Item 5. Fees And Compensation
Route One’s compensation for the Route One Funds is described below. If it elects to accept
additional clients, its compensation in those cases may be negotiable and may vary.
Management Fee/Allocation. For the Route One Funds, Route One charges an asset-based
management fee and/or special profit allocation. This fee/allocation is charged quarterly and is
based on the aggregate net assets of the Route One Funds (but for these purposes excluding any
investment by Route One’s affiliate, Route One Investment Company, LLC, which serves as the
general partner of the Route One Funds, and any investment held directly or indirectly by a
Principal or employee of Route One) as follows: (a) 0.375% of those assets up to $500,000,000,
(b) 0.34375% of those assets that exceed $500,000,000, up to $750,000,000, (c) 0.3125% of
those assets that exceed $750,000,000, up to $1,000,000,000, (d) 0.28125% of those assets that
exceed $1,000,000,000, up to $1,250,000,000, and (e) 0.25% of those assets that exceed
$1,250,000,000. Thus, the management fee or allocation charged will be approximately 1.0% to
1.5% per year. The management fee is payable at the beginning of each calendar quarter based
on those Route One Fund assets on the first day of that quarter. The management allocation is
made at the end of the calendar quarter but is based on those Route One Fund assets on the first
day of that quarter.
Performance Based Special Profit Allocation. Each Route One Fund investor is also charged a
performance based “Special Profit Allocation” by the Route One affiliate that serves as the
general partner of each Route One Fund, Route One Investment Company, LLC. This Special
Profit Allocation is based on the profits otherwise allocable to that investor. It is extremely
complex but it generally is calculated with respect to each Route One Fund investor as follows:
the Route One Funds generally account for profits and losses from (a) their liquid investments in
“Liquid Sub-Capital Accounts” and (b) their illiquid investments in “Illiquid Sub-Capital
Accounts” that are established for each illiquid investment. The current Special Profit Allocation
is 15% of the positive sum of:
(a) Profits and losses (including realized and unrealized gains and losses, but excluding
profits and losses from certain investments in U.S. Treasuries securities and disregarding any
7.5% withdrawal fees charged during the period (as discussed below)) otherwise allocable to that
investor’s Liquid Sub-Capital Account in the applicable measurement period; plus
(b) That investor’s Illiquid Sub-Capital Account realized profits minus Illiquid Sub-Capital
Account realized losses during that period; minus
(c) That investor’s remaining unrecouped losses (discussed below).
If Route One Investment Company, LLC reduces the value of assets in a set of Illiquid
Sub-Capital Accounts below the “cost basis” of those assets, it will use unrealized losses in that
set of Illiquid Sub-Capital Accounts to calculate profits and losses of the related investors’
Liquid Sub-Capital Accounts in that measurement period to determine Special Profit Allocations
and unrecouped losses, if any, applicable to those investors.
The Special Profit Allocation is made at the end of each year (and on withdrawal/redemption of
funds by or distribution of funds to an investor during a year) from each investor’s Sub-Capital
Accounts.
Clause (b) above contains defined terms that are complex, but, simply stated, those terms are
intended to include in the Special Profit Allocation computation profits and losses from illiquid
security investments at the time the related Illiquid Sub-Capital Accounts are closed. Thus, a
Special Profit Allocation is not made with respect to the profits on investments in an Illiquid
Sub-Capital Account until Route One determines that those investments should no longer be held
in that Illiquid Sub-Capital Account.
“Unrecouped losses” of an investor (sometimes referred to as a “high water mark”) are:
(a) The sum of (1) all losses allocated to that investor’s Liquid Sub-Capital Account in each
year, (2) all Illiquid Sub-Capital Account realized losses of that investor in each year, and (3) any
unrealized Illiquid Sub-Capital Account losses used in calculating profits and losses in the
related investor’s Liquid Sub-Capital Accounts, as described above, reduced (but not below zero)
by
(b) The sum of (1) all profits allocated to such investor’s Liquid Sub-Capital Account in the
same year that the losses are so allocated or in any subsequent year and (2) all Illiquid
Sub-Capital Account realized profits of that investor in that year or in any subsequent year.
For purposes of applying the foregoing formula, profits and losses exclude profits and losses that
accrue from certain investments in Treasury securities and disregard any 7.5% withdrawal fees
as if such fees had never been charged to the withdrawing/redeeming investor or credited to the
other investors. Unrecouped losses also exclude profits and losses allocated in any year prior to
the most recent year that began with zero unrecouped losses.
Route One complies with Rule 205-3 under the Investment Advisers Act of 1940, to the extent
required by applicable law. These performance based Special Profit Allocations may create an
incentive for Route One to make more risky and speculative investments than it would otherwise
make because Route One’s affiliate receives the Special Profit Allocation.
Route One deducts management fees and allocations and Special Profit Allocations directly from
client accounts.
Route One’s Principals, employees and family members of the foregoing do not pay
management fees or Special Profit Allocations.
The disclosure in this Item 5, together with the disclosure in Item 12, allow a plan that is subject
to the Employee Retirement Income Security Act of 1974 and that invests in a Route One Fund
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