West Chester, Pennsylvania-based TFS Capital LLC
is moving to scrap the performance fee adjustment from the fee structure of the $22.8 million TFS Small Cap Fund
. A special meeting of shareholders is scheduled for February 26 to approve an amended advisory agreement, which the board of trustees had greenlighted in December.
If approved by shareholders, the fund will pay TFS an advisory fee equal to the annual rate of 1.25 percent of the average value of the fund's daily net assets -- the same as the base fee under the existing advisory agreement.
In his January 22 letter to fund shareholders, TFS Larry Eiben
described the current fee structure as "complicated and difficult to explain to prospective investors."
Eiben noted that "although the Fund has enjoyed a superior investment record over the life of the Fund, it has not experienced similar success with the distribution of its shares."
"TFS has not collected any of its management fee since the inception of the Fund and has also reimbursed a significant amount of the Fund’s other operating expenses," he wrote. "For the Fund to increase its assets and reach a more appropriate size in a reasonable period of time, it needs to grow more rapidly through the issuance of additional shares... The Trustees have concluded that the investment community has not been receptive to the Fund because of the Fund’s unusual performance fee structure."
TFS President Larry Eiben's January 22 Letter to Fund Shareholders
I am writing to inform you of an upcoming Special Meeting of the shareholders of the TFS Small Cap Fund (the “Fund”) to be held on Friday, February 26, 2010. At this meeting, you are being asked to approve an amendment to the investment advisory agreement for the Fund with TFS Capital LLC (“TFS”) that eliminates the performance based adjustment from the fee structure. The Board of Trustees of your Fund has carefully reviewed this amended investment advisory agreement and believes that this proposal is in the Fund’s and your best interest.
Currently, the Fund’s investment advisory fee is structured with both a base fee and a performance related fee that adjusts the base fee upward or downward depending on the Fund’s performance relative to its benchmark, the Russell 2000 Index + 2.50% (the “Benchmark”), over a rolling 12 month period. This fee structure was designed to provide incentives to TFS to achieve superior returns. As described in the Proxy Statement, the fee payable under the proposed amended investment advisory agreement would be the same as the base fee under the current investment advisory agreement (1.25% of the Fund’s average daily net assets), except that the fee would not be subject to upward or downward adjustments based on the Fund’s performance relative to the Benchmark.
Although the Fund has enjoyed a superior investment record over the life of the Fund, it has not experienced similar success with the distribution of its shares. TFS has not collected any of its management fee since the inception of the Fund and has also reimbursed a significant amount of the Fund’s other operating expenses. For the Fund to increase its assets and reach a more appropriate size in a reasonable period of time, it needs to grow more rapidly through the issuance of additional shares. The Trustees have concluded that the investment community has not been receptive to the Fund because of the Fund’s unusual performance fee structure. The fee structure is complicated and difficult to explain to prospective investors and for them to readily understand; when the Fund outperforms for a given period the advisory fee is at the higher end of the industry standards for that period; and the advisory fee can vary considerably from period to period. Although the Board of Trustees continues to support performance fees conceptually, it has concluded that changing to a straightforward fixed fee structure is in the best interests of the Fund and its shareholders. The Board believes that TFS’s commitment to the Fund will continue and that the fixed fee will lead to the fee level and predictability that the investment community seems to want and thereby enable the Fund to become a viable mutual fund. Accordingly, the Board of Trustees recommends that the shareholders vote to approve the amended investment advisory agreement.
I'm sure that you, like most people, lead a busy life and are tempted to put this proxy aside for another day. Please don't. When shareholders do not return their proxies, additional expenses are incurred to pay for follow-up mailings and telephone calls. PLEASE TAKE A FEW MINUTES TO REVIEW THIS PROXY STATEMENT AND VOTE YOUR SHARES TODAY.
The Board of Trustees of the Fund has approved the proposal described herein and recommends a vote "FOR" the proposal. If you have any questions regarding the issue to be voted on or need assistance in completing your proxy card, please contact us toll free at 1-888-534-2001.
I appreciate your consideration of this important proposal. Thank you for investing with the TFS Small Cap Fund and for your continued support.
/s/ Larry S. Eiben
Larry S. Eiben
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