Annual Report

 

Historical Performance and Manager’s Discussion	2
About Your Fund's Expenses	8
Top Holdings and Sector Breakdown	9
Portfolio of Investments	10
Statement of Assets & Liabilities	13
Statement of Operations	14
Statements of Changes in Net Assets	15
Financial Highlights	19
Notes to Financial Statements	23
Report of Independent Registered Public Accounting Firm	29
Additional Information	29
Board of Trustees and Executive Officers	30

 

(800) 955-9988

www.sheltoncap.com

email us at info@sheltoncap.com

 

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This report is intended only for the information of shareholders or those who have received the offering prospectus covering shares of beneficial interest of The SCM Trust which contains information about the management fee and other costs. Investments in shares of The SCM Trust are neither insured nor guaranteed by the U.S. Government.

 

 

 

Greater China Fund

 

Market Review

 

The Shelton Greater China Fund’s (the “Fund”, sym: SGCFX) performance was correlated to, but trailed, the returns of the Fund’s benchmark, the MSCI Golden Dragon Index (the “Index”), over the course of the reporting period. The Fund returned 1.95% for the year compared to 5.40% for the benchmark index. After losing 14.8% in the first 3 weeks of the year, the Fund traded in a -10% to -15% range over the next month before moving back toward breakeven. By April 19th the Fund was down 1.31% YTD. The Fund and index began trending downward again through mid-May, dropping back to -10.45% YTD by May 19. The market trended upward mid-May to September, peaking on September 22 at the high point for the year, up 9.83% YTD. There was little volatility until early November when the Fund and benchmark both began to fall again, in large part due to the election of President Donald Trump and related possible U.S. trade policy changes.

 

The Chinese economy, which is the anchor point of the greater China region, reported GDP growth of 6.7% in each of the first 3 quarters of 2016 and 6.8% in the final quarter of the year, all within the target range of 6.5-7.0%. The IMF has boosted their forecast of China’s 2017 growth to 6.5%, but sees rising debt levels reducing anticipated 2018 growth to 6.0%. While higher than the prior year, China’s current inflation, as measured by the CPI YOY is 2.1%, still below the target rate of 3%, leaving policy makers room for additional stimulus. Shelton Capital believes that while the path may be volatile, the underlying trends for China still point to continued economic expansion which should translate over the long term into value for the equity markets in the Greater China region. However, there is significant concern over how actual policy will develop, especially with regard to US-China trade policy and disputed territories in the South China Sea. In addition, concerns remain over the quality of official Chinese government economic data and the lack of transparency in the shadow banking system, i.e., the potentially unrecognized bad debt held by Chinese banks.

 

Fund Performance

 

The Fund continues to be geographically diversified across the region with exposure to China, Hong Kong and Taiwan, though the Fund has higher exposure to Hong Kong and mainland China domiciled companies and less exposure to Taiwan than the Index. The Fund is diversified across market sectors and Fund holdings continue to reflect the broad market with the majority of the assets invested in the Financial and Information Technology sectors. The Fund’s largest holding, Tencent Holdings Ltd, once again contributed strong positive returns to the portfolio in 2016, as did Taiwan Semiconductor Manufacturing Company, Ltd. Banks which performed poorly in 2015, including BOC Hong Kong Holdings and China Construction Bank, bounced back with strong positive returns in the reporting period. Chemical companies Kingboard Chemical Holdings and Sinopec Shanghai Petrochemical Co. also made strong contributions to the Fund’s return. Laggards held by the Fund represented many different sectors, with no obvious concentrations, and included China Taiping Insurance Holdings Company, Haier Electronics Group Co., Ltd., China Resources Power Holdings Company Limited, and China Everbright International Limited.

 

Long-Term Market Themes

 

Shelton Capital believes China will experience strong economic growth relative to the U.S. and other developed markets for the foreseeable future, which should be reflected in the equity markets. Shelton Capital also believes that the Greater China region’s equity markets will continue to exhibit volatility due to, among other factors, growth expectations possibly not being realized at a steady pace; uncertainty due to the aforementioned evolving US-China relationship; a lack of transparency (relative to domestic US markets); and influence of a very strong central government. Shelton Capital will continue to maintain a portfolio diversified across the region and sectors, using the Index as a guideline and over or under weighting by geography or sector as our views evolve. Sector concentrations as well as specific stock investments will be guided by macro events as well as who Shelton Capital believes to be the likely beneficiaries of changes in government policy. Shelton Capital will watch the financial services sector for reforms that provide expanded access to the Chinese financial markets to both foreigners and Chinese nationals and target companies that will benefit from those reforms. Shelton Capital will continue to look for opportunities to invest in companies that can provide energy in a more pollution-efficient manner, as the central government is aware that current pollution levels are now an impediment to future growth. Construction should continue to benefit from China’s continued rapid urbanization and stimulus in the form of major infrastructure projects. Shelton Capital continues to look for companies that are well positioned to sell goods and services to China’s rapidly growing middle class.

 

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All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. Current performance may be lower or higher than the performance data cited. For more recent performance information, visit www.sheltoncap.com. Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

 

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BDC Income Fund

 

The Shelton BDC Income Fund (the “Fund”, sym: LOANX/LOAIX) commenced operations in May 2014 as the AR Capital BDC Income Fund and reorganized into the Shelton BDC Income Fund on November 4, 2016. The Fund is a series of the SCM trust and is registered with the SEC as a non-diversified, open-end management investment company. The Fund focuses its investments in securities of Business Development Companies (“BDC”s) including common stock, preferred stock, convertible bonds and other debt. Under normal market conditions, at least 80% of the Fund’s net assets will be invested BDC related securities. The Fund’s investment objective is to provide a high level of income with the potential for capital appreciation.

 

For the one year period ending December 31, 2016, the Fund’s Investor Class provided a +16.9% total return to shareholders, while the Fund’s Institutional Class provided a +15.9% total return to shareholders. The Fund’s benchmark, the Fargo BDC Index (sym: WFBDC), returned +24.4% for the same period. At period-end, 100% of the Fund’s investments were in U.S. domiciled securities. The breakdown of the portfolio was 72% listed BDCs, 13% Specialty Finance, 11% BDC Preferred and 4% cash.

 

BDC stocks were in strong demand beginning in mid-February, coinciding with the lows in the S&P 500 and oil. President Trump’s election, along with the campaign promises of fiscal stimulus and deregulation, provided a backdrop for long awaited economic growth and an improved business environment for middle market companies in particular. The yield advantage of BDCs (yielding 8-10%) contrasted with 10 year Treasury rates of 2.5% caused investors to add exposure in financial related stocks as the hunt for yield resumed in earnest. The floating rate assets embedded in most BDC portfolios offered an attractive alternative to fixed-income investors looking to protect against principal loss that may occur if rates rise significantly. An additional contributor to the positive fund flows in BDCs was the approaching merger of Ares Capital (ARCC) and American Capital (ACAS) with a large cash distribution to ACAS shareholders expected upon completion in early 2017. The first quarter rally in crude oil and energy related assets caused those BDCs with heavy exposure to the energy sector such as Prospect Capital (PSEC) and Gladstone Capital (GLAD) to have sharp rebounds from their 2015 prices.

 

Looking ahead, despite the run-up in BDCs, Shelton Capital remains cautiously optimistic towards specific types of BDC portfolios. Balance sheets appear lowly levered as many BDC management teams have built up cash levels during the past six months. Whereas fundamentals remain sound in many industries, the level of asset prices has decreased the risk/reward attractiveness and may put somewhat of a price cap on mid-market assets. In this environment, Shelton Capital looks for managements teams well placed to generate rates of return through organic investments, rather than through the employment of leverage. Additionally, there have been expectations in the market about the removal of the current Acquired Fund Fees and Expenses disclosure which requires a fund-of-funds’ prospectus to include the operating expenses of the underlying funds. This became an SEC requirement in January 2007 with the unintended consequence of making BDCs ineligible for indices such as Russell and S&P. An overturn of the rule may be a large technical positive and expand institutional ownership for longer BDCs.

 

Thank you for your support and the confidence you have placed in the Shelton BDC Income Fund.

 

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All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. Current performance may be lower or higher than the performance data cited. For more recent performance information, visit www.sheltoncap.com. Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

 

 

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Real Estate Income Fund

 

The Shelton Real Estate Income Fund (“The Fund”, sym: RENTX/RENIX) commenced operations in June 2013 as the AR Capital Real Estate Income Fund. The AR Capital Real Estate Income Fund reorganized into the Shelton Real Estate Income Fund on November 4, 2016. The Fund is a series of SCM Trust and is registered with the SEC as a non-diversified, open-end management investment company. The Fund focuses its investments in real estate securities, including securities issued by real estate investment trusts (REITs). Under normal market conditions, at least 80% of its net assets will be invested in income producing real estate common equity, preferred equity and debt securities. The Fund’s investment objective is to provide a high level of income with the potential for capital appreciation.

 

For the one year period ending December 31, 2016, the Fund’s Investor Class provided a 6.6% total return to shareholders, while the Fund’s Institutional Class provided a 6.4% total return to shareholders. These results lagged the broader REIT market (as defined by the S&P U.S.A. REIT Index) by 1.9% and 2.1%, respectively. The Fund was primarily exposed to the U.S. stock market as of December 31, 2016. At year-end, approximately 96% of the Fund’s investments were held in U.S. domiciled securities. The Fund’s largest equity exposures to non-U.S. issuers were in Great Britain at 1.8%, followed by France (1.4%) and Germany (1.3%); any remaining individual country exposure amounted to less than 0.5%. The Fund’s cash position at year-end was 4.4%. Our largest international currency exposure was to the Euro, at 3.5%, followed by the U.K. Pound (1.8%), while our concentration to both the Australian Dollar and Japanese Yen was roughly 0.4% each.

 

The Shelton Real Estate Income Fund started 2016 in much the same way most U.S. equities did, under pressure from a slowing Chinese economy, a fresh increase in short-term U.S. interest rates and plummeting energy prices. Concerns regarding the Chinese economy proved to be overdone, and following a trough in 1Q16, oil surged over 100% to finish the year over $50 a barrel. The Fund’s exposure to U.S. apartment REITs and U.S. industrial REITs were negatively impacted by these global macroeconomic trends. As markets recovered into the summer of 2016, supported by more dovish commentary from the U.S. Federal Reserve, so did shares of the Fund. The unexpected passing of the U.K. referendum to leave the European Union in June 2016 negatively and disproportionately impacted our U.K. REIT and real estate positions. However, the Fund had already begun to increase its cash position, following an 18% recovery in REITs shares since their February low. Through the remainder of the summer and fall of 2016, the Fund’s excess cash position provided a defensive buttress to an over 18% retracement in the REIT market through mid-November 2016. Throughout the fourth quarter, the Fund kept pace with the broader REIT market in absolute terms, but exhibited significantly lower volatility.

 

Moving forward, Shelton Capital remains cautiously optimistic toward REIT valuations. Commercial real estate fundamentals are sound. Supply across most sectors and markets remains disciplined while steady economic growth continues to support increasing rental rates and solid occupancies. Aging global demographics and the search for yield provide a demand tailwind for both direct real estate mandates by insurance companies and pension funds. In addition, S&P Dow Jones Indices, a leading provider of financial market indices, and MSCI Inc., a leading provider of investment decision support tools worldwide, created a new Real Estate Sector under the Global Industry Classification Standard (GICS^®), which may compel financial portfolio managers and pension consultants to re-examine concentrations and exposure to listed REIT securities. REIT balance sheets remain healthy, carrying historically low leverage while near-term debt maturities appear manageable. Notwithstanding higher U.S. interest rates, unprecedented global monetary stimulus may still provide a supportive financing backdrop, possibly allowing REITs to dispose of slower growth assets. However, risks remain to both fundamentals and sentiment. Geopolitical uncertainty has resulted in economic headwinds which may soften transaction volumes, temper growth prospects and/or increase equity risk premiums. On balance, we believe real estate related securities provide a compelling investment opportunity. We thank you for your support and the confidence you have placed in the Shelton Real Estate Income Fund.

 

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All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. Current performance may be lower or higher than the performance data cited. For more recent performance information, visit www.sheltoncap.com. Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

 

 

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The Funds’ advisor, Shelton Capital Managment (“Shelton Capital”), believes it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the Funds, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions, redemption fees, and exchange fees; and (2) ongoing costs, including management fees, distribution fees and other Fund expenses. Operating expenses, which are deducted from the Funds’ gross income, directly reduce the investment return of the Funds. The Funds’ expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. This example is intended to help you understand your ongoing cost (in dollars) of investing in the Funds and to compare these costs with the oncoing costs of investing in other mutual funds.

 

The examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2016 to December 31, 2016.

 

Actual Expenses

 

The first line of the tables below provide information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses you have paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

 

Hypothetical Example for Comparison Purposes

 

The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Funds’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the onging costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The Funds do not charge any sales charges. There is a redemption fee of 2% for shares of the Greater China Fund purchased that are held for 90 days or less from the date of purchase.

 

Please note that the expenses shown in the tables are meant to highlight your ongoing costs only and do not reflect any transactional cost, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the tables are useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

 

More information about the Funds’ expenses can be found in this report. For additional information on operating expenses and other shareholder costs, please refer to the Funds’ prospectus.

 

 

 

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Shelton Greater China

 

Shelton BDC Income Fund

 

Shelton Real Estate Income Fund

 

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At December 31, 2016, unrealized appreciation (depreciation) of securities for federal income tax purposes is as follows:

 

 

See accompanying notes to financial statements.

 

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At December 31, 2016, unrealized appreciation (depreciation) of securities for federal income tax purposes is as follows:

 

 

 

 

See accompanying notes to financial statements.

 

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At December 31, 2016, unrealized appreciation (depreciation) of securities for federal income tax purposes is as follows:

 

 

See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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See accompanying notes to financial statements.

 

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NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The SCM Trust (the “Trust”), is registered under the Investment Company Act of 1940, as amended, as a diversified open-end management investment company. The Trust currently consists of three separate series included in these financial statements. The SCM Trust is a Massachusetts business trust formed in July 1988.

 

The Shelton Greater China Fund (“Greater China Fund”) is an open-end, diversified series of the Trust. The Fund commenced operations in May, 1989 as the R.O.C. Taiwan Fund, a diversified, closed-end investment company. The R.O.C Taiwan Fund changed its name to the Taiwan Greater China Fund on December 29, 2003 and the change became effective on the New York Stock Exchange on January 2, 2004. On October 10, 2011, the Fund registered with the SEC as a diversified, open-end management investment company and began operations as The Shelton Greater China Fund.

 

The Shelton BDC Income Fund (“BDC Income Fund”) is an open-end, non-diversified series of the Trust. The inception date is April 22, 2014, and the commencement date of operations is May 2, 2014. The investment objective is to provide a high level of income with the potential for capital appreciation. Effective July 1, 2016, Shelton became the advisor to the Fund.

 

The Shelton Real Estate Income Fund (“Real Estate Income Fund”) is an open-end, non-diversified series of the Trust. The inception date is June 4, 2013, and the commencement date of operations is June 7, 2013. The investment objective is to provide current income with the potential for capital appreciation. Effective July 1, 2016 Shelton became the advisor to the Fund.

 

The Real Estate Income Fund and the BDC Income Fund (the “Successor Funds”) are each a successor to a series of the Realty Capital Income Funds Trust, a Delaware statutory trust, pursuant to a reorganization that took place after the close of business on November 4, 2016. Prior to November 4, 2016, each Successor Fund of the SCM Trust had no investment operations. As a result of the reorganization, holders of Class A and Class C shares of the AR Capital BDC Income Fund received Investor shares of the Shelton BDC Income Fund and holders of Advisor Class received Institutional shares of the Shelton BDC Income Fund. As a result of the reorganization, holders of Class A and Class C shares of the AR Capital Real Estate Income Fund and the AR Capital Real Estate Global Income Fund received Investor Shares of the Shelton Real Estate Income Fund and holders of Advisor Class received Institutional Shares of the Shelton Real Estate Income Fund.

 

The Trust follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946, “Financial Services – Investment Companies”.

 

(a) Security Valuation — Equity securities listed on a national or international exchange are valued at the last reported sales price. Futures contracts are valued at the settle price, depending on the exchange the contract trades on, typically as of 4:15 p.m., Eastern Time. Municipal securities are valued by an independent pricing service at a price determined by a matrix pricing method. This technique generally considers such factors as yields or prices of bonds of comparable quality, type of issue, coupon, maturity, ratings and general market conditions. U.S. government securities for which market quotations are readily available are valued at the mean between the closing bid and asked prices provided by an independent pricing service. U.S. agency securities consisting of mortgage pass-through certificates are valued using dealer quotations provided by an independent pricing service. U.S. Treasury Bills are valued at amortized cost which approximates market value. Securities with remaining maturities of 60 days or less are valued on the amortized cost basis as reflecting fair value.

 

Securities for which market quotes are not readily available from the Trust’s third party pricing service are valued at fair value, determined in good faith and in accordance with procedures adopted by the Board of Trustees. The Board has delegated to its Pricing Committee the responsibility for determining the fair value, subject to the Board oversight and the review of the pricing decisions at its quarterly meetings.

 

(b) Federal Income Taxes — No provision is considered necessary for federal income taxes. The Funds intend to qualify for and elect the tax treatment applicable to regulated investment companies under the Internal Revenue Code and to distribute all of their taxable income to shareholders.

 

(c) Security Transactions, Investment Income and Distributions to Shareholders — Security transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Withholding taxes on foreign dividends have been provided for, in accordance with the Trust’s understanding of the applicable country’s tax rules and rates. Distributions to shareholders are recorded on the ex-dividend Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for PFICs, wash sales, REIT adjustments and post-October capital losses.

 

Distributions received from investments in securities that represent a return of capital or capital gains are recorded as a reduction of cost of investment or as a realized gain, respectively. The calendar year-end amounts of ordinary income, capital gains, and return of capital included in distributions received from a Fund’s investments in real estate investment trusts (“REITs”) are reported to the Fund after the end of the calendar year; accordingly, a Fund estimates these amounts for accounting purposes until the characterization of REIT distributions is reported to the Fund after the end of the calendar year. Estimates are based on the most recent REIT distribution information available.

 

These “Book/tax” differences are considered either temporary (i.e., deferred losses, capital loss carry forwards) or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the composition of net assets based on their federal tax basis treatment; temporary differences do not require reclassification.

 

(d) Foreign Currency Translation — Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Trust does 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 exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized 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 company’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates.

 

(e)  Concentration — The Shelton Greater China Fund concentrates its investments in publicly traded equities issued by corporations located in People’s Republic of China, Hong Kong, Taiwan, or Singapore. The portfolio involves considerations not typically associated with investing in U.S. securities. In addition, the Trust is more susceptible to factors adversely affecting the economies of those countries than a fund not concentrated in these issuers to the same extent. Since the Trust’s investment securities are primarily denominated in New Taiwan Dollars (“NT$”) and Hong Kong Dollars (“HKD”), changes in the relationships of the NT$ and the HKD to the USD may also significantly affect the value of the investments and the earnings of the Trust.

 

The Shelton Real Estate Income Fund concentrates its investments in real estate securities (i.e., securities of issuers in the real estate industry), including securities issued by REITs. The Fund invests substantially all (and under normal market conditions, at least 80%) of its net assets (plus any borrowings for investment purposes) in income producing real estate securities. The Advisor evaluates securities based primarily on the relative attractiveness of income and secondarily considers their potential for capital appreciation. The Advisor considers real estate securities to be securities issued by a company that (a) derives at least 50% of its revenues from the ownership, construction, financing, management or sale of commercial, industrial or residential real

 

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estate, or (b) has at least 50% of its assets invested in such real estate. The Advisor plans to sell a security if, in the judgment of the portfolio managers, the security’s income potential has been compromised, an issuer’s fundamentals have deteriorated or may deteriorate or a more attractive investment opportunity is identified.

 

The Fund invests in both equity and debt securities, and invests to a substantial degree in securities issued by REITs. REITs are pooled investment vehicles that own interests in real estate, real-estate related loans or similar interests, and their revenue primarily consists of rent derived from owned, income-producing real estate properties and capital gains from the sale of such properties. A majority of the REITs in which the Fund invests are generally considered by the Advisor to be medium- or small-capitalization companies. The Fund will not invest in non-traded REITs that are sponsored, managed or distributed by affiliates of the Advisor.

 

Equity securities in which the Fund may invest include common and preferred stocks, convertible securities, rights and warrants to purchase common stock and depositary receipts. Although the Advisor anticipates that the Fund will invest a substantial portion of its assets in equity securities, the Fund may invest up to 100% of its net assets in debt securities of any maturity, duration or credit rating. Debt securities in which the Fund may invest include corporate debt obligations and CMBS. Debt securities acquired by the Fund may also include high-yield debt securities (commonly referred to as ‘‘junk’’ bonds) issued or guaranteed by real estate companies or other companies. The Fund invests in securities across all market capitalization ranges. The Fund may invest up to 15% of its net assets in illiquid securities.

 

The Shelton BDC Income Fund invests substantially all (and under normal market conditions, at least 80%) of its net assets (plus any borrowings for investment purposes) in common stocks and other equity securities of business development companies (‘‘BDCs’’) that are traded on one or more nationally recognized securities exchanges. The equity securities in which the Fund may invest consist of common stocks, securities convertible into common stocks; and preferred stocks. In addition, although the Fund typically invests in equity securities, the Fund may invest up to 20% of its net assets in debt securities of BDCs and other issuers of any maturity, duration or credit rating.

 

(f) Use of Estimates in Financial Statements — In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expense during the year. Actual results may differ from these estimates.

 

(g) Share Valuations — The net asset value (“NAV”) per share of each Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash or other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding of the Fund, rounded to the nearest cent. A Fund’s shares will not be priced on the days on which the NYSE is closed for trading. The offering and redemption price per share of each Fund is equal to a Fund’s NAV per share.

 

(h) Accounting for Uncertainty in Income Taxes — The Funds recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Fund’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years (2013-2015), or expected to be taken in the Fund’s 2016 tax returns. The Fund identifies its major tax jurisdictions as U.S. Federal, however the Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.

 

(i) Fair Value Measurements — The Funds utilize various methods to measure the fair value of most of its investments on a recurring basis. U.S. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of inputs are:

 

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the company has the ability to access.

 

Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.

 

Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.

 

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

 

The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

The following table summarizes the valuation of the Trust’s securities at December 31, 2016 using fair value hierarchy:

 

 

 

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NOTE 2 - INVESTMENT MANAGEMENT FEE AND OTHER RELATED PARTY TRANSACTIONS

 

Shelton Capital Management (“Shelton Capital” or the “Advisor”), a California limited partnership, provides each Fund with management and administrative services pursuant to investment management and administration servicing agreements.

 

In accordance with the terms of the management agreement, the Advisor receives compensation at the following annual rates:

 

 

Advisory Fees – The Board approved an interim investment advisory agreement (the “Interim Advisory Agreement”) which became effective July 1, 2016 between the Trust and Shelton. Under the Interim Advisory Agreement, Shelton Capital provided or arranged to provide the same advisory services to the Real Estate Income Fund and BDC Income Fund on the same terms as those provided under the previous investment advisory agreement (the “Prior Investment Advisory Agreement”) between the Trust and National Fund Advisors, LLC (“NFA”). Pursuant to the Prior and Interim Advisory Agreement with the Funds, the investment advisor (either Shelton Capital or NFA, as applicable) directed the daily operations of the Funds and supervised the performance of administrative and professional services provided by others. As compensation for its services and the related expenses borne by such investment adviser (either Shelton Capital or NFA, as applicable), each Fund paid an investment advisory fee, computed and accrued daily and paid monthly, at an annual rate of 0.90% and 0.80% of the BDC Income Fund’s and the Real Estate Income Fund’s average daily net assets. The Funds’ sub-advisors are paid by the Advisor, not the Funds.

 

For the year ended March 31, 2016 and the period April 1 2016 to June 30, 2016, NFA charged the Real Estate Income Fund and the BDC Income Fund advisory fees at the rates of 0.80% and 0.90% of the funds’ daily net assets, respectively. For the year ended March 31, 2016 and the period April 1, 2016 to June 30, 2016, NFA made expense reimbursement payments in the amounts of $18,990 and $43,930 for the Real Estate Income Fund and $72,304 and $70,006 for the BDC Income Fund respectively. Due to the reimbursements paid, this resulted in net advisory fee of $0 paid to NFA for the year ended March 31, 2016 and the period of April 1 to June 30, 2016.

 

Effective July 1, 2016 for the Shelton BDC Income Fund and the Shelton Real Estate Income Fund, Shelton has contractually agreed to waive a portion or all of its management fees and pay Fund expenses (excluding acquired fund fees and expenses, interest, taxes and extraordinary expenses) in order to limit the “Other Expenses” to 0.35% of average daily net assets of the Fund’s shares (the “Expense Cap”). The Expense Cap will remain in effect indefinitely. Shelton may recoup from the Fund any fees or expenses previously waived or paid by Shelton or NFA pursuant to this agreement for three years from the date they were waived or paid. Shelton’s ability to recoup any previously waived fees and paid expenses is subject to the Expense Cap as in effect at the time such fees were waived or expenses were paid. Prior to July 1, 2016 NFA had contractually agreed to waive a portion or all of its management fees and pay Fund expenses (excluding acquired fund fees and expenses, interest, taxes, distribution fees, and extraordinary expenses) in order to limit the Funds’ Other Expenses to 0.35% of average daily net assets of the Fund’s shares (the “Expense Cap”).

 

The Advisor contractually agreed to reduce total operating expense to certain Funds of the Trust. This additional contractual reimbursement is effective until January 2, 2018, unless renewed and is subject to recoupment within three fiscal years following reimbursement. Recoupment is limited to the extent the reimbursement does not exceed any applicable expense limit and the effect of the reimbursement is measured after all ordinary operating expenses are calculated; any such reimbursement is subject to the Board of Trustees’ review and approval. Reimbursements from the Advisor to affected Funds, and the voluntary expense limits, for the period ended December 31, 2016 are as follows:

 

 

At December 31, 2016, the remaining cumulative unreimbursed amount paid and/or waived by the Advisor on behalf of the Funds that may be reimbursed was $2,406,648. The Advisor may recapture a portion of the above amount no later than the dates as stated below.

 

 

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A Fund must pay its current ordinary operating expenses before the Advisor is entitled to any reimbursement of fees and/or expenses. Any such reimbursement is contingent upon Board of trustee review and approval prior to the time the reimbursement is initiated.

 

As compensation for administrative duties not covered by the management agreement, Shelton Capital receives an administration fee, which was revised on January 1, 2011. The administration fee is based on assets held, in aggregate, by the SCM Trust

 

Certain officers and trustees of the Trust are also partners of Shelton Capital. Teresa Axelson has served as the Chief Compliance Officer (“CCO”) of the Trust since November 2011. Ms. Axelson is also employed by Shelton Capital, the Advisor and Administrator to the Trust. The Trust is responsible for the portion of her salary allocated to her duties as the CCO of the Trust during her employment, and Shelton Capital is reimbursed by the Trust for this portion of her salary. The level of reimbursement is reviewed and determined by the Board of Trustees at least annually.

 

The SCM Trust adopted a Distribution Plan (the “Plan”), as amended (date), pursuant to Rule 12b-1 under the Investment Company Act of 1940, whereby the Advisor Shares of each Fund of the Shelton Funds pays the Distributor for expenses that relate to the promotion and distribution of shares. Under the Plan, the Advisor Shares of the Funds will pay the Distributor a fee at an annual rate of 0.25%, payable monthly, of the daily net assets attributable to such Fund’s Investor Shares.

 

From April 1, 2015 to December 31, 2015, Realty Capital Securities, LLC was the Distributor for the Funds. For this period, the Board adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act for the BDC Income Fund and Real Estate Income Fund (the “Funds”). The Plan provided that a monthly service and/or distribution fee (the “12b-1” Fee) be calculated by the Funds at an annual rate of 0.25% and 1.00% of the average daily NAV of the Class A and Class C shares, respectively, for the Funds. With respect to the Class A shares of the Real Estate Income Fund and the BDC Income Fund, 0.25% is paid for distribution services. This payment is fixed at 0.25% and is not based on expenses incurred by the Distributor. With respect to Class C shares of the Funds, 0.25% was paid for certain ongoing individual shareholder and administrative services and 0.75% was paid for distribution services, including past distribution services incurred. This payment was fixed at 1.00% and was not based on expenses incurred by the Distributor.

 

For the year ended March 31, 2016, the following were paid by each Fund of the Trust:

 

 

For the period April 1, 2016 to December 31, 2016, the following were paid by each Fund of the Trust:

 

 

From the period April 1, 2015 through December 31, 2015, Realty Capital Securities, LLC received underwriting commissions as shown in the table below for sales of Class A shares and Class C shares respectively, and the amounts retained by the principal underwriter or other affiliated broker dealers from the sales of Class A shares and Class C shares, respectively. The amounts as of March 31, 2016 were as follows:

 

 

For the period January 1, 2016 until March 24, 2016, the Funds did not have a distributor and were not able to offer shares. Effective March 25, 2016, RFS Partners (“RFS”) serves as the principal underwriter for the Funds pursuant to a principal underwriting agreement between the Trust and RFS. For the period discussed above, the Distributor acted as the Funds’ principal underwriter in a continuous public offering of the Funds’ Investor class and Institutional class shares. The Distributor is an affiliate of the Advisor.

 

For the April 1, 2016 to November 4, 2016 period, the Distributor acted as the Funds’ principal underwriter in a continuous public offering of the Funds’ Class A, Class C and Advisor Class shares. The Distributor is an affiliate of Shelton and received underwriting commissions as shown in the table below for sales of Class A shares and Class C shares respectively, and the amounts retained by the principal underwriter or other affiliated broker-dealers from the sales of Class A shares and Class C shares, respectively. Effective November 5, 2016, the Funds were no longer subject to underwriting commissions.

 

 

NOTE 3 - PURCHASES AND SALES OF SECURITIES

 

Purchases and sales of securities other than short-term instruments for the period ended December 31, 2016 were as follows:

 

 

 

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NOTE 4 - TAX CHARACTER

 

Reclassifications: Accounting principles generally accepted in the United States of America require certain components of net assets be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. For the year ended December 31, 2016, permanent differences resulting from different book and tax accounting for net operating losses, expiration of capital loss carryforwards and treatment of foreign currency gains have been reclassified. The reclassifications were as follows:

 

 

Tax Basis of Distributable Earnings: The tax character of distributable earnings at December 31, 2016 was as follows:

 

 

The difference between book basis and tax basis unrealized appreciation/(depreciation) is attributable primarily to wash sales and PFICs.

 

Elective Deferrals: The BDC Fund has elected to defer $303,820 of capital losses recognized during the period November 1, 2016-December 31, 2016.

 

The Real Estate Fund has elected to defer $6,168 of ordinary losses to the period ending December 31, 2017.

 

Capital Losses: Capital loss carry forwards, as of December 31, 2016, available to offset future capital gains, if any, are as follows:

 

 

 

Distributions to Shareholders: Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. These differences are primarily due to differing treatments of income and gains on various investment securities held by each Fund, timing differences and differing characterization of distributions made by each Fund.

 

The tax character of distributions paid during are as follows:

 

 

 

NOTE 5 – REORGANIZATIONS

 

On October 21, 2016, the shareholders of the AR Capital BDC Income Fund, the AR Capital Global Real Estate Income Fund and the AR Capital Real Estate Income Fund approved the agreement and plan of reorganization providing for the transfer of assets and assumption of liabilities of such funds by the Shelton BDC Income Fund and the Shelton Real Estate Income Fund, respectively. The reorganization was effective as of the close of business on November 4, 2016. The following tables illustrate the specifics of each Fund’s reorganization:

 

 

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As of close of business on November 4, 2016, the classes were converted at the following rates:

 

 

Assuming the acquisition had been completed on April 1, 2016, the beginning of the annual reporting period, of the Shelton Real Estate Income Fund’s pro forma results of operations for the period ended December 31, 2016 are as follows:

 

 

Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the former AR Capital Global Real Estate Income Fund that have been included in the Shelton Real Estate Income Fund’s statement of operations since November 4, 2016.

 

Note 6 – SUBSEQUENT EVENTS

 

 

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To the Shareholders and Board of Trustees
SCM Trust
Denver, Colorado

 

We have audited the accompanying statement of assets and liabilities of Shelton Greater China Fund, Shelton BDC Income Fund (formerly AR Capital BDC Income Fund), and Shelton Real Estate Income Fund (formerly AR Capital Real Estate Income Fund) (the “Funds”), each a series of SCM Trust, including the portfolios of investments, as of December 31, 2016, and with respect to Shelton Greater China Fund the related statement of operations for the year then ended, and the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, and with respect to Shelton BDC Income Fund and Shelton Real Estate Income Fund the statements of operations, and the statement of changes in net assets and the financial highlights for the period April 1, 2016 to December 31, 2016. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. The statements of operation and changes in net assets for the year ended March 31, 2016 and the financial highlights for the each of the periods prior to March 31, 2016 were audited by other auditors, and in their opinion dated May 31, 2016 they expressed an unqualified opinion on said financial statements and financial highlights.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmations of securities owned as of December 31, 2016, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Shelton Greater China Fund, Shelton BDC Income Fund, and Shelton Real Estate Income Fund as of December 31, 2016, the results of their operations, the changes in their net assets, and their financial highlights for the periods indicated above, in conformity with accounting principles generally accepted in the United States of America.

 

 

Philadelphia, Pennsylvania

March 1, 2017

 

 

Fund Holdings

 

The Fund holdings shown in this report are as of December 31, 2016. Holdings are subject to change at any time, so holdings shown in the report may not reflect current Fund holdings. The Fund files complete schedules of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available on the SEC’s website at www.sec.gov and may be reviewed and copied at the Commission’s Public Reference Room, 100 F. Street N.E., Room 1580, Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. The information filed in the form N-Q also may be obtained by calling (800) 955-9988.

 

Proxy Voting Policy

 

The Fund’s Statement of Additional Information (“SAI”) containing a description of the policies and procedures that the SCM Trust uses to determine how to vote proxies relating to portfolio securities, along with the Fund’s proxy voting record relating to portfolio securities held during the 12-month period ended June 30, 2016, is available upon request, at no charge, at the phone number below, or on the SEC’s website at www.sec.gov.

 

About this Report

 

This report is submitted for the general information of the shareholders of the SCM Trust. It is authorized for distribution only if preceded or accompanied by a current SCM Trust prospectus. Additional copies of the prospectus may be obtained by calling (800) 955-9988 or can be downloaded from the Fund’s website at www.sheltoncap.com. Please read the prospectus carefully before you invest or send money, as it explains the risks, fees and expenses of investing in the Fund.

 

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Overall responsibility for management of the Fund rests with the Board of Trustees. The Trustees serve during the lifetime of the Trust and until its termination, or until death, resignation, retirement or removal. The Trustees, in turn, elect the officers of the Fund to actively supervise its day-to-day operations. The officers have been elected for an annual term. The following are the Trustees and Executive Officers of the Fund:

 

 

The principal occupations of the Trustees and Executive Officers of the Fund during the past five years and public directorships held by the Trustees are set forth below:

 

 

Additional information about the Trustees may be found in the SAI, which is available without charge by calling (800) 955-9988.

 

 

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