See accompanying Notes to Financial Statements.
See accompanying Notes to Financial Statements.
See accompanying Notes to Financial Statements.
|
Notes
to Financial Statements
|
|
(1) Organization
The William Blair Macro Allocation Fund
(“MAF” or “Macro Allocation”) and the William Blair Commodity Strategy Long/Short Fund (“CLS”
or “Commodity Strategy Long/Short”) are separate Funds (together the “Funds”) within the William Blair
Funds (the “Trust”). The Trust is registered under the Investment Company Act of 1940 (the “1940 Act”),
as amended, as an open-end management investment company. For each Fund, the number of shares authorized is unlimited.
(a) Share Classes
Three different classes of shares currently
are available: N, I and Institutional. There are currently no assets in the Institutional Share Class. This report includes financial
highlight information for Classes N and I. Below is a brief description of the Class N shares and the Class I shares covered by
this report:
Class N
shares are offered to the
general public, either directly through the Trust’s distributor or through a select number of financial intermediaries. Class
N shares are sold without any sales load, and carry an annual 12b-1 distribution fee of 0.25%, a Shareholder Administration fee
of 0.15%, and may have a Sub-transfer agent fee that is not a fixed rate and may vary by Fund and class.
Class I
shares are offered to a
limited group of investors. They do not carry any sales load or distribution fees and generally have lower ongoing expenses than
the Class N shares. Class I shares have a Shareholder Administration fee of 0.15% and may have a Sub-transfer agent fee that is
not a fixed rate and may vary by Fund and class.
(b) Fund Objective and Description
Macro Allocation Fund
MAF’s objective is to maximize long-term
risk-adjusted total return.
In pursuing its investment objective, MAF
employs a dynamic global macro asset allocation strategy. This strategy attempts to exploit periodic market inefficiencies by taking
long and short positions in various asset classes (e.g., equity and fixed income) and currencies with a view to profit from movements
across and within such asset classes and currencies. MAF uses a top-down approach that focuses on general price movements in various
asset classes and currencies rather than the performance of individual company securities. MAF’s macro asset allocation strategy
is based primarily on the fundamental investment valuations of asset classes and currencies. The goal is to identify and exploit
periodic discrepancies between fundamental values and market prices. These perceived value/price discrepancies are the foundation
of the MAF’s portfolio construction. MAF may invest in or seek exposure to a wide range of asset classes including, without
limitation, equity and fixed income markets (including asset-backed securities, mortgage-backed securities and other collateralized
obligations and all grades and maturities of domestic and foreign credit, including high yield (junk bonds)), commodities, and
real estate, and currencies. MAF has no geographical or other limits on the allocation of its assets among asset classes.
Commodity Strategy Long/Short Fund
CLS’s objective is to seek long-term
risk-adjusted total return.
CLS’s investment strategies seeks
to provide broad exposure to commodities, provide attractive risk-adjusted returns with low correlations to traditional asset classes,
maintain the inflation protection of commodities investing and profit in both up and down commodity markets. CLS seeks to provide
exposure to the commodity trading strategies of independent commodity trading advisors (“CTAs”) selected by William
Blair & Company, L.L.C., (the “Advisor”) currently through derivative instruments (instruments whose values are
based on, for example, indices, currencies or securities), and invests in fixed-income securities.
CLS’s commodity investments include
derivative instruments that provide exposure to trading strategies of CTAs selected by the Advisor and/or by investing in limited
liability companies, limited partnerships, corporations or other pooled vehicles (“Underlying Vehicles”) managed by
such CTAs. The Advisor currently seeks exposure to CTA trading strategies through a total return swap (the “Swap”),
with Deutsche Bank AG, London Branch (“Deutsche Bank”) as the counterparty. The Swap, which is a type of derivative
instrument, is based on a customized index (the “Index”) designed to replicate the aggregate returns
14
|
Semi-Annual
Report
|
April
30, 2013
|
of the trading strategies of CTAs selected
by the Advisor. The swap currently has exposure to seven different CTAs which can be broadly placed into three different trading
strategies.
Systematic strategies
which utilize quantitative systems to exploit trending behavior of futures markets over
various time frames and may include some counter trend and mean reversion aspects.
Fundamental strategies
conduct deep research
into fundamental supply and demand factors that drive futures markets and use specialized models, data sources and other tools
to construct expectations of fundamental values.
Specialist strategies
employ specialized knowledge, research and analysis
systems to seek value from niche markets. As of April 30, 2013, the swap was made up of 39.7% Systematic strategies, 17.4% Fundamental
strategies and 42.9% Specialist strategies.
The Swap is based on a notional amount
agreed to by the Advisor and Deutsche Bank. The notional amount of the Swap may be adjusted from time to time and may exceed the
net assets of the fund. The Advisor may add or remove CTAs from the Index or increase or decrease the weighting given to a CTA
included in the Index. The Swap will expire on April 26, 2017, but may be terminated by the Fund on one day’s notice to Deutsche
Bank. The notional amount of the Swap as of April 30, 2013 was $18,816,304.
The Swap value reflects the current cost
of the fees of Deutsche Bank and the fixed fees of the CTAs together aggregating no more than 1.80% of the notional allocations
to the CTAs included in the Index and may include a deduction for the performance fees of the individual CTAs in an amount not
to exceed 20%. The deduction for performance fees in the Index will be based on the performance results of each individual CTA’s
trading strategy represented in the Index. Accordingly, a performance fee for one or more CTA trading strategies represented in
the Index may be deducted in calculating the Index even if the aggregate returns of the trading strategies of the CTAs are negative.
To the extent the aggregate notional allocations to the CTAs included in the Index exceed the net assets of the Fund, the deduction
from the Index for the fees of Deutsche Bank and the fixed fees of the CTAs will be greater as a percentage of the Fund’s
net assets than the deduction would be if the aggregate notional allocations to the CTAs included in the Index were equal to or
less than the net assets of the Fund. Fees are accrued daily within the Swap and deducted from the Swap value quarterly. During
the period ended April 30, 2013, total fees of the Swap were $128,791 of which $29,476 was related to performance fees.
(2) Significant Accounting Policies
The following is a summary of the Funds’
significant accounting policies in effect during the period covered by the financial statements, which are in accordance with U.S.
generally accepted accounting principles.
(a) Basis for Consolidation for Commodity
Strategy Long/Short Fund
CLS’s investments in the Swap are
made through William Blair CLS Ltd., a wholly-owned subsidiary of CLS organized under the laws of the Cayman Islands (the “Subsidiary”).
The Subsidiary acts as an investment vehicle for CLS in order to effect certain investments for the Fund consistent with CLS’s
investment objective and policies as specified in its Prospectus and Statement of Additional Information. CLS’s Portfolio
of Investments has been consolidated and includes the portfolio holdings of CLS and the Subsidiary. The consolidated financial
statements include the accounts of CLS and the Subsidiary. All inter-company transactions and balances have been eliminated. Under
the Articles of Association, shares issued by the Subsidiary confer upon a shareholder the right to receive notice of, to attend
and to vote at general meetings of the Subsidiary and shall confer upon the shareholder rights in a winding-up or repayment of
capital and the right to participate in the profits or assets of the Subsidiary. Investments held within the Subsidiary are used
to meet collateral requirements of the Swap and are invested in a money market fund. Under normal conditions, CLS will have an
investment in the Subsidiary between 5% and 20% of the net assets of CLS. As of April 30, 2013, the total investment in the Subsidiary
was $732,752, representing 4.9% of the net assets of CLS.
(b) Investment Income and Transactions
Dividend income and expense is recorded
on the ex-dividend date, except for those dividends from certain foreign securities that are recorded when the information is available.
Interest income is recorded on an accrual
basis, adjusted for amortization of premium or discount. Variable rate bonds and floating rate notes earn interest at coupon rates
that fluctuate at specific time intervals. The interest rates shown in the Consolidated Portfolio of Investments for CLS were the
rates in effect on April 30, 2013. Put bonds may be redeemed at the discretion of the holder on specified dates prior to maturity.
Premiums and discounts are accreted and
amortized on a straight-line basis for short-term investments with maturities < 60 days and on an effective interest method
for long-term investments.
Paydown gains and losses on mortgage and
asset-backed securities are reclassified to interest income. For the period ended April 30, 2013, the Commodity Strategy Long/Short
Fund recognized a reduction of income and an increase in net realized gains of $77,394.
April
30, 2013
|
William
Blair Funds
|
15
|
The Funds do not isolate that portion of
the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign currency
gains or losses arise from disposition of foreign currency, the difference in the foreign exchange rates between the trade and
settlement dates on securities transactions, and the difference between the amounts of dividends, interest and foreign withholding
taxes recorded on the ex-date or accrual date and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes (due to the changes in the exchange rate) in the value of foreign currency
and other assets and liabilities denominated in foreign currencies held at year end.
Security and shareholder transactions are
accounted for no later than one business day following the trade date. However, for financial reporting purposes, security and
shareholder transactions are accounted for on the trade date of the last business day of the reporting period. Realized gains and
losses from securities transactions are recognized on a specifically identified cost basis.
(c) Share Valuation and Distributions
to Shareholders
Shares are sold and redeemed on a continuous
basis at net asset value (“NAV”). The NAV per share is determined separately for each class by dividing each Fund’s
net assets attributable to that class by the number of shares of the class outstanding as of the close of regular trading on the
New York Stock Exchange (the “Exchange”), which is generally 4:00 p.m. Eastern time, on each day the Exchange is open.
Redemption fees may be applicable to redemptions or exchanges within 60 days of purchase. For both Class N and Class I shares,
the Funds assess a 2% redemption fee on shares sold or exchanged that have been owned 60 days or less as disclosed within each
Fund’s Prospectus. The redemption fees collected by the Funds are netted against the amount of redemptions for presentation
on the (Consolidated) Statements of Changes in Net Assets. As of April 30, 2013, the Funds have not collected any redemption fees.
Distributions from net investment income,
if any, of the Funds are declared and paid at least annually. Capital gain distributions, if any, are declared and paid at least
annually in December. Distributions payable to shareholders are recorded on the ex-dividend date.
(d) Foreign Currency Translation
The Funds may invest in securities denominated
in foreign currencies. As such, assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts
at the current exchange rate on the date of valuation. The values of foreign investments, open forward foreign currency contracts,
and cash denominated in foreign currencies are translated into U.S. dollars using a spot market rate of exchange as of the time
of the determination of each Fund’s NAV, typically 4:00 p.m. Eastern time on days when there is regular trading on the New
York Stock Exchange. Payables and receivables for securities transactions, dividends, interest income and tax reclaims are translated
into U.S. dollars using a spot market rate of exchange as of 4:00 p.m. Eastern time. Settlement of purchases and sales and dividend
and interest receipts are translated into U.S. dollars using a spot market rate of exchange as of 11:00 a.m. Eastern time.
(e) Income Taxes
Each Fund intends to comply with the provisions
of Subchapter M of the Internal Revenue Code available to regulated investment companies. Each Fund intends to make the requisite
distributions of income and capital gains to its shareholders sufficient to relieve it from all, or substantially all, federal
income and excise taxes. No provision for federal income and excise taxes has been made.
Management has evaluated all of the uncertain
tax positions of the Funds and has determined that no provision for income tax is required to be recorded in the financial statements.
As of October 31, 2012, the Funds had not been in existence for a complete fiscal year and therefore have not made annual filings
with the Internal Revenue Service.
The Funds treat the deferred loss associated
with current period wash sales as an adjustment to the cost of investments for tax purposes. The cost of investments for federal
income tax purposes and related gross unrealized appreciation/(depreciation) and net unrealized appreciation (depreciation) at
April 30, 2013, were as follows:
Fund
|
|
Cost of
Investments
|
|
Gross
Unrealized
Appreciation
|
|
Gross
Unrealized
Depreciation
|
|
Net
Unrealized
Appreciation/
(Depreciation)
|
Macro Allocation
|
|
|
$114,614,956
|
|
|
$3,787,504
|
|
|
|
$557,935
|
|
|
|
$3,229,569
|
|
Commodity Strategy Long/Short
|
|
|
16,263,364
|
|
|
73,241
|
|
|
|
17,910
|
|
|
|
55,331
|
|
16
|
Semi-Annual Report
|
April
30, 2013
|
The timing and characterization of certain
income and capital gain distributions are determined annually in accordance with federal income tax regulations that may differ
from U.S. generally accepted accounting principles. As a result, net investment income or loss and net realized gain or loss for
a reporting period may differ from the amount distributed during such period. In addition, the Funds may periodically record reclassifications
among certain capital accounts to reflect differences between financial reporting and income tax basis distributions. The reclassifications
were reported in order to reflect the tax treatment for certain permanent differences that exist between income tax regulations
and U.S. generally accepted accounting principles. The reclassifications generally relate to differing treatment of paydown gains
and losses, Section 988 currency transactions and income and gains from swap contracts. These reclassifications have no impact
on the net asset values of the Funds. Accordingly, at October 31, 2012, the following reclassifications were recorded:
Fund
|
|
Accumulated
Net Investment
Income(Loss)
|
|
Accumulated
Net Realized
Gain(Loss)
|
|
Capital Paid
in Excess
of Par Value
|
Macro Allocation
|
|
$(108,077
|
)
|
|
$109,122
|
|
|
$(1,045
|
)
|
Commodity Strategy Long/Short.
|
|
38,387
|
|
|
(37,585
|
)
|
|
(802
|
)
|
The tax
character of distributions paid during fiscal year ended 2012 was as follows:
Fund
|
|
Ordinary
Income
|
|
Long-Term
Capital Gains
|
|
Total
Distributions
|
Macro Allocation
|
|
$42,495
|
|
|
$—
|
|
|
$42,495
|
|
Commodity Strategy Long/Short
|
|
—
|
|
|
—
|
|
|
—
|
|
As of October 31, 2012, the components of distributable earnings
on a tax basis were as follows:
Fund
|
|
Undistributed
Ordinary Income
|
|
Accumulated
Capital and
Other Losses
|
|
Undistributed
Long-Term
Capital Gain
|
|
Net Unrealized
Appreciation
(Depreciation)
|
Macro Allocation
|
|
|
$753,928
|
|
|
|
$ —
|
|
|
|
$141,124
|
|
|
|
$ 245,881
|
|
Commodity Strategy Long/Short
|
|
|
34,598
|
|
|
|
(36,007
|
)
|
|
|
—
|
|
|
|
(138,437
|
)
|
As of October 31, 2012, the Commodity Strategy
Long/Short Fund has short-term capital loss carryforward, without expiration, of $36,007.
(f) Repurchase Agreements
In a repurchase agreement, a Fund buys
a security at one price and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time
and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser’s holding
period, while the seller’s obligation to repurchase is secured by the value of the underlying security. The Advisor will
monitor, on an ongoing basis, the value of the underlying securities to ensure that the value always equals or exceeds the repurchase
price plus accrued interest. Repurchase agreements may involve certain risks in the event of a default or insolvency of the other
party to the agreement, including possible delays or restrictions upon a Fund’s ability to dispose of the underlying securities.
The risk to a Fund is limited to the ability of the seller to pay the agreed upon sum on the delivery date. In the event of default,
a repurchase agreement provides that a Fund is entitled to sell the underlying collateral. The loss, if any, to a Fund will be
the difference between the proceeds from the sale and the repurchase price. However, if bankruptcy proceedings are commenced with
respect to the seller of the security, disposition of the collateral by the Fund may be delayed or limited. Although no definitive
creditworthiness criteria are used, the Advisor reviews the creditworthiness of the banks and non-bank dealers with which a Fund
enters into repurchase agreements to evaluate those risks. A Fund may, for tax purposes, deem repurchase agreements collateralized
by U.S. Government securities to be investments in U.S. Government securities.
(g) Use of Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements. Actual results may differ from those estimates.
(h) Indemnifications
In the normal course of business, the Funds
have entered into contracts in which the Funds agree to indemnify the other party or parties against various potential cost or
liabilities. The Funds’ maximum exposure under these arrangements is unknown. No claim has been made for indemnification
pursuant to any such agreement of the Funds.
April 30, 2013
|
William
Blair Funds
|
17
|
(3)
Valuation
(a)
Investment Valuation
The market value of domestic equity securities,
including exchange-traded funds, is determined by valuing securities traded on national securities markets or in the over-the-counter
markets at the last sale price or, if applicable, the official closing price or, in the absence of a recent sale on the date of
determination, the mean between the last reported bid and ask prices.
Investments in mutual funds which are not
traded on an exchange are valued at their respective net asset value per share.
The value of foreign equity securities
is generally determined based upon the last sale price on the foreign exchange or market on which it is primarily traded and in
the currency of that market as of the close of the appropriate exchange or, if there have been no sales during that day, at the
mean between the latest bid and ask prices. The Board of Trustees has determined that the passage of time between when the foreign
exchanges or markets close and when the Funds compute their net asset values could cause the value of foreign equity securities
to no longer be representative or accurate, and as a result, may necessitate that such securities be fair valued. Accordingly,
for foreign equity securities, the Funds may use an independent pricing service to fair value price the security as of the close
of regular trading on the New York Stock Exchange. As a result, a Fund’s value for a security may be different from the last
sale price (or the mean between the latest bid and ask prices).
Fixed-income securities are generally valued
using evaluated prices provided by an independent pricing service. The evaluated prices are formed using various market inputs
that the pricing service believes accurately represent the market value of a security at a particular point in time. The pricing
service determines evaluated prices for fixed-income securities using inputs including, but not limited to, recent transaction
prices, dealer quotes, transaction prices for securities with similar characteristics, collateral characteristics, credit quality,
payment history, liquidity and market conditions.
Option contracts on securities, currencies
and other financial instruments traded on one or more exchanges are valued at their most recent sale price on the exchange on which
they are traded most extensively. Futures contracts (and options and swaps thereon) are valued at the most recent settlement price
on the exchange on which they are traded most extensively. Forward foreign currency contracts are valued on the basis of the value
of the underlying currencies at the prevailing currency exchange rate as supplied by an independent pricing service.
The total return swaps in the Macro Allocation
Fund are valued by an independent pricing service using simulation pricing models. These models will value the underlying basket
of exchange-traded equity securities within the total return swap based on readily observable market prices.
CLS’ shares of the Subsidiary are
valued at the net asset value per share of the Subsidiary, which is calculated using the same valuation procedures as CLS. For
CLS, the Subsidiary’s investment in the Swap is fair valued based on the calculation of the Index by the counterparty. The
counterparty calculates the Index each index business day at the close of business in London, which is typically 11:00AM Eastern
Time. The Advisor performs certain daily tests of the Swap value in order to test the reasonableness of the counterparty’s
valuation. In determining the fair value of the Swap, the Advisor, under procedures approved by the Board of Trustees, will consider
whether there have been significant events that have occurred from the close of business in London when the Swap is valued and
the time that the Fund calculates its NAV.
Securities, and other assets, for which
a market price is not available or is deemed unreliable (e.g., securities affected by unusual or extraordinary events, such as
natural disasters or securities affected by market or economic events, such as bankruptcy filings), or the value of which is affected
by a significant valuation event, are valued at a fair value as determined in good faith by, or under the direction of, the Board
of Trustees and in accordance with the Trust’s valuation procedures. The value of fair valued securities may be different
from the last sale price (or the latest bid price), and there is no guarantee that a fair valued security will be sold at the price
at which a Fund is carrying the security.
(b) Fair Valuation Measurements
Fair value is defined as the price that
a Fund would receive upon selling a security in an orderly transaction to an independent buyer in the principal or most advantageous
market for the investment. Various inputs are used in determining the value of a Fund’s investments. A three-tier hierarchy
of inputs is used to classify fair value measurements for disclosure purposes. The three-tier hierarchy of inputs is summarized
in the three broad levels listed below:
|
·
|
Level
1—Quoted
prices (unadjusted)
in active
markets for
an identical
security.
|
|
|
|
|
·
|
Level
2—Prices
determined
using
other
significant
observable
inputs.
Observable
inputs
are inputs
that
other
market
participants
would
use in
pricing
a security.
These
may include
quoted
prices
for similar
securities,
interest
rates,
|
18
|
Semi-Annual Report
|
April 30, 2013
|
|
|
prepayment speeds, credit risk, and others. In addition, other observable inputs such as foreign exchange rates, benchmark securities indices and foreign futures contracts may be utilized in the valuation of certain foreign securities when significant events occur between the last sale on the foreign securities exchange and the time the net asset value of the Fund is calculated.
|
|
|
|
|
·
|
Level 3—Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment) unobservable inputs may be used. Unobservable inputs reflect the Fund’s own assumptions about the factors market participants would use in pricing an investment, and would be based on the best information available.
|
The inputs or methodology used for valuing
an investment are not necessarily an indication of the risk associated with investing in those securities. For example, money market
securities are valued using amortized cost, in accordance with rules under the 1940 Act. Generally, amortized cost approximates
the current fair value of a security, but since the value is not obtained from a quoted price in an active market, such securities
are reflected as Level 2.
Any transfers between Level 1 and Level
2 are disclosed, effective as of the beginning of the period, in the tables below with the reasons for the transfers disclosed
in a note to the tables, if applicable.
A description of the valuation techniques
applied to the Fund’s major categories of assets and liabilities measured at fair value on a recurring basis are as follows.
Exchange-Traded Securities
Securities traded on a national securities
exchange (or reported on the NASDAQ national market), including exchange-traded funds, are stated at the last reported sales price
on the day of valuation. Other securities traded in the over-the-counter market and listed securities for which no sale was reported
on that date are stated at the mean between the last reported bid and ask prices. To the extent these securities are actively traded
and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy.
Fixed-Income Securities
Fixed-income securities including corporate,
convertible and municipal bonds and notes, U.S. government agencies, U.S. treasury obligations, sovereign issues, bank loans, convertible
preferred securities and non-U.S. bonds are generally valued using evaluated prices provided by an independent pricing service.
The evaluated prices are formed using various market inputs that the pricing service believes accurately represent the market value
of a security at a particular point in time. The pricing service determines evaluated prices for fixed-income securities using
inputs including, but not limited to, recent transaction prices, dealer quotes, transaction prices for securities with similar
characteristics, collateral characteristics, credit quality, payment history, liquidity and market conditions. Securities that
use similar valuation techniques and observable inputs as described above are categorized as Level 2 of the fair value hierarchy.
Asset-Backed Securities
Mortgage-related and asset-backed securities
are usually issued as separate tranches, or classes, of securities within each deal. These securities are also normally valued
by pricing service providers that use broker dealer quotations or valuation estimates from their internal pricing models. The pricing
models for these securities usually consider tranche-level attributes, current market data, estimated cash flows and market-based
yield spreads for each tranche, and incorporate deal collateral performance, as available. Mortgage-related and asset-backed securities
that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.
Short-Term Investments
Short-term investments having a maturity
of 60 days or less at the time of purchase are generally valued at amortized cost, which approximates fair market value. These
investments are categorized as Level 2 of the fair value hierarchy.
Derivative Instruments
Listed derivatives, such as certain options
and futures contracts, that are actively traded are valued based on quoted prices from the exchange on which they are traded most
extensively and are categorized in Level 1 of the fair value hierarchy. Over-the-counter (OTC) derivative contracts include forward
foreign currency contracts, swap and certain option contracts related to interest rates, foreign currencies, credit standing of
reference entities, equity prices, or commodity prices. Depending on the
April 30, 2013
|
William Blair
Funds
|
19
|
product and the terms of the transaction, the fair value of
OTC derivative products can be modeled taking into account the counterparties’ creditworthiness and using a series of techniques,
including simulation models. Many pricing models do not entail material subjectivity because the methodologies employed do not
necessitate significant judgments and the pricing inputs are observed from actively quoted markets, as is the case of forward foreign
currency contracts and interest rate swaps. A substantial majority of OTC derivative products valued by a Fund using pricing models
fall into this category and are categorized within Level 2 of the fair value hierarchy.
CLS Swap Contract
The Swap held by the Subsidiary of CLS is fair valued based
on the calculation of the Index by the counterparty. The Swap is not a listed security nor does it actively trade. The fair value
is based on inputs that are not readily observable in the market place, primarily of which are the underlying baskets of commodity
investments on which the Swap value is derived. The Value of the Swap also reflects deductions for management and performance fees
from the underlying CTAs, counterparty fees and trading costs. The Swap is categorized within Level 3 of the fair value hierarchy.
As of April 30, 2013, the hierarchical input levels of securities
in each Portfolio, segregated by security class or other financial instrument, are as follows:
Investments
in Securities
|
|
Macro
Allocation
|
|
Commodity
Strategy
Long/Short
|
Assets
|
|
|
|
|
|
|
|
|
Level 1—Quoted Prices
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$
|
675,511
|
|
|
$
|
—
|
|
Exchange-Traded Funds
|
|
|
71,753,550
|
|
|
|
—
|
|
Purchased Options
|
|
|
1,024,563
|
|
|
|
—
|
|
Level 2—Other Significant Observable Inputs
|
|
|
|
|
|
|
|
|
Government Securities
|
|
|
10,614,974
|
|
|
|
11,087,211
|
|
Asset-Backed Securities
|
|
|
—
|
|
|
|
1,444,236
|
|
Corporate Obligations
|
|
|
—
|
|
|
|
1,480,227
|
|
Short-term Investments
|
|
|
33,775,927
|
|
|
|
2,307,021
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Level 1—Quoted Prices
|
|
|
|
|
|
|
|
|
Exchange-Traded Funds
|
|
|
(7,288,000
|
)
|
|
|
—
|
|
Total Investments in Securities
|
|
$
|
110,556,525
|
|
|
$
|
16,318,695
|
|
|
|
|
|
|
|
|
|
|
Other
Financial Instruments
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Level 1—Quoted Prices
|
|
|
|
|
|
|
|
|
Futures Contracts
|
|
$
|
1,568,068
|
|
|
$
|
—
|
|
Level 2—Other Significant Observable Inputs
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts
|
|
|
1,495,946
|
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Level 2—Other Significant Observable Inputs
|
|
|
|
|
|
|
|
|
Futures Contracts
|
|
|
(836,565
|
)
|
|
|
—
|
|
Total Return Swap
|
|
|
(11,417
|
)
|
|
|
—
|
|
Level 3—Significant Unobservable Inputs
|
|
|
|
|
|
|
|
|
Total Return Swap
|
|
|
—
|
|
|
|
(671,838
|
)
|
Total Other Financial Instruments
|
|
$
|
2,216,032
|
|
|
$
|
(671,838
|
)
|
The following is a reconciliation of Level
3 investments in the Commodity Strategy Long/Short Fund for which significant unobservable inputs were used to determine fair value:
|
|
Value
10/31/2012
|
|
|
Notional
Increase
|
|
|
Notional
Decrease
|
|
|
Change in
Unrealized
Depreciation
|
|
|
Value
4/30/2013
|
|
Total Return Swap
|
|
$(215,187
|
)
|
|
$7,671,724
|
|
|
$1,357,583
|
|
|
$(456,651
|
)
|
|
$(671,838
|
)
|
20
|
Semi-Annual Report
|
April 30, 2013
|
Significant unobservable inputs for the
Swap consist primarily of the performance of the underlying CTAs. For the period ended April 30, 2013, the CTA performance ranged
from -5.74% to 15.88%. The Swap value will increase or decrease generally in proportion to the weighted average performance of
the CTAs.
(4) Recent Accounting Pronouncement
In December 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2011-11
“Disclosures about
Offsetting Assets and Liabilities.”
These common disclosure requirements are intended to help investors and other financial
statement users to better assess the effect or potential effect of offsetting arrangements on a Fund’s financial position.
They also improve transparency in the reporting of how companies mitigate credit risk, including disclosure of related collateral
pledged or received. In addition, ASU 2011-11 facilitates comparison between those entities that prepare their financial statements
on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting
Standards. ASU 2011-11 requires entities to disclose both gross and net information about both instruments and transactions eligible
for offset in the financial position; and disclose instruments and transactions subject to an agreement similar to a master netting
agreement. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual
periods. Management is currently evaluating the implications of ASU 2011-11 and its impact on financial statement disclosures.
(5) Transactions with Affiliates
(a) Management and Expense Limitation
Agreements
Each Fund has a management agreement with
the Advisor for investment advisory, clerical, bookkeeping and administrative services. Each Fund pays the Advisor an annual fee,
payable monthly, based on a specified percentage of its average daily net assets. The annual advisory fee rates for the Macro Allocation
Fund and the Commodity Strategy Long/Short Fund are 0.80% and 1.40%, respectively.
Each Fund has also entered into an Amended
and Restated Expense Limitation Agreement with the Advisor. Under the terms of the agreement, the Advisor will waive its management
fee and/or reimburse each Fund for expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses,
dividend expenses on short sales and other investment-related costs and extraordinary expenses, such as litigation and other expenses
not incurred in the ordinary course of the Fund’s business) in excess of the agreed upon rate. The amount the Advisor owes
a Fund as of the reporting date is recorded as Receivable from Advisor on the (Consolidated) Statements of Assets and Liabilities.
The Advisor reimburses the Funds on a monthly basis. Under the terms of the agreement, the Advisor has agreed to waive its advisory
fees and/or reimburse other operating expenses through April 30, 2014, if total expenses for each class of the following Funds
exceed the following rates (as a percentage of average daily net assets):
Funds
|
|
Class N
|
|
Class I
|
Macro Allocation
|
|
1.35
|
%
|
|
1.10
|
%
|
Commodity Strategy Long/Short
|
|
1.95
|
%
|
|
1.70
|
%
|
For the period ended April 30, 2013, the fee waivers and/or
reimbursements were as follows:
|
|
Fund
Level
Waiver
|
|
Class I
Specific
Waiver
|
|
Class N
Specific
Waiver
|
|
Total
Waiver
|
Macro Allocation Fund
|
|
103,253
|
|
|
4,587
|
|
|
5,425
|
|
|
113,265
|
|
Commodity Strategy Long/Short Fund
|
|
152,343
|
|
|
1,465
|
|
|
253
|
|
|
154,061
|
|
For a period of three years subsequent
to the commencement of operations, the Advisor is entitled to reimbursement for previously waived fees and reimbursed expenses
to the extent the overall expense ratio remains below the expense limitation in place at the time the fee was waived and/or the
expense was reimbursed. The total amounts available for recapture at April 30, 2013 for MAF and CLS were $311,426 and $364,515,
respectively.
(b) Underwriting, Distribution Services
and Service Agreements
Each Fund has a Distribution Agreement
with William Blair for distribution services to the Funds’ Class N shares. Each Fund pays William Blair an annual fee, payable
monthly, based on a specified percentage of its average daily net assets of Class N shares. The annual rate expressed as a percentage
of average daily net assets for Class N is 0.25% for each Fund. Pursuant to the Distribution Agreement, William Blair enters into
related selling group agreements with various firms at various rates for sales of the Funds’ Class N shares.
April 30, 2013
|
William Blair Funds
|
21
|
Each Fund has a Shareholder Administration Agreement with William
Blair to provide shareholder administration services. Class N and Class I shares of the Funds pay William Blair an annual fee,
payable monthly, based upon 0.15% of average daily net assets attributable to each class, respectively. For the period ended April
30, 2013, the following shareholder administration fees were incurred:
Funds
|
|
Class N
|
|
|
Class I
|
|
|
Total
|
|
Macro Allocation
|
|
$
|
15,772
|
|
|
$
|
35,398
|
|
|
$
|
51,170
|
|
Commodity Strategy Long/Short
|
|
|
843
|
|
|
|
9,824
|
|
|
|
10,667
|
|
(6) Investment Transactions
Investment transactions, excluding money market instruments, repurchase
agreements and demand notes for the period ended April 30, 2013, were as follows:
Fund
|
|
Purchases
|
|
|
Sales
|
|
Macro Allocation
|
|
$
|
59,267,069
|
|
|
$
|
3,047,789
|
|
Commodity Strategy Long/Short
|
|
|
6,253,063
|
|
|
|
2,884,436
|
|
Transactions in written call and put options for the period ended
April 30, 2013 are as follows:
Macro Allocation Fund
|
|
# of
Contracts
|
|
|
Notional Amount
|
|
|
Premium
|
|
Balance at October 31, 2012
|
|
|
40
|
|
|
$
|
1,036,920
|
|
|
$
|
33,938
|
|
Sales
|
|
|
37
|
|
|
|
1,080,856
|
|
|
|
4,020
|
|
Closing Buys
|
|
|
(77
|
)
|
|
|
(2,117,776
|
)
|
|
|
(37,958
|
)
|
Expirations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Excised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at April 30, 2013
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(7) Short Sales
A Fund may sell a security it does not own in anticipation of a
decline in the fair value of that security. When the Fund sells a security short, it must borrow the security sold short and deliver
it to the broker-dealer through which it made the short sale. A gain, limited to the price at which the Fund sold the security
short, or a loss unlimited in size, will be recognized upon the termination of the short sale. The Fund is also subject to the
risk that it may be unable to reacquire a security to terminate a short position except at a price substantially in excess of the
price it sold the security short.
(8) Financial Derivative Instruments
The Funds may use derivative instruments to obtain investment exposures,
to maintain liquidity, to provide hedging, or in anticipation of changes in the composition of its portfolio holdings or as otherwise
provided in each Fund’s prospectus.
Derivative transactions carry counterparty risk as they are based
on contracts between the Fund and the applicable counterparty. For exchange-traded or cleared derivative contracts, such counterparty
risk is limited due to the role of the exchange or clearinghouse. OTC derivative contracts, however, are exposed to counterparty
risk in the amount of unrealized gains, net of collateral held, for the duration of the contract. The Funds seek to reduce counterparty
risk in respect of OTC derivatives contracts by only transacting with high credit-standing counterparties and by regularly monitoring
its exposure to counterparties.
Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial instrument for a specified price at a designated date,
time and place. An index futures contract is an agreement pursuant to which the parties agree to take or make delivery of an amount
of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price
at which the index futures contract was originally written. If the offsetting purchase price is less than the original sale price,
a Fund realizes a gain; if it is more, a Fund realizes a loss. Conversely, if the offsetting sale price is more than the original
purchase price, a Fund realizes a gain; if it is less, a Fund realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that a Fund will be able to enter into an offsetting transaction with respect
to a particular futures contract at a particular time. If a Fund is not able to enter into an offsetting transaction, a Fund will
continue to be required to maintain the margin deposits on the futures contract.
22
|
Semi-Annual
Report
|
April
30, 2013
|
Upon entering into a futures contract, a Fund is required to pledge
to the broker an amount of cash, U.S. government securities, or other liquid assets equal to a certain percentage of the contract
amount (initial margin deposit). Futures contracts are marked to market daily and an appropriate payable or receivable for the
change in value (“variation margin”) is recorded by the Fund and a cash payment is either made to or received from
the counterparty. Futures held through swaps are marked to market daily, however, the Fund does not make or receive cash payments
to/from the counterparty. Gains or losses are recognized but not considered realized until the contracts expire or are closed.
Options
The purchase or sale of an option by the Funds involves the payment
or receipt of a premium by the investor and the corresponding right or obligation, as the case may be, either to purchase or sell
the underlying security, commodity, or other instrument for a specific price at a certain time or during a certain period. Purchasing
options involves the risk that the underlying instrument will not change price in the manner expected, so the investor loses its
premium. Selling options involves potentially greater risk because the investor is exposed to the extent of the actual price movement
in the underlying security rather than only the amount of the premium paid (which could result in a potentially unlimited loss).
OTC options also involve counterparty credit risk. Purchased options are shown as an asset on the (Consolidated) Statements of
Assets and Liabilities and are included in Investments in securities. Premiums received for written options are shown as a liability
on the (Consolidated) Statements of Assets and Liabilities. Realized gains and losses on the sale, expiration or assignment of
an option are disclosed on the (Consolidated) Statements of Operations.
Forward Foreign Currency Contracts
The Funds may enter into forward foreign currency exchange contracts.
When entering into a forward currency contract, the Funds agree to receive or deliver a fixed quantity of foreign currency for
an agreed-upon price on an agreed future date. The Funds’ net equity therein, representing unrealized gain or loss on the
contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and
the forward rates at the reporting date, is included in the (Consolidated) Statements of Assets and Liabilities. Realized and unrealized
gains and losses are included in the (Consolidated) Statements of Operations. These instruments may involve market risk, credit
risk, or both kinds of risks in excess of the amount recognized in the (Consolidated) Statements of Assets and Liabilities. Risks
arise from the possible inability of counterparties to meet the terms of their contracts and from the price movements in currencies.
Swap Contracts
Swap agreements may include total return, interest rate, securities
index, commodity, security, currency exchange rate, credit default index, volatility and variance swaps. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging from a few weeks to several years. In a standard
“swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized
on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the
parties are calculated with respect to a “notional amount” (i.e., the change in the value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing
a particular index). Swap agreements are subject to the risk that the counterparty to the swap will default on its obligation to
pay the Fund and the risk that the Fund will not be able to meet its obligations to pay the counterparty to the swap. Swap agreements
may also involve fees, commissions or other costs that may reduce the Fund’s gains from a swap agreement or may cause the
Fund to lose money.
CLS gains exposure to the commodities market by investing in
a total return swap with Deutsche Bank as counterparty. The Fund’s returns are reduced or its losses are increased by
the costs associated with the Swap, which are the fees deducted by the counterparty in the valuation of the Swap. In
addition, there is the risk that the Swap may be terminated by the Fund or the counterparty in accordance with its terms or
as a result of regulatory changes. If the Swap were to terminate, the Fund may be unable to implement its investment
strategies with respect to commodities investments and the Fund may not be able to seek to achieve its investment
objective.
For the CLS Swap no price was paid upon entering into the arrangement
nor is any initial margin required to be posted. Any increase or decrease in the Swap value will be recorded on the (Consolidated)
Statements of Assets and Liabilities as appreciation or depreciation on the Swap contract. In the event of depreciation, the Fund
is required to deposit in a segregated account with its custodian an amount at least equal to the unrealized losses.
April
30, 2013
|
William
Blair Funds
|
23
|
The following table presents
the value of financial derivative instruments as of April 30, 2013 and their respective location on the Statement of Assets and
Liabilities:
|
|
Assets
|
|
Liabilities
|
|
|
|
Statement of Assets
|
|
|
|
Statement of Assets
|
|
|
|
Derivative
|
|
and Liabilities
|
|
Value
|
|
and Liabilities
|
|
Value
|
|
Macro Allocation
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
Unrealized appreciation on forward currency contracts
|
|
$
|
1,495,946
|
|
Unrealized depreciation on forward currency contracts
|
|
$
|
—
|
|
Interest rate
|
|
Receivable for variation margin
|
|
|
—
|
|
Payable for variation margin
|
|
|
1,106,799
|
|
Equity
|
|
Receivable for variation margin
|
|
|
1,838,302
|
|
Payable for variation margin
|
|
|
—
|
|
Interest rate
|
|
Investments in securities, at value
|
|
|
601,563
|
|
|
|
|
|
|
Equity
|
|
Investments in securities, at value
|
|
|
423,000
|
|
|
|
|
|
|
Equity
|
|
Unrealized appreciation on swap contract
|
|
|
—
|
|
Unrealized depreciation on swap contract
|
|
|
11,417
|
|
Commodity Strategy Long/Short
|
|
|
|
|
|
|
|
|
|
|
|
Commodities
|
|
Unrealized appreciation on swap contract
|
|
|
—
|
|
Unrealized depreciation on swap contract
|
|
|
671,838
|
|
The following table indicates
the effect of derivatives, by primary risk exposure, on the Statement of Operations for the period ended April 30, 2013:
The following table summarizes
the activity in capital shares of each Portfolio for the period ending April 30, 2013:
The following table summarizes
the activity in capital shares of each Fund for the period ending October 31, 2012: