December 27, 2006 VIA EDGAR AND E-MAIL U.S. Securities and Exchange Commission Division of Investment Management 100 F Street, N.E. Washington, D.C. 20549-9303 Attention: Mr. Chad D. Eskildsen, Senior Accountant Re: MGI Funds--Preliminary Information Statement Dear Sir and Madam: On behalf of the MGI Funds (the "Trust" or the "Registrant"), following are the responses to the comments of the Staff of the U.S. Securities and Exchange Commission (the "SEC") conveyed with regard to the Preliminary Information Statement (the "Information Statement") relating to the Trust's series, the MGI Core Opportunistic Fixed Income Fund (the "Fund"), which will inform shareholders of the Fund of the approval of a new subadvisory agreement between Mercer Global Investments, Inc., the Fund's investment advisor ("MGI" or the "Advisor"), and BlackRock Financial Management, Inc. (formerly, BlackRock Advisors, Inc.) ("BlackRock" or the "Subadvisor"). The Information Statement was filed with the SEC, pursuant to Rule 14c-5(a) under the Securities Exchange Act of 1934, as amended (the "1934 Act"), on Thursday, December 14, 2006. Chad D. Eskildsen had communicated the Staff's comments on the Information Statement to Mark A. Sheehan of Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust, in a telephone conversation on Wednesday, December 20, 2006. Each Staff comment is summarized below, followed by the Trust's response to the respective comment. Capitalized terms not otherwise defined in this letter have the meanings assigned to the terms in the Information Statement. 1. Comment. On page 4 of the Information Statement, in the section titled "The Subadvisor," please disclose the subadvisory fees paid to BlackRock in the Fund's last fiscal year. Response. Initially, the Trust notes that it operates in reliance upon the exemptive order (the "Order") issued by the SEC to the Trust and the Advisor that permits the Trust to U.S. Securities and Exchange Commission December 27, 2006 Page 2 utilize a manager-of-managers structure.(1) For purposes of the Information Statement, condition 3 of the Order(2) allows the Trust to use "Aggregate Fee Disclosure," which was defined in the Order as: "...permit[ting] the Trust to disclose for each Fund (as both a dollar amount and as a percentage of each Fund's net assets): (a) the aggregate fees paid to the Advisor and any Affiliated Subadvisers, and (b) THE AGGREGATE FEES PAID TO SUBADVISERS OTHER THAN AFFILIATED SUBADVISERS." (Emphasis added) The condition is intended to allow the Trust and the Advisor to negotiate more favorable subadvisory rates with subadvisors, thereby benefiting the Trust and its shareholders. In accordance with this condition, as an alternative to disclosing the subadvisory fees paid to BlackRock in the Information Statement, the Fund is permitted to disclose the aggregate subadvisory fees paid to BOTH BlackRock and Western Asset Management Company ("WAMCo"), the Fund's second subadvisor. In light of this, the following underlined disclosure will be inserted at the end of the initial paragraph of the section titled "The Subadvisor": BlackRock is independent of the Advisor, and discharges its responsibilities subject to the oversight and supervision of the Advisor. BlackRock is compensated out of the fees that the Advisor receives from the Fund. There will be no increase in advisory fees paid by the Fund as a consequence of the Current Subadvisory Agreement. FOR THE FISCAL YEAR ENDED MARCH 31, 2006, THE ADVISOR PAID AGGREGATE SUBADVISORY FEES TO BLACKROCK AND WAMCO OF $284,924, WHICH REPRESENTED 0.274% OF THE AVERAGE DAILY NET ASSETS OF THE FUND. THE FEES PAID BY THE ADVISOR TO EACH SUBADVISOR DEPEND UPON THE FEE RATES NEGOTIATED BY THE ADVISOR AND ON THE PERCENTAGE OF THE FUND'S ASSETS ALLOCATED TO THE SUBADVISORS BY MGI. 2. Comment. On page 6, in the section titled "Board of Trustees' Considerations," the Information Statement discloses: Additionally, given that the fee provided under the Current Subadvisory Agreement was identical to the fee under the Prior Subadvisory Agreement, the BOARD'S PRIOR DELIBERATIONS, at the May 16 and 17, 2005 - ----------------------------- (1) See Investment Company Act Release No. 27173 (December 1, 2005). (2) Condition 3 provides: "Within 90 days of the hiring of a new Subadviser, the affected Fund shareholders will be furnished all information about the new Subadviser that would be included in a proxy statement, EXCEPT AS MODIFIED TO PERMIT AGGREGATE FEE DISCLOSURE. This information will include Aggregate Fee Disclosure and any change in such disclosure caused by the addition of the new Subadviser. To meet this obligation, the Fund will provide shareholders within 90 days of the hiring of a new Subadviser with an information statement meeting the requirements of Regulation 14C, Schedule 14C, and Item 22 of Schedule 14A under the 1934 Act, EXCEPT AS MODIFIED BY THE ORDER TO PERMIT AGGREGATE FEE DISCLOSURE." (Emphasis added.) U.S. Securities and Exchange Commission December 27, 2006 Page 3 Board meeting, when the Prior Subadvisory Agreement was approved, remained relevant. (Emphasis added.) Disclose the Board's "prior deliberations" at the May 2005 meeting as they pertained to the Prior Subadvisory Agreement. Response. The Registrant will include the following new underlined disclosure in the Information Statement: Additionally, given that the fee provided under the Current Subadvisory Agreement was identical to the fee under the Prior Subadvisory Agreement, the Board's prior deliberations, at the May 16 and 17, 2005 Board meeting (THE "MAY 2005 MEETING"), when the Prior Subadvisory Agreement was approved, remained relevant. IN CONNECTION WITH THE INDEPENDENT TRUSTEES' CONSIDERATION OF THE PRIOR SUBADVISORY AGREEMENT AT THE MAY 2005 MEETING, THE INDEPENDENT TRUSTEES CONSIDERED INFORMATION RELATING TO: (I) THE PROCESS BY WHICH THE ADVISOR SELECTED AND RECOMMENDED BLACKROCK FOR BOARD APPROVAL; (II) THE NATURE, EXTENT, AND QUALITY OF THE SERVICES THAT BLACKROCK WOULD PROVIDE TO THE FUND; (III) BLACKROCK'S REPUTATION, INVESTMENT MANAGEMENT BUSINESS, PERSONNEL, AND OPERATIONS; (IV) BLACKROCK'S BROKERAGE AND TRADING POLICIES AND PRACTICES; (V) THE LEVEL OF SUBADVISORY FEES TO BE CHARGED BY BLACKROCK; AND A COMPARISON OF THOSE FEES TO THE FEES: (A) CHARGED BY BLACKROCK TO COMPARABLE ACCOUNTS BLACKROCK MANAGED, INCLUDING REGISTERED AND UNREGISTERED INVESTMENT COMPANIES OR OTHER POOLED INVESTMENT VEHICLES, AS APPLICABLE, AND (B) PAID BY CERTAIN OTHER REGISTERED INVESTMENT COMPANIES (OR THEIR INVESTMENT ADVISORS) AND HAVING INVESTMENT OBJECTIVES SIMILAR TO THAT OF THE FUND; (VI) BLACKROCK'S COMPLIANCE PROGRAM; (VII) BLACKROCK'S HISTORICAL PERFORMANCE RETURNS MANAGING A SIMILAR INVESTMENT MANDATE, AND SUCH PERFORMANCE COMPARISONS TO A RELEVANT INDEX; AND (VIII) BLACKROCK'S FINANCIAL CONDITION. THE INDEPENDENT TRUSTEES ALSO CONSIDERED AND ANALYZED OTHER INFORMATION AND FACTORS THAT THE INDEPENDENT TRUSTEES DEEMED RELEVANT WITH RESPECT TO BLACKROCK, INCLUDING: BLACKROCK'S MANAGEMENT STYLE; THE QUALIFICATIONS AND EXPERIENCE OF THE PERSONS THAT WILL BE RESPONSIBLE FOR THE DAY-TO-DAY MANAGEMENT OF THE FUND; AND BLACKROCK'S STAFFING LEVELS AND OVERALL RESOURCES. AT THE MAY 2005 MEETING, THE INDEPENDENT TRUSTEES REVIEWED THE NATURE, QUALITY, AND EXTENT OF THE SERVICES TO BE PROVIDED BY BLACKROCK TO THE FUND. THE INDEPENDENT TRUSTEES DISCUSSED THE SPECIFIC INVESTMENT PROCESS TO BE EMPLOYED BY BLACKROCK IN MANAGING THE ASSETS OF THE FUND TO BE ALLOCATED TO THE SUBADVISOR, THE QUALIFICATIONS OF BLACKROCK'S INVESTMENT MANAGEMENT TEAM WITH REGARD TO IMPLEMENTING THE FUND'S INVESTMENT U.S. Securities and Exchange Commission December 27, 2006 Page 4 MANDATE, AND BLACKROCK'S PERFORMANCE RECORD AS COMPARED TO ITS BENCHMARK. THE INDEPENDENT TRUSTEES CONSIDERED BLACKROCK'S INFRASTRUCTURE AND WHETHER THE SUBADVISOR APPEARED TO SUPPORT ITS INVESTMENT STRATEGY ADEQUATELY. THE INDEPENDENT TRUSTEES ALSO DISCUSSED THE ADVISOR'S REVIEW AND SELECTION PROCESS WITH RESPECT TO BLACKROCK, AND THE ADVISOR'S FAVORABLE ASSESSMENT AS TO THE NATURE AND QUALITY OF THE SUBADVISORY SERVICES EXPECTED TO BE PROVIDED BY BLACKROCK. THE INDEPENDENT TRUSTEES DETERMINED THAT THE FUND WOULD BENEFIT FROM THE QUALITY AND EXPERIENCE OF BLACKROCK'S PORTFOLIO MANAGERS. BASED ON THEIR CONSIDERATION AND REVIEW OF THE FOREGOING FACTORS, THE INDEPENDENT TRUSTEES CONCLUDED THAT THE NATURE, EXTENT, AND QUALITY OF THE SUBADVISORY SERVICES TO BE PROVIDED BY BLACKROCK UNDER THE PRIOR SUBADVISORY AGREEMENT, AS WELL AS BLACKROCK'S ABILITY TO RENDER SUCH SERVICES BASED ON ITS EXPERIENCE, OPERATIONS, AND RESOURCES, WERE APPROPRIATE FOR THE FUND, IN LIGHT OF THE FUND'S INVESTMENT OBJECTIVE. BECAUSE THE FUND WAS NEWLY FORMED AND HAD NOT YET COMMENCED INVESTMENT OPERATIONS, THE INDEPENDENT TRUSTEES COULD NOT CONSIDER BLACKROCK'S INVESTMENT PERFORMANCE WITH RESPECT TO ITS MANAGEMENT OF THE FUND AS A FACTOR IN EVALUATING THE PRIOR SUBADVISORY AGREEMENT AT THE MAY 2005 MEETING. HOWEVER, THE INDEPENDENT TRUSTEES DID REVIEW BLACKROCK'S HISTORICAL PERFORMANCE RECORD IN MANAGING OTHER FUNDS AND ACCOUNTS THAT ARE COMPARABLE TO THE FUND. THE INDEPENDENT TRUSTEES ALSO COMPARED THIS HISTORICAL PERFORMANCE TO A RELEVANT BENCHMARK, AND CONCLUDED THAT THE HISTORICAL PERFORMANCE RECORD FOR THE SUBADVISOR, VIEWED TOGETHER WITH THE OTHER FACTORS CONSIDERED BY THE INDEPENDENT TRUSTEES, SUPPORTED A DECISION TO APPROVE THE PRIOR SUBADVISORY AGREEMENT. THE INDEPENDENT TRUSTEES DISCUSSED THE SERVICES THAT WOULD BE RENDERED BY BLACKROCK AND EVALUATED THE COMPENSATION TO BE PAID TO BLACKROCK BY THE ADVISOR. THE INDEPENDENT TRUSTEES ALSO CONSIDERED COMPARISONS OF THE FEES PAID TO BLACKROCK BY THE ADVISOR WITH THE FEES CHARGED BY BLACKROCK TO ITS OTHER CLIENTS. THE INDEPENDENT TRUSTEES NOTED THAT THE FEE SCHEDULE OF BLACKROCK INCLUDED BREAKPOINTS THAT WOULD REDUCE BLACKROCK'S FEES AS ASSETS IN THE FUND INCREASED. IN ADDITION, THE INDEPENDENT TRUSTEES CONSIDERED THE SELECTION AND DUE DILIGENCE PROCESS EMPLOYED BY THE ADVISOR IN DECIDING TO RECOMMEND BLACKROCK AS A SUBADVISOR TO THE FUND, AND THE ADVISOR'S REASONS FOR CONCLUDING THAT THE FEES TO BE PAID TO THE SUBADVISOR FOR ITS SERVICES TO THE FUND WERE REASONABLE. THE INDEPENDENT TRUSTEES NOTED THAT THE SUBADVISORY FEES WERE PAID BY THE ADVISOR TO BLACKROCK AND WERE NOT ADDITIONAL FEES TO BE BORNE BY THE FUND. BASED ON THEIR DISCUSSION, THE INDEPENDENT TRUSTEES CONCLUDED THAT, IN LIGHT OF THE QUALITY AND EXTENT OF THE SERVICES TO BE U.S. Securities and Exchange Commission December 27, 2006 Page 5 PROVIDED, THE PROPOSED FEES TO BE PAID TO BLACKROCK WITH RESPECT TO THE ASSETS TO BE ALLOCATED TO THE SUBADVISOR APPEARED TO BE WITHIN A REASONABLE RANGE. BASED ON THESE FACTORS, THE DETERMINATION OF THE ADVISOR AT THE CONCLUSION OF ITS DUE DILIGENCE PROCESS, AND SUCH OTHER MATTERS AS WERE DEEMED RELEVANT, THE INDEPENDENT TRUSTEES, AT THE MAY 2005 MEETING, CONCLUDED THAT THE PROPOSED FEE RATE WAS REASONABLE IN RELATION TO THE SERVICES TO BE PROVIDED TO THE FUND BY BLACKROCK. AS A RESULT, THE INDEPENDENT TRUSTEES DECIDED TO RECOMMEND TO THE BOARD THE APPROVAL OF THE PRIOR SUBADVISORY AGREEMENT AT THE MAY 2005 MEETING. After full consideration of the factors discussed above, INCLUDING THE INDEPENDENT TRUSTEES' DELIBERATIONS AT THE MAY 2005 MEETING, with no single factor identified as being of paramount importance, the Board, including a majority of the Independent Trustees, with the assistance of independent counsel, concluded AT THE JULY BOARD MEETING that the approval of the Current Subadvisory Agreement was in the best interests of the Fund, and approved the Current Subadvisory Agreement with respect to the Fund. * * * * * * In connection with the Trust's response to the SEC Staff's comments on the Information Statement, the Trust acknowledges that: (i) the Trust is responsible for the adequacy of the disclosure in the Trust's filings; (ii) Staff comments or changes to disclosure in response to Staff comments in the filings reviewed by the Staff do not foreclose the SEC from taking any action with respect to the filings; and (iii) the Trust may not assert Staff comments as a defense in any proceeding initiated by the SEC under the federal securities laws of the United States. U.S. Securities and Exchange Commission December 27, 2006 Page 6 Please do not hesitate to contact Mark A. Sheehan, at (215) 564-8027, if you have any questions or wish to discuss any of the responses presented above. Sincerely, /s/Cynthia Lo Bessette Cynthia Lo Bessette Vice President and Secretary MGI Funds cc: David M. Goldenberg, Esq. Mercer Global Investments, Inc. Stuart H. Coleman, Esq. Stroock & Stroock & Lavan, LLP Bruce G. Leto, Esq. Stradley, Ronon, Stevens & Young, LLP
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Mercer Funds CORRESPCorrespondence with SEC
Filed: 27 Dec 06, 12:00am