2023-03-24ABDevelopingWorldIncomeFund_FYE_01_31_PRO_485B
Statement
of Additional Information
June 1,
2023
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Ticker |
Share
Class |
A |
C |
Y |
R5 |
Investor |
American
Beacon Developing World Income Fund (formerly known as the American Beacon
Frontier Markets Income Fund) |
AGUAX |
AGECX |
AGEYX |
AGEIX |
AGEPX |
This
Statement of Additional Information (“SAI”) should be read in conjunction with
the prospectus dated June 1,
2023 (the
“Prospectus”) for the American
Beacon Developing World Income Fund (the “Fund”), a separate series of
American Beacon Funds, a Massachusetts business trust. Copies of the
Prospectus may be obtained without charge by calling 1-800-658-5811. You also
may obtain copies of the Prospectus without charge by visiting the Fund’s
website at www.americanbeaconfunds.com. This SAI is incorporated by reference
into the Fund’s Prospectus. In other words, it is legally a part of the
Prospectus. This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by the current
Prospectus. Capitalized terms in this SAI have the same definition as in the
Prospectus, unless otherwise defined. Capitalized
terms that are not
otherwise defined in this SAI or the Prospectus are defined in Appendix
B.
The
financial statements and accompanying notes appearing in the Fund’s Annual
Shareholder Report for the fiscal year ended January 31, 2023 are
incorporated
by reference in this SAI. Copies of the Fund’s Annual and Semi-Annual
Shareholder Reports may be obtained, without charge, upon request by
calling 1-800-658-5811 or visiting
www.americanbeaconfunds.com.
Table
of Contents
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ORGANIZATION
AND HISTORY OF THE FUND
The Fund is
a separate series of American
Beacon Funds, an open-end management investment company organized as a
Massachusetts business trust on January
16, 1987. The Fund constitutes a separate investment portfolio with distinct
investment objectives and distinct purpose and strategy. The Fund is
diversified as defined by the Investment Company Act. The Fund is comprised of
multiple classes of shares designed to meet the needs of different
groups of investors. This SAI relates to the A Class, C Class, Y Class, R5
Class, and Investor Class shares of the Fund. Prior to February 28, 2020, the
R5 Class shares were known as the Institutional Class shares.
From
October 1, 2018 through January 4, 2023, the Fund was known as American Beacon
Frontier Markets Income Fund. On October 1, 2018, abrdn Investments
Limited (formally known as Aberdeen Asset Managers Limited) (“AIL”) began
managing a portion of the assets of the Fund. Prior to that date, the
Fund was known as American Beacon Global Evolution Frontier Markets Income Fund
and Global Evolution USA, LLC served as the Fund’s sole
sub-advisor.
ADDITIONAL
INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS
The Fund’s
investment objectives, principal investment strategies, and principal
risks are
described in the Prospectus. This section contains additional information
about the Fund’s investment policies and risks and types of investments the Fund
may purchase. The composition of the Fund’s portfolio and the
strategies that the Fund may use in selecting investments may vary over time.
The Fund is not required to use all of the investment strategies described
below in pursuing its investment objectives. It may use some of the investment
strategies only at some times or it may not use them at all. Investors
should carefully consider their own investment goals and risk tolerance before
investing in the Fund.
Borrowing
Risk — The
Fund may borrow money in an amount up to one-third of its total assets
(including the amount borrowed) from banks and other
financial institutions. The Fund may borrow for temporary purposes. Borrowing
may exaggerate changes in the Fund’s NAV and in its total return. Interest
expense and other fees associated with borrowing may impact the Fund’s expenses
and reduce its returns. (See “Cover
and Asset Segregation” disclosure
below.)
Callable
Securities — The Fund
may invest in fixed-income securities with call features. A call feature allows
the issuer of the security to redeem or call the
security prior to its stated maturity date. In periods of falling interest
rates, issuers may be more likely to call in securities that are paying higher
coupon
rates than prevailing interest rates. In the event of a call, the Fund would
lose the income that would have been earned to maturity on that security,
and the proceeds received by the Fund may be invested in securities paying lower
coupon rates. Thus, the Fund’s income could be reduced as a result of
a call. In addition, the market value of a callable security may decrease if it
is perceived by the market as likely to be called, which could have a negative
impact on the Fund’s total return.
Cash
Equivalents and Other Short-Term Investments —
Cash equivalents and other short-term investments in which the Fund may invest
include the
investments set forth below. Certain of
these investments are issued by and provide exposure to banks. The activities of
U.S. banks and most foreign
banks are subject to comprehensive regulations. The enactment of new legislation
or regulations, as well as changes in interpretation and enforcement
of current laws, may affect the manner of operations and profitability of
domestic and foreign banks. Significant developments in the U.S. banking
industry have included increased competition from other types of financial
institutions, increased acquisition activity and geographic expansion.
Banks may be particularly susceptible to certain economic factors, such as
interest rate changes and adverse developments in the market for real
estate. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
■ |
Bank
Deposit Notes. Bank
deposit notes are obligations of a bank that provide an alternative to
certificates of deposit. Similar to certificates of deposit,
deposit notes represent bank level investment and, therefore, are senior
to all holding company corporate debt. Bank deposit notes rank
junior
to domestic deposit liabilities of the bank and pari passu with other
senior, unsecured obligations of the bank. Typically, bank deposit notes
are not
insured by the Federal Deposit Insurance Corporation or any other
insurer. |
■ |
Bankers’
Acceptances.
Bankers’ acceptances are short-term credit instruments designed to enable
businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by
an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then “accepted” by a bank that,
in effect, unconditionally guarantees to pay the face value of the
instrument
on its maturity date. The acceptance may then be held by the accepting
bank as an earning asset or it may be sold in the secondary market
at the going rate of discount for a specific maturity. Most acceptances
have maturities of six months or less. Bankers’ acceptances rank junior
to
domestic deposit liabilities of the bank and pari passu with other senior,
unsecured obligations of the bank. |
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Bearer
Deposit
Notes.
Bearer deposit notes, or bearer bonds, are bonds or debt securities that
entitle the holder of the document to ownership or title
in the deposit. Such notes are typically unregistered, and whoever
physically holds the bond is presumed to be the owner of the instrument.
Recovery
of the value of a bearer bond in the event of its loss or destruction
usually is impossible. Interest is typically paid upon presentment of an
interest
coupon for payment. |
■ |
CDs. CDs
are negotiable certificates issued against funds deposited in an eligible
bank (including its domestic and foreign branches, subsidiaries and
agencies)
for a definite period of time and earning a specified rate of return. U.S.
dollar denominated CDs issued by banks abroad are known as Eurodollar
CDs. CDs issued by foreign branches of U.S. banks are known as Yankee
CDs. |
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Commercial
Paper.
Commercial paper is a short-term debt security issued by a corporation,
bank, municipality, or other issuer, usually for purposes such
as financing current operations. The Fund may invest in commercial paper
that cannot be resold to the public without an effective registration
statement
under the Securities Act. While some restricted commercial paper normally
is deemed illiquid, in certain cases it may be deemed
liquid. |
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Government
Obligations.
Government obligations may include U.S. Treasury securities, Treasury
inflation-protected securities, and other debt instruments
backed by the full faith and credit of the United States, or debt
obligations of U.S. Government-sponsored
entities. |
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Short-term
Corporate
Debt Securities.
Short-term corporate debt securities are securities and bonds issued by
corporations with shorter terms to maturity.
Corporate securities generally bear a higher risk than U.S. government
bonds. |
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Time
Deposits. Time
deposits, also referred to as “fixed time deposits,” are non-negotiable
deposits maintained at a banking institution for a specified
period of time at a specified interest rate. Time deposits may be
withdrawn on demand by the investor, but may be subject to early
withdrawal
penalties which vary depending upon market conditions and the remaining
maturity of the obligation. There are no contractual restrictions
on the right to transfer a beneficial interest in a time deposit to a
third party, although there is no market for such
deposits. |
Corporate
Actions — From
time to time, the Fund may voluntarily participate in corporate actions (for
example, acquisitions, mergers, rights offerings,
conversion privileges, exchange offers, credit event settlements, etc.) where
the issuer or counterparty offers securities or instruments to holders or
counterparties, such as the Fund, and the acquisition is determined to be
beneficial to Fund shareholders (“Corporate Actions”). In connection
with its holdings of foreign and developing markets securities and depositary
receipts, the Fund may not have the same rights afforded to stockholders
of a typical domestic company in the event of a corporate action.
Notwithstanding any percentage investment limitation listed under the
“Investment
Restrictions” section or any percentage investment limitation of the Investment
Company Act or rules thereunder, if the Fund has the opportunity
to acquire a permitted security or instrument through a Corporate Action, and by
doing so, the Fund would exceed a percentage investment
limitation following the acquisition, it will not constitute a violation if,
prior to the receipt of the securities or instruments and after announcement
of the Corporate Action, the Fund sells an offsetting amount of assets that are
subject to the investment limitation in question at least equal to
the value of the securities or instruments to be acquired.
Cover
and Asset Segregation —
The Fund may borrow money, make investments or employ trading practices that
obligate the Fund, on a fixed or contingent
basis, to deliver an asset or make a cash payment to another party in the
future. The Fund will comply with rules and guidance from the SEC with
respect to coverage of certain investments and trading practices. The Fund’s
approach to asset coverage may vary depending on terms within its
agreement with a counterparty. With respect to certain investments under the
agreement, the Fund calculates the obligations of the parties to the
agreement
on a “net basis” (i.e., the two payment streams are netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments). Under such circumstances, the Fund’s current obligations will
generally be equal only to the net amount to be paid by the Fund based on
the relative values of the positions held by each party to the agreement.
Earmarking or otherwise segregating a large percentage of the Fund’s
assets could impede the management of the Fund’s portfolio or the Fund’s ability
to meet redemption requests or other current obligations, because the
Fund may be unable to promptly dispose of those assets.
Creditor
Liability and Participation on Creditors’ Committees —
Generally, when the Fund holds bonds, loans or other similar debt securities of
an issuer,
the Fund becomes a creditor of the issuer. If the Fund is a creditor of an
issuer, it may be subject to challenges related to these investments,
either in
connection with the bankruptcy of the issuer or in connection with another
action brought by other creditors of the issuer, shareholders of the
issuer or
the issuer itself. Although it is under no obligation to do so, a sub-advisor to
the Fund may from time to time have an opportunity to consider, negotiate
or otherwise participate in the restructuring of the Fund’s portfolio investment
or the issuer of such investment. Accordingly, the Fund may from time
to time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of investments held by the
Fund. Such participation may subject the Fund to expenses such as legal fees and
may make the sub-advisor an “insider” of the issuer for purposes of
the federal securities laws, and therefore may restrict such sub-advisor’s
ability to trade in or acquire additional positions in a particular issuer when
it might otherwise desire to do so. Participation on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy
laws or other laws governing the rights of creditors and debtors. Similarly, a
sub-advisor may actively participate in bankruptcy court and related
proceedings on behalf of the Fund in order to protect the Fund’s
interests in connection with a restructuring transaction, and a sub-advisor may
cause the
Fund to enter into an agreement reasonably indemnifying third parties or
advancing from the Fund’s assets any legal fees or other costs to
third
parties, including parties involved in or assisting the Fund with a
restructuring transaction, such as trustees, servicers and other third parties.
Further, a
sub-advisor may have the authority to represent the Trust, or any Fund(s)
thereof, on creditors’ committees (or similar committees) or otherwise
in connection with the restructuring of an issuer’s debt and generally with
respect to challenges related to the investments held by the Fund relating to
the bankruptcy of an issuer or in connection with another action brought by
other creditors of the issuer, shareholders of the issuer or the issuer
itself. If the
sub-advisor also manages other funds or accounts that are deemed affiliated
persons of the sub-advisor and that hold the same debt investment
as the Fund, the Investment Company Act’s prohibition against certain joint
transactions may prevent the sub-advisor from negotiating with the issuer
on behalf of the Fund when it might otherwise desire to do so, unless the
sub-advisor obtained certain exemptive relief applicable to the Fund or
complied with existing regulatory guidance. In such instances, this may limit
the sub-advisor’s ability to protect the Fund’s interests in a restructuring
transaction.
Currencies
Risk — The Fund
may have significant exposure to foreign currencies for investment or hedging
purposes by making direct investments in non-U.S.
currencies or in securities denominated in non-U.S. currencies (including
developing market currencies), or by purchasing or selling foreign currency
forward contracts, non-U.S. currency futures contracts, options on non-U.S.
currencies and non-U.S. currency futures and swaps for cross-currency
investments. Foreign currencies will fluctuate, and may decline, in value
relative to the U.S. dollar and affect the Fund’s investments in foreign
(non-U.S.) currencies, securities that trade in, and receive revenues in, or in
derivatives that provide exposure to, foreign (non-U.S.) currencies.
For
example, if the U.S. dollar appreciates against foreign currencies, the value of
Fund holdings generally would depreciate and vice versa.
Cybersecurity
and Operational Risk — With the
increased use of technologies such as the Internet and the dependence on
computer systems to perform
necessary business functions, the Fund, and its service providers, may be
prone to operational and information security risks resulting from cyber-attacks.
In general, cyber incidents can result from deliberate attacks or unintentional
events. Cyber-attacks include, but are not limited to, stealing or
corrupting data maintained online or digitally (e.g., through “hacking,”
computer viruses or other malicious software coding), the theft and holding for
ransom of proprietary or confidential information or data (sometimes referred to
as “ransomware” attacks), denial of service attacks on websites,
“phishing” attempts and other social engineering techniques aimed at personnel
or systems, and the unauthorized release of confidential information.
Cyber-attacks affecting the Fund or the Manager, a
sub-advisor, the
custodian, the transfer agent, intermediaries and other third-party service
providers may adversely impact the Fund. For instance, cyber-attacks may
interfere with the processing of shareholder transactions, result in the
loss or
theft of shareholder data or funds, impact the Fund’s ability to calculate NAV
per share, cause the release of private shareholder information or confidential
business information, impede trading, subject the Fund to regulatory fines or
financial losses and/or cause reputational damage. A cyber-attack
may also result in shareholders or service providers being unable to access
electronic systems (“denial of services”), loss or theft of
proprietary
information or corporate data, physical damage to a computer or network system,
or remediation costs associated with system repairs. The Fund may
also incur additional costs for cybersecurity risk management purposes. Similar
types of cybersecurity risks are also present for issuers or securities
in which the Fund may invest, which could result in material adverse
consequences for such issuers and may cause the Fund’s investment in
such
companies to lose value. Adverse consequences also could result from
cybersecurity incidents affecting counterparties with which the Fund
engages in
transactions, governmental and other regulatory authorities, exchanges and other
financial market operators, banks, brokers, dealers, insurance
companies, other financial institutions and other parties. The Fund’s service
providers also may be negatively impacted due to operational risks
arising from non-cybersecurity related factors such as processing errors and
human errors, inadequate or failed internal or external processes, failures in
systems and technology errors or malfunctions, changes in personnel, and errors
caused by Fund service providers or counterparties.
In
addition, other events or circumstances — whether foreseeable, unforeseeable, or
beyond our control, such as acts of war, other conflicts, terrorism,
natural
disaster, widespread disease, pandemic or other public health crises may result
in, among other things, quarantines and travel restrictions, workforce
displacement and loss or reduction in Personnel and other resources. In the
above circumstances, the Fund and the Service Providers’ operations
may be significantly impacted, or even temporarily halted. The Fund’s securities
market counterparties or vendors may face the same or similar
systems failure, cybersecurity breaches and other business disruptions
risks.
Any of
these results could have a substantial adverse impact on the Fund and its
shareholders. For example, if a cybersecurity incident results in a denial
of service,
Fund shareholders could lose access to their electronic accounts and be unable
to buy or sell Fund shares for an unknown period of time, and service
providers could be unable to access electronic systems to perform critical
duties for the Fund, such as trading, NAV calculation, shareholder accounting
or fulfillment of Fund share purchases and redemptions. Cybersecurity incidents
could cause the Fund or a service provider to incur regulatory
penalties, reputational damage, additional compliance costs associated with
corrective measures, or financial loss of a significant magnitude and could
result in allegations that the Fund or Fund service provider violated
privacy and other laws. There are inherent limitations in risk management
systems
that seek to reduce the risks associated with cybersecurity and business
continuity plans in the event there is a cybersecurity breach, including
the
possibility that certain risks may not have been adequately identified or
prepared for, in large part because different or unknown threats may
emerge in
the future. Furthermore, the Fund does not control the cybersecurity systems and
plans of the issuers of securities in which the Fund invests, third party
service providers, trading counterparties or any other service providers whose
operations may affect the Fund or its shareholders. The widespread
use of work-from-home arrangements, such as during the COVID-19 pandemic, may
increase operational and information security risks.
Debentures —
Debentures are unsecured, medium- to long-term debt securities protected only by
the general creditworthiness of the corporate or government
issuer, not by collateral, and documented by indentures. Governments often issue
debentures because they generally cannot guarantee debt with
assets due to the fact that government assets are public property. Debenture
holders are unsecured creditors. In the event of default or bankruptcy
by the issuer, debenture holders will not have a claim against any specific
assets of the issuer and will therefore only be paid from the issuer’s
assets after the secured creditors have been paid. The value of a debenture can
fluctuate with changes in interest rates and the perceived ability of the
issuer to make interest or principal payments on time.
Derivatives —
Generally a derivative is a financial instrument the value of which is based on,
or “derived” from, a traditional security, asset, currency, or market
index (collectively referred to as “reference assets”). The Fund may use
derivatives for hedging and efficient portfolio management purposes.
Derivative
instruments may allow for better management of exposure to certain asset
classes, as well as more efficient access to asset classes. There are
many
different types of derivatives and many different ways to use them. Some forms
of derivatives, such as exchange-traded futures, options on securities,
commodities, or indices, and certain forward contracts are traded on regulated
exchanges. These types of derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. Non-standardized derivatives, on the other hand, tend
to be more specialized or complex, and may be harder to value. Certain
derivative securities are described more accurately as index/structured
securities. Index/structured securities are derivative securities whose value or
performance is linked to other equity securities (such as depositary
receipts), currencies, interest rates, indices or other financial
indicators.
Derivatives
may involve significant risk. Many derivative instruments often require little
or no payment and therefore often create inherent economic leverage.
Some derivatives have the potential for unlimited loss, regardless of the size
of the Fund’s initial investment. Not all derivative transactions require a
counterparty to post collateral, which may expose the Fund to greater
losses in the event of a default by a counterparty.
Derivatives
may be illiquid and may be more volatile than other types of investments. The
Fund may buy and sell derivatives that are neither centrally cleared nor
traded on an exchange. Such derivatives may be subject to heightened
counterparty, liquidity and valuation risk.
The
regulation of the U.S. and non-U.S. derivatives markets has undergone
substantial change in recent years and such change may continue. In particular,
effective August 19, 2022 (the “Compliance Date”), Rule 18f-4 under the 1940 Act
(the “Derivatives Rule”) replaced the asset segregation regime of
Investment Company Act Release No. 10666 (“Release 10666”) with a new framework
for the use of derivatives by registered funds. As of the
Compliance Date, the SEC rescinded Release 10666 and withdrew no-action letters
and similar guidance addressing the Fund’s use of derivatives and began
requiring the Fund to satisfy the requirements of the Derivatives Rule. As a
result, the Fund is no longer required to engage in “segregation”
or “coverage” techniques with respect to derivatives transactions and will
instead comply with the applicable requirements of the Derivatives
Rule.
The
Derivatives Rule mandates that the Fund adopt and/or implement: (i)
value-at-risk limitations (“VaR”); (ii) a written derivatives risk management
program;
(iii) new Board oversight responsibilities; and (iv) new reporting and
recordkeeping requirements. In the event that the Fund’s derivative exposure is
10% or less of its net assets, excluding certain currency and interest rate
hedging transactions, it can elect to be classified as a limited derivatives
user (“Limited Derivatives User”) under the Derivatives Rule, in which case the
Fund is not subject to the full requirements of the Derivatives Rule.
Limited Derivatives Users are excepted from VaR testing, implementing a
derivatives risk management program, and certain Board oversight and
reporting
requirements mandated by the Derivatives Rule. However, a Limited Derivatives
User is still required to implement written compliance policies and
procedures reasonably designed to manage its derivatives risks. The Derivatives
Rule also provides special treatment for reverse repurchase agreements,
similar financing transactions and unfunded commitment agreements. Specifically,
the Fund may elect whether to treat reverse repurchase agreements
and similar financing transactions as “derivatives transactions” subject to the
requirements of the Derivatives Rule or as senior securities
equivalent
to bank borrowings for purposes of Section 18 of the 1940 Act. In addition, the
Fund may invest in a security on a when-issued or forward-settling
basis, or with a non-standard settlement cycle, and the transaction will be
deemed not to involve a senior security, provided that: (i) the Fund
intends to physically settle the transaction; and (ii) the transaction will
settle within 35 days of its trade date.
The
enactment of the Dodd-Frank Act and similar global regulations resulted in
historic and comprehensive reform relating to derivatives, including the
manner in
which they are entered into, reported, recorded, executed, and settled or
cleared. Pursuant to these regulations, the SEC, CFTC and foreign regulators
have promulgated a broad range of regulations and guidance on the use of
derivatives, including use by registered investment companies. These
include regulations with respect to security-based swaps (e.g., derivatives
based on a single security or narrow-based securities index) that are
regulated
by the SEC in the U.S., and other swaps that are regulated by the CFTC and the
markets in which these instruments trade. In addition, regulations
adopted by the banking regulators require certain banks to include in a range of
financial contracts, including many derivatives contracts, terms
delaying or restricting default, termination and other rights in the event that
the bank and/or its affiliates become subject to certain types of resolution
or insolvency proceedings. The regulations could limit the Fund’s ability to
exercise a range of cross-default rights if its counterparty, or an affiliate
of the counterparty, is subject to bankruptcy or similar proceeding. Such
regulations could further negatively impact the Fund’s use of derivatives.
Under CFTC Regulation 4.5, the Fund is excluded from registration as a CPO if
its investments in commodity interests (such as futures contracts,
options on futures contracts, non-deliverable forwards and swaps), other than
those used for bona fide hedging purposes (as defined by the CFTC), are
limited, such that the aggregate initial margin and premiums required to
establish the positions (after taking into account unrealized profits
and
unrealized losses on any such positions and excluding the amount by which
options are “in-the-money” at the time of purchase) do not exceed 5% of the
Fund’s NAV. Alternatively, the aggregate net notional value of the positions,
determined at the time the most recent position was established,
may not exceed 100% of the Fund’s NAV, after taking into account unrealized
profits and unrealized losses on any such positions. Further, to qualify
for the exclusion in Regulation 4.5, the Fund must satisfy a marketing test,
which requires, among other things, that the Fund not hold itself out as a
vehicle for trading commodity interests. The Fund’s ability to use these
instruments also may be limited by federal income tax considerations.
See the
section entitled “Tax Information.”
The
Manager, on behalf of the Fund, has filed a notice claiming the CFTC Regulation
4.5 exclusion from CPO registration with respect to the Fund. The Manager is
also exempt from registration as a commodity trading advisor under CFTC
Regulation 4.14(a)(8) with respect to the Fund.
Further
information about the specific types of derivative instruments in which the Fund
may invest, including the risks involved in their use, are contained
under the description of each of these instruments in this SAI. The Fund may
invest in various types of derivatives, including among others:
■ |
Contracts
for Differences — A
contract for difference (“CFD”) is a contract in
which
one party agrees to pay the other party an amount of money based
on the difference between the current value of an asset
(such as a single security, a basket of securities or an index) and its
value on a specified
date in the future. CFDs allow
the Fund to take a long or short position without having to own the
reference security or index. A CFD is a privately
negotiated over-the-counter contract. Both buyer and seller generally are
required to post margin, which is adjusted daily, and adverse market
movements against the underlying asset may
require the buyer to make additional margin payments. The buyer may also
pay to the seller a financing
rate on the notional amount of the capital employed by the seller, less
the margin deposit. A CFD is usually terminated at the buyer’s
initiative.
By entering into a CFD transaction, the Fund could incur losses because it
would face many of the same types of risks as owning the underlying
asset
directly. As with other types of swap transactions, CFDs also carry
counterparty risk, which is the risk that the counterparty to the
CFD
transaction may be unable or unwilling to make payments to or otherwise
honor its financial obligations under the terms of the contract, that
the
parties may disagree as to the meaning or application of contractual
terms, or that the asset may
not perform as expected. CFDs
are similar to total
return swaps, except that payment only occurs once, on the contract
expiration date, whereas payment on total return swaps typically occurs at
agreed
upon intervals. |
■ |
Forward
Foreign Currency Contracts. The
Fund may enter into forward foreign currency contracts (“forward currency
contracts”), which are a type
of derivative instrument, for a variety of reasons. A forward
currency contract involves an obligation to purchase or sell a specified
currency at a future
date, which may be any fixed number of days from the date of the contract
agreed upon by the parties at a price set at the time of the contract.
Because these forward currency contracts normally are settled through an
exchange of currencies, they are traded in the interbank market
directly
between currency traders (usually large commercial banks) and their
customers. |
|
Forward
currency contracts may serve as long hedges. For example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar
price
of a security denominated in a foreign currency that it intends to
acquire. Forward currency contract transactions also may serve as short
hedges.
For example, the Fund may sell a forward currency contract to lock in the
U.S. dollar equivalent of the proceeds from the anticipated sale of
a
security or from a dividend or interest payment on a security denominated
in a foreign currency. |
|
The Fund
may enter into forward currency contracts to sell a foreign currency for a
fixed U.S. dollar amount approximating the value of some or all
of
its respective portfolio securities denominated in such foreign currency.
In addition, the Fund may use forward currency contracts when a
sub-advisor
wishes to “lock in” the U.S. dollar price of a security when the Fund is
purchasing or selling a security denominated in a foreign currency
or
anticipates receiving a dividend or interest payment denominated in a
foreign currency. |
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The Fund
may enter into forward currency contracts for the purchase or sale of a
specified currency at a specified future date either with respect to
specific
transactions or with respect to portfolio positions in order to minimize
the risk to the Fund from adverse changes in the relationship between
the
U.S. dollar and foreign currencies. |
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The Fund
may use forward currency contracts to seek to hedge against, or profit
from, changes in the value of a particular currency by using forward
currency
contracts on another foreign currency or a basket of currencies, the value
of which a sub-advisor believes will have a positive correlation to
the
values of the currency being hedged. When hedging, use of a different
foreign currency magnifies the risk that movements in the price of the
forward
contract will not correlate or will correlate unfavorably with the foreign
currency being hedged. |
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In
addition, the Fund may use forward currency contracts to shift exposure to
foreign currency fluctuations from one country to another. For
example,
if the Fund owned securities denominated in a foreign currency that a
sub-advisor believed would decline relative to another currency, it
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might
enter into a forward currency contract to sell an appropriate amount of
the first foreign currency, with payment to be made in the second
currency.
Transactions that involve two foreign currencies are sometimes referred to
as “cross hedging.” Use of a different foreign currency magnifies
the Fund’s exposure to foreign currency exchange rate
fluctuations. |
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The
Fund also may enter into forward currency contracts for non-hedging
purposes if a foreign currency is anticipated to appreciate or depreciate
in value,
but securities denominated in that currency do not present attractive
investment opportunities and are not held in the Fund’s investment
portfolio. |
|
The
cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period
and
the market conditions then prevailing. Because forward currency contracts
usually are entered into on a principal basis, no fees or commissions
are
involved. When the Fund enters into a forward currency contract, it relies
on the counterparty to make or take delivery of the underlying
currency
at the maturity of the contract. Failure by the counterparty to do so
would result in the loss of any expected benefit of the
transaction. |
|
Sellers
or purchasers of forward currency contracts can enter into offsetting
closing transactions, similar to closing transactions on futures, by
purchasing
or selling, respectively, an instrument identical to the instrument sold
or bought, respectively. Secondary markets generally do not exist
for
forward currency contracts, however, with the result that closing
transactions generally can be made for forward currency contracts only by
negotiating
directly with the counterparty. Thus, there can be no assurance that the
Fund will in fact be able to close out a forward currency contract
at a
favorable price prior to maturity. In addition, in the event of insolvency
of the counterparty, the Fund might be unable to close out a forward
currency
contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position,
and
would continue to be required to maintain a position in the securities or
currencies that are the subject of the hedge or to maintain cash or
securities. |
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The
precise matching of forward currency contract amounts and the value of
securities whose U.S. dollar value is being hedged by those contracts
involved
generally will not be possible because the value of such securities,
measured in the foreign currency, will change after the forward currency
contract
has been established. Thus, the Fund might need to purchase or sell
foreign currencies in the spot (cash) market to the extent such foreign
currencies
are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful
execution
of a short-term hedging strategy is highly
uncertain. |
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The Fund
bears the risk of loss of the amount expected to be received under a
forward currency contract in the event of the default or bankruptcy of
a
counterparty. If such a default occurs, the Fund may have contractual
remedies pursuant to the forward currency contract, but such remedies may
be
subject to bankruptcy and insolvency laws which could affect the Fund’s
rights as a creditor. |
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At
the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and
either extend the maturity of the forward contract (by “rolling” that
contract forward) or may initiate a new forward contract. If the Fund
retains
the portfolio security and engages in an offsetting transaction, the Fund
will incur a gain or a loss (as described below) to the extent that
there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward
contract
to sell the foreign currency. |
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Should
forward prices decline during the period between the Fund’s entering into
a forward contract for the sale of a foreign currency and the date
it
enters into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the
currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent
the price
of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. |
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Forward
currency contracts in which the Fund may engage include foreign exchange
forwards. The consummation of a foreign exchange forward requires
the actual exchange of the principal amounts of the two currencies in the
contract (i.e., settlement on a physical basis). Because foreign
exchange
forwards are physically settled through an exchange of currencies, they
are traded in the interbank market directly between currency traders
(usually large commercial banks) and their customers. A foreign exchange
forward generally has no deposit requirement, and no commissions
are charged at any stage for trades; foreign exchange dealers realize a
profit based on the difference (the spread) between the prices at
which
they are buying and the prices at which they are selling various
currencies. When the Fund enters into a foreign exchange forward, it
relies on the
counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would
result
in the loss of any expected benefit of the
transaction. |
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The
Fund may be required to obtain the currency that it must deliver under the
foreign exchange forward through the sale of portfolio securities
denominated
in such currency or through conversion of other assets of the Fund into
such currency. When the Fund engages in foreign currency transactions
for hedging purposes, it will not enter into foreign exchange forwards to
sell currency or maintain a net exposure to such contracts if their
consummation would obligate the Fund to deliver an amount of foreign
currency materially in excess of the value of its portfolio securities or
other
assets denominated in that currency. |
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Non-Deliverable
Currency Forwards. The
Fund also may enter into NDFs. NDFs are cash-settled, short-term forward
contracts on foreign currencies
(each a “Reference Currency”), generally on currencies that are
non-convertible, and may be thinly traded or illiquid. NDFs involve an
obligation
to pay a U. S. dollar amount (the “Settlement Amount”) equal to the
difference between the prevailing market exchange rate for the
Reference
Currency and the agreed upon exchange rate (the “NDF Rate”), with respect
to an agreed notional amount. NDFs have a fixing date and a
settlement (delivery) date. The fixing date is the date and time at which
the difference between the prevailing market exchange rate and the
agreed
upon exchange rate is calculated. The settlement (delivery) date is the
date by which the payment of the Settlement Amount is due to the
party
receiving payment. Although
NDFs are similar to other forward currency contracts, NDFs do not require
physical delivery of a Reference Currency on the settlement date.
Rather, on the settlement date, one counterparty pays the Settlement
Amount. NDFs typically may have terms from one month up to two
years
and are settled in U.S. dollars. The Fund will typically use NDFs for
hedging purposes or for direct investment in a foreign country for income
or
gain. The use of NDFs for hedging or to increase income or gain may not be
successful, resulting in losses to the Fund, and the cost of such
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strategies
may reduce the Fund’s returns. NDFs
are subject to many of the risks associated with derivatives in general
and forward currency transactions including risks associated with
fluctuations
in foreign currency and the risk that the counterparty will fail to
fulfill its obligations. In addition, pursuant to the Dodd-Frank Act and
regulations
adopted by the CFTC in connection with implementing the Dodd-Frank Act,
NDFs are deemed to be swaps, and consequently commodity
interests for purposes of amended Regulation 4.5. Although NDFs have
historically been traded OTC, some are now exchange-traded pursuant
to the Dodd-Frank Act. Under such circumstances, they will be centrally
cleared and a secondary market for them will exist. All NDFs are
subject
to counterparty risk, which is the risk that the counterparty will not
perform as contractually required under the NDF. With respect to NDFs
that
are centrally-cleared, the Fund could lose margin payments it has
deposited with the clearing organization as well as the net amount of
gains not
yet paid by the clearing organization if it breaches its obligations under
the NDF, becomes insolvent or goes into bankruptcy. In the event of
bankruptcy
of the clearing organization, the investor may be entitled to the net
amount of gains the investor is entitled to receive plus the return
of
margin owed to it only in proportion to the amount received by the
clearing organization’s other customers, potentially resulting in losses
to the investor.
NDFs that remain traded OTC will be subject to margin requirements for
uncleared swaps and counterparty risk common to other
swaps. |
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Forward
Contracts. The
Fund may enter into forward contracts. Forward contracts are a type of
derivative instrument that obligate the purchaser to
take delivery of, or cash settle a specific amount of, a commodity,
security or obligation underlying the contract at a specified time in the
future for a
specified price. Likewise, the seller incurs an obligation to deliver the
specified amount of the underlying asset against receipt of the specified
price.
Generally, forward contracts are traded through financial institutions
acting as market-makers, on certain securities exchanges, or over-the-counter,
and the protections afforded to investors may vary depending on the
trading environment. This is distinguishable from futures contracts,
which are traded on U.S. and foreign commodities
exchanges. Forward
contracts are often negotiated on an individual basis and are not
standardized. The market for forward contracts is substantially
unregulated,
as there is no limit on daily price movements and speculative position
limits are not applicable. The principals who deal in certain forward
contract markets are not required to continue to make markets in the
underlying reference assets in which they trade and these markets can
experience
periods of illiquidity, sometimes of significant duration. There have been
periods during which certain participants in forward contract markets
have refused to quote prices for certain underlying references or have
quoted prices with an unusually wide spread between the price at
which
they were prepared to buy and that at which they were prepared to sell. At
or prior to maturity of a forward contract, the Fund may enter into
an
offsetting contract and may incur a loss to the extent there has been
adverse movement in forward contract prices. The liquidity of the markets
for
forward contracts depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent
participants make
or take delivery, liquidity in the market for forwards could be reduced. A
relatively small price movement in a forward contract may result in
substantial
losses to the Fund, exceeding the amount of the margin paid. Forward
contracts can increase the Fund’s risk exposure to underlying reference
assets and their attendant risks. The
Fund bears the risk of loss of the amount expected to be received under a
forward contract in the event of the default or bankruptcy of a
counterparty.
If such a default occurs, the Fund may have contractual remedies pursuant
to the forward contract, but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Fund’s rights as a
creditor. |
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Futures
Contracts. The
Fund may enter into futures contracts. Futures contracts are a type of
derivative instrument that obligate the purchaser to take
delivery of, or cash settle a specific amount of, a commodity, security or
other obligation underlying the contract at a specified time in the
future
for a specified price. Likewise, the seller incurs an obligation to
deliver the specified amount of the underlying obligation against receipt
of the specified
price. Futures are traded on both U.S. and foreign commodities exchanges.
The purchase of futures can serve as a long hedge, and the sale
of
futures can serve as a short hedge. No
price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, the Fund is required to deposit “initial
margin” consisting
of cash, U.S. Government securities, suitable money market instruments, or
liquid, high-grade debt securities in an amount set by the exchange
on which the contract is traded and varying based on the volatility of the
underlying asset. Margin must also be deposited when writing a
call
or put option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin
on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the
Fund
at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high
volatility,
the Fund may be required by a futures exchange to increase the level of
its initial margin payment, and initial margin requirements might
be
increased generally in the future by regulatory action. Subsequent
“variation margin” payments (sometimes referred to as “maintenance margin”
payments)
are made to and from the futures broker daily as the value of the futures
position varies, a process known as “marking-to-market.” Variation
margin does not involve borrowing, but rather represents a daily
settlement of the Fund’s obligations to or from a futures broker. When the
Fund
purchases or sells a futures contract, it is subject to daily, or even
intraday, variation margin calls that could be substantial in the event of
adverse
price movements. If the Fund has insufficient cash to meet daily or
intraday variation margin requirements, it might need to sell securities
at a
time when such sales are disadvantageous. Purchasers
and sellers of futures contracts can enter into offsetting closing
transactions, by selling or purchasing, respectively, an instrument
identical to
the instrument purchased or sold. Positions in futures contracts may be
closed only on a futures exchange or board of trade that trades that
contract.
The Fund intends to enter into futures contracts only on exchanges or
boards of trade where there appears to be a liquid secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time. In such event, it may not be
possible
to close a futures contract. Although
many futures contracts by their terms call for the actual delivery or
acquisition of the underlying asset, in most cases the contractual
obligation
is fulfilled before the date of the contract without having to make or
take delivery of the securities or currency. The offsetting of a
contractual
obligation is accomplished by buying (or selling, as appropriate) on a
commodities exchange an identical futures contract calling for
delivery
in the same month. Such a transaction, which is effected through a member
of an exchange, cancels the obligation to make or take delivery
of
the securities or currency. Since all transactions in the futures market
are made, offset or fulfilled through a clearinghouse associated with the
exchange
on which the contracts are traded, the Fund will incur brokerage fees when
it purchases or sells futures contracts. If an offsetting purchase
price
is less than the original sale price, the Fund realizes a capital gain, or
if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sell price
is more than the original purchase price, the Fund realizes a capital
gain, or if it is less, the Fund realizes a capital loss. The Fund
have no current |
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intent
to accept physical delivery in connection with the settlement of futures
contracts. Under
certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract can vary from the previous
day’s settlement price; once that limit is reached, no trades may be made
that day at a price beyond the limit. Daily price limits do not limit
potential
losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation
of unfavorable
positions. If the Fund were unable to liquidate a futures contract due to
the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, the Fund
would
continue to be required to make daily variation margin payments and might
be required to maintain the position being hedged by the futures
contract
or option thereon or to maintain cash or securities in a segregated
account. The
ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation
margin
deposit requirements, investors may close futures contracts through
offsetting transactions that could distort the normal relationship
between
the cash and futures markets. Second, the liquidity of the futures market
depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced,
thus
producing distortion. Third, from the point of view of speculators, the
margin deposit requirements in the futures market are less onerous than
margin
requirements in the securities market. Therefore, increased participation
by speculators in the futures market may cause temporary price
distortions.
Due to the possibility of distortion, a correct forecast of securities
price or currency exchange rate trends by a sub-advisor may still not
result
in a successful transaction. Futures
contracts also entail other risks. Although the use of such contracts may
benefit the Fund, if investment judgment about the general direction
of, for example, an index is incorrect, the Fund’s overall performance
would be worse than if it had not entered into any such contract.
There
are differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given
transaction
not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market
demand
for futures, including technical influences in futures trading, and
differences between the financial instruments being hedged and the
instruments
underlying the standard contracts available for trading in such respects
as interest rate levels, maturities, and creditworthiness of issuers.
A
decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful
to
some degree because of market behavior or unexpected interest rate
trends. |
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Options.
The Fund may purchase and sell put options and call options, each a type
of derivative instrument, on securities and foreign currencies. A
call
option is “covered” if the Fund simultaneously holds an equivalent
position in the security underlying the option. Where the underlying
security is a
convertible bond, the call option is considered to be uncovered until the
option is exercised. |
|
An
option is a contract that gives the purchaser (holder) of the option, in
return for a premium, the right to buy from (call) or sell to (put) the
seller (writer)
of the option the security or currency underlying the option at a
specified exercise price at any time during the term of the option
(normally not
exceeding nine months). The writer of an option has the obligation upon
exercise of the option to deliver or pay the value of the underlying
security
or currency upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security or
currency. |
|
When
the Fund writes a call option, it is obligated to sell a security to a
purchaser at a specified price at any time until a certain date if the
purchaser decides
to exercise the option. The Fund will receive a premium for writing a call
option. So long as the obligation of the call option continues, the
Fund
may be assigned an exercise notice, requiring it to deliver the underlying
security against payment of the exercise price. The Fund may be
obligated
to deliver securities underlying an option at less than the market price.
By writing a covered call option, the Fund forgoes, in exchange for
the
premium less the commission (“net premium”), the opportunity to profit
during the option period from an increase in the market value of the
underlying
security or currency above the exercise price. If a call option that the
Fund has written expires unexercised, the Fund will realize a gain in
the
amount of the premium; however, that gain may be offset by a decline in
the market value of the underlying security during the option period. If
a
call option is exercised, the Fund will realize a gain or loss from the
sale of the underlying security. |
|
When
the Fund writes a put option, it is obligated to acquire a security at a
certain price at any time until a certain date if the purchaser decides to
exercise
the option. The Fund will receive a premium for writing a put option. By
writing a put option, the Fund, in exchange for the net premium
received,
accepts the risk of a decline in the market value of the underlying
security or currency below the exercise price. The Fund may terminate its
obligation
as the writer of a call or put option by purchasing a corresponding option
with the same exercise price and expiration date as the option
previously
written. If a put option that the Fund has written expires unexercised,
the Fund will realize a gain in the amount of the premium. When
the
Fund writes an option, an amount equal to the net premium received by the
Fund is included in the liability section of the Fund’s Statement of
Assets
and Liabilities as a deferred credit. The amount of the deferred credit
will be subsequently marked to market to reflect the current market
value
of the option written. The current market value of a traded option is the
last sale price or, in the absence of a sale, the mean between the
closing
bid and asked price. If an option expires unexercised on its stipulated
expiration date or if the Fund enters into a closing purchase transaction,
the
Fund will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and
the deferred
credit related to such option will be
eliminated. |
|
A
closing purchase transaction for exchange-traded options may be made only
on a national securities exchange. It is impossible to predict the
volume
of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue. There is no
assurance
that a liquid secondary market on an exchange will exist for a particular
option, or at any particular time, and for some options, such as
OTC
options, no secondary market on an exchange may exist. The hours of
trading for options may not conform to the hours during which the
underlying
securities are traded. To the extent that the option markets close before
the markets for the underlying securities, significant price and
rate
movements can take place in the underlying securities markets that cannot
be reflected in the option markets. The Fund may use NDOs to
assist in
reducing the foreign exchange risk, in particular situations when physical
delivery of the underlying currencies is not required or not
possible. |
|
The
Fund may write (sell) and purchase covered or uncovered call and covered
put options on foreign currencies for hedging or non-hedging purposes.
The Fund may use options on foreign currencies to protect against
decreases in the U.S. dollar value of securities held or increases in the
U.S.
dollar cost of securities to be acquired by the Fund or to protect the
U.S. dollar equivalent of dividends, interest, or other payments on those
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securities.
In addition, the Fund may write and purchase covered or uncovered call and
covered put options on foreign currencies for non-hedging purposes
(e.g., when the Manager or sub-advisor anticipates that a foreign currency
will appreciate or depreciate in value, but securities denominated
in that currency do not present attractive investment opportunities and
are not held in the Fund’s investment portfolio). The Fund may
write
covered or uncovered call and covered put options on any currency in order
to realize greater income than would be realized on portfolio securities
alone. Currency options have characteristics and risks similar to those of
securities options, as discussed herein. Certain options on foreign
currencies
are traded on the OTC market and involve liquidity and credit risks that
may not be present in the case of exchange-traded currency options. |
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Structured
Products.
The Fund may invest in structured products, including instruments
such as credit-linked securities, commodity-linked notes and
structured notes, which are potentially high-risk derivatives. For
example, a structured product may combine a traditional stock or bond with
an option
or forward contract. Generally, the principal amount, amount payable upon
maturity or redemption, or interest rate of a structured product is
tied
(positively or negatively) to the price of some currency or securities
index or another interest rate or some other economic factor (each, a
“benchmark”).
The interest rate or (unlike most fixed-income securities) the principal
amount payable at maturity of a structured product may be increased
or decreased, depending on changes in the value of the
benchmark. |
|
Structured
products can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management,
and
increased total return. Structured products may not bear interest or pay
dividends. The value of a structured product or its interest rate may be a
multiple
of a benchmark and, as a result, may be leveraged and move (up or down)
more steeply and rapidly than the benchmark. These benchmarks
may be sensitive to economic and political events, such as commodity
shortages and currency devaluations, which cannot be readily foreseen
by the purchaser of a structured product. Under certain conditions, the
redemption value of a structured product could be zero. Thus, an
investment
in a structured product may entail significant market risks that are not
associated with a similar investment in a traditional, U.S. dollar-denominated
bond that has a fixed principal amount and pays a fixed rate or floating
rate of interest. The purchase of structured products also exposes
the Fund to the credit risk of the issuer of the structured product.
These risks may cause significant fluctuations in the NAV of the
Fund. |
■ |
Credit-Linked
Notes. CLNs
are derivative debt obligations that are issued by limited purpose
entities or by financial firms, such as banks, securities
firms or their affiliates, and that are structured so that their
performance is linked to that of an underlying bond or other debt
obligation (a
“reference asset”), normally by means of an embedded or underlying credit
default swap. The issuer of a CLN in turns enters into a credit
protection
agreement or invests in a derivative instrument or basket of derivative
instruments, such as credit default swaps or interest rate swaps,
to
obtain exposure to certain fixed-income markets or to remain fully
invested when more traditional income producing securities are not
available. The
reference assets for the CLNs in which the Fund may invest will be limited
to sovereign or quasi-sovereign debt instruments or other investments
in which the Fund’s investment policies permit it to invest directly. The
Fund may invest in CLNs when the Fund’s sub-advisor believes that
doing so is more efficient than investing in the reference assets directly
or when such direct investment by the Fund is not feasible due to
legal
or other restrictions. The
issuer or one of the affiliates of the issuer of the CLNs in which the
Fund will invest, normally will purchase the reference asset underlying
the CLN
directly, but in some cases it may gain exposure to the reference asset
through a credit default swap or other derivative. Under the terms of a
CLN,
the Fund will receive a fixed or variable rate of interest on the
outstanding principal amount of the CLN, which in turn will be subject to
reduction
(potentially down to zero) if a “credit event” occurs with respect to the
underlying reference asset or its issuer. Such credit events will
include
payment defaults on the reference asset, and normally will also include
events that do not involve an actual default, such as actual or
potential
insolvencies, repudiations of indebtedness, moratoria on payments,
reference asset restructurings, limits on the convertibility or
repatriation
of currencies, and the imposition of ownership restrictions. If a credit
event occurs, payments on the CLN would terminate, and the Fund
normally would receive delivery of the underlying reference asset (or, in
some cases, a comparable “deliverable” asset) in lieu of the repayment
of principal. In some cases, however, including but not limited to
instances where there has been a market disruption or in which it is
or
has become illegal, impossible or impracticable for the Fund to purchase,
hold or receive the reference assets, the Fund may receive a cash
settlement
based on the value of the reference asset or a comparable instrument, less
fees charged and certain expenses incurred by the CLN issuer. CLNs
are debt obligations of the CLN issuers, and the Fund would have no
ownership or other property interest in the reference assets (other than
following
a credit event that results in the reference assets being delivered to the
Fund) or any direct recourse to the issuers of those reference
assets.
Thus, the Fund will be exposed to the credit risk of the issuers of the
reference assets that underlie its CLNs, as well as to the credit risk of
the
issuers of the CLNs themselves. CLNs will also be subject to currency
risk, liquidity risk, valuation risks, and the other risks of a credit
default swap.
Various determinations that may need to be made with respect to the CLNs,
including the occurrence of a credit event, the selection of deliverable
assets (where applicable) and the valuation of the reference asset for
purposes of determining any cash settlement amount, normally will
be made by the issuer or sponsor of the CLN. The interests of such issuer
or sponsor may not be aligned with those of the Fund or other investors
in the CLN. Accordingly, CLNs may also be subject to potential conflicts
of interest. There may be no established trading market for the
Fund’s
CLNs, in which event they may constitute illiquid
investments. |
■ |
Structured
Notes. The
Fund may invest in structured notes, which are derivative debt instruments
with principal and/or interest payments linked to
the value of a reference instrument (for example, a commodity, a foreign
currency, an index of securities, an interest rate or other financial
indicators).
The payments on a structured note may vary based on changes in one or more
specified reference instruments, such as a floating interest
rate compared to a fixed interest rate, the exchange rates between two
currencies, one or more securities or a securities or commodities
index.
A structured note may be positively or negatively indexed. For example,
its principal amount and/or interest rate may increase or decrease if
the
value of the reference instrument increases, depending upon the terms of
the instrument. The change in the principal amount payable with
respect
to, or the interest rate of, a structured note may be a multiple of the
percentage change (positive or negative) in the value of the underlying
reference instrument or instruments, which can make the value of such
securities volatile. This type of note increases the potential for
income
but at a greater risk of loss than a typical debt security of the same
maturity and credit quality. Structured notes can be used to increase
the
Fund’s exposure to changes in the value of assets or to hedge the risks of
other investments that the Fund holds. |
|
Structured
notes are subject to interest rate risk. They are also subject to credit
risk with respect both to the issuer and, if applicable, to the
underlying
security or borrower. If the underlying investment or index does not
perform as anticipated, the structured note might pay less interest
than
the stated coupon payment or repay less principal upon maturity. The price
of structured notes may be very volatile and they may have a limited
trading market, making it difficult to value them or sell them at an
acceptable price. In some cases, the Fund may enter into agreements
with
an issuer of structured notes to purchase minimum amounts of those notes
over time. Certain issuers of structured products may be deemed
to be
investment companies as defined in the Investment Company Act. As a
result, the Fund’s investments in these structured products may be
subject
to limits applicable to investments in other investment
companies. |
■ |
Swap
Agreements. A
swap is a transaction in which the Fund and a counterparty agree to pay or
receive payments at specified dates based upon or
calculated by reference to changes in specified prices or rates (e.g.,
interest rates in the case of interest rate swaps) or the performance of
specified
securities or indices based on a specified amount (the “notional” amount).
Nearly any type of derivative, including forward contracts, can
be
structured as a swap. See “Derivatives” for a further discussion of
derivatives risks. Swap agreements can be structured to provide exposure
to a variety
of different types of investments or market factors. For example, in an
interest rate swap, fixed-rate payments may be exchanged for floating
rate
payments; in a currency swap, U.S. dollar-denominated payments may be
exchanged for payments denominated in a foreign currency; and in a
total
return swap, payments tied to the investment return on a particular asset,
group of assets or index may be exchanged for payments that are
effectively
equivalent to interest payments or for payments tied to the return on
another asset, group of assets, or index. Swaps may have a leverage
component,
and adverse changes in the value or level of the underlying asset,
reference rate or index can result in gains or losses that are
substantially
greater than the amount invested in the swap itself. Some swaps currently
are, and more in the future will be, centrally cleared. Swaps that
are centrally-cleared are exposed to the creditworthiness of the clearing
organizations (and, consequently, that of their members - generally,
banks
and broker-dealers) involved in the transaction. For example, an investor
could lose margin payments it has deposited with the clearing organization
as well as the net amount of gains not yet paid by the clearing
organization if it breaches its agreement with the investor or becomes
insolvent
or goes into bankruptcy. In the event of bankruptcy of the clearing
organization, the investor may be able to recover only a portion of the
net
amount of gains on its transactions and of the margin owed to it,
potentially resulting in losses to the investor. Swaps that are not
centrally cleared
involve the risk that a loss may be sustained as a result of the
insolvency or bankruptcy of the counterparty or the failure of the
counterparty to
make required payments or otherwise comply with the terms of the
agreement. If a counterparty’s creditworthiness declines, the value of the
swap
might decline, potentially resulting in losses to the Fund. Changing
conditions in a particular market area, whether or not directly related to
the referenced
assets that underlie the swap agreement, may have an adverse impact on the
creditworthiness of a counterparty. To mitigate this risk, the
Fund
will only enter into swap agreements with counterparties considered by a
sub-advisor to present minimum risk of default, and the Fund normally
obtains collateral to secure its exposure. Swaps involve the risk that, if
the swap declines in value, additional margin would be required to
maintain
the margin level. The seller may require the Fund to deposit additional
sums to cover this, and this may be at short notice. If additional
margin
is not provided in time, the seller may liquidate the positions at a loss,
which may cause the Fund to owe money to the seller. The centrally
cleared
and OTC swap agreements into which the Fund enters normally provide for
the obligations of the Fund and its counterparty in the event of a
default
or other early termination to be determined on a net basis. Similarly,
periodic payments on a swap transaction that are due by each party on
the
same day normally are netted. The use of swap agreements requires special
skills, knowledge and investment techniques that differ from those
required
for normal portfolio management. Swaps may be considered illiquid
investments, and the Fund may be unable to sell a swap agreement to
a
third party at a favorable price; see “Illiquid and Restricted Securities”
for a description of liquidity risk. |
■ |
Credit
Default Swaps. In a
credit default swap, one party (the seller) agrees to make a payment to
the other party (the buyer) in the event that a “credit
event,” such as a default or issuer insolvency, occurs with respect to one
or more underlying or “reference” bonds or other debt securities.
The
Fund may be either a seller or a buyer of credit protection under a credit
default swap. The purchaser pays a fee during the life of the swap. If
there
is a credit event with respect to a referenced debt security, the seller
under a credit default swap may be required to pay the buyer the par
amount
(or a specified percentage of the par amount) of that security in exchange
for receiving the referenced security (or a specified alternative
security)
from the buyer. Credit default swaps may be on a single security, a basket
of securities or on a securities index. Alternatively, the credit
default
swap may be cash settled, meaning that the seller will pay the buyer the
difference between the par value and the market value of the defaulted
bonds. If the swap is on a basket of securities (such as the CDX indices),
the notional amount of the swap is reduced by the par amount of
the defaulted bond, and the fixed payments are then made on the reduced
notional amount. Taking
a long position in (i.e., acting as the seller under) a credit default
swap increases the exposure to the specific issuers, and the seller could
experience
a loss if a credit event occurs and the credit of the reference entity or
underlying asset has deteriorated. As a seller, the Fund would
effectively
add leverage because, in addition to its total net assets, the Fund would
be subject to investment exposure on the notional amount of the
swap. Taking a short position in (i.e., acting as the buyer under) a
credit default swap results in opposite exposures for the Fund. The risks
of being
the buyer of credit default swaps include the cost of paying for credit
protection if there are no credit events, pricing transparency when
assessing
the cost of a credit default swap, counterparty risk, and the need to fund
any delivery obligation, particularly in the event of adverse pricing
when purchasing bonds to satisfy a delivery obligation. Credit default
swap buyers are also subject to counterparty risk since the ability of
the
seller to make required payments is dependent on its
creditworthiness. |
■ |
Currency
Swaps. A
currency swap involves the exchange of payments denominated in one
currency for payments denominated in another. Payments
are based on a notional principal amount, the value of which is fixed in
exchange rate terms at the swap’s inception. Currency swap agreements
may be entered into on a net basis or may involve the delivery of the
entire principal value of one designated currency in exchange for
the
entire principal value of another designated currency. In such cases, the
entire principal value of a currency swap is subject to the risk that the
counterparty
will default on its contractual delivery obligations. Currency swaps are
subject to currency risk. |
■ |
Interest
Rate and Inflation Swaps. In
an interest rate swap, the parties exchange payments based on fixed or
floating interest rates multiplied by a
hypothetical or “notional” amount. For example, one party might agree to
pay the other a specified fixed rate on the notional amount in
exchange
for recovering a floating rate on that notional amount. Interest rate swap
agreements entail both interest rate risk and counterparty risk.
The
purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments
of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser,
to the extent that a specified index falls below a predetermined interest
rate, to receive payments of interest on a notional principal
|
|
amount
from the party selling such interest rate floor. There is a risk that
based on movements of interest rates, the payments made under a swap
agreement
will be greater than the payments received. The Fund may also invest in
inflation swaps, where an inflation rate index is used in place
of an
interest rate index. |
■ |
Total
Return Swaps. In a
total return swap transaction, one party agrees to pay the other party an
amount equal to the total return on a defined underlying
asset such as a security or basket of securities or on a referenced index
during a specified period of time. In return, the other party would
make periodic payments based on a fixed or variable interest rate or on
the total return from a different underlying asset or index. Total
return
swap agreements may be used to gain exposure to price changes in an
overall market or an asset. Total return swaps may effectively add
leverage
to the Fund’s portfolio because, in addition to its net assets, the Fund
would be subject to investment exposure on the notional amount
of
the swap, which may exceed the Fund’s net assets. If the Fund is the total
return receiver in a total return swap, then the credit risk for an
underlying
asset is transferred to the Fund in exchange for its receipt of the return
(appreciation) on that asset or index. If the Fund is the total
return
payer, it is hedging the downside risk of an underlying asset or index but
it is obligated to pay the amount of any appreciation on that asset
or
index. Total return swaps could result in losses if the underlying asset
or index does not perform as anticipated. Written total return swaps can
have
the potential for unlimited losses. |
■ |
Warrants.
Warrants are options to purchase an issuer’s securities at a stated price
during a stated term, usually at a price below the initial offering
price
of the securities and before the securities are offered to the general
public. If the market price of the underlying common stock does not
exceed
the warrant’s exercise price during the life of the warrant, the warrant
will expire worthless. As a result, warrants may be considered more
speculative
than certain other types of investments. Warrants usually have no voting
rights, pay no dividends and have no rights with respect to the
assets
of the corporation issuing them. The percentage increase or decrease in
the value of a warrant may be greater than the percentage increase
or
decrease in the value of the underlying common stock. Warrants may be
purchased with values that vary depending on the change in value of
one
or more specified indices (“index warrants”). Index warrants are generally
issued by banks or other financial institutions and give the holder the
right,
at any time during the term of the warrant, to receive upon exercise of
the warrant a cash payment from the issuer based on the value of the
underlying
index at the time of the exercise. Warrants may also be linked to the
performance of oil and/or the GDP of specific developing markets.
Warrants
are usually freely transferable, but may not be as liquid as
exchange-traded options, and the market for warrants may be very limited
and it may
be difficult to sell them promptly at an acceptable
price. |
ESG
Considerations —
Environmental, social, and/or governance (“ESG”) considerations, either
quantitative or qualitative, may be utilized as a component
of the Fund’s investment process to implement its investment strategies.
Since ESG
considerations are not the only component that may be evaluated
by a sub-advisor, the issuers in which the Fund invests may not be considered
ESG issuers or have good ESG ratings. To the
extent that the Fund
utilizes such considerations as a component of the Fund’s investment process,
the Fund’s performance may be affected depending on whether such
considerations are in or out of favor and relative to similar funds that do not
include such considerations in the investment process. There is no guarantee
that the utilization of ESG considerations will be additive to the Fund’s
performance. ESG considerations may vary across types of investments
and issuers, and not every such consideration may be identified, evaluated, or
evaluated in the same manner. ESG norms also differ by country and
region, and an issuer’s ESG practices or a sub-advisor’s assessment process of
such considerations may change over time. There are significant
differences in interpretations of what it means for a company to have good ESG
characteristics, and the Fund may underperform other funds that
use different considerations and/or a different methodology in evaluating such
considerations. Information used by the Fund to evaluate such
considerations, including the use of third-party research, if any, may not be
readily available, complete or accurate, and may vary across third-party
research providers and issuers, which could negatively impact the Fund’s ability
to accurately assess an issuer. As investors can differ in their views
regarding the meaning of ESG considerations, the Fund may invest in companies
that do not reflect the beliefs and values of any particular investor.
The regulatory landscape with respect to ESG investing in the United States is
still developing, and future rules and regulations may require the Fund to
modify or alter its investment process with respect to the use of such
considerations.
Expense
Risk — Fund
expenses are subject to a variety of factors, including fluctuations in the
Fund’s net assets. Accordingly, actual expenses may be greater or
less than those indicated. For example, to the extent that the Fund’s net assets
decrease due to market declines or redemptions, the Fund’s expenses
will increase as a percentage of Fund net assets. During periods of high market
volatility, these increases in the Fund’s expense ratio could be significant.
Fixed-Income
Investments — The Fund
may hold debt instruments, including government and corporate debt instruments,
and other fixed-income securities, including
derivative instruments that have fixed-income securities as reference
assets.
Typically, the values of fixed-income securities change inversely
with prevailing interest rates. Therefore, a fundamental risk of fixed-income
securities is interest rate risk, which is the risk that their value will
generally
decline as prevailing interest rates rise, which may cause the Fund’s NAV to
likewise decrease, and vice versa. How specific fixed-income securities
may react to changes in interest rates will depend on the specific
characteristics of each security. For example, while securities with longer
maturities
tend to produce higher yields, they also tend to be more sensitive to changes in
prevailing interest rates and are therefore more volatile than shorter-term
securities and are subject to greater market fluctuations as a result of changes
in interest rates. However, calculations of maturity and duration
may be based on estimates and may not reliably predict a security’s price
sensitivity to changes in interest rates. In addition, different interest
rate
measures (such as short- and long-term interest rates and U.S. and non-U.S.
interest rates), or interest rates on different types of securities or
securities
of different issuers, may not necessarily change in the same amount or in the
same direction. Investments in fixed-income securities with very low or
negative interest rates may diminish the Fund’s yield and performance.
Conversely, if rising interest rates cause the Fund to lose value, the Fund
could face
increased shareholder redemptions, which may lead to increased portfolio
turnover and transaction costs. An increase in shareholder redemptions
could also force the Fund to liquidate investments at disadvantageous times or
prices, therefore adversely affecting the Fund as well as the value of
your investment. For fixed-income securities with variable or floating rates,
the interest rates reset when the specified index or reference rate changes.
Fixed-income securities are also subject to credit risk, which is the risk that
the credit strength of an issuer of a fixed-income security will weaken
and/or that the issuer will be unable or unwilling to make timely principal and
interest payments and that the security may go into default. In addition,
there is prepayment risk, which is the risk that during periods of falling
interest rates, certain fixed-income securities with higher interest rates,
such as
mortgage- and asset-backed securities, may be prepaid by their issuers thereby
reducing the amount of interest payments. This is similar to call
risk, which
is the risk that the issuer of a debt security may repay the security early.
This may result in the Fund not enjoying the increase in the
security’s
market price that usually accompanies a decline in rates, and also having to
reinvest its proceeds in lower yielding securities. Fixed-income securities
may also be subject to valuation risk and liquidity risk. Valuation risk is the
risk that one or more of the fixed-income securities in which the Fund
invests are priced differently than the value realized upon such security’s
sale. In times of market instability, valuation may be more difficult.
Liquidity
risk is the risk that fixed-income securities may be difficult or impossible to
sell at the time that the Fund would like or at the price a sub-advisor
believes the security is currently worth. To the extent the Fund invests in
fixed-income securities in a particular industry or economic sector,
its share
values may fluctuate in response to events affecting that industry or
sector.
Securities
underlying mortgage- and asset-backed securities, which may include subprime
mortgages, also may be subject to a higher degree of credit risk,
valuation risk, and liquidity risk. To the extent that the Fund invests in
derivatives tied to fixed-income securities, such Fund may be more substantially
exposed to these risks than a portfolio that does not invest in such
derivatives.
Fixed-income
securities are also subject to market risk. The market for certain fixed-income
securities may become illiquid under adverse market or economic
conditions independent of any specific adverse changes in the conditions of a
particular issuer. Recent and potential future changes in government
monetary policy may also affect the level of interest rates. The Fund may be
subject to heightened interest rate risk in times of monetary policy
change and uncertainty, such as when the Federal Reserve ends a quantitative
easing program and/or raises interest rates. The end of quantitative
easing and/or rising interest rates may expose fixed-income markets to increased
volatility and may reduce the liquidity of certain investments.
These developments could cause the Fund’s NAV to fluctuate or make it more
difficult for the Fund to accurately value its securities. The amount of
assets deemed illiquid remaining within the Fund may also increase, making it
more difficult to meet shareholder redemptions and further adversely
affecting the value of the Fund.
In
addition, specific types of fixed-income securities in which the Fund may invest
are subject to the risks described elsewhere in this SAI.
■ |
Corporate
Debt and Other Fixed-Income Securities.
Typically, the values of fixed income securities change inversely with
prevailing interest rates. Therefore,
a fundamental risk of fixed income securities is interest rate risk, which
is the risk that their value generally will decline as prevailing
interest
rates rise, which may cause the Fund’s NAV to likewise decrease, and vice
versa. How specific fixed income securities may react to changes in
interest
rates will depend on the specific characteristics of each security. For
example, while securities with longer maturities tend to produce higher
yields,
they also tend to be more sensitive to changes in prevailing interest
rates. They are therefore more volatile than shorter-term securities and
are subject
to greater market fluctuations as a result of changes in interest rates.
Fixed income securities are also subject to credit risk, which is the risk
that
the credit strength of an issuer of a fixed income security will weaken
and/or that the issuer will be unable to make timely principal and
interest payments,
and that the security may go into
default. |
■ |
High-Yield
Bonds.
High-yield, non-investment grade bonds (also known as “junk bonds”) are
low-quality, high-risk corporate bonds that generally offer
a high level of current income. These bonds are considered speculative
with respect to the issuer’s ability to pay interest and repay principal
by rating
organizations. For example, Moody’s, S&P Global, and Fitch, Inc.
currently rate them below Baa3, BBB- and BBB-, respectively. Please see
“Appendix
A: Ratings Definitions” below for an explanation of the ratings applied to
high-yield bonds. High-yield bonds are often issued as a result
of
corporate restructurings, such as leveraged buyouts, mergers,
acquisitions, or other similar events. They may also be issued by smaller,
less creditworthy
companies or by highly leveraged firms, which are generally less able to
make scheduled payments of interest and principal than more financially
stable firms. Because of their lower credit quality, high-yield bonds must
pay higher interest to compensate investors for the substantial
credit
risk they assume. Lower-rated securities are subject to certain risks that
may not be present with investments in higher-grade securities.
Investors
should consider carefully their ability to assume the risks associated
with lower-rated securities before investing in the Fund. The lower
rating
of certain high-yield corporate income securities reflects a greater
possibility that the financial condition of the issuer or adverse changes
in general
economic conditions may impair the ability of the issuer to pay income and
principal. Changes by rating agencies in their ratings of a fixed-income
security also may affect the value of these investments; however,
allocating investments in the Fund among securities of different
issuers
should reduce the risks of owning any such securities separately. The
prices of these high-yield securities tend to be less sensitive to
interest rate
changes than higher-rated investments, but more sensitive to adverse
economic changes or individual corporate developments. During economic
downturns, periods of rising interest rates, or when inflation or
deflation occurs, highly leveraged issuers may experience financial stress
that
adversely affects their ability to service principal and interest payment
obligations, to meet projected business goals or to obtain additional
financing,
and the markets for their securities may be more volatile. They may also
not have more traditional methods of financing available to them
and
may be unable to repay debt at maturity by refinancing. In addition,
lower-rated securities may experience substantial price declines when
there is an
expectation that issuers of such securities might experience financial
difficulties. As a result, the yields on lower-rated securities can rise
dramatically.
However, the higher yields of high-yield securities may not reflect the
value of the income stream that holders of such securities may
expect,
but rather the risk that such securities may lose a substantial portion of
their value as a result of their issuer’s financial restructuring or
default.
If an issuer defaults, the Fund may incur additional expenses to seek
recovery. Additionally, accruals of interest income for the Fund may
have
to be adjusted in the event of default. In the event of an issuer’s
default, the Fund may write off prior income accruals for that issuer,
resulting in a
reduction in the Fund’s current dividend payment. In the event of an in
court or out of court restructuring of high-yield bond in which the Fund
invests,
the Fund may acquire (and subsequently sell) equity securities or exercise
warrants that it receives. In addition, the market for high-yield
securities
generally is less robust and active than that for higher-rated securities,
which may limit the Fund’s ability to sell such securities at fair value
in
response to changes in the economy or financial markets and could make the
valuation of these portfolio securities more
difficult. |
Foreign
Debt Securities — The
Fund may invest in foreign fixed and floating rate income securities (including
developing market securities) , all or a portion of
which may be non-U.S. dollar denominated and which include: (a) debt obligations
issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities, including Brady Bonds; (b) debt obligations of supranational
entities; (c) debt obligations of the U.S. Government issued in non-dollar
securities; (d) debt obligations and other fixed-income securities of foreign
corporate issuers (both dollar and non-dollar denominated); and (e) debt
obligations of U.S. corporate issuers (both Eurodollar and non-dollar
denominated). Foreign debt securities may be structured as fixed-, variable- or
floating-rate obligations, or as zero-coupon, pay-in-kind and step-coupon
securities. There is no minimum rating criteria for the Fund’s investments
in such securities. The cost of servicing foreign debt will generally
be
adversely affected by rising international interest rates, because many external
debt obligations bear interest at rates which are adjusted based upon
international
interest rates. The Fund’s foreign debt securities may be held outside of the
United States in the primary market for the securities in the custody of
certain eligible foreign banks and trust companies, as permitted under the
Investment Company Act. Investing in the securities of foreign issuers
involves special considerations that are not typically associated with investing
in the securities of U.S. issuers and the risks similar to those of foreign
securities , such as the fact that foreign markets can be extremely volatile,
foreign debt securities may be less liquid than securities of U.S. issuers,
and transaction fees, custodial costs, currency conversion costs and other fees
are generally higher for foreign debt securities. See “Foreign Securities”
and “Fixed-Income Investments” for a further discussion of these and other
risks. In addition, developing markets are markets that have risks that
are different and higher than those in more developed markets. See “Foreign
Securities - Developing Market Securities” for a further discussion
of those risks. See “Eurodollar and Yankee CD Obligations” for a further
discussion of risks associated with those investments.
Foreign
Securities — The
Fund may invest in U.S. dollar-denominated and non-U.S. dollar-denominated
equity and debt securities of foreign issuers and foreign
branches of U.S. banks, including negotiable CDs, bankers’ acceptances, and
commercial paper. Foreign issuers are issuers organized and doing
business principally outside the United States and include corporations, banks,
non-U.S. governments, and quasi-governmental organizations. While
investments in foreign securities are intended to reduce risk by providing
further diversification, such investments involve sovereign and other
risks, in
addition to the credit and market risks normally associated with domestic
securities. These additional risks may include: the possibility of adverse
political and economic developments (including political or social instability,
nationalization, expropriation, or confiscatory taxation), the impact
of
economic, political, social, diplomatic or other conditions or events
(including, for example, military confrontations and actions, war, other
conflicts, terrorism,
and disease/virus outbreaks and epidemics); the potentially adverse effects of
unavailability of public information regarding issuers, less or less
reliable information about the securities and business operations of foreign
issuers, less governmental supervision and regulation of financial markets,
reduced liquidity of certain financial markets, and the lack of uniform
accounting, auditing, and financial reporting standards or the application
of standards that are different or less stringent than those applied in the
United States; different laws and customs governing securities purchases,
tracking and custody; the difficulty of predicting international trade patterns
and the possibility of exchange controls or limitations on the removal of
funds or assets; the impact of economic, political, social, diplomatic or other
conditions or events (including, for example, military confrontations
and actions, war, other conflicts, terrorism, and disease/virus outbreaks and
epidemics); and possibly more limited legal remedies and access to
the courts available to enforce the Fund’s rights as an investor. The prices of
such securities may be more volatile than those of domestic securities.
Equity securities may trade at price/earnings multiples higher than comparable
U.S. securities, and such levels may not be sustainable. The economies
of many of the countries in which the Fund may invest are not as developed as
the U.S. economy, and individual foreign economies can differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments position. Certain such economies may
rely heavily on particular industries or foreign capital and are more
vulnerable to diplomatic developments, the imposition of economic sanctions
against a particular country or countries, changes in international trading
patterns, trade barriers, and other protectionist or retaliatory
measures.
Foreign
stock markets are generally not as developed or efficient as, and may be more
volatile than, those in the United States. While growing in volume,
they usually have substantially less trading volume than U.S. markets. As a
result, foreign securities may trade with less frequency and in less
volume than
domestic securities and therefore may exhibit greater or lower price volatility.
The Fund may be exposed to risks in the process of clearing and
settling trades and the holding of securities by foreign banks, agents and
depositories. Governments or trade groups may compel local agents to
hold
securities in designated depositories that are not subject to independent
evaluation. Additional costs associated with an investment in foreign
securities
may include higher custodial fees than apply to domestic custody arrangements
and transaction costs of foreign currency conversions. Investments
in developing markets may be subject to greater custody risks than investments
in more developed markets. Foreign markets also have different
clearance and settlement procedures. In certain markets, there have been times
when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of
the assets of the Fund is not invested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems
could result in losses to the Fund due to subsequent declines in value of the
securities or, if the Fund has entered into a contract to sell the securities,
could result in possible liability to the purchaser. In addition, certain
foreign markets may institute share blocking, which is a practice under
which an
issuer’s securities are blocked from trading at the custodian or sub-custodian
level for a specified number of days before and, in certain instances,
after a shareholder meeting where a vote of shareholders takes place. The
blocking period can last up to several weeks. Share blocking may prevent the
Fund from buying or selling securities during this period, because during the
time shares are blocked, trades in such securities will not settle. It
may be difficult or impossible to lift blocking restrictions, with the
particular requirements varying widely by country. As a consequence of
these
restrictions, the sub-advisor, on behalf of the Fund, may elect not to vote
proxies in markets that require share blocking. Interest rates prevailing
in other
countries may affect the prices of foreign securities and exchange rates for
foreign currencies. Local factors, including the strength of the local
economy,
the demand for borrowing, the government’s fiscal and monetary policies, and the
international balance of payments, often affect interest rates in
other countries.
Economic
sanctions and other similar governmental actions could, among other things,
effectively restrict or eliminate the Fund’s ability to purchase or sell
foreign securities, and thus may prevent the Fund from making investments or
make the Fund’s investments in such securities less liquid or more difficult
to value. In addition, as a result of economic sanctions, the Fund may be forced
to sell or otherwise dispose of investments at inopportune times or
prices, which could result in losses to the Fund and increased transaction
costs. These conditions may be in place for a substantial period of time and
enacted with limited advance notice to the Fund. The risks posed by sanctions
against a particular foreign country, its nationals or industries or
businesses within the country may be heightened to the extent the Fund invests
significantly in the affected country or region or in issuers from the
affected
country that depend on global markets.
Investing
in foreign currency denominated securities involves not only the special risks
associated with investing in non-U.S. issuers, as described above, but also
the additional risks of adverse changes in foreign exchange rates and investment
or exchange control regulations, which could prevent cash from being
brought back to the United States. Additionally, dividends and interest payable
on foreign securities (and gains realized on disposition thereof)
may be subject to foreign taxes, including taxes withheld from those payments.
Some governments may impose a tax on purchases by foreign investors
of certain securities that trade in their country. Countries may amend or revise
their existing tax laws, regulations and/or procedures in the
future,
possibly with retroactive effect. Changes in or uncertainties regarding the
laws, regulations or procedures of a country could reduce the after-tax
profits of the Fund, directly or indirectly, including by reducing the after-tax
profits of companies located in such countries in which the Fund invests, or
result in unexpected tax liabilities for the Fund. Commissions on foreign
securities exchanges are often at fixed rates and are generally higher
than those
negotiated commissions on U.S. exchanges, although a sub-advisor endeavors to
achieve the most favorable net results on portfolio transactions.
The Fund
may also invest in foreign “market access” investments, such as participatory
notes, low-exercise price options or warrants, equity-linked notes, or
equity swaps. These investments may provide economic exposure to an issuer
without directly holding its securities. For example, market access
investments may be used where regulatory or exchange restrictions make it
difficult or undesirable for the Fund to invest directly in an issuer’s
common
stock. Use of market access investments may involve risks associated with
derivative investments, which are discussed in “Derivatives.” Market
access investments can be either exchange-traded or over-the-counter. Certain
market access investments can be subject to the credit risk of both the
underlying issuer and a counterparty. Holders of certain market access
investments might not have voting, dividend, or other rights associated
with
shareholders of the referenced securities. Holders of market access investments
might not have any right to make a claim against an issuer or counterparty
in the event of their bankruptcy or other restructuring. It may be more
difficult or time consuming to dispose of certain market access investments
than the referenced security.
The Fund
may be subject to the risk that its share price may be exposed to arbitrage
attempts by investors seeking to capitalize on differences in the values of
foreign securities trading on foreign exchanges that may close before the time
the Fund’s net asset value is determined. If such arbitrage attempts
are successful, the Fund’s net asset value might be diluted.
The use of
fair value pricing in certain circumstances may help deter such arbitrage
activities. The effect of such fair value pricing is that foreign securities
may not be priced on the basis of quotations from the primary foreign securities
market in which they are traded, but rather may be fair valued. As
such, fair value pricing is based on subjective judgment and it is possible that
fair value may differ materially from the value realized on a sale of a
foreign security. It is also possible that use of fair value pricing will limit
an investment adviser’s ability to implement the Fund’s investment strategy
(e.g., reducing the volatility of the Fund’s share price) or achieve its
investment objectives. The Fund’s
market timing and frequent trading policies
and procedures also are intended to help deter arbitrage
activities.
■ |
African
Securities. The
Fund may invest in securities of issuers in African countries that involve
heightened risks of political instability, civil war, armed
conflict, social instability as a result of religious, ethnic and/or
socio-economic unrest, authoritarian and/or military involvement in
governmental
decision-making, corruption, expropriation and/or nationalization of
assets, confiscatory taxation, genocidal warfare in certain countries,
and other risks. Many
under-developed African countries have developing capital markets that do
not contain the safeguards inherent in those of developed countries.
Risks of investing in such markets include heightened volatility, smaller
investor base, fewer brokerage firms, heightened counterparty risk,
inconsistent
and rapidly changing regulation, and the risk that trading on African
securities markets may be suspended altogether. Some markets of
the
countries in Africa in which the Fund may invest are in only the earliest
stages of development with less liquidity, fewer securities brokers, fewer
issuers
and more capital market restrictions than developed markets. There may be
less financial and other information publicly available to investors,
and
the information that is provided may lack integrity. Uniform accounting,
auditing and financial reporting standards may not exist, and the
governments
of certain countries may exercise substantial influence over many aspects
of the private sector. Investments in certain countries may require
the adoption of special procedures that may involve additional costs to
the Fund. Certain
African countries may unpredictably restrict or control the extent to
which foreign investors may invest in securities of issuers located in
those countries,
and governments may limit the repatriation of investment proceeds to
foreign countries. Regulation may require governmental approval or
special
licenses for foreign investors and limitations could be places on
investment practices regarding share-class ownership, shareholder rights
and title
to securities. A delay in obtaining a government approval or a license
would delay investments in a particular country, and, as a result, the
Fund may
not be able to invest in certain securities while approval is pending.
Additionally, taxes may be placed on foreign investors, and while portions
of these
taxes may be recoverable, any non-recovered portions will reduce the
income received from investments in such countries. Even in circumstances
where adequate laws and shareholder rights exist, it may not be possible
to obtain timely and equitable enforcement of the law. Many
countries in Africa are heavily dependent on international trade and are
subject to trade barriers, embargoes, exchange controls, currency
valuation
adjustments and other protectionist measures. A primary source of revenue
for these countries is the export of commodities including precious
minerals and metals, agricultural products and energy products. The
countries are, therefore, more vulnerable to changes in commodity
prices,
interest rates, or sectors affecting a particular commodity, such as
drought, floods, weather, embargoes, tariffs, and international economic,
political
and regulatory developments. Certain
issuers located in countries in Africa in which the Fund may invest may
operate in, or have dealings with, countries subject to sanctions
and/or
embargoes imposed by the U.S. government and the United Nations, and/or
countries identified by the U.S. government as state sponsors of
terrorism.
As a result, an issuer may sustain damage to its reputation if it is
identified as an issuer which operates in, or has dealings with, such
countries.
In addition, disease epidemics are more likely to affect trade practices
and international dealings with certain African countries. Political
instability and protests in North Africa and the Middle East have caused
significant disruptions to many industries. Political and social unrest
can
spread quickly through the region, and developments in one country can
influence the political events in neighboring countries. Protests may
turn
violent, and civil war and political reconstruction in certain countries
pose a risk to investments in the region. Continued political and social
unrest,
including ongoing warfare and terrorist activities in the Middle East and
Africa, may negatively affect the value of an investment in the Fund.
All
of these risks, among others, could adversely affect the Fund’s
investments in African countries. Any particular country in Africa may be
subject to the
foregoing risks in greater or lesser degrees relative to other countries
in Africa, and as a result, circumstances that may positively affect a
country in
Africa in which the Fund is not invested may not have a corresponding
positive effect on other countries in Africa in which the Fund is
invested. |
■ |
Developing
Market Investments. The
Fund may invest in developing market securities. Developing countries
include all countries in the world except
the countries that are classified by MSCI Inc. as “developed markets.”
Developing countries typically have lower incomes, less integrated
financial
markets, smaller economies, and less mature political systems compared to
developed countries. Developing countries are commonly located
in Africa, the Asia-Pacific region, Central or Eastern Europe, the Middle
East, Central America or the Caribbean, and South America.
|
|
Investments
in developing market country securities involve special risks. The
economies, markets and political structures of a number of the
developing
market countries in which the Fund can invest do not compare favorably
with the United States and other mature economies in terms of wealth
and stability. Therefore, investments in these countries may be riskier,
and will be subject to erratic and abrupt price movements. These risks
are
discussed below. Economies. The
economies of developing market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of
gross
domestic product, rate of inflation, currency depreciation, reliable
access to capital, capital reinvestment, resource self-sufficiency and
balance of
payments and trade difficulties. Some economies are less well developed
and less diverse (for example, Latin America, Eastern Europe and certain
Asian
countries), and may be heavily dependent upon international trade, as well
as the economic conditions in the countries with which they trade.
Such
economies accordingly have been, and may continue to be, adversely
affected by trade barriers, exchange controls, managed adjustments in
relative
currency values and other protectionist or retaliatory measures imposed or
negotiated by the countries with which they trade. Similarly, many
of
these countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations,
large amounts of national and external debt, severe recession, and extreme
poverty and unemployment. Developing market countries may
also experience a higher level of exposure and vulnerability to the
adverse effects of climate change. This may be attributed to both the
geographic
location of developing market countries and/or a country’s lack of access
to technology or resources to adjust and adapt to its effects. An
increased
occurrence and severity of natural disasters and extreme weather events
such as droughts and decreased crop yields, heat waves, flooding
and
rising sea levels, and increased spread of disease, could cause harmful
effects to the performance of affected economies. The
economies of developing market countries may be based predominately on
only a few industries or may be dependent on revenues from participating
commodities or on international aid or developmental assistance.
Developing market economies may develop unevenly or may never fully
develop. Investments in countries that have recently begun moving away
from central planning and state-owned industries toward free markets,
such as the Eastern European, Russian or Chinese economies, should be
regarded as speculative. Governments. Developing markets may have
uncertain national policies and social, political and economic
instability. While government involvement in the private sector varies in
degree among
developing market countries, such involvement may in some cases include
government ownership of companies in certain sectors, wage and
price
controls or imposition of trade barriers and other protectionist measures.
In the past, governments of such nations have expropriated substantial
amounts of private property, and most claims of the property owners have
never been fully settled. There is no assurance that such expropriations
will not reoccur. In addition, there is no guarantee that some future
economic or political crisis will not lead to price controls, forced
mergers
of companies, confiscatory taxation or creation of government monopolies
to the possible detriment of the Fund’s investments. In such event,
it is possible that the Fund could lose the entire value of its
investments in the affected markets. Developing
market countries may have national policies that limit the Fund’s
investment opportunities such as restrictions on investment in issuers or
industries
deemed sensitive to national interests. Repatriation of investment income,
capital and the proceeds of sales by foreign investors may require
governmental registration and/or approval in some developing market
countries. In addition, if the Fund invests in a market where restrictions
are considered acceptable, a country could impose new or additional
repatriation restrictions after investment that are unacceptable. This
might
require, among other things, applying to the appropriate authorities for a
waiver of the restrictions or engaging in transactions in other
markets
designed to offset the risks of decline in that country. Further, some
attractive securities may not be available, or may require a premium for
purchase,
due to foreign shareholders already holding the maximum amount legally
permissible. In addition to withholding taxes on investment income,
some countries with developing capital markets may impose differential
capital gain taxes on foreign investors. An
issuer or governmental authority that controls the repayment of a
developing market country’s debt may not be able or willing to repay the
principal
and/or interest when due in accordance with the terms of such debt. A
debtor’s willingness or ability to repay principal and interest due in a
timely
manner may be affected by, among other factors, its cash flow situation,
and, in the case of a government debtor, the extent of its foreign
reserves,
the availability of sufficient foreign exchange on the date a payment is
due, the relative size of the debt service burden to the economy as a
whole
and the political constraints to which a government debtor may be subject.
Government debtors may default on their debt and may also be dependent
on expected disbursements from foreign governments, multilateral agencies
and others abroad to reduce principal and interest arrearages
on their debt. Holders of government debt may be requested to participate
in the rescheduling of such debt and to extend further loans to
government debtors. There may be limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the
courts
of the defaulting party itself, and the ability of the holder of foreign
government fixed-income securities to obtain recourse may be subject to
the
political climate in the relevant country. In addition, no assurance can
be given that the holders of commercial bank debt will not contest
payments
to the holders of other foreign government debt obligations in the event
of default under their commercial bank loan agreements. Capital
Markets. The
capital markets in developing market countries may be underdeveloped. They
may have low or non-existent trading volume, resulting
in a lack of liquidity and increased volatility in prices for such
securities, as compared to securities from more developed capital markets.
Developing
market securities may be substantially less liquid and more volatile than
those of mature markets, and securities may be held by a limited
number
of investors. This may adversely affect the timing and pricing of the
Fund’s acquisition or disposal of securities. There
may be less publicly available information about issuers in developing
market countries than would be available in more developed capital
markets,
and such issuers may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which
U.S. companies are subject. In certain countries with developing capital
markets, reporting standards vary widely. As a result, traditional
investment
measurements used in the U.S., may not be applicable. Investing in certain
countries with developing capital markets may entail purchasing
securities issued by or on behalf of entities that are insolvent,
bankrupt, in default or otherwise engaged in an attempt to reorganize or
reschedule
their obligations, and in entities that have little or no proven credit
rating or credit history. In any such case, the issuer’s poor or
deteriorating
financial condition may increase the likelihood that the investing Fund
will experience losses or diminution in available gains due to
bankruptcy,
insolvency or fraud. There may also be custodial restrictions or other
non-U.S. or U.S. governmental laws or restrictions applicable to
investments
in developing market countries. Practices
in relation to the clearing or settlement of securities transactions in
developing markets involve higher risks than those in developed
markets,
in part because the Fund may use brokers and counterparties that are less
well capitalized, and custody and registration of assets in some
countries
may be unreliable. Supervisory authorities also may be unable to apply
standards comparable to those in developed markets. Thus, there
may
be risks that settlement may be delayed and that cash or securities
belonging to the Fund may be in jeopardy because of failures of or defects
in |
|
the
systems. In particular, market practice may require that payment be made
before receipt of the security being purchased or that delivery of a
security
be made before payment is received. In such cases, default by a broker or
bank (the “counterparty”) through whom the transaction is effected
might cause the Fund to suffer a loss. There can be no certainty that the
Fund will be successful in eliminating counterparty risk, particularly
as
counterparties operating in developing market countries frequently lack
the substance or financial resources of those in developed countries.
There
may also be a danger that, because of uncertainties in the operation of
settlement systems in individual markets, competing claims may arise
with
respect to securities held by or to be transferred to the
Fund. |
■ |
Eastern
European and Russian Securities. In
addition to the risks listed under “Foreign Securities - Developing Market
Investments, “ investing in Russian
and other Eastern European issuers presents additional risks. Investing in
the securities of Eastern European and Russian issuers is highly
speculative
and involves risks not usually associated with investing in the more
developed markets of Western Europe, the U.S. or other developed
countries.
Political and economic reforms have not yet established a definite trend
away from centrally planned economies and state-owned industries.
Investments in Eastern European countries may involve risks of
nationalization, expropriation, and confiscatory taxation. Many Eastern
European
countries continue to move towards market economies at different paces
with different characteristics. Most Eastern European markets suffer
from thin trading activity and less reliable investor protections.
Additionally, because of less stringent auditing and financial reporting
standards
as compared to U.S. companies, there may be little reliable corporate
information available to investors. As a result, it may be difficult to
assess
the value or prospects of an investment in Eastern European and Russian
companies. Further, information and transaction costs, differential
taxes,
and sometimes political or transfer risk give a comparative advantage to
the domestic investor rather than the foreign investor. In addition,
these
markets are particularly sensitive to social, political, economic, and
currency events in Western Europe and Russia and may suffer heavy losses
as a
result of their trading and investment links to these economies and
currencies. Additionally, Russia may continue to attempt to assert its
influence
in the region through economic or even military measures, as evidenced by
its invasion of Ukraine in February 2022 and the ongoing conflict
in that region. The
United States and the EU historically have imposed economic sanctions on
certain Russian individuals and companies, including certain financial
institutions,
and have limited certain exports and imports to and from Russia.
Sanctions, or even the threat of further sanctions, may result in the
decline
of the value and liquidity of Russian securities, a weakening of the ruble
or other adverse consequences to the Russian economy. These sanctions
could also result in the immediate freeze of Russian securities, either by
issuer, sector or the Russian markets as a whole, impairing the
ability
of the Fund to buy, sell, receive or deliver those securities. In such
circumstances, the Fund may be forced to liquidate non-restricted assets
in order
to satisfy shareholder redemptions. Such liquidation of Fund assets could
result in the Fund receiving substantially lower prices for its
securities. Sanctions
could also result in Russia taking counter measures or retaliatory actions
which may further impair the value and liquidity of Russian securities.
As a result, the Fund’s performance may be adversely affected. The
potential impact of sanctions imposed in response to Russia’s invasion
of
Ukraine in February 2022 are discussed below. In
some of the countries of Eastern Europe, there is no stock exchange or
formal market for securities. Such countries may also have government
exchange
controls, currencies with no recognizable market value relative to the
established currencies of Western market economies, little or no
experience
in trading in securities, no accounting or financial reporting standards,
a lack of banking and securities infrastructure to handle such
trading
and a legal tradition that does not recognize rights in private property.
Credit and debt issues and other economic difficulties affecting
Western
Europe and its financial institutions can negatively affect Eastern
European countries. Eastern
European economies may also be particularly susceptible to the volatility
of the international credit market due to their reliance on bank
related
inflows of foreign capital, and their continued dependence on the Western
European zone for credit and trade. Accordingly, the European crisis
may present serious risks for Eastern European economies, which may have a
negative effect on the Fund’s investments in the region. Compared
to most national stock markets, the Russian securities market suffers from
a variety of problems not encountered in more developed markets.
There is little long-term historical data on the Russian securities market
because it is relatively new and a substantial proportion of securities
transactions
in Russia are privately negotiated outside of stock exchanges. The
inexperience of the Russian securities market and the limited volume
of
trading in securities in the market may make obtaining accurate prices on
portfolio securities from independent sources more difficult than in
more
developed markets. Poor accounting standards, inept management, pervasive
corruption, insider trading and crime, and inadequate regulatory
protection
for the rights of all investors all may pose additional risks, including
to foreign investors. Because
of the relatively recent formation of the Russian securities market as
well as the underdeveloped state of the banking and telecommunications
systems, settlement, clearing and registration of securities transactions
are subject to significant risks not normally associated with
securities transactions in the United States and other more developed
markets. Prior to 2013, there was no central registration system for
equity share
registration in Russia and registration was carried out by either the
issuers themselves or by registrars located throughout Russia. Such
registrars
were not necessarily subject to effective state supervision nor were they
licensed with any governmental entity, thereby increasing the risk
that
the Fund could lose ownership of its securities through fraud, negligence,
or even mere oversight. With the implementation of the National
Settlement
Depository (“NSD”) in Russia as a recognized central securities
depository, title to Russian equities is now based on the records of the
NSD
and not the registrars. Although the implementation of the NSD is
generally expected to decrease the risk of loss in connection with
recording and
transferring title to securities, issues resulting in loss still might
occur. In addition, issuers and registrars are still prominent in the
validation and approval
of documentation requirements for corporate action processing in Russia.
Because the documentation requirements and approval criteria vary
between registrars and/or issuers, there remain unclear and inconsistent
market standards in the Russian market with respect to the completion
and
submission of corporate action elections. Significant delays or problems
may occur in registering the transfer of securities, which could cause the
Fund
to incur losses due to a counterparty’s failure to pay for securities the
Fund has delivered or the Fund’s inability to complete its contractual
obligations
because of theft or other reasons. To the extent that the Fund suffers a
loss relating to title or corporate actions relating to its portfolio
securities,
it may be difficult for the Fund to enforce its rights or otherwise remedy
the loss. In addition, there is the risk that the Russian tax system
will
not be reformed to prevent inconsistent, retroactive, and/or exorbitant
taxation, or, in the alternative, the risk that a reformed tax system may
result
in the inconsistent and unpredictable enforcement of the new tax
laws. |
|
The
Russian economy is heavily dependent upon the export of a range of
commodities including most industrial metals, forestry products, oil, and
gas.
Accordingly, it is strongly affected by international commodity prices and
is particularly vulnerable to any weakening in global demand for these
products.
Decreases in the price of commodities, which have in the past pushed the
whole economy into recession, have demonstrated the
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sensitivity
of the Russian economy to such price volatility. Russia continues to face
significant economic challenges, including weak levels of investment
and a sluggish recovery in external demand. Over the long-term, Russia
faces challenges including a shrinking workforce, a high level of
corruption,
and difficulty in accessing capital for smaller, non-energy companies and
poor infrastructure in need of large
investments. |
|
Foreign
investors also face a high degree of currency risk when investing in
Russian securities and a lack of available currency hedging instruments.
In the
past, the Russian ruble has been subject to significant devaluation
pressure as a result of the imposition of sanctions by the United States
and the European
Union and the decline in commodity prices and the value of Russian
exports. Although the Russian Central Bank has spent a significant
amount
of its foreign exchange reserves in an attempt to maintain the ruble’s
value, there is a risk of significant future devaluation. In addition,
there is
the risk that the Russian government may impose capital controls on
foreign portfolio investments in the event of extreme financial or
political crisis.
Such capital controls may prevent the sale of a portfolio of foreign
assets and the repatriation of investment income and capital. These risks
may
cause flight from the ruble into U.S. dollars and other
currencies. |
|
In
February 2022, Russia launched a large-scale invasion of Ukraine. The
outbreak of hostilities between the two countries could result in more
widespread
conflict and could have a severe adverse effect on the regional and the
global financial markets and economies (including in Europe and
the
U.S.), companies in other countries (including those that have done
business in Russia), and various sectors, industries and markets for
securities and
commodities. Actual and threatened responses to such military action have
impacted, and may continue to impact, the markets for certain Russian
commodities, such as oil and natural gas. In addition, tensions have
increased between Russia’s neighbors and Western countries, which may
adversely
affect the region’s economic growth. Moreover, disruptions caused by
Russian military action or other actions (including cyberattacks and
espionage)
or resulting actual and threatened responses to such activity, including
purchasing and financing restrictions, boycotts or changes in consumer
or purchaser preferences, sanctions, tariffs or cyberattacks on the
Russian government, Russian companies or Russian individuals, including
politicians,
may impact Russia’s economy and Russian issuers of securities in which the
Fund invests. The extent and duration of the military action, the
resulting sanctions or other punitive actions, and the resulting future
market disruptions, are impossible to predict but have been and could
continue
to be significant. Russia’s
actions have induced the United States and other countries (collectively,
the “Sanctioning Bodies”) to impose economic sanctions on Russia,
Russian
individuals, and Russian corporate and banking entities, which can consist
of prohibiting certain securities trades and private transactions in
the
energy sector, asset freezes and prohibition of all business with such
persons and entities. The sanctions have included a commitment by certain
countries
and the EU to remove selected Russian banks from the Society for Worldwide
Interbank Financial Telecommunications, commonly called “SWIFT,”
the electronic network that connects banks globally, and the imposition of
restrictive measures to prevent the Russian Central Bank from undermining
the impact of the sanctions. A number of large corporations and U.S.
states have also divested or announced plans to divest interests
or
otherwise curtail business dealings with certain Russian businesses. The
Sanctioning Bodies may impose additional sanctions in the future. Such
sanctions,
or even the threat of further sanctions, may impact many sectors of the
Russian economy and related markets. Current and potential future
sanctions, or the threat of sanctions, and Russia’s response, as discussed
below, may cause any of the following: (a) a decline in the value and
liquidity
of Russian securities; (b) a weakening or devaluation of the ruble; (c) a
downgrade in Russia’s credit rating and/or its default on sovereign
obligations;
(d) increased volatility of Russian securities; (e) the immediate freeze
of Russian securities and/or funds invested in prohibited assets; or (f)
additional
counter measures or retaliatory actions. In
response to the sanctions, the Russian Central Bank raised its interest
rates, suspended the sales of Russian securities by non-residents of
Russia on its
local stock exchange, prohibited the repatriation of Russian assets by
foreign investors, and barred Russian issuers from participating in
depositary receipt
programs. Russia may take additional countermeasures or retaliatory
actions in the future, including, for example, restricting gas exports to
other
countries, seizing U.S. and European residents’ assets, imposing capital
controls to restrict movements of capital entering and existing the
country,
or undertaking or provoking other military conflict elsewhere in
Europe. The
Russian invasion, sanctions in response, and any related events may
adversely and significantly affect the performance of the Fund and its
ability to
achieve its investment objectives by restricting or prohibiting the Fund’s
ability to gain exposure to Russian issuers or other affected issuers. To
the extent
that the Fund has direct exposure to Russian or Eastern European issuers,
these events may also make it difficult for the Fund to sell, receive or
deliver
securities or assets to realize the value of that
exposure. |
■ |
European
Securities. The
Fund’s performance may be affected by political, social and economic
conditions in Europe, such as growth of economic output
(the gross national product), the rate of inflation, the rate at which
capital is reinvested into European economies, the success of governmental
actions to reduce budget deficits, the resource self-sufficiency of
European countries and conflict between European countries. Most
developed
countries in Western Europe are members of the European Union (“EU”), and
many are also members of the European Economic and Monetary
Union (“EMU” or “Eurozone”). The EMU is comprised of EU members that have
adopted the euro currency. Member states relinquish control
of their own monetary policies. The EMU requires Eurozone countries to
comply with restrictions on interest rates, deficits, debt levels, and
inflation
rates; fiscal and monetary controls; and other factors, each of which may
significantly impact every European country and their economic
partners,
including those countries that are not members of the EMU. Changes in
imports or exports, changes in governmental or EU regulations on
trade,
changes in the exchange rate of the euro (the common currency of the EU),
the threat of default or actual default by one or more EU member
states
on its sovereign debt, and/or an economic recession in one or more EU
member states may have a significant adverse effect on the economies
of
other EU member states and their trading partners. The
European financial markets have experienced and may continue to experience
volatility and adverse trends due to concerns relating to economic
downturns;
rising government debt levels and the possible default on government debt;
national unemployment in several European countries, including,
but not limited to, Austria, Belgium, Cyprus, France, Greece, Ireland,
Italy, Portugal, Spain and Ukraine; and, most recently, the COVID-19
pandemic
and the Russian invasion of Ukraine. These events have adversely affected
the exchange rate of the euro and may continue to significantly
affect
European countries. Responses to financial problems by European
governments, central banks, and others, including austerity measures and
other
reforms, may not produce the desired results, may result in social unrest
and may limit future growth and economic recovery or may have unintended
consequences. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. The impact of these actions, especially
if they occur in a disorderly fashion, could be significant and
far-reaching. Many
EU nations are susceptible to economic risks associated with high levels
of debt. Non-governmental issuers, and even certain governments,
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have
defaulted on, or been forced to restructure, their debts, and other
issuers have faced difficulties obtaining credit or refinancing existing
obligations.
A default or debt restructuring by any European country could adversely
impact holders of that country’s debt and sellers of credit default
swaps linked to that country’s creditworthiness, which may be located in
other countries. Such a default or debt restructuring could affect
exposures
to other EU countries and their companies as well. Further defaults on, or
restructurings of, the debt of governments or other entities could
have additional adverse effects on economies, financial markets and asset
valuations around the world. In
addition, issuers have faced difficulties obtaining credit or refinancing
existing obligations; financial institutions have in many cases required
government
or central bank support, have needed to raise capital and/or have been
impaired in their ability to extend credit; and financial markets in
Europe
and elsewhere have experienced extreme volatility and declines in asset
values and liquidity. Furthermore, certain EU countries have had to
accept
assistance from supranational agencies such as the International Monetary
Fund, the European Stability Mechanism or others. The European
Central
Bank has also intervened to purchase Eurozone debt in an attempt to
stabilize markets and reduce borrowing costs. There can be no assurance
that any creditors or supranational agencies will continue to intervene or
provide further assistance, and markets may react adversely to
any
expected reduction in the financial support provided by these
creditors. Certain
European countries have experienced negative interest rates on certain
fixed-income instruments. A negative interest rate is an unconventional
central bank monetary policy tool where nominal target interest rates are
set with a negative value (i.e., below zero percent) intended
to help create self-sustaining growth in the local economy. Negative
interest rates may result in heightened market volatility and may
detract
from the Fund’s performance to the extent the Fund is exposed to such
interest rates. Secessionist
movements, such as the Catalan separatist movement in Spain, the
independence movement in Scotland, and the Flemish movement in
Belgium,
as well as government or other responses to such movements, may create
instability and uncertainty in the region. In addition, the national
politics
of European countries have been unpredictable and subject to influence by
disruptive political groups and ideologies. European governments
may
be subject to change and such countries may experience social and
political unrest. Unanticipated or sudden political or social developments
may
result in sudden and significant investment losses. The occurrence of
terrorist incidents throughout Europe also could impact financial markets.
The
impact of these or other events is not clear but could be significant and
far-reaching and materially impact the value and liquidity of the Fund’s
investments. Russia’s
war with Ukraine has negatively impacted European economic activity. The
effects on the economies of European countries of the Russia/Ukraine
war and Russia’s response to sanctions imposed by the U.S. and other
countries are impossible to predict, but have been and could continue
to be
significant. For example, exports in Eastern Europe have been disrupted
for certain key commodities, pushing commodity prices to record
highs,
and energy prices in Europe have increased
significantly. |
■ |
Latin
American Securities. Investments
in securities of Latin American issuers involve risks that are specific to
Latin America, including certain legal, regulatory,
political and economic risks. Most Latin American countries have
experienced, at one time or another, severe and persistent levels of
inflation,
including, in some cases, hyperinflation, as well as high interest rates.
This has at time led to extreme government measures to keep inflation
in check, and a generally debilitating effect on economic growth. Although
inflation in many countries has lessened, there is no guarantee
it
will remain at lower levels. Political
Instability. Certain Latin American countries have historically suffered
from social, political, and economic instability and volatility, currency
devaluations,
government defaults and high unemployment rates. For investors, this has
meant additional risk caused by periods of regional conflict, political
corruption, totalitarianism, protectionist measures, nationalization,
hyperinflation, debt crises, sudden and large currency devaluation, and
intervention
by the military in civilian and economic spheres. However, in some Latin
American countries, a move to sustainable democracy and a more
mature and accountable political environment is under way. Domestic
economies have been deregulated, privatization of state-owned companies
is almost completed and foreign trade restrictions have been relaxed.
Nonetheless, there can be no guarantee that such trends will continue
or that the desired outcomes of these developments will be successful. In
addition, to the extent that events such as those listed above
continue
in the future, they could reverse favorable trends toward market and
economic reform, privatization, and removal of trade barriers, and
result
in significant disruption in securities markets in the region. Investors
in the region continue to face a number of potential risks. Governments
of
many Latin American countries have exercised and continue to exercise
substantial influence over many aspects of the private sector.
Governmental
actions in the future could have a significant effect on economic
conditions in Latin American countries, which could affect the
companies
in which the Fund invests and, therefore, the value of Fund shares.
Additionally, an investment in Latin America is subject to certain risks
stemming
from political and economic corruption, which may negatively affect the
country or the reputation of companies domiciled in a certain country.
For certain countries in Latin America, political risks have created
significant uncertainty in the financial markets and may further limit the
economic
recovery in the region. Dependence
on Exports and Economic Risk. Certain Latin American countries depend
heavily on exports to the U.S., investments from a small number
of countries, and trading relationships with key trading partners,
including the U.S., Europe, Asia and other Latin American countries.
Accordingly,
these countries may be sensitive to fluctuations in demand, protectionist
trade policies, exchange rates and changes in market conditions
associated with those countries. Additionally, in Mexico, the long-term
implications of the United States-Mexico-Canada Agreement, the
2020
successor to NAFTA, are yet to be determined. This uncertainty may have an
adverse impact on Mexico’s economic outlook and the value of Fund
investments in Mexico. |
|
The
economic growth of most Latin American countries is highly dependent on
commodity exports and the economies of certain Latin American countries,
particularly Mexico and Venezuela, are highly dependent on oil exports. As
a result, these economies are particularly susceptible to fluctuations
in the price of oil and other commodities and currency
fluctuations. |
|
The
prices of oil and other commodities experienced volatility driven, in
part, by a continued slowdown of growth in China and the effects of the
COVID-19
pandemic. If growth in China remains slow, or if global economic
conditions worsen, prices for Latin American commodities may experience
increased volatility and demand may continue to decrease. Although certain
of these countries have recently shown signs of recovery, such
recovery, if sustained, may be gradual. In addition, prolonged economic
difficulties may have negative effects on the transition to a more stable
democracy
in some Latin American countries. |
|
Trade
Agreements. Certain Latin American countries have entered into regional
trade agreements that are designed to, among other things, reduce
trade
barriers between countries, increase competition among companies, and
reduce government subsidies in certain industries. No assurance can
be
given that these changes will be successful in the long term, or that
these changes will result in the economic stability intended. There is a
possibility
that these trade arrangements will not be fully implemented, or will be
partially or completely unwound. It is also possible that a significant
participant could choose to abandon a trade agreement, which could
diminish its credibility and influence. Any of these occurrences could
have
adverse effects on the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of participants’
national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of
confidence
in the Latin American markets, an undermining of Latin American economic
stability, the collapse or slowdown of the drive towards Latin
American
economic unity, and/or reversion of the attempts to lower government debt
and inflation rates that were introduced in anticipation of such
trade agreements. Such developments could have an adverse impact on the
Fund’s investments in Latin America generally or in specific countries
participating in such trade agreements. |
|
Sovereign
Debt. Latin American economies generally are heavily dependent upon
foreign credit and loans, and may be more vulnerable to diplomatic
developments,
the imposition of economic sanctions against a particular country or
countries, changes in international trading patterns, trade barriers,
and other protectionist or retaliatory measures. In addition to risk of
default, debt repayment may be restructured or rescheduled, which
may
impair economic activity. Moreover, the debt may be susceptible to high
interest rates and may reach levels that would adversely affect Latin
American
economies. In addition, certain Latin American economies have been
influenced by changing supply and demand for a particular currency,
monetary
policies of governments (including exchange control programs, restrictions
on local exchanges or markets and limitations on foreign investment
in a country or on investment by residents of a country in other
countries), and currency devaluations and revaluations. A relatively small
number
of Latin American companies represents a large portion of Latin America’s
total market and thus may be more sensitive to adverse political
or
economic circumstances and market movements. A number of Latin American
countries are among the largest debtors of developing countries
and
have a history of reliance on foreign debt and default. The majority of
the region’s economies have become dependent upon foreign credit and
loans
from external sources to fund government economic plans. Historically,
these plans have frequently resulted in little benefit accruing to the
economy.
Most countries have been forced to restructure their loans or risk default
on their debt obligations. In addition, interest on the debt is
subject
to market conditions and may reach levels that would impair economic
activity and create a difficult and costly environment for borrowers.
Accordingly,
these governments may be forced to reschedule or freeze their debt
repayment, which could negatively affect local markets. While the
region
has recently had mixed levels of economic growth, recovery from past
economic downturns in Latin America has historically been slow, and
such
growth, if sustained, may be gradual. The ongoing effects of the European
debt crisis, the effects of the COVID-19 pandemic, and persistent
low
growth in the global economy may reduce demand for exports from Latin
America and limit the availability of foreign credit for some countries
in
the region. As a result, the Fund’s investments in Latin American
securities could be harmed if economic recovery in the region is
limited. |
■ |
Middle
East Securities.
Many Middle Eastern countries are prone to political turbulence, and the
political and legal systems in such countries may have
an adverse impact on the Fund. Certain economies in the Middle East are
highly reliant on income from the exports of primary commodities,
such
as oil, or trade with countries involved in the sale of oil, and their
economies are therefore vulnerable to changes in the market for oil and
foreign
currency values. As global demand for oil fluctuates, many Middle Eastern
economies may be significantly impacted. Additionally, the economies
of many Middle Eastern countries are largely dependent on, and linked
together by, certain commodities (such as gold, silver, copper,
diamonds,
and oil). As a result, Middle Eastern economies are vulnerable to changes
in commodity prices, and fluctuations in demand for these commodities
could significantly impact economies in these regions. A downturn in one
country’s economy could have a disproportionally large effect on
others in the region. Many
Middle Eastern governments have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain
cases,
a Middle Eastern country’s government may own or control many companies,
including some of the largest companies in the country. Accordingly,
governmental actions in the future could have a significant effect on
economic conditions in Middle Eastern countries, and a country’s
government
may act in a detrimental or hostile manner toward private enterprise or
foreign investment. This could affect private sector companies
and
the Fund, as well as the value of securities in the Fund’s
portfolio. Certain
Middle Eastern markets are in the earliest stages of development and may
be considered “developing markets.” Financial markets in the Middle
East generally are less liquid and more volatile than other markets,
including markets in developed and developing economies. As a result,
there
may be a high concentration of market capitalization and trading volume in
a small number of issuers representing a limited number of industries,
as well as a high concentration of investors and financial intermediaries.
Brokers in Middle Eastern countries typically are fewer in number
and
less well-capitalized than brokers in the United States. Since the Fund
may need to effect securities transactions through these brokers, the Fund
is
subject to the risk that these brokers will not be able to fulfill their
obligations to the Fund (i.e., counterparty risk). This risk is magnified
to the extent
that the Fund effects securities transactions through a single broker or a
small number of brokers. In addition, securities may have limited
marketability
and be subject to erratic price movements. The
legal systems in certain Middle Eastern countries also may have an adverse
impact on the Fund. For example, the potential liability of a shareholder
in a U.S. corporation with respect to acts of the corporation generally is
limited to the amount of the shareholder’s investment. However,
the
concept of limited liability is less clear in certain Middle Eastern
countries. The Fund therefore may be liable in certain Middle Eastern
countries for
the acts of a corporation in which it invests for an amount greater than
its actual investment in that corporation. Similarly, the rights of
investors in
Middle Eastern issuers may be more limited than those of shareholders of a
U.S. corporation. It may be difficult or impossible to obtain or enforce
a
legal judgment in a Middle Eastern country. Some Middle Eastern countries
prohibit or impose substantial restrictions on investments in their
capital
markets, particularly their equity markets, by foreign entities such as
the Fund. For example, certain countries may require governmental
approval
prior to investment by foreign persons or limit the amount of investment
by foreign persons in a particular issuer. Certain Middle Eastern
countries
may also limit the investment by foreign persons to a specific class of
securities of an issuer that may have less advantageous terms (including
price) than securities of the issuer available for purchase by nationals
of the relevant Middle Eastern country. The
manner in which foreign investors may invest in issuers in certain Middle
Eastern countries, as well as limitations on those investments, may have
an
adverse impact on the operations of the Fund. For example, in certain of
these countries, the Fund may be required to invest initially through a
local
broker or other entity and then have the shares that were purchased
re-registered in the name of the Fund. Re-registration in some instances
|
|
may
not be possible on a timely basis. This may result in a delay during which
the Fund may be denied certain of its rights as an investor, including
rights
as to dividends or to be made aware of certain corporate actions. There
also may be instances where the Fund places a purchase order but is
subsequently
informed, at the time of re-registration, that the permissible allocation
of the investment to foreign investors has been filled and, consequently,
the Fund may not be able to invest in the relevant
company. Substantial
limitations may exist in certain Middle Eastern countries with respect to
the Fund’s ability to repatriate investment income or capital gains.
The
Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation of capital, as well as by
the
application to the Fund of any restrictions on investment. Certain Middle
Eastern countries may be heavily dependent upon international trade
and,
consequently, have been and may continue to be negatively affected by
trade barriers, exchange controls, managed adjustments in relative
currency
values and other protectionist measures imposed or negotiated by the
countries with which they trade. These countries also have been and
may
continue to be adversely impacted by economic conditions in the countries
with which they trade. In addition, certain issuers located in Middle
Eastern
countries in which the Fund invests may operate in, or have dealings with,
countries subject to sanctions and/or embargoes imposed by the
U.S.
government and the United Nations, and/or countries identified by the U.S.
government as state sponsors of terrorism. As a result, an issuer
may
sustain damage to its reputation if it is identified as an issuer which
operates in, or has dealings with, such countries. The Fund, as an
investor in such
issuers, will be indirectly subject to those risks. Certain
Middle Eastern countries have strained relations with other Middle Eastern
countries due to territorial and sovereignty disputes, historical
animosities,
international alliances, religious tensions or defense concerns, which may
periodically become violent and may adversely affect the economies
of these countries. Certain Middle Eastern countries experience
significant unemployment as well as widespread underemployment.
Many
Middle Eastern countries periodically have experienced political, economic
and social unrest as protestors have called for widespread reform.
Some
of these protests have resulted in a governmental regime change, internal
conflict or civil war. In some instances where pro-democracy movements
successfully toppled regimes, the stability of successor regimes has at
times proven weak, as evidenced, for example, in Egypt. In other
instances,
these changes have devolved into armed conflict involving local factions,
regional allies or international forces, and even protracted civil
wars.
If further regime change were to occur, internal conflicts were to
intensify, or a civil war were to continue in any of these countries, such
instability
could adversely affect the economies of these Middle Eastern countries in
which the Fund invests and could decrease the value of the Fund’s
investments. Middle
Eastern economies may be subject to acts of terrorism, political strife,
religious, ethnic or socioeconomic unrest, conflict and violence and
sudden
outbreaks of hostilities with neighboring countries. There has been an
increase in recruitment efforts and an aggressive push for territorial
control
by terrorist groups in the region, which has led to an outbreak of warfare
and hostilities. Such hostilities may continue into the future or may
escalate
at any time due to ethnic, racial, political, religious or ideological
tensions between groups in the region or foreign intervention or lack of
intervention,
among other factors. These developments could adversely affect the
Fund. |
■ |
Pacific
Basin Securities.
Many Asian countries may be subject to a greater degree of social,
political and economic instability than is the case in the U.S.
and Western European countries. Such instability may result from, among
other things, (i) authoritarian governments or military involvement in
political
and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with
demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v)
ethnic,
religious and racial disaffection. In addition, the Asia-Pacific
geographic region has historically been prone to natural disasters. The
occurrence of a
natural disaster in the region, including the subsequent recovery, could
negatively impact the economy of any country in the region. The
existence
of overburdened infrastructure and obsolete financial systems also
presents risks in certain Asian countries, as do environmental
problems. The
economies of most of the Asian countries are heavily dependent on
international trade and are accordingly affected by protective trade
barriers and
the economic conditions of their trading partners, principally, the U.S.,
Japan, China and the EU. The enactment by the U.S. or other principal
trading
partners of protectionist trade legislation, reduction of foreign
investment in the local economies and general declines in the
international securities
markets could have a significant adverse effect upon the securities
markets of the Asian countries. The economies of certain Asian
countries
may depend to a significant degree upon only a few industries and/or
exports of primary commodities and, therefore, are vulnerable to
changes
in commodity prices that, in turn, may be affected by a variety of
factors. In addition, certain developing Asian countries, such as the
Philippines
and India, are especially large debtors to commercial banks and foreign
governments. Many of the Pacific Basin economies may be intertwined,
so an economic downturn in one country may result in, or be accompanied
by, an economic downturn in other countries in the region. Furthermore,
many of the Pacific Basin economies are characterized by high inflation,
underdeveloped financial services sectors, heavy reliance on international
trade, frequent currency fluctuations, devaluations, or restrictions,
political and social instability, and less efficient
markets. The
securities markets in Asia are substantially smaller, less liquid and more
volatile than the major securities markets in the U.S., and some of the
stock
exchanges in the region are in the early stages of their development, as
compared to the stock exchanges in the U.S. Equity securities of many
companies
in the region may be less liquid and more volatile than equity securities
of U.S. companies of comparable size. Additionally, many companies
traded on stock exchanges in the region are smaller and less seasoned than
companies whose securities are traded on stock exchanges in the
U.S. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the
number
of shares available for investment by the Fund. In some countries, there
is no established secondary market for securities. Therefore, liquidity
of
securities may be generally low and transaction costs generally high.
Similarly, volume and liquidity in the bond markets in Asia are less than
in the U.S.
and, at times, price volatility can be greater than in the U.S. A limited
number of issuers in Asian securities markets may represent a disproportionately
large percentage of market capitalization and trading value. The limited
liquidity of securities markets in Asia may also affect the Fund’s
ability to acquire or dispose of securities at the price and time it
wishes to do so. In addition, the Asian securities markets are susceptible
to being
influenced by large investors trading significant blocks of
securities. |
|
The
legal systems in certain developing market Pacific Basin countries also
may have an adverse impact on the Fund. For example, while the potential
liability
of a shareholder in a U.S. corporation with respect to acts of the
corporation is generally limited to the amount of the shareholder’s
investment,
the notion of limited liability is less clear in certain Pacific Basin
countries. Similarly, the rights of investors in Pacific Basin companies
may be
more limited than those of shareholders of U.S. corporations. It may be
difficult or impossible to obtain and/or enforce a judgment in a Pacific
Basin
country. |
|
Many
stock markets are undergoing a period of growth and change which may
result in trading volatility and difficulties in the settlement and
recording
of transactions, and in interpreting and applying the relevant law and
regulations. With respect to investments in the currencies of Asian
countries,
changes in the value of those currencies against the U.S. dollar will
result in corresponding changes in the U.S. dollar value of the Fund’s
assets
denominated in those currencies. Certain developing economies in the
Asia-Pacific region have experienced currency fluctuations, devaluations,
and restrictions; unstable employment rates; rapid fluctuation in, among
other things, inflation and reliance on exports; and less efficient
markets. Currency fluctuations or devaluations in any one country can have
a significant effect on the entire Asia Pacific region. Holding
securities
in currencies that are devalued (or in companies whose revenues are
substantially in currencies that are devalued) will likely decrease the
value
of the Fund’s investments. Some developing Asian countries prohibit or
impose substantial restrictions on investments in their capital markets,
particularly
their equity markets, by foreign entities such as the Fund. For example,
certain countries may require governmental approval prior to investments
by foreign persons or limit the amount of investment by foreign persons in
a particular company or limit the investment by foreign persons
to only a specific class of securities of a company which may have less
advantageous terms (including price and shareholder rights) than
securities
of the company available for purchase by nationals of the relevant
country. There can be no assurance that the Fund will be able to obtain
required
governmental approvals in a timely manner. In addition, changes to
restrictions on foreign ownership of securities subsequent to the Fund’s
purchase
of such securities may have an adverse effect on the value of such shares.
Certain countries may restrict investment opportunities in issuers
or
industries deemed important to national
interests. |
Illiquid
and Restricted Securities —
Generally, an illiquid asset is an asset that the Fund reasonably expects cannot
be sold or disposed of in current market
conditions in seven calendar days or less without the sale or disposition
significantly changing the market value of the investment. Historically,
illiquid
securities have included securities that have not been registered under the
Securities Act, securities that are otherwise not readily marketable,
and
repurchase agreements having a remaining maturity of longer than seven calendar
days.
Securities
that have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly
from the
issuer or in the secondary market. Such securities include those sold in private
placement offerings made in reliance on the “private placement”
exemption from registration afforded by Section 4(a)(2) of the Securities Act,
and resold to qualified institutional buyers pursuant to Rule 144A under
the Securities Act (“Section 4(a)(2) securities”). Such securities are
restricted as to disposition under the federal securities laws, and generally
are sold to institutional investors, such as the Fund, that agree they are
purchasing the securities for investment and not with an intention to
distribute
to the public. These securities may be sold only in a privately negotiated
transaction or pursuant to an exemption from registration.
A large
institutional market exists for certain securities that are not registered under
the Securities Act, including repurchase agreements, commercial paper,
foreign securities, municipal securities and corporate bonds and notes. Section
4(a)(2) securities normally are resold to other institutional investors
through or with the assistance of the issuer or dealers that make a market in
the Section 4(a)(2) securities, thus providing liquidity. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer’s ability to honor a
demand for repayment. Rule 144A under the Securities Act is designed to
facilitate efficient trading among institutional investors by permitting
the sale of certain unregistered securities to qualified institutional buyers.
To the extent privately placed securities held by the Fund qualify under Rule
144A and an institutional market develops for those securities, the Fund likely
will be able to dispose of the securities without registering them under
the Securities Act. To the extent that institutional buyers are uninterested in
purchasing restricted securities, the Fund’s investment in such securities
could have the effect of reducing the Fund’s liquidity. A determination could be
made that certain securities qualified for trading under Rule 144A are
liquid. In addition to Rule 144A, Regulation S under the Securities Act permits
the sale abroad of securities that are not registered for sale in the United
States and includes a provision for U.S. investors, such as the Fund, to
purchase such unregistered securities if certain conditions are
met.
Limitations
on resale may have an adverse effect on the marketability of portfolio
securities, and the Fund might be unable to dispose of restricted or
other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven calendar days.
However,
the fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative
of their liquidity. In addition, the Fund may get only limited information about
an issuer of such a security, so it may be less able to predict a loss. The
Fund also might have to register such restricted securities in order to dispose
of them, resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities. The illiquidity of
the market, as well as the lack of publicly available information regarding
these securities, also may make it difficult to determine a fair value for
certain securities for purposes of computing the Fund’s NAV.
Indebtedness,
Loan Participations and Assignments — Floating
rate securities, including loans, provide for automatic adjustment of the
interest rate at
fixed intervals (e.g., daily, weekly, monthly, or semi-annually) or automatic
adjustment of the interest rate whenever a specified interest rate or
index
changes. The interest rate on floating rate securities ordinarily is determined
by reference to LIBOR, a particular bank’s prime rate, the 90-day U.S.
Treasury
Bill rate, the rate of return on commercial paper or bank CDs, an index of
short-term tax-exempt rates or some other objective measure.
Loan
interests are a form of direct debt instrument in which the Fund may invest by
taking an assignment of all or a portion of an interest in a loan previously
held by another institution or by acquiring a participation in an interest in a
loan that continues to be held by another institution. The Fund
may invest
in secured and unsecured loans. Loans are subject to the same risks as other
direct debt instruments discussed above and carry additional risks
described in this section. The Fund’s ability to receive payments in
connection with loans depends on the financial condition of the borrower. The
Manager or
the sub-advisor will not rely solely on another lending institution’s credit
analysis of the borrower, but will perform its own investment analysis of
the borrower. The Manager’s or the sub-advisor’s analysis may include
consideration of the borrower’s financial strength, managerial experience,
debt coverage, additional borrowing requirements or debt maturity schedules,
changing financial conditions, and responsiveness to changes in
business conditions and interest rates. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small fraction of the amount
owed. In connection with the restructuring of a loan or other direct debt
instrument outside of bankruptcy court in a negotiated work-out or in the
context of bankruptcy proceedings, equity securities or junior debt securities
may be received in exchange for all or a portion of an interest in the
security. Loans are typically administered by a bank, insurance company, finance
company or other financial institution (the “agent”) for a lending syndicate
of financial institutions. In a typical loan, the agent administers the terms of
the loan agreement and is responsible for the collection of principal
and interest and fee payments from the borrower and the apportionment of these
payments to all lenders that are parties to the loan
agreement.
In addition, an institution (which may be the agent) may hold collateral on
behalf of the lenders. Typically, under loan agreements, the agent is
given broad authority in monitoring the borrower’s performance and is obligated
to use the same care it would use in the management of its own
property. In asserting rights against a borrower, the Fund normally will be
dependent on the willingness of the lead bank to assert these rights, or
upon a vote
of all the lenders to authorize the action. If an agent becomes insolvent, or
has a receiver, conservator, or similar official appointed for it by
the
appropriate regulatory authority, or becomes a debtor in a bankruptcy
proceeding, the agent’s appointment may be terminated and a successor
agent would
be appointed. If an appropriate regulator or court determines that assets held
by the agent for the benefit of purchasers of loans are subject to
the claims of the agent’s general or secured creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or suffer
a loss of
principal and/or interest. The Fund may be subject to similar risks when it
buys a participation interest or an assignment from an intermediary,
as
discussed below. A number of judicial decisions in the United States have upheld
the right of borrowers to sue lenders or bondholders on the basis of various
evolving legal theories (commonly referred to as “lender liability”). Generally,
lender liability is founded upon the premise that an institutional
lender or bondholder has violated a duty (whether implied or contractual) of
good faith, commercial reasonableness and fair dealing owed to the
borrower or issuer or has assumed a degree of control over the borrower or
issuer resulting in the creation of a fiduciary duty owed to the borrower or
issuer or its other creditors or stockholders. Because of the nature of its
investments, the Fund may be subject to allegations of lender liability.
In addition, under common law principles that in some cases form the basis for
lender liability claims, if a lender or bondholder: (i) intentionally
takes an
action that results in the undercapitalization of a borrower to the detriment of
other creditors of such borrower, (ii) engages in other inequitable
conduct to the detriment of such other creditors, (iii) engages in fraud with
respect to, or makes misrepresentations to, such other creditors or (iv)
uses its influence as a stockholder to dominate or control a borrower to the
detriment of other creditors of such borrower, a court may elect to subordinate
the claim of the offending lender or bondholder to the claims of the
disadvantaged creditor or creditors, a remedy called “equitable subordination.”
The Fund does not intend to engage in conduct that would form the basis for
a successful cause of action based upon the equitable subordination
doctrine; however, because of the nature of the debt obligations, the Fund may
be subject to claims from creditors of an obligor that debt
obligations of such obligor which are held by the Fund should be equitably
subordinated. Because affiliates of, or persons related to, the Manager
and/or the
sub-advisor may hold equity or other interests in obligors of the Fund, the Fund
could be exposed to claims for equitable subordination or lender
liability or both based on such equity or other holdings. Loans that are fully
secured offer the Fund more protection than an unsecured loan in
the event
of non-payment of scheduled interest or principal. However, there is no
assurance that the collateral from a secured loan in which the Fund
invests can
be promptly liquidated, or that its liquidation value will be equal to the value
of the debt. In most loan agreements, there is no formal requirement
to pledge additional collateral if the value of the initial collateral declines.
As a result, a loan may not always be fully collateralized and can decline
significantly in value. If a borrower becomes insolvent, access to collateral
may be limited by bankruptcy and other laws. Borrowers that are in bankruptcy
may pay only a small portion of the amount owed, if they are able to pay at all.
If a secured loan is foreclosed, the Fund will likely be required to
bear the costs and liabilities associated with owning and disposing of the
collateral. There is also a possibility that the Fund will become the
owner of
its pro rata share of the collateral, which may carry additional risks and
liabilities. In addition, under legal theories of lender liability, the
Fund potentially
might be held liable as a co-lender. In the event of a borrower’s bankruptcy or
insolvency, the borrower’s obligation to repay the loan may be subject
to certain defenses that the borrower can assert as a result of improper conduct
by the agent. Some loans are unsecured. If the borrower defaults on
an unsecured loan, the Fund will be a general creditor and will not have
rights to any specific assets of the borrower. Loans may be subject to legal or
contractual restrictions on resale. Loans are not currently listed on any
securities exchange or automatic quotation system, and there may not be an
active trading market for some loans. As a result, the Fund may be unable
to sell such investments at an opportune time or may have to resell them
at less than fair market value. The lack of a liquid secondary market may have
an adverse impact on the Fund’s ability to dispose of particular
assignments or participations when necessary to meet redemptions of the
Fund’s shares, to meet the Fund’s liquidity needs or when necessary
in response to a specific economic event, such as deterioration in the
creditworthiness of the borrower. In addition, transactions in loan investments
may take a significant amount of time to settle (i.e., more than seven days and
up to several weeks or longer). Accordingly, the proceeds from the
sale of a loan investment may not be available to make additional investments or
to meet redemption obligations until potentially a substantial
period after the sale of the loan. The extended trade settlement periods could
force the Fund to liquidate other securities to meet redemptions
and may present a risk that the Fund may incur losses in order to timely
honor redemptions. To the extent that the Manager or the sub-advisor
determines that any such investments are illiquid, they will be subject to the
Fund‘s restrictions on investments in illiquid securities. The borrower in
a loan arrangement may, either at its own election or pursuant to the terms of
the loan documentation, prepay amounts of the loan from time to
time. Due to prepayment, the actual maturity of loans is typically shorter than
their stated final maturity calculated solely on the basis of the stated life
and payment schedule. The degree to which borrowers prepay loans, whether as a
contractual requirement or at their election, may be affected by
general business conditions, market interest rates, the borrower’s financial
condition and competitive conditions among lenders. Such prepayments
may require the Fund to replace an investment with a lower yielding
security which may have an adverse effect on the Fund’s share price.
Prepayments
cannot be predicted with accuracy. Floating rate loans can be less sensitive to
prepayment risk, but the Fund’s NAV may still fluctuate in response to
interest rate changes because variable interest rates may reset only
periodically and may not rise or decline as much as interest rates in
general. A
borrower must comply with various restrictive covenants in a loan agreement such
as restrictions on dividend payments and limits on total debt. The
loan agreement may also contain a covenant requiring the borrower to prepay the
loan with any free cash flow. A breach of a covenant is normally an
event of default, which provides the agent or the lenders the right to call the
outstanding loan. Loans normally are not registered with the SEC or any
state securities commission or listed on any securities exchange. As a result,
the amount of public information available about a specific loan
historically has been less extensive than if the loan were registered or
exchange-traded. They may also not be considered “securities,” and purchasers,
such as the Fund, therefore may not be entitled to rely on the strong anti-fraud
protections of the federal securities laws. In the absence of definitive
regulatory guidance, the Fund relies on the sub-advisor’s research in an
attempt to avoid situations where fraud and misrepresentation could adversely
affect the Fund. In addition, loan interests may not be rated by
independent rating agencies and therefore, investments in a particular loan
participation
may depend almost exclusively on the credit analysis of the borrower performed
by the Manager or the sub-advisor.
■ |
Assignments.
When the Fund purchases a loan by assignment, the Fund typically
succeeds to the rights of the assigning lender under the loan agreement
and becomes a lender under the loan agreement. Subject to the terms of the
loan agreement, the Fund typically succeeds to all the rights
|
|
and
obligations under the loan agreement of the assigning lender. However,
assignments may be arranged through private negotiations between
potential
assignees and potential assignors, and the rights and obligations acquired
by the purchaser of an assignment may differ from, and be more
limited
than, those held by the assigning lender. |
■ |
Participation
Interests. In
purchasing a loan participation, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan
to a borrower. The contractual arrangement with the bank transfers the
cash stream of the underlying bank loan to the participating investor.
The
Fund’s rights under a participation interest with respect to a particular
loan may be more limited than the rights of original lenders or of
investors who
acquire an assignment of that loan. In purchasing participation
interests, the Fund will have the right to receive payments of
principal, interest and
any fees to which it is entitled only from the lender selling the
participation interest (the “participating lender”) and only when the
participating lender
receives the payments from the borrower. In a
participation interest, the Fund will usually have a contractual
relationship only with the selling institution and not the underlying
borrower. The Fund
normally will have to rely on the participating lender to demand and
receive payments in respect of the loans, and to pay those amounts on
to the
Fund; thus, the Fund will be subject to the risk that the lender may
be unwilling or unable to do so. In such a case, the Fund would not
likely have
any rights against the borrower directly. In addition, the issuing bank
does not guarantee the participations. As a result, the Fund will
assume the
credit risk of both the borrower and the lender that is selling the
participation. In addition, the Fund generally will have no right to
object to certain
changes to the loan agreement agreed to by the participating
lender. In
buying a participation interest, the Fund might not directly benefit from
the collateral supporting the related loan and may be subject to any
rights of
set off the borrower has against the selling institution. In the event of
bankruptcy or insolvency of the borrower, the obligation of the borrower
to repay
the loan may be subject to certain defenses that can be asserted by the
borrower as a result of any improper conduct of the participating
lender.
As a result, the Fund may be subject to delays, expenses and risks
that are greater than those that exist when the Fund is an original
lender or assignee. If
the participating lender fails to perform its obligations under the
participation agreement, the Fund might incur costs delays and risks in
realizing payment
that are greater than those that would have been involved if purchasing a
direct obligation of such borrower. The Fund may suffer a loss of
principal
and/or interest. If a participating lender becomes insolvent, the
Fund may be treated as a general creditor of that lender. As a general
creditor, the
Fund may not benefit from a right of set off that the lender has against
the borrower. Further, in the event of the bankruptcy or insolvency
of the corporate borrower, the loan participation may be subject to
certain defenses that can be asserted by such borrower as a result of
improper
conduct by the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations
purchased
by the Fund may be regarded as illiquid. The Fund will acquire a
participation interest only if the Manager or the sub-advisor determines
that
the participating lender or other intermediary participant selling the
participation interest is creditworthy. |
■ |
Fees. The
Fund may be required to pay and may receive various commissions and fees
in the process of purchasing, holding and selling loans. The fee
component may include any, or a combination of, the following elements:
assignment fees, arrangement fees, nonuse fees, facility fees, letter of
credit
fees, and ticking fees. Arrangement fees are paid at the commencement of a
loan as compensation for the initiation of the transaction. A non-use
fee is paid based upon the amount committed but not used under the loan.
Facility fees are on-going annual fees paid in connection with a
loan.
Letter of credit fees are paid if a loan involves a letter of credit.
Ticking fees are paid from the initial commitment indication until loan
closing if for
an extended period. The amount of fees is negotiated at the time of
closing. In addition, the Fund may incur expenses associated with
researching
and analyzing potential loan investments, including legal
fees. |
Inflation-Indexed
Securities —
Inflation-indexed securities, also known as “inflation-protected securities,”
are fixed-income instruments structured such that
their interest payments and principal amounts are adjusted to keep up with
inflation. Two structures are common. The U.S. Treasury and some other
issuers use a structure that accrues inflation into the principal value of the
bond. Other issuers pay out the index-based accruals as part of its coupon.
The U.S. Treasury is obligated to repay at least the greater of the original
principal value or accrued principal value at maturity for inflation-indexed
securities issued directly by the U.S. Government, which are referred to as
“U.S. Treasury Inflation Protected Securities,” or “TIPS,” and are
backed by the full faith and credit of the U.S. Government. However,
inflation-indexed securities of other issuers may or may not have the
same
principal guarantee and may repay an amount less than the original principal
value at maturity. If inflation is lower than expected during the period the
Fund holds the security, the Fund may earn less on it than on a conventional
bond. Inflation-indexed securities are expected to react primarily
to changes in the “real” interest rate (i.e., the nominal, or stated, rate less
the rate of inflation), while a typical bond reacts to changes in the
nominal
interest rate. Accordingly, inflation-indexed securities have characteristics of
fixed-rate U.S. Treasury securities having a shorter duration. Changes in
market interest rates from causes other than inflation will likely affect the
market prices of inflation-indexed securities in the same manner as
conventional bonds. Any increase in the principal amount of an inflation-indexed
debt security will be considered ordinary income, even though the Fund will
not receive the principal until maturity. Thus, the Fund could be required, at
times, to liquidate other investments in order to satisfy its distribution
requirements.
There can
be no assurance that the inflation index used will accurately measure the real
rate of inflation in the prices of goods and services. The Fund’s investments
in inflation-indexed securities may lose value in the event that the actual rate
of inflation is different than the rate of the inflation index. In addition,
inflation-indexed securities are subject to risks related to the
discontinuation, substitution or fundamental alteration of the Consumer Price
Index for
All Urban Consumers (the index used for U.S. TIPS) or other relevant pricing
indices. Such alteration, which could be effected by legislation or Executive
Order, could be materially adverse to the interests of an investor in the
securities or substituted with an alternative index. In periods of deflation
when the inflation rate is declining, the principal value of an
inflation-indexed security will be adjusted downward. This will result in a
decrease in
the interest payments thereon, but holders at maturity receive no less than par
value. However, if the Fund purchases inflation-indexed securities
in the secondary market whose principal values have been adjusted upward due to
inflation since issuance, the Fund may experience a loss if there is a
subsequent period of deflation.
Interfund
Lending — Pursuant
to an order issued by the SEC, the Fund may participate in a credit facility
whereby the Fund, under certain conditions, is
permitted to lend money directly to and borrow directly from other funds under
the Manager’s management for temporary purposes. The credit facility is
administered by a credit facility team consisting of professionals from the
Manager’s asset management, compliance, and accounting departments,
who report on credit facility activities to the Board. The credit facility can
provide a borrowing fund with savings at times when the cash
position of
the Fund is insufficient to meet temporary cash requirements. This situation
could arise when shareholder redemptions exceed anticipated volumes and
the Fund has insufficient cash on hand to satisfy such redemptions, or when
sales of securities do not settle as expected, resulting in a cash
shortfall for the Fund. When the Fund liquidates portfolio securities to meet
redemption requests, it often does not receive payment in settlement
for up to
two days (or longer for certain foreign transactions). However, redemption
requests normally are satisfied the next business day. The credit facility
provides a source of immediate, short-term liquidity pending settlement of the
sale of portfolio securities. Although the credit facility may reduce the
Fund’s need to borrow from banks, the Fund remains free to establish and utilize
lines of credit or other borrowing arrangements with banks.
Issuer
Risk — The
value of an investment may decline for a number of reasons which directly relate
to the issuer, such as management performance, financial
leverage and reduced demand for the issuer’s goods or services, as well as the
historical and prospective earnings of the issuer and the value of its
assets.
LIBOR
Risk — Certain
of the instruments in which the Fund may invest have variable or floating coupon
rates, or may
provide exposure to underlying investments
with coupon rates, that are
based on LIBOR, the Secured Overnight Financing Rate (“SOFR”), Euro Interbank
Offered Rate and other similar
types of reference rates (each, a “Reference Rate”). These Reference Rates are
generally intended to represent the rate at which contributing banks may
obtain short-term borrowings within certain financial markets. LIBOR is produced
daily by averaging the rates reported by a number of banks and
may be a significant factor in determining the Fund’s payment obligation under a
derivative instrument, the cost of financing to the Fund, or an
investment’s value or return to the Fund, and may be used in other ways that
affect the Fund’s performance. Most maturities and currencies of LIBOR were
phased out at the end of 2021, with the remaining ones to be phased out on June
30, 2023. These events and any additional regulatory or market
changes may have an adverse impact on the Fund or its investments, including
increased volatility or illiquidity in markets for instruments that rely on
LIBOR.
Regulators
and market participants are working together to develop successor Reference
Rates. SOFR has been selected by a committee established by the Board
of Governors of the Federal Reserve System and the Federal Reserve Bank of New
York to replace LIBOR as a Reference Rate in the United States and
U.S. law requires that contracts without a practicable LIBOR alternative default
to SOFR plus a set spread beginning in mid-2023. SOFR is a secured,
nearly risk-free rate, while LIBOR is an unsecured rate that includes an element
of bank credit risk. In addition, SOFR is strictly an overnight rate, while
LIBOR historically has been published for various maturities, ranging from
overnight to one year. Thus, LIBOR may be expected to be higher than SOFR,
and the spread between the two is likely to widen in times of market stress.
Certain existing contracts provide for a spread adjustment when
transitioning to SOFR from LIBOR, but there is no assurance that it will provide
adequate compensation. Other countries have undertaken similar initiatives
to identify replacement Reference Rates for LIBOR in their respective markets.
However, there are obstacles to converting certain existing investments
and transactions to a new Reference Rate, as well as risks associated with using
a new Reference Rate with respect to new investments and
transactions. It is expected that market participants will focus on the
transition mechanisms by which the Reference Rates in existing contracts or
instruments
may be amended, whether through legislation, marketwide protocols, fallback
contractual provisions, bespoke negotiations or amendments
or otherwise. This process could require extensive negotiations of and/or
amendments to agreements and other documentation governing
Reference Rate-linked investments and lead to disputes, litigation, or other
actions with counterparties or portfolio companies regarding the interpretation
and enforceability of “fallback” provisions that provide for an alternative
Reference Rate in the event of Reference Rate unavailability. Nonetheless,
there remains uncertainty regarding the impact of the transition from LIBOR on
the Fund and the financial markets generally, and the termination
of certain Reference Rates presents risks to the Fund. Financial industry groups
have begun transitioning to the use of a different Reference Rate or
benchmark rate, but there are obstacles to converting certain securities and
transactions to a new Reference Rate or benchmark rate. The transition
process, or the failure of an industry to transition, could lead to increased
volatility and illiquidity in markets for instruments that currently rely
on LIBOR to
determine interest rates and a reduction in the values of some LIBOR-based
investments, all of which would impact the Fund. Various complexities
brought about by significant changes to operational processes and IT systems
could take a long time to complete, and coordination with other
market participants may become severely impacted, which may negatively impact
the Fund. Since the usefulness of LIBOR as a benchmark could deteriorate
during the transition period, these effects could occur prior to June 30, 2023.
While some LIBOR-based instruments may contemplate a scenario
where LIBOR becomes unavailable by providing for an alternative rate-setting
methodology, not all may have such provisions and there may be
significant uncertainty regarding the effectiveness of any such methodologies.
Further, U.S. issuers are currently not obligated to include any particular
fallback language in transaction documents for new issuances of LIBOR-linked
securities. In addition, the alternative reference or benchmark rate may be
an ineffective substitute, potentially resulting in prolonged adverse market
conditions for the Fund. The elimination of a Reference Rate or any other
changes or reforms to the determination or supervision of Reference Rates could
have an adverse impact on the market for or value of any securities
or payments linked to those Reference Rates and other financial obligations held
by the Fund or on its overall financial condition or results of operations.
Any substitute Reference Rate and any pricing adjustments imposed by a regulator
or by counterparties or otherwise may adversely affect the Fund’s
performance and/or NAV. At this time, it is not possible to completely identify
or predict the effect of any such changes, any establishment of
alternative Reference Rates or any other reforms to Reference Rates that may be
enacted in the UK or elsewhere.
Municipal
Securities — The Fund
may invest in municipal securities the interest on which is excludable from
gross income for federal income tax purposes
(“tax-exempt”), as well as municipal securities the interest on which is
taxable. Municipal bonds are issued for a wide variety of reasons, including
to construct public facilities, to obtain funds for operating expenses, to
refund outstanding municipal obligations, and to loan funds to various
public institutions and facilities. Municipal securities are subject to credit
risk where a municipal issuer of a security might not make interest or
principal
payments on a security as they become due. An issuer’s actual or perceived
credit quality can be affected by, among other things, the financial
condition of the issuer, the issuer’s future borrowing plans and sources of
revenue, the economic feasibility of a project or general borrowing purpose,
and political or economic developments in the region where the instrument is
issued. Local and national market forces, such as declines in real estate
prices or general business activity, shifting demographics or political gridlock
may result in decreasing tax bases, growing entitlement budgets,
and increasing construction and/or maintenance costs and could reduce the
ability of certain issuers of municipal securities to repay their obligations.
Municipal
securities also are subject to interest rate risk. As with other fixed income
securities, an increase in interest rates generally will reduce the value of
the Fund’s investments in municipal obligations, whereas a decline in interest
rates generally will increase that value.
Some
municipal securities, including those in the high yield market, may include
transfer restrictions (e.g., may only be transferred to qualified institutional
buyers and purchasers meeting other qualification requirements set by the
issuer). As such, it may be difficult to sell municipal securities at
a time when
it may otherwise be desirable to do so or the Fund may be able to sell them only
at prices that are less than what the Fund regards as their fair
market value.
To the
extent that municipalities face severe financial hardship, certain state and
local governments may have difficulty paying principal or interest when due on
their outstanding debt and may experience credit ratings downgrades on their
debt. In addition, municipal securities backed by revenues from a
project or specified assets may be adversely impacted by a municipality’s
failure to collect the revenue. The possibility of their defaulting on
obligations,
and/or declaring bankruptcy where allowable, creates risks to the value of
municipal securities held by the Fund. Difficulties in the municipal
securities markets could result in increased illiquidity, volatility and credit
risk, and a decrease in the number of municipal securities investment
opportunities.
The Fund
may purchase municipal securities that are fully or partially backed by entities
providing credit support such as letters of credit, guarantees, or insurance.
The credit quality of the entities that provide such credit support will affect
the market values of those securities. The insurance feature of a municipal
security guarantees the full and timely payment of interest and principal
through the life of an insured obligation. The insurance feature does
not,
however, guarantee the market value of the insured obligation or the net asset
value of the Fund’s shares represented by such an insured obligation.
The sub-advisor generally looks to the credit quality of the issuer of a
municipal security to determine whether the security meets the Fund’s
quality
restrictions, even if the security is covered by insurance. However, a downgrade
in the claims-paying ability of an insurer of a municipal security could have
an adverse effect on the market value of the security. Certain significant
providers of insurance for municipal securities can incur and, in the
past have
incurred, significant losses as a result of exposure to certain categories of
investments, such as sub-prime mortgages and other lower credit quality
investments that have experienced defaults or otherwise suffered extreme credit
deterioration. Such losses can adversely impact the capital adequacy of
these insurers and may call into question the insurers’ ability to fulfill their
obligations under such insurance if they are called to do so, which could
negatively affect the Fund. There are a limited number of providers of insurance
for municipal securities and a Fund may have multiple investments
covered by one insurer. Accordingly, this may make the value of those
investments dependent on the claims-paying ability of that one insurer and
could result in share price volatility for the Fund’s shares.
In
addition, the amount of publicly available information for municipal issuers is
generally less than for corporate issuers. Unlike other types of investments,
municipal obligations have traditionally not been subject to the registration
requirements of the federal securities laws, although there have been
proposals to provide for such registration. This lack of SEC regulation has
adversely affected the quantity and quality of information available
to the bond
markets about issuers and their financial condition. The SEC has responded to
the need for such information with Rule 15c2-12 under the Securities
Exchange Act of 1934, as amended (the “Rule”). The Rule requires that
underwriters must reasonably determine that an issuer of municipal securities
undertakes in a written agreement for the benefit of the holders of such
securities to file with a nationally recognized municipal securities
information
repository certain information regarding the financial condition of the issuer
and material events relating to such securities.
Additionally,
the Internal Revenue Service (“Service”) occasionally challenges the tax-exempt
status of the interest on particular municipal securities. If the Service
determined that interest earned on a municipal security the Fund held was
taxable and the issuer thereof failed to overcome that determination,
that interest would be taxable to the Fund, possibly retroactive to the time the
Fund purchased the security.
The
municipal securities in which the Fund may invest may include:
■ |
General
Obligation
Bonds.
General obligation bonds are secured by the pledge of the issuer’s full
faith, credit, and usually, taxing power and are payable
from and backed only by the issuer’s general unrestricted revenues and not
from any particular fund or source. The characteristics and method
of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer, and payment may be dependent
upon
appropriation by the issuer’s legislative body. The taxing power may be an
unlimited ad valorem tax or a limited tax, usually on real estate and
personal
property. Most states do not tax real estate, but leave that power to
local units of government. |
Other
Investment Company Securities and Exchange-Traded Products —
Investments in the securities of other investment companies may involve
duplication of advisory fees and certain other expenses. By investing in another
investment company, the Fund becomes a shareholder of that investment
company. As a result, Fund shareholders indirectly will bear the Fund’s
proportionate share of the fees and expenses paid by shareholders of
the other
investment company, in addition to the fees and expenses Fund shareholders
directly bear in connection with the Fund’s own operations. Any
such fees and expenses are reflected in the Fees and Expenses Table for the Fund
in its Prospectus. The Fund
may invest in investment company
securities advised by the Manager, and shareholders could pay fees charged by
the Manager to such investment company. The Fund’s investment
in securities of other investment companies, except for money market funds, is
generally limited to (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund’s total assets with respect to any one
investment company and (iii) 10% of the Fund’s total assets in all investment
companies in the aggregate. However, currently the Fund may exceed these limits
when investing in shares of an ETF or other investment company
subject to a statutory exemption or to the terms and conditions of an exemptive
order from the SEC obtained by the ETF or other investment company
that permits an investing fund, such as the Fund, to invest in the ETF or other
investment company in excess of the limits described above. Rule 12d1-4
under the Investment Company Act and revisions to other rules permitting funds
to invest in other investment companies, which are intended to
streamline and enhance the regulatory framework applicable to fund of funds
arrangements, took effect on January 19, 2022. While Rule 12d1-4
permits more types of fund of fund arrangements without an exemptive order, and
supersedes many prior exemptive orders, it imposes new conditions,
including limits on control and voting of acquired funds’ shares, evaluations
and findings by investment advisers, fund investment agreements,
and limits on most three-tier fund structures.
The Fund at
times may invest in shares of other investment companies and exchange-traded
products, which, in addition to the general risks of investments
in other investment companies described above, include the following
risks:
■ |
Money
Market Funds. The
Fund can invest free cash balances in registered open-end investment
companies regulated as money market funds under
the Investment Company Act, to provide liquidity or for defensive
purposes. The Fund would invest in money market funds rather
than purchasing
individual short-term investments. Although a money market fund is
designed to be a relatively low risk investment, it is not free of risk.
Despite
the short maturities and high credit quality of a money market fund’s
investments, increases in interest rates and deteriorations in the credit
quality
of the instruments the money market fund has purchased may reduce the
money market fund’s yield and can cause the price of a money market
security to decrease. In addition, a money market fund is subject to the
risk that the value of an investment may be eroded over time by
inflation.
If the liquidity of a money market fund’s portfolio deteriorates below
certain levels, the money market fund may suspend redemptions (i.e.,
impose
a redemption gate) and thereby prevent the Fund from selling its
investment in the money market fund, or impose a fee of up to 2% on
amounts
redeemed from the money market fund. |
Redemption
Risk — The Fund
may experience periods of heavy redemptions that could cause the Fund to sell
assets at inopportune times at a loss or depressed
value. The risk of loss is greater if redemption requests are frequent, occur in
times of overall market turmoil or declining prices for the securities
sold, or when the securities the Fund wishes to sell are illiquid. The sale of
assets to meet redemption requests may create capital gains, which the
Fund would then be required to distribute to shareholders. Redemption risk is
greater to the extent that one or more investors or intermediaries
control a large percentage of investments in the Fund, have short investment
horizons, or have unpredictable cash flow needs. Additionally,
during periods of heavy redemptions, the Fund may borrow funds from the
interfund credit facility, or from a bank line of credit, which may
increase costs. The ability or willingness of dealers and other institutional
investors to buy or hold fixed-income securities or otherwise to “make a
market” in
debt securities has also been reduced. Heavy redemptions, whether by a few large
investors or many smaller investors, could hurt the Fund’s
performance.
Sovereign
and Quasi-Sovereign Government and Supranational Debt —
Sovereign debt securities may include: debt securities issued or guaranteed
by governments, governmental agencies or instrumentalities and political
subdivisions located in developing market countries; debt securities
issued by government owned, controlled or sponsored entities located in
developing market countries; interests in entities organized and operated
for the purpose of restructuring the investment characteristics of instruments
issued by any of the above issuers; participations in loans between
developing market governments and financial institutions; and Brady Bonds, which
are debt securities issued under the framework of the Brady Plan
as a means for debtor nations to restructure their outstanding external
indebtedness.
Investments
in debt securities issued or guaranteed by foreign governments and their
political subdivisions or agencies involve special risks not present
in
corporate debt obligations. Sovereign debt is subject to risks in addition to
those relating to non-U.S. investments generally. The issuer of the debt or
the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance
with the terms of such debt, and the Fund may have limited legal recourse
in the event of a default. As a sovereign entity, the issuing government
may be immune from lawsuits in the event of its failure or refusal to pay the
obligations when due.
Sovereign
debt differs from debt obligations issued by private entities in that,
generally, remedies for defaults must be pursued in the courts of the
defaulting
party. Legal recourse is therefore somewhat diminished when the issuer is a
foreign government or its political subdivisions or agencies. Political
conditions, especially a sovereign entity’s willingness to meet the terms of its
debt obligations, are of considerable significance. Also, holders of
commercial
bank debt issued by the same sovereign entity may contest payments to the
holders of sovereign debt in the event of default under commercial
bank loan agreements.
A sovereign
debtor’s willingness or ability to repay principal and interest due in a timely
manner may be affected by, among other factors, its cash flow situation,
insufficient foreign currency reserves, the availability of sufficient non-U.S.
exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor’s policy toward
principal international lenders, the failure to implement economic reforms
required by the International Monetary Fund or other multilateral agencies and
the political constraints to which a sovereign debtor may be subject.
Increased protectionism on the part of a country’s trading partners or political
changes in those countries could also adversely affect its exports. Such events
could diminish a country’s trade account surplus, if any, or the credit standing
of a particular local government or agency.
Sovereign
debtors’ ability to repay their obligations may also be dependent on
disbursements or assistance from foreign governments or multinational
agencies,
the country’s access to trade and other international credits, and the country’s
balance of trade. The receipt of assistance from other governments
or multinational agencies is not assured. Assistance may be dependent on a
country’s implementation of austerity measures and reforms, which may
be politically difficult to implement. These measures may limit or be perceived
to limit economic growth and recovery. In the past, some sovereign
debtors have rescheduled their debt payments, declared moratoria on payments or
restructured their debt to effectively eliminate portions of it, and
similar occurrences may happen in the future. There is no bankruptcy proceeding
by which sovereign debt on which governmental entities have defaulted
may be collected in whole or in part.
The
occurrence of political, social or diplomatic changes in one or more of the
countries issuing sovereign debt could adversely affect the Fund’s
investments.
Political changes or a deterioration of a country’s domestic economy or balance
of trade may affect the willingness of countries to service their
sovereign debt. While the Manager and sub-advisors endeavor to manage
investments in a manner that will minimize the exposure to such risks,
there can
be no assurance that adverse political changes will not cause the Fund to
suffer a loss of interest or principal on any of its holdings.
Brady
Bonds. Brady Bonds may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated), and they are
actively traded in the over-the-counter secondary market. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating
rate discount bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the Brady
Bonds. Brady Bonds are not, however, considered to be U.S. Government
securities. Interest payments on Brady Bonds are often collateralized by
cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating
rate bonds,
initially is equal to at least one year’s rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to “value recovery payments” in
certain circumstances, which in effect constitute supplemental interest
payments, but generally are not collateralized. Brady Bonds are often viewed as
having three or four valuation components: (i) collateralized repayment
of principal at final maturity; (ii) collateralized interest payments; (iii)
uncollateralized interest payments; and (iv) any uncollateralized
repayment
of principal at maturity (these uncollateralized amounts constitute the
“residual risk”). In the event of a default with respect to Collateralized
Brady Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral
for the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be
held by the collateral agent to the scheduled maturity of the defaulted Brady
Bonds, which will continue to be outstanding, at which time the face amount
of the collateral will equal the principal payments which would have been due on
the Brady Bonds in the normal course. Brady Bonds involve
various risk factors including residual risk and the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds. There can be no assurance that Brady Bonds in which the
Fund may invest will not be subject to restructuring arrangements
or to requests for new credit, which may cause the Fund to suffer a loss of
interest or principal on any of its holdings.
Supranational
entities may also issue debt securities. Supranational organizations are
entities designated or supported by a government or governmental
group to promote economic development. Included among these organizations are
the Asian Development Bank, the European Investment
Bank, the Inter-American Development Bank, the International Monetary Fund, the
United Nations, the World Bank and the European Bank for
Reconstruction and Development. Supranational organizations have no taxing
authority and are dependent on their members for payments of interest
and principal to the extent their assets are insufficient. Further, the lending
activities of such entities are limited to a percentage of their total
capital,
reserves and net income. Obligations of supranational entities are subject to
the risk that the governments on whose support the entity depends for
its financial backing or repayment may be unable or unwilling to provide that
support. Obligations of a supranational entity that are denominated
in foreign currencies will also be subject to the risks associated with
investments in foreign currencies, as described above in the section
“Currencies
Risk.”
Supranational
Risk —
Supranational organizations are entities designated or supported by a government
or governmental group to promote economic
development. Supranational organizations have no taxing authority and are
dependent on their members for initial and ongoing payments of interest
and principal to the extent their assets are insufficient. Further, the lending
activities of such entities are limited to a percentage of their total
capital,
reserves and net income. Obligations of supranational entities are subject to
the risk that the governments on whose support the entity depends for
its financial backing or repayment may be unable or unwilling to provide that
support. Obligations
of a supranational entity that are denominated
in foreign currencies will also be subject to the risks associated with
investments in foreign currencies, as described above in the section
“Currencies
Risk.”
Time-Zone
Arbitrage —
Investing in foreign securities may involve a greater risk for excessive trading
due to “time-zone arbitrage.” If an event occurring
after the close of a foreign market, but before the time the Fund
computes its current NAV per share, causes a change in the price of the
foreign
securities and such price is not reflected in the Fund’s
current NAV per share, investors may attempt to take advantage of anticipated
price movements
in securities held by the Fund based
on such pricing discrepancies.
Unrated
Securities Risk — Because
the Fund may purchase securities that are not rated by any rating
organization, a sub-advisor, after assessing their credit
quality, may internally assign ratings to certain of those securities, in
categories of those similar to those of rating organizations. Investing in
unrated
securities involves the risk that a sub-advisor may not accurately evaluate
the security’s comparative credit rating. To the extent that the Fund
invests in
unrated securities, the Fund’s success in achieving its investment
objectives may depend more heavily on a sub-advisor’s credit analysis than
if the Fund
invested exclusively in rated securities. Less public information is typically
available about unrated securities or issuers. Some unrated securities
may not
have an active trading market or may be difficult to value, which means
the Fund might have difficulty selling them promptly at an acceptable
price.
Unrated securities may also be subject to greater liquidity risk and price
volatility.
U.S.
Government Agency Securities — U.S.
Government agency securities are issued or guaranteed by the U.S. Government or
its agencies or instrumentalities.
Some obligations issued by U.S. Government agencies and instrumentalities are
supported by the full faith and credit of the U.S. Treasury;
others by the right of the issuer to borrow from the U.S. Treasury; others by
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others only by the credit of
the agency or instrumentality. U.S. Government securities bear fixed,
floating or variable rates of interest. The market prices of U.S. government
agency securities are not guaranteed by the U.S. Government. While the U.S.
Government currently provides financial support to certain U.S.
Government-sponsored agencies or instrumentalities, no assurance can be
given that
it will always do so, since it is not so obligated by law. U.S. Government
securities include U.S. Treasury bills, notes and bonds, Federal Home
Loan Bank
obligations, Federal Intermediate Credit Bank obligations, U.S. Government
agency obligations and repurchase agreements secured thereby. U.S.
Government agency securities are subject to credit risk and interest rate
risk.
U.S.
Treasury Obligations — U.S.
Treasury obligations include bills (initial maturities of one year or less),
notes (initial maturities between two and ten years), and
bonds (initial maturities over ten years) issued by the U.S.
Treasury,
separately traded registered interest and principal component parts of
such
obligations (known as “STRIPS”) and inflation-indexed securities. The prices
of these securities (like all debt securities) change between issuance
and
maturity in response to fluctuating market interest rates and credit ratings.
U.S. Treasury obligations are subject to credit risk and interest rate risk.
Treasury
inflation-indexed securities (formerly known as inflation-protected securities
or “TIPS”) are U.S. Government securities whose principal value is periodically
adjusted according to the rate of inflation (by reference to the Consumer Price
Index for All Urban Consumers (“CPI-U”), which is calculated
by the Bureau of Labor Statistics a part of the Department of Labor). The CPI-U
is a measurement of changes in the cost of living, made up of
components such as housing, food, transportation and energy. There can be no
assurance that the CPI-U or any non-U.S. inflation index will accurately
measure the real rate of inflation in the prices of goods and services. The
three-month lag in calculating the CPI-U for purposes of adjusting the
principal value of U.S. TIPS may give rise to risks under certain circumstances.
The interest rate on TIPS is fixed at issuance, but over the life of the
security
this interest may be paid on an increasing or decreasing principal value that
has been adjusted for inflation (but not below par value). Although repayment
of the original principal upon maturity is guaranteed, the market value of TIPS
is not guaranteed and will fluctuate. The values of TIPS generally
fluctuate in response to changes in real interest rates, which are in turn tied
to the relationship between nominal interest rates and the rate of inflation.
If inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in the value of TIPS.
In
contrast, if nominal interest rates were to increase at a faster rate than
inflation, real interest rates might rise, leading to a decrease in the value of
TIPS. If
inflation is lower than expected during the period the Fund holds TIPS, the Fund
may earn less on the TIPS than on a conventional bond. Because the
coupon rate on TIPS is lower than fixed-rate Treasury Department securities, the
CPI-U would have to rise at least to the amount of the
difference
between the coupon rate of the fixed-rate Treasury Department issues and the
coupon rate of the TIPS, assuming all other factors are equal, in order
for such securities to match the performance of the fixed-rate Treasury
Department securities. If interest rates rise due to reasons other than
inflation,
(for example, due to changes in the currency exchange rates), investors in TIPS
may not be protected to the extent that the increase is not reflected
in the bonds’ inflation measure. In periods of deflation when the inflation rate
is declining, the principal value of an inflation-indexed security will be
adjusted downward. This will result in a decrease in the interest payments
thereon, but holders at maturity receive no less than par value. However, if
the Fund purchases inflation-indexed securities in the secondary market whose
principal values have been adjusted upward due to inflation since
issuance, the Fund may experience a loss if there is a subsequent period of
deflation. Any increase in principal value of TIPS caused by an increase
in the CPI
is taxable in the year the increase occurs, even though the holder will not
receive cash representing the increase at that time. As a result, the
Fund could
be required at times to liquidate other investments, including when it is not
advantageous to do so, in order to satisfy its distribution requirements
as a “regulated investment company.” See “Tax Information.” If the Fund invests
in TIPS, it will be required to treat as original issue discount
(“OID”) any increase in the principal amount of the securities that occurs
during the course of its taxable year. If the Fund purchases such securities
that are issued in stripped form either as stripped bonds or coupons, it will be
treated as if it had purchased a newly issued debt instrument having OID.
Because the Fund is required to distribute substantially all of its net
investment income (including accrued OID), its investment in either zero coupon
bonds or TIPS may require it to distribute to shareholders an amount greater
than the total cash income it actually receives. Accordingly, in order to
make the required distributions, the Fund may be required to borrow or liquidate
securities.
Valuation
Risk — This is
the risk that certain securities may be valued at a price different from the
price at which they can be sold. This risk may be especially
pronounced for investments, such as certain credit-linked notes and other
derivatives, which may be illiquid or which may become illiquid, and for
securities that trade in relatively thin markets and/or markets that experience
extreme volatility. The valuation of the Fund’s investments in an accurate
and timely manner may be impacted by technological issues and/or errors by third
party service providers, such as pricing services or accounting
agents. If market or other conditions make it difficult to value certain
investments, SEC rules and applicable accounting protocols may require the
valuation of these investments using more subjective methods, such as fair-value
methodologies. Using fair value methodologies to price investments
may result in a value that is different from an investment’s most recent closing
price and from the prices used by others for the same investment.
No assurance can be given that such prices accurately reflect the price the Fund
would receive upon sale of a security. An investment’s valuation
may differ depending on the method used for determining value. Investors who
purchase or redeem Fund shares on days when the Fund is holding
fair-valued securities may receive fewer or more shares, or lower or higher
redemption proceeds, than they would have received if the securities
had not
been fair valued or a different valuation methodology had been used. The value
of foreign securities, certain fixed-income securities and currencies,
as applicable, may be materially affected by events after the close of the
markets on which they are traded, but before the Fund determines its
NAV.
Variable
or Floating Rate Obligations — Variable
and floating rate securities provide for a periodic adjustment in the interest
rate paid on the obligations.
A variable rate obligation has a coupon rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on
which the coupon is based. The adjustment intervals may be regular, and range
from daily up to annually, or may be event based, such as based on a
change in the prime rate. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless,
such obligations may fluctuate in value in response to interest rate changes if
there is a delay between changes in market interest rates and the
interest reset date for the obligation, or for other reasons.
The Fund
may invest in floaters and engage in credit spread trades. The interest rate on
a floater is a variable rate which is tied to another interest rate,
such as a
money-market index or U.S. Treasury bill rate. The interest rate on a floater
resets periodically, typically every one or three months. While, because of
the interest rate reset feature, floaters provide the Fund with a certain degree
of protection against rises in interest rates, the Fund will participate
in any declines in interest rates as well. A credit
spread trade is an investment position relating to a difference in the prices or
interest rates of two
securities or currencies, where the value of the investment position is
determined by movements in the difference between the prices or interest
rates, as
the case may be, of the respective securities or currencies.
When-Issued
and Forward Commitment Transactions —
These transactions involve a commitment by the Fund to purchase or sell
securities with payment and
delivery to take place at a future date, typically one to two months after the
date of the transaction. The payment obligations and interest
rate are fixed at the time the buyer enters into the transaction. These
transactions enable the Fund to “lock-in” what the Manager or a
sub-advisor,
as applicable, believes
to be an attractive price or yield on a particular security for a period of
time, regardless of future changes in interest rates. For
instance, in periods of rising interest rates and falling prices, the Fund might
sell securities it owns on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising prices, the Fund
might purchase a security on a when-issued or forward commitment
basis and sell a similar security to settle such purchase, thereby obtaining the
benefit of currently higher yields. Forward commitment transactions
are executed for existing obligations, whereas in a when-issued transaction, the
obligations have not yet been issued.
The value
of securities purchased on a when-issued or forward commitment basis and any
subsequent fluctuations in their value are reflected in the computation
of the Fund’s NAV starting on the date of the agreement to purchase the
securities. Because the Fund has not yet paid for the securities, this
produces an effect similar to leverage. The Fund does not earn interest on
securities it has committed to purchase until the securities are paid for
and
delivered on the settlement date. When the Fund makes a forward commitment to
sell securities it owns, the proceeds to be received upon settlement
are included in its assets. Fluctuations in the market value of the underlying
securities are not reflected in the Fund’s NAV as long as the commitment
to sell remains in effect.
When
entering into a when-issued or forward commitment transaction, the Fund
will rely on the other party to consummate the transaction; if the other party
fails to do so, the Fund may be disadvantaged. If the other party fails to
complete the trade, the Fund may lose the opportunity to obtain a favorable
price. For purchases on a when-issued basis, the price of the security is fixed
at the date of purchase, but delivery of and payment for the securities
is not set until after the securities are issued. The value of when-issued
securities is subject to market fluctuation during the interim period
and no
income accrues to the Fund until settlement takes place. Such transactions
therefore involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date or if the value of the security to be sold
increases prior to the settlement date. A sale of a when-issued
security
also involves the risk that the other party will be unable to settle the
transaction. When-issued, delayed-delivery and forward commitment transactions
may cause the Fund to liquidate positions when it may not be advantageous to do
so in order to satisfy its purchase or sale obligations.
Pursuant to
Rule 18f-4 under the Investment Company Act,
when-issued, delayed-delivery and forward commitment transactions will be deemed
not to involve
a senior security, provided that: the Fund intends to physically settle the
transaction; and the transaction will settle within 35 days of its trade
date. If
such transactions are deemed senior securities, the Fund will maintain with its
custodian segregated (or earmarked) liquid securities in an amount at
least equal to the when-issued or forward commitment transaction. Earmarking or
otherwise segregating a large percentage of the Fund’s assets
could impede a sub-advisor’s ability to manage the Fund’s portfolio.
OTHER
INVESTMENT STRATEGIES AND RISKS
In addition
to the investment strategies and risks described in the Prospectus, the Fund may
(except where otherwise indicated):
1 |
Engage
in dollar rolls or purchase or sell securities on a when-issued or forward
commitment basis. The purchase or sale of when-issued securities
enables
an investor to hedge against anticipated changes in interest rates and
prices by locking in an attractive price or yield. The price of
when-issued
securities is fixed at the time the commitment to purchase or sell is
made, but delivery and payment for the when-issued securities takes
place at a later date, normally one to two months after the date of
purchase. During the period between purchase and settlement, no
payment
is made by the purchaser to the issuer and no interest accrues to the
purchaser. Such transactions therefore involve a risk of loss if the
value
of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement
date.
A sale of a when-issued security also involves the risk that the other
party will be unable to settle the transaction. Dollar rolls are a type of
forward
commitment transaction. Purchases and sales of securities on a forward
commitment basis involve a commitment to purchase or sell securities
with payment and delivery to take place at some future date, normally one
to two months after the date of the transaction. As with when-issued
securities, these transactions involve certain risks, but they also enable
an investor to hedge against anticipated changes in interest rates
and prices. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations
have
not yet been issued. When purchasing securities on a when-issued or
forward commitment basis, a segregated amount of liquid assets at least
equal
to the value of purchase commitments for such securities will be
maintained until the settlement date. |
2 |
Invest
in other investment companies (including affiliated investment companies)
to the extent permitted by the Investment Company Act, or exemptive
relief granted by the SEC. |
3 |
Loan
securities to broker-dealers or other institutional investors. Securities
loans will not be made if, as a result, the aggregate amount of all
outstanding
securities loans by the Fund exceeds 33¹/3% of
its total assets (including the market value of collateral received). For
purposes of complying
with the Fund’s investment policies and restrictions, collateral received
in connection with securities loans is deemed an asset of the Fund
to
the extent required by law. |
4 |
Enter
into repurchase agreements. A repurchase agreement is an agreement under
which securities are acquired by the Fund from a securities dealer
or bank subject to resale at an agreed upon price on a later date. The
acquiring Fund bears a risk of loss in the event that the other party to
a
repurchase agreement defaults on its obligations and the Fund is delayed
or prevented from exercising its rights to dispose of the collateral
securities.
However, the Manager or a sub-advisor, as applicable, attempts to minimize
this risk by entering into repurchase agreements only with financial
institutions that are deemed to be of good financial
standing. |
5 |
Purchase
securities sold in private placement offerings made in reliance on the
“private placement” exemption from registration afforded by Section
4(a)(2)
of the Securities Act and resold to qualified institutional buyers under
Rule 144A under the Securities Act. The Fund will not invest more
than
15% of its net assets in Section 4(a)(2) securities and illiquid
securities unless the Manager or a sub-advisor, as applicable, determines
that any Section
4(a)(2) securities held by the Fund in excess of this level are
liquid. |
INVESTMENT
RESTRICTIONS
Fundamental
Policies.
The Fund
has the following fundamental investment policy that enables it to invest in
another investment company or series thereof that has substantially
similar investment objectives and policies:
Notwithstanding
any other limitation, the Fund may invest all of its investable assets in an
open-end management investment company with substantially
the same investment objectives, policies and limitations as the Fund. For this
purpose, “all of the Fund’s investable assets” means that the only
investment securities that will be held by the Fund will be the Fund’s interest
in the investment company.
The Fund
has no current intention to convert to a master-feeder structure, as permitted
by the foregoing policy.
Fundamental
Investment Restrictions. The
following discusses the investment policies of the Fund.
The
following restrictions have been adopted by the Fund and may be changed with
respect to the Fund only by the majority vote of the Fund’s outstanding
voting securities. “Majority of the outstanding voting securities” under the
Investment Company Act and as used herein means, with respect to
the Fund, the lesser of (a) 67% of the shares of the Fund present at the meeting
if the holders of more than 50% of the shares are present and
represented at the shareholders’ meeting or (b) more than 50% of the shares of
the Fund.
The Fund
may not:
1 |
Purchase
or sell real estate or real estate limited partnership interests,
provided, however, that the Fund may invest in securities secured by real
estate
or interests therein or issued by companies which invest in real estate or
interests therein when consistent with the other policies and limitations
described in the Prospectus. |
2 |
Invest
in physical commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
|
| purchasing
or selling foreign currency, options, futures contracts, options on
futures contracts, forward contracts, swaps, caps, floors, collars,
securities
on a forward-commitment or delayed-delivery basis, and other similar
financial instruments). |
3 |
Engage
in the business of underwriting securities issued by others, except to the
extent that, in connection with the disposition of securities, the
Fund
may be deemed an underwriter under federal securities
law. |
4 |
Lend
any security or make any other loan except (i) as otherwise permitted
under the Investment Company Act, (ii) pursuant to a rule, order or
interpretation
issued by the SEC or its staff, (iii) through the purchase of a portion of
an issue of debt securities in accordance with the Fund’s investment
objective, policies and limitations, or (iv) by engaging in repurchase
agreements with respect to portfolio
securities. |
5 |
Issue
any senior security except as otherwise permitted (i) under the Investment
Company Act or (ii) pursuant to a rule, order or interpretation
issued
by the SEC or its staff. |
6 |
Borrow
money, except as otherwise permitted under the Investment
Company Act or pursuant to a rule, order or interpretation issued by
the SEC or
its staff, including (i) as a temporary measure, (ii) by entering into
reverse repurchase agreements, and (iii) by lending portfolio securities
as collateral.
For purposes of this investment limitation, the purchase or sale of
options, futures contracts, options on futures contracts, forward
contracts,
swaps, caps, floors, collars and other similar financial
instruments shall not constitute
borrowing. |
7 |
Invest
more than 5% of its total assets (taken at market value) in securities of
any one issuer, other than obligations issued by the U.S. Government,
its
agencies and instrumentalities, or purchase more than 10% of the voting
securities of any one issuer, with respect to 75% of the Fund’s total
assets. |
8 |
Invest
more than 25% of its total assets in the securities of companies primarily
engaged in any industry or group of industries provided that this
limitation
does not apply to: (i) obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; and (ii) tax-exempt
securities
issued by municipalities and their agencies and
authorities. |
The above
percentage limits (except the limitation on borrowings) are based upon
asset values at the time of the applicable transaction; accordingly, a
subsequent
change in asset values will not affect a transaction that was in compliance with
the investment restrictions at the time such transaction was effected.
With respect to the fundamental investment restriction relating to making loans
set forth in number 4 above, securities loans will not be made if, as
a result, the aggregate amount of all outstanding securities loans by the Fund
exceeds 33¹/3% of its
total net assets (including the market value of
collateral received).
With
respect to the fundamental investment restriction relating to industry
concentration set forth in number 8 above, the Manager may analyze the
characteristics
of a particular issuer and instrument and may assign an industry classification
consistent with those characteristics. The Manager may, but need
not, consider industry classifications provided by third parties, and the
classifications applied to Fund investments will be informed by applicable
law. A large economic or market sector shall not be construed as a single
industry or group of industries. The Manager currently considers securities
issued by a foreign government (but not the U.S. Government or its agencies or
instrumentalities) to be an “industry” subject to the 25% limitation.
Thus, not more than 25% of the Fund’s total assets will be invested in
securities issued by any one foreign government or supranational organization.
The Fund might invest in certain securities issued by companies in a particular
industry whose obligations are guaranteed by a foreign government.
The Manager could consider such a company to be within the particular industry
and, therefore, the Fund will invest in the securities of such a
company only if it can do so under its policy of not being concentrated in any
single industry or group of industries.
Non-Fundamental
Investment Restrictions. The
following non-fundamental investment restrictions apply to the Fund (except
where noted otherwise)
and may be changed with respect to the Fund by a vote of a majority of the
Board. The Fund may not:
1 |
Invest
more than 15% of its net assets in illiquid securities, including time
deposits and repurchase agreements that mature in more than seven
days;
or |
2 |
Purchase
securities on margin, except that (1) the Fund may obtain such short-term
credits as necessary for the clearance of transactions, and (2)
the
Fund may make margin payments in connection with foreign currency, futures
contracts, options, forward contracts, swaps, caps, floors, collars,
securities purchased or sold on a forward-commitment or delayed-delivery
basis or other financial instruments. |
All
percentage limitations on investments will apply at the time of the making of an
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the extent
designated as such in the Prospectus, the other investment policies described in
this SAI are not fundamental and may be changed by approval of
the Trustees.
TEMPORARY
OR DEFENSIVE INVESTMENTS
In times of
unstable or adverse market, economic, political or other conditions, where the
Manager or the sub-advisors believe it is appropriate and in the Fund’s
best interest, the Fund can invest up to 100% in cash and other types of
securities for defensive or temporary purposes. It can also hold cash or
purchase these types of securities for liquidity purposes to meet cash needs due
to redemptions of Fund shares, or to hold while waiting to invest cash
received from purchases of Fund shares or the sale of other portfolio
securities.
These
temporary investments can include: (i) obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; (ii) commercial paper rated
in the highest short-term category by a rating organization; (iii) domestic,
Yankee and Eurodollar certificates of deposit or bankers’ acceptances
of banks rated in the highest short-term category by a rating organization; (iv)
any of the foregoing securities that mature in one year or less
(generally known as “cash equivalents”); (v) other short-term corporate debt
obligations; (vi) repurchase agreements; (vii) futures; or (viii) shares of
money
market funds, including funds advised by the Manager or the
sub-advisors.
PORTFOLIO
TURNOVER
Portfolio
turnover is a measure of trading activity in a portfolio of securities, usually
calculated over a period of one year. The rate is calculated by dividing
the lesser amount of purchases or sales of securities by the average amount of
securities held over the period. A portfolio turnover rate of 100% would
indicate that the Fund sold and replaced the entire value of its securities
holdings during the period. High portfolio turnover can increase the Fund’s
transaction costs and generate additional capital gains or losses.
Portfolio
turnover may vary significantly from year to year due to a variety of factors,
including fluctuating volume of shareholder purchase and redemption
orders, market conditions, investment strategy changes, and/or changes in a
sub-advisor’s investment outlook.
DISCLOSURE
OF PORTFOLIO HOLDINGS
The Fund
publicly discloses portfolio holdings information as follows:
1 |
a
complete list of holdings for the Fund on an annual and semi-annual basis
in the reports to shareholders within sixty days of the end of each fiscal
semi-annual
period and in publicly available filings of Form N-CSR with the SEC within
ten days thereafter (available on the SEC’s website at www.sec.gov); |
2 |
a
complete list of holdings for the Fund as of the end of each fiscal
quarter in publicly available filings of Form N-PORT with the SEC within
sixty days
of the end of the fiscal quarter (available on the SEC’s website at
www.sec.gov); |
3 |
a
complete list of holdings for the Fund as of the end of each month on the
Fund’s website (www.americanbeaconfunds.com) approximately twenty
days after the end of the month; and |
4 |
ten
largest holdings for the Fund as of the end of each calendar quarter on
the Fund’s website (www.americanbeaconfunds.com) and in sales materials
approximately fifteen days after the end of the calendar
quarter. |
Public
disclosure of the Fund’s holdings on the website and in sales materials may be
delayed when an investment manager informs the Fund that such disclosure
could be harmful to the Fund. In addition, individual holdings may be omitted
from website and sales material disclosure, when such omission is
deemed to be in the Fund’s best interest. Disclosure of the Fund’s ten largest
holdings may exclude U.S. Treasury securities and cash equivalent
assets, although such holdings will be included in the Fund’s complete list of
holdings.
Disclosure
of Nonpublic Holdings
Occasionally,
certain interested parties — including individual investors, institutional
investors, intermediaries that distribute shares of the Fund, third-party
service providers, rating and ranking organizations, and others — may request
portfolio holdings information that has not yet been publicly disclosed
by the Fund. The Fund’s policy is to control the disclosure of nonpublic
portfolio holdings information in an attempt to prevent parties from
utilizing
such information to engage in trading activity harmful to Fund shareholders. To
this end, the Board has adopted a Holdings Policy. The purpose of
the Holdings Policy is to define those interested parties who are authorized to
receive nonpublic portfolio holdings information on a selective
basis and to set forth conditions upon which such information may be provided.
In general, nonpublic portfolio holdings may be disclosed on a selective
basis only when it is determined that: (i) there is a legitimate business
purpose for the information; (ii) recipients are subject to a duty of
confidentiality,
including a duty not to trade on the nonpublic information; and (iii) disclosure
is in the best interests of Fund shareholders. The Holdings
Policy does not restrict the Fund from disclosing that a particular security is
not a holding of the Fund. The Holdings Policy is summarized below.
A variety
of third-party service providers require access to Fund holdings to provide
services to the Fund or to assist the Manager and the sub-advisors in managing
the Fund (“service providers”). The service providers have a duty to keep the
Fund’s nonpublic information confidential either through written
contractual arrangements with the Fund (or another Fund service provider) or by
the nature of their role with respect to the Fund (or the service provider).
The Fund has determined that disclosure of nonpublic holdings information to
service providers fulfills a legitimate business purpose and is in the best
interest of shareholders. In addition, the Fund has determined that disclosure
of nonpublic holdings information to members of the Board fulfills
a legitimate business purpose, is in the best interest of Fund shareholders, and
each Trustee is subject to a duty of confidentiality.
The Fund
has ongoing arrangements to provide nonpublic holdings information to the
following service providers:
|
| |
Service
Provider |
Service |
Holdings
Access |
Manager |
Investment
management and administrator |
Complete
list on intraday basis with no lag |
Sub-Advisor |
Investment
management |
Holdings
under sub-advisor’s management on intraday
basis with no lag |
State
Street Bank and Trust Co. (“State Street”) and
its designated foreign sub-custodians |
Fund’s
custodian and foreign custody manager, sub-administrator,
and foreign sub-custodians |
Complete
list on intraday basis with no lag |
PricewaterhouseCoopers
LLP |
Fund’s
independent registered public accounting firm |
Complete
list on annual basis with no lag |
Bloomberg,
L.P. |
Performance
and portfolio analytics reporting |
Complete
list on daily basis with no lag |
BNP
Paribas Security Services |
Middle
Office provider to sub-advisor |
Complete
list on monthly basis with no lag |
Citibank
NA and its affiliates |
Middle
Office provider to sub-advisor |
Complete
list on monthly basis with no lag |
FactSet
Research Systems, Inc. |
Performance
and portfolio analytics reporting for the
Manager and sub-advisor |
Complete
list on daily basis with no lag |
|
| |
Service
Provider |
Service |
Holdings
Access |
Virtu
ITG, LLC |
Fair
valuation of portfolio securities for American Beacon
Funds with significant foreign securities holdings;
transaction cost analysis for sub-advisor. |
Complete
list on daily basis with no lag and more
frequently when the Manager seeks advice with
respect to certain holdings |
KPMG
International |
Service
provider to State Street |
Complete
list on annual basis with lag |
Certain
third parties are provided with nonpublic holdings information (either complete
or partial lists) by the Manager or another service provider on an ad hoc
basis in the
ordinary course of business. These
third parties include: broker-dealers, prospective sub-advisors, borrowers of
the Fund’s portfolio
securities, pricing services, legal counsel, and issuers (or their agents).
Broker-dealers utilized by the Fund in the process of purchasing and
selling
portfolio securities or providing market quotations receive limited holdings
information on a current basis with no lag. The Manager provides current
holdings to investment managers being considered for appointment as a
sub-advisor to the Fund. If the Fund participates in securities lending
activities,
potential borrowers of the Fund’s securities receive information pertaining to
the Fund’s securities available for loan. Such information is provided on
a current basis with no lag. The Fund utilizes various pricing services to
supply market quotations and evaluated prices to State Street. State
Street and the Manager may disclose current nonpublic holdings to those pricing
services. An investment manager may provide holdings information
to legal counsel when seeking advice regarding those holdings. From time to
time, an issuer (or its agent) may contact the Fund requesting confirmation
of ownership of the issuer’s securities. Such holdings information is provided
to the issuer (or its agent) as of the date requested. The Fund does
not have written contractual arrangements with these third parties regarding the
confidentiality of the holdings information. However, the Fund would
not continue to utilize a third party that the Manager determined to have
misused nonpublic holdings information.
The Fund
has ongoing arrangements to provide periodic holdings information to certain
organizations that publish ratings and/or rankings for the Fund or that
redistribute the Fund’s holdings to financial intermediaries to facilitate their
analysis of the Fund. The Fund has determined that disclosure of holdings
information to such organizations fulfills a legitimate business purpose and is
in the best interest of shareholders, as it provides existing and potential
shareholders with an independent basis for evaluating the Fund in comparison to
other mutual funds. As of the date of this SAI, all such organizations
receive holdings information after it has been made public on the Fund’s
website.
No
compensation or other consideration may be paid to the Fund, the Fund’s service
providers, or any other party in connection with the disclosure of portfolio
holdings information.
Under the
Holdings Policy, disclosure of nonpublic portfolio holdings information to
parties other than those discussed above must meet all of the following
conditions:
1 |
Recipients
of portfolio holdings information must agree in writing to keep the
information confidential until it has been posted to the Fund’s
website
and not to trade based on the information; |
2 |
Holdings
may only be disclosed as of a month-end date; |
3 |
No
compensation may be paid to the Fund, the Manager or any other party in
connection with the disclosure of information about portfolio securities;
and |
4 |
A
member of the Manager’s Compliance staff must approve requests for
nonpublic holdings information. |
In
determining whether to approve a request for portfolio holdings disclosure by
the Manager, Compliance staff generally considers the type of requestor
and its relationship to the Fund, the stated reason for the request, any
historical pattern of requests from that same individual or entity, the
style and
strategy of the Fund for which holdings have been requested (e.g., passive
versus active management), whether the Fund is managed by one or multiple
investment managers, and any other factors it deems relevant. Any potential
conflicts between shareholders and affiliated persons of the Fund that
arise as a result of a request for portfolio holdings information shall be
decided by the Manager in the best interests of shareholders. However, if
a conflict exists between the interests of shareholders and the Manager, the
Manager may present the details of the request to the Board for a
determination to either approve or deny the request. On a quarterly basis, the
Manager will prepare a report for the Board outlining any instances of
disclosures of nonpublic holdings during the period that did not comply with the
Holdings Policy. The Compliance staff generally determines whether a
historical pattern of requests by the same individual or entity constitutes an
“ongoing arrangement” and should be disclosed in the Fund’s SAI.
The Manager
and the sub-advisor(s) to the Fund may manage substantially similar portfolios
for clients other than the Fund. Those other clients may receive and
publicly disclose their portfolio holdings information prior to public
disclosure by the Fund. The Holdings Policy is not intended to limit the
Manager or
the sub-advisor(s) from making such disclosures to their clients.
LENDING
OF PORTFOLIO SECURITIES
The Fund
may lend securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions.
In connection with such loans, the Fund remains the beneficial owner of the
loaned securities and continues to be entitled to payments in amounts
approximately equal to the interest, dividends or other distributions payable on
the loaned securities. The Fund also has the right to terminate a loan at
any time. The Fund does not have the right to vote on securities while they
are on loan. However, it is the Fund’s policy to attempt to terminate
loans in time to vote those proxies that the Fund determines are material to its
interests. Loans of portfolio securities may not exceed 33¹/3%
of the
value of the Fund’s total assets (including the value of all assets received as
collateral for the loan). The Fund will receive collateral consisting of
cash in the
form of cash or cash equivalents, securities of the U.S. Government and its
agencies and instrumentalities, approved bank letters of credit, or other
forms of collateral that are permitted by the SEC for registered investment
companies, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. If the
collateral consists of cash, the Fund will reinvest the cash and may
pay the
borrower a pre-negotiated fee or “rebate” for the use of that cash collateral.
Under the terms of the securities loan agreement between the
Fund and
State Street, its securities lending agent, State Street indemnifies the Fund
for certain losses resulting from a borrower default. However, should the
borrower of the securities fail financially, the Fund may experience delays in
recovering the loaned securities or exercising its rights in the collateral.
In a loan transaction, the Fund will also bear the risk of any decline in value
of securities acquired with cash collateral. The Fund seeks to minimize
this risk by normally limiting the investment of cash collateral to registered
money market funds, including money market funds advised by the Manager
that invest in U.S. Government and agency securities.
For all
funds that engage in securities lending, the Manager receives compensation for
administrative and oversight functions with respect to securities lending,
including oversight of the securities lending agent. The amount of such
compensation depends on the income generated by the loan of the securities.
As of the
date of this SAI, the Fund does not intend to engage in securities lending
activities.
TRUSTEES
AND OFFICERS OF THE TRUST
The
Board of Trustees
The Trust
is governed by its Board of Trustees. The Board is responsible for and oversees
the overall management and operations of the Trust and the Fund, which
includes the general oversight and review of the Fund’s investment activities,
in accordance with federal law and the law of the Commonwealth
of Massachusetts as well as the stated policies of the Fund. The Board oversees
the Trust’s officers and service providers, including American
Beacon, which is responsible for the management of the day-to-day operations of
the Fund based on policies and agreements reviewed and approved by
the Board. In carrying out these responsibilities, the Board regularly interacts
with and receives reports from senior personnel of service providers,
including American Beacon’s investment personnel and the Trust’s CCO. The Board
also is assisted by the Trust’s independent registered public
accounting firm (which reports directly to the Trust’s Audit and Compliance
Committee), independent counsel and other experts as appropriate, all of whom
are selected by the Board.
Risk
Oversight
Consistent
with its responsibility for oversight of the Trust and the Fund, the Board
oversees the management of risks relating to the administration and operation
of the Trust and the Fund. American Beacon, as part of its responsibilities for
the day-to-day operations of the Fund, is responsible for day-to-day
risk management for the Fund. The Board, in the exercise of its reasonable
business judgment, also separately considers potential risks that may impact
the Fund. The Board performs this risk management oversight directly and, as to
certain matters, through its committees (described below) and through
the Board members who are not “interested persons” of the Trust as defined in
Section 2(a)(19) of the Investment Company Act (“Independent
Trustees”). The following provides an overview of the principal, but not all,
aspects of the Board’s oversight of risk management for the Trust and
the Fund.
In general,
the Fund’s risks include, among others, investment risk, credit risk, liquidity
risk, securities selection risk and valuation risk. The Board has adopted,
and periodically reviews, policies and procedures designed to address these and
other risks to the Trust and the Fund. In addition, under the general
oversight of the Board, American Beacon, the Fund’s investment adviser, and
other service providers to the Fund have themselves adopted a variety of
policies, procedures and controls designed to address particular risks to the
Fund. Different processes, procedures and controls are employed with
respect to different types of risks. Further, American Beacon as manager of the
Fund oversees and regularly monitors the investments, operations and
compliance of the Fund’s investment advisers.
The Board
also oversees risk management for the Trust and the Fund through review of
regular reports, presentations and other information from officers of
the Trust and other persons. Senior officers of the Trust, and senior officers
of American Beacon, and the Fund’s CCO regularly report to the Board on a
range of matters, including those relating to risk management. The Board and the
Investment Committee also regularly receive reports from American
Beacon with respect to the investments, securities trading and securities
lending activities of the Fund, as applicable. In addition to regular
reports
from American Beacon, the Board also receives reports regarding other service
providers to the Trust, either directly or through American Beacon or
the Fund’s CCO, on a periodic or regular basis. At least annually, the Board
receives a report from the Fund’s CCO regarding the effectiveness
of the Fund’s compliance program. Also, typically on an annual basis, the Board
receives reports, presentations and other information from
American Beacon in connection with the Board’s consideration of the renewal of
each of the Trust’s agreements with American Beacon and the Trust’s
distribution plans under Rule 12b-1 under the Investment Company
Act.
Senior
officers of the Trust and American Beacon also report regularly to the Audit and
Compliance Committee on Fund valuation matters and on the Trust’s
internal controls and accounting and financial reporting policies and practices.
In addition, the Audit and Compliance Committee receives regular
reports from the Trust’s independent registered public accounting firm on
internal control and financial reporting matters. On at least a quarterly
basis, the Audit and Compliance Committee meets with the Fund’s CCO to discuss
matters relating to the Fund’s compliance program.
Board
Structure and Related Matters
Independent
Trustees constitute at least three-quarters of the Board. Brenda A. Cline, an
Independent Trustee, serves as Independent Chair of the Board. The
Independent Chair’s responsibilities include: setting an agenda for each meeting
of the Board; presiding at all meetings of the Board and Independent
Trustees; and serving as a liaison with other Trustees, the Trust’s officers and
other management personnel, and counsel to the Fund. The Independent
Chair shall perform such other duties as the Board may from time to time
determine.
The
Trustees discharge their responsibilities collectively as a Board, as well as
through Board committees, each of which operates pursuant to a charter
approved by
the Board that delineates the responsibilities of that committee. The Board has
established three standing committees: the Audit and Compliance
Committee, the Investment Committee and the Nominating and Governance Committee.
For example, the Investment Committee is responsible
for oversight of the process, typically performed annually, by which the Board
considers and approves the Fund’s investment advisory
agreement
with American Beacon, while specific matters related to oversight of the Fund’s
independent auditors have been delegated by the Board to its Audit
and Compliance Committee, subject to approval of the Audit and Compliance
Committee’s recommendations by the Board. The members and
responsibilities of each Board committee are summarized below.
The Board
periodically evaluates its structure and composition as well as various aspects
of its operations. The Board believes that its leadership structure,
including its Independent Chair position and its committees, is appropriate for
the Trust in light of, among other factors, the asset size and nature of
the funds in the Trust, the number of series of the American Beacon Funds
Complex overseen by the Board, the arrangements for the conduct of
the Fund’s operations, the number of Trustees, and the Board’s responsibilities.
On an annual basis, the Board conducts a self-evaluation that
considers, among other matters, whether the Board and its committees are
functioning effectively and whether, given the size and composition of
the Board
and each of its committees, the Trustees are able to oversee effectively the
number of Funds in the complex.
The Trust
is part of the American Beacon Funds Complex, which is comprised of
25 series within the American Beacon Funds, 1 series within the
American
Beacon Institutional Funds Trust, and 1 series within the American
Beacon Select Funds. The same persons who constitute the Board of the
Trust also
constitute the Board of the American Beacon Institutional Funds Trust and the
American Beacon Select Funds and each Trustee oversees the Trusts’
combined 27 series.
The Board
holds five (5) regularly scheduled meetings each year. The Board may hold
special meetings, as needed, either in person or by telephone, to address
matters arising between regular meetings. The Independent Trustees also hold at
least one in-person meeting each year during a portion of which
management is not present and may hold special meetings, as needed, either in
person or by telephone.
The
Trustees of the Trust are identified in the tables below, which provide
information as to their principal business occupations and directorships held
during the
last five years and certain other information. Subject to the Trustee Retirement
Plan described below, a Trustee serves until his or her successor
is elected and qualified or until his or her earlier death, resignation or
removal. The address of each Trustee listed below is 220 East Las Colinas
Boulevard, Suite 1200, Irving, Texas 75039. Each Trustee serves for an
indefinite term or until his or her removal, resignation, or
retirement.*
|
|
| |
Name
(Age)*
|
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
INTERESTED
TRUSTEE |
|
|
|
Eugene
J. Duffy (68)**
|
Trustee
since 2008 |
Trustee
since 2017 |
Managing
Director, Global Investment Management Distribution, Mesirow Financial
Administrative
Corporation (2016-Present); Managing Director, Institutional Services,
Intercontinental
Real Estate Corporation (2014-2016); Trustee, American Beacon Sound
Point
Enhanced Income Fund (2018-2021); Trustee, American Beacon Apollo Total
Return Fund
(2018-2021). |
NON-INTERESTED
TRUSTEES |
|
|
|
Gilbert
G. Alvarado (53) |
Trustee
since 2015 |
Trustee
since 2017 |
Chief
Financial Officer, The Conrad Prebys Foundation (2022-Present); President,
SJVIIF, LLC, Impact
Investment Fund (2018-2022); Director, Kura MD, Inc. (local telehealth
organization) (2015-2017);
Senior Vice President/CFO, Sierra Health Foundation (health conversion
private
foundation) (2006-2022); Senior Vice President/CFO, Sierra Health
Foundation: Center
for Health Program Management (California public benefit corporation)
(2012-2022);
Director, Sacramento Regional Technology Alliance (2011-2016); Director,
Valley
Healthcare Staffing (2017–2018); Trustee, American Beacon Sound Point
Enhanced Income
Fund (2018-2021); Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
Joseph
B. Armes (61) |
Trustee
since 2015 |
Trustee
since 2017 |
Director,
Switchback Energy Acquisition (2019-2021); Chairman & CEO, CSW
Industrials f/k/a
Capital Southwest Corporation (investment company) (2015-Present);
Chairman of the Board
of Capital Southwest Corporation, predecessor to CSW Industrials, Inc.
(investment company)
(2014-2017); President & CEO, JBA Investment Partners (family
investment vehicle)
(2010-Present); Director and Chair of Audit Committee, RSP Permian (oil
and gas producer)
(2013-2018); Trustee, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
Gerard
J. Arpey (64) |
Trustee
since 2012 |
Trustee
since 2017 |
Partner,
Emerald Creek Group (private equity firm) (2011-Present); Director, S.C.
Johnson & Son,
Inc. (privately held company) (2008-Present); Director, The Home Depot,
Inc. (NYSE: HD)
(2015-Present); Trustee, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
Brenda
A. Cline (62) |
Chair
since 2019
Vice
Chair 2018
Trustee
since 2004 |
Chair
since 2019
Vice
Chair 2018
Trustee
since 2017 |
Chief
Financial Officer, Treasurer and Secretary, Kimbell Art Foundation
(1993-Present); Director,
Tyler Technologies, Inc. (public sector software solutions company)
(2014-Present); Director,
Range Resources Corporation (oil and natural gas company) (2015-Present);
Trustee,
Cushing Closed-End (2) and Open-End Funds (3) (2017-2021); Chair, American
Beacon
Sound Point Enhanced Income Fund (2019-2021), Vice Chair (2018), Trustee
(2018-2021);
Chair, American Beacon Apollo Total Return Fund (2019-2021), Vice Chair
(2018),
Trustee (2018-2021). |
|
|
| |
Name
(Age)* |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
Claudia
A. Holz (65) |
Trustee
since 2018 |
Trustee
since 2018 |
Independent
Director, Blue Owl Capital Inc. (2021-Present); Partner, KPMG LLP
(1990-2017);
Trustee, American Beacon Sound Point Enhanced Income Fund (2018-2021);
Trustee,
American Beacon Apollo Total Return Fund (2018-2021). |
Douglas
A. Lindgren (61) |
Trustee
since 2018 |
Trustee
since 2018 |
Director,
JLL Income Property Trust (2022-Present); CEO North America, Carne Global
Financial
Services (2016-2017); Consultant, Carne Financial Services (2017-2019);
Managing
Director, IPS Investment Management and Global Head, Content Management,
UBS
Wealth Management (2010-2016); Trustee, American Beacon Sound Point
Enhanced Income
Fund (2018-2021); Trustee, American Beacon Apollo Total Return Fund
(2018-2021). |
Barbara
J. McKenna (60) |
Trustee
since 2012 |
Trustee
since 2017 |
President/Managing
Principal, Longfellow Investment Management Company (2005-Present,
President since 2009); Member, External Diversity Council of the Federal
Reserve
Bank of Boston (2021-Present); Member, Federal Reserve Bank of Boston CEO
Roundtable
(2021-Present); Board Advisor, United States Tennis Association
(2021-Present); Trustee,
American Beacon Sound Point Enhanced Income Fund (2018-2021); Trustee,
American
Beacon Apollo Total Return Fund
(2018-2021). |
* |
The
Board has adopted a retirement policy that requires Trustees to retire no
later than the last day of the calendar year in which they reach the age
of 75. |
** |
Mr.
Duffy is deemed to be an “interested person” of the Trust, as defined by
the Investment Company Act of 1940, as amended, by virtue of his position
with Mesirow Financial,
Inc., a broker-dealer. |
In addition
to the information set forth in the tables above and other relevant
qualifications, experience, attributes or skills applicable to a particular
Trustee,
the following provides further information about the qualifications and
experience of each Trustee.
Gilbert G.
Alvarado: Mr. Alvarado has extensive organizational management and financial
experience as senior vice president and chief financial officer in public
charities and private foundations, service as director of private companies and
non-profit organizations, service as president of non-profit institutional
investment fund, an adjunct professor for a non-profit school of management at
University of San Francisco, and multiple years of service as a
Trustee.
Joseph B.
Armes: Mr. Armes has extensive financial, investment and organizational
management experience as chairman of the board of directors, president
and chief executive officer of an investment company listed on NASDAQ, president
and chief executive officer of a private family investment vehicle,
chief operating officer of a private holding company for a family office,
president, chief executive officer, chief financial officer and director of a
special
purpose acquisition company listed on the American Stock Exchange, a director
and audit committee chair of an oil and gas exploration and production
company listed on the New York Stock Exchange and as an officer of public
companies and as a director and officer of private companies, and
multiple years of service as a Trustee.
Gerard J.
Arpey: Mr. Arpey has extensive organizational management, financial and
international experience serving as chairman, chief executive officer,
and chief financial officer of one of the largest global airlines, service as a
director of public and private companies, service to several charitable
organizations,
and multiple years of service as a Trustee.
Brenda A.
Cline: Ms. Cline has extensive organizational management, financial and
investment experience as executive vice president, chief financial officer,
secretary and treasurer to a private foundation, service as a director, trustee,
audit committee chair, and member of the nominating and governance
committees of various publicly held companies and mutual funds, service as a
trustee to a private university, and several charitable boards, including
acting as a member of their investment and/or audit committees, extensive
experience as an audit senior manager with a large public accounting
firm, and multiple years of service as a Trustee.
Eugene J.
Duffy: Mr. Duffy has extensive experience in the investment management business
and organizational management experience as a member of senior
management, service as a director of a bank, service as a chairman of a
charitable fund and as a trustee to an association, service on the board of a
private university and non-profit organization, service as chair to a financial
services industry association, and multiple years of service as a Trustee.
Claudia A.
Holz: Ms. Holz has extensive financial audit and organizational management
experience obtained as an audit partner with a major public accounting
firm for over 27 years. Prior to her retirement, she led audits of large public
investment company complexes and held several management roles in
the firm’s New York and national offices.
Douglas A.
Lindgren: Mr. Lindgren has extensive senior management experience in the asset
management industry, having overseen several organizations
and numerous fund structures and having served as an Adjunct Professor of
Finance at Columbia Business School.
Barbara J.
McKenna: Ms. McKenna has extensive experience in the investment management
industry, organizational management experience as a member of
senior management, service as a director of an investment manager, member of
numerous financial services industry associations, and multiple
years of service as a Trustee.
Committees
of the Board
The Trust
has an Audit and Compliance Committee (“Audit Committee”). The Audit
Committee consists of Mses. Holz (Chair) and McKenna, and Messrs.
Armes and Duffy. Ms. Cline, as Chair of the Board, serves on the Audit Committee
in an ex-officio non-voting capacity. As set forth in its charter,
the primary duties of the Trust’s Audit Committee are: (a) to oversee the
accounting and financial reporting processes of the Trust and the Fund
and their
internal controls and, as the Committee deems appropriate, to inquire into the
internal controls of certain third-party service providers; (b) to oversee the
quality and integrity of the Trust’s financial statements and the independent
audit thereof; (c) to approve, prior to appointment, the engagement
of the Trust’s independent auditors and, in connection therewith, to review and
evaluate the qualifications, independence and performance
of the Trust’s independent auditors; (d) to oversee the Trust’s compliance with
all regulatory obligations arising under applicable federal securities
laws, rules and regulations and oversee management’s implementation and
enforcement of the Trust’s compliance policies and procedures (“Compliance
Program”); and (e) to coordinate the Board’s oversight of the Trust’s CCO in
connection with his or her implementation of the Trust’s Compliance
Program. The Audit Committee met four (4) times during the fiscal year
ended January 31, 2023.
The Trust
has a Nominating and Governance Committee (“Nominating Committee”) that is
comprised of Messrs. Armes (Chair) and Alvarado, and Mses. Cline
and McKenna. As set forth in its charter, the Nominating Committee’s primary
duties are: (a) to make recommendations regarding the nomination
of non-interested Trustees to the Board; (b) to make recommendations regarding
the appointment of an Independent Trustee as Chair of the Board;
(c) to evaluate qualifications of potential “interested” members of the Board
and Trust officers; (d) to review shareholder recommendations for
nominations to fill vacancies on the Board; (e) to make recommendations to the
Board for nomination for membership on all committees of the Board; (f)
to consider and evaluate the structure, composition and operation of the Board;
(g) to review shareholder recommendations for proposals to be
submitted for consideration during a meeting of Fund shareholders; and (h) to
consider and make recommendations relating to the compensation of
Independent Trustees and of those officers as to whom the Board is charged with
approving compensation. Shareholder recommendations for Trustee
candidates may be mailed in writing, including a comprehensive resume and any
supporting documentation, to the Nominating Committee in care of the
Secretary of the Fund, and must otherwise comply with the Declaration of Trust
and By-Laws of the Trust. The Nominating and Governance Committee
met four (4) times during the fiscal year ended January 31,
2023.
The Trust
has an Investment Committee that is comprised of Messrs. Lindgren (Chair),
Alvarado and Arpey. Ms. Cline, as Chair of the Board, serves on the
Investment Committee in an ex-officio non-voting capacity. As set forth in its
charter, the Investment Committee’s primary duties are: (a) to review
and
evaluate the short- and long-term investment performance of the Manager and each
of the designated sub-advisors to the Fund; (b) to evaluate recommendations
by the Manager regarding the hiring or removal of designated sub-advisors to the
Fund; (c) to review material changes recommended
by the Manager to the allocation of Fund assets to a sub-advisor; (d) to review
proposed changes recommended by the Manager to the investment
objectives or principal investment strategies of the Fund; and (e) to review
proposed changes recommended by the Manager to the material provisions
of the advisory agreement with a sub-advisor, including, but not limited to,
changes to the provision regarding compensation. The Investment
Committee met four (4) times during the fiscal year ended January 31,
2023.
Trustee
Ownership in the Fund
The
following tables show the amount of equity securities owned in the Fund and all
series of the American Beacon Funds Complex by the Trustees as of the
calendar year ended December 31, 2022.
|
|
|
|
|
|
| |
|
INTERESTED
TRUSTEE |
|
Duffy |
American
Beacon Developing World Income Fund |
$10,001-$50,000 |
Aggregate
Dollar Range of Equity Securities in all Trusts (27
Funds as of December 31, 2022) |
Over
$100,000 |
|
NON-INTERESTED
TRUSTEES |
|
Alvarado |
Armes |
Arpey |
Cline |
Holz |
Lindgren |
McKenna |
American
Beacon Developing World Income Fund |
None |
None |
None |
None |
None |
None |
None |
Aggregate
Dollar Range of Equity Securities in all Trusts (27
Funds as of December 31, 2022) |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Over
$100,000 |
Trustee
Compensation
As
compensation for their service to the American Beacon Funds Complex, including
the Trust (collectively, the “Trusts”), each Trustee is compensated from the
Trusts as follows: (1) an annual retainer of $130,000; (2) meeting attendance
fee (for attendance in person or via teleconference) of (a) $12,000 for
in-person attendance, or $5,000 for telephonic attendance, by Board members for
each regularly scheduled or special Board meeting, (b) $2,500 for
attendance by Committee members at meetings of the Audit Committee and the
Investment Committee, (c) $1,000 for attendance by Committee
members at meetings of the Nominating and Governance Committee; and (d) $2,500
for attendance by Board members for each special telephonic
Board meeting; and (3) reimbursement of reasonable expenses incurred in
attending Board meetings, Committee meetings, and relevant educational
seminars. For this purpose, the Board considers attendance at regular meetings
held by videoconference to constitute in-person attendance
at a Board meeting. The Trustees also may be compensated for attendance at
special Board and/or Committee meetings from time to time.
For her
service as Board Chair, Ms. Cline receives an additional annual retainer of
$50,000. Although she attends several committee meetings at each quarterly
Board meeting, she receives a single $2,500 fee each quarter for her attendance
at the Audit Committee and Investment Committee meetings.
The chairpersons of the Audit Committee and the Investment Committee each
receive an additional annual retainer of $25,000 and the Chair of
the Nominating and Governance Committee receives an additional annual retainer
of $10,000.
|
| |
The
following table shows total compensation (excluding reimbursements) paid
by the Trusts to each Trustee for the fiscal year ended January 31,
2023. |
Name
of Trustee |
Aggregate
Compensation from the Trust |
Total
Compensation from the Trusts |
INTERESTED
TRUSTEE |
|
|
Eugene
J. Duffy |
$206,961 |
$219,000 |
NON-INTERESTED
TRUSTEES |
|
|
Gilbert
G. Alvarado |
$226,806 |
$240,000 |
Joseph
B. Armes |
$216,411 |
$229,000 |
Gerard
J. Arpey |
$202,236 |
$214,000 |
Brenda
A. Cline1
|
$259,882 |
$275,000 |
Claudia
A. Holz |
$203,181 |
$215,000 |
Douglas
A. Lindgren |
$203,181 |
$215,000 |
Barbara
J. McKenna |
$207,197 |
$219,250 |
1 |
Upon
her retirement from the Board, Ms. Cline is eligible for flight benefits
afforded to Eligible Trustees who served on the Boards prior to September
12, 2008 as described
below. |
The Boards
have adopted a Trustee Retirement Plan. The Trustee Retirement Plan provides
that a Trustee who has served on the Boards prior to September
12, 2008, and who has reached a mandatory retirement age established by the
Board (currently 75) is eligible to elect Trustee Emeritus status
(“Eligible Trustees”). Eligible Trustees who have served on the Board of one or
more Trusts for at least five years may elect to retire from the Board at an
earlier age and immediately assume Trustee Emeritus status. The Board has
determined that, other than the Trustee Retirement Plan established
for Eligible Trustees, no other retirement benefits will accrue for current or
future Trustees. Ms. Cline is the only Eligible Trustee.
Each
Eligible Trustee and his or her spouse (or designated companion) may receive
annual flight benefits from the Trusts of up to $40,000 combined, on a
tax-grossed up basis, on American Airlines (a subsidiary of the Manager’s former
parent company) for a maximum period of 10 years, depending upon length
of service prior to September 12, 2008. Eligible Trustees may opt to receive
instead an annual retainer of $20,000 from the Trusts in lieu of flight
benefits. No retirement benefits are accrued for Board service after September
12, 2008.
A Trustee
Emeritus must be reasonably available to provide advice, counseling and
assistance to the Trustees and American Beacon as needed, as agreed to
from time to time by the parties involved; however, a Trustee Emeritus does not
have any voting rights at Board meetings and is not subject to election
by shareholders of the Fund. Currently, three individuals who retired from
the Board and accrued retirement benefits for periods prior to September
12, 2008, have assumed Trustee Emeritus status. Two individuals and their
spouses receive annual flight benefits of up to $40,000 combined,
on a tax-grossed up basis, on American Airlines. The other individual receives
an annual retainer of $20,000 from the Trusts in lieu of flight benefits.
Principal
Officers of the Trust
The
Officers of the Trust conduct and supervise its daily business. As of the date
of this SAI, the Officers of the Trust, their ages, their business address
and their
principal occupations and directorships during the past five years are as set
forth below. The address of each Officer is 220 East Las Colinas Boulevard,
Suite 1200, Irving, Texas 75039. Each Officer serves for a term of one year or
until his or her resignation, retirement, or removal. Each Officer has
and continues to hold the same position with the American Beacon Funds, the
American Beacon Select Funds, and the American Beacon Institutional
Funds Trust.
|
|
| |
Name
(Age) |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
OFFICERS |
|
|
|
Jeffrey
K. Ringdahl (48) |
President since
April 2022
Vice
President 2010-2022 |
President since
April 2022
Vice
President 2017-2022 |
Director
(2015-Present), President (2018-Present), Chief Executive Officer
(2022-Present), Chief
Operating Officer (2010-2022), Senior Vice President (2013-2018), American
Beacon Advisors,
Inc.; Director (2015-Present), President (2018-Present), Senior Vice
President (2015-2018),
Resolute Investment Holdings, LLC; Director (2015-Present), President
(2018-Present),
Senior Vice President (2015-2018), Resolute Topco, Inc.; Director
(2015-Present),
President (2018-Present), Senior Vice President (2015-2018), Resolute
Acquisition,
Inc.; Director (2015-Present), President (2018-Present), Chief Executive
Officer (2022-Present),
Chief Operating Officer (2018-2022), Senior Vice President (2015-2018),
Resolute
Investment Managers, Inc.; Director (2017-Present), President and Chief
Executive Officer
(2022-Present), Executive Vice President (2017-2022), Resolute Investment
Distributors,
Inc.; Director (2017-Present), President (2018-Present), Chief Executive
Officer (2022-Present),
Chief Operating Officer (2018-2022), Executive Vice President (2017-2018),
Resolute
Investment Services, Inc.; President (2022-Present), Senior Vice President
(2017-2022),
Vice President (2012-2017), Manager (2015-Present), American Private
Equity Management,
L.L.C.; Trustee, American Beacon NextShares Trust (2015-2020); Director
and Executive
Vice President & Chief Operating Officer, Alpha Quant Advisors, LLC
(2016-2020); Director,
Shapiro Capital Management, LLC (2017-Present); Director and Executive
Vice President,
Continuous Capital, LLC (2018-2022); Director, RSW Investments Holdings,
LLC (2019-Present);
Manager, SSI Investment Management, LLC (2019-Present); Director,
National
Investment Services of America, LLC (2019-Present); Director and Vice
President, American
Beacon Cayman Transformational Innovation Company, Ltd., (2017-2018); Vice
President,
American Beacon Delaware Transformational Innovation Corporation
(2017-2018);
Director (2014-Present), President (2022-Present) and Vice President
(2014-2022),
American Beacon Cayman Managed Futures Strategy Fund, Ltd.; Director
(2018-Present)
and, President (2022-Present), Vice President (2018-2022), American Beacon
Cayman
TargetRisk Company, Ltd.; Vice President, American Beacon Sound Point
Enhanced Income
Fund (2018-2021); Vice President, American Beacon Apollo Total Return Fund
(2018-2021). |
Rosemary
K. Behan (64) |
Vice
President, Secretary
and Chief
Legal Officer since
2006 |
Vice
President, Secretary
and Chief
Legal Officer since
2017 |
Senior
Vice President (2021-Present), Vice President (2006-2021), Secretary and
General Counsel
(2006-Present), American Beacon Advisors, Inc.; Secretary, Resolute
Investment Holdings,
LLC (2015-Present); Secretary, Resolute Topco, Inc. (2015-Present);
Secretary, Resolute
Acquisition, Inc. (2015-Present); Senior Vice President (2021-Present),
Vice President
(2015-2021), Secretary and General Counsel (2015-Present), Resolute
Investment Managers,
Inc.; Secretary, Resolute Investment Distributors, Inc. (2017-Present);
Senior Vice President
(2021-Present), Vice President (2017-2021), Secretary and General Counsel
(2017-Present),
Resolute Investment Services, Inc.; Secretary, American Private Equity
Management,
LLC (2008-Present); Secretary and General Counsel, Alpha Quant Advisors,
LLC
(2016-2020); Vice President and Secretary, Continuous Capital, LLC
(2018-2022); Secretary,
Green Harvest Asset Management, LLC (2019-2021); Secretary, American
Beacon
Delaware Transformational Innovation Corporation (2017-2018); Secretary,
American
Beacon Cayman Transformational Innovation Company, Ltd. (2017-2018);
Secretary,
American Beacon Cayman Managed Futures Strategy Fund, Ltd. (2014-Present);
Secretary,
American Beacon Cayman TargetRisk Company, Ltd (2018-Present); Vice
President,
Secretary, and Chief Legal Officer, American Beacon Sound Point Enhanced
Income
Fund (2018-2021); Vice President, Secretary, and Chief Legal Officer,
American Beacon
Apollo Total Return Fund (2018-2021). |
Paul
B. Cavazos (53) |
Vice
President since
2016 |
Vice
President since
2017 |
Chief
Investment Officer and Senior Vice President, American Beacon Advisors,
Inc. (2016-Present);
Vice President, American Private Equity Management, L.L.C. (2017-Present);
Vice
President, American Beacon Sound Point Enhanced Income Fund (2018-2021);
Vice President,
American Beacon Apollo Total Return Fund (2018-2021). |
Erica
B. Duncan (52) |
Vice
President since
2011 |
Vice
President since
2017 |
Vice
President, American Beacon Advisors, Inc. (2011-Present); Vice President,
Resolute Investment
Managers, Inc. (2018-Present); Vice President, Resolute Investment
Services, Inc. (2018-Present);
Vice President, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Vice President, American Beacon Apollo Total Return Fund
(2018-2021). |
|
|
| |
Name
(Age) |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
Rebecca
L. Harris (56) |
Vice
President Since
2022 |
Vice
President Since
2022 |
Senior
Vice President (2021-Present), Vice President (2011-2021), American Beacon
Advisors,
Inc.; Senior Vice President (2021-Present), Vice President (2017-2021),
Resolute Investment
Managers, Inc.; Senior Vice President (2021-Present), Vice President
(2017-2021),
Resolute Investment Services, Inc.; Vice President, Alpha Quant Advisors,
LLC (2016-2020);
Vice President (2018-2022), Director (2022) Continuous Capital, LLC;
Director (2022-Present)
National Investment Services of America, LLC; Director (2022-Present) RSW
Investments
Holdings LLC; Director (2022-Present) Shapiro Capital Management LLC;
Director
(2022-Present) SSI Investment Management LLC; Assistant Secretary,
American Beacon
Sound Point Enhanced Income Fund (2018-2021); Assistant Secretary,
American Beacon
Apollo Total Return Fund (2018-2021); Assistant Secretary, American Beacon
Funds (2010
– 2022); Assistant Secretary, American Beacon Select Funds (2010 – 2022);
Assistant Secretary,
American Beacon Institutional Funds Trust (2017 –
2022). |
Terri
L. McKinney (59) |
Vice
President since
2010 |
Vice
President since
2017 |
Senior
Vice President, (2021-Present) Vice President, (2009-2021), American
Beacon Advisors,
Inc.; Senior Vice President (2021-Present), Vice President (2017-2021),
Resolute Investment
Managers, Inc.; Senior Vice President (2021-Present), Vice President
(2018-2021),
Resolute Investment Services, Inc.; Vice President, Alpha Quant Advisors,
LLC (2016-2020);
Vice President, Continuous Capital, LLC (2018-2022); Vice President,
American
Beacon Sound Point Enhanced Income Fund (2018-2021); Vice President,
American
Beacon Apollo Total Return Fund (2018-2021). |
Samuel
J. Silver (60) |
Vice
President since
2011 |
Vice
President since
2017 |
Vice
President (2011-Present), Chief Fixed Income Officer (2016-Present),
American Beacon Advisors,
Inc.; Vice President, American Beacon Sound Point Enhanced Income Fund
(2018-2021);
Vice President, American Beacon Apollo Total Return Fund
(2018-2021). |
Melinda
G. Heika (61) |
Vice
President since
2021 |
Vice
President since
2021 |
Senior
Vice President (2021-Present), Treasurer and CFO (2010-Present), American
Beacon Advisors,
Inc.; Treasurer, Resolute Topco, Inc. (2015-Present); Treasurer, Resolute
Investment Holdings,
LLC (2015-Present); Treasurer, Resolute Acquisition, Inc. (2015-Present);
Senior Vice
President (2021-Present), Treasurer and CFO (2017-Present), Resolute
Investment Managers,
Inc.; Treasurer, Resolute Investment Distributors, Inc. (2017); Senior
Vice President
(2021-Present), Treasurer and CFO (2017-Present), Resolute Investment
Services, Inc.;
Treasurer, American Private Equity Management, L.L.C. (2012-Present);
Treasurer and CFO,
Alpha Quant Advisors, LLC (2016-2020); Treasurer, Continuous Capital, LLC
(2018-2022);
Treasurer, American Beacon Cayman Transformational Innovation, Ltd.
(2017-2018);
Treasurer, American Beacon Delaware Transformational Innovation
Corporation
(2017-2018); Director (2014-Present), Vice President (2022-Present) and
Treasurer
(2014-2022), American Beacon Cayman Managed Futures Strategy Fund, Ltd.;
Director
and Vice President (2022-Present), and Treasurer (2018-2022), American
Beacon Cayman
TargetRisk Company, Ltd.; Principal Accounting Officer and Treasurer,
American Beacon
Funds (2010-2021); Principal Accounting Officer and Treasurer, American
Beacon Select
Funds (2010-2021); Principal Accounting Officer and Treasurer, American
Beacon Institutional
Funds Trust (2017-2021); Principal Accounting Officer and Treasurer
(2018-2021),
Vice President (2021), American Beacon Sound Point Enhanced Income Fund;
Principal
Accounting Officer and Treasurer (2018-2021), Vice President (2021),
American Beacon
Apollo Total Return Fund (2018-2021). |
Gregory
Stumm (41) |
Vice
President since
2022 |
Vice
President since
2022 |
Senior
Vice President, American Beacon Advisors, Inc. (2022-Present); Senior Vice
President, Resolute
Investment Managers, Inc. (2022-Present); Senior Vice
President, Resolute Investment
Services, Inc. (2022-Present); Director and Senior Vice President,
Resolute Investment
Distributors, Inc. (2022-Present). |
Sonia
L. Bates (66) |
Principal
Accounting
Officer
and Treasurer since
2021 |
Principal
Accounting
Officer
and Treasurer since
2021 |
Assistant
Treasurer, American Beacon Advisors, Inc. (2011-2018); Vice President,
Fund and Tax
Reporting (2023-Present), Director, Fund and Tax Reporting (2011-2023),
Resolute Investment
Services, Inc; Assistant Treasurer, American Private Equity Management,
L.L.C. (2012-Present);
Assistant Treasurer, American Beacon Cayman Transformational Innovation
Company,
Ltd. (2017-2018); Treasurer, American Beacon Cayman Managed Futures
Strategy
Fund, Ltd. (2022-Present); Treasurer (2022-Present) and Assistant
Treasurer (2018-2022),
American Beacon Cayman TargetRisk Company, Ltd.; Assistant Treasurer
(2018-2021),
Principal Accounting Officer and Treasurer (2021), American Beacon Sound
Point
Enhanced Income Fund; Assistant Treasurer (2019-2021), Principal
Accounting Officer and
Treasurer (2021), American Beacon Apollo Total Return Fund; Assistant
Treasurer, American
Beacon Funds (2011-2021); Assistant Treasurer, American Beacon Select
Funds (2011-2021);
Assistant Treasurer, American Beacon Institutional Funds Trust
(2017-2021). |
|
|
| |
Name
(Age) |
Position
and Length
of Time Served
on the American
Beacon Funds
and American
Beacon Select
Funds |
Position
and Length
of Time Served
on the American
Beacon Institutional
Funds
Trust |
Principal
Occupation(s) and Directorships During Past 5 Years |
Christina
E. Sears (51) |
Chief
Compliance
Officer since
2004
Assistant
Secretary since
1999 |
Chief
Compliance
Officer
and Assistant
Secretary since
2017 |
Chief
Compliance Officer (2004-Present), Vice President (2019-Present), American
Beacon Advisors,
Inc.; Vice President, Resolute Investment Managers, Inc. (2017-Present);
Vice President,
Resolute Investment Distributors, Inc. (2017-Present); Vice President,
Resolute Investment
Services, Inc. (2019-Present); Chief Compliance Officer, American Private
Equity Management,
LLC (2012-Present); Chief Compliance Officer, Green Harvest Asset
Management,
LLC (2019-2021); Chief Compliance Officer, RSW Investments Holdings, LLC
(2019-Present);
Chief Compliance Officer (2016-2019), Vice President (2016-2020), Alpha
Quant
Advisors, LLC; Chief Compliance Officer (2018-2019), Vice President
(2018-2022), Continuous
Capital, LLC.; Chief Compliance Officer and Assistant Secretary, American
Beacon
Sound Point Enhanced Income Fund (2018-2021); Chief Compliance Officer and
Assistant
Secretary, American Beacon Apollo Total Return Fund
(2018-2021). |
Shelley
L. Dyson (53) |
Assistant
Treasurer since
2021 |
Assistant
Treasurer since
2021 |
Fund
Tax Manager (2020-Present), Manager, Tax (2014-2020), Resolute Investment
Services, Inc.;
Assistant Treasurer, American Beacon Cayman Managed Futures Strategy Fund,
Ltd. (2022-Present);
Assistant Treasurer, American Beacon Cayman TargetRisk Company, Ltd
(2022-Present);
Assistant Treasurer, American Beacon Sound Point Enhanced Income Fund
(2021);
Assistant Treasurer, American Beacon Apollo Total Return Fund
(2021). |
Shelley
D. Abrahams (48) |
Assistant
Secretary since
2008 |
Assistant
Secretary since
2017 |
Corporate
Governance Manager (2023-Present), Senior Corporate Governance &
Regulatory
Specialist (2020-2023), Corporate Governance & Regulatory Specialist
(2017-2020),
Resolute Investment Services, Inc.; Assistant Secretary, American Beacon
Cayman
Managed Futures Strategy Fund, Ltd. (2022-Present); Assistant Secretary,
American Beacon
Cayman TargetRisk Company, Ltd (2022-Present); Assistant Secretary,
American Beacon
Sound Point Enhanced Income Fund (2018-2021); Assistant Secretary,
American Beacon
Apollo Total Return Fund (2018-2021). |
Michael
D. Jiang (38) |
Assistant
Secretary since
2021 |
Assistant
Secretary since
2021 |
Assistant
Secretary (2022-Present), Associate General Counsel (2021-Present),
American Beacon
Advisors, Inc.; Assistant Secretary (2021-Present), Resolute Investment
Distributors, Inc.;
Assistant Secretary (2022-Present), Associate General Counsel
(2021-Present), Resolute Investment
Managers, Inc.; Assistant Secretary (2022-Present), Associate General
Counsel (2021-Present),
Resolute Investment Services, Inc.; Vice President (2018-2021), Second
Vice President
(2015-2018), The Northern Trust Company; Assistant Secretary, American
Beacon Sound
Point Enhanced Income Fund (2021); Assistant Secretary, American Beacon
Apollo Total
Return Fund (2021). |
Teresa
A. Oxford (64) |
Assistant
Secretary since
2015 |
Assistant
Secretary since
2017 |
Assistant
Secretary and Associate General Counsel (2015-Present), American Beacon
Advisors,
Inc.; Assistant Secretary (2018-2021), Resolute Investment Distributors,
Inc.; Assistant
Secretary and Associate General Counsel (2017-Present), Resolute
Investment Managers,
Inc.; Assistant Secretary and Associate General Counsel (2018-Present),
Resolute Investment
Services, Inc.; Assistant Secretary (2016-2020), Alpha Quant Advisors,
LLC; Assistant
Secretary (2020-2022), Continuous Capital, LLC.; Assistant Secretary,
American Beacon
Sound Point Enhanced Income Fund (2018-2021); Assistant Secretary,
American Beacon
Apollo Total Return Fund (2018-2021). |
CODE
OF ETHICS
The
Manager, the Trust, the Distributor, and the sub-advisors each have adopted a
Code of Ethics under Rule 17j-1 of the Investment Company Act. Each Code
of Ethics significantly restricts the personal trading of all employees with
access to non-public portfolio information. For example, each Code of Ethics
generally requires pre-clearance of all personal securities trades (with limited
exceptions) and prohibits employees from purchasing or selling a security
that is being purchased or sold or being considered for purchase (with limited
exceptions) or sale by any Fund. In addition, the Manager’s and the Trust’s
Code of Ethics requires employees to report trades in shares of the Trusts. Each
Code of Ethics is on public file with, and may be obtained from, the
SEC.
PROXY
VOTING POLICIES
The Fund
invests exclusively in non-voting securities and is therefore not expected to
vote proxies relating to portfolio securities. If the Fund were to vote any
proxies, the proxy voting record for the most recent year ended June 30 will be
available as of August 31 of each year upon request and without
charge by calling 1-800-967-9009 or by visiting the SEC’s website at
http://www.sec.gov. The proxy voting record can be found in Form N-PX
on the
SEC’s website.
CONTROL
PERSONS AND 5% SHAREHOLDERS
A principal
shareholder is any person who owns of record or beneficially 5% or more of any
class of the Fund’s outstanding shares. A control person is a
shareholder that owns beneficially or through controlled companies more than 25%
of the voting securities of a company or acknowledges the existence
of control. Shareholders owning voting securities in excess of 25% may determine
the outcome of any matter affecting and voted on by shareholders
of the Fund. The actions of an entity or person that controls the Fund could
have an effect on other shareholders. For instance, a control person may
have effective voting control over the Fund or large redemptions by a control
person could cause the Fund’s other shareholders to pay a higher pro
rata portion of the Fund’s expenses.
Set forth
below are entities or persons that own 5% or more of the outstanding shares of a
class of the Fund as of April 30,
2023. The
Trustees and officers of
the Trusts, as a group, own less than 1% of all classes of the Fund’s shares
outstanding.
|
|
|
|
|
| |
Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R5
CLASS |
Investor
CLASS |
CHARLES
SCHWAB & CO INC*
|
|
|
|
17.74% |
|
43.79% |
SPECIAL
CUST A/C |
|
|
|
|
|
|
EXCLUSIVE
BENEFIT OF CUSTOMERS |
|
|
|
|
|
|
ATTN
MUTUAL FUNDS |
|
|
|
|
|
|
101
MONTGOMERY ST |
|
|
|
|
|
|
SAN
FRANCISCO CA 94104-4151 |
|
|
|
|
|
|
CHARLES
SCHWAB & CO INC* |
|
23.56% |
|
|
6.22% |
|
SPECIAL
CUSTODY A/C FBO CUSTOMERS |
|
|
|
|
|
|
ATTN
MUTUAL FUNDS |
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211
MAIN STREET |
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SAN
FRANCISCO CA 94105-1901 |
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J.P.
MORGAN SECURITIES LLC OMNIBUS* |
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7.17% |
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ACCT
FOR THE EXCLUSIVE BEN OF CUST |
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4
CHASE METROTECH CTR FL 3RD |
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BROOKLYN
NY 11245-0003 |
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LPL
FINANCIAL* |
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10.05% |
6.04% |
9.50% |
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4707
EXECUTIVE DR |
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SAN
DIEGO CA 92121-3091 |
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NATIONAL
FINANCIAL SERVICES LLC* |
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9.08% |
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26.51% |
18.04% |
18.02% |
FOR
EXCLUSIVE BENEFIT OF |
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OUR
CUSTOMERS |
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ATTN
MUTUAL FUNDS DEPT 4TH FLOOR |
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499
WASHINGTON BLVD |
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JERSEY
CITY NJ 07310-1995 |
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PERSHING
LLC* |
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24.09% |
42.69% |
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15.58% |
1
PERSHING PLZ |
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JERSEY
CITY NJ 07399-0001 |
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RAYMOND
JAMES* |
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8.58% |
6.85% |
14.98% |
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OMNIBUS
FOR MUTUAL FUNDS |
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ATTN
COURTNEY WALLER |
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880
CARILLON PKWY |
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ST
PETERSBURG FL 33716-1100 |
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TD
AMERITRADE INC FOR THE* |
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12.85% |
38.99% |
15.60% |
EXCLUSIVE
BENEFIT OF OUR CLIENTS |
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PO
BOX 2226 |
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OMAHA
NE 68103-2226 |
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UBS
WM USA* |
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6.34% |
31.39% |
8.68% |
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OMNI
ACCOUNT M/F |
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SPEC
CDY A/C EBOC UBSFSI |
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1000
HARBOR BLVD |
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Shareholder
Address |
Fund
Percentage (listed
if over 25%) |
A
CLASS |
C
CLASS |
Y
CLASS |
R5
CLASS |
Investor
CLASS |
WEEHAWKEN
NJ 07086-6761 |
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KEYBANK
NA |
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6.88% |
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CHARITABLE
OPPORTUNISTIC INC FD PRI |
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P.O.
BOX 94871 |
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CLEVELAND
OH 44101-4871 |
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* |
Denotes
record owner of Fund shares only |
INVESTMENT
SUB-ADVISORY AGREEMENTS
The Fund’s
sub-advisors are listed below with information regarding their controlling
persons or entities. According to the Investment Company Act, a person or
entity with control with respect to an investment advisor has “the power to
exercise a controlling influence over the management or policies of a
company, unless such power is solely the result of an official position with
such company.” Persons and entities affiliated with the sub-advisors are
considered
affiliates of the Fund.
|
| |
abrdn
Investments Limited |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity’s Business |
abrdn
plc |
Parent
of abrdn (Holdings) PLC |
Financial
Services |
abrdn
(Holdings) PLC |
Parent
of abrdn Investments Limited |
Financial
Services |
|
| |
Global
Evolution USA, LLC |
|
|
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity’s Business |
Conning
Holdings Limited |
Owns
69.19% of Global Evolution Holding ApS |
The
direct and indirect holding company of Conning
entities, including Conning, Inc., a registered
investment advisor. |
Global
Evolution Holding ApS |
Owns
approximately 99.72% of Global Evolution
Financial ApS |
Financial
holding company |
Global
Evolution Financial ApS |
100%
holding company of Global Evolution Fondsmaeglerselskab
A/S |
Financial
holding company |
Global
Evolution Fondsmaeglerselskab A/S |
Parent
Company |
Investment
management firm founded in 2007 |
Søren
Rump |
Co-founder
and Board Member |
Financial
Services |
Morten
Bugge |
Co-founder
and Director |
Financial
Services |
Torben
Schytt |
Director |
Financial
Services |
abrdn
Investments Limited is located at 10 Queens Terrace, Aberdeen, Scotland, AB10
1YG.
Global
Evolution USA, LLC is located at 250 Park Avenue, 15th floor, New York, NY
10177, United States. The parent company, Global Evolution Fondsmaeglerselskab
A/S is located at Buen 11, 2nd floor, DK-6000 Kolding, Denmark.
The Trust,
on behalf of the Fund, and the Manager have entered into an Investment Advisory
Agreement with each sub-advisor pursuant to which the Fund pays
each sub-advisor an annualized sub-advisory fee that is calculated and accrued
daily based on a percentage of the Fund’s average daily assets.
Each Investment Advisory Agreement will automatically terminate if assigned, and
may be terminated without penalty at any time by the Manager, by
a vote of a majority of the Trustees or by a vote of a majority of the
outstanding voting securities of the Fund on no less than thirty (30)
days’ nor
more than sixty (60) days’ written notice to a sub-advisor, or by a sub-advisor
upon sixty (60) days’ written notice to the Trust. The Investment Advisory
Agreements will continue in effect from year to year provided that annually such
continuance is specifically approved by a vote of the Trustees,
including the affirmative votes of a majority of the Trustees who are not
parties to the Investment Advisory Agreements or “interested persons”
(as defined in the Investment Company Act) of any such party, cast in person at
a meeting called for the purpose of considering such approval,
or by the vote of shareholders.
In
rendering investment advisory services to the Fund, Global Evolution may use the
resources of one or more foreign (non-U.S.) affiliates that are not registered
under the Investment Advisers Act of 1940, as amended (“Global Evolution’s
Foreign Affiliates”), to provide portfolio management, research and trading
services to the Fund. Under a Participating Affiliate Agreement, each of Global
Evolution’s Foreign Affiliates are considered “participating
affiliates” of Global
Evolution pursuant to applicable guidance from the staff of the SEC allowing
U.S. registered advisers to use investment advisory and trading
resources of unregistered advisory affiliates subject to the regulatory
supervision of the registered adviser. Each of Global
Evolution’s Foreign
Affiliates and any of
their respective employees who provide services to the Fund are considered under
the Participating Affiliate Agreement to be
“supervised persons” of Global Evolution as that term is defined in the
Investment Advisers Act of 1940, as amended.
In
rendering investment advisory services, AIL may use the resources of investment
advisor subsidiaries of abrdn plc. These affiliates have entered into a
memorandum
of understanding / personnel sharing procedures pursuant to which investment
professionals from each affiliate may render portfolio management
and research services to U.S. clients of the abrdn plc affiliates as associated
persons of AIL.
MANAGEMENT,
ADMINISTRATIVE, SECURITIES LENDING, AND DISTRIBUTION SERVICES
The
Manager
The
Manager, located at 220 East Las Colinas Boulevard, Suite 1200, Irving, Texas
75039 is a Delaware corporation and a wholly-owned subsidiary of Resolute
Investment Managers, Inc. (“RIM”). RIM is, in turn, a wholly-owned
subsidiary of Resolute Acquisition, Inc., which is a wholly-owned
subsidiary
of Resolute Topco, Inc., a wholly-owned subsidiary of Resolute
Investment Holdings, LLC (“RIH”). RIH is owned primarily by Kelso
Investment Associates
VIII, L.P., KEP VI, LLC and Estancia Capital Partners L.P., investment
funds affiliated with Kelso & Company, L.P. (“Kelso”) or Estancia Capital
Management,
LLC (“Estancia”), which are private equity firms. The address of Kelso and its
investment funds is 320 Park Avenue, 24th Floor, New York, NY
10022. The address of Estancia and its investment fund is 20865 N 90th Place,
Suite 200, Scottsdale, AZ 85255. The address of RIH is 220 East Las
Colinas Boulevard, Suite 1200, Irving, TX 75039.
Listed
below are individuals and entities that may be deemed control persons of the
Manager.
|
| |
Controlling
Person/Entity |
Basis
of Control |
Nature
of Controlling Person/Entity’s Business |
Resolute
Investment Holdings, LLC |
Parent
Company |
Holding
Company - Founded in 2015 |
Kelso
Investment Associates VIII, L.P. |
Ownership
in Parent Company |
Investment
Fund |
The Manager
is paid a management fee as compensation for providing the Fund with management,
asset allocation and administrative services. The expenses
are allocated daily to each class of shares of the Fund based upon the relative
proportion of net assets represented by such class. The Management
Agreement provides for the Manager to receive an annualized management fee based
on a percentage of the Fund’s average daily net assets that
is calculated and accrued daily according to the following
schedule:
| |
First
$5 billion |
0.35% |
Next
$5 billion |
0.325% |
Next
$10 billion |
0.30% |
Over
$20 billion |
0.275% |
Operating
expenses directly attributable to a specific class are charged against the
assets of that class. Pursuant to the Management Agreement, the Manager
provides the Trust with office space, office equipment and personnel necessary
to manage and administer the Trust’s operations. This includes:
■ |
complying
with reporting requirements; |
■ |
corresponding
with shareholders; |
■ |
maintaining
internal bookkeeping, accounting and auditing services and
records; |
■ |
supervising
the provision of services to the Trust by third parties;
and |
■ |
administering
the Funds’
interfund lending facility and lines of credit, if
applicable. |
In addition
to its oversight of the sub-advisors, the Manager may invest the portion of the
Fund’s assets that the sub-advisors determine to be allocated to
short-term investments.
The Fund is
responsible for expenses not otherwise assumed by the Manager, including the
following: audits by independent auditors; transfer agency, custodian,
dividend disbursing agent and shareholder recordkeeping services; taxes, if any,
and the preparation of the Fund’s tax returns; interest; costs of Trustee
and shareholder meetings; preparing, printing and mailing prospectuses and
reports to existing shareholders; fees for filing reports with regulatory
bodies and the maintenance of the Fund’s existence; legal fees; fees to federal
and state authorities for the registration of shares; fees and expenses of
Trustees; insurance and fidelity bond premiums; fees paid to service providers
providing reports regarding adherence by sub-advisors to the investment
style of the Fund; fees paid for brokerage commission analysis for the purpose
of monitoring best execution practices of the sub-advisors; and any
extraordinary expenses of a nonrecurring nature.
The Manager
has contractually agreed from time to time to waive fees and/or reimburse
expenses for the Fund in order to maintain competitive expense
ratios for the Fund. The contractual expense reimbursement can be changed or
terminated only in the discretion and with the approval of a majority of
the Fund’s Board of Trustees. The Manager will itself waive fees and/or
reimburse expenses of the Fund to maintain the contractual expense ratio caps
for each applicable class of shares or make arrangements with other service
providers to do so. The Manager may also, from time to time, voluntarily
waive fees and/or reimburse expenses of the Fund. The Board approved a policy
whereby the Manager may seek repayment for such fee waivers and
expense reimbursements. Under the policy, the Manager can be reimbursed by the
Fund for any contractual or voluntary fee waivers or expense
reimbursements if reimbursement to the Manager (a) occurs within three years
from the date of the Manager’s waiver/reimbursement and (b) does not
cause the Fund’s Total Annual Fund Operating Expenses to exceed the lesser of
the contractual percentage limit in effect at the time of the waiver/reimbursement
or the time of recoupment.
The
following tables show the total management fees paid to the Manager for
management and administrative services, and the investment advisory fees paid
to the sub-advisors based on the Fund’s average daily net assets for each of the
Fund’s three most recent fiscal years ended January 31. The following
tables also show the management fees waived or recouped by the Manager and the
sub-advisory fees waived by a sub-advisor, if applicable. The fees
paid to the Manager were equal to 0.35% of the Fund’s average daily net assets.
In the tables below, the fees paid to the sub-advisors are expressed
both as a dollar amount and percentage of the Fund’s average daily net
assets.
|
|
| |
Management
Fees Paid to American Beacon Advisors, Inc. (Gross) |
|
|
|
|
2021 |
2022 |
2023 |
|
$1,407,900 |
$1,641,296 |
$1,438,882 |
|
|
| |
Sub-Advisor
Fees (Gross) |
|
|
|
|
2021 |
2022 |
2023 |
|
$1,958,354 |
$2,306,841 |
$2,017,339 |
|
0.50% |
0.50% |
0.50% |
|
|
| |
Management
Fees (Waived)/Recouped |
|
|
|
|
2021 |
2022 |
2023 |
|
$7,958 |
$0 |
$0 |
The
sub-advisors for the Fund have not waived fees during the three most recent
fiscal years ended January 31.
Distribution
Fees
The Manager
(or another entity approved by the Board) under a distribution plan adopted
pursuant to Rule 12b-1 under the Investment Company Act, is paid up
to 0.25% per annum of the average daily net assets of the A Class shares and up
to 1.00% per annum of the average daily net assets of the C Class
shares of the Fund for distribution and shareholder servicing related services,
including expenses relating to selling efforts of various broker-dealers,
shareholder servicing fees and the preparation and distribution of A Class and C
Class shares advertising material and sales literature. The Manager
will receive Rule 12b-1 fees from the A Class and C Class shares regardless of
the amount of the Manager’s actual expenses related to distribution
and shareholder servicing efforts on behalf of each Class. Thus, the Manager may
realize a profit or a loss based upon its actual distribution and
shareholder servicing related expenditures for the A Class and C Class
shares. The Manager anticipates that the Rule 12b-1 plan will benefit
shareholders
by providing broader access to the Fund through broker-dealers and other
financial intermediaries who require compensation for their expenses in
order to offer shares of the Fund. The Board has not authorized Y Class, R5
Class, R6 Class, or Investor Class shares of the Fund to pay any fees
pursuant to a distribution plan. Distribution fees pursuant to Rule 12b-1 under
the Investment Company Act for the fiscal year ended January 31, 2023
were:
| |
Distribution
Fees |
|
2023 |
A
Class |
$7,670 |
C
Class |
$80,836 |
Certain
sub-advisors of the Fund or other series of the American Beacon Funds contribute
to the Manager to support the American Beacon Funds’ distribution
activities.
Service
Plan Fees
The A
Class, C Class and Investor Class have each adopted a Service Plan
(collectively, the “Service Plans”). The Service Plans authorize the payment to
the Manager
(or another entity approved by the Board) of up to 0.375% per annum of the
average daily net assets of the Investor Class shares, up to 0.25% per
annum of the average daily net assets of the A Class shares and C Class shares.
In addition, the Fund may reimburse the Manager for certain
non-distribution shareholder services provided by financial intermediaries
attributable to Y Class and R5 Class shares. The Manager or other approved
entities may spend such amounts on any activities or expenses primarily intended
to result in or relate to the servicing of A Class, C Class, Y Class, R5
Class, and Investor Class shares including, but not limited to, payment of
shareholder service fees and transfer agency or sub-transfer agency expenses.
The fees, which are included as part of the Fund’s “Other Expenses” in the Table
of Fees and Expenses in the Prospectus, will be payable monthly in
arrears. The primary non-distribution shareholder fees paid to financial
intermediaries, such as plan sponsors and broker-dealers, generally include
shareholder servicing, record keeping and servicing fees. Service Plan fees paid
by the A Class, C Class, and Investor Class shares of the Fund pursuant to
the applicable Service Plan for the three most recent fiscal years ended January
31 were as follows:
|
|
| |
Service
Plan Fees |
|
|
|
|
2021 |
2022 |
2023 |
A
Class |
$4,298 |
$2,986 |
$2,538 |
C
Class |
$9,684 |
$9,061 |
$8,576 |
Investor
Class |
$196,250 |
$180,360 |
$144,788 |
Securities
Lending Fees
As
compensation for services provided by the Manager in connection with securities
lending activities conducted by the Fund, the lending Fund pays to the
Manager, with respect to cash collateral posted by borrowers, a fee of 10% of
the net monthly interest income (the gross interest income earned by the
investment of cash collateral, less the amount paid to borrowers and related
expenses) from such activities and, with respect to loan fees paid by
borrowers
when a borrower posts collateral other than cash, a fee up to 10% of such loan
fees.
Securities
lending income is generated from the demand premium (if any) paid by the
borrower to borrow a specific security and from the return on investment
of cash collateral, reduced by negotiated rebate fees paid to the borrower and
transaction costs. To the extent that a loan is secured by non-cash
collateral, securities lending income is generated as a demand premium reduced
by transaction costs.
The Manager
has not received any fees from securities lending activities of the Fund within
the last three fiscal years.
As of the
date of this SAI, the Fund does not intend to engage in securities lending
activities.
The
Distributor
Resolute
Investment Distributors, Inc. (“RID” or “Distributor”) is the Fund’s distributor
and principal underwriter of the Fund’s shares.
RID,
located at 220 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039, is a
registered broker-dealer and is a member of FINRA. The Distributor is
affiliated
with the Manager through common ownership. Under a Distribution Agreement with
the Trust, the Distributor acts as the distributor and principal
underwriter of the Trust in connection with the continuous offering of shares of
the Fund. The Distributor continually distributes shares of the Fund on a
best efforts basis. The Distributor has no obligation to sell any specific
quantity of the Fund’s shares. Pursuant to the Distribution Agreement,
to the
extent applicable, the Distributor receives, and may re-allow to broker-dealers,
all or a portion of the sales charge paid by the purchasers of A Class and C
Class shares. For A Class and C Class shares, the Distributor receives
commission revenue consisting of the portion of the A Class and C Class sales
charge remaining after the allowances by the Distributor to the broker-dealers.
The Distributor retains any portion of the commission fees that are
not paid to the broker-dealers for use solely to pay distribution related
expenses.
The
aggregate sales charges paid to, or retained by, the Distributor from the sale
of shares and the CDSC retained by the Distributor on the redemption
of shares during the three most recent fiscal years ended January 31 are
shown in the table below:
|
|
|
|
| |
American
Beacon Fund |
|
Sales
Charge Revenue |
Deferred
Sales Charge Revenue |
|
Fiscal
Year |
Amount
Paid to Distributor |
Amount
Retained by
Distributor |
Amount
Paid to Distributor |
Amount
Retained by
Distributor |
American
Beacon Developing World Income Fund |
2023 |
$13,963 |
$1,364 |
$272 |
- |
|
2022 |
$21,419 |
$2,497 |
$92 |
- |
|
2021 |
$8,490 |
$375 |
$254 |
- |
RID does
not receive compensation on redemptions and repurchases, brokerage commissions,
or other compensation. However, as shown in a separate chart, RID
may receive distribution fees (i.e., Rule 12b-1 fees) from certain share classes
of the Fund.
OTHER
SERVICE PROVIDERS
State
Street, located at One Congress Street,
Suite 1,
Boston,
Massachusetts 02114-2016, serves as
custodian for the Fund. State Street also serves as the Fund’s
Foreign Custody Manager pursuant to rules adopted under the Investment Company
Act, whereby it selects and monitors eligible foreign sub-custodians.
The Manager also has entered into a sub-administration agreement with State
Street. Under the sub-administration agreement, State Street
provides the Fund with certain financial reporting and tax
services.
Pursuant to
an administrative services agreement among the Manager, the Trust, American
Beacon Institutional Funds Trust and Parametric Portfolio Associates
LLC (“Parametric”), located at 800 Fifth Avenue, Suite 2800, Seattle, Washington
98104, Parametric provides certain administrative services related to
the equitization of cash balances for certain series of the American Beacon
Funds Complex.
SS&C GIDS,
Inc., located at 2000 Crown Colony Drive, Quincy, Massachusetts 02169 is the
transfer agent and dividend paying agent for the Trust and provides
these services to Fund shareholders.
The Fund’s
independent registered public accounting firm is PricewaterhouseCoopers
LLP, which is
located at 101 Seaport
Blvd., Suite 500, Boston, MA 02210.
K&L
Gates LLP, 1601 K Street, NW, Washington, D.C. 20006, serves as legal counsel to
the Fund.
PORTFOLIO
MANAGERS
The
portfolio managers to the Fund (the “Portfolio Managers”) have responsibility
for the day-to-day management of accounts other than the Fund. Information
regarding these other accounts has been provided by each sub-advisor and is set
forth below. The number of accounts and assets is shown as of
January 31, 2023.
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and Assets by Account
Type |
Number
of Accounts and Assets for which Advisory Fee is Performance-Based |
Name
of Investment Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
American
Beacon Advisors, Inc. |
Paul
B. Cavazos |
5
($9.9 bil) |
1
($0.6 bil) |
3
($14.0 bil) |
None |
None |
None |
Colin
J. Hamer |
2
($5.3 bil) |
1
($0.6 bil) |
2
($13.5 bil) |
None |
None |
None |
Patrick
Sporl |
None |
None |
1
($12.5 bil) |
None |
None |
None |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and
Assets by Account Type |
Number
of Accounts and Assets for Which Advisory
Fee is Performance-Based |
Name
of Investment
Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
abrdn
Investments Limited |
Brett
Diment |
None |
None |
3
($1.3 bil) |
None |
None |
None |
Kevin
Daly |
None |
None |
3
($0.7 bil) |
None |
None |
None |
Edwin
Gutierrez |
None |
3
($0.3 bil) |
9
($2.3 bil) |
None |
None |
None |
Siddharth
Dahiya |
3
($0.3 bil) |
5
($2.1 bil) |
4
($0.03 bil) |
None |
None |
None |
|
|
|
|
|
| |
|
Number
of Other Accounts Managed and
Assets by Account Type |
Number
of Accounts and Assets for Which Advisory
Fee is Performance-Based |
Name
of Investment
Advisor and
Portfolio Manager |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Registered
Investment
Companies |
Other
Pooled Investment
Vehicles |
Other
Accounts |
Global
Evolution USA, LLC |
Morten
Bugge |
1
($24.2 mil) |
10
($3.2 bil) |
26
($9.4 bil) |
None |
8
(3.0 bil) |
9
($5.6 bil) |
Christian
Mejrup |
1
($24.2 mil) |
10
($3.2 bil) |
26
($9.4 bil) |
None |
8
(3.0 bil) |
9
($5.6 bil) |
Lars
Peter Nielson |
1
($24.2 mil) |
10
($3.2 bil) |
26
($9.4 bil) |
None |
8
(3.0 bil) |
9
($5.6 bil) |
Sofus
Asboe |
1
($24.2 mil) |
10
($3.2 bil) |
26
($9.4 bil) |
None |
8
(3.0 bil) |
9
($5.6 bil) |
Michael
Hansen |
1
($24.2 mil) |
10
($3.2 bil) |
26
($9.4 bil) |
None |
8
(3.0 bil) |
9
($5.6 bil) |
Kristian
Wigh |
1
($24.2 mil) |
10
($3.2 bil) |
26
($9.4 bil) |
None |
8
(3.0 bil) |
9
($5.6 bil) |
Conflicts
of Interest
As noted in
the table above, the Portfolio Managers manage accounts other than the Fund.
This side-by-side management may present potential conflicts
between a Portfolio Manager’s management of the Fund’s investments, on the one
hand, and the investments of the other accounts, on the other hand.
Set forth below is a description by the Manager and each sub-advisor of any
foreseeable material conflicts of interest that may arise from the
concurrent management of the Fund and other accounts. The information regarding
potential conflicts of interest was provided by the Manager and the
sub-advisors as of January 31, 2023.
The Manager The
Manager’s Portfolio Managers are responsible for managing the Fund and other
accounts, including separate accounts and unregistered
funds. The Manager typically assigns funds and accounts with similar investment
strategies to the same Portfolio Manager to mitigate the potentially
conflicting investment strategies of accounts. Other than potential conflicts
between investment strategies, the side-by-side management of both the
Fund and other accounts may raise potential conflicts of interest due to the
interest held by the Manager or one of its affiliates in an account and certain
trading practices used by the Portfolio Managers (e.g., cross trades between the
Fund and another account and allocation of aggregated trades).
The Manager has developed policies and procedures reasonably designed to
mitigate those conflicts. In particular, the Manager has adopted policies
limiting the ability of Portfolio Managers to cross securities between the Fund
and a separate account and policies designed to ensure the fair allocation
of securities purchased on an aggregated basis.
Portfolio
Managers of the Manager with responsibility for oversight of Fund sub-advisors
are also responsible for overseeing sub-advisors selected by the Manager
to manage other client accounts. In some cases, the same investment process and
overall investment strategy are used for both the Fund and another
client account. When a sub-advisor has a limited capacity for managing assets,
these Portfolio Managers may have an incentive to allocate the
capacity disproportionately among clients. Certain Portfolio Managers oversee
fixed-income assets managed internally by the Manager as well as equity and
fixed-income assets managed externally by sub-advisors. Potential conflicts of
interest may occur when the Manager’s Portfolio Managers allocate
Fund assets to internal fixed-income Portfolio Managers rather than external
Portfolio Managers, since the Manager has the potential to earn more fees
under this scenario. These potential conflicts of interest are disclosed to the
Board in connection with the process of approving the Manager as an
investment advisor to the Fund.
abrdn Investments Limited
(“AIL”) The
portfolio managers’ management of “other accounts” may give rise to potential
conflicts of interest in connection
with their management of the Fund’s investments, on the one hand, and the
investments of the other accounts, on the other. The other accounts
may have the same investment objective as the Fund. Therefore, a potential
conflict of interest may arise as a result of the identical investment
objectives, whereby the portfolio manager could favor one account over another.
However, AIL believes that these risks are mitigated by the fact
that: (i) accounts with like investment strategies managed by a particular
portfolio manager are generally managed in a similar fashion, subject
to
exceptions to account for particular investment restrictions or policies
applicable only to certain accounts, differences in cash flows and account
sizes, and
similar factors; and (ii) portfolio manager personal trading is monitored to
avoid potential conflicts. In addition, AIL has adopted trade allocation
procedures that require equitable allocation of trade orders for a particular
security among participating accounts.
In some
cases, another account managed by the same portfolio manager may compensate AIL
based on the performance of the portfolio held by that account.
The existence of such a performance-based fee may create additional conflicts of
interest for the portfolio manager in the allocation of management
time, resources and investment opportunities.
Another
potential conflict could include instances in which securities considered as
investments for the Fund also may be appropriate for other investment
accounts managed by AIL or its affiliates. Whenever decisions are made to buy or
sell securities by the Fund and one or more of the other
accounts
simultaneously, AIL may aggregate the purchases and sales of the securities and
will allocate the securities transactions in a manner that it believes to
be equitable under the circumstances. As a result of the allocations, there may
be instances where the Fund will not participate in a transaction
that is allocated among other accounts. While these aggregations and allocation
policies could have a detrimental effect on the price or amount of
the securities available to the Fund from time to time, it is the opinion of AIL
that the benefits from the policies outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
Global Evolution USA, LLC (“Global
Evolution”) Actual or
apparent conflicts of interest may arise when a portfolio manager has day-to-day
management
responsibilities with respect to more than one fund or other account. This
potential conflict may be heightened where the sub-advisor manages one
or more other accounts where the advisory fees may be higher and/or a portion of
their investment advisory fee is based upon the performance
of that fund/account. Where conflicts of interest arise between the Fund and
other accounts managed by the portfolio manager, the sub-advisor
will proceed in a manner that ensures that the Fund will not be treated less
favorably. There may be instances where similar portfolio transactions
may be executed for the same security for numerous accounts managed by the
Portfolio Managers. In such instances, securities will be allocated
in accordance with the sub-advisor’s trade allocation policy.
Compensation
The
following is a description provided by the Manager and each investment
sub-advisor regarding the structure of and criteria for determining the
compensation
of each Portfolio Manager as of January 31, 2023.
The Manager
Compensation of the Manager’s Portfolio Managers is comprised of base salary and
annual cash bonus. Each Portfolio Manager’s base annual
salary is fixed. The Manager determines base salary based upon comparison to
industry salary data. In addition, all Portfolio Managers participate
in the Manager’s annual cash bonus plan. The amount of the total bonus pool is
based upon the profitability of the Manager. Each Portfolio Manager has
a target bonus award expressed as a percentage of base salary, which is
determined by the Portfolio Manager’s level of responsibility. Additionally,
the Portfolio Managers may participate in the Manager’s equity incentive
plan.
AIL
AIL’s
remuneration policies are designed to support its business strategy as a leading
international asset manager. The objective is to attract, retain and
reward
talented individuals for the delivery of sustained, superior returns for AIL’s
clients and shareholders. AIL operates in a highly competitive international
employment market, and aims to maintain its strong track record of success in
developing and retaining talent.
AIL’s
policy is to recognize corporate and individual achievements each year through
an appropriate annual bonus scheme. The bonus is a single, fully discretionary
variable pay award. The aggregate value of awards in any year is dependent on
the group’s overall performance and profitability. Consideration
is also given to the levels of bonuses paid in the market. Individual awards,
which are payable to all members of staff, are determined by a rigorous
assessment of achievement against defined objectives.
The
variable pay award comprises a mixture of cash and a deferred award based on the
size of the award. Deferred awards are by default abrdn shares,
with an option to put up to 50% of deferral into funds. Overall compensation
packages are designed to be competitive relative to the investment
management industry.
Base
Salary
AIL’s
policy is to pay a fair salary commensurate with the individual’s role,
responsibilities and experience, and having regard to the market rates being
offered for
similar roles in the asset management sector and other comparable companies. Any
increase is generally to reflect inflation and is applied in a manner
consistent with other AIL employees; any other increases must be justified by
reference to promotion or changes in responsibilities.
Annual
Bonus
The
Remuneration Committee determines the key performance indicators that will be
applied in considering the overall size of the bonus pool. In line with
practices amongst other asset management companies, individual bonuses are not
subject to an absolute cap. However, the aggregate size of the bonus pool
is dependent on the group’s overall performance and profitability. Consideration
is also given to the levels of bonuses paid in the market. Individual
awards are determined by a rigorous assessment of achievement against defined
objectives, and are reviewed and approved by the Remuneration
Committee.
AIL has a
deferral policy which is intended to assist in the retention of talent and to
create additional alignment of executives’ interests with AIL’s sustained
performance and, in respect of the deferral into funds, managed by AIL, to align
the interest of asset managers with our clients.
Staff
performance is reviewed formally at least once a year. The review process
evaluates the various aspects that the individual has contributed to AIL,
and
specifically, in the case of portfolio managers, to the relevant investment
team. Discretionary bonuses are based on client service, asset growth and
the
performance of the respective portfolio manager. Overall participation in team
meetings, generation of original research ideas and contribution to presenting
the team externally are also evaluated.
In the
calculation of a portfolio management team’s bonus, AIL takes into consideration
investment matters (which include the performance of funds, adherence
to the company investment process, and quality of company meetings) as well as
more subjective issues such as team participation and effectiveness
at client presentations through KPI scorecards. To the extent performance is
factored in, such performance is not judged against any specific
benchmark and is evaluated over the period of a year - January to December. The
pre- or after-tax performance of an individual account is not considered
in the determination of a portfolio manager’s discretionary bonus; rather the
review process evaluates the overall performance of the team for all of
the accounts the team manages. Portfolio manager performance on investment
matters is judged over all of the accounts the portfolio manager
contributes to and is documented in the appraisal process. A combination of the
team’s and individual’s performance is considered and evaluated.
Although
performance is not a substantial portion of a portfolio manager’s compensation,
AIL also recognizes that fund performance can often be driven by
factors outside one’s control, such as (irrational) markets, and as such pays
attention to the effort by portfolio managers to ensure integrity of
our core
process by sticking to disciplines and processes set, regardless of momentum and
`hot’ themes. Short-terming is thus discouraged and trading-oriented
managers will thus find it difficult to thrive in the AIL environment.
Additionally, if any of the aforementioned undue risks were to be taken by a
portfolio manager, such trend would be identified via AIL’s dynamic compliance
monitoring system. In rendering investment management services,
AIL may use the resources of additional investment adviser subsidiaries of abrdn
plc. These affiliates have entered into a memorandum of understanding
(“MOU”) pursuant to which investment professionals from each affiliate may
render portfolio management, research or trading services to AIL
clients. Each investment professional who renders portfolio management, research
or trading services under a MOU or personnel sharing arrangement
(“Participating Affiliate”) must comply with the provisions of the Advisers Act,
the 1940 Act, the Securities Act, the Exchange Act, and the
Employee Retirement Income Security Act of 1974, and the laws of states or
countries in which AIL does business or has clients. No remuneration is
paid by the
Fund with respect to the MOU/personnel sharing arrangements.
Global
Evolution For
serving as portfolio managers of the Fund, Portfolio Managers receive
competitive base salaries and are eligible for performance-based
compensation from overall firm-wide profits. No Portfolio Managers have
compensation directly linked to Fund performance. Additionally,
all Portfolio Managers hold or are vesting equity in Global Evolution and/or its
parent company Global Evolution Fondsmaeglerselskab A/S. While no
portion of the sub-advisor’s advisory fee is based upon the performance of the
Fund, the sub-advisor and its Portfolio Managers manage other
account(s) where part of the advisory fee is based upon the performance of that
account.
Ownership of the
Fund
A Portfolio
Manager’s beneficial ownership of the Fund is defined as the Portfolio
Manager having the opportunity to share in any profit from transactions
in the Fund, either directly or indirectly, as the result of any contract,
understanding, arrangement, relationship or otherwise. Therefore, ownership
of Fund shares by members of the Portfolio Manager’s immediate family or by a
trust of which the Portfolio Manager is a trustee could be considered
ownership by the Portfolio Manager. The table below sets forth each Portfolio
Manager’s beneficial ownership of the Fund as of January 31, 2023 as
provided by the Manager and
the Fund’s
sub-advisors.
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Developing
World Income
Fund |
American
Beacon Advisors, Inc. |
|
Paul
B. Cavazos |
None |
Colin
J. Hamer |
$1-$10,000 |
Patrick
Sporl |
None |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Developing
World Income
Fund |
AIL |
|
Brett
Diment |
None |
Kevin
Daly |
None |
Edwin
Gutierrez |
None |
Siddharth
Dahiya |
None |
| |
Name
of Investment Advisor and Portfolio Managers |
American
Beacon Developing
World Income
Fund |
Global
Evolution |
|
Morten
Bugge |
None |
Christian
Mejrup |
None |
Lars
Peter Nielson |
None |
Kristian
Wigh |
None |
Sofus
Asboe |
None |
Michael
Hansen |
None |
PORTFOLIO
SECURITIES TRANSACTIONS
In
selecting brokers or dealers to execute particular transactions, the Manager and
the sub-advisors are authorized to consider “brokerage and research services”
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934, as amended), provision of statistical quotations (including the
quotations necessary to determine the Fund’s NAV), and other information
provided to the Fund, to the Manager and/or to the sub-advisors (or their
affiliates), provided, however, that the Manager or the sub-advisors must always
seek best execution. Research and brokerage services may include
information on portfolio companies, economic analyses, and other investment
research services. The Trust does not allow the Manager or sub-advisors
to enter arrangements to direct transactions to broker-dealers as compensation
for the promotion or sale of Trust shares by those broker-dealers.
The Manager and the sub-advisors are also authorized to cause the Fund to pay a
commission (as defined in SEC interpretations) to a
broker or
dealer who provides such brokerage and research services for executing a
portfolio transaction which is in excess of the amount of the commission
another broker or dealer would have charged for effecting that transaction. The
Manager or the sub-advisors, as appropriate, must determine
in good faith, however, that such commission was reasonable in relation to the
value of the brokerage and research services provided, viewed in
terms of that particular transaction or in terms of all the accounts over which
the Manager or the sub-advisors exercise investment discretion. The fees of
the sub-advisors are not reduced by reason of receipt of such brokerage and
research services. However, with disclosure to and pursuant to written
guidelines approved by the Board, as applicable, the Manager, or the
sub-advisors (or a broker-dealer affiliated with them) may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 under the Investment Company Act) for doing
so. Brokerage and research services obtained with Fund commissions might be used
by the Manager and/or the sub-advisors, as applicable, to benefit
their other accounts under management.
The Manager
and each sub-advisor will place its own orders to execute securities
transactions that are designed to implement the Fund’s investment objectives
and policies. In placing such orders, each sub-advisor will seek best
execution. The full range and quality of services offered by the
executing broker or dealer will be considered when making these determinations.
Pursuant to written guidelines approved by the Board, as appropriate,
a sub-advisor of the Fund, or its affiliated broker-dealer, may execute
portfolio transactions and receive usual and customary brokerage commissions
(within the meaning of Rule 17e-1 of the Investment Company Act) for doing so.
The Fund’s turnover rate, or the frequency of portfolio transactions,
will vary from year to year depending on market conditions and the Fund’s cash
flows. High portfolio turnover increases the Fund’s transaction
costs, including brokerage commissions, and may result in a greater amount of
recognized capital gains.
The
Investment Advisory Agreements provide, in substance, that in executing
portfolio transactions and selecting brokers or dealers, the principal
objective
of each sub-advisor is to seek best execution. In assessing available execution
venues, each sub-advisor shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the value of any eligible research, the financial condition and execution
capability of the broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. Transactions
with respect to the securities of small and emerging growth companies in which
the Fund may invest may involve specialized services on the part of
the broker or dealer and thereby may entail higher commissions or spreads than
would be the case with transactions involving more widely traded
securities.
The Fund
may establish brokerage commission recapture arrangements with certain brokers
or dealers. If a sub-advisor chooses to execute a transaction
through a participating broker, the broker rebates a portion of the commission
back to the Fund. Any collateral benefit received through participation
in the commission recapture program is directed exclusively to the Fund. Neither
the Manager nor any of the sub-advisors receive any benefits
from the commission recapture program. The sub-advisors’ participation in the
brokerage commission recapture program is optional. Each sub-advisor
retains full discretion in selecting brokerage firms for securities transactions
and is instructed to use the commission recapture program for a
transaction only if it is consistent with the sub-advisor’s obligation to seek
the best execution available.
Soft
Dollars
During the
fiscal year ended January 31, 2023, the Fund did not direct any transactions to
brokers for research services.
Brokerage
Commissions
For the
three most recent fiscal years ended January 31, no brokerage commissions were
paid by the Fund.
Affiliated
Broker Commissions
For the
three most recent fiscal years ended January 31, no brokerage commissions were
paid to affiliated brokers by the Fund.
Commission
Recapture
For the
fiscal year ended January 31, 2023, the Fund received $0 as a result of
participation in the commission recapture program.
Securities
Issued by Top 10 Brokers
The
following table lists the Fund’s holdings in securities issued by a
broker-dealer (or by its parent) that were one of the top ten brokers or
dealers, for the fiscal
year ended January 31, 2023, through which the Fund executed transactions or
sold shares.
|
| |
Regular
Broker-Dealers |
American
Beacon Fund |
Aggregate
Value of Securities (000s) |
Citigroup
Global Markets |
American
Beacon Developing
World Income
Fund |
$2,300 |
ADDITIONAL
PURCHASE AND SALE INFORMATION FOR A CLASS SHARES
Sales Charge Reductions and
Waivers
As
described in the Prospectus, there are various ways to reduce your sales charge
when purchasing A Class shares. Additional information about A Class sales
charge reductions is provided below.
LOI. The LOI
may be revised upward at any time during the 13-month period of the LOI (“LOI
Period”), and such a revision will be treated as a new LOI, except that
the LOI Period during which the purchases must be made will remain unchanged.
Purchases made from the date of revision will receive the reduced
sales charge, if any, resulting from the revised LOI. The LOI will be considered
completed if the shareholder dies within the 13-month LOI Period.
Commissions to dealers will not be adjusted or paid on the difference between
the LOI amount and the amount invested before the shareholder’s
death.
All
dividends and other distributions on shares held in escrow will be credited
to the shareholder’s account in shares (or paid in cash, if requested). If
the
intended investment is not completed within the specified LOI Period, the
purchaser may be required to remit to the transfer agent the difference
between the
sales charge actually paid and the sales charge which would have been paid if
the total of such purchases had been made at a single time. Any
dealers assigned to the shareholder’s account at the time a purchase was made
during the LOI Period will receive a corresponding commission
adjustment if appropriate. If the difference is not paid by the close of the LOI
Period, the appropriate number of shares held in escrow will be redeemed
to pay such difference. If the proceeds from this redemption are inadequate, the
purchaser may be liable to the Fund for the balance still outstanding.
Rights of
Accumulation. Subject
to the limitations described in the aggregation policy, you may take into
account your accumulated holdings in any class of
the American Beacon Funds to determine your sales charge for A Class shares on
investments in accounts eligible to be aggregated. If you make a gift
of A Class shares, upon your request, you may purchase the shares at the sales
charge discount allowed under rights of accumulation of all of your
investments in any class of the American Beacon Funds.
Aggregation.
Qualifying investments for aggregation include those made by you and your
“immediate family” as defined in the Prospectus, if all parties are
purchasing shares for their own accounts and/or:
■ |
individual-type
employee benefit plans, such as an IRA, individual 403(b) plan or
single-participant Keogh-type plan; |
■ |
business
accounts solely controlled by you or your immediate family (for example,
you own the entire business); |
■ |
trust
accounts established by you or your immediate family (for trusts with only
one primary beneficiary, upon the trustor’s death the trust account
may
be aggregated with such beneficiary’s own accounts; for trusts with
multiple primary beneficiaries, upon the trustor’s death the trustees of
the trust
may instruct the Fund’s transfer agent to establish separate trust
accounts for each primary beneficiary; each primary beneficiary’s separate
trust account
may then be aggregated with such beneficiary’s own
accounts); |
■ |
endowments
or foundations established and controlled by you or your immediate family;
or |
■ |
529
accounts, which will be aggregated at the account owner level (Class 529-E
accounts may only be aggregated with an eligible employer
plan). |
Individual
purchases by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are:
■ |
for a
single trust estate or fiduciary account, including employee benefit plans
other than the individual-type employee benefit plans described
above; |
■ |
made
for two or more employee benefit plans of a single employer or of
affiliated employers as defined in the Investment Company Act, excluding
the
individual-type employee benefit plans described
above; |
■ |
for
nonprofit, charitable or educational organizations, or any endowments or
foundations established and controlled by such organizations, or any
employer-sponsored
retirement plans established for the benefit of the employees of such
organizations, their endowments, or their foundations;
or |
■ |
for
individually established participant accounts of a 403(b) plan that is
treated similarly to an employer-sponsored plan for sales charge purposes
(see
“Purchases by certain 403(b) plans” under “Sales Charges” above), or made
for two or more such 403(b) plans that are treated similarly to
employer-sponsored
plans for sales charge purposes, in each case of a single employer or
affiliated employers as defined in the Investment Company Act.
Purchases made for nominee or street name accounts (securities held in the
name of a broker-dealer or another nominee such as a bank trust
department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or
street name accounts unless otherwise qualified as described
above. |
Concurrent
Purchases. As
described in the Prospectus, you may reduce your A Class sales charge by
combining simultaneous purchases in any of the American
Beacon Funds.
Other Purchases. Pursuant
to a determination of eligibility by the Manager, A Class shares of the Fund may
be sold at NAV (without the imposition of a front-end
sales charge) to:
1 |
current
or retired trustees, and officers of the American Beacon Funds family,
current or retired employees and directors of the Manager and its
affiliated
companies, certain family members and employees of the above persons, and
trusts or plans primarily for such persons; |
2 |
currently
registered representatives and assistants directly employed by such
representatives, retired registered representatives with respect to
accounts
established while active, or full-time employees (collectively, “Eligible
Persons”) (and their spouses, and children, including children in step
and
adoptive relationships, sons-in-law and daughters-in-law, if the Eligible
Persons or the spouses or children of the Eligible Persons are listed in
the
account registration with the spouse or parent) of broker-dealers who have
sales agreements with the Distributor (or who clear transactions
through
such dealers), plans for the dealers, and plans that include as
participants only the Eligible Persons, their spouses and/or
children; |
3 |
companies
exchanging securities with the Fund through a merger, acquisition or
exchange offer; |
4 |
insurance
company separate accounts; |
5 |
accounts
managed by the Manager, a sub-advisor to the Fund and its affiliated
companies; |
6 |
the
Manager or a sub-advisor to the Fund and its affiliated
companies; |
7 |
an
individual or entity with a substantial business relationship with, which
may include the officers and employees of the Fund’s custodian or
transfer
agent, the Manager or a sub-advisor to the Fund and its affiliated
companies, or an individual or entity related or relating to such
individual or
entity; |
8 |
full-time
employees of banks that have sales agreements with the Distributor, who
are solely dedicated to directly supporting the sale of mutual
funds; |
9 |
directors,
officers and employees of financial institutions that have a selling group
agreement with the Distributor; |
10 |
banks,
broker-dealers and other financial institutions (including registered
investment advisors and financial planners) that have entered into an
agreement
with the Distributor or one of its affiliates, purchasing shares on behalf
of clients participating in a fund supermarket or in a wrap program,
asset allocation program or other program in which the clients pay an
asset-based fee; |
11 |
clients
of authorized dealers purchasing shares in fixed or flat fee brokerage
accounts; |
12 |
Employer-sponsored
defined contribution - type plans, including 401(k) plans, 457 plans,
employer sponsored 403(b) plans, profit-sharing and money
purchase pension plans, defined benefit plans and non-qualified deferred
compensation plans, and IRA rollovers involving retirement plan
assets
invested in a
fund in
the American Beacon Funds fund family; and |
13 |
Employee
benefit and retirement plans for the Manager and its
affiliates. |
Shares are
offered at NAV per share to these persons and organizations due to anticipated
economies in sales effort and expense. Once an account is established
under this NAV per share privilege, additional investments can be made at NAV
per share for the life of the account.
It is
possible that a broker-dealer may not be able to offer one or more of these
waiver categories. If this situation occurs, it is possible that the investor
would need
to invest through another broker-dealer in order to take advantage of these
waiver categories. The Fund may terminate or amend the terms of
these sales charge waivers at any time.
Moving Between
Accounts.
Investments in certain account types may be moved to other account types without
incurring additional A Class sales charges.
These transactions include, for example:
■ |
redemption
proceeds from a non-retirement account (for example, a joint tenant
account) used to purchase Fund shares in an IRA or other individual-type
retirement account; |
■ |
“required
minimum distributions” (as described in Section 401(a)(9) of the Internal
Revenue Code) from an IRA or other individual-type retirement
account
used to purchase Fund shares in a non-retirement account;
and |
■ |
death
distributions paid to a beneficiary’s account that are used by the
beneficiary to purchase Fund shares in a different
account. |
It is
possible that a broker-dealer may not be able to offer the ability to move
between accounts. If this situation occurs, it is possible that the investor
would need
to invest through another broker-dealer in order to take advantage of this
privilege. Please contact your financial intermediary for additional
information.
ADDITIONAL
INFORMATION REGARDING CONTINGENT DEFERRED SALES CHARGES
As
discussed in the Prospectus, the redemption of C Class shares may be subject to
a CDSC if you redeem your shares within 12 months of purchase. If you
purchased $1,000,000 or more of A Class shares of the Fund (and therefore paid
no initial sales charges) and subsequently redeem your shares within 18
months of your purchase, you may be charged a CDSC upon redemption. In
determining whether the CDSC is payable, it is assumed that shares not
subject to the CDSC are the first redeemed followed by other shares held for the
longest period of time. The CDSC will not be imposed upon shares
representing reinvested dividends or other distributions, or upon amounts
representing share appreciation. As described in the Prospectus, there are
various circumstances under which the CDSC will be waived. Additional
information about CDSC waivers is provided below.
The CDSC is
waived under the following circumstances:
■ |
Any
partial or complete redemption following death or “disability” (as defined
in the Internal Revenue Code) of a shareholder (including one who
owns
the shares with his or her spouse as a joint tenant with rights of
survivorship) from an account in which the deceased or disabled is named.
The
Manager or the Fund’s transfer agent may require documentation prior to
waiver of the charge, including death certificates, physicians’
certificates,
etc. |
■ |
Redemptions
from a systematic withdrawal plan. If the systematic withdrawal plan is
based on a fixed dollar amount or number of shares, systematic
withdrawal
redemptions are limited to no more than 10% of your account value or
number of shares per year, as of the date the Manager or the Fund’s
transfer agent receives your request. If the systematic withdrawal plan is
based on a fixed percentage of your account value, each redemption
is
limited to an amount that would not exceed 10% of your annual account
value at the time of withdrawal. |
■ |
Redemptions
from retirement plans qualified under Section 401 of the Internal Revenue
Code. The CDSC will be waived for benefit payments made by
American Beacon Funds directly to plan participants. Benefit payments
include, but are not limited to, payments resulting from death,
“disability,” “retirement,”
“separation from service” (each as defined in the Internal Revenue Code),
“required minimum distributions” (as described in Section 401(a)(9)
of the Internal Revenue Code), in-service distributions, hardships, loans
and qualified domestic relations orders. The CDSC waiver will not
apply
in the event of termination of the plan or transfer of the plan to another
financial institution. |
■ |
Redemptions
that are required minimum distributions from a traditional IRA as required
by the Internal Revenue Service. |
■ |
Involuntary
redemptions as a result of your account not meeting the minimum balance
requirements, the termination and liquidation of the Fund, or other
actions by the Fund. |
■ |
Distributions
from accounts for which the broker-dealer of record has entered into a
written agreement with the Distributor (or Manager) allowing this
waiver. |
■ |
To
return excess contributions made to a retirement
plan. |
■ |
To
return contributions made due to a mistake of
fact. |
The
following example illustrates the operation of the CDSC. Assume that you open an
account and purchase 1,000 shares at $10 per share and that six months
later the NAV per share is $12 and, during such time, you have acquired 50
additional shares through reinvestment of distributions. If at such time
you should redeem 450 shares (proceeds of $5,400), 50 shares will not be subject
to the charge because of dividend reinvestment. With respect to
the remaining 400 shares, the charge is applied only to the original cost of $10
per share and not to the increase in NAV of $2 per share. Therefore,
$4,000 of the $5,400 redemption proceeds will pay the charge. At the rate of
1.00%, the CDSC would be $40 for redemptions of C Class shares. In
determining whether an amount is available for redemption without incurring a
deferred sales charge, the purchase payments made for all shares in
your account are aggregated.
REDEMPTIONS
IN KIND
Although
the Fund intends to redeem shares in cash, the Fund reserves the right to pay
the redemption price in whole or in part by a distribution of securities
or other assets. However, shareholders always will be entitled to redeem shares
for cash up to the lesser of $250,000 or 1% of the Fund’s net asset value
during any 90-day period. Redemption in kind is not as liquid as a cash
redemption. In addition, to the extent the Fund redeems its shares in this
manner, the shareholder assumes the risk of a subsequent change in the market
value of those securities, the cost of liquidating the securities and the
possibility of a lack of a liquid market for those securities.
TAX
INFORMATION
The tax
information in the Prospectus and in this section relates solely to the federal
income tax law and assumes that the Fund will continue to qualify each
taxable year as a “regulated investment company” (“RIC”) under the Internal
Revenue Code (as discussed below). The tax information in this section is
only a summary of certain key federal tax considerations affecting the Fund and
its shareholders and is in addition to the tax information provided in
the Prospectus. No attempt has been made to present a complete explanation of
the federal income tax treatment of the Fund or the tax implications
to its shareholders. The discussions here and in the Prospectus are not intended
as substitutes for careful tax planning. The tax information is based on
the Internal Revenue Code and applicable regulations in effect, and
administrative pronouncements and judicial decisions publicly available,
on the date
of this SAI. Future legislative, regulatory or administrative changes or court
decisions may significantly change the tax rules applicable to the Fund
and its shareholders. Any of these changes or court decisions may have a
retroactive effect.
Taxation of the Fund
The Fund
intends to continue to qualify each taxable year for treatment as a RIC
under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue
Code. To so qualify, the Fund (which is treated as a separate corporation for
these purposes) must, among other requirements:
■ |
Derive
at least 90% of its gross income each taxable year from (1) dividends,
interest, payments with respect to securities loans and gains from the
sale
or other disposition of securities or foreign currencies, or other income,
including gains from options, futures or forward contracts, derived with
respect
to its business of investing in securities or those currencies
(“Qualifying Income”) and (2) net income derived from an interest in a
“qualified publicly
traded partnership” (“QPTP”) (“Gross Income Requirement”). A QPTP is a
“publicly traded partnership” (that is, a partnership the interests
in
which are “traded on an established securities market” or “readily
tradable on a secondary market (or the substantial equivalent thereof)” (a
“PTP”))
that meets certain qualifying income requirements other than a partnership
at least 90% of the gross income of which is Qualifying
Income; |
■ |
Diversify
its investments so that, at the close of each quarter of its taxable year,
(1) at least 50% of the value of its total assets is represented by cash
and
cash items, Government securities, securities of other RICs, and other
securities, with those other securities limited, in respect of any one
issuer, to an
amount that does not exceed 5% of the value of the Fund’s total assets and
that does not represent more than 10% of the issuer’s outstanding
voting securities (equity securities of QPTPs being considered voting
securities for these purposes), and (2) not more than 25% of the
value
of its total assets is invested in (a) the securities (other than
Government securities or securities of other RICs) of any one
issuer, (b) the securities
(other than securities of other RICs) of two or more issuers the Fund
controls (by owning 20% or more of their voting power) that are
determined
to be engaged in the same, similar or related trades or businesses, or (c)
the securities of one or more QPTPs (“Diversification Requirements”);
and |
■ |
Distribute
annually to its shareholders at least the sum of 90% of its investment
company taxable income (generally, net investment income, the excess
(if any) of net short-term capital gain over net long-term capital loss,
and net gains (if any) from certain foreign currency transactions, all
determined
without regard to any deduction for dividends paid) and 90% of its net
exempt interest income (“Distribution
Requirement”). |
By
qualifying for treatment as a RIC, the Fund (but not its shareholders) will be
relieved of federal income tax on the part of its investment company
taxable
income and net capital gain (i.e., the excess of net long-term capital gain over
net short-term capital loss) that it distributes to its shareholders.
If for any
taxable year the Fund does not qualify for that treatment - either (1) by
failing to satisfy the Distribution Requirement, even if it satisfies the
Gross
Income and Diversification Requirements (“Other Requirements”), or (2) by
failing to satisfy any of the Other Requirements and is unable to, or
determines
not to, avail itself of Internal Revenue Code provisions that enable a RIC to
cure a failure to satisfy any of the Other Requirements as long as the failure
“is due to reasonable cause and not due to willful neglect” and the RIC pays a
deductible tax calculated in accordance with those provisions and meets
certain other requirements - then for federal tax purposes, all of its taxable
income (including its net capital gain) would be subject to tax at the regular
corporate rate without any deduction for dividends paid to its shareholders, and
the dividends it pays would be taxable to its shareholders as ordinary
income (or possibly, (a) for individual and certain other non-corporate
shareholders (each, an “individual”), as “qualified dividend income”
(as
described in the Prospectus) (“QDI”), and/or (b) in the case of corporate
shareholders that meet certain holding period and other requirements
regarding
their Fund shares, as eligible for the dividends-received deduction (“DRD”)) to
the extent of the Fund’s current and accumulated earnings and
profits. Failure to qualify for RIC treatment would therefore have a negative
impact on the Fund’s income and performance. Furthermore, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before requalifying for RIC treatment.
It is possible that the Fund will not qualify as a RIC in any given taxable
year.
The Fund
will be subject to a nondeductible 4% federal excise tax (“Excise Tax”) to the
extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and substantially all of its “capital
gain net income” for the one-year period ending on October 31 of that
year, plus certain other amounts. The Fund intends to make sufficient
distributions by the end of each calendar year to avoid liability for the
Excise
Tax.
Taxation of Certain Investments and
Strategies
Hedging
strategies, such as entering into forward contracts and selling (writing) and
purchasing options and futures contracts, involve complex rules that will
determine for federal income tax purposes the amount, character and timing of
recognition of gains and losses the Fund may realize in connection
therewith. In general, the Fund’s (1) gains from the disposition of foreign
currencies and (2) gains from such contracts will be treated as Qualifying
Income under the Gross Income Requirement.
Dividends
and interest the Fund receives, and gains it realizes, on foreign securities may
be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions (collectively, “foreign taxes”) that would
reduce the yield and/or total return on its securities. Tax treaties
between
certain countries and the United States may reduce or eliminate foreign taxes,
however, and many foreign countries do not impose taxes on capital
gains realized on investments by foreign investors. It is impossible to
determine the effective rate of the Fund’s foreign tax in advance, since the
amount of
its assets to be invested in various countries is not known.
The Fund
may invest in the stock of “passive foreign investment companies” (“PFICs”). A
PFIC is any foreign corporation (with certain exceptions) that, in general,
meets either of the following tests for a taxable year: (1) at least 75% of its
gross income is passive; or (2) an average of at least 50% of the value (or
adjusted tax basis, if elected) of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund
will be
subject to federal income tax on a portion of any “excess distribution” it
receives on the PFIC stock and of any gain on its disposition of that
stock
(collectively, “PFIC income”), plus interest thereon, even if the Fund
distributes the PFIC income as a dividend to its shareholders. The balance of
the PFIC
income will be included in the Fund’s investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders. Fund distributions thereof will not be eligible to be
treated as QDI or for the DRD.
If the Fund
invests in a PFIC and elects to treat the PFIC as a “qualified electing fund”
(“QEF”), then in lieu of incurring the foregoing tax and interest obligation,
the Fund would be required to include in income each taxable year its pro rata
share of the QEF’s annual ordinary earnings and net capital gain —
which the Fund likely would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax — even if the QEF
did not
distribute those earnings and gain to the Fund. In most instances, however, it
will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Alternatively,
the Fund may elect to “mark to market” any stock in a PFIC it owns at the end of
its taxable year, in which event it likely would be required to
distribute to its shareholders any resulting gains to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax. “Marking-to-market,”
in this context, means including in gross income each taxable year (and treating
as ordinary income) the excess, if any, of the fair market
value of the stock over the Fund’s adjusted basis therein (including any net
mark-to-market gain or loss for each prior taxable year for which an
election
was in effect) as of the end of that year. Pursuant to the election, the Fund
also would be allowed to deduct (as an ordinary, not a capital, loss)
the excess,
if any, of its adjusted basis in PFIC stock over the fair market value thereof
as of the taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock the Fund included in income for prior taxable
years under the election. The Fund’s adjusted basis in each PFIC’s
stock subject to the election would be adjusted to reflect the amounts of income
included and deductions taken thereunder.
Investors
should be aware that determining whether a foreign corporation is a PFIC is a
fact-intensive determination that is based on various facts and circumstances
and thus is subject to change, and the principles and methodology used therein
are subject to interpretation. As a result, the Fund may not be
able, at the time it acquires a foreign corporation’s stock, to ascertain
whether the corporation is a PFIC and a foreign corporation may become
a PFIC
after the Fund acquires stock therein. While the Fund generally will seek to
minimize its investment in PFIC stock, and to make appropriate elections
when they are available, to lessen the adverse tax consequences detailed above,
there are no guarantees that it will be able to do so, and the Fund
reserves the right to make those investments as a matter of its investment
policy.
The Fund
may invest in one or more LLCs and limited partnerships (“LPs”) that will be
classified for federal tax purposes as partnerships (and, except as expressly
stated below, this discussion assumes that classification). LLCs and LPs in
which the Fund may invest may include a “publicly traded partnership”
(that is, a partnership the interests in which are “traded on an established
securities market” or “readily tradable on a secondary market (or the
substantial equivalent thereof)”) (a “PTP”), which may be a QPTP, which
satisfies certain qualifying income requirements, or a non-QPTP, which
does not
satisfy those requirements.
If an LLC
or LP in which the Fund invests is a QPTP, all its net income (regardless of
source) will be qualifying income for the Fund under the Gross Income
Requirement. The Fund’s investment in QPTPs, together with certain other
investments, however, may not exceed 25% of the value of its total assets at
the end of each quarter of its taxable year in order to satisfy one of the
Diversification Requirements.
With
respect to non-QPTPs, (1) if an LLC or LP (including a PTP) is treated for
federal tax purposes as a corporation, distributions from it to the Fund
might be
treated as QDI and eligible for the DRD and disposition of the Fund’s interest
therein would generate gain or loss from the disposition of a security,
or (2) if such an LLC or LP is not treated for those purposes as a corporation,
the Fund would be treated as having earned its proportionate share of
each item of income the LLC or LP earned. In the latter case, the Fund would be
able to treat its share of the entity’s income as qualifying income
under the Gross Income Requirement only to the extent that income would be such
if realized directly by the Fund in the same manner as realized by
the LLC or LP. Certain LLCs and LPs (e.g., private funds) in which the Fund may
invest may generate income and gains that are not such qualifying
income. The Fund will monitor its investments in LLCs and LPs to assure its
compliance with the requirements for continued qualification as a RIC.
Some
futures contracts, foreign currency contracts, and “non-equity” options (i.e.,
certain listed options, such as those on a “broad-based” securities index) -
except any “securities futures contract” that is not a “dealer securities
futures contract” (both as defined in the Internal Revenue Code) and
any
interest rate swap, currency swap, basis swap, interest rate cap, interest rate
floor, commodity swap, equity swap, equity index swap, credit default
swap, or
similar agreement - in which the Fund invests may be subject to Internal Revenue
Code section 1256 (collectively, “Section 1256 contracts”). Any Section
1256 contract the Fund holds at the end of its taxable year must be
“marked-to-market” (that is, treated as having been sold at that time
for its
fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized.
Sixty
percent of any net gain or loss realized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of Section 1256 contracts,
will be treated as long-term capital gain or loss, and the balance will be
treated as short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax. These rules may operate to
increase the amount that the Fund must distribute to satisfy the
Distribution Requirement (i.e., with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary
income when
distributed to them, and to increase the net capital gain the Fund recognizes,
without in either case increasing the cash available to it.
Under
Internal Revenue Code section 988, a gain or loss (1) from the disposition of
foreign currencies, (2) except in certain circumstances, from options,
futures, and forward contracts on foreign currencies (and on financial
instruments involving foreign currencies) and from notional principal
contracts
(e.g., swaps, caps, floors, and collars) involving payments denominated in
foreign currencies, (3) on the disposition of each foreign-currency-denominated
debt security that is attributable to fluctuations in the value of the foreign
currency between the dates of acquisition and
disposition of the security, and (4) that is attributable to exchange rate
fluctuations between the time the Fund accrues interest, dividends, or other
receivables
or expenses or other liabilities denominated in a foreign currency and the time
it actually collects the receivables or pays the liabilities generally
will be treated as ordinary income or loss. These gains or losses will increase
or decrease the amount of the Fund’s investment company taxable
income to be distributed to its shareholders as ordinary income, rather than
affecting the amount of its net capital gain. If the Fund’s section 988 losses
exceed its other investment company taxable income for a taxable year, the Fund
would not be able to distribute any dividends, and any distributions
made during that year (including those made before the losses were realized)
would be characterized as a non-taxable “return of capital” to
shareholders, rather than as a dividend, thereby reducing each shareholder’s
basis in his or her Fund shares and treating any part of such distribution
exceeding
that basis as gain from the disposition of those shares.
Offsetting
positions the Fund enters into or holds in any actively traded option, futures
or forward contract may constitute a “straddle” for federal income tax
purposes. Straddles are subject to certain rules that may affect the amount,
character and timing of recognition of the Fund’s gains and losses with
respect to positions of the straddle by requiring, among other things, that (1)
losses realized on disposition of one position of a straddle be deferred to
the extent of any unrealized gain in an offsetting position until the latter
position is disposed of, (2) the Fund’s holding period in certain straddle
positions not begin until the straddle is terminated (possibly resulting in gain
being treated as short-term rather than long-term capital gain), and (3)
losses recognized with respect to certain straddle positions, that otherwise
would constitute short-term capital losses, be treated as long-term capital
losses. Applicable regulations also provide certain “wash sale” rules, which
apply to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and “short sale” rules
applicable to straddles. Different elections are available, which may
mitigate
the effects of the straddle rules, particularly with respect to a “mixed
straddle” (i.e., a straddle at least one, but not all, positions of which are
Section
1256 contracts).
When a
covered call option written (sold) by the Fund expires, the Fund will realize a
short-term capital gain equal to the amount of the premium it received
for writing the option. When the Fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option.
When a covered call option written by the Fund is exercised, it will be treated
as having sold the underlying security, producing long-term or
short-term capital gain or loss, depending on the holding period of the
underlying security and whether the sum of the option price received on the
exercise
plus the premium received when it wrote the option is more or less than the
underlying security’s basis.
If the Fund
has an “appreciated financial position” - generally, any position (including an
interest through an option, futures or forward contract or short sale)
with respect to any stock, debt instrument (other than “straight debt”) or
partnership interest the fair market value of which exceeds its adjusted
basis - and enters into a “constructive sale” of the position, the Fund will be
treated as having made an actual sale thereof, with the result that it
will recognize gain at that time. A constructive sale generally consists of a
short sale, an offsetting notional principal contract or a futures or
forward
contract the Fund or a related person enters into with respect to the same or
substantially identical property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive
sale. The foregoing will not apply, however, to any transaction of the Fund
during any taxable year that otherwise would be treated as a constructive
sale if the transaction is closed within 30 days after the end of that year and
the Fund holds the appreciated financial position unhedged for 60 days
after that closing (i.e., at no time during that 60-day period is the Fund’s
risk of loss regarding that position reduced by reason of certain specified
transactions with respect to substantially identical or related property, such
as having an option to sell, being contractually obligated to sell, making a
short sale or granting an option to buy substantially identical stock or
securities).
Certain
aspects of the tax treatment of derivative instruments are currently unclear and
may be affected by changes in legislation, regulations, administrative
rules, and/or other legally binding authority that could affect the treatment of
income from those instruments and the character, timing of
recognition and amount of the Fund’s taxable income or net realized gains and
distributions. If the IRS were to assert successfully that income the
Fund
derives from those investments does not constitute Qualifying Income, the Fund
might cease to qualify as a RIC (with the consequences described above under
“Taxation of the Fund”) or might be required to reduce its exposure to such
investments.
The Fund
may acquire zero coupon or other securities issued with original issue discount
(“OID”) (such as STRIPS). As a holder of those securities, the Fund must
include in its gross income the OID that accrues on them during the taxable
year, even if it receives no corresponding payment on them during the
year. Similarly, the Fund must include in its gross income each taxable year
securities it receives as “interest” on pay-in-kind securities. Because the
Fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID and other non-cash income
(such as that “interest”), to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular taxable
year to distribute as a dividend an amount that is greater than the total amount
of cash it actually receives. Those distributions will be made from the
Fund’s cash assets or from the proceeds of sales of its portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales,
which would increase or decrease its investment company taxable income and/or
net capital gain.
Taxation of the Fund’s
Shareholders
General
- Dividends
and other distributions the Fund declares in the last quarter of any calendar
year that are payable to shareholders of record on a date in
that quarter will be deemed to have been paid by the Fund and received by those
shareholders on or before December 31 of that year even if the Fund
pays the distributions during the following January. Accordingly, those
distributions will be reportable by, and taxed to, those shareholders
for the
taxable year in which that December 31 falls.
If Fund
shares are redeemed at a loss after being held for six months or less, the loss
will be treated as long-term, instead of short-term, capital loss to
the extent
of any capital gain distributions received on those shares. In addition, any
loss a shareholder realizes on a redemption of Fund shares will be disallowed
to the extent the shares are replaced within a 61-day period beginning 30 days
before and ending 30 days after the redemption; in that
case, the
basis in the acquired shares will be adjusted to reflect the disallowed loss.
Investors also should be aware that the price of Fund shares at any time may
reflect the amount of a forthcoming dividend or other distribution, so if they
purchase Fund shares shortly before the record date for a distribution,
they will pay full price for the shares and receive some part of the price back
as a taxable distribution, even though it represents a partial return of
invested capital.
If more
than 50% of the value of the Fund’s total assets at the close of any taxable
year consists of securities of foreign corporations, it will be eligible
to file an
election for that year with the IRS that would enable its shareholders to
benefit from any foreign tax credit or deduction available with respect
to any
foreign taxes it pays. Pursuant to the election, the Fund would treat those
taxes as dividends paid to its shareholders and each shareholder (1)
would be
required to include in gross income, and treat as paid by the shareholder, the
shareholder’s proportionate share of those taxes, (2) would be required to
treat that share of those taxes and of any dividend the Fund paid that
represents income from foreign or U.S. possessions sources (“foreign-source
income”) as the shareholder’s own income from those sources, and (3) could
either use the foregoing information in calculating the foreign tax
credit against the shareholder’s federal income tax or, alternatively, deduct
the foreign taxes deemed paid by the shareholder in computing taxable
income. If the Fund makes this election for a taxable year, it will report to
its shareholders shortly after that year their respective shares of the
foreign
taxes it paid and its foreign-source income for that year.
An
individual shareholder of the Fund who, for a taxable year, has no more than
$300 ($600 for married persons filing jointly) of creditable foreign
taxes
included on IRS Forms 1099 and all of whose foreign-source income is “qualified
passive income” may elect for that year to be exempt from the extremely
complicated foreign tax credit limitation for federal income tax purposes (about
which shareholders may wish to consult their tax advisers), in which event
the shareholder would be able to claim a foreign tax credit without having to
file the detailed Form 1116 that otherwise is required. A shareholder
will not be entitled to credit or deduct its portion of foreign taxes the Fund
paid that is allocable to Fund shares the shareholder has not held for at
least 16 days during the 31-day period beginning 15 days before the
ex-distribution date for those shares. The minimum holding period will
be extended
if the shareholder’s risk of loss with respect to those shares is reduced by
reason of holding an offsetting position. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions. A foreign
shareholder may not deduct or claim a credit for foreign taxes in
determining its federal income tax liability unless the Fund dividends paid to
it are effectively connected with the shareholder’s conduct of a U.S. trade
or business.
Basis
Election and Reporting - A Fund
shareholder who wants to use an acceptable method for basis determination with
respect to Fund shares other than
the average basis method (the Fund’s default method) must elect to do so in
writing, which may be electronic. The basis determination method a
Fund shareholder elects may not be changed with respect to a redemption
(including a redemption that is part of an exchange) of Fund shares
after the settlement date of the redemption.
In addition
to the requirement to report the gross proceeds from redemptions of Fund shares,
the Fund (or its administrative agent) must report to the IRS and
furnish to its shareholders the basis information for Fund shares that are
redeemed or exchanged and indicate whether they had a short-term (one year
or less) or long-term (more than one year) holding period. Fund shareholders
should consult with their tax advisers to determine the best IRS-accepted
basis determination method for their tax situation and to obtain more
information about how the basis reporting law applies to them. Fund
shareholders who acquire and hold Fund shares through a financial intermediary
should contact their financial intermediary for information related to
the basis election and reporting.
Backup
Withholding - The Fund
is required to withhold and remit to the U.S. Treasury 24% of dividends,
capital gain distributions, and redemption proceeds
(regardless of the extent to which gain or loss may be realized) otherwise
payable to any individual who fails to certify that the taxpayer identification
number furnished to the Fund is correct or who furnishes an incorrect number
(together with the withholding described in the next sentence,
“backup withholding”). Withholding at that rate also is required from the Fund’s
dividends and capital gain distributions otherwise payable to such a
shareholder who (1) is subject to backup withholding for failure to report the
receipt of interest or dividend income properly or (2) fails to certify to
the Fund that he or she is not subject to backup withholding or that it is
a corporation or other “exempt recipient.” Backup withholding is not an
additional tax; rather, any amounts so withheld may be credited against the
shareholder’s federal income tax liability or refunded if proper documentation
is submitted to the IRS.
Non-U.S.
Shareholders - Dividends
the Fund pays to a shareholder who is a nonresident alien individual or foreign
entity (each a “non-U.S. shareholder”) —
other than (1) dividends paid to a non-U.S. shareholder whose ownership of the
Fund’s shares is “effectively connected” with a trade or business
within the United States the shareholder conducts and (2) capital gain
distributions paid to a nonresident alien individual who is physically
present in
the United States for no more than 182 days during the taxable year -- generally
are subject to 30% federal withholding tax (unless a reduced
rate of withholding or a withholding exemption is provided under an applicable
treaty). However, two categories of dividends the Fund might pay,
“short-term
capital gain dividends”
and “interest-related
dividends,” to non-U.S. shareholders (with certain exceptions) and reported by
it in writing to
its shareholders are exempt from that tax. “Short-term capital gain dividends”
are dividends that are attributable to net short-term gain, computed
with certain adjustments. “Interest-related dividends” are dividends that are
attributable to “qualified net interest income” (i.e., “qualified interest
income,” which generally consists of certain OID, interest on obligations “in
registered form,” and interest on deposits, less allocable deductions)
from sources within the United States. Non-U.S. shareholders are urged to
consult their own tax advisers concerning the applicability of that
withholding tax.
Foreign
Account Tax Compliance Act (“FATCA”) - Under
FATCA, “foreign financial institutions” (“FFIs”) and “non-financial foreign
entities” (“NFFEs”)
that are Fund shareholders may be subject to a generally nonrefundable 30%
withholding tax on income dividends the Fund pays. As discussed
more fully below, the FATCA withholding tax generally can be avoided (a) by an
FFI, if it reports certain information regarding direct and indirect
ownership of financial accounts U.S. persons hold with the FFI, and (b) by an
NFFE that certifies its status as such and, in certain circumstances,
information
regarding substantial U.S. owners. Proposed regulations (having current effect)
have been issued to eliminate certain FATCA withholding taxes,
including the withholding tax on investment sale proceeds that was scheduled to
begin in 2019, and to defer the effective date of other taxes.
The U.S.
Treasury has negotiated intergovernmental agreements (“IGAs”) with certain
countries and is in various stages of negotiations with other foreign
countries with respect to alternative approaches to implement FATCA. An entity
in one of those countries may be required to comply with the
terms of
the IGA instead of U.S. Treasury regulations. An FFI resident in a country that
has entered into a Model I IGA with the United States must report to
that country’s government (pursuant to the terms of the applicable IGA and
applicable law), which will, in turn, report to the IRS. An FFI resident in
a Model II IGA country generally must comply with U.S. regulatory requirements,
with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with
whichever of the foregoing applies will be exempt from FATCA withholding.
An FFI can
avoid FATCA withholding by becoming a “participating FFI,” which requires the
FFI to enter into a tax compliance agreement with the IRS under the
Internal Revenue Code. Under such an agreement, a participating FFI agrees to
(1) verify and document whether it has U.S. accountholders, (2) report
certain information regarding their accounts to the IRS, and (3) meet certain
other specified requirements.
An NFFE
that is the beneficial owner of a payment from the Fund can avoid FATCA
withholding generally by certifying its status as such and, in certain
circumstances,
either that (1) it does not have any substantial U.S. owners or (2) it does have
one or more such owners and reports the name, address, and
taxpayer identification number of each such owner. The NFFE will report to the
Fund or other applicable withholding agent, which may, in turn, report
information to the IRS.
Those
foreign shareholders also may fall into certain exempt, excepted, or deemed
compliant categories established by U.S. Treasury regulations, IGAs,
and other
guidance regarding FATCA. An FFI or NFFE that invests in the Fund will need to
provide it with documentation properly certifying the entity’s status
under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are
different from, and in addition to, the tax certification rules to avoid
backup withholding described above. Foreign investors are urged to consult their
tax advisers regarding the application of these requirements to their
own situation and the impact thereof on their investment in the
Fund.
Other
Taxes -
Statutory rules and regulations regarding state and local taxation of ordinary
income dividends, QDI dividends and net capital and foreign
currency gain distributions may differ from the federal income taxation rules
described above. Distributions may also be subject to additional state,
local and foreign taxes depending on each
shareholder’s situation.
Investors
should consult their own tax advisors with respect to the tax consequences to
them of an investment in the Fund based on their particular circumstances.
The Fund does not expect to receive a ruling from any tax authority or an
opinion of tax counsel with respect to its treatment of any tax positions.
Tax consequences of transactions are not the primary consideration of the Fund
in implementing its investment strategy.
DESCRIPTION
OF THE TRUST
The Trust
is an entity of the type commonly known as a “Massachusetts business trust.”
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable for its obligations. However,
the Trust’s Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder
held personally liable for the obligations of the Trust. The Declaration of
Trust also provides that the Trust may maintain appropriate insurance
(e.g., fidelity bonding) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents to cover possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss due to
shareholder liability is limited to circumstances in which both inadequate
insurance
existed and the Trust itself was unable to meet its obligations. The Trust has
not engaged in any other business.
The Trust
was originally created to manage money for large institutional investors. The
following individuals (and members of that individual’s “immediate
family”), are eligible to purchase shares of the R5 Class with an initial
investment of less than $250,000: (i) employees of the Manager, or its parent
company, Resolute Investment Managers, Inc., (ii) employees of a sub-advisor for
Funds where it serves as sub-advisor, (iii) members of the Board, (iv)
employees of Kelso/Estancia, and (v) members of the Manager’s Board of
Directors. The term “immediate family” refers to one’s spouse, children,
grandchildren, grandparents, parents, parents-in-law, brothers and sisters,
sons- and daughters-in-law, a sibling’s spouse, a spouse’s sibling, aunts,
uncles, nieces and nephews; relatives by virtue of remarriage (step-children,
step-parents, etc.) are included. Any shareholders that the Manager transfers
to the R5 Class upon termination of the class of shares in which the
shareholders were originally invested is also eligible for purchasing shares
of the R5
Class with an initial investment of less than $250,000.
The
Investor Class was created to give individuals and other smaller investors an
opportunity to invest in the American Beacon Funds. The R5 and Y Classes
were created to manage money for large institutional investors, including
pension and 401(k) plans. The A Class and C Class were created for investors
investing in the American Beacon Funds through their broker-dealers or other
financial intermediaries.
FINANCIAL
STATEMENTS
APPENDIX
A
Ratings
Definitions
Below are
summaries of the ratings definitions used by some of the rating organizations.
Those ratings represent the opinion of the rating organizations
as to the credit quality of the issues that they rate. The summaries are based
upon publicly available information provided by the rating organizations.
Ratings of Long-Term Obligations and
Preferred Stocks — The Fund
utilizes ratings provided by rating organizations in order to determine
eligibility of long-term
obligations. The ratings described in this section may also be used for
evaluating the credit quality for preferred stocks.
Credit
ratings typically evaluate the safety of principal and interest payments, not
the market value risk of bonds. The rating organizations may fail to
update a
credit rating on a timely basis to reflect changes in economic or financial
conditions that may affect the market value of the security. For these
reasons, credit ratings may not be an accurate indicator of the market value of
a bond.
The four
highest Moody’s ratings for long-term obligations (or issuers thereof) are Aaa,
Aa, A and Baa. Obligations rated Aaa are judged to be of the highest
quality and subject to the lowest level of credit risk. Obligations rated Aa are
judged to be of high quality and subject to very low credit risk. Obligations
rated A are judged to be upper-medium grade and subject to low credit risk.
Obligations rated Baa are judged to be medium-grade and subject to
moderate credit risk and, as such, may possess certain speculative
characteristics.
Moody’s
ratings of Ba, B, Caa, Ca and C are considered below investment grade.
Obligations rated Ba are judged to have speculative elements and are
subject to
substantial credit risk. Obligations rated B are considered speculative and
subject to high credit risk. Obligations rated Caa are judged to be of poor
standing and subject to very high credit risk. Obligations rated Ca are highly
speculative and are likely in, or very near, default, with some prospect of
recovery of principal and interest. Obligations rated C are the lowest rated and
are typically in default, with little prospect for recovery of principal
or interest. Moody’s also appends numerical modifiers 1, 2, and 3 to each
generic rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. Additionally, a
“(hyb)” indicator is appended to all ratings of hybrid securities issued by
banks, insurers, finance companies, and securities firms. By their terms, hybrid
securities allow for the omission of scheduled dividends, interest,
or principal payments, which can potentially result in impairment if such an
omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that could result in impairment. Together
with the hybrid indicator, the long-term obligation rating assigned to
a hybrid security is an expression of the relative credit risk associated with
that security.
The four
highest S&P Global ratings for long-term obligations are AAA, AA, A and BBB.
An obligation rated AAA has the highest rating assigned by S&P
Global and indicates that the obligor’s capacity to meet its financial
commitments on the obligation is extremely strong. An obligation rated AA
differs
from the highest-rated obligations only to a small degree. The obligor’s
capacity to meet its financial commitments on the obligation is very
strong. An
obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations
in higher-rated categories. However, the obligor’s capacity to meet its
financial commitments on the obligation is still strong. An obligation
rated BBB
exhibits adequate protection parameters; however, adverse economic conditions or
changing circumstances are more likely to weaken the obligor’s
capacity to meet its financial commitments on the obligation.
S&P
Global ratings of BB, B, CCC, CC, C, SD, and D are regarded as having
significant speculative characteristics. BB indicates the least degree of
speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposure to adverse conditions. An obligation rated BB is less
vulnerable to nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor’s inadequate capacity to
meet its financial commitments on the obligation. An obligation rated B is more
vulnerable to nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial commitments on the obligation.
Adverse business, financial, or economic conditions will likely
impair the obligor’s capacity or willingness to meet its financial commitments
on the obligation. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitments
on the obligation. An obligation rated CC is currently highly vulnerable to
nonpayment. The CC rating is used when a default has not yet occurred
but S&P Global expects default to be a virtual certainty, regardless of the
anticipated time to default. An obligation rated C is currently highly
vulnerable
to nonpayment, and the obligation is expected to have lower relative seniority
or lower ultimate recovery compared with obligations that are rated
higher. An obligation rated D is in default or in breach of an imputed promise.
For non-hybrid capital instruments, the D rating category is used when
payments on an obligation are not made on the date due, unless S&P Global
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period or the next 30 calendar days. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. An obligation’s rating is lowered to D if it is subject to a
distressed debt restructuring. An SD (selective default) rating is assigned
when S&P Global believes that the obligor has selectively defaulted on a
specific issue or class of obligations but it will continue to meet its
payment
obligations on other issues or classes of obligations in a timely manner. The
ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the rating
categories.
The four
highest ratings for long-term obligations by Fitch Ratings are AAA, AA, A and
BBB. Obligations rated AAA are deemed to be of the highest credit
quality. AAA ratings denote the lowest expectation of credit risk. They are
assigned only in cases of exceptionally strong capacity for payment of
financial
commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events. Obligations rated AA are deemed to be of very high credit
quality. AA ratings denote expectations of very low credit risk. They indicate
very strong capacity for payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events. Obligations
rated A are deemed to be of high credit quality. An A rating denotes
expectations
of low credit risk. The capacity for payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case for
higher ratings. Obligations rated BBB are deemed to be of good
credit
quality. BBB ratings indicate that expectations of default risk are currently
low. The capacity for payment of financial commitments is considered
adequate
but adverse business or economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
Fitch’s
ratings of BB, B, CCC, CC, C, RD and D are considered below investment grade or
speculative grade. Obligations rated BB are deemed to be speculative.
BB ratings indicate an elevated vulnerability to credit risk, particularly in
the event of adverse changes in business or economic conditions over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Obligations rated B are deemed to be highly
speculative. B ratings indicate that material credit risk is present, but a
limited margin of safety remains. Financial commitments are currently
being met;
however, the capacity for continued payment is vulnerable to deterioration in
the business and economic environment. CCC ratings indicate
that substantial credit risk is present. CC ratings indicate very high levels of
credit risk. C indicates exceptionally high levels of credit risk Obligations
rated C indicate a default or default-like process had begun, or the issuer is
in standstill, or for a closed funding vehicle, payment capacity is
irrevocably impaired. Ratings in the categories of ‘CCC’, ‘CC’, and ‘C’ can also
relate to obligations or issuers that are in default. In this case, the
rating does
not opine on default risk but reflects the recovery expectation only. Conditions
that are indicative of a C category rating for an issuer include:
(a) the issuer has entered into a grace or cure period following non-payment of
a material financial obligation; (b) the issuer has entered into a temporary
negotiated waiver or standstill agreement following a payment default on a
material financial obligation; (c) the formal announcement by the issuer
or their agent of a distressed debt exchange; or (d) a closed financing vehicle
where payment capacity is irrevocably impaired such that it is not
expected to pay interest and/or principal in full during the life of the
transaction, but where no payment default is imminent. Obligations rated RD
indicate an
issuer that, in Fitch Ratings’ opinion, has experienced an uncured payment
default or distressed debt exchange on a bond, loan or other material
financial obligation but which has not entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up
procedure,
and which has not otherwise ceased operating. This would include: (a) the
selective payment default on a specific class or currency of debt; (b) the
uncured expiry of any applicable grace period, cure period or default
forbearance period following a payment default on a bank loan, capital
markets
security or other material financial obligation; (c) the extension of multiple
waivers or forbearance periods upon a payment default on one or more
material financial obligations, either in series or in parallel; or (d) ordinary
execution of a distressed debt exchange on one or more material financial
obligations. Obligations rated D indicate an issuer that, in Fitch Ratings’
opinion, has entered into bankruptcy filings, administration, receivership,
liquidation or other formal winding-up procedure or that has otherwise ceased
business. Default ratings are not assigned prospectively to entities or
their obligations; within this context, non-payment on an instrument that
contains a deferral feature or grace period will generally not be considered
a default until after the expiration of the deferral or grace period, unless a
default is otherwise driven by bankruptcy or other similar circumstance,
or by a distressed debt exchange. In all cases, the assignment of a default
rating reflects the agency’s opinion as to the most appropriate rating
category consistent with the rest of its universe of ratings and may differ from
the definition of default under the terms of an issuer’s financial obligations
or local commercial practice. The modifiers “+” or “-” may be appended to a
rating to denote relative status within major rating categories.
Such suffixes are not added to the AAA obligation rating category, or to
corporate finance obligation ratings in the categories below CCC.
Ratings of Municipal
Obligations — Moody’s
ratings for short-term investment-grade municipal obligations are designated
Municipal Investment Grade (MIG or
VMIG in the case of variable rate demand obligations) and are divided into three
levels — MIG/VMIG 1, MIG/VMIG 2, MIG/VMIG 3, and SG. The
MIG/VMIG 1 designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity
provider
and structural and legal protections. The MIG/VMIG 2 designation denotes strong
credit quality. Generally, MIG/VMIG 2 indicates that the margins of
protection are ample, although not as large as in the preceding group. The
MIG/VMIG 3 designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market access for refinancing is
likely to be less well-established. An SG designation denotes speculative-grade
credit quality. Debt instruments in this category may lack sufficient margins of
protection.
S&P
Global uses SP-1, SP-2, SP-3, and D to rate short-term municipal obligations. A
rating of SP-1 denotes a strong capacity to pay principal and interest.
An issue determined to possess a very strong capacity to pay debt service is
given a plus (+) designation. A rating of SP-2 denotes a satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes. A rating of
SP-3 denotes a speculative capacity to pay principal and interest. A rating of D
is assigned upon failure to pay the note when due, completion of a
distressed debt restructuring, or the filing of a bankruptcy petition or the
taking of similar action and where default on an obligation is a virtual
certainty,
for example due to automatic stay provisions.
Ratings of Short-Term
Obligations — Moody’s
short-term ratings, designated as P-1, P-2, P-3, or NP, are opinions of the
ability of issuers to honor short-term
financial obligations that generally have an original maturity not exceeding
thirteen months. The rating P-1 (Prime-1) is the highest short-term
rating assigned by Moody’s and it denotes an issuer (or supporting institution)
that has a superior ability to repay short-term debt obligations.
The rating P-2 (Prime-2) denotes an issuer (or supporting institution) that has
a strong ability to repay short-term debt obligations. The rating P-3
(Prime-3) denotes an issuer (or supporting institution) that has an acceptable
ability for repayment of senior short-term policyholder claims and
obligations. The rating NP (Not Prime) denotes an issuer (or supporting
institution) that does not fall within any of the Prime rating
categories.
S&P
Global short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means
obligations with an original maturity of no more than 365 days, including
commercial paper. A short-term obligation rated A-1 is rated in the highest
category by S&P Global and indicates that the obligor’s capacity to meet its
financial commitments on the obligation is strong. Within this category,
certain obligations are designated with a plus sign (+). This indicates that the
obligor’s capacity to meet its financial commitments on these obligations
is extremely strong. A short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in the highest rating category. However, the
obligor’s capacity to meet its financial commitments on the obligation
is satisfactory. A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to weaken the obligor’s capacity to meet its
financial commitments on the obligation. A short-term obligation rated B is
regarded as vulnerable and has significant speculative characteristics. The
obligor currently has the capacity to meet its financial commitments;
however, it faces major ongoing uncertainties which could lead to the obligor’s
inadequate capacity to meet its financial commitments on the
obligation. A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the obligation.
A short-term obligation rated D is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the D rating category is used when
payments on an obligation are not made on the date due,
unless
S&P Global believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will
be treated as five business days. The D rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. An obligation’s rating is lowered to D if it is subject
to a
distressed debt restructuring. An SD rating is assigned when S&P Global
believes that the obligor has selectively defaulted on a specific issue or
class of
obligations but it will continue to meet its payment obligations on other issues
or classes of obligations in a timely manner.
A
short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity and relates to the capacity to
meet
financial obligations in accordance with the documentation governing the
relevant obligation. Short-term deposit ratings may be adjusted for loss
severity.
Fitch Rating’s Short-Term Ratings are assigned to obligations whose initial
maturity is viewed as “short term” based on market convention (a long-term
rating can also be used to rate an issue with short maturity). Typically, this
means up to 13 months for corporate, sovereign, and structured obligations
and up to 36 months for obligations in U.S. public finance markets. A rating of
F1 denotes an obligation of the highest short-term credit quality. It
indicates the strongest intrinsic capacity for timely payment of financial
commitments and may have an added “+” to denote any exceptionally
strong credit feature. A rating of F2 denotes good short-term credit quality. It
indicates a good intrinsic capacity for timely payment of financial
commitments. A rating of F3 denotes fair short-term credit quality. The
intrinsic capacity for timely payment of financial commitments is adequate. A
rating of B denotes an obligation that is of speculative short-term credit
quality, indicating minimal capacity for timely payment of financial
commitments as well as heightened vulnerability to near term adverse changes in
financial and economic conditions. A rating of C denotes a high
short-term default risk. Default is a real possibility. A rating of RD indicates
an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. RD is typically
applicable to entity ratings only. A rating of D indicates a broad-based
default event for an entity or the default of a short-term
obligation.
APPENDIX
B
GLOSSARY
| |
|
|
Advisers
Act |
Investment
Advisers Act of 1940, as amended |
American
Beacon or the Manager |
American
Beacon Advisors, Inc. |
Beacon
Funds |
American
Beacon Funds |
Board |
Board
of Trustees |
Brexit |
The
United Kingdom’s departure from the European Union |
CCO |
Chief
Compliance Officer |
CD |
Certificate
of Deposit |
CDSC |
Contingent
Deferred Sales Charge |
CFTC |
Commodity
Futures Trading Commission |
CFD |
Contract
for Difference |
CPO |
Commodity
Pool Operator |
CLN |
Credit-Linked
Notes |
Denial
of Services |
A
cybersecurity incident that results in customers or employees being unable
to access electronic systems |
Dividends |
Distributions
from the Fund’s net investment income |
Dodd-Frank
Act |
Dodd-Frank
Wall Street Reform and Consumer Protection Act |
DRD |
Dividends-received
deduction |
EMU |
The
European Union’s Economic and Monetary Union |
ESG |
Environmental,
Social, and Governance |
ETF |
Exchange-Traded
Fund |
ETN |
Exchange-Traded
Note |
EU |
European
Union |
FINRA |
Financial
Industry Regulatory Authority, Inc. |
Floaters |
Floating
rate debt instruments |
Forwards |
Forward
Currency Contracts |
Holdings
Policy |
Policies
and Procedures for Disclosure of Portfolio Holdings |
Internal
Revenue Code |
Internal
Revenue Code of 1986, as amended |
IRA |
Individual
Retirement Account |
IRS |
Internal
Revenue Service |
Junk
Bonds |
High-yield,
non-investment grade bonds |
LIBOR |
ICE
LIBOR |
Management
Agreement |
The
Fund’s Management Agreement with the Manager |
Manager |
American
Beacon Advisors, Inc. |
Moody’s |
Moody’s
Investors Service, Inc. |
NAV |
Net
asset value |
NDF |
Non-deliverable
forward contracts |
NDO |
Non-deliverable
Option |
NYSE |
New
York Stock Exchange |
OTC |
Over-the-Counter |
QDI |
Qualified
Dividend Income |
RIC |
Regulated
Investment Company, as defined in the Internal Revenue
Code |
S&P
Global |
S&P
Global Ratings |
SAI |
Statement
of Additional Information |
SEC |
Securities
and Exchange Commission |
| |
|
|
Securities
Act |
Securities
Act of 1933, as amended |
State
Street |
State
Street Bank and Trust Co. |
STRIPS |
Separately
traded registered interest and principal securities |
Trust |
American
Beacon Funds |
Trustee
Retirement Plan |
Trustee
Retirement Policy and Trustee Emeritus and Retirement
Plan |
UK |
United
Kingdom |
Voluntary
Action |
When
the Fund voluntarily participates in corporate actions (for example,
rights offerings, conversion privileges,
exchange offers, credit event settlements, etc.) where the issuer or
counterparty offers securities
or instruments to holders or counterparties, such as the Fund, and the
acquisition is determined
to be beneficial to Fund
shareholders |