Description of Advisor Firm____________________________________________________
SMH Capital Advisors LLC ("SMHCA" or the "Advisor") filed for registration as an investment
adviser with the Securities and Exchange Commission (SEC) in 1996 and is a Limited Liability
Corporation organized in the state of Texas. SMHCA is a wholly owned subsidiary of Moyers
Organization LLC.
SMHCA has an affiliated broker-dealer, SMH Capital Investments, LLC (SMHCI), which is under
common ownership and control with SMHCA. SMHCI is also licensed as an insurance agency in
the State of Texas.
The principal officer and managing member of SMHCA is Dwayne Moyers. SMHCA currently
manages the majority of its assets on a discretionary basis. As of December 31, 2022, the Firm
had $370,511,025 in discretionary assets under management and no non-discretionary assets
under management.
Advisory Services Offered_____________________________________________________
While this brochure generally describes the business of SMHCA, certain sections also discuss
the activities of its Supervised Persons, which refer to the Firm’s officers, partners, directors (or
other persons occupying a similar status or performing similar functions), employees or any other
person who provides investment advice on SMHCA’s behalf and is subject to the Firm’s
supervision or control.
Wealth Management Services___________________________________________________
SMHCA provides clients with discretionary wealth management services which are offered
primarily through three programs: (1) the Advisor Platform Programs; (2) the SMH Capital
Investments Program (SMHCI Program) and (3) the Institutional Program. SMHCA also provides
sub-advisory services to two mutual funds in the Catalyst fund family.
In each of the three programs, SMHCA allocates client assets amount various mutual funds,
exchange-traded funds (“ETFs”), equity securities, including common and preferred stock,
exchange-listed, over-the-counter, and foreign issuer securities; warrants; corporate debt
securities; commercial paper; certificates of deposit; municipal securities; closed-end funds;
American Depository Receipts (ADRs); Real Estate Investment Trusts; Publicly Traded
Development Companies (“BDCs”); US. Government and government agency securities; high
yield corporate bonds; and collateralized mortgage obligations (“CMOs”), in accordance with their
stated investment objectives. SMHCA’s methodology is the same for all three programs.
However, not all strategies are available in each program. Any differences in implementation are
in the types of investments used to achieve the objectives of the strategy. Specific details related
to each program are provided later in this brochure.
Where appropriate, the Firm may also provide advice about any type of legacy position or other
investment held in client portfolios. Such assets may not be held at their primary custodian.
SMHCA tailors its advisory services to meet the needs of its individual clients and seeks to ensure,
on a continuous basis, that client portfolios are managed in a manner consistent with those needs
and objectives. SMHCA consults with clients on an initial and ongoing basis to assess their
specific risk tolerance, time horizon, liquidity constraints and other related factors relevant to the
management of their portfolios. SMHCA is not required to verify any information received from
the client or from the client’s other professionals and is expressly authorized to rely on all
information provided by the client. Clients are advised to promptly notify SMHCA if there are
changes in their financial situation or if they wish to place any limitations on the management of
their portfolios. Clients may impose reasonable restrictions or mandates on the management of
their accounts if SMHCA determines, in its sole discretion, the conditions would not materially
impact the performance of a management strategy or prove overly burdensome to the Firm’s
management efforts.
SMH Capital Investments LLC (“SMHCI”), an affiliated broker-dealer, will serve as the broker-
dealer for certain client advisory accounts. In such situations, SMHCA shall earn its advisory fee,
and SMHCI shall receive separate transaction fees/commission for effecting transactions, a
portion of which transaction fees/commissions may be remitted by SMHCI to representatives of
SMHCA in their separate individual capacities as registered representatives of SMHCI.
SMHCA does not serve as the custodian of any client assets. Depending on the program selected,
assets are held at Wells Fargo Clearing Services (WFCS) formerly known as First Clearing LLC
or the custodian of the client’s choice.
Advisor Platform Programs:
SMHCA has entered into agreements to provide portfolio management services to clients of wrap
fee programs sponsored by certain independent national brokerage firms (“Sponsors”) which are
not affiliated with SMHCA. As participants in wrap fee programs, clients pay the Sponsor an asset-
based fee that covers, among other costs, brokerage commissions and investment advisory fees.
SMHCA relies upon the Sponsor to determine the suitability of the wrap fee program for the client,
as well as the suitability of SMHCA’s services. Clients should be aware that SMHCA will generally
not be provided with sufficient information by the Sponsor to assess suitability in connection with
SMHCA’s services. Additionally, SMHCA is not provided information relative to the percentage of
a client’s total assets that are being invested in its wrap fee program. For the services it provides
to clients in the wrap fee programs, SMHCA receives a percentage of the fees charged by the
Sponsor.
Under a wrap fee arrangement sponsored by an independent brokerage firm, the brokerage firm
is responsible for the recommendation to retain the services of SMHCA to manage all or a portion
of your assets. The brokerage firm is also responsible for monitoring and evaluating our services
in managing your assets. All decisions about where transactions are executed, where your assets
are custodied, and the fees paid by you are determined by your brokerage firm. Depending on
the amount of the wrap fee the brokerage firm charges you, the number of securities transactions
in your account, and the value of custodial or other services you receive, the amount of the wrap
fee may or may not be less than the total cost of such services if you obtained them separately.
You can obtain more specific information on each wrap fee arrangement in the Wrap Fee Program
Brochure which should be available to you from the wrap fee sponsor. SMHCA does not act as a
sponsor of any of these wrap fee arrangements.
Two different programs are available under the Advisor Platform Programs. Each of the programs
and the strategies available in each program are described below:
(1) Separately Managed Account Program (SMA Program)
Clients in the SMA program are traditionally high net worth clients who are introduced to SMHCA
by a third-party investment advisor. The third-party advisor recommends the amount of assets
that a client invest in an SMHCA Separately Managed Account.
Within the SMA Program, SMHCA offers ten individual strategies and six strategic allocations. To
establish an SMA account, a client must invest a minimum of $200,000. However, to participate
in the SMHCA Total Return Income Unconstrained Strategy, a minimum of $5,000,000 is
required. SMHCA, in its sole discretion, may waive the minimum account size.
Individual Strategies
Individual strategies are individual separately managed accounts managed to the model of the
strategy. Clients may choose to allocate 100% of the account to an individual strategy or they
may choose a strategic allocation, where portions of the account are allocated to create a blend
of several individual strategies within one account.
SMHCA High Income: Portfolios are managed with a target of 100% high yield corporate and
convertible bonds (with residual cash). On rare occasions, investment grade bonds may be
purchased that, while still rated above high yield, are trading as high yield securities in anticipation
of downgrades to follow. This style is designed to provide a higher current yield and total return.
SMHCA Socially Responsible High Income: Portfolios are managed in the same way as the
SMHCA High Income except that the SMHCA Socially Responsible High Income strategy will
adhere to a socially responsible investment policy that prohibits owning any companies in the
investment portfolio that derive more than 50% of their annual revenue from the following
industries: alcohol, tobacco, gambling, weapons manufacturing or pornography.
SMHCA Diversified Income: To take advantage of the benefits of combining high yield with
grade indices with less risk than a pure high yield portfolio. Portfolios are managed to a target, at
time of purchase, of 50% investment grade or AAA bonds and 50% high yield bonds (with residual
cash). The AAA portion of the portfolio is comprised of Collateralized Mortgage Obligations
(CMOs). CMOs are not rated by an of the rating agencies. SMHCA uses the rating for the
underlying agency of the bonds to allocate these securities to the investment grade or AAA portion
of the portfolio. The AAA bonds purchased will reflect the current credit rating of the United States
government; subject to changes of upgrades or downgrades in rating. SMHCA has the option of
increasing the investment grade or AAA bond allocation to as high as 80%, at the time of
purchase, if it determines that the market dictates such a move.
SMHCA Socially Responsible Diversified Income: Portfolios are managed in the same way as the
SMHCA Diversified Income except that the SMHCA Socially Responsible Diversified Income
strategy will adhere to a socially responsible investment policy, for the high yield portion of the
portfolio, that prohibits owning any companies in the investment portfolio that derive more than
50% of their annual revenue from the following industries: alcohol, tobacco, gambling, weapons
manufacturing or pornography.
SMHCA Total Return Income: This strategy is geared for long-term growth from both income and
capital appreciation over a 10-year period, or a full market cycle. Portfolios are invested in mutual
funds and other securities. (See “Catalyst Funds” section for important disclosure information
regarding Catalyst Mutual Funds.)
SMHCA Municipal Income: This strategy is managed to a target of 100% municipal bonds with
an objective of providing tax advantaged income. Portfolios are invested in closed-end funds and
Exchange-Traded Funds.
SMHCA Tactical Equity: This strategy is managed using proprietary technical indicators. Focusing
primarily on securities within the MSCI EAFE, MSCI Emerging Market Index, S&P 500, NASDAQ
100, Barclays Aggregate Bond and the BofA Merrill Lynch High Yield Index, technical indicators
will dictate whether portfolios will be invested in either bond or equity-based exchange traded
funds.
SMHCA Concentrated Aggressive Growth: This strategy is managed using proprietary
fundamental as well as technical indicators. Focusing primarily on securities traded on a national
market exchange with market caps above $500 million. This is a concentrated portfolio; one
position may represent up to 33% of the account at the time of purchase.
SMHCA Alternative Financial Services: This strategy is typically managed to a 100% target in the
non-traditional bank and insurance financial sectors. This strategy will focus on alternative asset
managers, non-traditional lenders, mortgage services, business development companies and
other financial sector participants. Portfolios will invest in individual equity positions.
SMHCA Absolute Income: This strategy intends to produce a high level of current income by
investing in income oriented closed-end funds trading at significant discounts from Net Asset
Value (NAV), Business Development Companies (BDCs) trading at significant discounts from
their reported NAV, Real Estate Investment Trusts (REITs), high yield corporate bonds trading at
a discount from par, high dividend equity securities, and potentially restructurings and equity
closed-end mutual funds trading at a discount to NAV. In the event that opportunities do not exist
in manager’s opinion, they may hold cash or money market equivalents or high-quality fixed
income ETF’s with a duration of 5 years or less.
Strategic Allocations
Strategic allocations are individual accounts that include a blend of general target percentages of
SMHCA individual strategies described above in one account. Descriptions below contain the
general target percentage allowed to each individual strategy within the client account. Clients
should refer to the individual strategy descriptions above for a complete description of how each
of the accounts will be managed.
SMHCA Conservative Income and Growth: 60% SMHCA Diversified Income, 30% SMHCA
Tactical Equity, and 10% SMHCA Concentrated Aggressive Growth.
SMHCA Moderate Income and Growth: 60% SMHCA Total Return Income, 30% SMHCA Tactical
Equity, and 10% SMHCA Concentrated Aggressive Growth.
SMHCA High Income and Growth: 60% SMHCA High Income, 30% SMHCA Tactical Equity, and
10% SMHCA Concentrated Aggressive Growth.
SMHCA Growth: 70% SMHCA Tactical Equity, 20% SMHCA Concentrated Aggressive Growth,
and 10% SMHCA Alternative Financial Services.
SMHCA Aggressive Growth: 50% SMHCA Tactical Equity, 30% SMHCA Concentrated
Aggressive Growth 20%, and SMHCA Alternative Financial Services.
SMHCA Tax Free and Growth: 60% SMHCA Municipal Income, 30% SMHCA Tactical Equity,
and 10% SMHCA Concentrated Aggressive Growth.
(2) Unified Managed Account Program
SMHCA has entered into agreements to provide portfolio management services to clients of
Unified Managed Account (“UMA”) programs sponsored by certain independent national
brokerage firms (“Sponsors”). As participants in the UMA programs, clients are offered a single
portfolio that can contain multiple asset managers and funds, that is customized by the Client’s
financial advisor. SMHCA may be one of the managers selected for managing a portion of the
client’s account assets. Client’s participating in the UMA Program pay the Sponsor an asset-
based fee that covers, among other costs, brokerage commissions and investment advisory fees.
SMHCA relies on the Sponsor and/or Client’s financial advisor to determine the suitability of the
UMA program for the client, as well as the suitability of SMHCA’s services. Clients should be
aware that SMHCA will generally not be provided with sufficient information by the Sponsor to
assess client’s suitability in connection with SMHCA’s services. For the services it provides to
clients in the UMA programs, SMHCA receives a percentage of the fees charged by the Sponsor.
For clients participating in Unified Managed Account Programs, SMHCA offers four investment
strategies which are described below. Clients should refer to the disclosure document provided
by the Sponsor for a complete list of SMHCA strategies offered.
Strategies:
SMHCA High Income: Portfolios are managed with a target of 100% high yield corporate and
convertible bonds (with residual cash). On rare occasions, investment grade bonds may be
purchased that, while still rated above high yield, are trading as high yield securities in anticipation
of downgrades to follow. This style is designed to provide a higher current yield and total return.
SMHCA Socially Responsible High Income: Portfolios are managed in the same way as the High
Income except that the Socially Responsible High-Income product will adhere to a socially
responsible investment policy that prohibits owning any companies in the investment portfolio that
derive more than 50% of their annual revenue from the following industries: alcohol, tobacco,
gambling, weapons manufacturing or pornography.
SMHCA Diversified Income: To take advantage of the benefits of combining high yield with
grade indices with less risk than a pure high yield portfolio. Portfolios are managed to a target, at
time of purchase, of 50% investment grade or AAA bonds and 50% high yield bonds (with residual
cash). The AAA portion of the portfolio is comprised of Collateralized Mortgage Obligations
(CMOs). CMOs are not rated by any of the rating agencies. SMHCA uses the rating for the
underlying agency of the bonds to allocate these securities to the investment grade or AAA portion
of the portfolio. The AAA bonds purchased will reflect the current credit rating of the United States
government; subject to changes of upgrades or downgrades in ratings. SMHCA has the option
of increasing the investment grade or AAA bond allocation to as high as 80%, at time of purchase,
if it determines that the market dictates such a move.
SMHCA Socially Responsible
Diversified Income: Portfolios are managed in the same way as the
SMHCA Diversified Income except that the SMHCA Socially Responsible Diversified Income
strategy will adhere to a socially responsible investment policy, for the high yield portion of the
portfolio, that prohibits owning any companies in the investment portfolio that derive more than
50% of their annual revenue from the following industries: alcohol, tobacco, gambling, weapons
manufacturing or pornography.
SMH Capital Investments Program (SMHCI Program)
For clients who would like to access SMHCA strategies directly and without the use of a third-
party advisor or platform, the SMHCI wrap program is available. Clients wishing to participate in
the SMHCI Program must utilize the custody and clearing services of WFCS and enter into an
SMHCI Program Agreement with SMHCA. The minimum investment required to establish a
program account varies depending on the strategy selected. Clients should refer to the SMHCI
Program Agreement for specific minimum investment information. SMHCA may, in its sole
discretion, waive minimum account size requirements.
Generally speaking, a wrap fee is assessed on the value of a Client’s assets under management
by the investment adviser and is not dependent on the amount of trading in the account or the
advice given in any particular time period. The client should be aware that lower fees for
comparable services may be available in other SMHCA programs or from other sources including
other investment advisers. Under a wrap program, the sponsor arranges for the client to receive
investment advisory services, the execution of securities brokerage transactions, custody and
reporting services for a single specified fee. Participation in a wrap program may cost the
participant more or less than purchasing such services separately.
All clients whose accounts are managed within the SMHCI Program will receive a separate wrap
fee brochure which discusses the specific terms and conditions of participation. When offering
services in conjunction with the SMHCI Program, SMHCA will not receive any portion of any
transaction fees received by its affiliated broker-dealer, SMH Capital Investments LLC. Some
portfolios in the strategies listed below may be implemented using mutual funds that are advised
by or otherwise affiliated with SMHCA. SMHCA will purchase Class I shares when available or
Class A shares if Class I shares are not available. In the event that Class A shares are purchased,
a 12b-1 fee may be paid to SMHCA’s affiliated broker-dealer, SMHCI.
Individual Strategies
SMHCA Diversified Income: To take advantage of the benefits of combining high yield with
grade indices with less risk than a pure high yield portfolio. Portfolios are managed to a target, at
time of purchase, of 50% investment grade or AAA bonds and 50% high yield bonds (with residual
cash). The AAA portion of the portfolio is comprised of Collateralized Mortgage Obligations
(CMOs). CMOs are not rated by any of the rating agencies. SMHCA uses the rating for the
underlying agency of the bonds to allocate these securities to the investment grade or AAA portion
of the portfolio. The AAA bonds purchased will reflect the current credit rating of the United States
government; subject to changes of upgrades or downgrades in ratings. SMHCA has the option
of increasing the investment grade or AAA bond allocation to as high as 80%, at time of purchase,
if it determines that the market dictates such a move.
SMHCA Socially Responsible Diversified Income: Portfolios are managed in the same way as the
SMHCA Diversified Income except that the SMHCA Socially Responsible Diversified Income
strategy will adhere to a socially responsible investment policy, for the high yield portion of the
portfolio, that prohibits owning any companies in the investment portfolio that derive more than
50% of their annual revenue from the following industries: alcohol, tobacco, gambling, weapons
manufacturing or pornography.
SMHCA High Income: Portfolios are typically managed with a target of 100% high yield corporate
and convertible bonds (with residual cash). On rare occasions investment grade bonds may be
purchased that, while still rated above high yield, are trading as high yield securities in anticipation
of downgrades to follow. This style is designed to provide a higher current yield and total return.
SMHCA Socially Responsible High Income: Portfolios are managed in the same way as the High
Income except that the Socially Responsible High-Income product will adhere to a socially
responsible investment policy that prohibits owning any companies in the investment portfolio that
derive more than 50% of their annual revenue from the following industries: alcohol, tobacco,
gambling, weapons manufacturing and pornography.
SMHCA Total Return Income: This strategy is geared for long-term growth from both income and
capital appreciation over a 10-year period, or a full market cycle. Portfolios are invested in mutual
funds. (See “Catalyst Funds” section for important disclosure information regarding the Catalyst
Mutual Funds.)
SMHCA Municipal Income: This strategy is typically managed to a target of 100% municipal bonds
with an objective of providing tax advantaged income. Portfolios are invested in closed-end funds
and Exchange Traded Funds.
SMHCA Tactical Equity: This strategy is managed using proprietary technical indicators.
Focusing primarily on the securities within the MSCI EAFE, MSCI Emerging Market Index, S&P
500, NASDAQ 100, Barclays Aggregate Bond and the BoFA Merrill Lynch High Yield Index,
technical indicators will dictate whether portfolios will be invested in either bond or equity-based
exchange traded funds.
SMHCA Concentrated Aggressive Growth: This strategy is managed using proprietary
fundamental as well as technical indicators. Focusing primarily on securities traded on a national
market exchange with market caps above 500 million. This is a concentrated portfolio; one
position can make up to 33% of the account at the time of purchase.
SMHCA Catalyst Allocation: This strategy is designed to provide a diversified portfolio utilizing
the Catalyst Fund family. (See “Catalyst Funds” section for important disclosure information
regarding the Catalyst Mutual Funds.)
SMHCA Alternative Financial Services: This strategy is typically managed to a 100% target in the
non-bank and insurance financial sectors. This strategy will focus on alternative asset managers,
non-traditional lenders, mortgage services, business development companies and other financial
sector participants. Portfolios will invest in individual equity positions.
SMHCA Absolute Income: The strategy is intended to produce a high level of current income by
investing in income oriented closed end funds trading at significant discounts from Net Asset
Value, Business Development Companies trading at significant discounts from their reported
NAV, Real Estate Investment Trusts, high yield corporate bonds trading at a discount from par,
high dividend equity securities, and potentially restructurings and equity closed end mutual funds
trading at a discount to NAV. In the event that opportunities do not exist in manager’s opinion,
they may hold cash or money market equivalents or high-quality fixed income ETF’s with a
duration of 5 years or less.
SMHCA Growth: CLOSED TO NEW INVESTORS. Portfolios are invested in individual equities,
mutual funds, and dividend paying stocks. This strategy is designed for clients seeking long-term
capital appreciation within a diversified portfolio of equities. The majority of the portfolio is
concentrated in growth oriented mutual funds. (See “Catalyst Funds” section for important
disclosure information regarding the Catalyst Mutual Funds.)
SMHCA Balanced Growth: CLOSED TO NEW INVESTORS. Portfolios are invested in mutual
funds, dividend paying stocks, individual equities, and high yield bonds. This strategy is for clients
seeking long-term wealth accumulation or moderate income. Typically, at least one-third of the
portfolio is concentrated in income producing securities with the balance in individual equities and
growth oriented mutual funds. (See “Catalyst Funds” section for important disclosure information
regarding the Catalyst Mutual Funds.)
SMHCA Balanced Growth & Bonds: CLOSED TO NEW INVESTORS. Portfolios are invested in
mutual funds, dividend paying stocks, individual equities, investment grade and high yield bonds.
This strategy is for clients seeking long-term wealth accumulation or moderate income. Typically,
at least one-third of the portfolio is concentrated in income producing securities with the balance
in individual equities and growth oriented mutual funds. (See “Catalyst Funds” section for
important disclosure information regarding the Catalyst Mutual Funds.)
SMHCA Total Return Income Standard Composite: CLOSED TO NEW INVESTORS. This
portfolio contains a few legacy accounts that are fully discretionary and pay a portfolio
administration fee as well as transaction fees and commission fees. Portfolios are invested in
mutual funds, some of which may be proprietary. (See “Catalyst Funds” section for additional
disclosure). This strategy is geared for long-term growth from both income and capital
appreciation over a 10-year period, or a full market cycle.
SMHCA Total Return Income Plus Standard Composite: CLOSED TO NEW INVESTORS. This
portfolio contains fully discretionary accounts that pay a portfolio administration fee and
transactions and commissions separately. This composite contains fully discretionary accounts
that may be made up of up to 50% in investment grade bonds, high yield bonds, dividend paying
stocks, and individual equities. This strategy was for investors that desired a moderate total return
for income and/or capital appreciation. It is usually weighted 50% in bonds and 50% in growth
equities or mutual funds.
Strategic Allocations
Strategic allocations are individual wrap fee accounts that include a blend of general target
percentages of SMHCA individual strategies in the same account. Portions of the account are
allocated to several individual strategies within one account. Descriptions below contain the
general target percentages allocated to each individual strategy within the client account.
Clients should refer to the individual strategy descriptions above for a complete description of
each how portion of the account will be managed.
SMHCA Conservative Income and Growth: 60% SMHCA Diversified Income, 30% SMHCA
Tactical Equity, and 10% SMHCA Concentrated Aggressive Growth.
SMHCA Moderate Income and Growth: 60% SMHCA Total Return Income, 30% SMHCA
Tactical Equity, and 10% SMHCA Concentrated Aggressive Growth.
SMHCA High Income and Growth: 60% SMHCA High Income, 30% SMHCA Tactical Equity,
and 10% SMHCA Concentrated Aggressive Growth.
SMHCA Growth: 70% SMHCA Tactical Equity, 20% SMHCA Concentrated Aggressive Growth,
and 10% SMHCA Alternative Financial Services.
SMHCA Aggressive Growth: 50% SMHCA Tactical Equity, 30% SMHCA Concentrated
Aggressive Growth, and 20% SMHCA Alternative Financial Services.
SMHCA Tax Free and Growth: 60% SMHCA Municipal Income, 30% SMHCA Tactical Equity,
and 10% SMHCA Concentrated Aggressive Growth.
Institutional Program
SMHCA offers advisory and management services to institutional clients. Clients in this program
are typically working with a consultant and have minimum investable assets of $5,000,000.
SMHCA may, in its sole discretion, waive minimum investment restrictions.
Strategies
SMHCA High Yield: Portfolios are typically managed with a target of 100% high yield corporate
and convertible bonds (with residual cash). On rare occasions, investment grade bonds may be
purchased that, while still rated above high yield, are trading as high yield securities in anticipation
of downgrades to follow. This style is designed to provide a higher current yield and total return.
SMHCA Socially Responsible High Yield: Portfolios are managed in the same way as the High
Income except that SMHCA will adhere to a socially responsible investment policy that
prohibits owning any companies in the investment portfolio that derive more than 50% of their
annual revenue from the following industries: alcohol, tobacco, gambling, weapons manufacturing
or pornography.
SMHCA High Yield Opportunity Composite: Portfolios will be invested in high yield U.S. dollar
debt instruments which are listed or traded on a recognized market in the U.S. and issued by U.S.
and non-U.S. issuers. Such U.S. dollar debt instruments will include: corporate bonds (fixed or
floating rate) with credit rating of non-investment grade or rated Baa or lower by Moody’s or BBB
or lower by S&P (on occasion investment grade bonds may be purchased), preferred stocks or
convertible securities, namely, corporate bonds or preferred stocks which are convertible into, or
exchangeable for, common stocks. The portfolios will not contain financial derivative instruments.
This style is designed to provide a higher current yield and total return.
SMHCA Diversified Income: To take advantage of the benefits of combining high yield with
grade indices with less risk than a pure high yield portfolio. Portfolios are managed to a target, at
time of purchase, of 50% investment grade or AAA bonds and 50% high yield bonds (with residual
cash). The AAA portion of the portfolio is comprised of Collateralized Mortgage Obligations
(CMOs). CMOs are not rated by any of the rating agencies. SMHCA uses the rating for the
underlying agency of the bonds to allocate these securities to the investment grade or AAA portion
of the portfolio. The AAA bonds purchased will reflect the current credit rating of the United States
government; subject to changes of upgrades or downgrades in ratings. SMHCA has the option
of increasing the investment grade or AAA bond allocation to as high as 80%, at time of purchase,
if it determines that the market dictates such a move.
SMHCA Socially Responsible Diversified Income: Portfolios are managed in the same way as the
SMHCA Diversified Income except that the SMHCA Socially Responsible Diversified Income
strategy will adhere to a socially responsible investment policy, for the high yield portion of the
portfolio, that prohibits owning any companies in the investment portfolio that derive more than
50% of their annual revenue from the following industries: alcohol, tobacco, gambling, weapons
manufacturing or pornography.
Sub-Advisory Services
SMHCA is the sub-adviser for two funds in the Catalyst fund family (the “Catalyst Funds”); each
a series of the Mutual Funds Series Trust (formerly known as the Catalyst Funds), an open-end
investment management company registered with the SEC, commonly referred to as a mutual
fund, sponsored by Catalyst Capital Advisors, LLC (“CCA”). The Catalyst Funds use various
allocations of high yield debt securities and dividend paying equities. As sub-adviser, SMHCA
receives 50% of the management fee paid to the investment adviser, CCA.
In March 2008, SMHCA entered into a Joint Venture Agreement with the sponsor of the Mutual
Fund Series Trust, in connection with the creation of the Catalyst/SMH High Income Fund
(formerly known as the Catalyst High Income Fund), and the Catalyst/SMH Total Return Income
Fund (formerly known as the Catalyst Total Return Fund) (the “Catalyst Funds”). Pursuant to the
Joint Venture Agreement, SMHCA agreed to (a) act as sub-adviser for the Catalyst Funds, (b)
make a capital contribution to CCA sufficient to pay certain start-up expenses of the Catalyst
Funds and (c) pay a portion of the up-front commissions paid to brokers on sales of Class C
shares and to wholesalers of the Catalyst Funds as compensation for share purchases in the
Catalyst Funds. In exchange for its capital contribution, SMHCA is entitled to receive non-voting,
Class C Units of Membership in CCA, which entitle SMHCA to receive 50% of the net proceeds
received by CCA related to the Funds if CCA is acquired or sells the rights to manage the Funds.
In addition, certain employees of SMHCA are also registered representatives of SMH Capital
Investments LLC, an affiliated broker dealer, and may receive commissions and 12b-1 fees for
selling the Funds. Such a structure creates a conflict of interest. In addition, SMHCA may utilize
the Catalyst Funds to implement SMHCA strategies. In addition to earning advisory fees for
implementing the strategy, SMHCA also earns a management fee from the fund. This structure,
which allows SMHCA to earn a management fee, as well as entitles it to receive 50% of the net
proceeds received by CCA related to the Funds upon change of control, creates a conflict of
interest when recommending investments. See the Catalyst Fund Prospectus for a full description
of the management fees and expenses related to the Catalyst Funds.