NOTE 1 – ORGANIZATION
The Pemberwick Fund (the “Pemberwick Fund” or the “Fund”) is a series of Manager Directed Portfolios (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the
“1940 Act”), and was organized as a Delaware statutory trust on April 4, 2006. The Fund is an open-end investment management company and is a non-diversified series of the Trust. The Pemberwick Fund, a series of FundVantage Trust (the “Predecessor
Fund”) was reorganized into a newly created series of the Trust (the “Reorganization”) pursuant to an Agreement and Plan of Reorganization dated November 1, 2016. The Reorganization was approved by the shareholders of the Predecessor Fund at a
meeting held on November 17, 2016. The Predecessor Fund transferred all its assets to the Fund in exchange for shares of the Fund and the assumption by the Fund of all the known liabilities of the Predecessor Fund. The Predecessor Fund commenced
operations on February 1, 2010. Pemberwick Investment Advisors LLC (“Pemberwick” or the “Advisor”) serves as the investment advisor to the Fund, and J.P. Morgan Investment Management Inc. (“J.P. Morgan” or the “Sub-Advisor”) serves as the sub-advisor
to the Fund. Pemberwick and J.P. Morgan also served as the advisor and sub-advisor, respectively, to the Predecessor Fund. The Fund changed its fiscal year end from April 30 to March 31 in 2017. The investment objective of the Fund is to seek
maximum current income that is consistent with liquidity and stability of principal.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with U.S. generally accepted accounting principles (“GAAP”). The
Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services – Investment Companies.
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A.
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Security Valuation: All investments in securities are recorded at their estimated fair value, as described in Note 3.
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B.
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Federal Income Taxes: It is the Fund’s policy 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 taxable income to its shareholders. Therefore, no federal income or excise tax provisions are required.
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The Fund recognizes 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 Fund’s tax
positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken or expected to be taken on a tax return. The tax returns for the Fund for the prior three fiscal years
are open for examination. The Fund identifies its major tax jurisdictions as U.S. Federal and the state of Delaware.
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Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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C.
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Securities Transactions, Income and Distributions: Securities transactions are accounted for on the trade date. Realized gains and losses on securities sold are
determined on the basis of identified cost. Interest income is recorded on an accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Discounts and premiums on fixed income securities are
amortized using the effective interest method.
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The Fund distributes substantially all of its net investment income, if any, daily, and net realized capital gains, if any, annually. Distributions from net realized gains for book purposes may include
short-term capital gains. All short-term capital gains are included in ordinary income for tax purposes. The amount of dividends and distributions to shareholders from net investment income and net realized capital gains is determined in
accordance with federal income tax regulations, which differ from GAAP. To the extent these book/tax differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax treatment.
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The Fund is charged for those expenses that are directly attributable to it, such as investment advisory, custody and transfer agent fees. Expenses that are not attributable to a Fund are typically allocated
among the funds in the Trust proportionately based on allocation methods approved by the Board of Trustees (the “Board”). Common expenses of the Trust are typically allocated among the funds in the Trust based on a fund’s respective net
assets, or by other equitable means.
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D.
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Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets during the reporting period. Actual results could differ from those estimates.
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E.
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Redemption Fees: The Fund does not charge redemption fees to shareholders.
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F.
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Reclassification of Capital Accounts: GAAP requires that certain components of net assets relating to permanent differences be reclassified between financial and tax
reporting. These reclassifications have no effect on net assets or net asset value per share.
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G.
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Events Subsequent to the Fiscal Year End: In preparing the financial statements as of March 31, 2020, management considered the impact of subsequent events for
potential recognition or disclosure in the financial statements and had concluded that no additional disclosures are necessary. On November 25, 2019, U.S. Bancorp, the parent company of Quasar Distributors, LLC, the Fund’s distributor,
announced that it had signed a purchase agreement to sell Quasar to Foreside Financial Group, LLC such that Quasar will become a wholly-owned broker-dealer subsidiary of Foreside. The transaction closed at the end of March 2020. Quasar will
remain the Fund’s distributor.
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Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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H.
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Recent Accounting Pronouncements and Rule Issuances: In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are
required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is
permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management has
evaluated the impact of this change in guidance, and due to the permissibility of early adoption, modified the Fund’s fair value disclosures for the current reporting period.
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NOTE 3 – SECURITIES VALUATION
The Fund has adopted authoritative fair value accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards
require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value, a discussion of changes in valuation techniques and related inputs during the period, and expanded disclosure of
valuation levels for major security types. These inputs are summarized in the three broad levels listed below:
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Level 1 –
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Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.
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Level 2 –
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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.
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Level 3 –
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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.
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Following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities measured at fair value on a recurring basis.
Debt Securities: Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and
U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently
executed transactions in securities of
Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may
incorporate market observable data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. To the extent these securities are actively
traded and valuation adjustments are not applied, they are categorized in level 2 of the fair value hierarchy.
Registered Investment Companies: Investments in registered investment companies (e.g., mutual funds) are generally priced at the ending NAV provided by the
applicable registered investment company’s service agent and will be classified in Level 1 of the fair value hierarchy.
Short-Term Debt Securities: Short-term debt instruments having a maturity of less than 60 days are valued at the evaluated mean price supplied by an
approved pricing service. Pricing services may use various valuation methodologies including matrix pricing and other analytical pricing models as well as market transactions and dealer quotations. In the absence of prices from a pricing service, the
securities will be priced in accordance with the procedures adopted by the Board. Short-term debt securities are generally classified in Level 1 or Level 2 of the fair market hierarchy depending on the inputs used and market activity levels for
specific securities.
The Board delegated day-to-day valuation issues to a Valuation Committee of the Trust which, as of March 31, 2020, was comprised of officers of the Trust. The function of the Valuation Committee
is to value securities where current and reliable market quotations are not readily available, or the closing price does not represent fair value, by following procedures approved by the Board. These procedures consider many factors, including the
type of security, size of holding, trading volume and news events. All actions taken by the Valuation Committee are subsequently reviewed and ratified by the Board.
Depending on the relative significance of the valuation inputs, fair valued securities may be classified in either level 2 or level 3 of the fair value hierarchy.
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 fair valuation hierarchy of
the Fund’s securities as of March 31, 2020:
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Level 1
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Level 2
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Level 3
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Total
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Corporate Bonds and Notes
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$
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—
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$
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295,564,028
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$
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—
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$
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295,564,028
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Collateralized
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Mortgage Obligations
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—
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8,723,146
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—
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8,723,146
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U.S. Government
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Agency Obligations
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—
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580,660
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—
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580,660
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U.S. Treasury Obligations
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—
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31,016,085
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—
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31,016,085
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Short-Term Investments
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10,900,609
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—
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—
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10,900,609
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Total Investments
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in Securities
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$
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10,900,609
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$
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335,883,919
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$
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—
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$
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346,784,528
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Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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NOTE 4 – INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
For the year ended March 31, 2020, the Advisor provided the Fund with investment management services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office
space, and facilities, and provides most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee at an annual rate of 0.25% from the Fund based upon the average daily net assets of the Fund.
For the year ended March 31, 2020, the Fund incurred $898,629 in advisory fees. Advisory fees payable at March 31, 2020 for the Fund were $45,030. The Advisor has hired J.P. Morgan Investment Management Inc. as a sub-advisor to manage the U.S.
Treasuries and agency debt portion of the Fund. The Advisor pays the Sub-Advisor fee for the Pemberwick Fund from its own assets and these fees are not an additional expense of the Fund.
The Fund is responsible for its own operating expenses. The Advisor voluntarily waives 10 basis points of the annual investment advisory fee Pemberwick is entitled to receive from the Fund
pursuant to the advisory agreement between Pemberwick and the Fund. Such waiver will continue until Pemberwick notifies the Fund of a change in its voluntary waiver or its discontinuation. For the year ended March 31, 2020, the Advisor voluntarily
waived fees in the amount of $359,451. The fees waived by the Advisor are not subject to recoupment.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services, LLC (“Fund Services” or the “Administrator”) acts as the Fund’s Administrator under an Administration Agreement.
The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Fund’s custodian, transfer agent and accountants;
coordinates the preparation and payment of the Fund’s expenses and reviews the Fund’s expense accruals. Fund Services also serves as the fund accountant and transfer agent to the Fund. Vigilant Compliance, LLC serves as the Chief Compliance Officer
to the Fund. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. For the year ended March 31, 2020, the Fund incurred the following expenses for administration, fund accounting, transfer agency and custody fees:
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Administration and fund accounting
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$
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320,832
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Custody
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$
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34,492
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Transfer agency(a)
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$
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25,744
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(a)
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Does not include out-of-pocket expenses.
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At March 31, 2020, the Fund had payables due to Fund Services for administration, fund accounting and transfer agency fees and to U.S. Bank N.A. for custody fees in the following amounts:
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Administration and fund accounting
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$
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78,572
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Custody
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$
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8,680
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Transfer agency(a)
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$
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6,414
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(a)
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Does not include out-of-pocket expenses.
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Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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Quasar Distributors, LLC (the “Distributor”) acts as the Fund’s principal underwriter in a continuous public offering of the Fund’s shares. The Distributor is an affiliate of the Administrator. A
Trustee of the Trust is deemed to be an interested person of the Trust due to his former position with the Distributor.
Certain officers of the Fund are employees of the Administrator and are not paid any fees by the Fund for serving in such capacities.
NOTE 5 – SECURITIES TRANSACTIONS
For the year ended March 31, 2020, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, were as follows:
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Purchases
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U.S. Government Obligations
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$
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10,518,364
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Other
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$
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95,226,039
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Sales
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U.S. Government Obligations
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$
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14,531,935
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Other
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$
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119,489,945
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NOTE 6 – INCOME TAXES AND DISTRIBUTIONS TO SHAREHOLDERS
As of March 31, 2020, the components of accumulated earnings/(losses) on a tax basis were as follows:
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Cost of investments(a)
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$
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357,938,107
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Gross unrealized appreciation
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996,524
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Gross unrealized depreciation
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(12,150,103
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)
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Net unrealized depreciation
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(11,153,579
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)
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Undistributed ordinary income
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426
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Undistributed long-term capital gain
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—
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Total distributable earnings
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426
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Other accumulated gains/(losses)
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(826,274
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)
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Total accumulated earnings/(losses)
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$
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(11,979,427
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)
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(a)
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The difference between the book basis and tax basis net unrealized appreciation and cost is attributable primarily to wash sales.
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At March 31, 2020, the Fund had short-term tax basis capital losses of $(211,798) with no expiration date and long-term tax basis capital losses of $(614,476) with no expiration date.
The tax character of distributions paid during the year ended March 31, 2020, and the year ended March 31, 2019 was as follows:
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Year Ended
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Year Ended
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March 31, 2020
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March 31, 2019
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Ordinary income
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$8,766,061
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$9,138,771
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Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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NOTE 7 – PRINCIPAL RISKS
The following is a list of certain risks that may apply to your investment in the Fund. Further information about investment risks is available in the Fund’s Statement of Additional Information.
Credit Risk: Credit risk is the risk that an issuer will not make timely payments of principal and interest. A credit rating assigned to a particular debt
security is essentially the opinion of a nationally recognized statistical rating organization (“NRSRO”) as to the credit quality of an issuer and may prove to be inaccurate. There is also the risk that a bond issuer may “call,” or repay, its high
yielding bonds before their maturity dates.
Concentration Risk: By concentrating its assets in the banking industry, the Fund is subject to the risk that economic, business, political or other
conditions that have a negative effect on the banking industry will negatively impact the Fund to a greater extent than if the Fund’s assets were diversified across different industries or sectors.
Deflation Risk: Deflation to the U.S. economy may cause principal to decline and inflation-linked securities could underperform securities whose interest
payments are not adjusted for inflation or linked to a measure of inflation.
Fixed Income Market Risks: Fixed-income securities are or may be subject to interest rate, credit, liquidity, prepayment and extension risks. There is
also the risk that an issuer may “call,” or repay, its high yielding bonds before their maturity dates. Fixed-income securities subject to prepayment can offer less potential for gains during a declining interest rate environment and similar or
greater potential for loss in a rising interest rate environment. Limited trading opportunities for certain fixed-income securities may make it more difficult to sell or buy a security at a favorable price or time.
Interest Rate Risk: Interest rates may go up resulting in a decrease in the value of the securities held by the Fund. Interest rates have been
historically low, so the Fund faces a heightened risk that interest rates may rise. Debt securities subject to prepayment can offer less potential for gains during a declining interest rate environment and similar or greater potential for loss in a
rising interest rate environment.
Management Risk: The Advisor’s or Sub-Advisor’s judgments about the attractiveness, value and potential appreciation of the Fund’s investments may prove to
be incorrect and the investment strategies employed by the Advisor and the Sub-Advisor in selecting investments for the Fund may not result in an increase in the value of your investment or in overall performance equal to other similar investment
vehicles having similar investment strategies.
Market Risk: Certain investments selected for the Fund’s portfolio may be worth less than the price originally paid for them, or less than they were worth
at an earlier time. The value of the Fund’s investments may go up or down, sometimes dramatically and unpredictably, based on current market conditions, such as real or perceived adverse political or economic conditions, inflation, changes in
interest rates, lack of liquidity in the fixed income markets or adverse investor sentiment.
Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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Recent Market Events; Market Risk. Market risk may affect a single issuer, industry, sector of the economy or the market as a whole. U.S. and international
markets experienced significant volatility in recent months and years due to a number of economic, political and global macro factors including the impact of the coronavirus as a global pandemic and related public health issues, growth concerns in
the U.S. and overseas, uncertainties regarding interest rates, trade tensions and the threat of tariffs imposed by the U.S. and other countries. In particular, the spread of the novel coronavirus worldwide has resulted in disruptions to supply chains
and customer activity, stress on the global healthcare system, rising unemployment claims, quarantines, cancellations, market declines, the closing of borders, restrictions on travel and widespread concern and uncertainty. Health crises and related
political, social and economic disruptions caused by the spread of the recent coronavirus outbreak may also exacerbate other pre-existing political, social and economic risks in certain countries. It is not possible to know the extent of these
impacts, and they may be short term or may last for an extended period of time. These developments as well as other events, such as the U.S. presidential election, could result in further market volatility and negatively affect financial asset
prices, the liquidity of certain securities and the normal operations of securities exchanges and other markets, despite government efforts to address market disruptions. In addition, the Fund may face challenges with respect to its day-to-day
operations if key personnel of the Advisor or other service providers are unavailable due to quarantines and restrictions on travel related to the coronavirus outbreak. Global economies and financial markets are increasingly interconnected, which
increases the probabilities that conditions in one country or region might adversely impact issues in a different country or region.
Non-Diversification Risk: Because the Fund is “non-diversified,” it may invest a greater percentage of its assets in the securities of a single issuer. As
a result, a decline in the value of an investment in a single issuer could cause the Fund’s overall value to decline to a greater degree than if the Fund held a more diversified portfolio.
Prepayment Risk: In times of declining interest rates, the Fund’s higher yielding securities will be prepaid, and the Fund will have to replace them with
securities having a lower yield.
U.S. Government Agencies and Instrumentalities Securities Risk: Securities issued by U.S. Government agencies and instrumentalities have different levels
of U.S. Government credit support. Some are backed by the full faith and credit of the U.S. Government, while others are supported by only the discretionary authority of the U.S. Government or only by the credit of the agency or instrumentality. No
assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities because they are not obligated to do so by law. Guarantees of timely prepayment of principal and interest do not assure
that the market prices and yields of the securities are guaranteed nor do they guarantee the net asset value or performance of the Fund, which will vary with changes in interest rates, the Advisor’s success and other market conditions.
Pemberwick Fund
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NOTES TO FINANCIAL STATEMENTS (Continued)
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March 31, 2020
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NOTE 8 – GUARANTEES AND INDEMNIFICATION
In the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and 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, based on experience, the Fund expects the risk of loss to be remote.
NOTE 9 – CONTROL OWNERSHIP
The beneficial ownership, either directly or indirectly of more than 25% of the voting securities of a Fund creates a presumption of control of the Fund, under Section 2(a)(9) of the Investment
Company Act of 1940. While no individual shareholder has a position which exceeds 25% of the voting securities of the Fund, there are numerous shareholders who are affiliated with the Advisor. As of March 31, 2020, investors who are affiliated with
the Advisor, when aggregated, owned 100% of the voting securities of the Fund.
Pemberwick Fund