NOTES TO FINANCIAL STATEMENTS
The Advisors’ Inner
Circle Fund
(the “Trust”) is organized as a Massachusetts business trust under an Amended and Restated Agreement and Declaration of Trust dated February 18, 1997. The Trust is registered under the Investment Company Act of 1940,
as amended, as an open-end management investment company with 45 funds. The financial statements herein are those of the CBRE Clarion Long/Short Fund (the “Fund”). The investment objective of the Fund is total return, consisting of capital
appreciation and current income, while attempting to preserve capital and mitigate risk by employing hedging strategies, primarily short selling. The Fund is non-diversified and seeks to achieve its objective by taking long and short positions in
equity securities of companies that are principally engaged in the real estate industry. The Fund’s adviser, CBRE Clarion Securities LLC (the “Adviser”) utilizes a multi-step investment process for constructing the Fund’s
investment portfolio that combines top-down region and sector allocation with bottom-up individual stock selection. The Fund may invest in securities of companies of any market capitalization and, as a general matter, the Fund expects its
investments to be primarily in equity securities issued by U.S. companies. However, the Fund may invest up to 50% of its assets in securities of non-U.S. issuers, including emerging market issuers, denominated in U.S. dollars, non-U.S. currencies or
multinational currency units. The financial statements of the remaining funds of the Trust are presented separately. The assets of each fund of the Trust are segregated, and a shareholder’s interest is limited to the fund of the Trust in which
shares are held.
The Fund commenced operations on December 30, 2011 as a result of a tax-free contribution in-kind from a limited partnership
managed by the Adviser. On this date, the Fund issued 10,598,589 Institutional Class Shares in exchange for net assets at their then current value of $105,985,887, including unrealized appreciation of $9,338,636.
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2.
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Significant Accounting Policies:
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The
following is a summary of the significant accounting policies followed by the Fund:
Use of Estimates
— The preparation of
financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
19
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
— Securities listed on a securities exchange, market or automated quotation system for which quotations are readily
available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded, or, if there is no such
reported sale, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. The prices for foreign securities are reported in local currency and converted to U.S. dollars using currency
exchange rates. Prices for most securities held in the Fund are provided daily by recognized independent pricing agents. If a security price cannot be obtained from an independent, third-party pricing agent, the Fund will seek to obtain a bid price
from at least one independent broker.
Securities for which market prices are not “readily available” are valued in accordance
with Fair Value Procedures established by the Trust’s Board of Trustees (the “Board”). The Trust’s Fair Value Procedures are implemented through a Fair Value Committee (the “Committee”) designated by the Board. Some of
the more common reasons that may necessitate that a security be valued using Fair Value Procedures include: the security’s trading has been halted or suspended; the security has been de-listed from a national exchange; the security’s
primary trading market is temporarily closed at a time when under normal conditions it would be open; the security has not been traded for an extended period of time; the security’s primary pricing source is not able or willing to provide a
price; or trading of the security is subject to local government-imposed restrictions. When a security is valued in accordance with the Fair Value Procedures, the Committee will determine the value after taking into consideration relevant
information reasonably available to the Committee. As of October 31, 2012, there were no fair valued securities.
In accordance with
the authoritative guidance on fair value measurements and disclosure under U.S. GAAP, the Fund discloses fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The objective
of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accordingly, the fair value
hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
20
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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(Level 1) and the lowest priority to unobservable inputs (Level 3).The three levels of the fair value hierarchy are described below:
• Level 1 — Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that the Fund has the ability to
access at the measurement date;
• Level 2 — Other significant observable inputs (includes quoted prices for similar
securities, interest rates, prepayment speeds, credit risk, referenced indices, quoted prices in inactive markets, adjusted quoted prices in active markets, adjusted quoted prices on foreign equity securities that were adjusted in accordance with
pricing procedures approved by the Board, etc.); and
• Level 3 — Prices, inputs or exotic modeling techniques which are both
significant to the fair value measurement and unobservable (supported by little or no market activity).
Investments are classified
within the level of the lowest significant input considered in determining fair value. Investments classified within Level 3 whose fair value measurement considers several inputs may include Level 1 or Level 2 inputs as components of the overall
fair value measurement.
As of October 31, 2012, all of the Fund’s investments and securities sold short were considered Level
1. For details of investment classifications, reference the Schedule of Investments and Securities Sold Short.
For the period ended
October 31, 2012, there have been no transfers between Level 1 and Level 2 assets and liabilities. During the period ended October 31, 2012, there were no Level 3 securities.
During the period ended October 31, 2012, there have been no significant changes to the Fund’s fair valuation methodologies.
Securities Sold Short
— The Fund engages in short selling. To complete a short sale transaction, the Fund must borrow the security to
make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender amounts equal to any dividends or interest, which accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a
premium, which would decrease the proceeds of the security sold. Upon entering into a short position, the Fund records the proceeds as a deposit with the prime broker in its Statement of Assets and Liabilities and establishes an offsetting liability
for the securities sold under the
21
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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short sale agreement. The liability is subsequently marked to market to reflect changes in the value of securities sold short. The Fund is subject to risk of loss if the broker were to fail to
perform its obligation under contractual terms. Short sales transactions result in off-balance sheet risk because the ultimate obligation may exceed the amount shown in the Statements of Assets and Liabilities. The Fund will incur a loss if the
price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the price of the security declines between those dates. Short selling involves the risk
of a potentially unlimited increase in the market value of the security sold short, which could result in a potentially unlimited loss for the Fund.
In accordance with the terms of its prime brokerage agreement, the Fund may receive rebate income or be charged a fee on borrowed securities. Such income or fee is calculated on a daily basis based upon the market
value of each borrowed security and a variable rate that is dependent upon the availability of such security. The Fund records these prime broker charges on a net basis as interest income or interest expense on securities sold short. In addition,
the Fund is required to pay the lender any dividends declared on short positions. Such amounts are recorded on the ex-dividend date as dividend expense on securities sold short.
Short sales are collateralized by cash deposits with the counterparty broker, Morgan Stanley, and pledged securities held at the custodian, Union
Bank, N.A. The collateral required is determined daily by reference to the market value of the short positions.
The Fund is required to
maintain margin cash balances at the prime broker sufficient to satisfy its short sales positions on a daily basis. The Fund is charged interest expense at the Fed Funds Rate plus 200 basis points on the amount of any shortfall in the required cash
margin.
The Fund had prime brokage borrowings throughout the period ended October 31, 2012 as follows:
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Maximum
Amount
Borrowed
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Average
Outstanding
Balance
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Effective
Interest Rate
Paid
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Interest
Paid
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$11,360,182
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$
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5,776,263
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2.14
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%
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$
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17,542
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Federal Income Taxes
— It is the Fund’s intention to qualify as a regulated investment company for
Federal income tax purposes by complying with the appropriate provisions of Subchapter M of the Internal Revenue Code of
22
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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1986, as amended. Accordingly, no provisions for Federal income taxes have been made in the financial statements.
The Fund evaluates tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether it is “more-likely than-not” (i.e., greater than 50-percent) that
each tax position will be sustained upon examination by a taxing authority based on the technical merits of the position. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current
year. The Fund did not record any tax provision in the current period. However, management’s conclusions regarding tax positions taken may be subject to review and adjustment at a later date based on factors including, but not limited to,
examination by tax authorities (i.e., the initial open tax year end, as applicable), on-going analysis of and changes to tax laws, regulations and interpretations thereof.
As of and during the period ended October 31, 2012, the Fund did not have any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax
expense in the Statement of Operations. During the period, the Fund did not incur any interest or penalties.
Security Transactions
and Investment Income/Expense
— Security transactions are accounted for on trade date for financial reporting purposes. Costs used in determining realized gains and losses on the sales of investment securities are based on specific
identifications. Dividend income and expense is recognized on the ex-dividend date and interest income is recognized on an accrual basis.
Foreign Currency Translation —
The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets
and liabilities denominated in a foreign currency are translated into U.S. dollars on the date of valuation. The Fund does not isolate that portion of realized or unrealized gains and losses resulting from changes in the foreign exchange rate from
fluctuations arising from changes in the market prices of the securities. These gains and losses are included in net realized and unrealized gains and losses on investments on the Statement of Operations. Net realized and unrealized gains and losses
on foreign currency transactions represent net foreign exchange gains or losses from foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses realized between trade and settlement dates on securities
transactions and the difference between the amount of the investment income and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid.
23
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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Expenses —
Expenses that are directly related to the Fund are charged to the Fund. Other operating expenses of the Trust are prorated to
the Fund based on number of funds and/or relative net assets.
Classes
— Class specific expenses are borne by that class of
shares. Income, realized and unrealized gains (losses), and non-class specific expenses are allocated to the respective class on the basis of relative daily net assets.
Dividends and Distributions to Shareholders
— The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. All distributions are
recorded on ex-dividend date.
Deferred Offering Costs
— Offering costs, including costs of printing initial prospectus,
legal and registration fees, are amortized over twelve-months from inception of the Fund. As of October 31, 2012, the remaining amount still to be amortized for the Fund was $17,663.
Redemption Fees
— The Fund retains redemption fees of 2.00% on redemptions of fund shares held for less than 60 days. For the period
ended October 31, 2012, the Fund received $26,383 and $32,600 in redemption fees for the Institutional Class Shares and Investor Class Shares, respectively.
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3.
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Transactions with Affiliates:
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Certain
officers of the Trust are also officers of SEI Investments Global Funds Services (the “Administrator”), a wholly owned subsidiary of SEI Investments Company, and/or SEI Investments Distribution Co. (the “Distributor”). Such
officers are paid no fees by the Trust, other than the Chief Compliance Officer (“CCO”) as described below, for serving as officers of the Trust.
A portion of the services provided by the CCO and his staff, whom are employees of the Administrator, are paid for by the Trust as incurred. The services include regulatory oversight of the Trust’s Advisors
and service providers as required by SEC regulations. The CCO’s services and fees have been approved by and are reviewed by the Board.
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4.
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Administration, Distribution, Transfer Agent and Custodian Agreements:
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The Fund and the Administrator are parties to an Administration Agreement under which the Administrator provides management and administration services for an annual fee equal to the higher of $120,000 for the
Fund, plus $15,000 per additional class or 0.12% of the first $250 million, 0.10% on assets between $250 million and $500 million and 0.08% of any amount above $500 million of the Fund’s average daily net assets.
24
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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The Trust and the Distributor are parties to a Distribution Agreement. The Distributor receives no fees under the agreement.
The Fund has adopted a shareholder servicing plan pursuant to which it may engage third-party service providers to provide certain shareholder services to Fund
shareholders (the “Service Plan”). Under the Service Plan, the Fund may pay service providers a fee at a rate of up to 0.10% and 0.20% annually of the average daily net assets attributable to the Institutional Class Shares and Investor
Class Shares, respectively, subject to the arrangement for provision of shareholder and administrative services. For the period ended October 31, 2012, the Institutional Class Shares and Investor Class Shares incurred $59,312 and $37,162 of
shareholder servicing fees, an effective rate of 0.05% and 0.15%, respectively.
The Fund has adopted a distribution plan under Rule 12b-1 under the 1940
Act for Investor Class Shares that allows the Fund to pay distribution and service fees for the sale and distribution of its shares, and for services provided to shareholders. The maximum annual distribution fee for Investor Class Shares of the Fund
is 0.25% annually of the average daily net assets. For the period ended October 31, 2012, the Fund incurred $62,025 of distribution fees, an effective rate of 0.25%.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent for the Fund under a transfer agency agreement with the Trust. During the period ended October 31, 2012, the Fund earned cash
management credits of $168, which were used to offset transfer agent expenses. This amount is labeled as “Fees Paid Indirectly” on the Statement of Operations.
Union Bank, N.A. acts as custodian (the “Custodian”) for the Fund. The Custodian plays no role in determining the investment policies of the Fund or which securities are to be purchased or sold by the
Fund.
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5.
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Investment Advisory Agreement:
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Under the
terms of an investment advisory agreement, the Adviser provides investment advisory services to the Fund at a fee calculated at an annual rate of 1.25% of the Fund’s average daily net assets. The Adviser has contractually agreed to waive fees
and reimburse expenses in order to keep total annual fund operating expenses after fee waivers and/or expense reimbursements (excluding interest, dividend and prime broker fees on securities sold short, taxes, brokerage commissions, acquired fund
fees and expenses, and extraordinary expenses) (collectively “excluded expenses”) from exceeding 1.64% and 1.99% of the Fund’s Institutional Class and Investor Class Shares’ average daily net assets, respectively, until
January 1, 2013. In addition, if at any point it becomes unnecessary for the Adviser to reduce fees and make expense reimbursements, the Adviser may retain
25
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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the difference between the Total Annual Fund Operating Expenses (less excluded expenses) and 1.64% and 1.99% for the Institutional Class Shares and Investor Class Shares, respectively, to
recapture all or a portion of its prior fee reductions and expense reimbursements made during the preceding three-year period. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon
ninety (90) days’ prior written notice to the Trust, effective as of the close of business on January 1, 2013. As of October 31, 2012, fees which were previously waived by the Adviser which may be subject to possible future
reimbursement to the Adviser were $10,797, expiring in 2015.
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Period Ended
October 31, 2012*
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Share Transactions:
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Institutional Class
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Issued
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14,525,309
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Issued in Connection with In-Kind Transfer**
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10,598,589
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Redeemed
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(1,228,669
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)
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Increase in Institutional Class Share Transactions
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23,895,229
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Investor Class
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Issued
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6,421,396
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Redeemed
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(834,264
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)
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Increase in Investor Class Share Transactions
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5,587,132
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Net Increase in Shares Outstanding from Share Transactions
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29,482,361
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*
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Commenced operations on December 30, 2011.
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**
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See Note 1 in the Notes to Financial Statements.
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7.
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Investment Transactions:
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The cost of
security purchases and the proceeds from security sales, other than long-term U.S. Government, short-term investments, short sales and purchases to cover, for the period ended October 31, 2012 were $346,482,522 and $139,961,176, respectively.
There were no purchases or sales of long-term U.S. Government securities.
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8.
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Federal Tax Information:
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The Fund maintains a December 31
st
year end for tax purposes. Amounts disclosed in the Fund’s fiscal period ended October 31, 2012 financial statements,
with
26
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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respect to Federal income tax disclosure, are based on the facts as of October 31, 2012 and are subject to change.
The amount and character of income and capital gain distributions, if any, to be paid are determined in accordance with Federal income tax regulations, which may differ from U.S. GAAP. As a result, net investment
income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. These book/tax differences may be temporary or permanent. To the extent these differences
are permanent in nature, they are charged or credited to undistributed net investment income (loss), accumulated net realized gain (loss) or paid-in capital, as appropriate, in the period that the differences arise.
The following permanent differences primarily attributable to the tax treatment of certain investments in REITs and foreign currency realized gain (loss) have been
reclassified to/from the following accounts during the fiscal period ended October 31, 2012:
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Increase in
Undistributed Net
Investment Income
|
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Decrease in
Accumulated Net
Realized Gain
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Increase in
Paid-In
Capital
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$568,712
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$(1,560,993)
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$
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992,281
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These reclassifications have no impact on net assets or net asset value per share.
As of October 31, 2012, the components of distributable earnings on a tax basis were as follows:
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Undistributed Ordinary Income (Loss)
|
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$
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(3,210,418
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)
|
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Undistributed Long-Term Capital Gains
|
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213,076
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Unrealized Appreciation
|
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7,976,758
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Total Distributable Earnings
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$
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4,979,416
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The Federal tax cost and aggregate gross unrealized appreciation and depreciation on investments, excluding securities sold short,
held by the Fund at October 31, 2012 were as follows:
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Federal
Tax Cost
|
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Aggregate Gross
Unrealized
Appreciation
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Aggregate Gross
Unrealized
Depreciation
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Net Unrealized
Appreciation
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$285,421,536
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$
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14,124,484
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$
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(5,597,920
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)
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$
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8,526,564
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The Fund concentrates
its investments in the real estate sector. Investing in real estate securities (which include REITs) may subject the Fund to risks associated with the direct ownership of real estate, such as casualty or condemnation losses;
27
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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OCTOBER 31, 2012
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fluctuations in rental income, declines in real estate values and other risks related to local or general economic conditions; increases in operating costs and property taxes, potential
environmental liabilities, changes in zoning laws and regulatory limitations on rent. Changes in interest rates may also affect the value of the Fund’s investment in real estate securities. REITs are pooled investment vehicles that own, and
usually operate, income-producing real estate. REITs typically incur fees that are separate from those of the Fund. Accordingly, the Fund’s shareholders will indirectly bear a proportionate share of the REITs’ operating expenses, in
addition to paying Fund expenses. REIT operating expenses are not reflected in the fee table and example above. In addition, REITs are subject to the possibility of failing to qualify for tax-free pass-through of income under the Internal Revenue
Code and maintaining exemption from the registration requirements of the Investment Company Act of 1940, as amended.
At October 31, 2012, 25% of
Institutional Class Shares total shares outstanding were held by one record shareholder owning 10% or greater of the aggregate total shares outstanding.
In the normal course of business, the Fund enters into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is
dependent on future claims that may be made against the Fund and, therefore, cannot be established; however, based on experience, the risk of loss from such claim is considered remote.
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11.
|
Recent Accounting Pronouncement:
|
In December
2011, the Financial Accounting Standards Board issued a further update to the guidance
“Balance Sheet — Disclosures about Offsetting Assets and Liabilities”
. The amendments to this standard require an entity to disclose
information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amended guidance is effective for interim and annual reporting periods
beginning after January 1, 2013. At this time, management is evaluating the implications of this update and its impact on the financial statements has not been determined.
Management has evaluated
the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. Based on this evaluation, no disclosures and/or adjustments were required to the financial statements.
28
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THE ADVISORS’ INNER CIRCLE FUND
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CBRE CLARION
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LONG/SHORT FUND
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|
OCTOBER 31, 2012
|