisting of 60 percent domestic equities and 40 percent international equities). The Fund performed in line with its benchmark during this time frame. Fund exposure to domestic technology and financials, factor exposure to high-quality and momentum, and emerging Asian equity exposure all helped performance during the year.
Particular emphasis within Asia and Europe, both developed and emerging, has been prevalent in the portfolio, and this emphasis will likely continue. Trading over the year focused on reducing domestic large-cap growth exposure in favor of global value exposure, as well as an increase in commodities, global healthcare, and more granular exposure such as European financials.
Turnover for the Fund over the last 12 months was 41 percent.
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CLS Global Diversified Equity Fund - Performance Update
This chart illustrates a comparison of a hypothetical investment of $10,000 in the CLS Global Diversified Equity Fund (assuming reinvestment of all dividends and distributions) versus the Fund’s benchmark index.
The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The returns shown do not reflect taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. The Fund’s total annual operating expenses, including underlying fund expenses, for the CLS Global Diversified Equity Fund per the most recent prospectus was 1.45%. CLS has contractually agreed to limit total operating expenses at least through December 31, 2017, so that Class N Share direct expenses (not including expenses relating to dividends on short sales, interest expense, indirect fees and expenses of Underlying Funds and extraordinary or non-recurring expenses) do not exceed 1.15% of average daily net assets. The Fund’s performance would be lower had the advisor not waived fees and/or reimbursed expenses. For performance information current to the most recent month-end, please call toll-free 1-866-811-0225.
Performance of the risk budget benchmark shows how the Fund’s performance compares to an index with similar investment strategies and underlying holdings as the Fund. The blended benchmark consists of 60% of the Russell 3000® Index and 40% of the MSCI ACWI (ex-US).
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CLS Growth and Income Fund - Portfolio Summary
CLS Growth & Income returned 7.68% over the last year. The Fund has a Risk Budget of 55 (i.e., over time is 55 percent as risky as a diversified stock portfolio consisting of 60 percent domestic equities and 40 percent international equities).
During the year performance was benefited by exposure to domestic equities, especially in the technology and financial sectors, high yield bonds, and select emerging market stocks. Detracting from performance were international stocks, commodities, and stocks focused on the basic material and energy sectors. Throughout the year the portfolio has maintained its emphasis on non-U.S. stocks in both developed countries, as well as emerging markets. While valuations are extended domestically, stock markets are priced for more attractive returns internationally. We expect this point of emphasis to continue.
Within the fixed income allocation, we have improved overall credit quality. The portfolio continues to emphasize exposure to Treasury Inflation Protected Securities (TIPS), agency mortgage-backed securities, and emerging market bonds at the expense of corporate bonds and U.S. Treasuries. We are emphasizing smart beta positions within the portfolio as opposed to those based on market cap weighting, and we expect this to continue.
Turnover for the Fund over the last 12 months was 45 percent.
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CLS Growth and Income Fund - Performance Update
This chart illustrates a comparison of a hypothetical investment of $10,000 in the CLS Growth and Income Fund (assuming reinvestment of all dividends and distributions) versus the Fund’s benchmark index.
The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The returns shown do not reflect taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. The Fund’s total annual operating expenses, including underlying fund expenses, for the CLS Growth and Income Fund per the most recent prospectus was 1.56%. CLS has contractually agreed to limit total operating expenses at least through December 31, 2017, so that Class N Share direct expenses (not including expenses relating to dividends on short sales, interest expense, indirect fees and expenses of Underlying Funds and extraordinary or non-recurring expenses) do not exceed 1.15% of average daily net assets. The Fund’s performance as shown above would have been lower had the advisor not waived fees and/or reimbursed expenses. For performance information current to the most recent month-end, please call toll-free 1-866-811-0225.
The 1-3 Month Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value.
Performance of the risk budget benchmark shows how the Fund’s performance compares to an index with similar investment strategies and underlying holdings as the Fund. The risk budget benchmark consists of (i) 55% of a blended benchmark consisting of 60% of the Russell 3000® Index and 40% of the MSCI ACWI (ex-US), and (ii) 45% of the 1-3 Month Treasury Bill Index. The weightings against this benchmark are consistent with the risk level of the Fund and these indexes are utilized to reflect the Fund’s broad exposure to the global equity market.
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CLS Flexible Income Fund - Portfolio Summary
CLS Flexible Income returned 3.48% over the last year. This intermediate-term bond Fund has a Risk Budget of 20 (i.e., over time has 20 percent of the risk of a diversified stock portfolio consisting of 60 percent domestic equities and 40 percent international equities).
During the year, exposure to high yield bonds, emerging market bonds and global stocks contributed positively to performance. Detracting from performance were Treasury bonds, mortgage-backed securities and municipal bonds. The Fund remains positioned with a strong tilt toward credit, both investment grade and high yield, and has deemphasized Treasury bond exposure. We believe slow and steady economic growth will continue, keeping a lid on defaults and benefiting the sector overall. The Fund has maintained a strategic underweight to interest rate sensitivity as measured by duration, which we expect to continue. While we do not believe interest rates necessarily have to rise from their current levels, we prefer the risk and reward tradeoff in credit risk over interest rate risk at this time.
Turnover for the Fund over the last 12 months was 8 percent.
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CLS Flexible Income Fund - Performance Update
This chart illustrates a comparison of a hypothetical investment of $10,000 in the CLS Flexible Income Fund (assuming reinvestment of all dividends and distributions) versus the Fund’s benchmark index.
The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The returns shown do not reflect taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. The Fund’s total annual operating expenses, including underlying fund expenses, for the CLS Flexible Income Fund per the most recent prospectus was 1.24%. CLS has contractually agreed to limit total operating expenses at least through December 31, 2017, so that Class N Share direct expenses (not including expenses relating to dividends on short sales, interest expense, indirect fees and expenses of Underlying Funds and extraordinary or non-recurring expenses) do not exceed 0.80% of average daily net assets. The Fund’s performance as shown above would have been lower had the advisor not waived fees and/or reimbursed expenses. For performance information current to the most recent month-end, please call toll-free 1-866-811-0225.
The Bloomberg Barclays US Aggregate Bond Index is a market-capitalization-weighted index that covers the USD- denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, and taxable areas of the bond market. Prior to August 24, 2016, the index was known as Barclays Aggregate Bond Index.
Performance of the risk budget benchmark shows how the Fund’s performance compares to an index with similar investment strategies and underlying holdings as the Fund. The risk budget benchmark consists of (i) 20% of a blended benchmark consisting of 60% of the Russell 3000® Index and 40% of the MSCI ACWI (ex-US), and (ii) 80% of the 1-3 Month Treasury Bill Index.
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CLS International Equity Fund - Portfolio Summary
International Equity returned 10.03% percent over the last year. The Fund consists of primarily international equities and is not Risk Budgeted, although it is managed with risk considerations and a focus on delivering higher incremental-income relative to its benchmark. The portfolio management methodology is quantitatively driven through the use of fundamental risk factors.
The Fund underperformed its benchmark during this time frame, primarily due to its exposure to the minimum volatility and value factors as well as frontier markets. Performance was helped by exposure to the size factor as well as individual country selection, particularly within the Europe and Asia regions.
The Fund currently has risk factor tilts emphasizing value and size. This has resulted in more small and mid-cap exposures as well as undervalued securities. On a regional basis, the portfolio is currently tilted toward emerging markets, primarily within Asia.
Emerging markets continue to be relatively attractive given valuations and economic growth prospects. Within developed markets, notable regional tilts include an underweight to developed Europe and an overweight to developed Asia. Developed Europe valuations are not as attractive as they once were, and economic growth is more stagnant, while developed Asian countries share many favorable characteristics with their emerging market neighbors.
Trades in recent months included adding exposure to emerging markets at the expense of developed markets.
Turnover for the Fund over the last 12 months was 155 percent.
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CLS International Equity Fund - Performance Update
This chart illustrates a comparison of a hypothetical investment of $10,000 in the CLS International Equity Fund (assuming reinvestment of all dividends and distributions) versus the Fund’s benchmark index.
The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The returns shown do not reflect taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. The Fund’s total annual operating expenses, including underlying fund expenses, for the CLS International Equity Fund per the most recent prospectus was 2.66%. CLS has contractually agreed to limit total operating expenses at least through December 31, 2017, so that Class N Share direct expenses (not including expenses relating to dividends on short sales, interest expense, indirect fees and expenses of Underlying Funds and extraordinary or non-recurring expenses) do not exceed 1.15% of average daily net assets. The Fund’s performance as shown above would have been lower had the advisor not waived fees and/or reimbursed expenses. For performance information current to the most recent month-end, please call toll-free 1-866-811-0225.
The MSCI ACWI (ex-US) is a market-capitalization weighted index that provides a broad measure of stock performance throughout the world, with the exception of U.S.-based equities. The index includes both developed and emerging markets.
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CLS Shelter Fund - Portfolio Summary
CLS Shelter Fund returned 15.11% over the last year. The Fund has a risk-based benchmark (75 percent of a blended benchmark consisting of 80 percent of the Russell 3000 Index (composed of the 3,000 largest U.S. stocks) and 20 percent of the MSCI ACWI (ex-US) (a benchmark for international stocks), and 25 percent of the 1-3 Month Treasury Bill Index (an index of very short-term government debt securities)).
The Fund seeks to protect client portfolios from large losses. In some market conditions, moves to reduce risk will occur just before the market rallies. During these periods, the Fund will generally trail its benchmark. When the market trends in one direction for a longer period of time, the Fund will generally outperform its benchmark, as it seeks to protect on the downside, as well as on the upside, locking in and protecting gains as the market rallies. As markets rallied over the last year, this was beneficial for the Fund, allowing it to outperform its benchmark. The Fund locked in gains two times in early 2017.
At the beginning of the fiscal year, approximately 25% of the Fund was invested in protected assets, and remained in this range until August, when strong market performance allowed the Fund to be in a range from 85 percent to fully invested in diversified equities for the period from August 2016 through April 2017.
The Fund’s allocation, when fully invested, favors international markets and large-cap U.S. stocks. Part of the international position is allocated to a position that lessens the effect of currency changes on the Fund. In the U.S., the Fund favors value stocks over growth stocks.
Turnover for the Fund over the last 12 months was 147 percent.
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CLS Shelter Fund - Performance Update
This chart illustrates a comparison of a hypothetical investment of $10,000 in the CLS Shelter Fund (assuming reinvestment of all dividends and distributions) versus the Fund’s benchmark index.
The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The returns shown do not reflect taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. The Fund’s total annual operating expenses, including underlying fund expenses, for the CLS Shelter Fund per the most recent prospectus was 1.42%. CLS has contractually agreed to limit total operating expenses at least through December 31, 2017, so that Class N Share direct expenses (not including expenses relating to dividends on short sales, interest expense, indirect fees and expenses of Underlying Funds and extraordinary or non-recurring expenses) do not exceed 1.15% of average daily net assets. The Fund’s performance shown above would have been lower had the advisor not waived fees and/or reimbursed expenses. For performance information current to the most recent month-end, please call toll-free 1-866-811-0225.
Performance of the risk based benchmark shows how the Fund’s performance compares to an index with similar investment strategies and underlying holdings as the Fund. The risk based benchmark consists of (i) 75% of a blended benchmark consisting of 80% of the Russell 3000® Index and 20% of the MSCI ACWI (ex-US), and (ii) 25% of the 1-3 Month Treasury Bill Index.
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Milestone Treasury Obligations Fund - Portfolio Summary
During the past year, the Milestone Treasury Obligations Fund focused on its conservative investment philosophy and management discipline. We are proud to provide this annual report which highlights the results of our conservative, compliance-driven investment philosophy.
As we continue through 2017, we remain committed to our mission and values. We look forward to continuing to work in partnership with you all to address your liquidity objectives and cash management priorities. We will continue to explore new cash management capabilities in direct response to requests from both current and prospective investors.
All data is as of April 30, 2017. The Portfolio breakdown is expressed as a percentage of total investments and may vary over time.
Please refer to the Portfolio of Investments for a detailed analysis of the Fund’s holdings.
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
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AdvisorOne Funds Annual Report
Schedule of Investments - CLS Global Aggressive Equity Fund April 30, 2017
Refer to the Notes to Financial Statements in this Report for further information regarding the values set forth above.
Schedule of Investments - CLS Global Aggressive Equity Fund (Continued) April 30, 2017
ETF - Exchange Traded Fund
MSCI - Morgan Stanley Capital International
PHLX - Philadelphia Stock Exchange
SPDR - Standard & Poors’ Depositary Receipts
Schedule of Investments - CLS Global Diversified Equity Fund April 30, 2017
Schedule of Investments - CLS Global Diversified Equity Fund (Continued) April 30, 2017
DB - Deutsche Bank
EAFE - Europe, Australasia, Far East
EM - Emerging Markets
FTSE - Financial Times Stock Exchange
SSGA - State Street Global Advisors
Schedule of Investments - CLS Growth and Income Fund April 30, 2017
Schedule of Investments - CLS Growth and Income Fund (Continued) April 30, 2017
CEF - Closed End Fund
RAFI - Research Affiliates
TIPS - Treasury Inflation-Protected Securities
Schedule of Investments - CLS Flexible Income Fund April 30, 2017
Schedule of Investments - CLS Flexible Income Fund (Continued)
April 30, 2017
MLP - Master Limited Partnership
TIPS - Treasury Inflation-Protected Security
Schedule of Investments - CLS International Equity Fund April 30, 2017
Schedule of Investments - CLS Shelter Fund April 30, 2017
ACWI - All Country World Index
Repurchase Agreements - 52.82%
BNP Paribas Securities Corp., dated 4/28/2017, repurchase price $75,000,000 (Collateralized by: U.S. Treasury Notes: $8,377,200, 1.750%, 10/31/2020; aggregate market value plus accrued interest $8,496,519; U.S. Treasury Inflationary Bond: $68,814,700, 0.750%, 2/15/2045; aggregate market value plus accrued interest $68,003,481)
Credit Agricole, dated 4/28/2017, repurchase price $71,634,000 (Collateralized by: U.S. Treasury Note: $72,607,400, 1.875%, 2/28/2022; aggregate market value plus accrued interest $73,066,723)
Societe Generale, dated 4/28/2017, repurchase price $60,000,000 (Collateralized by: U.S. Treasury Note: $27,467,900, 1.500%, 8/15/2026; aggregate market value plus accrued interest $25,742,983; U.S. Treasury Floating Rate Note: $35,312,100, 0.000%, 7/31/2018; aggregate market value plus accrued interest $35,457,037)
* Includes Securities Loaned $11,307,236; $16,037,341; $0.
AdvisorOne Funds (the “Trust” or the “Funds”) was organized as a Delaware Business Trust in December 1996 and is registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as an open-end management investment company. The CLS Global Aggressive Equity Fund, CLS Global Diversified Equity Fund, CLS Growth and Income Fund, CLS Flexible Income Fund, CLS International Equity Fund, CLS Shelter Fund and Milestone Treasury Obligations Fund, collectively the “Funds” and each individually a “Fund” are each a diversified series of the Trust. The Milestone Treasury Obligations Fund, formerly known as the Treasury Obligations Portfolio (“Predecessor Fund”), was reorganized into the AdvisorOne Funds (the “Trust”) on January 23, 2012. The Predecessor Fund was a series of the Milestone Funds, a Delaware business trust formed on July 14, 1994. The Funds each offer an unlimited number of shares of beneficial interest without par value.
The Funds offer the following classes of shares:
CLS Global Diversified Equity Fund’s Class C shares were closed on August 29, 2016.
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The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses for the year. Actual results could differ from those estimates. The Funds are investment companies and accordingly follow the investment companies accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 “Financial Services – Investment Companies” including FASB Accounting Standard Update ASU 2013-08.
Security Valuation – Securities listed on an exchange are valued at the last reported sale price at the close of the regular trading session of the exchange on the business day the value is being determined, or in the case of securities listed on NASDAQ at the NASDAQ Official Closing Price (“NOCP”). In the absence of a sale such securities shall be valued at the mean between the current bid and ask prices on the primary exchange on the day of valuation. Exchange traded options, futures and options on futures are valued at the settlement price determined by the exchange. Short-term investments that mature in 60 days or less may be valued at amortized cost, provided such valuations represent fair value. Under the amortized cost method, a portfolio instrument is valued at cost and any premium or discount is amortized to maturity. Amortization of premium and accretion of market discount are charged to income. Debt securities (other than short-term obligations) are valued each day by an independent pricing service approved by the Trust’s Board of Trustees (the “Board”) based on methods which include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type, indications as to values from dealers, and general market conditions or market quotations from a major market maker in the securities.
The Funds may hold securities, such as private investments, interests in commodity pools, other non-traded securities or temporarily illiquid securities, for which market quotations are not readily available or are determined to be unreliable. These securities will be valued using the “fair value” procedures approved by the Board. The Board has delegated execution of these procedures to a fair value team composed of one or more representatives from each of the (i) Trust, (ii) administrator, and (iii) advisor. The team may also enlist third party consultants such as a valuation specialist at a public accounting firm, valuation consultant or financial officer of a security issuer on an as- needed basis to assist in determining a security-specific fair value. The Board reviews and ratifies the execution of this process and the resultant fair value prices at least quarterly to assure the process produces reliable results.
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Fair Valuation Process – As noted above, the fair value team is composed of one or more representatives from each of the (i) Trust, (ii) Administrator, and (iii) Advisor. The applicable investments are valued collectively via inputs from each of these groups. For example, fair value determinations are required for the following securities: (i) securities for which market quotations are insufficient or not readily available on a particular business day (including securities for which there is a short and temporary lapse in the provision of a price by the regular pricing source), (ii) securities for which, in the judgment of the advisor, the prices or values available do not represent the fair value of the instrument. Factors which may cause the advisor to make such a judgment include, but are not limited to, the following: only a bid price or an ask price is available; the spread between bid and ask prices is substantial; the frequency of sales; the thinness of the market; the size of reported trades; and actions of the securities markets, such as the suspension or limitation of trading; (iii) securities determined to be illiquid; (iv) securities with respect to which an event that will affect the value thereof has occurred (a “significant event”) since the closing prices were established on the principal exchange on which they are traded, but prior to a Fund’s calculation of its net asset value. Specifically, interests in commodity pools or managed futures pools are valued on a daily basis by reference to the closing market prices of each futures contract or other asset held by a pool, as adjusted for pool expenses. Restricted or illiquid securities, such as private placements or non-traded securities are valued via inputs from the advisor based upon the current bid for the security from two or more independent dealers or other parties reasonably familiar with the facts and circumstances of the security (who should take into consideration all relevant factors as may be appropriate under the circumstances). If the advisor is unable to obtain a current bid from such independent dealers or other independent parties, the fair value team shall determine the fair value of such security using the following factors: (i) the type of security; (ii) the cost at date of purchase; (iii) the size and nature of a Fund’s holdings; (iv) the discount from market value of unrestricted securities of the same class at the time of purchase and subsequent thereto; (v) information as to any transactions or offers with respect to the security; (vi) the nature and duration of restrictions on disposition of the security and the existence of any registration rights; (vii) how the yield of the security compares to similar securities of companies of similar or equal creditworthiness; (viii) the level of recent trades of similar or comparable securities; (ix) the liquidity characteristics of the security; (x) current market conditions; and (xi) the market value of any securities into which the security is convertible or exchangeable.
Valuation of Fund of Funds – The Funds may invest in portfolios of open-end or closed-end investment companies (the “Underlying Funds”). The Underlying Funds value securities in their portfolios for which market quotations are readily available at their market values (generally the last reported sale price) and all other securities and assets at their fair value to the methods established by the board of directors of the Underlying Funds.
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Open-ended investment companies are valued at their respective net asset values as reported by such investment companies. The shares of many closed-end investment companies, after their initial public offering, frequently trade at a price per share, which is different than the net asset value per share. The difference represents a market premium or market discount of such shares. There can be no assurances that the market discount or market premium on shares of any closed- end investment company purchased by their Funds will not change.
The Funds utilize various methods to measure the fair value of all of its investments on a recurring basis. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of input are:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities that a 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 in an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing a 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 necessarily an indication of the risk associated with investing in those securities. The following table summarizes the inputs used as of April 30, 2017 for the Funds’ investments measured at fair value:
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Notes to Financial Statements (Continued)
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The Funds did not hold any Level 3 securities during the year. There were no transfers into or out of any level during the year. It is the Funds’ policy to recognize transfers between Level 1 & Level 2 at the end of the reporting period.
Repurchase Agreements
The Milestone Treasury Obligations Fund may purchase securities from financial institutions subject to the seller’s agreement to repurchase and the Fund’s agreement to resell the securities at par. The advisor only enters into repurchase agreements with financial institutions that are primary dealers and deemed to be creditworthy by the investment advisor in accordance with procedures adopted by the Board. Securities purchased subject to repurchase agreements are maintained with a custodian of the Fund and must have, at all times, an aggregate market value plus accrued interest greater than or equal to the repurchase price. If the market value of the underlying securities falls below 102% of the value of the repurchase price, the Fund will require the seller to deposit additional collateral by the next business day. In the event that the seller under the agreement defaults on its repurchase obligation or fails to deposit sufficient collateral, the Fund has the contractual right, subject to the requirements of applicable bankruptcy and insolvency laws, to sell the underlying securities and may claim any resulting loss from the seller.
Offsetting of Financial Assets and Derivative Liabilities – The following table presents the Fund’s liability derivatives available for offset, net of collateral pledged as of April 30, 2017:
Assets:
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Exchange Traded Funds
The Funds may invest in exchange traded funds (“ETFs”). ETFs are a type of index fund bought and sold on a securities exchange. An ETF trades like common stock and represents a fixed portfolio of securities designed to track the performance and dividend yield of a particular domestic or foreign market index. A Fund may purchase an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although the lack of liquidity on an ETF could result in it being more volatile. Additionally, ETFs have fees and expenses that reduce their value.
Income Taxes
It is each Fund’s policy to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income and gains to its shareholders and therefore, no provision for federal income tax has been made. Each Fund is treated as a separate taxpayer for federal income tax purposes.
The Funds recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Funds’ tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years (2014-2016), or expected to be taken in the Funds’ 2017 tax returns. The Funds identified their major tax jurisdictions as U.S. Federal, Nebraska and foreign jurisdictions where the Funds make significant investments; however, the Funds are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
Security Transactions and Related Income
Investment security transactions are accounted for on a trade date basis. Cost is determined and gains and losses are based upon the specific identification method for both financial statement and Federal income tax purposes. Dividend income is recorded on the ex-dividend date and interest income is recorded on an accrual basis. Purchase discounts and premiums on securities are accreted and amortized over the life of the respective securities.
Expenses
Expenses of the Trust that are directly identifiable to a specific Fund, are charged to that Fund. Expenses, which are not readily identifiable to a specific Fund, are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expense and the relative sizes of the Funds. Each Fund’s income, expenses (other than the class specific distribution and shareholder service fees) and realized and unrealized gains and losses are allocated proportionally each day between the classes based upon the relative net assets of each class.
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Distributions to Shareholders
Income will normally be declared and distributed at least annually for all Funds with the exception of the Milestone Treasury Obligations Fund. Income will normally be declared daily and distributed monthly for the Milestone Treasury Obligations Fund. The Funds declare and pay net realized capital gains, if any, annually. The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from GAAP. These differences are primarily due to the treatment of wash sale losses, grantor trust and partnership income.
Indemnification
The Trust indemnifies its officers and Trustees for certain liabilities that may arise from the performance of their duties to the Trust. Additionally, in the normal course of business, the Funds enter into contracts that contain a variety of representations and warranties and which provide general indemnities. A Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Trust expects the risk of loss due to these warranties and indemnities to be remote.
Advisory Fees
The Trust has entered into an Investment Advisory Agreement with CLS Investments, LLC (the “Advisor”, formerly Clarke Lanzen Skalla Investment Firm, LLC), a subsidiary of NorthStar Financial Services Group, LLC. As compensation for the services rendered, facilities furnished, and expenses borne by the Advisor, the Funds will pay the Advisor a fee accrued daily and paid monthly, at the annualized rate of 0.75% of net assets for CLS Global Aggressive Equity Fund, CLS Global Diversified Equity Fund, CLS Growth and Income Fund, CLS International Equity Fund, and CLS Shelter Fund; CLS Flexible Income at the annualized rate of 0.40%; and Milestone Treasury Obligations Fund at the annualized rate of 0.10%.
The Trustees have adopted a Shareholder Servicing Plan with respect to the Class N Shares, Investor Shares and Institutional Shares of the Funds (“Shareholder Servicing Plan”). The Shareholder Servicing Plan allows each of the Funds to use part of its assets for the payment of certain shareholder servicing expenses, including administrative or other shareholder support services. For these services under the Shareholder Servicing Plan, the Funds pay CLS an amount up to 0.25% of average net assets attributable to Class N Shares, Investor Shares and Institutional Shares as applicable, of the respective Funds on an annualized basis. CLS shall use monies to compensate other parties that have entered into shareholder servicing agreements with CLS with respect to the servicing of Fund shares.
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The Advisor has contractually agreed to waive or limit its management fees and to reimburse expenses, other than expenses relating to dividends on short sales, interest expense, indirect fees and expenses of underlying funds, and extraordinary or non-recurring expenses, through December 31, 2017, so that the annual operating expenses of the Funds do not exceed the percentage of the average daily net assets as indicated below:
The waivers and reimbursements, if any, of the Advisor’s fees pursuant to this contractual agreement for the year ended April 30, 2017, were as follows:
Fees waived or expenses reimbursed may be recouped by the Advisor from a Fund for a period up to three years from the date the fee or expense was waived or reimbursed. However, no recoupment payment will be made by a Fund if it would result in the Fund exceeding the contractual expense limitation described above. Except as noted below, during the year ended April 30, 2017, the Advisor recaptured no fees for prior period expense waivers/reimbursements from the Funds. The table below contains the amounts of fee waivers and expense reimbursements subject to recapture by the Advisor through April 30 of the years indicated:
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During the year ended April 30, 2017, the Advisor recaptured $28,889 for prior period expense waivers/reimbursements from the Funds. The table below contains the amounts of fee waivers and expense reimbursements subject to recapture by the Advisor for Milestone Treasury Obligations Fund through:
Distributor
The distributor of the Funds is Northern Lights Distributors, LLC (the “Distributor”), an affiliate of the advisor. The Trust, with respect to the Funds, has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act (the “Plan”). The Plan provides for the payment of a distribution fee to the Distributor at an annualized rate of 1.00% of the average daily net assets attributable to Class C shares. During the year ended April 30, 2017, the Global Diversified Equity Fund Class C shares incurred $7,480 pursuant to the Plan. The Global Diversified Equity Fund Class C closed on August 29, 2017. Class N shares do not pay any 12b-1 distribution fees, but pay the Advisor 0.25% for payments to third parties for shareholder services.
Administration, Fund Accounting, Transfer Agent, Custody Administration Fees
Gemini Fund Services, LLC (“GFS”), an affiliate of the distributor and advisor, provides administration, fund accounting, and transfer agent services to the Trust. Pursuant to a separate servicing agreement with GFS, the Funds pay GFS customary fees for providing administration, fund accounting, and transfer agency services to the Funds. Certain officers of the Trust are also officers of GFS, and are not paid any fees directly by the Funds for serving in such capacities.
In addition, certain affiliates of the distributor provide ancillary services to the Funds as follows:
Blu Giant, LLC (“Blu Giant”), an affiliate of GFS, the Distributor and the Advisor, provides EDGAR conversion and filing services as well as print management services for the Funds on an ad-hoc basis. For the provision of these services, Blu Giant receives customary fees from the Funds.
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Chief Compliance Officer
Northern Lights Compliance Services, LLC (“NLCS”), an affiliate of GFS, the Distributor and the Advisor, provides a Chief Compliance Officer to the Trust, as well as related compliance services, pursuant to a consulting agreement between NLCS and the Trust. Under the terms of such agreement, NLCS receives customary fees from the Funds.
Trustees Fees
Prior to January 1, 2017, the Trust pays each Trustee of the Trust who was not an interested person a flat fee of $24,000 per year plus $6,000 for an in-person quarterly meeting or $1,000 per quarter if participating in the meeting by telephone. Effective January 1, 2017, the Trust will pay each Trustee of the Trust who was not an interested person a flat fee of $50,000 per year, paid in quarterly installments. In every instance, the cost of the fees are to be allocated among the participating Funds in accordance with a formula that takes into account the overall asset size of each affected Fund. The Trust also reimburses the Trustees for travel and other expenses incurred in attending meetings of the Board. Officers of the Trust and Trustees who are interested persons of the Trust do not receive any direct compensation from the Trust.
Certain officers of the Trust are officers of GFS, NLCS, the Advisor and/or the Distributor.
The identified cost of investments in securities (including written options and short sales) owned by each Fund for federal income tax purposes, and their respective gross unrealized appreciation and depreciation at April 30 2017, were as follows:
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The cost of purchases and the proceeds from sales of investments, other than short-term securities, for the year ended April 30, 2017, were as follows:
An affiliated company is a company in which a Fund has ownership of at least 5% of the voting securities. Companies that are affiliates at April 30, 2017 are noted in the Funds’ Portfolio of Investments. Transactions during the year with companies that are affiliates or were affiliates at the beginning of the year are as follows:
CLS Global Aggressive Equity
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CLS Global Diversified Equity
CLS Growth and Income
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CLS Flexible Income
CLS International Equity
CLS Shelter
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As of April 30, 2017, the Funds had an unlimited number of shares authorized. Following is a summary of shareholder transactions for each Fund:
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Notes to Financial Statements (Continued) April 30, 2017
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The CLS Global Aggressive Equity Fund, CLS Global Diversified Equity Fund, CLS Growth and Income Fund, CLS Flexible Income Fund, CLS International Equity Fund, and CLS Shelter Fund have entered into a securities lending arrangement with The Bank of New York Mellon (the “Lending Agent”). Under the terms of the agreement, the Funds are authorized to loan securities through the Lending Agent to approved third-party borrowers. In exchange, the Funds receive cash collateral in the amount of at least 102% of the value of the securities loaned. The value of securities loaned is disclosed in a footnote on the statement of Assets & Liabilities and on the Schedule of Investments. Securities lending income is disclosed in the Funds’ Statements of Operations. Although risk is mitigated by the collateral, the Funds could experience a delay in recovering their securities and possible loss of income or value if the Borrower fails to return them.
The Lending Agent may invest the cash collateral received in connection with securities lending transactions in the Milestone Treasury Obligations Fund. The Milestone Treasury Obligations Fund is deemed an affiliate of the Trust and is managed by CLS Investments, LLC. The Milestone Treasury Obligations Fund is registered under the 1940 Act as an open end investment company, is subject to Rule 2a-7 under the 190 Act, which CLS may receive an investment advisory fee of up to 0.10% on an annualized basis of the average daily net assets of the Milestone Treasury Obligations Fund.
Securities Lending income represents a portion of total investment income and may not continue in the future due to market conditions.
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The Portfolio has adopted the disclosure provisions of FASB Accounting Standards Update No. 2014-11 (“ASU No. 2014-11”), “Transfers & Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 is intended to provide increased transparency about the types of collateral pledged in securities lending transactions and other similar transactions that are accounted for as secured borrowing.
The following table displays a breakdown of transactions accounted for as secured borrowings, the gross obligations by class of collateral pledged, and the remaining contractual maturity of those transactions as of April 30, 2017:
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The beneficial ownership, either directly or indirectly, of more than 25% of voting securities of a fund creates a presumption of control of the Fund, under Section 2(a)(9) of the 1940 Act. As of April 30, 2017, Nationwide Trust Company held the following voting securities for the sole benefit of customers and may be deemed to control the Funds:
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The tax character of distributions for the following periods were as follows:
For the year ended April 30, 2017:
For the year ended April 30, 2016:
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As of April 30, 2017, the components of accumulated earnings/ (deficit) on a tax basis were as follows:
The difference between book basis and tax basis undistributed net investment income, accumulated net realized gain/(loss), and unrealized appreciation/(depreciation) from investments is primarily attributable to the tax deferral of losses on wash sales, and adjustments for partnerships and C-Corporation return of capital distributions. In addition, the amount listed under other book/tax differences is primarily attributable to dividends payable.
Late year losses incurred after December 31 within the fiscal year are deemed to arise on the first business day of the following fiscal year for tax purposes. The Funds incurred and elected to defer such late year losses as follows:
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At April 30, 2017, the Funds had capital loss carry forwards for federal income tax purposes available to offset future capital gains as follows:
Permanent book and tax differences, primarily attributable to the reclassification of Fund distributions, and adjustments for paydowns and partnerships, resulted in reclassifications for the year ended April 30, 2017 as follows:
On October 13, 2016 the Securities and Exchange Commission amended existing rules intended to modernize reporting and disclosure of information. These amendments relate to Regulation S-X which sets forth the form and content of financial statements. At this time, management is evaluating the implications of adopting these amendments and their impact on the financial statements and accompanying notes.
Subsequent events after the date of the Statement of Assets and Liabilities have been evaluated through the date the financial statements were issued. Management has concluded that there are no material items requiring adjustment or disclosure in the financial statements.
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Trustees
AdvisorOne Funds
Omaha, Nebraska
We have audited the accompanying statements of assets and liabilities, including the schedules of investments of CLS Global Aggressive Equity Fund, CLS Global Diversified Equity Fund, CLS Growth and Income Fund, CLS Flexible Income Fund, CLS International Equity Fund, CLS Shelter Fund (the “CLS Funds”), and Milestone Treasury Obligations Fund (“Milestone”), each a series of AdvisorOne Funds, as of April 30, 2017, and with respect to CLS Funds, the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, and with respect to Milestone, the statements of operations for the year ended April 30, 2017, the statement of changes for the year ended April 30, 2017, the five months ended April 30, 2016, and the year ended November 30, 2015, and the financial highlights for the year ended April 30, 2017, the five months ended April 30, 2016, and for each of the four years in the period ended November 30, 2015. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform an audit of the Funds’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of April 30, 2017, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of CLS Global Aggressive Equity Fund, CLS Global Diversified Equity Fund, CLS Growth and Income Fund, CLS Flexible Income Fund, CLS International Equity Fund, CLS Shelter Fund, and Milestone Treasury Obligations Fund, as of April 30, 2017, and the results of their operations, the changes in their net assets, and their financial highlights for the periods indicated above, in conformity with accounting principles generally accepted in the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
June 28, 2017
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Shareholder Expense Example (Unaudited)
As a shareholder of the Funds you may incur two types of costs: (1) transaction costs, including contingent deferred sales charges on redemptions and (2) ongoing costs, including management fees; distribution and/or service (12b-1 fees) fees; and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated below.
Actual Expenses: The first section of the table 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 applicable number under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during the period.
Hypothetical Examples for Comparison Purposes: The second section of the table below provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 Fund 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), or contingent deferred sales charges on redemptions. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
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Shareholder Expense Example (Unaudited)(Continued)
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Independent Trustees (Unaudited)
Unless otherwise noted, the address of each Trustee and Officer is 17605 Wright Street, Omaha, NE 68130.
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Interested Trustees and Officers (Unaudited)
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Interested Trustees and Officers (Unaudited) (Continued)
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Supplemental Information (Unaudited)
Factors Considered by the Trustees in
Approval of the Renewal of an Investment Advisory Agreement
At a regular meeting (the “Meeting”) of the Board of Trustees (the “Board” or the “Trustees”) of the AdvisorOne Funds (the “Trust”) held on January 19, 2017, the Board, including those Trustees who are not “interested persons” as that term is defined in the Investment Company Act of 1940, as revised (the “Independent Trustees”), considered the renewal of the Investment Advisory Agreement between the Trust and CLS Investments, LLC (“CLS”) on behalf of the CLS Global Diversified Equity Fund, CLS Growth and Income Fund, CLS International Equity Fund, CLS Global Aggressive Equity, CLS Flexible Income, CLS Shelter Fund and the Milestone Treasury Obligations Fund (individually, each a “Fund” and collectively, the “Funds”)(“Advisory Agreement”).
The Board reviewed and discussed written materials that were provided by CLS in advance of the Meeting, CLS’s oral presentation and other information that the Board received at the Meeting. The Board relied upon the advice of independent legal counsel and their own business judgment in determining the material factors to be considered in evaluating the Advisory Agreement and the weight to be given to each such factor. The conclusions reached by the Trustees were based on a comprehensive evaluation of all of the information provided and were not the result of any one factor. Moreover, each Trustee may have afforded different weight to the various factors in reaching his conclusions with respect to the Advisory Agreement.
Nature, extent and quality of services. As to the nature, extent, and quality of the services provided by CLS to the Funds, the Trustees reviewed materials provided by CLS related to the Advisory Agreement, including a description of the manner in which investment decisions are made and executed, and discussed the benefits of the professional personnel performing services for the Funds, including the team of individuals that primarily monitor and execute the investment process, noting their decades of combined experience. The Board noted changes in the CLS portfolio management team. Management discussed the quality of backgrounds of CLSA personnel and the depth of their experience. The Trustees noted their appreciation for the number of CFAs managing the Funds. The Trustees expressed confidence in the remaining portfolio management team, citing the consistent portfolio management process that the CIO has achieved. The Board noted the fiduciary duty commitment of CFAs and that CLS appears to have embraced a culture of compliance that is strong and consistent. The Board then discussed the quality of CLS’s compliance personnel and the compliance tools utilized to oversee CLS’s management of the Funds. Additionally, the Board received satisfactory written responses from CLS with respect to a series of important questions, including whether CLS was involved in any lawsuits or pending regulatory actions. The Board discussed the extent of CLS’s rigorous investment analysis process and CLS’s willingness to invest the necessary resources to ensure portfolio managers have the tools necessary to conduct their research. The Board stated their appreciation of CLS’s willingness to make management available to the Independent Trustees when requested and their willingness to re-examine strategies when necessary for benefits of shareholders. The Board reviewed the financial information provided by CLS and concluded that CLS has the financial resources to meet its obligations to the Funds. The Trustees viewed the overall services provided by CLS as satisfactory.
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Supplemental Information (Unaudited) (Continued)
Performance. The Board reviewed information on the investment performance of Milestone and the Core Funds versus their respective benchmark for the one-year, five-year, ten-year, and since inception periods. They also reviewed the performance of each Fund compared to its Morningstar category and discussed the relative performance in the context of fund turnover, volatility and long term track record. In addition to the data provided by CLS as part of the 15(c) materials, the Board also reviewed the quarterly performance data provided by the adviser. The Board discussed the positive direction of investment performance relative to the Fund’s respective benchmarks. They noted that under the CIO’s leadership, the Board had seen a more positive contribution to overall performance and they appreciated the controlled risk environment he has installed. They also noted that CLS had done well at managing risk and communicating the risk characteristics of the Funds to investors. The Board noted that generally, performance in the near term had been strong and, while certain Funds have underperformed since inception, recent performance had a positive impact on long term performance metrics. The Board also noted recent strong performance relative to the Funds’ peer groups. Regarding performance relative to each Fund’s index-based benchmarks, the Board discussed the differences between an index and an actively managed product and agreed that the index was less relevant than performance of other actively managed products. With regards to performance, the Board also noted the following:
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After further discussion and based upon the information noted above and the information provided by CLS about each Fund’s performance versus its respective benchmark for the one-year, five-year, and since inception periods, and in some cases, ten-year performance data, the Board concluded that performance for each Fund was reasonable.
Fees and Expenses. The Board reviewed the advisory fees and expense ratios of the Funds relative to each Fund’s peer group and Morningstar category and noted that each Fund’s gross advisory fee and net expense ratio were generally in line with the average fee of the respective Fund peer group. They discussed the advisory fee of Growth and Income, which was materially higher than the Morningstar category average, noting that the category average is not particularly helpful because there was a significant range due to the variability of the funds within the category. They also noted that Fund compared better to its Morningstar category when comparing its fee against the median fee. The Board also noted the Fund’s gross expense ratio was lower than the Morningstar category average. In addition to the advisory fees, the Board discussed and noted that CLS receives shareholder servicing fees with respect to the class N shares of the Core
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Funds pursuant to the Shareholder Servicing Plan which was adopted by the Board, all of which is paid to third party service providers. The Board then reviewed the contractual fee agreements for each Fund, which stated that CLS had agreed to waive or limit its management fees and/ or reimburse expenses at least through August 31, 2018 so that the total operating expenses of the Core Funds do not exceed specified limits, and the Board found such arrangements to be beneficial to shareholders. The Board concluded that overall the total expense ratios of each Fund are very competitive, and that the advisory fee waivers continued to benefit each Fund. The Board concluded that the advisory fee paid by each Fund was reasonable.
Profitability. The Board considered the profits realized by CLS in connection with the operation of each Fund, and considered whether the amount of profit was a fair entrepreneurial profit for the management of the Fund. The Trustees discussed industry trends and profitability averages. The Board also considered the income and other benefits realized by CLS and its affiliates from activities and services provided to the Funds. The Board reviewed CLS’s financial statements as of December 31, 2016 and noted there were no adverse material changes in the financial condition of CLS since the approval of the Advisory Agreement at the January 19, 2017 meeting. The Trustees concluded that to the extent CLS earned a profit from a Fund, the profits appeared reasonable and not excessive.
Economies of Scale. The Board considered whether economies of scale have been attained with respect to the management of the Funds, and whether there is potential for realization of any further economies of scale. After discussion, it was the consensus of the Board that, because of the current size of each Fund, CLS continues to waive a portion of its advisory fee for all Funds, with the exception of Milestone, in order to maintain the expense cap, and therefore the Board will not request any changes to the management fee structure. After further discussion, representatives of CLS and the Board agreed that economies of scale would be re-evaluated in the future.
Conclusion. Having requested and received such information from CLS as the Board believed to be reasonably necessary to evaluate the terms of the Advisory Agreement, and as assisted by the advice of independent counsel, the Board, including a majority of the Independent Trustees, determined that the terms of the Advisory Agreement were reasonable and renewal of the Advisory Agreement was in the best interests of each Fund and its shareholders.
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Proxy Voting Policy
Information regarding how the Funds voted proxies relating to portfolio securities for the most recent twelve month period ended June 30 as well as a description of the policies and procedures that the Funds use to determine how to vote proxies is available without charge, upon request, by calling 1-866-811-0225 or by referring to the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
Portfolio Holdings
The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC (1-800-SEC-0330). The information on Form N-Q is available without charge, upon request, by calling 1-866-811-0225.
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ABOUT CLS
CLS Investments (CLS) is a third party investment manager, ETF strategist, and long-time trusted partner in the financial industry. CLS’s extensive risk management experience, active asset allocation approach, and customizable strategy offerings have led clients to entrust their portfolios to CLS since 1989.
Through CLS’s partnership structure, your financial advisor maintains a direct relationship with you, while CLS’s portfolio management and analytics teams take on the day-to-day research, trading, and operations required to manage your account. Together, you and your advisor use the tools CLS provides to determine the investing strategy, investment types, and risk tolerance level most appropriate for you. Your advisor provides this information to CLS so we can accordingly make timely active asset allocation decisions within your portfolio. Through this mutually beneficial connection, CLS enhances your advisor’s service to you.