December 22, 2015
FILED VIA EDGAR
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Horizon Funds
Registration Statement on Form N-1A Filed June 2, 2015
File No. 811-23063
Ladies and Gentlemen:
We are submitting this correspondence on behalf of our client, the Horizon Funds (the “Trust”). Mr. Jay Williamson of the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) provided written comments, dated July 2, 2015, regarding the above-referenced registration statement (the “Registration Statement”) on Form N-1A under the Securities Act of 1933 (the “Securities Act”) and the Investment Company Act of 1940 (the “1940 Act”), to register common shares of each of the Horizon Active Asset Allocation Fund, the Horizon Active Risk Assist Fund and the Horizon Active Income Fund (each, a “Horizon Fund”, and together, the “Horizon Funds”), each a series of the Trust. The following are the comments provided and the Trust’s response to each:
General
1. | Several of the comments issued below on the Horizon Active Asset Allocation Fund will also apply to similar disclosure contained in the Active Risk Assist Fund and Active Income Fund. For brevity we have not repeated our comments. Please consider whether our comment applies to similar disclosure in these other funds. |
RESPONSE: The Trust confirms that it will consider the Staff’s comment above and respond accordingly.
2. | We note the Funds being registered will be successor funds and your statement that the Funds will have the same adviser and substantially the same investment objectives, strategies and policies. We have the following comments: |
a. | What were the purpose(s) behind the reorganizations? Why was each predecessor chosen to be registered? |
RESPONSE: Each of the predecessor funds (each a “Predecessor Fund”) is an open end investment company registered under the 1940 Act and a separate series of the AdvisorOne Funds. The reorganizations are being effected for the purpose of reorganizing each of the Predecessor Funds into the corresponding Fund, each of which is a separate series of the Trust. The reorganization is intended to be structured as a tax free reorganization, wherein each Predecessor Fund will transfer all of its assets and liabilities to the applicable Horizon Fund in exchange for shares of the applicable Horizon Fund, which shares will be distributed to the shareholders of the Predecessor Fund in connection with the liquidation of the Predecessor Fund.
1
b. | Is shareholder approval being solicited and, if so, how and when will approval be requested and obtained? |
RESPONSE: Yes. The Board of Trustees of AdvisorOne has delivered to the shareholders of each of the Predecessor Funds a proxy statement seeking their approval to the reorganization. It is expected that the reorganizations will be completed, subject to shareholder approval, in the first quarter of 2016.
c. | Did any of the Predecessor Funds rely on the exclusion from the definition of investment company under the Investment Company Act in section 3(c)(1) or 3(c)(7) of that Act? |
RESPONSE: No. As stated above, each Predecessor Fund is an open end investment company registered under the 1940 Act.
d. | Are there any differences in the investment objectives, strategies and policies between a Predecessor Fund and its Predecessor Fund? If yes, what are they? |
RESPONSE: Although the disclosures for each Horizon Fund have been revised to make them clearer for investors, the investment objectives, strategies and policies of each Horizon Fund will be substantially similar to that of its Predecessor Fund (except as indicated in response to Comment 10 below). Each Horizon Fund is expected to have the same investment adviser and portfolio management team as the applicable Predecessor Fund.
e. | Did the adviser manage any other accounts that were materially equivalent to a fund? Were these other accounts converted to registered investment companies, and if not, why not? |
RESPONSE: While the investment adviser to each Predecessor Fund may manage other accounts pursuant to a strategy similar to that of a Predecessor Fund, no such other accounts are involved in the reorganization.
f. | Were there any materially equivalent accounts that had lower performance as compared with the related predecessor? |
RESPONSE: Please see our response to Comment 2(e).
g. | Does the Fund have the records necessary to support the calculation of performance as required by rule 204-2(a)(16) under the Investment Advisers Act? |
Yes, the Trust confirms that each Fund will have the records necessary to support the calculation of performance as required by rule 204-2(a)(16) under the Investment Advisers Act. The Horizon Funds will commence operations only upon the closing of the reorganization, such that each Horizon Fund is a continuation of its respective Predecessor Fund and, as such, will continue its performance record.
2
3. | We note your intention to invest in a variety of derivatives. Please note that the Division of Investment Management has made a number of observations about derivatives-related disclosure by investment companies in a letter from Barry D. Miller, Associate Director, to Karrie McMillan, General Counsel, Investment Company Institute, dated July 30, 2010. Please review the observations set forth in that letter and revise your disclosure relating to your use of derivatives as appropriate. |
RESPONSE: It is not a principal investment strategy of any Horizon Fund to invest in any type of derivative other than options. Accordingly, each reference to “derivatives” in a Horizon Fund’s disclosure has been changed to “options”.
Horizon Active Asset Allocation Fund
Fees and Expenses of the Allocation Fund, page 1
4. | Three of the line items included under Shareholder Fees are presented even though no fees are charged for any investor class. Please consider removing these line items to better enable investors to focus on the fees they will actually pay. |
RESPONSE: The Trust has considered your comment, but believes that including all line items in the Shareholder Fee table makes comparisons between the fees charged by Horizon Funds and those charged by other funds easier for shareholders and potential shareholders.
5. | We note the disclosure in footnote one to your fee table referencing estimated expenses. Please tell us why you are not using actual expenses for the most recent fiscal year. |
RESPONSE: The Trust will use actual expenses where available, such as, for example, acquired fund fees and expenses. However, certain service providers to the Horizon Funds will differ from the service providers to the Predecessor Funds, including, without limitation, the Horizon Funds’ administrator, transfer agent and custodian. Accordingly, the expenses to be incurred by the Horizon Funds in connection with such service providers have been estimated for each Horizon Fund’s first fiscal year.
6. | Please confirm that your expense example is appropriately calculated and only reflects the fee waiver and expense reimbursement agreement for the initial duration of the agreement. |
RESPONSE: The Trust confirms that each Horizon Fund’s expense example is appropriately calculated and only reflects the fee waiver and expense reimbursement agreement for the initial duration of the agreement.
Principal Investment Strategies of the Allocation Fund, page 2
7. | We note the references to Currencies and Commodities in the bulleted list under Principal Investment Strategies. Please revise to address how, and to what extent, the Fund will invest in these areas. |
RESPONSE: None of the Funds will invest in currencies or commodities as a principal investment strategy. Accordingly, references to currencies and commodities have been removed from the Funds’ discussions of their respective principal investment strategies. However, because the Funds may at times invest in ETFs that have exposure to commodities, a discussion of the risks of investments in commodities has been added to the Funds’ Item 9 disclosure.
3
Principal Risks of the Allocation Fund, page 3 |
8. | Please revise your ETF Risk disclosure to briefly address the risks associated with the ETF structure and arbitrage mechanism, e.g., the possibility that the ETF may trade at a discount to NAV. |
RESPONSE: The following has been added to the “Principal Risks” section of each Horizon Fund’s prospectus:
“Fluctuation of NAV; Unit Premiums and Discounts. The NAV of the shares of the ETFs in which the [Fund] may invest will generally fluctuate with changes in the market value of the ETF’s securities holdings and supply and demand of the ETF’s shares on the exchanges on which the ETF’s shares are traded. The market prices of an ETF’s shares may deviate significantly from the NAV of the ETF’s shares during periods of market volatility. If the [Fund] purchases an ETF’s shares at a time when the market price is at a premium to the NAV of the ETF’s shares or sells at a time when the market price is at a discount to the NAV of the ETF’s shares, then the [Fund] may sustain losses that are in addition to any losses caused by a decrease in NAV.”
Additionally, the following has been added to the Funds’ Item 9 disclosure:
“Fluctuation of NAV; Unit Premiums and Discounts. The NAV of the shares of the ETFs in which the [Fund] may invest will generally fluctuate with changes in the market value of the ETF’s securities holdings. The market prices of an ETF’s shares will generally fluctuate in accordance with changes in the ETF’s NAV and supply and demand of the ETF’s shares on the exchanges on which the ETF’s shares are traded. It cannot be predicted whether an ETF’s shares will trade below, at or above their NAV. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for the ETF’s shares will be closely related to, but not identical to, the same forces influencing the prices of the securities of the ETF trading individually or in the aggregate at any point in time. The market prices of an ETF’s shares may deviate significantly from the NAV of the ETF’s shares during periods of market volatility. While an ETF’s creation/redemption feature is designed to make it likely that the ETF’s shares normally will trade close to its NAV, disruptions to creations and redemptions and/or market volatility may result in trading prices that differ significantly from the ETF’s NAV. If the [Fund] purchases an ETF’s shares at a time when the market price is at a premium to the NAV of the ETF’s shares or sells at a time when the market price is at a discount to the NAV of the ETF’s shares, then the [Fund] may sustain losses that are in addition to any losses caused by a decrease in NAV.”
Performance, page 4 |
9. | Please include year-to-date return information as of the most recent quarter. See Item 4(b) (2) (ii) of Form N-1A. |
RESPONSE: The Trust expects to effect the reorganization and launch of each Horizon Fund in early February. If this occurs, the most recent quarter end will be December 31 and the Bar Chart will not require a footnote regarding subsequent year-to-date performance as required by Item 4(b)(2)(ii). In the event that the Horizon Funds commence operations at such time that the most recent quarter end is not December 31, the disclosures to each Horizon Fund will be revised accordingly to include the footnote required by Item 4(b)(2)(ii).
4
Horizon Active Risk Assist Fund, page 6 |
10. | You state the Fund’s investment objective “is to capture the majority of the returns associated with equity market investments, while mitigating downside risk through use of a risk overlay strategy.” Please revise to set forth your objective in clear and understandable language. |
RESPONSE: The objective has been revised as follows: “The investment objective of the Horizon Active Risk Assist® Fund (the “Risk Assist Fund”) is capital appreciation with a secondary emphasis on capital preservation.”
Principal Investment Strategies of the Risk Assist Fund, page 7 |
11. | On page nine you reference “a proprietary process that prompts a risk reduction of the portfolio.” Elsewhere you refer to your risk overlay strategy, “Risk Assist” overlay, and Risk Assist Strategy. Please revise to briefly discuss your strategy in clear, concise and understandable language. Explain how your process is different from the temporary defensive measures typically employed. |
RESPONSE: The applicable language has been revised to reflect the consistent use of the term “Risk Assist strategy”. As described in the Principal Investment Strategies for the Risk Assist Fund, the Risk Assist strategy is different from temporary defensive measures in that the Risk Assist strategy may be deployed under normal market circumstances, in stages and for relatively long periods of time, each as part of the Fund’s principal investment strategies; whereas, temporary defensive measures are typically deployed with respect to all or substantially all of the Fund’s assets, for temporary periods, in response to extreme market volatility, market disruptions or other unusual market conditions.
12. | Please clarify what you mean by “commodity-linked underlying investments.” |
RESPONSE: Please see the Trust’s response regarding investments in commodities above under Comment 7 regarding relocating the Fund’s discussion of commodities. Additionally, the disclosure has been revised as follows:
“Commodity Risk. A Fund's exposure to the commodities through underlying investments that invest in commodities may subject the Fund to greater volatility than investments in traditional securities.”
5
Horizon Active Income Fund, page 11 |
Principal Investment Strategies of the Income Fund, page 12 |
13. | In the first paragraph under Principal Investment Strategies of the Income Fund you refer to “other securities that Horizon believes …” Please clarify what other securities you are referring to. |
RESPONSE: The following language has been deleted from the disclosure: “, or other securities that Horizon believes are likely to generate income for the Income Fund”.
14. | We note the statement that the Fund “may enter into a number of different types of options transactions …” Please provide more specific disclosure about the types of derivatives you will employ. |
RESPONSE: The following disclosure has been added to the principal investment discussion for each Fund: “In addition, the [Fund] may buy or write options on puts or calls for investment purposes, to hedge other investments or to generate option premiums for the [Fund], including, without limitation, option combinations such as spreads, straddles, strangles and collars.”
Principal Risks of the Income Fund, page 12 |
15. | We note the reference to Commodity Risk on page 12; however, the Income Fund’s strategy disclosure does not address commodity-linked investments. Please reconcile. |
RESPONSE: Please see the Trust’s response to Comments 7 and 12 above.
Performance, page 14 |
16. | Your investment strategies discussion suggests you will invest in a variety of investments, including equities, sovereign debt, master limited partnerships and real estate investment trusts. Please tell us how you concluded that the Barclays Aggregate Bond Index is an appropriate broad-based securities market index. |
RESPONSE: While the Fund may invest in a variety of income-producing securities, the Trust believes that the Barclays Aggregate Bond Index is an appropriate broad-based securities market index because, under normal market conditions, a majority of the Income Fund’s investments have historically been comprised of ETFs that invest in U.S. bonds, which correlates to the types of securities comprising the Barclays Aggregate Bond Index.
6
Additional Information About the Funds’ Principal Investment Strategies, page 17 |
17. | We note the disclosure on page 17 under “Fund of Funds” and the statement under “Selection of ETFs” that “each Fund may invest up to 40% of its total assets in one ETF.” Please tell us your plans for complying with Section 12(d) under the Investment Company Act. Your response should address any no-action or exemptive relief on which you intend to rely and explain how you will or have complied with the terms and conditions associated with the relief granted. |
RESPONSE: The Horizon Funds have policies and procedures pursuant to which they monitor their investments in other investment companies for compliance with Section 12(d)(1)(A). With respect to Section 12(d)(1)(A)(i), the Funds will enter into various Participation Agreements with other investment companies that have obtained appropriate exemptive relief from the Commission and may on occasion acquire more than 3% of the total outstanding voting stock of such investment companies pursuant to such Participation Agreements. With respect to Section 12(d)(1)(A)(ii) and (iii), the Funds invest in accordance with the restrictions of Section 12(d)(1)(F) pursuant to Rule 12d1-3 under the Investment Company Act of 1940.
How to Purchase Shares, page 23 |
18. | We note the discussion of sales charge discounts on page 23. Please revise your Item 3 disclosure to include the required language regarding these discounts. |
RESPONSE: Each Horizon Fund’s Item 3 disclosure has been revised to include the following disclosure: “You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A shares of the [Fund]. More information about these and other discounts is available from your financial professional and in this Prospectus in the “Class A Shares” section beginning on [page].”
Statement of Additional Information |
19. | We note you incorporate your November 31, 2014 financial statements by reference into your Statement of Additional Information. However, it is unclear where these documents were filed with us as the Funds have no prior reporting history. Please review General Instruction D to Form N-1A and revise as appropriate. Also, to the extent that your audited financial statements are legally a part of your registration statement through incorporation by reference, please provide a consent or explain why none is required. |
RESPONSE: Each disclosure in the SAI regarding incorporation by reference of the November 30, 2014 financial statements has been revised to read as follows: “The financial statements of the Predecessor Funds for the fiscal period ended November 30, 2014, which are included in each Predecessor Fund’s Annual Report to Shareholders dated November 30, 2014 (Accession No: 0000910472-14-000451), are incorporated herein by reference.” The Trust confirms that it will provide a consent from the Predecessor Fund’s auditors with the Trust’s next amended filing.
7
Investment Restrictions of the Funds, page 1 |
20. | Please revise your concentration policy to refer to “industry or group of industries.” Also, given your fund of funds structure, clarify how you will analyze your industry exposures (i.e., will you look through to the ETF’s holdings?). |
RESPONSE: The Horizon Funds’ disclosure regarding its fundamental policy regarding concentration has been revised as follows: “(9) Invest 25% or more of the value of its total assets in any one industry or group of industries.” Additionally, the following disclosure has been added adjacent to the list of the Fund’s fundamental restrictions to clarify the Fund’s policies on industry exposure: “With respect to the above fundamental investment restriction on concentration in a particular industry, securities of the U.S. Government (including its agencies and instrumentalities), tax-exempt securities of state or municipal governments and their political subdivisions and investments in other registered investment companies are not considered to be issued by members of any industry.”
Accounting Comments |
21. | Please update your financial statements, as necessary, with any amended filing. In addition, please ensure other disclosures – such as the Financial Highlights are appropriately updated, as necessary. |
RESPONSE: The Trust confirms that it will update financial statements and other financial disclosures, as necessary, with any amended filing.
22. | Please advise whether you are including seed financial statements, meeting the $100,000 minimum capital balance. |
RESPONSE: The Trust will not be including seed financial statements because it will not be offering securities until after the reorganization, at which time it will exceed the $100,000 minimum capital balance.
23. | Please provide a consent from your independent registered public accounting firm. |
RESPONSE: Please see our response to Comment 19 above.
Horizon Active Asset Allocation Fund |
Fees and Expenses of the Allocation Fund |
24. | Please confirm that the expense limitation agreements for all funds are in accordance with the guidance set forth in the 2009 Investment Companies Industry Developments Audit Risk Alert ARA-INV.73 which states: |
The SEC staff has seen instances where funds instituted a cap in the first year of operations and then increased the cap in subsequent years above the current expense ratio. The SEC staff reminds registrants that they cannot begin to recapture prior year expenses incurred under previous expense cap arrangements solely because of an increase in the current year's expense cap. Prior year expenses can be recaptured only if the current expense ratio is less than the prior year expense cap that was in place when such prior year expenses were waived.
8
RESPONSE: The Trust confirms that the expense limitation agreement for each Horizon Fund is in accordance with the guidance set forth in the 2009 Investment Companies Industry Developments Audit Risk Alert ARA-INV.73.
25. | Please explain your calculations for the hypothetical expenses for years 1, 3, 5, 10 for each Fund and remove the line above Class N. |
RESPONSE: The Trust confirms that the expense example calculations are performed in accordance with Instructions 4(a)-(f) of Item 3 of Form N-1A. The line above Class N has been removed.
Horizon Active Risk Assist Fund |
Investment Objective |
26. | Per 11/30/14 financial statements, the investment objective of the Horizon Active Risk Assist Fund is capital appreciation. Did this change as a result of the merger? |
RESPONSE: As stated above in response to the Staff’s comment in Comment 10, the investment objective of the Horizon Active Risk Assist Fund has been revised as follows: “The investment objective of the Horizon Active Risk Assist® Fund (the “Risk Assist Fund”) is capital appreciation with a secondary emphasis on capital preservation.”
Financial Highlights |
27. | Please include a line under Net gain from investments for the period ended November 30, 2015. |
RESPONSE: A line under Net gain from investments for the period ended November 30, 2015 has been added.
28. | Please explain why your gross expenses to average net assets ratio was so high during the period ended November 30, 2015. |
RESPONSE: Gross expenses to average net assets ratio for the Horizon Active Risk Assist Fund were high during the period ended November 30, 2015, because, at such time, the Fund had only recently commenced operations on August 28, 2014 and had relatively few assets.
Statement of Additional Information |
29. | The language incorporating your financial statements by reference refers to your fiscal year ended November 31, 2014. Revise to state November 30. |
RESPONSE: The requested change has been made.
9
************************************************************************
In submitting this correspondence, the Trust acknowledges that: (i) the Trust is responsible for the adequacy and accuracy of the disclosure in the filing; (ii) staff comments or changes to disclosure in response to staff comments in the filing reviewed by the staff do not foreclose the Commission from taking any action with respect to the filing; and (iii) the Trust may not assert staff comments as a defense in any proceeding initiated by the Commission or any persona under the federal securities laws of the United States.
Thank you for your comments. Please contact me at 336-607-7512 if you have any additional questions or comments.
Very truly yours,
Jeffrey T. Skinner
10