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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