ck0000773674-20220331
August
1, 2022
American
Century Investments
Statement
of Additional Information
American
Century Government Income Trust
Capital
Preservation Fund
Investor
Class (CPFXX)
Ginnie
Mae Fund
Investor
Class (BGNMX)
I
Class (AGMHX)
A
Class (BGNAX)
C
Class (BGNCX)
R
Class (AGMWX)
R5
Class (AGMNX)
Government
Bond Fund
Investor
Class (CPTNX)
I
Class (ABHTX)
A
Class (ABTAX)
C
Class (ABTCX)
R
Class (ABTRX)
R5
Class (ABTIX)
Inflation-Adjusted
Bond Fund
Investor
Class (ACITX)
I
Class (AIAHX)
Y
Class (AIAYX)
A
Class (AIAVX)
C
Class (AINOX)
R
Class (AIARX)
R5
Class (AIANX)
R6
Class (AIADX)
G
Class (AINGX)
Short-Term
Government Fund
Investor
Class (TWUSX)
I
Class (ASGHX)
A
Class (TWAVX)
C
Class (TWACX)
R
Class (TWARX)
R5
Class (TWUOX)
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| This
statement of additional information adds to the discussion in the funds’
prospectuses dated August 1, 2022, but is not a prospectus. The statement
of additional information should be read in conjunction with the funds’
current prospectuses. If you would like a copy of a prospectus, please
contact us at the address or telephone numbers listed on the back cover or
visit American Century Investments’ website at
americancentury.com. |
|
This
statement of additional information incorporates by reference
certain
information that appears in the funds’ annual reports, which
are delivered to all investors. You may obtain a free copy of the funds’
annual reports by calling 1-800-345-2021. |
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©2022
American Century Proprietary Holdings, Inc. All rights reserved.
Table
of Contents
American
Century Government Income Trust is a registered, open-end management investment
company that was organized as a Massachusetts business trust on July 24, 1985.
Until January 1997, it was known as Benham Government Income Trust. Throughout
this statement of additional information we refer to American Century Government
Income Trust as the trust.
For
accounting and performance purposes, Government Bond is the post-reorganization
successor to the American Century Treasury Fund.
Each
fund described in this statement of additional information is a separate series
of the trust and operates for many purposes as if it were an independent
company. Each fund has its own investment objective, strategy, management team,
assets, and tax identification and stock registration numbers.
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Fund |
Ticker
Symbol |
Inception
Date |
|
Capital
Preservation |
|
|
|
Investor
Class |
CPFXX |
10/13/1972 |
|
Ginnie
Mae |
|
|
|
Investor
Class |
BGNMX |
09/23/1985 |
|
I
Class |
AGMHX |
04/10/2017 |
|
A
Class |
BGNAX |
10/09/1997 |
|
C
Class |
BGNCX |
03/01/2010 |
|
R
Class |
AGMWX |
09/28/2007 |
|
R5
Class |
AGMNX |
09/28/2007 |
|
Government
Bond |
|
|
|
Investor
Class |
CPTNX |
05/16/1980 |
|
I
Class |
ABHTX |
04/10/2017 |
|
A
Class |
ABTAX |
10/09/1997 |
|
C
Class |
ABTCX |
03/01/2010 |
|
R
Class |
ABTRX |
03/01/2010 |
|
R5
Class |
ABTIX |
03/01/2010 |
|
Inflation-Adjusted
Bond |
|
|
|
Investor
Class |
ACITX |
02/10/1997 |
|
I
Class |
AIAHX |
04/10/2017 |
|
Y
Class |
AIAYX |
04/10/2017 |
|
A
Class |
AIAVX |
06/15/1998 |
|
C
Class |
AINOX |
03/01/2010 |
|
R
Class |
AIARX |
03/01/2010 |
|
R5
Class |
AIANX |
10/01/2002 |
|
R6
Class |
AIADX |
07/28/2017 |
|
G
Class |
AINGX |
07/28/2017 |
|
Short-Term
Government |
|
|
|
Investor
Class |
TWUSX |
12/15/1982 |
|
I
Class |
ASGHX |
04/10/2017 |
|
A
Class |
TWAVX |
07/08/1998 |
|
C
Class |
TWACX |
03/01/2010 |
|
R
Class |
TWARX |
03/01/2010 |
|
R5
Class |
TWUOX |
03/01/2010 |
This
section explains the extent to which the funds’ advisor, American Century
Investment Management, Inc. (ACIM), can use various investment vehicles and
strategies in managing a fund’s assets. Descriptions of the investment
techniques and risks associated with each appear in the section, Investment
Strategies and Risks
on
page 5. In the case of the funds’ principal investment strategies, these
descriptions elaborate upon the discussion contained in the
prospectus.
Each
fund (except the money market fund) is diversified as defined in the Investment
Company Act of 1940 (the Investment Company Act). Diversified means that, with
respect to 75% of its total assets, each fund will not invest more than 5% of
its total assets in the securities of a single issuer or own more than 10% of
the outstanding voting securities of a single issuer (other than U.S. government
securities and securities of other investment companies).
The
money market fund, Capital Preservation, operates pursuant to Rule 2a-7 under
the Investment Company Act, which permits the valuation of portfolio securities
on the basis of amortized cost. To rely on Rule 2a-7, the fund must comply with
the definition of diversified under the rule.
To
meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S. government or
a regulated investment company); and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer (other than the U.S. government or a regulated investment
company) and it does not own more than 10% of the outstanding voting securities
of a single issuer.
Investments
are varied according to what is judged advantageous under changing economic
conditions. It is the advisor’s policy to retain maximum flexibility in
management without restrictive provisions as to the proportion of one or another
class of securities that may be held, subject to the investment restrictions
described below. Subject to the specific limitations applicable to a fund, the
fund management teams may invest the assets of each fund in varying amounts in
other instruments when such a course is deemed appropriate in order to pursue a
fund’s investment objective. Unless otherwise noted, all investment restrictions
described below and in each fund’s prospectus are measured at the time of the
transaction in the security. If market action affecting fund securities
(including, but not limited to, appreciation, depreciation or a credit rating
event) causes a fund to exceed an investment restriction, the advisor is not
required to take immediate action. Under normal market conditions, however, the
advisor’s policies and procedures indicate that the advisor will not make any
purchases that will make the fund further outside the investment
restriction.
Capital
Preservation is a money market fund that seeks maximum safety and liquidity. Its
secondary objective is to seek to pay its shareholders the highest rate of
return on their investment in Capital Preservation consistent with safety and
liquidity. Capital Preservation pursues its investment objectives by investing
exclusively in short-term U.S. Treasury securities guaranteed by the direct full
faith and credit pledge of the U.S. government. Capital Preservation’s
dollar-weighted average portfolio maturity will not exceed 60 days and its
weighted average life will not exceed 120 days.
While
the risks associated with investing in short-term U.S. Treasury securities are
very low, an investment in Capital Preservation is not risk-free.
Money
market funds seeks to maintain a $1.00 share price, although there is no
guarantee they will be able to do so. Shares of the money market fund are
neither insured nor guaranteed by the U.S. government.
The
Ginnie Mae Fund seeks high current income while maintaining liquidity and safety
of principal by investing primarily in GNMA certificates. Under normal market
conditions, the fund invests at least 80% of its net assets in certificates
issued by the Government National Mortgage Association (GNMA).
Ginnie
Mae certificates represent interests in pools of mortgage loans and in the cash
flows from those loans. These certificates are guaranteed by the GNMA and are
backed by the full faith and credit of the U.S. government as to the timely
payment of interest and repayment of principal. This means that the Ginnie Mae
Fund receives its share of interest and principal payments owed on the
underlying pool of mortgage loans, regardless of whether borrowers make their
scheduled mortgage payments.
The
fund also may buy securities issued by the U.S. government and its agencies and
instrumentalities, including mortgage-backed securities issued by the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac), among others. The U.S. government provides varying
levels of financial support to these agencies and instrumentalities. For
temporary defensive purposes, the Ginnie Mae Fund may invest 100% of its assets
in these securities.
A
unique feature of mortgage-backed securities, such as GNMA certificates, is that
their principal is scheduled to be paid back gradually for the duration of the
loan rather than in one lump sum at maturity. Investors (such as those investing
in the Ginnie Mae Fund) receive scheduled monthly payments of principal and
interest, but they also may receive unscheduled prepayments of principal on the
underlying mortgages. See Mortgage-Related
Securities
on page 16
for a discussion of prepayment risk.
Government
Bond seeks to provide a high level of current income under normal market
conditions. Government Bond pursues its investment objective by investing at
least 80% of its net assets in securities issued or guaranteed by agencies and
instrumentalities of the U.S. government, including mortgage-backed securities.
It may invest in U.S. Treasury bills, bonds, notes and zero-coupon securities,
all of which are backed by the direct full faith and credit pledge of the U.S.
government. It also may invest in securities issued by agencies and
instrumentalities of the U.S. government other than the U.S. Treasury. The U.S.
government provides varying levels of financial support to these agencies.
Government Bond invests in securities of all maturity ranges and is not limited
to a specific weighted average portfolio maturity range. Government Bond’s
weighted average portfolio maturity varies as determined by the portfolio
managers, taking into consideration market conditions and other relevant
factors.
Inflation-Adjusted
Bond pursues its investment objective by investing in inflation-indexed
securities. These securities include inflation-indexed Treasury securities that
are backed by the full faith and credit of the U.S. government and indexed or
otherwise structured by the U.S. Treasury to provide protection against
inflation. Inflation-indexed securities may be issued by the U.S. Treasury in
the form of notes or bonds. The fund also may invest in inflation-indexed
securities issued by U.S. government agencies and instrumentalities other than
the U.S. Treasury. In addition, the fund may invest in inflation-indexed
securities issued by entities other than the U.S. Treasury or the U.S.
government and its agencies and instrumentalities, such as corporations and
foreign governments. Under normal market conditions the fund invests at least
80% of its net assets in inflation-adjusted bonds. The advisor considers
inflation-adjusted bonds to include inflation-indexed bonds, notes, commercial
paper, short-term instruments and other debt securities. The fund also may
invest in traditional U.S. Treasury, U.S. government agency or other non-U.S.
government securities that are not inflation-indexed, and in derivative
instruments such as options, futures contracts, options on futures contracts,
and swap agreements (including, but not limited to, inflation swap agreements
and credit default swap agreements), or in mortgage- or asset-backed securities,
provided that such investments are in keeping with the fund’s investment
objective.
Inflation-Adjusted
Bond also may invest in U.S. Treasury securities that are not indexed to
inflation for liquidity and total return purposes, or if at any time the
portfolio managers believe there is an inadequate supply of appropriate
inflation-indexed securities in which to invest or when such investments are
required as a temporary defensive measure. Inflation-Adjusted Bond’s portfolio
may consist of any combination of these securities consistent with investment
strategies employed by the advisor. While Inflation-Adjusted Bond seeks to
provide a measure of inflation protection to its investors, there is no
assurance that the fund will provide less risk than a fund investing in
conventional fixed-principal securities.
There
are no maturity or duration restrictions for the securities in which
Inflation-Adjusted Bond may invest. The U.S. Treasury has issued
inflation-indexed Treasury securities with five-year, 10-year, 20-year and
30-year maturities.
Inflation-Adjusted
Bond may be appropriate for investors who are seeking to protect all or a part
of their investment portfolio from the effects of inflation.
Traditional
fixed-principal notes and bonds pay a stated return or rate of interest in
dollars and are redeemed at their par amount. Inflation during the period that
the securities are outstanding will diminish the future purchasing power of
these dollars. Inflation-Adjusted Bond is designed to serve as a vehicle to
protect against this diminishing effect.
Inflation-Adjusted
Bond is designed to provide total return consistent with an investment in
inflation-indexed securities. Inflation-Adjusted Bond’s yield will reflect both
the inflation-adjusted interest income and the inflation adjustment to
principal, which are features of inflation-indexed securities. The current
income generated by Inflation-Adjusted Bond will vary with month-to-month
changes in the Consumer Price Index and may be substantially more or
substantially less than traditional fixed-principal securities.
There
are special investment risks, particularly share price volatility and potential
adverse tax consequences, associated with investment in inflation-indexed
securities. These risks are described in the section titled Investment
Strategies and Risks
on page 5. You should read that section carefully to make sure you understand
the nature of Inflation-Adjusted Bond before you invest in the
fund.
Short-Term
Government seeks to provide investors with a high level of current income while
maintaining safety of principal. Short-Term Government pursues this objective by
investing primarily in securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities, including mortgage-backed, asset-backed and
other securities in keeping with its investment objectives. Under normal
conditions, the portfolio managers invest at least 80% of Short-Term
Government’s net assets in securities of the U.S. government and its agencies
and instrumentalities and maintain a weighted average maturity of three years or
less. The portfolio managers also may invest in investment-grade debt securities
of U.S. companies and pre-refunded municipal securities.
This
section describes investment vehicles and techniques the portfolio managers can
use in managing a fund’s assets. It also details the risks associated with each,
because each investment vehicle and technique contributes to a fund’s overall
risk profile.
Asset-Backed
Securities (ABS) (Ginnie Mae, Government Bond, Inflation-Adjusted Bond and
Short-Term Government only)
ABS
are structured like mortgage-backed securities, but instead of mortgage loans or
interest in mortgage loans, the underlying assets may include, for example, such
items as motor vehicle installment sales or installment loan contracts, leases
of various types of real and personal property, home equity loans, student
loans, small business loans, and receivables from credit card agreements. The
ability of an issuer of ABS to enforce its security interest in the underlying
assets may be limited. The value of an ABS is affected by changes in the
market’s perception of the assets backing the security, the creditworthiness of
the servicing agent for the loan pool, the originator of the loans, or the
financial institution providing any credit enhancement.
Payments
of principal and interest passed through to holders of ABS are typically
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or a priority to certain of the
borrower’s other securities. The degree of credit enhancement varies, and
generally applies to only a fraction of the asset-backed security’s par value
until exhausted. If the credit enhancement of an ABS held by the fund has been
exhausted, and if any required payments of principal and interest are not made
with respect to the underlying loans, the fund may experience losses or delays
in receiving payment.
Some
types of ABS may be less effective than other types of securities as a means of
“locking in” attractive long-term interest rates. One reason is the need to
reinvest prepayments of principal; another is the possibility of significant
unscheduled prepayments resulting from declines in interest rates. These
prepayments would have to be reinvested at lower rates. As a result, these
securities may have less potential for capital appreciation during periods of
declining interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value during periods
of rising interest rates. Prepayments may also significantly shorten the
effective maturities of these securities, especially during periods of declining
interest rates. Conversely, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates than traditional debt securities, and, therefore,
potentially increasing the volatility of the fund.
The
risks of investing in ABS are ultimately dependent upon the repayment of loans
by the individual or corporate borrowers. Although the fund would generally have
no recourse against the entity that originated the loans in the event of default
by a borrower, ABS typically are structured to mitigate this risk of
default.
ABS
are generally issued in more than one class, each with different payment terms.
Multiple class ABS may be used as a method of providing credit support through
creation of one or more classes whose right to payments is made subordinate to
the right to such payments of the remaining class or classes. Multiple classes
also may permit the issuance of securities with payment terms, interest rates or
other characteristics differing both from those of each other and from those of
the underlying assets. Examples include so-called strips (ABS entitling the
holder to disproportionate interests with respect to the allocation of interest
and principal of the assets backing the security), and securities with classes
having characteristics such as floating interest rates or scheduled amortization
of principal.
Collateralized
Debt Obligations
The
funds, other than Capital Preservation, may also invest in collateralized debt
obligations (CDOs), including collateralized loan obligations (CLOs),
collateralized bond obligations (CBOs), and other similarly structured
investments. CBOs and CLOs are types of asset backed securities. A CLO is a
trust or other special purpose entity that is typically collateralized by a pool
of loans, which may include, among others, U.S. and non-U.S. senior secured
loans, senior unsecured loans, and subordinate corporate loans, including loans
that may be rated below investment grade or equivalent unrated loans. A CBO is
generally a trust which is backed by a diversified pool of high risk, below
investment grade fixed income securities. The risks of an investment in a CDO
depend largely on the type of the collateral backing the obligation and the
class of the CDO in which a fund invests. CDOs are subject to credit, interest
rate, valuation, prepayment and extension risks. These securities are also
subject to risk of default on the underlying asset, particularly during periods
of economic downturn. CDOs carry additional risks including, but not limited to,
(i) the possibility that distributions from collateral securities will not be
adequate to make interest or other payments, (ii) the collateral may decline in
value or default, (iii) a fund may invest in CDOs that are subordinate to other
classes, and (iv) the complex structure of the security may not be fully
understood at the time of investment and may produce disputes with the issuer or
unexpected investment results.
Convertible
Securities
The
funds may invest in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a
particular
time period at a specified price or formula. A convertible security entitles the
holder to receive the interest paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Before conversion or exchange, such securities ordinarily provide
a stream of income with generally higher yields than common stocks of the same
or similar issuers, but lower than the yield on non-convertible debt. Of course,
there can be no assurance of current income because issuers of convertible
securities may default on their obligations. In addition, there can be no
assurance of capital appreciation because the value of the underlying common
stock will fluctuate. Because of the conversion feature, the managers consider
some convertible securities to be equity equivalents.
The
price of a convertible security will normally fluctuate in some proportion to
changes in the price of the underlying asset. A convertible security is subject
to risks relating to the activities of the issuer and/or general market and
economic conditions. The stream of income typically paid on a convertible
security may tend to cushion the security against declines in the price of the
underlying asset. However, the stream of income causes fluctuations based upon
changes in interest rates and the credit quality of the issuer. In general, the
value of a convertible security is a function of (1) its yield in comparison
with yields of other securities of comparable maturity and quality that do not
have a conversion privilege and (2) its worth, at market value, if converted or
exchanged into the underlying common stock. The price of a convertible security
often reflects such variations in the price of the underlying common stock in a
way that a non-convertible security does not. At any given time, investment
value generally depends upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer and the seniority of the security in the issuer’s capital
structure.
A
convertible security may be subject to redemption at the option of the issuer at
a predetermined price. If a convertible security held by a fund is called for
redemption, the fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock or to cash, or would sell the
convertible security to a third party, which may have an adverse effect on the
fund. A convertible security may feature a put option that permits the holder of
the convertible security to sell that security back to the issuer at a
predetermined price. A fund generally invests in convertible securities for
their favorable price characteristics and total return potential and normally
would not exercise an option to convert unless the security is called or
conversion is forced.
Contingent
convertible securities (sometimes referred to as CoCos or Additional Tier 1
instruments) generally either convert into equity or have their principal
written down upon the occurrence of certain trigger events, which may be linked
to the issuer’s stock price, regulatory capital thresholds, regulatory actions
relating to the issuer’s continued viability, or other pre-specified events.
Under certain circumstances, CoCos may be subject to an automatic write-down of
the principal amount or value of the securities, sometimes to zero, thereby
cancelling the securities. If such an event occurs, a fund may not have any
rights to repayment of the principal amount of the securities that has not
become due. Additionally, a fund may not be able to collect interest payments or
dividends on such securities. In the event of liquidation or dissolution of the
issuer, CoCos generally rank junior to the claims of holders of the issuer’s
other debt obligations. CoCos also may provide for the mandatory conversion of
the security into common stock of the issuer under certain circumstances.
Because the common stock of an issuer may not pay a dividend, a fund may
experience reduced yields (or no yield) as a result of the conversion.
Conversion of the security from debt to equity would deepen the subordination of
the investor and thereby worsen the fund’s standing in bankruptcy.
Corporate
Debt Securities
Short-Term
Government may invest a portion of its assets in investment-grade debt
securities of U.S. companies, including mortgage-backed, asset-backed and other
securities, when the portfolio managers believe such securities represent an
attractive investment for the fund. Inflation-Adjusted Bond also may invest in
debt securities issued by corporations. The value of the debt securities in
which the funds may invest will fluctuate based upon changes in interest rates
and the credit quality of the issuer. Corporate debt securities will be limited
to investment-grade obligations, except that Inflation-Adjusted Bond may invest
in high-yield securities, or junk bonds. Investment grade means that at the time
of purchase, such obligations are rated within the four highest categories by a
nationally recognized statistical rating organization (for example, at least Baa
by Moody’s Investors Service, Inc. or BBB by Standard & Poor’s Corporation),
or, if not rated, are of equivalent investment quality as determined by the
fund’s advisor. According to Moody’s, bonds rated Baa are medium-grade and
possess some speculative characteristics. A BBB rating by S&P indicates
S&P’s belief that a security exhibits a satisfactory degree of safety and
capacity for repayment, but is more vulnerable to adverse economic conditions
and changing circumstances.
The
value of a fund’s investments in corporate debt securities will change as
prevailing interest rates change. In general, the prices of such securities vary
inversely with interest rates. As prevailing interest rates fall, the prices of
bonds and other securities that trade on a yield basis generally rise. When
prevailing interest rates rise, bond prices generally fall. Depending upon the
particular amount and type of fixed-income securities holdings of a fund, these
changes may impact the net asset value of the fund’s shares.
Counterparty
Risk
A
fund will be exposed to the credit risk of the counterparties with which, or the
brokers, dealers and exchanges through which, it deals, whether it engaged in
exchange traded or off-exchange transactions. If a fund’s futures
commission merchant (FCM) becomes bankrupt or insolvent, or otherwise defaults
on its obligations to the fund, the fund may not receive all amounts owed to it
in respect of its trading, despite the clearinghouse fully discharging all of
its obligations. The Commodity Exchange Act
requires
an FCM to segregate all funds received from its customers with respect to
regulated futures transactions from such FCM’s proprietary funds. If an
FCM were not to do so to the full extent required by law, the assets of an
account might not be fully protected in the event of the bankruptcy of an
FCM. Furthermore, in the event of an FCM’s bankruptcy, a fund would be
limited to recovering only a pro rata share of all available funds segregated on
behalf of an FCM’s combined customer accounts, even though certain property
specifically traceable to the fund (for example, U.S. Treasury bills deposited
by the fund) was held by an FCM. FCM bankruptcies have occurred in which
customers were unable to recover from the FCM’s estate the full amount of their
funds on deposit with such FCM and owing to them. Such situations could
arise due to various factors, or a combination of factors, including inadequate
FCM capitalization, inadequate controls on customer trading and inadequate
customer capital. In addition, in the event of the bankruptcy or
insolvency of a clearinghouse, the fund might experience a loss of funds
deposited through its FCM as margin with the clearinghouse, a loss of unrealized
profits on its open positions, and the loss of funds owed to it as realized
profits on closed positions. Such a bankruptcy or insolvency might also
cause a substantial delay before the fund could obtain the return of funds owed
to it by an FCM who was a member of such clearinghouse.
Because
bi-lateral derivative transactions are traded between counterparties based on
contractual relationships, a fund is subject to the risk that a counterparty
will not perform its obligations under the related contracts. Although
each fund intends to enter into transactions only with counterparties which the
advisor believes to be creditworthy, there can be no assurance that a
counterparty will not default and that the funds will not sustain a loss on a
transaction as a result. In situations where a fund is required to post margin
or other collateral with a counterparty, the counterparty may fail to segregate
the collateral or may commingle the collateral with the counterparty’s own
assets. As a result, in the event of the counterparty’s bankruptcy or
insolvency, a fund’s collateral may be subject to the conflicting claims of the
counterparty’s creditors, and a fund may be exposed to the risk of a court
treating a fund as a general unsecured creditor of the counterparty, rather than
as the owner of the collateral.
A
fund is subject to the risk that issuers of the instruments in which it invests
and trades may default on their obligations under those instruments, and that
certain events may occur that have an immediate and significant adverse effect
on the value of those instruments. There can be no assurance that an
issuer of an instrument in which a fund invests will not default, or that an
event that has an immediate and significant adverse effect on the value of an
instrument will not occur, and that a fund will not sustain a loss on a
transaction as a result.
Transactions
entered into by a fund may be executed on various U.S. and non-U.S. exchanges,
and may be cleared and settled through various clearinghouses, custodians,
depositories and prime brokers throughout the world. Although a fund
attempts to execute, clear and settle the transactions through entities the
advisor believes to be sound, there can be no assurance that a failure by any
such entity will not lead to a loss to a fund.
Cyber
Security Risk
As
the funds increasingly rely on technology and information systems to operate,
they become susceptible to operational risks linked to security breaches in
those information systems. Both calculated attacks and unintentional events can
cause failures in the funds’ information systems. Cyber attacks can include
acquiring unauthorized access to information systems, usually through hacking or
the use of malicious software, for purposes of stealing assets or confidential
information, corrupting data, or disrupting fund operations. Cyber attacks can
also occur without direct access to information systems, for example by making
network services unavailable to intended users. Cyber security failures by, or
breaches of the information systems of, the advisor, distributors,
broker-dealers, other service providers (including, but not limited to, index
providers, fund accountants, custodians, transfer agents and administrators), or
the issuers of securities the fund invests in may also cause disruptions and
impact the funds’ business operations. Breaches in information security
may result in financial losses, interference with the funds’ ability to
calculate NAV, impediments to trading, inability of fund shareholders to
transact business, violations of applicable privacy and other laws, regulatory
fines, penalties, reputational damage, reimbursement or other compensation
costs, or additional compliance costs. Additionally, the funds may incur
substantial costs to prevent future cyber incidents. The funds have business
continuity plans in the event of, and risk management systems to help prevent,
such cyber attacks, but these plans and systems have limitations including the
possibility that certain risks have not been identified. Moreover, the funds do
not control the cyber security plans and systems of our service providers and
other third party business partners. The funds and their shareholders could be
negatively impacted as a result.
Derivative
Instruments
To
the extent permitted by its investment objectives and policies, each fund may
invest in securities that are commonly referred to as derivative instruments.
Generally, a derivative instrument is a financial arrangement, the value of
which is based on, or derived from, a traditional security, asset, or market
index. Examples of common derivative instruments include futures contracts,
warrants, structured notes, credit default swaps, options contracts, swap
transactions, forward currency contracts, and treasury futures, including
foreign government bond futures.
Certain
derivative instruments may be described as structured investments. A structured
investment is a security whose value or performance is linked to an underlying
index or other security or asset class. Structured investments include
asset-backed securities (ABS), commercial and residential mortgage-backed
securities (MBS and CMBS), and collateralized mortgage obligations (CMO), which
are described more fully below. Structured investments also include securities
backed by other types of
collateral.
Structured investments involve the transfer of specified financial assets to a
special purpose entity, generally a corporation or trust, or the deposit of
financial assets with a custodian; and the issuance of securities backed by, or
representing interests in, those assets.
Some
structured investments are individually negotiated agreements or are traded over
the counter. Structured investments may be organized and operated to restructure
the investment characteristics of the underlying security. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics, such
as varying maturities, payment priorities and interest rate provisions, and the
extent of such payments made with respect to structured investments is dependent
on the extent of the cash flow on the underlying instruments. Because structured
investments typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured investments
are subject to such risks as the inability or unwillingness of the issuers of
the underlying securities to repay principal and interest, and requests by the
issuers of the underlying securities to reschedule or restructure outstanding
debt and to extend additional loan amounts.
Some
derivative instruments, such as mortgage-related and other asset-backed
securities, are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There
are many different types of derivative instruments and many different ways to
use them. Futures and options are commonly used for traditional hedging purposes
to attempt to protect a fund from exposure to changing interest rates,
securities prices or currency exchange rates, and for cash management purposes
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities.
The
return on a derivative instruments may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There
is a range of risks associated with investments in derivatives,
including:
•the
risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the portfolio managers anticipate
or that the value of the structured or derivative instrument will not move or
react to changes in the underlying security, interest rate, market index or
other financial asset as anticipated;
•the
possibility that there may be no liquid secondary market, which may make it
difficult or impossible to close out a position when desired;
•the
risk that daily limits on price fluctuations and speculative position limits on
exchanges on which a fund may conduct its transactions in derivative instruments
may prevent profitable liquidation of positions, subjecting a fund to the
potential of greater loss;
•the
risk that adverse price movements in an instrument can result in a loss
substantially greater than a fund’s initial investment;
•the
risk that the counterparty will fail to perform its obligations;
and
•the
risk that a fund will be subject to higher volatility because some derivative
instruments create leverage.
A
fund may not invest in a derivative instrument if its credit, interest rate,
liquidity, counterparty and other risks associated with ownership of the
security are outside acceptable limits set forth in the fund’s prospectus.
The
funds’ Board of Trustees has reviewed the advisor’s derivatives
risk management program policy, which includes policies and procedures
reasonably designed to manage a fund’s derivatives risk. Unless a fund qualifies
as a limited derivatives user, the fund will
be required
to participate
in the
derivatives management program, which includes compliance
with value-at-risk
based leverage limits, oversight by
a derivatives
risk manager, and additional reporting and disclosure regarding its derivatives
positions. A fund designated as
a limited
derivatives user has policies and procedures to manage its aggregate derivatives
risk.
The advisor will report on the
derivatives risk management program to
the Board of Trustees on
a quarterly basis. The derivatives risk management program complies with
recently adopted Rule 18f-4. In connection with the adoption of Rule 18f-4, the
SEC also eliminated the existing asset segregation framework for covering
derivatives and certain financial instruments.
Foreign
Currency Exchange Transactions
Inflation-Adjusted
Bond may conduct foreign currency transactions on a spot basis (i.e., for prompt
delivery and settlement) or forward basis (i.e., by entering into forward
currency exchange contracts, currency options and futures transactions for
hedging or any lawful purpose). See Derivative
Instruments
on page 7.
Although foreign exchange dealers generally do not charge a fee for such
transactions, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies.
Forward
contracts are customized transactions that require a specific amount of a
currency to be delivered at a specific exchange rate on a specific date or range
of dates in the future. Forward contracts are generally traded in an interbank
market directly between currency traders (usually larger commercial banks) and
their customers. The parties to a forward contract may agree to offset or
terminate the contract before its maturity, or may hold the contract to maturity
and complete the contemplated currency exchange.
The
following summarizes the principal currency management strategies involving
forward contracts. A fund may also use swap agreements, indexed securities, and
options and futures contracts relating to foreign currencies for the same
purposes.
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Settlement
Hedges or Transaction Hedges.
When the portfolio managers wish to lock in the U.S. dollar price of or
proceeds from a foreign currency denominated security when a fund is
purchasing or selling the security, a fund may enter into a forward
contract to do so. This type of currency transaction, often called a
“settlement hedge” or “transaction hedge,” protects the fund against an
adverse change in foreign currency values between the date a security is
purchased or sold and the date on which payment is made or received (i.e.,
settled). Forward contracts to purchase or sell a foreign currency may
also be used by a fund in anticipation of future purchases or sales of
securities denominated in foreign currency, even if the specific
investments have not yet been selected by the portfolio managers. This
strategy is often referred to as “anticipatory
hedging.” |
| (2) |
Position
Hedges.
When the portfolio managers believe that the currency of a particular
foreign country may suffer substantial decline against the U.S. dollar, a
fund may enter into a forward contract to sell foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of its
portfolio securities either denominated in, or whose value is tied to,
such foreign currency. This use of a forward contract is sometimes
referred to as a “position hedge.” For example, if a fund owned securities
denominated in Euro, it could enter into a forward contract to sell Euro
in return for U.S. dollars to hedge against possible declines in the
Euro’s value. This hedge would tend to offset both positive and negative
currency fluctuations, but would not tend to offset changes in security
values caused by other factors. |
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A
fund could also hedge the position by entering into a forward contract to
sell another currency expected to perform similarly to the currency in
which the fund’s existing investments are denominated. This type of hedge,
often called a “proxy hedge,” could offer advantages in terms of cost,
yield or efficiency, but may not hedge currency exposure as effectively as
a simple position hedge against U.S. dollars. This type of hedge may
result in losses if the currency used to hedge does not perform similarly
to the currency in which the hedged securities are
denominated. |
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The
precise matching of forward contracts in the amounts and values of
securities involved generally would not be possible because the future
values of such foreign currencies will change as a consequence of market
movements in the values of those securities between the date the forward
contract is entered into and the date it matures. Predicting short-term
currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. Normally,
consideration of the prospect for currency parities will be incorporated
into the long-term investment decisions made with respect to overall
diversification strategies. However, the managers believe that it is
important to have flexibility to enter into such forward contracts when
they determine that a fund’s best interests may be served. |
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At
the maturity of the forward contract, the fund may either sell the
portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate the obligation to deliver the foreign
currency by purchasing an “offsetting” forward contract with the same
currency trader obligating the fund to purchase, on the same maturity
date, the same amount of the foreign currency. |
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It
is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the forward contract.
Accordingly, it may be necessary for a fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign currency
the fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency the fund is obligated
to deliver. |
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Shifting
Currency Exposure.
A fund may also enter into forward contracts to shift its investment
exposure from one currency into another for hedging purposes or to enhance
returns. This may include shifting exposure from U.S. dollars to foreign
currency, or from one foreign currency to another foreign currency. This
strategy tends to limit exposure to the currency sold, and increase
exposure to the currency that is purchased, much as if a fund had sold a
security denominated in one currency and purchased an equivalent security
denominated in another currency. For example, if the portfolio managers
believed that the U.S. dollar may suffer a substantial decline against the
Euro, they could enter into a forward contract to purchase Euros for a
fixed amount of U.S. dollars. This transaction would protect against
losses resulting from a decline in the value of the U.S. dollar, but would
cause the fund to assume the risk of fluctuations in the value of the
Euro. |
Successful
use of currency management strategies will depend on the fund management team’s
skill in analyzing currency values. Currency management strategies may
substantially subject a fund’s investment exposure to changes in currency rates
and could result in losses to a fund if currencies do not perform as the
portfolio managers anticipate. For example, if a currency’s value rose at a time
when the portfolio managers hedged a fund by selling the currency in exchange
for U.S. dollars, a fund would not participate in the currency’s appreciation.
Similarly, if the portfolio managers increase a fund’s exposure to a currency
and that
currency’s
value declines, a fund will sustain a loss. There is no assurance that the
portfolio managers’ use of foreign currency management strategies will be
advantageous to a fund or that they will hedge at appropriate
times.
The
fund will generally cover outstanding forward contracts by maintaining liquid
portfolio securities denominated in, or whose value is tied to, the currency
underlying the forward contract or the currency being hedged.
The
fund may also invest in nondeliverable forward (NDF) currency transactions. An
NDF is a transaction that represents an agreement between the fund and a
counterparty to buy or sell a specified amount of a particular currency at an
agreed upon foreign exchange rate on a future date. Unlike other currency
transactions, there is no physical delivery of the currency on the settlement of
an NDF transaction. Rather, the fund and the counterparty agree to net the
settlement by making a payment in U.S. dollars or another fully convertible
currency that represents any difference between the foreign exchange rate agreed
upon at the inception of the NDF agreement and the actual exchange rate on the
agreed upon future date. The fund may use an NDF contract to gain exposure to
foreign currencies which are not internationally traded or if the markets for
such currencies are heavily regulated or highly taxed. When currency exchange
rates do not move as anticipated, a fund could sustain losses on the NDF
transaction. This risk is heightened when the transactions involve currencies of
emerging market countries. Additionally, certain NDF transactions which involve
currencies of less developed countries or with respect to certain other
currencies, may be relatively illiquid.
Foreign
Securities
Inflation-Adjusted
Bond may invest in securities of foreign issuers, including foreign governments
and corporations, when these securities meet its standards of selection.
Securities of foreign issuers may or may not be inflation-linked, and may trade
in U.S. or foreign securities markets. Securities of foreign issuers may be less
liquid, more volatile and harder to value than U.S. securities. Although the
fund invests primarily in U.S. dollar-denominated securities, the fund also may
invest in securities denominated in foreign currencies.
Investments
in securities of foreign issuers may present certain risks,
including:
Currency
Risk
— The value of the foreign investments held by the fund may be significantly
affected by changes in currency exchange rates. The dollar value of a foreign
security generally decreases when the value of the dollar rises against the
foreign currency in which the security is denominated, and tends to increase
when the value of the dollar falls against such currency. In addition, the value
of fund assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities, and by currency restrictions, exchange control regulation, currency
devaluations and political developments.
Social,
Political
and Economic Risk
— The economies of many of the countries in which the fund invests are not as
developed as the economy of the United States and may be subject to
significantly different forces. Political or social instability, expropriation,
nationalization, confiscatory taxation and limitations on the removal of funds
or other assets also could adversely affect the value of investments. Further,
the fund may find it difficult or be unable to enforce ownership rights, pursue
legal remedies or obtain judgments in foreign courts.
Regulatory
Risk
— Foreign companies generally are not subject to the regulatory controls imposed
on U.S. issuers and, in general, there is less publicly available information
about foreign securities than is available about domestic securities. Many
foreign companies are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic companies, and there may be less stringent investor protection and
disclosure standards in some foreign markets. Certain jurisdictions do not
currently provide the Public Company Accounting Oversight Board (“PCAOB”) with
sufficient access to inspect audit work papers and practices, or otherwise do
not cooperate with U.S. regulators, potentially exposing investors in U.S.
capital markets to significant risks. Income from foreign securities owned by
the fund may be reduced by a withholding tax at the source, which would reduce
dividend income payable to shareholders.
Market
and Trading Risk
— Brokerage commission rates in foreign countries, which generally are fixed
rather than subject to negotiation as in the United States, are likely to be
higher. The securities markets in many of the countries in which the fund
invests will have substantially less trading volume than the principal U.S.
markets. As a result, the securities of some companies in these countries may be
less liquid, more volatile and harder to value than comparable U.S. securities.
Furthermore, one securities broker may represent all or a significant part of
the trading volume in a particular country, resulting in higher trading costs
and decreased liquidity due to a lack of alternative trading partners. There
generally is less government regulation and supervision of foreign stock
exchanges, brokers and issuers, which may make it difficult to enforce
contractual obligations.
Clearance
and Settlement Risk
— Foreign securities markets also have different clearance and settlement
procedures, and 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 clearance and settlement could
result in temporary periods when assets of the fund are uninvested and no return
is earned. The inability of the fund to make intended security purchases due to
clearance and settlement problems could cause the fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
clearance and settlement problems could result either in losses to the fund due
to subsequent declines in the value of the portfolio security or, if the fund
has entered into a contract to sell the security, liability to the
purchaser.
Ownership
Risk
— Evidence of securities ownership may be uncertain in many foreign countries.
As a result, there is a risk that a fund’s trade details could be incorrectly or
fraudulently entered at the time of the transaction, resulting in a loss to the
fund.
Sanctions
—
The
U.S. may impose economic sanctions against companies in various sectors of
certain countries. This could limit a fund's investment opportunities in such
countries, impairing the fund’s ability to invest in accordance with its
investment strategy and/or to meet its investment objective. For example, a fund
may be prohibited from investing in securities issued by companies subject to
such sanctions. In addition, the sanctions may require a fund to freeze its
existing investments in sanctioned companies, prohibiting the fund from selling
or otherwise transacting in these investments. Current sanctions or the threat
of potential sanctions may also impair the value or liquidity of affected
securities and negatively impact a fund.
In
early 2022, the United States and countries throughout the world imposed
economic sanctions on Russia in response to its military invasion of Ukraine.
The sanctions are broad and include restrictions on the Russian government as
well as Russian companies, individuals, and banking entities. The sanctions and
other measures, such as boycotts or changes in consumer preferences, will likely
cause declines in the value and liquidity of Russian securities, downgrades in
the credit ratings of Russian securities, devaluation of Russia’s currency, and
increased market volatility and disruption in Russia and throughout the world.
Sanctions and similar measures, such as banning Russia from financial
transaction systems that facilitate international transfers of funds, could
limit or prevent the funds from selling and buying impacted securities both in
Russia and in other markets. Such measures will likely cause significant delay
in the settlement of impacted securities transactions or prevent settlement all
together. The lack of available market prices for such securities may cause the
funds to use fair value procedures to value certain securities. The consequences
of the war and sanctions may negatively impact other regional and global
economic markets. Additionally, Russia may take counter measures or engage in
retaliatory actions—including cyberattacks and espionage—which could further
disrupt global markets and supply chains. Companies in other countries that do
business with Russia and the global commodities market for oil and natural gas,
especially, will likely feel the impact of the sanctions. The sanctions,
together with the potential for a wider armed or cyber conflict, could increase
financial market volatility globally and negatively impact the funds’
performance beyond any direct exposure to Russian issuers or
securities.
Bond
Connect Risk —
Consistent with their investment objectives and strategies, the funds may invest
in certain securities that are listed and traded through China’s Bond Connect
Program (“Bond Connect”), which allows non-Chinese investors to purchase certain
fixed-income investments available from China’s interbank bond market. Bond
Connect uses the trading infrastructure of both Hong Kong and China and is
therefore not available on trading holidays in those countries. As a result,
prices of securities purchased through Bond Connect may fluctuate at times when
a fund is unable to add to or exit its position. Securities offered through Bond
Connect may lose their eligibility for trading through the program at any time.
If Bond Connect securities lose their eligibility for trading through the
program, they may be sold but can no longer be purchased through Bond Connect.
Bond Connect is subject to regulation by both Hong Kong and China, and there can
be no assurance that further regulations will not affect the availability of
securities in the program, the frequency of redemptions, or other limitations.
In China, the Hong Kong Monetary Authority Central Money Markets Unit holds Bond
Connect securities on behalf of investors (such as the funds) via accounts
maintained with China’s two fixed-income securities clearinghouses. While these
investors may hold beneficial interest in Bond Connect securities, courts in
China have limited experience in applying the concept of beneficial ownership.
Additionally, a fund may not be able to participate in corporate actions
affecting Bond Connect securities due to time constraints or for other
operational reasons. As a result, payments of distributions could be delayed.
Bond Connect trades are settled in Chinese currency, the renminbi (“RMB”). It
cannot be guaranteed that investors will have timely access to a reliable supply
of RMB in Hong Kong.
Emerging
Markets Risk
— Inflation-Adjusted Bond may invest in securities of issuers located in
emerging market (developing) countries. Investing in securities of issuers in
emerging market countries involves exposure to significantly higher risk than
investing in countries with developed markets. Emerging market countries may
have economic structures that generally are less diverse and mature, and
political systems that can be expected to be less stable than those of developed
countries.
Securities
prices in emerging market countries can be significantly more volatile than in
developed countries, reflecting the greater uncertainties of investing in lesser
developed markets and economies. In particular, emerging market countries may
have relatively unstable governments, and may present the risk of
nationalization of businesses, expropriation, confiscatory taxation or in
certain instances, reversion to closed-market, centrally planned economies. Such
countries may also have less protection of property rights than developed
countries.
Futures
and Options
The
funds, other than Capital Preservation, may enter into futures contracts,
options or options on futures contracts. The funds may not, however, enter into
a futures transaction for speculative purposes. Generally, futures transactions
will be used to:
•protect
against a decline in market value of a fund’s securities (taking a short futures
position), or
•protect
against the risk of an increase in market value for securities in which a fund
generally invests at a time when a fund is not fully invested (taking a long
futures position), or
•provide
a temporary substitute for the purchase of an individual security that may be
purchased in an orderly fashion.
Some
futures and options strategies, such as selling futures, buying puts and writing
calls, hedge a fund’s investments against price fluctuations. Other strategies,
such as buying futures, writing puts and buying calls, tend to increase market
exposure.
Although
other techniques may be used to control a fund’s exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For
example, the sale of a future by a fund means the fund becomes obligated to
deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. Futures contracts provide for the sale by one party and purchase
by another party of a specific security at a specified future time and price.
The portfolio managers may engage in futures and options transactions based on
securities indices that are consistent with a fund’s investment objective. An
example of an index that may be used is the S&P 500®
Index for equity funds. The managers also may engage in futures and options
transactions based on specific securities, such as U.S. Treasury bonds or notes.
Futures contracts are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (CFTC), a U.S. government agency.
Index
futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e., buying a contract that has previously been sold
or selling a contract that has previously been bought).
Unlike
when a fund purchases or sells a bond, no price is paid or received by the fund
upon the purchase or sale of the future. Initially, a fund will be required to
deposit an amount of cash or securities equal to a varying specified percentage
of the contract amount. This amount is known as initial margin. The margin
deposit is intended to ensure completion of the contract (delivery or acceptance
of the underlying security) if it is not terminated prior to the specified
delivery date. A margin deposit does not constitute a margin transaction for
purposes of a fund’s investment restrictions. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish margin deposit requirements that are higher than
the exchange minimums. Cash held in the margin account generally is not
income-producing. However, coupon-bearing securities, such as Treasury bills and
bonds, held in major accounts generally will earn income. Subsequent payments,
called variation margin, to and from the broker will be made on a daily basis as
the price of the underlying debt securities or index fluctuates, making the
future more or less valuable, a process known as marking the contract to market.
Changes in variation margin are recorded by a fund as unrealized gains or
losses. At any time prior to expiration of the future, a fund may elect to close
the position by taking an opposite position that will operate to terminate its
position in the future. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the fund, and the fund
realizes a loss or gain.
By
buying a put option, a fund obtains the right (but not the obligation) to sell
the instrument underlying the option at a fixed strike price and in return a
fund pays the current market price for the option (known as the option premium).
A fund may terminate its position in a put option it has purchased by allowing
it to expire, by exercising the option or by entering into an offsetting
transaction, if a liquid market exists. If the option is allowed to expire, a
fund will lose the entire premium it paid. If a fund exercises a put option on a
security, it will sell the instrument underlying the option at the strike price.
The buyer of a typical put option can expect to realize a gain if the value of
the underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss limited to the
amount of the premium paid, plus related transaction costs.
The
features of call options are essentially the same as those of put options,
except that the buyer of a call option obtains the right to purchase, rather
than sell, the instrument underlying the option at the option’s strike price.
The buyer of a typical call option can expect to realize a gain if the value of
the underlying instrument increases substantially and can expect to suffer a
loss if security prices do not rise sufficiently to offset the cost of the
option.
When
a fund writes a put option, it takes the opposite side of the transaction from
the option’s buyer. In return for the receipt of the premium, a fund assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. A fund may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. Otherwise, a fund must
continue to be prepared to pay the strike price while the
option
is outstanding, regardless of price changes, and must continue to post margin as
discussed below. If the price of the underlying instrument rises, a put writer
would generally realize as profit the premium it received. If the price of the
underlying instrument remains the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a lower
price. If the price of the underlying instrument falls, the put writer would
expect to suffer a loss.
A
fund writing a call option is obligated to sell or deliver the option’s
underlying instrument in return for the strike price upon exercise of the
option. Writing calls generally is a profitable strategy if the price of the
underlying instrument remains the same or falls. A call writer offsets part of
the effect of a price decline by receipt of the option premium, but gives up
some ability to participate in security price increases. The writer of an
exchange traded put or call option on a security, an index of securities or a
futures contract is required to deposit cash or securities or a letter of credit
as margin and to make mark to market payments of variation margin as the
position becomes unprofitable.
Risks
Related to Futures and Options Transactions
Futures
and options prices can be volatile, and trading in these markets involves
certain risks. If the portfolio managers apply a hedge at an inappropriate time
or judge interest rate or equity market trends incorrectly, futures and options
strategies may lower a fund’s return.
A
fund could suffer losses if it is unable to close out its position because of an
illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the portfolio managers consider it appropriate or
desirable to do so. In the event of adverse price movements, a fund would be
required to continue making daily cash payments to maintain its required margin.
If the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio managers would not
otherwise elect to do so. In addition, a fund may be required to deliver or take
delivery of instruments underlying futures contracts it holds. The portfolio
managers will seek to minimize these risks by limiting the contracts entered
into on behalf of the funds to those traded on national futures exchanges and
for which there appears to be a liquid secondary market.
A
fund could suffer losses if the prices of its futures and options positions were
poorly correlated with its other investments, or if securities underlying
futures contracts purchased by a fund had different maturities than those of the
portfolio securities being hedged. Such imperfect correlation may give rise to
circumstances in which a fund loses money on a futures contract at the same time
that it experiences a decline in the value of its hedged portfolio securities. A
fund also could lose margin payments it has deposited with a margin broker, if,
for example, the broker became bankrupt.
Most
futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the maximum
amount that the price of a futures contract may vary either up or down from the
previous day’s settlement price at the end of the trading session. Once the
daily limit has been reached in a particular type of contract, no trades may be
made on that day at a price beyond the limit. However, the daily limit governs
only price movement during a particular trading day and, therefore, does not
limit potential losses. In addition, the daily limit may prevent liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Options
on Futures
By
purchasing an option on a futures contract, a fund obtains the right, but not
the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.
Some
funds may write (or sell) call options that obligate them to sell (or deliver)
the option’s underlying instrument upon exercise of the option. While the
receipt of option premiums would mitigate the effects of price declines, a fund
would give up some ability to participate in a price increase on the underlying
security. If a fund were to engage in options transactions, it would own the
futures contract at the time a call was written and would keep the contract open
until the obligation to deliver it pursuant to the call expired.
Restrictions
on the Use of Futures Contracts and Options
Each
non-money market fund may enter into futures contracts, options, options on
futures contracts, or swap agreements as permitted by its investment policies
and the Commodity Futures Trading Commission (CFTC) rules. The advisor to each
fund has claimed an exclusion from the definition of the term “commodity pool
operator” under the Commodity Exchange Act and, therefore, the advisor
is
not
subject to registration or regulation as a commodity pool operator
under
that Act
with
respect to its provision of services to each fund.
Certain
rules adopted by the CFTC
may impose additional limits on the ability of a fund to invest in futures
contracts, options on futures, swaps, and certain other commodity interests if
its investment advisor does not register with the CFTC as a “commodity pool
operator” with respect to such fund. It is expected that the funds will be able
to execute their investment strategies within the limits adopted by the CFTC’s
rules. As a result, the advisor does not intend to register with the CFTC as a
commodity pool
operator
on behalf of any of the funds. In the event that one of the funds engages in
transactions that necessitate future registration with the CFTC, the advisor
will register as a commodity pool operator and comply with applicable
regulations with respect to that fund.
To
the extent required by law, each fund will segregate cash, cash equivalents or
other appropriate liquid securities on its records in an amount sufficient to
cover its obligations under the futures contracts, options and swap
agreements.
Inflation-Indexed
Securities
The
funds may purchase inflation-indexed securities issued by the U.S. Treasury,
U.S. government agencies and instrumentalities other than the U.S. Treasury, and
(except the money market fund) entities other than the U.S. Treasury or U.S.
government agencies and instrumentalities.
Inflation-indexed
securities are designed to offer a return linked to inflation, thereby
protecting future purchasing power of the money invested in them. However,
inflation-indexed securities provide this protected return only if held to
maturity. In addition, inflation-indexed securities may not trade at par value.
Real interest rates (the market rate of interest less the anticipated rate of
inflation) change over time as a result of many factors, such as what investors
are demanding as a true value for money. When real rates do change,
inflation-indexed securities prices will be more sensitive to these changes than
conventional bonds, because these securities were sold originally based upon a
real interest rate that is no longer prevailing. Should market expectations for
real interest rates rise, the price of inflation-indexed securities and the
share price of Inflation-Adjusted Bond will fall. Investors in the fund should
be prepared to accept not only this share price volatility but also the possible
adverse tax consequences it may cause.
An
investment in securities featuring inflation-adjusted principal and/or interest
involves factors not associated with more traditional fixed-principal
securities. Such factors include the possibility that the inflation index may be
subject to significant changes, that changes in the index may or may not
correlate to changes in interest rates generally or changes in other indices, or
that the resulting interest may be greater or less than that payable on other
securities of similar maturities. In the event of sustained deflation, it is
possible that the amount of semiannual interest payments, the inflation-adjusted
principal of the security or the value of the stripped components will decrease.
If any of these possibilities are realized, Inflation-Adjusted Bond’s net asset
value could be negatively affected.
Inflation-Indexed
Treasury Securities
Inflation-indexed
U.S. Treasury securities are U.S. Treasury securities with a final value and
interest payment stream linked to the inflation rate. Inflation-indexed U.S.
Treasury securities may be issued in either note or bond form. Inflation-indexed
U.S. Treasury notes have maturities of at least one year, but not more than 10
years. Inflation-indexed U.S. Treasury bonds have maturities of more than 10
years.
Inflation-indexed
U.S. Treasury securities may be attractive to investors seeking an investment
backed by the full faith and credit of the U.S. government that provides a
return in excess of the rate of inflation. These securities were first sold in
the U.S. market in January 1997. Inflation-indexed U.S. Treasury securities are
auctioned and issued on a quarterly basis.
Structure
and Inflation Index —
The
principal value of inflation-indexed U.S. Treasury securities will be adjusted
to reflect changes in the level of inflation. The index for measuring the
inflation rate for inflation-indexed U.S. Treasury securities is the
non-seasonally adjusted U.S. City Average All Items Consumer Price for All Urban
Consumers Index (Consumer Price Index) published monthly by the U.S. Department
of Labor’s Bureau of Labor Statistics.
Semiannual
coupon interest payments are made at a fixed percentage of the inflation-indexed
principal value. The coupon rate for the semiannual interest rate of each
issuance of inflation-indexed U.S. Treasury securities is determined at the time
the securities are sold to the public (i.e., by competitive bids in the
auction). The coupon rate will likely reflect real yields available in the U.S.
Treasury market; real yields are the prevailing yields on U.S. Treasury
securities with similar maturities, less then-prevailing inflation expectations.
While a reduction in inflation will cause a reduction in the interest payment
made on the securities, the repayment of principal at the maturity of the
security is guaranteed by the U.S. Treasury to be no less than the original face
or par amount of the security at the time of issuance.
Indexing
Methodology —
The
principal value of inflation-indexed U.S. Treasury securities will be indexed,
or adjusted, to account for changes in the Consumer Price Index. Semiannual
coupon interest payment amounts will be determined by multiplying the
inflation-indexed principal amount by one-half the stated rate of interest on
each interest payment date.
Taxation
— The taxation of inflation-indexed U.S. Treasury securities is similar to the
taxation of conventional bonds. Both interest payments and the difference
between original principal and the inflation-adjusted principal will be treated
as interest income subject to taxation. Interest payments are taxable when
received or accrued. The inflation adjustment to the principal is subject to tax
in the year the adjustment is made, not at maturity of the security when the
cash from the repayment of principal is received. If an upward adjustment has
been made, investors in non-tax-deferred accounts will pay taxes on this amount
currently. Decreases in the indexed principal can be deducted only from current
or previous interest payments reported as income.
Inflation-indexed
U.S. Treasury securities therefore have a potential cash flow mismatch to an
investor, because investors must pay taxes on the inflation-adjusted principal
before the repayment of principal is received. It is possible that, particularly
for high
income
tax bracket investors, inflation-indexed U.S. Treasury securities would not
generate enough cash in a given year to cover the tax liability they could
create. This is similar to the current tax treatment for zero-coupon bonds and
other discount securities. If inflation-indexed U.S. Treasury securities are
sold prior to maturity, capital losses or gains are realized in the same manner
as traditional bonds.
Inflation-Adjusted
Bond, however, distributes all income on a quarterly basis. Investors in
Inflation-Adjusted Bond will receive dividends that represent both the interest
payments and the principal adjustments of the inflation-indexed securities held
in the fund’s portfolio. An investment in Inflation-Adjusted Bond may,
therefore, be a means to avoid the cash flow mismatch associated with a direct
investment in inflation-indexed securities. For more information about taxes and
their effect on you as an investor in the fund, see Taxes
on
page 49.
U.S.
Government Agencies
— A number of U.S. government agencies and instrumentalities other than the U.S.
Treasury may issue inflation-indexed securities. Some U.S. government agencies
have issued inflation-indexed securities whose design mirrors that of the
inflation-indexed U.S. Treasury securities described above.
Other
Entities —
Entities other than the U.S. Treasury or U.S. government agencies and
instrumentalities may issue inflation-indexed securities. While some entities
have issued inflation-linked securities whose design mirrors that of the
inflation-indexed U.S. Treasury securities described above, others utilize
different structures. For example, the principal value of these securities may
be adjusted with reference to the Consumer Price Index, but the semiannual
coupon interest payments are made at a fixed percentage of the original issue
principal. Alternatively, the principal value may remain fixed, but the coupon
interest payments may be adjusted with reference to the Consumer Price
Index.
Loan
Participation Notes
Inflation
Adjusted Bond may invest in loan participation notes ("LPNs"). In terms of their
functioning and investment risk, LPNs are comparable to an investment in
"normal" bonds. In return for the investor’s commitment of capital, the issuer
makes regular interest payments and, at maturity or in accordance with an agreed
upon amortization schedule, the note is repaid at par.
However,
in contrast to "normal" bonds, there are three parties involved in the issuance
of an LPN. The legal issuer, typically a bankruptcy-remote, limited purpose
entity, issues notes to investors and uses the proceeds received from investors
to make loans to the borrower-with each loan generally having substantially
identical payment terms to the related note issued by the issuer. The borrower
is typically an operating company, and the issuer’s obligations under a note are
typically limited to the extent of any capital repayments and interest payments
made by the borrower under the related loan. Accordingly, the investor generally
assumes the credit risk of the underlying borrower. The loan participation note
structure is generally used to provide the borrower more efficient financing in
the capital markets than the borrower would be able to obtain if it issued notes
directly.
In
the event of a default by the borrower of an LPN, the fund may experience delays
in receiving payments of interest and principal while the note issuer enforces
and liquidates the underlying collateral, and there is no guarantee that the
underlying collateral will cover the principal and interest owed to the fund
under the LPN.
LPNs
are generally subject to liquidity risk. Even though an LPN may be traded on an
exchange there can be no assurance that a liquid market will develop for the
LPNs, that holders of the LPNs will be able to sell their LPNs, or that such
holders will be able to sell their LPNs for a price that reflects their
value.
Depending
on the creditworthiness of the underlying borrower, LPNs may be subject to the
risk of investing in high-yield securities. Additionally, LPNs are generally
utilized by foreign borrowers and therefore may be subject to the risk of
investing in foreign securities and emerging markets
risk. Such foreign risk could include interest payments being subject to
withholding tax.
LIBOR
Transition Risk
The
London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate intended to
be representative of the rate at which major international banks who are members
of the British Bankers Association lend to one another over short-terms.
Following manipulation allegations, financial institutions
have started the process of phasing
out the use of LIBOR. The transition process to a replacement rate or rates
may lead to increased volatility or illiquidity in markets for instruments that
currently rely on LIBOR. The transition may also result in a change in the value
of certain instruments the funds hold or a change in the cost of temporary
borrowing for the funds. As
LIBOR is discontinued, the LIBOR replacement rate may be lower than market
expectations, which could have an adverse impact on the value of preferred and
debt-securities with floating or fixed-to-floating rate coupons. The transition
away from LIBOR could result in losses to the funds.
Loans
of Portfolio Securities
In
order to realize additional income, a fund may lend its portfolio securities.
Such loans may not exceed one-third of the fund’s total assets valued at market,
however, this limitation does not apply to purchases of debt securities in
accordance with the fund’s investment objectives, policies and limitations, or
to repurchase agreements with respect to portfolio securities.
Cash
received from the borrower as collateral through loan transactions may be
invested in other eligible securities. Investing this cash subjects that
investment to market appreciation or depreciation. If a borrower defaults on a
securities loan because of insolvency or other reasons, the lending fund could
experience delays or costs in recovering the securities it loaned; if the value
of
the
loaned securities increased over the value of the collateral, the fund could
suffer a loss. To minimize the risk of default on securities loans, the advisor
adheres to guidelines prescribed by the Board of Trustees governing lending of
securities. These guidelines strictly govern
•the
type and amount of collateral that must be received by the fund;
•the
circumstances under which additions to that collateral must be made by
borrowers;
•the
return to be received by the fund on the loaned securities;
•the
limitations on the percentage of fund assets on loan; and
•the
credit standards applied in evaluating potential borrowers of portfolio
securities.
In
addition, the guidelines require that the fund have the option to terminate any
loan of a portfolio security at any time and set requirements for recovery of
securities from borrowers.
Mortgage-Related
Securities
Background
A
mortgage-backed security represents an ownership interest in a pool of mortgage
loans. The loans are made by financial institutions to finance home and other
real estate purchases. As the loans are repaid, investors receive payments of
both interest and principal.
Like
fixed-income securities such as U.S. Treasury bonds, mortgage-backed securities
pay a stated rate of interest during the life of the security. However, unlike a
bond, which returns principal to the investor in one lump sum at maturity,
mortgage-backed securities return principal to the investor in increments during
the life of the security.
Because
the timing and speed of principal repayments vary, the cash flow on
mortgage-backed securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages or default on their loans, the
principal is distributed pro rata to investors.
As
with other fixed-income securities, the prices of mortgage-backed securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage-backed securities rise, and vice versa. Changing interest
rates have additional significance for mortgage-backed securities investors,
however, because they influence prepayment rates (the rates at which mortgage
holders prepay their mortgages), which in turn affect the yields on
mortgage-backed securities. When interest rates decline, prepayment rates
generally increase. Mortgage holders take advantage of the opportunity to
refinance their mortgages at lower rates with lower monthly payments. When
interest rates rise, mortgage holders are less inclined to refinance their
mortgages. The effect of prepayment activity on yield depends on whether the
mortgage-backed security was purchased at a premium or at a
discount.
A
fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, a fund might miss an opportunity to earn interest at higher
prevailing rates.
GNMA
Certificates
The
Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934 (Housing Act), as amended,
authorizes GNMA to guarantee the timely payment of interest and repayment of
principal on certificates that are backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or by Title V of the
Housing Act of 1949 (FHA Loans), or guaranteed by the Department of Veterans
Affairs under the Servicemen’s Readjustment Act of 1944 (VA Loans), as amended,
or by pools of other eligible mortgage loans. The Housing Act provides that the
full faith and credit of the U.S. government is pledged to the payment of all
amounts that may be required to be paid under any guarantee. GNMA has unlimited
authority to borrow from the U.S. Treasury in order to meet its obligations
under this guarantee.
GNMA
certificates represent a pro rata interest in one or more pools of the following
types of mortgage loans: (a) fixed-rate level payment mortgage loans; (b)
fixed-rate graduated payment mortgage loans (GPMs); (c) fixed-rate growing
equity mortgage loans (GEMs); (d) fixed-rate mortgage loans secured by
manufactured (mobile) homes (MHs); (e) mortgage loans on multifamily residential
properties under construction (CLCs); (f) mortgage loans on completed
multifamily projects (PLCs); (g) fixed-rate mortgage loans that use escrowed
funds to reduce the borrower’s monthly payments during the early years of the
mortgage loans (buydown mortgage loans); and (h) mortgage loans that provide for
payment adjustments based on periodic changes in interest rates or in other
payment terms of the mortgage loans.
Fannie
Mae Certificates
The
Federal National Mortgage Association (FNMA or Fannie Mae) is a federally
chartered and privately owned corporation established under the Federal National
Mortgage Association Charter Act. Fannie Mae was originally established in 1938
as a U.S. government agency designed to provide supplemental liquidity to the
mortgage market and was reorganized as a stockholder-owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae acquires capital from
investors
who
would not ordinarily invest in mortgage loans directly and thereby expands the
total amount of funds available for housing. This money is used to buy home
mortgage loans from local lenders, replenishing the supply of capital available
for mortgage lending.
Fannie
Mae certificates represent a pro rata interest in one or more pools of FHA
Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by a government agency) of the
following types: (a) fixed-rate level payment mortgage loans; (b) fixed-rate
growing equity mortgage loans; (c) fixed-rate graduated payment mortgage loans;
(d) adjustable-rate mortgage loans; and (e) fixed-rate mortgage loans secured by
multifamily projects.
Fannie
Mae certificates entitle the registered holder to receive amounts representing a
pro rata interest in scheduled principal and interest payments (at the
certificate’s pass-through rate, which is net of any servicing and guarantee
fees on the underlying mortgage loans), any principal prepayments, and a
proportionate interest in the full principal amount of any foreclosed or
otherwise liquidated mortgage loan. The full and timely payment of interest and
repayment of principal on each Fannie Mae certificate is guaranteed by Fannie
Mae; this guarantee is not backed by the full faith and credit of the U.S.
government. See Current
Status of
Fannie Mae and Freddie Mac.
Freddie
Mac Certificates
The
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970 (FHLMC Act), as amended. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit. Its
principal activity consists of purchasing first-lien conventional residential
mortgage loans (and participation interests in such mortgage loans) and
reselling these loans in the form of mortgage-backed securities, primarily
Freddie Mac certificates.
Freddie
Mac certificates represent a pro rata interest in a group of mortgage loans (a
Freddie Mac certificate group) purchased by Freddie Mac. The mortgage loans
underlying Freddie Mac certificates consist of fixed- or adjustable-rate
mortgage loans with original terms to maturity of between 10 and 30 years,
substantially all of which are secured by first-liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
standards set forth in the FHLMC Act. A Freddie Mac certificate group may
include whole loans, participation interests in whole loans, undivided interests
in whole loans, and participations composing another Freddie Mac certificate
group.
Freddie
Mac guarantees to each registered holder of a Freddie Mac certificate the timely
payment of interest at the rate provided for by the certificate. Freddie Mac
also guarantees ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but generally does not guarantee the
timely repayment of principal. Freddie Mac may remit principal at any time after
default on an underlying mortgage loan, but no later than 30 days following (a)
foreclosure sale, (b) payment of a claim by any mortgage insurer, or (c) the
expiration of any right of redemption, whichever occurs later, and in any event
no later than one year after demand has been made upon the mortgager for
accelerated payment of principal. Obligations guaranteed by Freddie Mac are not
backed by the full faith and credit pledge of the U.S. government. See
Current
Status of
Fannie Mae and Freddie Mac.
Current
Status of Fannie Mae and Freddie Mac
Since
September 2008, Fannie Mae and Freddie Mac have operated under a conservatorship
administered by the Federal Housing Finance Agency (FHFA). In addition, the U.S.
Treasury has entered into senior preferred stock purchase agreements (SPSPAs) to
provide additional financing to Fannie Mae and Freddie Mac. Although the SPSPAs
are intended to provide Fannie Mae and Freddie Mac with the necessary cash
resources to meet their obligations, Fannie Mae and Freddie Mac continue to
operate as going concerns while in conservatorship, and each remains liable for
all of its obligations, including its guaranty obligations, associated with its
mortgage-backed securities.
The
future status and role of Fannie Mae or Freddie Mac could be impacted by, among
other things, the actions taken and restrictions placed on Fannie Mae or Freddie
Mac by the FHFA in its role as conservator, the restrictions placed on Fannie
Mae’s or Freddie Mac’s operations and activities under the senior preferred
stock purchase agreements, market responses to developments at Fannie Mae or
Freddie Mac, and future legislative, regulatory, or legal action that alters the
operations, ownership, structure and/or mission of Fannie Mae or Freddie Mac,
each of which may, in turn, impact the value of, and cash flows on, any
securities guaranteed by Fannie Mae and Freddie Mac.
Collateralized
Mortgage Obligations (CMOs)
(Ginnie
Mae, Government Bond, Inflation-Adjusted Bond and Short-Term Government
only)
A
CMO is a multiclass bond backed by a pool of mortgage pass-through certificates
or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie Mae or Freddie
Mac pass-through certificates; (b) unsecured mortgage loans insured by the
Federal Housing Administration or guaranteed by the Department of Veterans’
Affairs; (c) unsecuritized conventional mortgages; or (d) any combination
thereof.
In
structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called tranches. Each CMO is a set of two or
more tranches, with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven and 20
years.
As
payments on the underlying mortgage loans are collected, the CMO issuer pays the
coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
sequential pay or plain vanilla CMO.
Some
CMOs are structured so that the prepayment or market risks are transferred from
one tranche to another. Prepayment stability is improved in some tranches if
other tranches absorb more prepayment variability.
The
final tranche of a CMO often takes the form of a Z-bond, also known as an
accrual bond or accretion bond. Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage loans. The existence
of a Z-bond tranche helps stabilize cash flow patterns in the other tranches. In
a changing interest rate environment, however, the value of the Z-bond tends to
be more volatile.
As
CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.
The
existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche — known as a companion bond, support or
non-PAC bond — that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.
Floating-rate
CMO tranches (floaters) pay a variable rate of interest that is usually tied to
a reference rate, such as the Secured Overnight Financing Rate (SOFR).
Institutional investors with short-term liabilities, such as commercial banks,
often find floating-rate CMOs attractive investments. Super floaters (which
float a certain percentage above a reference rate) and inverse floaters (which
float inversely to a reference rate) are variations on the floater structure
that have highly variable cash flows.
Stripped
Mortgage-Backed Securities (Ginnie Mae, Government Bond, Inflation-Adjusted Bond
and Short-Term Government only)
Stripped
mortgage-backed securities are created by segregating the cash flows from
underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security’s
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO.
The
market values of IOs and POs are very sensitive to interest rate and prepayment
rate fluctuations. POs, for example, increase (or decrease) in value as interest
rates decline (or rise). The price behavior of these securities also depends on
whether the mortgage collateral was purchased at a premium or discount to its
par value. Prepayments on discount coupon POs generally are much lower than
prepayments on premium coupon POs. IOs may be used to hedge a fund’s other
investments because prepayments cause the value of an IO strip to move in the
opposite direction from other mortgage-backed securities.
Commercial
Mortgage-Backed Securities (CMBS) (Ginnie Mae, Government Bond,
Inflation-Adjusted Bond and Short-Term Government only)
CMBS
are securities created from a pool of commercial mortgage loans, such as loans
for hotels, shopping centers, office buildings, apartment buildings, and the
like. Interest and principal payments from these loans are passed on to the
investor according to a particular schedule of payments. They may be issued by
U.S. government agencies or by private issuers. The credit quality of CMBS
depends primarily on the quality of the underlying loans and on the structure of
the particular deal. Generally, deals are structured with senior and subordinate
classes. Multiple classes may permit the issuance of securities with payment
terms, interest rates, or other characteristics differing both from those of
each other and those of the underlying assets. Examples include classes having
characteristics such as floating interest rates or scheduled amortization of
principal. Rating agencies rate the individual classes of the deal based on the
degree of seniority or subordination of a particular class and other factors.
The value of these securities may change because of actual or perceived changes
in the creditworthiness of individual borrowers, their tenants, the servicing
agents, or the general state of commercial real estate and other
factors.
CMBS
may be partially stripped so that each investor class receives some interest and
some principal. When securities are completely stripped, however, all of the
interest is distributed to holders of one type of security, known as an
interest-only security (IO), and all of the principal is distributed to holders
of another type of security known as a principal-only security (PO). The funds
are permitted to invest in IO classes of CMBS. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The cash
flows and yields on IO classes are extremely sensitive to the rate of principal
payments
(including
prepayments) on the related underlying mortgage assets. In the cases of IOs,
prepayments affect the amount of cash flows provided to the investor. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, an investor may fail to fully recoup its initial investment in an IO
class of a stripped mortgage-backed security, even if the IO class is rated AAA
or Aaa or is derived from a full faith and credit obligation. However, because
commercial mortgages are often locked out from prepayment, or have high
prepayment penalties or a defeasance mechanism, the prepayment risk associated
with a CMBS IO class is generally less than that of a residential
IO.
Adjustable
Rate Mortgage Securities
Adjustable
rate mortgage securities (ARMs) have interest rates that reset at periodic
intervals. Acquiring ARMs permits a fund to participate in increases in
prevailing current interest rates through periodic adjustments in the coupons of
mortgages underlying the pool on which ARMs are based. In addition, when
prepayments of principal are made on the underlying mortgages during periods of
rising interest rates, a fund can reinvest the proceeds of such prepayments at
rates higher than those at which they were previously invested. Mortgages
underlying most ARMs, however, have limits on the allowable annual or lifetime
increases that can be made in the interest rate that the mortgagor pays.
Therefore, if current interest rates rise above such limits over the period of
the limitation, a fund holding an ARM does not benefit from further increases in
interest rates. Moreover, when interest rates are in excess of coupon rates
(i.e., the rates being paid by mortgagors) of the mortgages, ARMs behave more
like fixed income securities and less like adjustable rate securities and are
subject to the risks associated with fixed income securities. In addition,
during periods of rising interest rates, increases in the coupon rate of
adjustable rate mortgages generally lag current market interest rates slightly,
thereby creating the potential for capital depreciation on such
securities.
Mortgage
Dollar Rolls
The
funds (except Capital Preservation) may enter into mortgage dollar rolls in
which a fund sells mortgage-backed securities to financial institutions for
delivery in the current month and simultaneously contracts to repurchase similar
securities on a specified future date. During the period between the sale and
repurchase (the “roll period”), the fund forgoes principal and interest paid on
the mortgage-backed securities. The fund is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the “drop”), as well as by the interest earned on the cash
proceeds of the initial sale. The fund will use the proceeds generated from the
transaction to invest in other securities that are permissible investments for
the fund. Such investments may have a leveraging effect, increasing the
volatility of the fund.
For
each mortgage dollar roll transaction, a fund will cover the roll by segregating
on its books an offsetting cash position or a position of liquid securities of
equivalent value.
A
fund could suffer a loss if the contracting party fails to perform the future
transaction and the fund is therefore unable to buy back the mortgage-backed
securities it initially sold. The fund also takes the risk that the
mortgage-backed securities that it repurchases at a later date will have less
favorable market characteristics than the securities originally sold.
To-Be-Announced
Mortgage-Backed Securities
To-be-announced
(TBA) commitments are forward agreements for the purchase or sale of securities,
which are described in greater detail under the heading When-Issued
and Forward Commitment Agreements.
A fund may gain exposure to mortgage-backed securities through TBA transactions.
TBA mortgage-backed securities typically are debt securities structured by
agencies such as Fannie Mae and Freddie Mac. In a typical TBA mortgage
transaction, certain terms (such as price) are fixed, with delayed payment and
delivery on an agreed upon future settlement date. The specific mortgage-backed
securities to be delivered are not typically identified at the trade date but
the delivered security must meet specified terms (such as issuer, interest rate,
and underlying mortgage terms). Consequently, TBA mortgage-backed transactions
involve increased interest rate risk because the underlying mortgages may be
less favorable at delivery than anticipated. TBA mortgage contracts also involve
a risk of loss if the value of the underlying security to be purchased declines
prior to delivery date. The yield obtained for such securities may be higher or
lower than yields available in the market on delivery date. The funds may also
take short positions in TBA investments. To enter a short sale of a TBA
security, a fund effectively agrees to sell a security it does not own at a
future date and price. The funds generally anticipate closing short TBA
positions before delivery of the respective security is required, however if the
fund is unable to close a position, the fund would have to purchase the
securities needed to settle the short sale. Such purchases could be at a
different price than anticipated, and the fund would lose or gain money based on
the acquisition price.
Municipal
Bonds
Each
fund, except Capital Preservation, may invest in municipal bonds, which
generally have maturities of more than one year when issued and are designed to
meet longer-term capital needs. These securities have two principal
classifications: general obligation bonds and revenue bonds.
General
obligation (GO) bonds are issued by states, counties, cities, towns and regional
districts to fund a variety of public projects, including construction of and
improvements to schools, highways, and water and sewer systems. GO bonds are
backed by the issuer’s full faith and credit pledge based on its ability to levy
taxes for the timely payment of interest and repayment of principal, although
such levies may be constitutionally or statutorily limited as to rate or
amount.
Revenue
bonds are not backed by an issuer’s taxing authority; rather, interest and
principal are secured by the net revenues from a project or facility. Revenue
bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and seaport facilities, schools and
hospitals.
Industrial
development bonds (IDBs), a type of revenue bond, are issued by or on behalf of
public authorities to finance privately operated facilities. These bonds are
used to finance business, manufacturing, housing, athletic and pollution control
projects, as well as public facilities such as mass transit systems, air and
seaport facilities and parking garages. Payment of interest and repayment of
principal on an IDB depend solely on the ability of the facility’s operator to
meet financial obligations and on the pledge, if any, of the real or personal
property financed. The interest earned on IDBs may be subject to the federal
alternative minimum tax.
Some
longer-term municipal bonds allow an investor to “put” or sell the security at a
specified time and price to the issuer or other “put provider.” If a put
provider fails to honor its commitment to purchase the security, the fund may
have to treat the security’s final maturity as its effective maturity,
lengthening the fund’s weighted average maturity and increasing the volatility
of the fund.
Municipal
Notes
Each
fund, except Capital Preservation, may invest in municipal notes, which are
issued by state and local governments or government entities to provide
short-term capital or to meet cash flow needs.
Tax
anticipation notes (TANs) are issued in anticipation of seasonal tax revenues,
such as ad valorem property, income, sales, use and business taxes, and are
payable from these future taxes. TANs usually are general obligations of the
issuer. General obligations are backed by the issuer’s full faith and credit
pledge based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue
anticipation notes (RANs) are issued with the expectation that receipt of future
revenues, such as federal revenue sharing or state aid payments, will be used to
repay the notes. Typically, these notes also constitute general obligations of
the issuer.
Bond
anticipation notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
Revenue
anticipation warrants, or reimbursement warrants, are issued to meet the cash
flow needs of state governments at the end of a fiscal year and in the early
weeks of the following fiscal year. These warrants are payable from unapplied
money in the state’s General Fund, including the proceeds of RANs issued
following enactment of a state budget or the proceeds of refunding warrants
issued by the state.
Other
Investment Companies
Each
of the funds may invest in other investment companies, such as closed-end
investment companies, unit investment trusts, exchange traded funds (ETFs) and
other open-end investment companies, provided that the investment is consistent
with the fund’s investment policies and restrictions. Under the Investment
Company Act, a fund’s investment in such securities, subject to certain
exceptions, currently is limited to
•3%
of the total voting stock of any one investment company;
•5%
of the fund’s total assets with respect to any one investment company;
and
•10%
of the fund’s total assets in the aggregate.
Such
exceptions may include reliance on Rule 12d1-4
of the Investment Company Act.
Rule 12d1-4, subject to certain requirements,
would permit a fund to invest in affiliated investment companies (other American
Century mutual funds and ETFs) and unaffiliated investment companies in excess
of the limitations described above.
A
fund’s investments in other investment companies may include money market funds
managed by the advisor. Investments in money market funds are not subject to the
percentage limitations set forth above.
As
a shareholder of another investment company, a fund would bear, along with other
shareholders, its pro rata portion of the other investment company’s expenses,
including advisory fees. These expenses would be in addition to the management
fee that each fund bears directly in connection with its own
operations.
ETFs
are a type of fund bought and sold on a securities exchange. An ETF trades like
common stock and may be actively managed or index-based. A fund may purchase an
ETF to temporarily gain exposure to a portion of the U.S. or a foreign market
while awaiting purchase of underlying securities, to gain exposure to specific
asset classes or sectors, or as a substitute for investing directly in
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities. Additionally, because the price of ETF shares is based on
market price rather than net asset value (NAV), shares may trade at a price
greater than NAV (a premium) or less than NAV (a discount). A fund may also
incur brokerage commissions, as well as the cost of the bid/ask spread, when
purchasing or selling ETF shares.
Repurchase
Agreements
Each
fund, with the exception of Capital Preservation, may invest in repurchase
agreements when they present an attractive short-term return on cash that is not
otherwise committed to the purchase of securities pursuant to the investment
policies of that fund.
A
repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to repurchase it on a
specified date in the future at an agreed-upon price. The repurchase price
reflects an agreed-upon interest rate during the time the fund’s money is
invested in the security.
Because
the security purchased constitutes collateral for the repurchase obligation, a
repurchase agreement can be considered a loan collateralized by the security
purchased. The fund’s risk is the seller’s ability to pay the agreed-upon
repurchase price on the repurchase date. If the seller defaults, the fund may
incur costs in disposing of the collateral, which would reduce the amount
realized thereon. If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. To the extent the value
of the security decreases, the fund could experience a loss.
Each
of the funds, with the exception of Capital Preservation, may invest in
repurchase agreements with respect to any security in which that fund is
authorized to invest, even if the remaining maturity of the underlying security
would make that security ineligible for purchase by such fund.
In
the event of exceptional market or economic conditions, Capital Preservation may
invest temporarily in repurchase agreements collateralized by U.S. government
securities.
Restricted
and Illiquid Securities
Each
fund may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the funds’ criteria for selection. Restricted
securities include securities that cannot be sold to the public without
registration under the Securities Act of 1933 or the availability of an
exemption from registration, or that are “not readily marketable” because they
are subject to other legal or contractual delays in or restrictions on resale.
Rule 144A securities are securities that are privately placed with and traded
among qualified institutional investors rather than the general public. Although
Rule 144A securities are considered restricted securities, they are not
necessarily illiquid.
With
respect to securities eligible for resale under Rule 144A, the advisor
will determine
the liquidity of such pursuant
to the fund’s
Liquidity Risk Management Program, approved
by the Board of Trustees in
accordance with
Rule 22e-4.
Each of the funds may invest no more than 15% of the value of its net assets (5%
of the value of its total assets for Capital Preservation) in illiquid
securities.
Because
the secondary market for such securities is limited to certain qualified
institutional investors, the liquidity of such securities may be limited
accordingly and a fund may, from time to time, hold a Rule 144A or other
security that is illiquid. In such an event, the portfolio managers will
consider appropriate remedies to minimize the effect on such fund’s liquidity.
Short-Term
Securities
In
order to meet anticipated redemptions, anticipated purchases of additional
securities for a fund’s portfolio, or, in some cases, for temporary defensive
purposes, the funds may invest a portion of their assets in money market and
other short-term securities.
Examples
of those securities include:
•Securities
issued or guaranteed by the U.S. government and its agencies and
instrumentalities;
•Commercial
Paper;
•Certificates
of Deposit and Euro Dollar Certificates of Deposit;
•Bankers’
Acceptances;
•Short-term
notes, bonds, debentures or other debt instruments;
•Repurchase
agreements; and
•Money
market funds.
Swap
Agreements
Each
fund (except Capital Preservation) may invest in swap agreements, consistent
with its investment objective and strategies. A fund may enter into a swap
agreement in order to, for example, attempt to obtain or preserve a particular
return or spread at a lower cost than obtaining a return or spread through
purchases and/or sales of instruments in other markets; protect against currency
fluctuations; attempt to manage duration to protect against any increase in the
price of securities the fund anticipates purchasing at a later date; or gain
exposure to certain markets in the most economical way possible.
Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard “swap” transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or “swapped” between the parties are generally
calculated with respect to a “notional amount,” i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or
in
a “basket” of securities representing a particular index. Forms of swap
agreements include, for example, interest rate swaps, under which fixed- or
floating-rate interest payments on a specific principal amount are exchanged and
total return swaps, under which one party agrees to pay the other the total
return of a defined underlying asset (usually an index, including inflation
indexes, stock, bond or defined portfolio of loans and mortgages) in exchange
for fee payments, often a variable stream of cashflows based on a reference
rate. The funds may enter into credit default swap agreements to hedge an
existing position by purchasing or selling credit protection. Credit default
swaps enable an investor to buy/sell protection against a credit event of a
specific issuer. The seller of credit protection against a security or basket of
securities receives an up-front or periodic payment to compensate against
potential default event(s). The fund may enhance income by selling protection or
attempt to mitigate credit risk by buying protection. Market supply and demand
factors may cause distortions between the cash securities market and the credit
default swap market.
Whether
a fund’s use of swap agreements will be successful depends on the advisor’s
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Interest rate swaps could result
in losses if interest rate changes are not correctly anticipated by the fund.
Total return swaps could result in losses if the reference index, security, or
investments do not perform as anticipated by the fund. Credit default swaps
could result in losses if the fund does not correctly evaluate the
creditworthiness of the issuer on which the credit default swap is based.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The funds will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness or that are cleared through a
Derivatives Clearing Organization (“DCO”). Certain restrictions imposed on the
funds by the Internal Revenue Code may limit the funds’ ability to use swap
agreements.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
and related regulatory developments require the clearing and exchange-trading of
certain standardized derivative instruments that the CFTC and SEC have defined
as “swaps.” The CFTC has implemented mandatory exchange-trading and clearing
requirements under the Dodd-Frank Act and the CFTC continues to approve
contracts for central clearing. Although exchange trading is designed to
decrease counterparty risk, it does not do so entirely because the fund will
still be subject to the credit risk of the central clearinghouse. Cleared swaps
are subject to margin requirements imposed by both the central clearinghouse and
the clearing member FCM. Uncleared swaps are now subject to posting and
collecting collateral on a daily basis to secure mark-to-market obligations
(variation margin). Swaps data reporting may subject a fund
to administrative costs, and the safeguards established to
protect trader anonymity may not function as expected.
Exchange trading, central clearing, margin
requirements, and data reporting regulations may increase a fund’s
cost of hedging risk and, as a result, may affect shareholder
returns.
U.S.
Government Securities
U.S.
Treasury bills, notes, zero-coupon bonds and other bonds are direct obligations
of the U.S. Treasury. Treasury bills have initial maturities of one year or
less, Treasury notes from two to 10 years, and Treasury bonds more than 10
years. While U.S. Treasury securities are supported by the full faith and credit
of the U.S. government, such securities are nonetheless subject to credit risk
(i.e., the risk that the U.S. government may be, or be perceived to be, unable
to make interest and principal payments). Although U.S. Treasury securities
carry little principal risk if held to maturity, the prices of these securities
(like all debt securities) change between issuance and maturity in response to
fluctuating market interest rates.
A
number of U.S. government agencies and instrumentalities issue debt securities.
These agencies generally are created by Congress to fulfill a specific need,
such as providing credit to home buyers or farmers. Among these agencies are the
Federal Home Loan Banks, the Federal Farm Credit Banks and the Resolution
Funding Corporation. Some agency securities are backed by the full faith and
credit pledge of the U.S. government, some are supported by the right of the
issuer to borrow from the U.S. Treasury, and some are guaranteed only by the
issuing agency. Agency securities typically offer somewhat higher yields than
U.S. Treasury securities with similar maturities. However, these securities may
involve greater risk of default than securities backed by the U.S. Treasury.
There can be no assurance that the U.S. government will provide financial
support to a government agency or instrumentality when it is not obligated by
law to do so.
On
August 5, 2011, Standard & Poor’s Ratings Services (S&P)
lowered its long-term sovereign credit rating for the United States to “AA+”
from “AAA.” The market prices and yields of securities supported by the full
faith and credit of the U.S. government may be adversely affected by S&P’s
downgrade or any future downgrades of the U.S. government’s credit rating. While
the long-term impact of the downgrade is uncertain, it could, for example, lead
to increased volatility in the short-term.
Variable-
and Floating-Rate Securities
Interest
rates on securities may be fixed for the term of the investment (fixed-rate
securities) or tied to prevailing interest rates. Floating-rate instruments have
interest rates that change whenever there is a change in a designated base rate;
while variable-rate instruments provide for specified periodic interest rate
reset adjustments.
Floating-rate
securities frequently have caps limiting the extent to which coupon rates can be
raised. The price of a floating-rate security may decline if its capped coupon
rate is lower than prevailing market interest rates. Fixed- and floating-rate
securities
may
be issued with a call date (which permits redemption before the maturity date).
The exercise of a call may reduce an obligation’s yield to
maturity.
Interest
rate resets on floating-rate U.S. government agency securities generally occur
at intervals of one year or less in response to changes in a predetermined
interest rate index. There are two main categories of indices: those based on
U.S. Treasury securities and those derived from a calculated measure, such as a
cost-of-funds index. Commonly used indices include the three-month, six-month
and one-year Treasury bill rates; the two-year Treasury note yield; and the
Eleventh District Federal Home Loan Bank Cost of Funds Index (EDCOFI).
Fluctuations in the prices of floating-rate U.S. government agency securities
are typically attributed to differences between the coupon rates on these
securities and prevailing market interest rates between interest rate reset
dates.
When-Issued
and Forward Commitment Agreements
The
portfolio managers may sometimes purchase securities on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date.
For
example, a fund may sell a security and at the same time make a commitment to
purchase the same or a comparable security at a future date and specified price.
Conversely, a fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash and carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
particular security that a fund owns. The fund will sell that security to the
broker-dealer and simultaneously enter into a forward commitment agreement to
buy it back at a future date. This type of transaction generates income for the
fund if the dealer is willing to execute the transaction at a favorable price in
order to acquire a specific security.
When
purchasing securities on a when-issued or forward commitment basis, a fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of the security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
To
the extent a fund remains fully invested or almost fully invested at the same
time it has purchased securities on a when-issued basis, there will be greater
fluctuations in its net asset value than if it solely set aside cash to pay for
when-issued securities. When the time comes to pay for the when-issued
securities, the fund will meet its obligations with available cash, through the
sale of securities, or, although it would not normally expect to do so, by
selling the when-issued securities themselves (which may have a market value
greater or less than the fund’s payment obligation). Selling securities to meet
when-issued or forward commitment obligations may generate taxable capital gains
or losses.
Zero-Coupon
Securities
Zero-Coupon
Treasury and Treasury-Equivalent Securities
Zero-coupon
U.S. Treasury securities (or zeros) are the unmatured interest coupons and
underlying principal portions of U.S. Treasury bonds. Unlike traditional U.S.
Treasury securities, these securities are sold at a discount to their face value
and all of the interest and principal is paid when the securities mature.
Originally, these securities were created by broker-dealers who bought Treasury
bonds and deposited these securities with a custodian bank. The broker-dealers
then sold receipts representing ownership interests in the coupons or principal
portions of the bonds. Some examples of zero-coupon securities sold through
custodial receipt programs are CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts) and generic TRs
(Treasury Receipts).
The
U.S. Treasury subsequently introduced a program called Separate Trading of
Registered Interest and Principal of Securities (STRIPS), through which it
exchanges eligible securities for their component parts and then allows the
component parts to trade in book-entry form. STRIPS are direct obligations of
the U.S. government and have the same credit risks as other U.S. Treasury
securities.
Zero-coupon
Treasury equivalent securities are government agency debt securities that are
ultimately backed by obligations of the U.S. Treasury and are considered by the
market place to be backed by the full faith and credit of the U.S. Treasury.
These securities are created by financial institutions (like broker-dealers) and
by U.S. government agencies. For example, the Resolution Funding Corporation
(REFCORP) issues bonds whose interest payments are guaranteed by the U.S.
Treasury and whose principal amounts are secured by zero-coupon U.S. Treasury
securities held in a separate custodial account at the Federal Reserve Bank of
New York. The principal amount and maturity date of REFCORP bonds are the same
as the par amount and maturity date of the corresponding zeros; upon maturity,
REFCORP bonds are repaid from the proceeds of the zeros. REFCORP zeros are the
unmatured coupons and principal portions of REFCORP bonds.
The
U.S. government may issue securities in zero-coupon form. These securities are
referred to as original issue zero-coupon securities.
Zero-Coupon
U.S. Government Agency Securities
A
number of U.S. government agencies issue debt securities. These agencies
generally are created by Congress to fulfill a specific need, such as providing
credit to homebuyers or farmers. Among these agencies are the Farm Home Loan
Banks and the Federal Farm Credit Banks.
Zero-coupon
U.S. government agency securities operate in all respects like zero-coupon
Treasury securities and their equivalents, except that they are created by
separating a U.S. government agency bond’s interest and principal payment
obligations. The final maturity value of a zero-coupon U.S. government agency
security is a debt obligation of the issuing agency. Some agency securities are
backed by the full faith and credit pledge of the U.S. government, while others
are guaranteed only by the issuing agency. Agency securities typically offer
somewhat higher yields than U.S. Treasury securities with similar maturities.
However, these securities may involve greater risk of default than securities
backed by the U.S. Treasury.
Securities
issued by U.S. government agencies in zero-coupon form are referred to as
original issue zero-coupon securities.
Unless
otherwise indicated, with the exception of the percentage limitations on
borrowing, the policies described below apply at the time a fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in a fund’s assets will not be considered in
determining whether it has complied with its investment policies.
Fundamental
Investment Policies
The
funds’ fundamental investment policies are set forth below. These investment
policies, a funds’ investment objective set forth in its prospectus, and a
fund’s status as diversified may not be changed without approval of a majority
of the outstanding votes of shareholders of a fund. Under the Investment Company
Act, the vote of a majority of the outstanding votes of shareholders means, the
vote of (A) 67 percent or more of the voting securities present at a shareholder
meeting, if the holders of more than 50 percent of the outstanding voting
securities are present or represented by proxy; or (B) more than 50 percent of
the outstanding voting securities, whichever is less.
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Subject |
Policy |
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Senior
Securities |
A
fund may not issue senior securities, except as permitted under the
Investment Company Act. |
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Borrowing |
A
fund may not borrow money, except that a fund may borrow for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33⅓% of the fund’s total assets (including the amount borrowed)
less liabilities (other than borrowings). |
|
Lending |
A
fund may not lend any security or make any other loan if, as a result,
more than 33⅓% of the fund’s total assets would be lent to other parties,
except (i) through the purchase of debt securities in accordance with its
investment objective, policies and limitations; or (ii) by engaging in
repurchase agreements with respect to portfolio
securities. |
|
Real
Estate |
A
fund may not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments. This policy shall not
prevent a fund from investing in securities or other instruments backed by
real estate or securities of companies that deal in real estate or are
engaged in the real estate business. |
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Concentration |
A
fund may not concentrate its investments in securities of issuers in a
particular industry (other than securities issued or guaranteed by the
U.S. government or any of its agencies or
instrumentalities). |
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Underwriting |
A
fund may not serve as an underwriter of securities issued by others,
except to the extent that the fund may be considered an underwriter within
the meaning of the Securities Act of 1933 in the disposition of restricted
securities. |
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Commodities |
A
fund may not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, provided that this
limitation shall not prohibit the fund from purchasing or selling options
and futures contracts or from investing in securities or other instruments
backed by physical commodities. |
|
Control |
A
fund may not invest for purposes of exercising control over
management. |
For
purposes of the investment policy relating to senior securities, a fund may
borrow from any bank provided that immediately after any such borrowing there is
asset coverage of at least 300% for all borrowings of such fund. In the event
that such asset coverage falls below 300%, the fund shall, within three days
thereafter (not including Sundays and holidays) or such longer period as the SEC
may prescribe by rules and regulations, reduce the amount of its borrowings to
an extent that the asset coverage of such borrowings is at least 300%. In
addition, when a fund enters into certain transactions involving potential
leveraging, it will hold offsetting positions or segregate assets to cover such
obligations at levels consistent with the guidance of the SEC and its
staff.
For
purposes of the investment policies relating to lending and borrowing, the funds
have received an exemptive order from the SEC regarding an interfund lending
program. Under the terms of the exemptive order, the funds may borrow money from
or lend money to other American Century Investments-advised funds that permit
such transactions. All such transactions will be subject to the limits for
borrowing and lending set forth above. The funds will borrow money through the
program only when the costs are equal to or lower than the cost of short-term
bank loans. Interfund loans and borrowing normally extend only overnight, but
can
have a maximum duration of seven days. The funds will lend through the program
only when the returns are higher than those available from other short-term
instruments (such as repurchase agreements). The funds may have to borrow from a
bank at a higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost investment
opportunity or additional borrowing costs.
For
purposes of the investment policy relating to concentration, a fund shall not
purchase any securities that would cause 25% or more of the value of the fund’s
net assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that
(a)there
is no limitation with respect to obligations issued or guaranteed by the U.S.
government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions and repurchase agreements secured by such
obligations (except that an Industrial Development Bond backed only by the
assets and revenues of a non-governmental user will be deemed to be an
investment in the industry represented by such user);
(b)wholly
owned finance companies will be considered to be in the industries of their
parents if their activities are primarily related to financing the activities of
their parents;
(c)utilities
will be divided according to their services, for example, gas, gas transmission,
electric and gas, electric, and telephone will each be considered a separate
industry; and
(d)personal
credit and business credit businesses will be considered separate
industries.
Nonfundamental
Investment Policies
In
addition, the funds are subject to the following investment policies that are
not fundamental and may be changed by the Board of Trustees.
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Subject |
Policy |
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Leveraging |
A
fund may not purchase additional investment securities at any time during
which outstanding borrowings exceed 5% of the total assets of the
fund. |
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Liquidity |
A
fund may not purchase any security or enter into a repurchase agreement
if, as a result, more than 15% of its net assets (5% of its total assets
for Capital Preservation Fund) would be invested in illiquid securities.
Illiquid securities include repurchase agreements not entitling the holder
to payment of principal and interest within seven days, and in securities
that are illiquid by virtue of legal or contractual restrictions on resale
or the absence of a readily available market. |
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Short
Sales |
A
fund may not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in futures contracts and options are
not deemed to constitute selling securities short. |
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Margin |
A
fund may not purchase securities on margin, except to obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits in connection with
transactions involving futures, options (puts, calls, etc.), swaps, short
sales, forward contracts, commitment agreements, and other similar
investment techniques shall not be deemed to constitute purchasing
securities on margin. |
For
purposes of the funds’ investment policy related to short sales, short positions
in derivative instruments taken by the funds are not considered selling
securities short.
The
Investment Company Act imposes certain additional restrictions upon the funds’
ability to acquire securities issued by insurance companies, broker-dealers,
underwriters or investment advisors, and upon transactions with affiliated
persons as defined in the Act. It also defines and forbids the creation of
cross- and circular-ownership. Neither the SEC nor any other agency of the
federal or state government participates in or supervises the management of the
funds or their investment practices or policies.
For
temporary defensive purposes, a fund may invest in securities that may not fit
its investment objective or its stated market. During a temporary defensive
period, a fund may direct its assets to the following investment
vehicles:
•interest-bearing
bank accounts or certificates of deposit;
•U.S.
government securities and repurchase agreements collateralized by U.S.
government securities; and
•other
money market funds.
To
the extent a fund assumes a defensive position, it may not achieve its
investment objective.
The
portfolio turnover rate of each fund (except the money market fund) for its most
recent fiscal year is included in the Fund
Summary
section of that fund’s prospectus. The portfolio turnover rate for such funds’
last five fiscal years (or a shorter period if the fund is less than five years
old) is shown in the Financial
Highlights
tables in the prospectus. Because of the short-term nature of the money market
fund’s investments, portfolio turnover rates are not generally used to evaluate
its trading activities.
For
each fund other than the money market fund, the portfolio managers intend to
purchase a given security whenever they believe it will contribute to the stated
objective of a particular fund. In order to achieve each fund’s investment
objective, the managers may sell a given security regardless of the length of
time it has been held in the portfolio, and regardless of the gain or loss
realized on the sale. The managers may sell a portfolio security if they believe
that the security is not fulfilling its purpose because, among other things, it
did not live up to the managers’ expectations, because it may be replaced with
another security holding greater promise, because it has reached its optimum
potential, because of a change in the circumstances of a particular company or
industry or in general economic conditions, or because of some combination of
such reasons.
Because
investment decisions are based on a particular security’s anticipated
contribution to a fund’s investment objective, the managers believe that the
rate of portfolio turnover is irrelevant when they determine that a change is
required to achieve the fund’s investment objective. As a result, a fund’s
annual portfolio turnover rate cannot be anticipated and may be higher than that
of other mutual funds with similar investment objectives. Higher turnover could
result in greater trading costs, which is a cost the funds pay directly.
Portfolio turnover also may affect the character of capital gains realized and
distributed by a fund, if any, because short-term capital gains are
characterized as ordinary income.
Because
the managers do not take portfolio turnover rate into account in making
investment decisions, (1) the managers have no intention of maintaining any
particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as representative
of the rates that will be attained in the future.
Variations
in a fund’s portfolio turnover rate from year to year may be due to a
fluctuating volume of shareholder purchase and redemption activity, varying
market conditions, and/or changes in the managers’ investment outlook.
The
advisor (ACIM) has adopted policies and procedures with respect to the
disclosure of fund portfolio holdings and characteristics, which are described
below.
Distribution
to the Public
Month-end
full portfolio holdings for each fund will generally be made available for
distribution 15 days after the end of each calendar quarter for each of the
preceding three months. This disclosure is in addition to the portfolio
disclosure in annual and semiannual shareholder reports and the quarter-end
portfolio disclosures on Form N-PORT. Such disclosures are filed with the
Securities and Exchange Commission within 60 days of each fiscal quarter end and
also posted on americancentury.com at approximately the same time the filings
are made. The distribution of holdings after the above time periods is not
limited.
On
a monthly basis, top 10 holdings (on an absolute basis and relative to the
appropriate benchmark) for each fund (except AC Alternatives Market Neutral
Value Fund, which is limited to the top five pairs by type, as described below)
will generally be made available for distribution 7 days after the end of each
month, and will be posted on americancentury.com at approximately the same
time.
Portfolio
characteristics that are derived from portfolio holdings will be made available
for distribution 7 days after the end of each month, or as soon thereafter as
possible, which timeframe may vary by fund. Certain characteristics, as
determined by the advisor, will be posted on americancentury.com monthly at
approximately the time they are made available for distribution. Data derived
from portfolio returns and any other characteristics not deemed confidential
will be available for distribution at any time. The advisor may make
determinations of confidentiality on a fund-by-fund basis, and may add or delete
characteristics to or from those considered confidential at any
time.
Any
American Century Investments fund that sells securities short as an investment
strategy will disclose full portfolio holdings in annual and semiannual
shareholder reports and on Form N-PORT. These funds will make long and short
holdings as of the end of a calendar quarter available for distribution 15 days
after the end of each calendar quarter. These funds may also make limited
disclosures as noted in the Single Event Requests section below. The
distribution of holdings after the above time periods is not
limited.
Examples
of securities (both long and short) currently or previously held in a portfolio
may be included in presentations or other marketing documents as soon as
available. The inclusion of such examples is at the relevant portfolio’s team
discretion.
So
long as portfolio holdings are disclosed in accordance with the above
parameters, the advisor makes no distinction among different categories of
recipients, such as individual investors, institutional investors,
intermediaries that distribute the funds’ shares, third-party service providers,
rating and ranking organizations, and fund affiliates. Because this information
is publicly available and widely disseminated, the advisor places no conditions
or restrictions on, and does not monitor, its use. Nor does the advisor require
special authorization for its disclosure.
Accelerated
Disclosure
The
advisor recognizes that certain parties, in addition to the advisor and its
affiliates, may have legitimate needs for information about portfolio holdings
and characteristics prior to the times prescribed above. Such accelerated
disclosure is permitted under the circumstances described below.
Ongoing
Arrangements
Certain
parties, such as investment consultants who provide regular analysis of fund
portfolios for their clients and intermediaries who pass through information to
fund shareholders, may have legitimate needs for accelerated disclosure. These
needs may include, for example, the preparation of reports for customers who
invest in the funds, the creation of analyses of fund characteristics for
intermediary or consultant clients, the reformatting of data for distribution to
the intermediary’s or consultant’s clients, and the review of fund performance
for ERISA fiduciary purposes.
In
such cases, accelerated disclosure is permitted if the service provider enters
an appropriate non-disclosure agreement with the funds’ distributor in which it
agrees to treat the information confidentially until the public distribution
date and represents that the information will be used only for the legitimate
services provided to its clients (i.e., not for trading). Non-disclosure
agreements require the approval of an attorney in the advisor’s legal
department. The advisor’s compliance department receives quarterly reports
detailing which clients received accelerated disclosure, what they received,
when they received it and the purposes of such disclosure. Compliance personnel
are required to confirm that an appropriate non-disclosure agreement has been
obtained from each recipient identified in the reports.
Those
parties who have entered into non-disclosure agreements as of March
31, 2022,
are as follows:
•Aetna
Inc.
•Alight
Solutions LLC
•AllianceBernstein
L.P.
•American
Fidelity Assurance Co.
•Ameritas
Life Insurance Corporation
•AMP
Capital Investors Limited
•Annuity
Investors Life Insurance Company
•Aon
Hewitt Investment Consulting
•Athene
Annuity & Life Assurance Company
•AUL/American
United Life Insurance Company
•AXA
Equitable Funds Management Group, LLC
•Bell
Globemedia Publishing
•Bellwether
Consulting, LLC
•BNY
Mellon Performance & Risk Analytics, LLC
•Brighthouse
Life Insurance Company
•Callan
Associates, Inc.
•Calvert
Asset Management Company, Inc.
•Cambridge
Associates, LLC
•Cambridge
Financial Services, Inc.
•Capital Cities,
LLC
•Charles
Schwab & Co., Inc.
•Clearwater
Analytics, LLC
•Cleary
Gull Inc.
•Commerce
Bank
•Connecticut
General Life Insurance Company
•Corestone
Investment Managers AG
•Corning
Incorporated
•Curcio
Webb LLC
•Deutsche
AM Distributors, Inc.
•Eckler
Partners Ltd.
•Electra
Information Systems, Inc.
•Equitable
Investment Management Group, LLC
•EquiTrust
Life Insurance Company
•Farm
Bureau Life Insurance Company
•FCA
US LLC
•Fidelity
Workplace Services, LLC
•FIL
Investment Management
•Finance-Doc
Multimanagement AG
•Fund
Evaluation Group, LLC
•Gavion,
LLC
•Government
Employees Pension Service
•Great-West
Financial Retirement Plan Services, LLC
•The
Guardian Life Insurance Company of America
•ICMA
Retirement Corporation
•Intel
Corporation
•InvesTrust
Consulting, LLC
•Iron
Capital Advisors
•Jefferson
National Life Insurance Company
•JLT
Investment Management Limited
•John
Hancock Financial Services, Inc.
•Kansas
City Life Insurance Company
•Kiwoom
Asset Management
•Kmotion,
Inc.
•Korea
Investment Management Co. Ltd.
•Korea
Teachers Pension
•Legal
Super Pty Ltd.
•The
Lincoln National Life Insurance Company
•Lipper
Inc.
•Marquette
Associates
•Massachusetts
Mutual Life Insurance Company
•Mercer
Investment Management, Inc.
•Merrill
Lynch
•Midland
National Life Insurance Company
•Minnesota
Life Insurance Company
•Modern
Woodmen of America
•Montana
Board of Investments
•Morgan
Stanley Smith Barney LLC
•Morningstar
Investment Management LLC
•Morningstar,
Inc.
•Morningstar
Investment Services, Inc.
•MUFG
Union Bank, NA
•Mutual
of America Life Insurance Company
•National
Life Insurance Company
•Nationwide
Financial
•NEPC
•The
Newport Group
•Nomura
Asset Management U.S.A. Inc.
•Nomura
Securities International, Inc.
•The
Northern Trust Company
•Northwestern
Mutual Life Insurance Co.
•NYLIFE
Distributors, LLC
•Old
Mutual Global Investors (UK) Limited
•Pacific
Life Insurance Company
•Pavilion
Advisory Group Inc.
•Principal
Life Insurance Company
•Prudential
Financial
•RidgeWorth
Capital Management, Inc.
•Rocaton
Investment Advisors, LLC
•RSM
US Wealth Management LLC
•RVK,
Inc.
•S&P
Financial Communications
•Säästöpankki
(The Savings Banks)
•Security
Benefit Life Insurance Co.
•Shinhan
BNP Paribas Asset Management
•SP-Fund
Management Ltd.
•State
Street Global Exchange
•SunTrust
Bank
•Symetra
Life Insurance Company
•Tokio
Marine Asset Management Co., Ltd.
•Towers
Watson Investment Services, Inc.
•Towers
Watson Limited
•UBS
Financial Services, Inc.
•UBS
Wealth Management
•Valic
Financial Advisors Inc.
•VALIC
Retirement Services Company
•Vestek
Systems, Inc.
•Voya
Retirement Insurance and Annuity Company
•Wells
Fargo Bank, N.A.
•Wilshire
Associates Incorporated
•Zeno
Consulting Group, LLC
Once
a party has executed a non-disclosure agreement, it may receive any or all of
the following data for funds in which its clients have investments or are
actively considering investment:
(1) Full
holdings (both long and short) quarterly as soon as reasonably available;
(2) Full
holdings (long only) monthly as soon as reasonably available;
(3) Top
10 holdings (top 5 pairs for each type for AC Alternatives Market Neutral Value
Fund) monthly as soon as reasonably available; and
(4) Portfolio
attributes (such as sector or country weights), characteristics and performance
attribution monthly as soon as reasonably available.
The
types, frequency and timing of disclosure to such parties vary.
Single
Event Requests
In
certain circumstances, the advisor may provide fund holding information on an
accelerated basis outside of an ongoing arrangement with manager-level or higher
authorization. For example, from time to time the advisor may receive requests
for proposals (RFPs) from consultants or potential clients that request
information about a fund’s holdings on an accelerated basis. As long as such
requests are on a one-time basis, and do not result in continued receipt of
data, such information may be provided in the RFP. In these circumstances, top
15 long and short holdings may be disclosed 7 days after the end of each month.
Such disclosure may be presented in paired trades, such as by showing a long
holding in one sector or security and a corresponding short holding in another
sector or security together to show a long/short strategy. Such information will
be provided with a confidentiality legend and only in cases where the advisor
has reason to believe that the data will be used only for legitimate purposes
and not for trading.
Service
Providers
Various
service providers to the funds and the funds’ advisor must have access to some
or all of the funds’ portfolio holdings information on an accelerated basis from
time to time in the ordinary course of providing services to the funds. These
service providers include the funds’ custodian (daily, with no lag), auditors
(as needed) and brokers involved in the execution of fund trades (as needed).
Additional information about these service providers and their relationships
with the funds and the advisor are provided elsewhere in this statement of
additional information. In addition, the funds’ investment advisor may use
analytical systems provided by third party data aggregators who have access to
the funds’ portfolio holdings daily, with no lag. These data aggregators enter
into separate non-disclosure agreements after authorization by an appropriate
officer of the advisor. The agreements with service providers and data
aggregators generally require that they treat the funds’ portfolio holdings
information confidentially until the public distribution date and represent that
the information will be used only for the legitimate services it provides (i.e.,
not for trading).
Additional
Safeguards
The
advisor’s policies and procedures include a number of safeguards designed to
control disclosure of portfolio holdings and characteristics so that such
disclosure is consistent with the best interests of fund shareholders, including
procedures to address conflicts between the interests of shareholders and those
of the advisor and its affiliates. First, the frequency with which this
information is disclosed to the public, and the length of time between the date
of the information and the date on which the information is disclosed, are
selected to minimize the possibility of a third party improperly benefiting from
fund investment decisions to the detriment of fund shareholders. In the event
that a request for portfolio holdings or characteristics creates a potential
conflict of interest that is not addressed by the safeguards and procedures
described above, the advisor’s procedures require that such requests may only be
granted with the approval of the advisor’s legal department and the relevant
chief investment officers. In addition, distribution of portfolio holdings
information, including compliance with the advisor’s policies and the resolution
of any potential conflicts that may arise, is monitored quarterly by the
advisor’s compliance department. Finally, the funds’ Board of Trustees exercises
oversight of disclosure of the funds’ portfolio securities. The board has
received and reviewed a summary of the advisor’s policy and is informed on a
quarterly basis of any changes to or violations of such policy detected during
the prior quarter.
Neither
the advisor nor the funds receive any compensation from any party for the
distribution of portfolio holdings information.
The
advisor reserves the right to change its policies and procedures with respect to
the distribution of portfolio holdings information at any time. There is no
guarantee that these policies and procedures will protect the funds from the
potential misuse of holdings information by individuals or firms in possession
of such information.
The
individuals listed below serve as trustees of the funds. Each trustee will
continue to serve in this capacity until death, retirement, resignation or
removal from office. The board has adopted a mandatory retirement age for
trustees who are not “interested persons,” as that term is defined in the
Investment Company Act (independent trustees). Independent trustees shall retire
on December 31 of the year in which they reach their 76th
birthday.
Jonathan
S. Thomas is an “interested person” because he currently serves as President and
Chief Executive Officer of American Century Companies, Inc. (ACC), the parent
company of American Century Investment Management, Inc. (ACIM or the advisor).
The other trustees (more than three-fourths of the total number) are
independent. They are not employees, directors or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACIM, American Century Investment Services, Inc. (ACIS)
and American Century Services, LLC (ACS), and they do not have any other
affiliations, positions or relationships that would cause them to be considered
“interested persons” under the Investment Company Act. The trustees serve in
this capacity for eight (in the case of Jonathan S. Thomas, 16; and Jeremy
I. Bulow,
9) registered investment companies in the American Century Investments family of
funds.
The
following table presents additional information about the trustees. The mailing
address for each trustee other than Jonathan S. Thomas is 3945
Freedom Circle, Suite #800, Santa Clara,
California 95054.
The mailing address for Jonathan S. Thomas is 4500 Main Street, Kansas City,
Missouri 64111.
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Name
(Year of Birth) |
Position(s)
Held with Funds |
Length
of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of American Century Portfolios Overseen by Trustee |
Other
Directorships Held During Past 5 Years |
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Independent
Trustees |
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Tanya
S. Beder
(1955) |
Trustee
and Board Chair |
Since
2011 |
Chairman
and CEO, SBCC
Group Inc.
(independent advisory services) (2006 to present) |
34 |
Kirby
Corporation; Nabors Industries Ltd.; CYS Investments, Inc.
(2012-2017) |
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Jeremy
I. Bulow
(1954) |
Trustee |
Since
2011 |
Professor
of Economics, Stanford
University, Graduate School of Business
(1979 to present) |
75 |
None |
|
Jennifer
Cabalquinto
(1968) |
Trustee |
Since
2021 |
Special
Advisor, GSW
Sports, LLC
(2020 to Present); Chief Financial Officer, GSW
Sports, LLC
(2013 to 2020) |
34 |
None |
|
Anne
Casscells
(1958) |
Trustee |
Since
2016 |
Co-Chief
Executive Officer and Chief Investment Officer, Aetos
Alternatives Management
(investment advisory firm) (2001 to present); Lecturer in Accounting,
Stanford
University, Graduate School of Business
(2009 to 2017) |
34 |
None |
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Jonathan
D. Levin
(1972) |
Trustee |
Since
2016 |
Philip
H. Knight Professor and Dean, Graduate
School of Business, Stanford University
(2016 to present); Professor, Stanford
University
(2000 to present) |
34 |
None |
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Peter
F. Pervere
(1947) |
Trustee |
Since
2007 |
Retired |
34 |
None |
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John
B. Shoven (1947)
|
Trustee |
Since
2002 |
Charles
R. Schwab Professor of Economics, Stanford
University
(1973 to present, emeritus since 2019)
|
34 |
Cadence
Design Systems; Exponent;
Financial Engines |
|
Interested
Trustee |
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Jonathan
S. Thomas
(1963) |
Trustee |
Since
2007 |
President
and Chief Executive Officer, ACC
(2007 to present). Also serves as Chief Executive Officer, ACS;
Director, ACC
and other ACC
subsidiaries |
139 |
None |
Qualifications
of Trustees
Generally,
no one factor was decisive in the selection of the trustees to the board.
Qualifications considered by the board to be important to the selection and
retention of trustees include the following: (i) the individual’s business and
professional experience and accomplishments; (ii) the individual’s educational
background and accomplishments; (iii) the individual’s experience and expertise
performing senior policy-making functions in business, government, education,
accounting, law and/or administration; (iv) how the individual’s expertise and
experience would contribute to the mix of relevant skills and experience on the
board; (v) the individual’s ability to work effectively with the other members
of the board; and (vi) the individual’s ability and willingness to make the time
commitment necessary to serve as an effective trustee. In addition, the
individuals’ ability to review and critically evaluate information, their
ability to evaluate fund service providers, their ability to exercise good
business judgment on behalf of fund shareholders, their prior service on the
board, and their familiarity with the funds are considered important
assets.
While
the board has not adopted a specific policy on diversity, it takes overall
diversity into account when considering and evaluating nominees for trustee. The
board generally considers the manner in which each trustee’s professional
experience, background, skills, and other individual attributes will contribute
to the effectiveness of the board. Additional information about each trustee’s
individual educational and professional experience (supplementing the
information provided in the table above) follows.
Tanya
S. Beder:
BA, Yale University; MBA, Harvard University; Fellow in Practice, International
Center for Finance, Yale University, School of Management; formerly, Lecturer in
Public Policy, Stanford University; formerly, Chief Executive Officer, Tribeca
Global Management LLC (asset management firm); formerly, Managing Director and
Head of Strategic Quantitative Investment Division, Caxton Associates LLC;
formerly, President and Co-Founder, Capital Market Risk Advisors Inc.; formerly
Founder and Chief Executive Officer, SB Consulting Corp.
Jeremy
I. Bulow: BA,
MA, Yale University; PhD in Economics, Massachusetts Institute of Technology;
formerly, Director, Bureau of Economics, Federal Trade Commission
Jennifer
Cabalquinto:
BS in Accounting, State University of New York; Experienced Financial Leadership
Program Graduate, General Electric Company; formerly, Chief Financial Officer,
Legal Solutions Holdings Inc.; formerly, Chief Financial Officer, NBC Universal,
Universal Studios Hollywood; formerly, Vice President, Finance, NBC Universal,
Los Angeles Television Station Group
Anne
Casscells:
BA in British Studies, Yale University; MBA, Stanford Graduate School of
Business; formerly Chief Investment Officer and Managing Director of Investment
Policy Research, Stanford Management Company; formerly Vice President, Fixed
Income Division, Goldman Sachs
Jonathan
D. Levin: BA
in English, BS in Mathematics, Stanford University; MPhil in Economics, Oxford
University; PhD in Economics, Massachusetts Institute of Technology; Senior
Fellow, Stanford Institute for Economic Policy Research; Trustee, Gordon and
Betty Moore Foundation;
Member, President’s Council of Advisors on Space and Technology
Peter
F. Pervere:
BA in History, Stanford University; CPA; formerly, Vice President and Chief
Financial Officer, Commerce One, Inc. (software and services provider);
formerly, Vice President and Corporate Controller, Sybase, Inc.; formerly with
accounting firm of Arthur Young & Co.
John
B. Shoven:
BA in Physics, University of California; PhD in Economics, Yale University;
formerly Director of the Stanford Institute for Economic Policy Research;
formerly, Chair of Economics and Dean of Humanities and Sciences, Stanford
University
Jonathan
S. Thomas:
BA
in Economics, University of Massachusetts; MBA, Boston College; formerly held
senior leadership roles with Fidelity Investments, Boston Financial Services,
Bank of America and Morgan Stanley; serves on the Board of Governors of the
Investment Company Institute
Responsibilities
of the Board
The
board is responsible for overseeing the advisor’s management and operations of
the funds pursuant to the management agreement. Trustees also have significant
responsibilities under the federal securities laws. Among other things,
they:
•oversee
the performance of the funds;
•oversee
the quality of the advisory and shareholder services provided by the
advisor;
•review
annually the fees paid to the advisor for its services;
•monitor
potential conflicts of interest between the funds and their affiliates,
including the advisor;
•oversee custody
of assets and the valuation of securities; and
•oversee
the funds’ compliance program.
In
performing their duties, board members receive detailed information about the
funds and the advisor regularly throughout the year, and they meet in person at
least quarterly with management of the advisor to review reports about fund
operations. Certain Board committee members also hold periodic telephone
conferences with management between quarterly board meetings. The trustees’ role
is to provide oversight and not to provide day-to-day management.
The
board has all powers necessary or convenient to carry out its responsibilities.
Consequently, the board may adopt bylaws providing for the regulation and
management of the affairs of the funds and may amend and repeal them to the
extent that such bylaws do not reserve that right to the funds’ shareholders.
They may increase or reduce the number of board members and may, subject to the
Investment Company Act, fill board vacancies. Board members also may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate. They may establish and terminate committees consisting of two or
more trustees who may exercise the powers and authority of the board as
determined by the trustees. They may, in general, delegate such authority as
they consider desirable to any officer of the funds, to any board committee and
to any agent or employee of the funds or to any custodian, transfer agent,
investor servicing agent, principal underwriter or other service provider for a
fund.
To
communicate with the board, or a member of the board, a shareholder should send
a written communication addressed to the board or member of the board to the
attention of the Corporate Secretary at the following address: P.O. Box 418210,
Kansas City,
Missouri
64141-9210. Shareholders who prefer to communicate by email may send their
comments to [email protected]. All shareholder
communications received will be forwarded to the board or to the independent
chairman of such board.
Board
Leadership Structure and Standing Board Committees
Tanya
S. Beder
currently serves as the independent board chair
and has served in such capacity since 2022. Of the board’s members, Jonathan S.
Thomas is the only member who is an “interested person” as that term is defined
in the Investment Company Act. The remaining members are independent trustees.
The independent trustees meet separately to consider a variety of matters that
are scheduled to come before the board and meet periodically with the funds’
Chief Compliance Officer and fund auditors. They are advised by independent
legal counsel. No independent trustee may serve as an officer or employee of a
fund. The board has also established several committees, as described below.
Each committee is comprised solely of independent trustees. The board believes
that the current leadership structure, with independent trustees filling all but
one position on the board, with an independent trustee serving as board
chair and with the board committees comprised only of independent trustees, is
appropriate and allows for independent oversight of the funds.
The
board has an Audit and Compliance Committee that approves the funds’ engagement
of the independent registered public accounting firm and recommends approval of
such engagement to the independent trustees. The committee also oversees the
activities of the accounting firm, receives regular reports regarding fund
accounting, oversees securities valuation (approving the funds’ or the trust’s
valuation policy and receiving reports regarding instances of fair valuation
thereunder), and receives regular reports from the advisor’s internal audit
department. The committee also reviews the results of the funds’ compliance
testing program, meets regularly with the funds’ Chief Compliance Officer, and
monitors implementation of the funds’ Code of Ethics. The committee currently
consists of Peter F. Pervere (chair), Tanya S. Beder, Jennifer Cabalquinto
and
Anne Casscells.
It met four times during the fiscal year ended March 31, 2022.
The
board also has a Portfolio Committee that meets quarterly to review the
investment activities and strategies used to manage the funds’ assets and
monitor investment performance. The committee regularly receives reports from
the advisor’s Chief Investment Officer, portfolio managers, credit analysts and
other investment personnel concerning the funds’ investments. The committee also
receives information regarding fund trading activities and monitors derivative
usage. It currently consists of Anne
Casscells
(chair), Tanya S. Beder, Jeremy
I. Bulow, Jonathan D. Levin
and John
B. Shoven.
The committee met four times during the fiscal year ended March 31, 2022.
The
Client Experience Oversight Committee monitors the quality of services that the
funds offer both to direct customers and to intermediaries who offer fund shares
to their customers. All channels of communication (written, telephone, web and
mobile) are reviewed. The level of performance is compared to peer competitors.
The committee also monitors payments to intermediaries and trading in fund
shares that could harm the interests of other shareholders and reviews future
strategic initiatives of the advisor and their potential effects on fund
shareholders. The committee currently consists of John B. Shoven (chair),
Jeremy
I. Bulow,
Jonathan D. Levin and Peter F. Pervere. It met four times during the fiscal year
ended March 31, 2022.
The
Technology and Risk Committee coordinates the board’s oversight of the funds’
risk management processes and monitors the systems, practices and procedures the
advisor uses to manage the funds’ risks. In addition, the committee oversees
enterprise technology risk management and the advisor’s processes for oversight
of vendors that provide critical services or technologies to the funds or on
which the advisor relies in providing services to the funds. It also makes
recommendations to the board regarding the allocation of risk oversight
activities among the board’s committees. The committee currently consists of
Jennifer
Cabalquinto
(chair), Tanya
S. Beder, Anne Casscells
and Peter
F. Pervere.
It met four times during the fiscal year ended March 31, 2022.
The
board has a Corporate Governance Committee that is responsible for reviewing
board procedures and committee structures. The committee also considers and
recommends individuals for nomination as trustees. The names of potential
trustee candidates may be drawn from a number of sources, including
recommendations from members of the board, the advisor (in the case of
interested trustees only), shareholders and third party search firms. The
committee seeks to identify and recruit the best available candidates and will
evaluate qualified shareholder nominees on the same basis as those identified
through other sources. Although not written, the funds have a policy of
considering all candidates recommended in writing by shareholders. Shareholders
may submit trustee nominations in writing to the Corporate Secretary, P.O. Box
418210, Kansas City, Missouri 64141-9210, or by email to
[email protected]. The nomination should include the
following information:
•Shareholder’s
name, the fund name, number of fund shares owned and length of period
held;
•Name,
age and address of the candidate;
•A
detailed resume describing, among other things, the candidate’s educational
background, occupation, employment history, financial knowledge and expertise
and material outside commitments (e.g., memberships on other boards and
committees, charitable foundations, etc.);
•Any
other information relating to the candidate that is required to be disclosed in
solicitations of proxies for election of trustees in an election contest
pursuant to Regulation 14A under the Securities Exchange Act of
1934;
•A
supporting statement that (i) describes the candidate’s reasons for seeking
election to the board and(ii) documents his/her qualifications to serve as a
trustee; and
•A
signed statement from the candidate confirming his/her willingness to serve on
the board.
The
Corporate Governance Committee also may consider, and make recommendations to
the board regarding, other matters relating to the corporate governance of the
funds. It currently consists of Jonathan
D. Levin
(chair), Tanya
Beder, Jeremy
I. Bulow and John B. Shoven. The committee met four times during the fiscal year
ended March 31, 2022.
Risk
Oversight by the Board
As
previously disclosed, the board oversees the advisor’s management of the funds
and meets at least quarterly with management of the advisor to review reports
and receive information regarding fund operations. Risk oversight relating to
the funds is one component of the board’s oversight and is undertaken in
connection with the duties of the board. As described in the previous section,
the board’s committees, including the Technology and Risk Committee, assist the
board in overseeing various types of risks relating to the funds. The board
receives regular reports from each committee regarding the committee’s areas of
oversight responsibility. In addition, the board receives information regarding,
and has discussions with senior management of the advisor about, the advisor’s
enterprise risk management systems and strategies. There can be no assurance
that all elements of risk, or even all elements of material risk, will be
disclosed to or identified by the board, or that the advisor’s risk management
systems and strategies, and the board’s oversight thereof, will mitigate all
elements of risk, or even all elements of material risk, to the
funds.
Board
Compensation
Each
independent trustee receives compensation for service as a member of the board.
Under the terms of each management agreement with the advisor, the funds are
responsible for paying such fees and expenses. None of the interested trustees
or officers of the funds receive compensation from the funds. For the fiscal
year ended March 31, 2022, each independent trustee received the following
compensation for his or her service to the funds and the American Century family
of funds.
|
|
|
|
|
|
|
|
|
| Name
of Trustee |
Total
Compensation for Service
as Trustee of the Funds1 |
Total
Compensation for Service as Directors/Trustees for the American Century
Investments Family of Funds2 |
| Tanya
S. Beder |
$50,477 |
$321,250 |
| Jeremy
I. Bulow |
$46,696 |
$328,750 |
| Jennifer
Cabalquinto |
$33,696 |
$216,250 |
| Anne
Casscells |
$45,145 |
$287,500 |
|
Ronald
J. Gilson3 |
$45,740 |
$337,500 |
|
Frederick
L. A. Grauer3 |
$34,598 |
$221,250 |
| Jonathan
D. Levin |
$44,946 |
$286,250 |
| Peter
F. Pervere |
$48,275 |
$307,500 |
| John
B. Shoven |
$46,705 |
$297,500 |
1 Includes
compensation paid to the trustees for the fiscal year ended March 31,
2022,
and also includes amounts deferred at the election of the trustees under the
American Century Mutual Funds Independent Directors’ Deferred Compensation Plan.
2 Includes
compensation paid to each trustee for his or her service as director/trustee for
eight (in the case of Mr.
Bulow and
Mr. Gilson, nine) investment companies in the American Century Investments
family of funds. The total amount of deferred compensation included in the table
is as follows: Mr.
Bulow, $25,938; Ms.
Casscells, $287,500
and Mr. Pervere, $30,750.
3 Mr.
Gilson and Mr. Grauer retired from the board on December 31, 2021.
None
of the funds currently provides any pension or retirement benefits to the
trustees except pursuant to the American Century Mutual Funds’ Independent
Directors’ Deferred Compensation Plan adopted by the trust. Under the plan, the
independent trustees may defer receipt of all or any part of the fees to be paid
to them for serving as trustees of the funds. All deferred fees are credited to
accounts established in the names of the trustees. The amounts credited to each
account then increase or decrease, as the case may be, in accordance with the
performance of one or more American Century funds selected by the trustee. The
account balance continues to fluctuate in accordance with the performance of the
selected fund or funds until final payment of all amounts credited to the
account. Trustees are allowed to change their designation of funds from time to
time.
Generally,
deferred fees are not payable to a trustee until the distribution date elected
by the trustee in accordance with the terms of the plan. Such distribution date
may be a date on or after the trustee’s retirement date, but may be an earlier
date if the trustee agrees not to make any additional deferrals after such
distribution date. Distributions may commence prior to the elected payment date
for certain reasons specified in the plan, such as unforeseeable emergencies,
death or disability. Trustees may receive deferred fee account balances either
in a lump sum payment or in substantially equal installment payments to be made
over a
period
not to exceed 10 years. Upon the death of a trustee, all remaining deferred fee
account balances are paid to the trustee’s beneficiary or, if none, to the
trustee’s estate.
The
plan is an unfunded plan and, accordingly, the funds have no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
met all payment obligations under the plan. The rights of trustees to receive
their deferred fee account balances are the same as the rights of a general
unsecured creditor of the funds. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.
Ownership
of Fund Shares
The
trustees owned shares in the funds as of December 31, 2021,
as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
of Trustee |
|
Tanya
S.
Beder |
Jeremy
I.
Bulow |
Jennifer
Cabalquinto |
Anne
Casscells |
|
Dollar
Range of Equity Securities in the Funds: |
|
|
|
|
|
Capital
Preservation Fund |
B |
B |
A |
A |
|
Ginnie
Mae Fund |
A |
A |
A |
A |
|
Government
Bond Fund |
A |
A |
A |
A |
|
Inflation-Adjusted
Bond Fund |
E |
A |
A |
D |
|
Short-Term
Government Fund |
A |
A |
A |
A |
|
Aggregate
Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen by Trustee in
Family of Investment
Companies |
E |
B |
A |
E |
Ranges:
A—none, B—$1-$10,000, C—$10,001-$50,000, D—$50,001-$100,000, E—More than
$100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
of Trustee |
|
Jonathan
Levin |
Peter
F.
Pervere |
John
B.
Shoven |
Jonathan
S.
Thomas |
|
Dollar
Range of Equity Securities in the Funds: |
|
|
|
|
|
Capital
Preservation Fund |
A |
A |
A |
A |
|
Ginnie
Mae Fund |
A |
A |
A |
A |
|
Government
Bond Fund |
A |
A |
A |
A |
|
Inflation-Adjusted
Bond Fund |
A |
A |
A |
B |
|
Short-Term
Government Fund |
A |
A |
A |
A |
|
Aggregate
Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen by Trustee in
Family of Investment
Companies |
A |
E |
E |
E |
Ranges:
A—none, B—$1-$10,000, C—$10,001-$50,000, D—$50,001-$100,000, E—More than
$100,000
Beneficial
Ownership of Affiliates by Independent Trustees
No
independent trustee or his or her immediate family members beneficially owned
shares of the advisor, the principal underwriter of the funds or any other
person directly or indirectly controlling, controlled by, or under common
control with the advisor or the funds’ principal underwriter as of December 31,
2021.
The
following table presents certain information about the executive officers of the
funds. Each officer serves as an officer for 16 (in the case of Robert J. Leach,
15) investment companies in the American Century family of funds. No officer is
compensated for his or her service as an officer of the funds. The listed
officers are interested persons of the funds and are appointed or re-appointed
on an annual basis. The mailing address for each of the officers listed below is
4500 Main Street, Kansas City, Missouri 64111.
|
|
|
|
|
|
|
|
|
|
Name
(Year
of
Birth)
|
Offices
with
the
Funds
|
Principal
Occupation(s) During the Past Five Years
|
Patrick
Bannigan
(1965)
|
President
since 2019 |
Executive
Vice President and Director, ACC
(2012 to present); Chief Financial Officer, Chief Accounting Officer and
Treasurer, ACC
(2015 to present). Also serves as President, ACS;
Vice President, ACIM;
Chief Financial Officer, Chief Accounting Officer and/or Director,
ACIM,
ACS
and other ACC
subsidiaries |
| R.
Wes Campbell (1974) |
Chief
Financial Officer and Treasurer since 2018 |
Vice
President, ACS,
(2020 to present); Investment Operations and Investment Accounting, ACS
(2000 to present) |
Amy
D. Shelton
(1964) |
Chief
Compliance
Officer and Vice President since 2014 |
Chief
Compliance Officer, American Century funds,
(2014
to present); Chief Compliance Officer, ACIM
(2014 to present); Chief Compliance Officer, ACIS
(2009 to present). Also serves as Vice President, ACIS |
John
Pak
(1968) |
General
Counsel and
Vice President since 2021 |
General
Counsel and Senior Vice President, ACC
(2021 to present); Also serves as General Counsel and Senior Vice
President, ACIM,
ACS and ACIS.
Chief Legal Officer of Investment and Wealth Management, The Bank of New
York Mellon (2014 to 2021) |
C.
Jean Wade
(1964) |
Vice
President since 2012 |
Senior
Vice President, ACS
(2017 to present); Vice President, ACS
(2000 to 2017) |
Robert
J.
Leach
(1966) |
Vice
President
since 2006 |
Vice
President, ACS
(2000 to present) |
David
H.
Reinmiller
(1963) |
Vice
President
since 2000 |
Attorney,
ACC
(1994 to present). Also serves as Vice President, ACIM
and ACS
|
Ward
D.
Stauffer
(1960) |
Secretary
since
2005 |
Attorney,
ACC
(2003 to present) |
Code of Ethics
The
funds, their investment advisor and principal underwriter have adopted codes of
ethics under Rule 17j-1 of the Investment Company Act. They permit personnel
subject to the codes to invest in securities, including securities that may be
purchased or held by the funds, provided that they first obtain approval from
the compliance department before making such investments.
The
funds’ Board of Trustees has adopted a general statement of proxy voting
principles that governs the exercise of voting and consent rights associated
with the securities purchased and/or held by the funds. The funds have delegated
to the advisor the responsibility for exercising such rights, subject to the
board’s oversight. The advisor has adopted proxy voting policies that describe
in detail how the advisor intends to exercise its delegated proxy voting
authority in a manner consistent with the board’s principles.
Copies
of the advisor’s proxy voting policies are attached hereto as Appendix E. Copies
of the board’s proxy voting principles, as well as information regarding how the
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30, are available at americancentury.com/proxy. The
advisor’s proxy voting record also is available on the SEC’s website at
sec.gov.
A
list of the fund’s principal shareholders appears in Appendix
A.
The
funds have no employees. To conduct the funds’ day-to-day activities, the trust
has hired a number of service providers. Each service provider has a specific
function to fill on behalf of the funds that is described below.
ACIM,
ACS and ACIS are wholly owned, directly or indirectly, by ACC. The Stowers
Institute for Medical Research (SIMR) controls ACC by virtue of its beneficial
ownership of more than 25% of the voting securities of ACC. SIMR is part of a
not-for-profit biomedical research organization dedicated to finding the keys to
the causes, treatments and prevention of disease.
American
Century Investment Management, Inc. (ACIM) serves as the investment advisor for
each of the funds. A description of the responsibilities of the advisor appear
in each prospectus under the heading Management.
Each
class of each fund is subject to a contractual unified management fee based on a
percentage of the daily net assets of each class of such class. For more
information about the unified management fee, see The
Investment Advisor under
the heading Management
in
each fund’s prospectus. The annual rate at which this fee is assessed is
determined daily in a multi-step process. First, each fund is categorized
according to the broad asset class in which it invests (e.g., money market, bond
or equity), and the assets of all
funds for which ACIM serves as the investment advisor and for which American
Century Investment Services, Inc. (ACIS) serves as the distributor
are totaled for
each category (Fund
Category Assets). Second, the assets are totaled for certain other accounts
managed by the advisor (Other Account Category Assets). To be included, these
accounts must have the same management team and investment objective as a fund
in the same category with the same Board of Trustees as the trust. Together, the
Fund Category Assets and the Other Account Category Assets comprise the
“Investment Category Assets.” The Investment Category Fee Rate is then
calculated by applying a fund’s Investment Category Fee Schedule to the
Investment Category Assets and dividing the result by the Investment Category
Assets.
Finally,
a separate Complex Fee Schedule is applied to the assets of all
funds for which ACIM serves as the
investment
advisor and for which ACIS serves as the distributor (the
“Complex Assets”), and the Complex Fee Rate is calculated based on the resulting
total. The Investment Category Fee Rate and the Complex Fee Rate are then added
to determine the Management Fee Rate payable by a class of the fund to the
advisor.
For
purposes of determining the assets that comprise the Fund Category Assets, Other
Account Category Assets and Complex Assets, the assets of registered investment
companies managed by the advisor that invest exclusively
in the shares of other registered investment companies shall not be
included.
The
schedules by which the unified management fee is determined are shown
below.
|
|
|
|
|
|
|
Investment
Category Fee Schedule for: Capital Preservation |
|
Category
Assets |
Fee
Rate |
|
First
$1 billion |
0.2500% |
|
Next
$1 billion |
0.2070% |
|
Next
$3 billion |
0.1660% |
|
Next
$5 billion |
0.1490% |
|
Next
$15 billion |
0.1380% |
|
Next
$25 billion |
0.1375% |
|
Thereafter |
0.1370% |
|
|
|
|
|
|
|
Investment
Category Fee Schedule for: Government Bond, Inflation-Adjusted
Bond |
|
Category
Assets |
Fee
Rate |
|
First
$1 billion |
0.2800% |
|
Next
$1 billion |
0.2280% |
|
Next
$3 billion |
0.1980% |
|
Next
$5 billion |
0.1780% |
|
Next
$15 billion |
0.1650% |
|
Next
$25 billion |
0.1630% |
|
Thereafter |
0.1625% |
|
|
|
|
|
|
|
Investment
Category Fee Schedule for: Short-Term Government, Ginnie
Mae |
|
Category
Assets |
Fee
Rate |
|
First
$1 billion |
0.3600% |
|
Next
$1 billion |
0.3080% |
|
Next
$3 billion |
0.2780% |
|
Next
$5 billion |
0.2580% |
|
Next
$15 billion |
0.2450% |
|
Next
$25 billion |
0.2430% |
|
Thereafter |
0.2425% |
The
Complex Fee is determined according to the schedule below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Complex
Assets |
Investor,
A, C and R Classes: Fee Rate |
I
Class: Fee Rate |
Y
and R5 Classes: Fee Rate |
R6
and G Classes: Fee Rate |
|
First
$2.5 billion |
0.3100% |
0.2100% |
0.1100% |
0.0600% |
|
Next
$7.5 billion |
0.3000% |
0.2000% |
0.1000% |
0.0500% |
|
Next
$15 billion |
0.2985% |
0.1985% |
0.0985% |
0.0485% |
|
Next
$25 billion |
0.2970% |
0.1970% |
0.0970% |
0.0470% |
|
Next
$25 billion |
0.2870% |
0.1870% |
0.0870% |
0.0370% |
|
Next
$25 billion |
0.2800% |
0.1800% |
0.0800% |
0.0300% |
|
Next
$25 billion |
0.2700% |
0.1700% |
0.0700% |
0.0200% |
|
Next
$25 billion |
0.2650% |
0.1650% |
0.0650% |
0.0150% |
|
Next
$25 billion |
0.2600% |
0.1600% |
0.0600% |
0.0100% |
|
Next
$25 billion |
0.2550% |
0.1550% |
0.0550% |
0.0050% |
|
Thereafter |
0.2500% |
0.1500% |
0.0500% |
0.0000% |
On
each calendar day, each class of each fund accrues a management fee that is
equal to the class’s Management Fee Rate times the net assets of the class
divided by 365 (366 in leap years). On the first business day of each month, the
funds pay a management fee to the advisor for the previous month. The fee for
the previous month is the sum of the calculated daily fees for each class of a
fund during the previous month.
The
management agreement between the trust and the advisor shall continue in effect
for a period of two years from its effective date (unless sooner terminated in
accordance with its terms) and shall continue in effect from year to year
thereafter for each fund so long as such continuance is approved at least
annually by:
(1)either
the funds’ Board of Trustees, or a majority of the outstanding voting securities
of such fund (as defined in the Investment Company Act); and
(2)the
vote of a majority of the trustees of the funds who are not parties to the
agreement or interested persons of the advisor, cast in person at a meeting
called for the purpose of voting on such approval.
The
management agreement states that the funds’ Board of Trustees or a majority of
the outstanding voting securities of each class of such fund may terminate the
management agreement at any time without payment of any penalty on 60 days’
written notice to the advisor. The management agreement shall be automatically
terminated if it is assigned.
The
management agreement states that the advisor shall not be liable to the funds or
their shareholders for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
The
management agreement also provides that the advisor and its officers, trustees
and employees may engage in other business, render services to others, and
devote time and attention to any other business whether of a similar or
dissimilar nature.
Certain
investments may be appropriate for the funds and also for other clients advised
by the advisor. Investment decisions for the funds and other clients are made
with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a fund.
The
advisor may aggregate purchase and sale orders of the funds with purchase and
sale orders of its other clients when the advisor believes that such aggregation
provides the best execution for the funds. The Board of Trustees has approved
the policy of the advisor with respect to the aggregation of portfolio
transactions. Fixed-income securities transactions are not executed through a
centralized trading desk. Instead, portfolio teams are responsible for executing
trades with broker/dealers in a predominately dealer marketplace. Trade
allocation decisions are made by the portfolio manager at the time of trade
execution and orders entered on the fixed-income order management system. The
advisor will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The advisor
receives no additional compensation or remuneration as a result of such
aggregation.
Unified
management fees paid by each fund for the fiscal periods ended March 31, 2022,
2021 and 2020, are indicated in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
2022 |
2021 |
2020 |
|
Capital
Preservation |
$1,582,1121 |
$4,517,9283 |
$9,749,751 |
|
Ginnie
Mae |
$3,769,001 |
$5,272,863 |
$4,904,342 |
|
Government
Bond |
$3,074,129 |
$3,785,051 |
$2,963,367 |
|
Inflation-Adjusted
Bond |
$9,192,4712 |
$7,958,6804 |
$7,808,3365 |
|
Short-Term
Government |
$1,215,179 |
$1,628,740 |
$1,010,853 |
1 Amount
shown reflects waiver by advisor of $8,755,922
in management fees.
2 Amount
shown reflects waiver by advisor of $2,061,088
in management fees.
3 Amount
shown reflects waiver by advisor of $6,129,826 in management fees.
4 Amount
shown reflects waiver by advisor of $1,517,636 in management fees.
5 Amount
shown reflects waiver by advisor of $1,088,161 in management fees.
Accounts
Managed
The
portfolio managers are responsible for the day-to-day management of various
accounts, as indicated by the following table. None of these accounts has an
advisory fee based on the performance of the account.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Managed (As of March 31, 2022) |
|
|
Registered
Investment
Companies (e.g. American
Century Investments
funds
and American
Century Investments -
subadvised
funds) |
Other
Pooled
Investment Vehicles
(e.g., commingled
trusts and 529
education
savings plans) |
Other
Accounts
(e.g., separate
accounts and
corporate accounts
including incubation
strategies and
corporate
money) |
|
Miguel
Castillo |
Number
of Accounts |
17 |
1 |
2 |
|
Assets |
$24.6
billion1 |
$60.7
million |
$554.8
million |
|
Robert
V. Gahagan |
Number
of Accounts |
19 |
0 |
2 |
|
Assets |
$25.3
billion2 |
$0 |
$554.8
million |
|
Curtis
Manning3 |
Number
of Accounts |
3 |
0 |
0 |
|
Assets |
$1.5
billion4 |
$0 |
$0 |
|
James
E. Platz |
Number
of Accounts |
18 |
0 |
2 |
|
Assets |
$24.8
billion3 |
$0 |
$554.8
million |
|
Dan
Shiffman |
Number
of Accounts |
18 |
0 |
2 |
|
Assets |
$25.3
billion4 |
$0 |
$554.8
million |
|
Peter
Van Gelderen |
Number
of Accounts |
11 |
0 |
2 |
|
Assets |
$14.1
billion5 |
$0 |
$554.8
million |
|
Michael
Waggaman3 |
Number
of Accounts |
4 |
0 |
1 |
|
Assets |
$1.7
billion4 |
$0 |
$13.2
million |
1 Includes
$3.5
billion in Inflation-Adjusted Bond.
2
Includes
$758.3
million in Government Bond; $3.5
billion in Inflation-Adjusted Bond; and $215.2
million in Short-Term Government.
3 Information
provided as of June 24, 2022.
4 Includes
$602.6
million in Ginnie Mae.
5 Includes
$602.6
million in Ginnie Mae; $758.3
million in Government Bond; and $215.2
million in Short-Term Government.
Potential
Conflicts of Interest
Certain
conflicts of interest may arise in connection with the management of multiple
portfolios. Potential conflicts include, for example, conflicts among investment
strategies, such as one portfolio buying or selling a security while another
portfolio has a differing, potentially opposite position in such security. This
may include one portfolio taking a short position in the security of an issuer
that is held long in another portfolio (or vice versa). Other potential
conflicts may arise with respect to the allocation of investment opportunities,
which are discussed in more detail below. American Century Investments has
adopted policies and procedures that are designed to minimize the effects of
these conflicts.
Responsibility
for managing American Century Investments client portfolios is organized
according to investment discipline. Investment disciplines include, for example,
disciplined equity, global growth equity, global value equity, global fixed
income multi-asset strategies, exchange traded funds and Avantis Investors
funds. Within each discipline are one or more portfolio teams responsible for
managing specific client portfolios. Generally, client portfolios with similar
strategies are managed by the same team using the same objective, approach, and
philosophy. Accordingly, portfolio holdings, position sizes, and industry and
sector exposures tend to be similar across similar portfolios, which minimizes
the potential for conflicts of interest. In addition, American Century
Investments maintains an ethical wall that restricts real time access to
information regarding any portfolio’s transaction activities and positions to
team members that have responsibility for a given portfolio or are within the
same equity investment discipline. The ethical wall is intended to aid in
preventing the misuse of portfolio holdings information and trading activity in
the other disciplines.
For
each investment strategy, one portfolio is generally designated as the “policy
portfolio.” Other portfolios with similar investment objectives, guidelines and
restrictions, if any, are referred to as “tracking portfolios.” When managing
policy and tracking portfolios, a portfolio team typically purchases and sells
securities across all portfolios that the team manages. American Century
Investments’ trading systems include various order entry programs that assist in
the management of multiple portfolios, such as the ability to purchase or sell
the same relative amount of one security across several funds. In some cases a
tracking portfolio may have additional restrictions or limitations that cause it
to be managed separately from the policy portfolio. Portfolio managers make
purchase and sale decisions for such portfolios alongside the policy portfolio
to the extent the overlap is appropriate, and separately, if the overlap is not.
American
Century Investments may aggregate orders to purchase or sell the same security
for multiple portfolios when it believes such aggregation is consistent with its
duty to seek best execution on behalf of its clients. Orders of certain client
portfolios may, by investment restriction or otherwise, be determined not
available for aggregation. American Century Investments has adopted policies and
procedures to minimize the risk that a client portfolio could be systematically
advantaged or disadvantaged in connection with the aggregation of orders. To the
extent equity trades are aggregated, shares purchased or sold are generally
allocated to the participating portfolios pro rata based on order size. Because
initial public offerings (IPOs) are usually available in limited supply and in
amounts too small to permit across-the-board pro rata allocations, American
Century Investments has adopted special procedures designed to promote a fair
and equitable allocation of IPO securities among clients over time. A
centralized trading desk executes all fixed income securities transactions for
Avantis ETFs and mutual funds. For all other funds in the American Century
complex, portfolio teams are responsible for executing fixed income trades with
broker/dealers in a predominantly dealer marketplace. Trade allocation decisions
are made by the portfolio manager at the time of trade execution and orders
entered on the fixed income order management system. There is an ethical wall
between the Avantis trading desk and all other American Century traders. The
Advisor’s Global Head of Trading monitors all trading activity for best
execution and to make sure no set of clients is being systematically
disadvantaged.
Finally,
investment of American Century Investments’ corporate assets in proprietary
accounts may raise additional conflicts of interest. To mitigate these potential
conflicts of interest, American Century Investments has adopted policies and
procedures intended to provide that trading in proprietary accounts is performed
in a manner that does not give improper advantage to American Century
Investments to the detriment of client portfolios.
Compensation
American
Century Investments portfolio manager compensation is structured to align the
interests of portfolio managers with those of the shareholders whose assets they
manage. As of March 31, 2022, it includes the components described below, each
of which is determined with reference to a number of factors such as overall
performance, market competition, and internal equity.
Base
Salary
Portfolio
managers receive base pay in the form of a fixed annual salary.
Bonus
A
significant portion of portfolio manager compensation takes the form of an
annual incentive bonus,
which is
determined by a combination of factors. One factor is investment performance.
The
mutual funds’
investment performance is generally measured by a combination of one-, three-
and five-year pre-tax performance relative to various benchmarks and/or
internally-customized peer groups, such as those indicated below. The
performance comparison periods may be adjusted based on a fund’s inception date
or a portfolio manager’s tenure on the fund.
|
|
|
|
|
|
|
|
|
|
Fund |
Benchmark |
Peer
Group |
|
Ginnie
Mae |
Bloomberg
U.S. GNMA Index |
N/A |
|
Government
Bond |
Bloomberg
U.S. Government/MBS Index |
Morningstar
U.S. Intermediate Government |
|
Inflation-Adjusted
Bond |
Bloomberg
U.S. Treasury Inflation Protected Securities (TIPS) Index |
Morningstar
U.S. Inflation-Protection Bond |
|
Short-Term
Government |
Bloomberg
U.S. 1-3 Year Government Bond Index |
Morningstar
U.S. Short Government |
Portfolio
managers may have responsibility for multiple American Century Investments
mutual funds. In such cases, the performance of each is assigned a percentage
weight appropriate for the portfolio manager’s relative levels of
responsibility. Portfolio managers also may have responsibility for other types
of managed portfolios
or ETFs.
If the performance of a managed account or
ETF is
considered for purposes of compensation, it is generally
measured via
the same criteria
as an
American Century Investments mutual fund (i.e., relative to the performance of a
benchmark and/or peer group).
A
second factor in the bonus calculation relates to the performance of a number of
American Century Investments funds managed according to one of the following
investment disciplines: global growth equity, global value equity, disciplined
equity, global fixed-income and multi-asset strategies. The
performance of American Century ETFs may also be included for certain investment
disciplines. Performance
is measured for each product individually as described above and then combined
to create an overall composite for the product group. These composites may
measure one-year performance (equal weighted) or a combination of one-, three-
and five-year performance (equal or asset weighted) depending on the portfolio
manager’s responsibilities and products managed and the composite for certain
portfolio managers may include multiple disciplines. This feature is designed to
encourage effective teamwork among portfolio management teams in achieving
long-term investment success for similarly styled portfolios.
A
portion of portfolio managers’ bonuses may be
discretionary and may be
tied to factors
such as profitability,
or individual performance goals, such as research projects and the development
of new products.
Restricted
Stock Plans
Portfolio
managers are eligible for grants of restricted stock of ACC. These grants are
discretionary, and eligibility and availability can vary from year to year. The
size of an individual’s grant is determined by individual and product
performance as well as other product-specific considerations such as
profitability. Grants can appreciate/depreciate in value based on the
performance of the ACC stock during the restriction period (generally three to
four years).
Deferred
Compensation Plans
Portfolio
managers are eligible for grants of deferred compensation. These grants are used
in very limited situations, primarily for retention purposes. Grants are fixed
and can appreciate/depreciate in value based on the performance of the American
Century Investments mutual funds in which the portfolio manager chooses to
invest them.
Ownership
of Securities
The
following table indicates the dollar range of securities of each fund
beneficially owned by the funds’ portfolio managers as of March 31, 2022
the funds’ most recent fiscal year end. Certain portfolio managers serve on
teams that oversee a number of funds in the same broad investment strategy and
are not expected to invest in each fund.
|
|
|
|
|
|
|
Aggregate
Dollar Range of Securities in Fund |
|
Ginnie
Mae |
|
|
Curtis
Manning1 |
A |
|
Dan
Shiffman |
A |
|
Peter
Van Gelderen |
A |
|
Michael
Waggaman1 |
A |
|
Government
Bond |
|
|
Robert
V. Gahagan |
A |
|
Curtis
Manning1 |
A |
|
James
E. Platz |
C |
|
Peter
Van Gelderen |
A |
|
Michael
Waggaman1 |
A |
|
|
|
|
|
|
|
Aggregate
Dollar Range of Securities in Fund |
|
Inflation-Adjusted
Bond |
|
|
Miguel
Castillo |
C |
|
Robert
V. Gahagan |
A |
|
James
E. Platz |
C |
|
Short-Term
Government |
|
|
Robert
V. Gahagan |
A |
|
Curtis
Manning1 |
A |
|
James
E. Platz |
B |
|
Peter
Van Gelderen |
A |
|
Michael
Waggaman1 |
A |
Ranges:
A – none; B – $1-$10,000; C – $10,001-$50,000; D – $50,001-$100,000; E –
$100,001-$500,000; F – $500,001-$1,000,000;
G – More than
$1,000,000.
1 Information
provided as of June 24, 2022.
American
Century Services, LLC (ACS), 4500 Main Street, Kansas City, Missouri 64111,
serves as transfer agent and dividend-paying agent for the funds. It provides
physical facilities, computer hardware and software, and personnel for the
day-to-day administration of the funds and the advisor. The advisor pays ACS’s
costs for serving as transfer agent and dividend-paying agent for the funds out
of the advisor’s unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption Investment
Advisor
on page 36.
Proceeds
from purchases of fund shares may pass through accounts maintained by the
transfer agent at Commerce Bank, N.A. or UMB Bank, n.a. before being held at the
fund’s custodian. Redemption proceeds also may pass from the custodian to the
shareholder through such bank accounts.
From
time to time, special services may be offered to shareholders who maintain
higher share balances in our family of funds. These services may include the
waiver of minimum investment requirements, expedited confirmation of shareholder
transactions, newsletters and a team of personal representatives. Any expenses
associated with these special services will be paid by the advisor.
The
advisor has entered into an Administration Agreement with State Street Bank and
Trust Company (SSB) to provide certain fund accounting, fund financial
reporting, tax and treasury/tax compliance services for the funds, including
striking the daily net asset value for each fund. The advisor pays SSB a monthly
fee as compensation for these services that is based on the total net assets of
accounts in the American Century complex serviced by SSB. ACS does pay SSB for
some additional services on a per fund basis. While ACS continues to serve as
the administrator of the funds, SSB provides sub-administrative services that
were previously undertaken by ACS.
The
funds’ shares are distributed by American Century Investment Services, Inc.
(ACIS), a registered broker-dealer. The distributor is a wholly owned subsidiary
of ACC and its principal business address is 4500 Main Street, Kansas City,
Missouri 64111.
The
distributor is the principal underwriter of the funds’ shares. The distributor
makes a continuous, best-efforts underwriting of the funds’ shares. This means
the distributor has no liability for unsold shares. The advisor pays ACIS’s
costs for serving as principal underwriter of the funds’ shares out of the
advisor’s unified management fee. For a description of this fee and the terms of
its payment, see the above discussion under the caption Investment
Advisor
on page 36. ACIS does not earn commissions for distributing the funds’
shares.
Certain
financial intermediaries unaffiliated with the distributor or the funds may
perform various administrative and shareholder services for their clients who
are invested in the funds. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the funds
and their performance, preparing and distributing client account statements, and
other administrative and shareholder services that would otherwise be provided
by the distributor or its affiliates. The distributor may pay fees out of its
own resources to such financial intermediaries for the provision of these
services.
State
Street Bank and Trust Company (SSB), State Street Financial Center, One Lincoln
Street, Boston, Massachusetts 02111 serves as custodian of the funds’ cash and
securities under a Master Custodian Agreement with the trust. Foreign
securities, if any, are held by foreign banks participating in a network
coordinated by SSB. The custodian takes no part in determining the investment
policies of the funds or in deciding which securities are purchased or sold by
the funds. The funds, however, may invest in certain obligations of the
custodian and may purchase or sell certain securities from or to the custodian.
State
Street Bank and Trust Company (SSB) serves as securities lending agent for the
funds pursuant to a Securities Lending Administration Agreement with the
advisor. The funds did not loan their securities or employ SSB as securities
lending agent during their most recent fiscal year. To the extent that the funds
engage in securities lending during the current fiscal year, information
concerning the amounts of income and fees/compensation related to securities
lending activities will be included in the statement of additional information
in the next annual update to the funds’ registration statement.
As
the funds’ securities lending agent, SSB is expected to locate borrowers for
fund securities, execute loans of portfolio securities pursuant to terms and
parameters defined by the advisor and the Board of Trustees, monitor the daily
value of the loaned securities and collateral, require additional collateral as
necessary, manage cash collateral, and provide certain limited recordkeeping and
accounting services.
The
funds’ Board appointed Deloitte & Touche LLP to serve as the funds’
independent registered public accounting firm for the fiscal year ended March
31, 2022. The address of Deloitte & Touche LLP is 1100 Walnut Street, Suite
3300, Kansas City, Missouri 64106. As the independent registered public
accounting firm of the funds, Deloitte & Touche LLP provides
services including auditing the annual financial statements and financial
highlights for each fund.
For
the fiscal years ended March 31, 2021 and 2020, PricewaterhouseCoopers served as
the funds’ independent registered public accounting firm. The address of
PricewaterhouseCoopers LLP is 1100 Walnut, Suite 1300, Kansas City, Missouri
64106. As the independent registered public accounting firm of the funds,
PricewaterhouseCoopers LLP provided services including auditing the annual
financial statements and financial highlights for each fund.
The
advisor places orders for equity portfolio transactions with broker-dealers, who
receive commissions for their services. Generally, commissions relating to
securities traded on foreign exchanges will be higher than commissions relating
to securities traded on U.S. exchanges. The advisor purchases and sells
fixed-income securities through principal transactions, meaning the advisor
normally purchases securities on a net basis directly from the issuer or a
primary market-maker acting as principal for the securities. The funds generally
do not pay a stated brokerage commission on these transactions, although the
purchase price for debt securities usually includes an undisclosed compensation.
Purchases of securities from underwriters typically include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market-makers typically include a dealer’s mark-up (i.e., a spread
between the bid and asked prices).
Under
the management agreement between the funds and the advisor, the advisor has the
responsibility of selecting brokers and dealers to execute portfolio
transactions. The funds’ policy is to secure the most favorable prices and
execution of orders on its portfolio transactions. The advisor selects
broker-dealers on their perceived ability to obtain “best execution” in
effecting transactions in its clients’ portfolios. In selecting broker-dealers
to effect portfolio transactions relating to equity securities, the advisor
considers the full range and quality of a broker-dealer’s research and brokerage
services, including, but not limited to, the following:
•applicable
commission rates and other transaction costs charged by the
broker-dealer
•value
of research provided to the advisor by the broker-dealer (including economic
forecasts, fundamental and technical advice on individual securities, market
analysis, and advice, either directly or through publications or writings, as to
the value of securities, availability of securities or of purchasers/sellers of
securities)
•timeliness
of the broker-dealer’s trade executions
•efficiency
and accuracy of the broker-dealer’s clearance and settlement
processes
•broker-dealer’s
ability to provide data on securities executions
•financial
condition of the broker-dealer
•the
quality of the overall brokerage and customer service provided by the
broker-dealer
In
transactions to buy and sell fixed-income securities, the selection of the
broker- dealer is determined by the availability of the desired security and its
offering price, as well as the broker-dealer’s general execution and operational
and financial capabilities in the type of transaction involved. The advisor will
seek to obtain prompt execution of orders at the most favorable prices or
yields.
The
advisor does not consider the receipt of products or services other than
brokerage or research services in selecting broker-dealers.
On
an ongoing basis, the advisor seeks to determine what levels of commission rates
are reasonable in the marketplace. In evaluating the reasonableness of
commission rates, the advisor considers:
•rates
quoted by broker-dealers
•the
size of a particular transaction, in terms of the number of shares, dollar
amount, and number of clients involved
•the
ability of a broker-dealer to execute large trades while minimizing market
impact
•the
complexity of a particular transaction
•the
nature and character of the markets on which a particular trade takes
place
•the
level and type of business done with a particular firm over a period of
time
•the
ability of a broker-dealer to provide anonymity while executing
trades
•historical
commission rates
•rates
that other institutional investors are paying, based on publicly available
information
The
brokerage commissions paid by the funds may exceed those that another
broker-dealer might have charged for effecting the same transactions, because of
the value of the brokerage and research services provided by the broker-dealer.
Research services furnished by broker-dealers through whom the funds effect
securities transactions may be used by the advisor in servicing all of its
accounts, and not all such services may be used by the advisor in managing the
portfolios of the funds.
Pursuant
to its internal allocation procedures, the advisor regularly evaluates the
brokerage and research services provided by each broker-dealer that it uses. On
a periodic basis, members of the advisor’s portfolio management team assess the
quality and value of research and brokerage services provided by each
broker-dealer that provides execution services and research to the advisor for
its clients’ accounts. The results of the periodic assessments are used to add
or remove brokers from the approved brokers list, if needed, and to set research
budgets for the following period. Execution-only brokers are used where
deemed appropriate.
In
the fiscal years ended March 31, 2022, 2021 and 2020, the brokerage commissions
including, as applicable, futures commissions, of each fund are listed in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
2022 |
2021 |
2020 |
| Capital
Preservation |
$0 |
$0 |
$0 |
| Ginnie
Mae |
$4,902 |
$10,429 |
$41 |
| Government
Bond |
$51,581 |
$61,913 |
$20,007 |
| Inflation-Adjusted
Bond |
$37,626 |
$9,416 |
$50,114 |
| Short-Term
Government |
$10,255 |
$9,459 |
$9,344 |
Brokerage
commissions paid by a fund may vary significantly from year to year as a result
of changing asset levels throughout the year, portfolio turnover, varying market
conditions, and other factors. For example, brokerage commissions varied for the
fiscal years ended March 31, 2022 for Ginnie Mae, Government Bond, and
Inflation-Adjusted Bond, as these funds managed portfolio duration due to
interest rate volatility throughout the year.
As
of the end of its most recently completed fiscal year, the fund listed below
owned securities of its regular brokers or dealers (as defined by Rule 10b-1
under the Investment Company Act) or of their parent companies.
|
|
|
|
|
|
|
|
|
|
Fund |
Broker,
Dealer or Parent |
Value
of Securities Owned as of
March 31, 2022 |
| Inflation-Adjusted
Bond |
Bank
of America Corp. |
$6,364,006 |
|
|
Barclays
PLC |
$2,682,696 |
|
|
Citigroup,
Inc. |
$3,286,878 |
|
|
Credit
Agricole Corporate and Investment Bank |
$24,999,781 |
|
|
Deutsche
Bank AG/New York, NY |
$2,891,397 |
|
|
JPMorgan
Chase & Co. |
$2,307,641 |
|
The
Declaration of Trust permits the Board of Trustees to issue an unlimited number
of full and fractional shares of beneficial interest without par value, which
may be issued in series (or funds). Each of the funds named on the front of this
statement of additional information is a series of shares issued by the trust.
In addition, each series (or fund) may be divided into separate classes. See
Multiple
Class Structure,
which follows. Additional funds and classes may be added without a shareholder
vote.
Each
fund votes separately on matters affecting that fund exclusively. Voting rights
are not cumulative, so that investors holding more than 50% of the trust’s
(i.e., all funds’) outstanding shares may be able to elect a Board of Trustees.
The trust undertakes dollar-based voting, meaning that the number of votes a
shareholder is entitled to is based upon the dollar amount of the shareholder’s
investment. The election of trustees is determined by the votes received from
all trust shareholders without regard to whether a majority of shares of any one
fund voted in favor of a particular nominee or all nominees as a
group.
Each
shareholder has rights to dividends and distributions declared by the fund he or
she owns and to the net assets of such fund upon its liquidation or dissolution
proportionate to his or her share ownership interest in the fund. Shares of each
fund have equal voting rights, although each fund votes separately on matters
affecting that fund exclusively.
The
trust shall continue unless terminated by (1) approval of at least two-thirds of
the shares of each fund entitled to vote or (2) by the Trustees by written
notice to shareholders of each fund. Any fund may be terminated by (1) approval
of at least two-thirds of the shares of that fund or (2) by the Trustees by
written notice to shareholders of that fund.
Upon
termination of the trust or a fund, as the case may be, the trust shall pay or
otherwise provide for all charges, taxes, expenses and liabilities belonging to
the trust or the fund. Thereafter, the trust shall reduce the remaining assets
belonging to each fund (or the particular fund) to cash, shares of other
securities or any combination thereof, and distribute the proceeds belonging to
each fund (or the particular fund) to the shareholders of that fund ratably
according to the number of shares of that fund held by each shareholder on the
termination date.
Shareholders
of a Massachusetts business trust could, under certain circumstances, be held
personally liable for its obligations. However, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the trust. The Declaration of Trust also provides for indemnification and
reimbursement of expenses of any shareholder held personally liable for
obligations of the trust. The Declaration of Trust provides that the trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the trust and satisfy any judgment thereon. The
Declaration of Trust further provides that the trust may maintain appropriate
insurance (for example, fidelity, bonding, and errors and omissions insurance)
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 as a result of shareholder liability is
limited to circumstances in which both inadequate insurance exists and the trust
is unable to meet its obligations.
The
assets belonging to each series are held separately by the custodian and the
shares of each series represent a beneficial interest in the principal, earnings
and profit (or losses) of investments and other assets held for each series.
Your rights as a shareholder are the same for all series of securities unless
otherwise stated. Within their respective fund or class, all shares have equal
redemption rights. Each share, when issued, is fully paid and
non-assessable.
The
Trust’s Board of Trustees has adopted a multiple class plan pursuant to Rule
18f-3 under
the Investment
Company Act.
The plan is described in the prospectus of any fund that offers more than one
class. Pursuant to such plan, the funds may issue the following classes of
shares: Investor Class, I Class, Y Class, A Class, C Class, R Class, R5 Class,
R6 Class and G Class. Not all funds offer all classes.
The
Investor Class is made available to investors directly from American Century
Investments and/or through some financial intermediaries. Additional information
regarding eligibility for Investor Class shares may be found in the funds’
prospectus. The I Class is made available to institutional shareholders or
through financial intermediaries that provide various shareholder and
administrative services. Y Class shares are available through financial
intermediaries that offer fee-based advisory programs. The A and C Classes also
are made available through financial intermediaries, for purchase by individual
investors who receive advisory and personal services from the intermediary. The
R Class is made available through financial intermediaries and is generally used
in 401(k) and other retirement plans. The R5 and R6 Class is generally available
only to participants in employer-sponsored retirement plans where a financial
intermediary provides recordkeeping services to plan participants. G Class
shares are available for purchase only by funds advised by American Century
Investments and other American Century advisory clients that are subject to a
contractual fee for investment management services. The classes have different
unified management fees as a result of their separate arrangements for
shareholder services. In addition, the A, C and R Class shares each are subject
to a separate Master Distribution and Individual Shareholder Services Plan (the
A Class Plan, C Class Plan and R Class Plan, respectively, and collectively, the
plans) described below. The plans have been adopted by the funds’ Board of
Trustees in accordance with Rule 12b-1 adopted by the SEC under the Investment
Company Act.
Rule
12b-1
Rule
12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by its Board of
Trustees and approved by its shareholders. Pursuant to such rule, the Board of
Trustees of the funds’ A, C and R Classes have approved and entered into the A
Class Plan, C Class Plan and R Class Plan, respectively. The plans are described
below.
In
adopting the plans, the Board of Trustees (including a majority of trustees who
are not interested persons of the funds, as defined in the Investment Company
Act, hereafter referred to as the independent trustees) determined that there
was a reasonable likelihood that the plans would benefit the funds and the
shareholders of the affected class. Some of the anticipated benefits include
improved name recognition of the funds generally; and growing assets in existing
funds, which helps retain and attract investment management talent, provides a
better environment for improving fund performance, and can lower the total
expense ratio for funds with stepped-fee schedules. Pursuant to Rule 12b-1,
information about revenues and expenses under the plans is presented to the
Board of Trustees quarterly. Continuance of the plans must be approved by the
Board of Trustees, including a majority of the independent trustees, annually.
The plans may be amended by a vote of the Board of Trustees, including a
majority of the independent trustees, except that the plans may not be amended
to materially increase the amount to be spent for distribution without majority
approval of the shareholders of the affected class. The plans terminate
automatically in the event of an assignment and may be terminated upon a vote of
a majority of the independent trustees or by vote of a majority of outstanding
shareholder votes of the affected class.
All
fees paid under the plans will be made in accordance with Section 2830 of the
Conduct Rules of the Financial Industry Regulatory Authority
(FINRA).
The
Share Class Plans
As
described in the prospectus, the A, C and R Class shares of the funds are made
available to persons purchasing through broker-dealers, banks, insurance
companies and other financial intermediaries that provide various
administrative, shareholder and distribution services. In addition, the A, C and
R Classes are made available to participants in employer-sponsored retirement
plans. The funds’ distributor enters into contracts with various banks,
broker-dealers, insurance companies and other financial intermediaries, with
respect to the sale of the funds’ shares and/or the use of the funds’ shares in
various investment products or in connection with various financial
services.
Certain
recordkeeping and administrative services that would otherwise be performed by
the funds’ transfer agent may be performed by a plan sponsor (or its agents) or
by a financial intermediary for A, C and R Class investors. In addition to such
services, the financial intermediaries provide various individual shareholder
and distribution services.
To
enable the funds’ shares to be made available through such plans and financial
intermediaries, and to compensate them for such services, the funds’ Board of
Trustees has adopted the A, C and R Class Plans. Pursuant to the plans, the
following fees are paid and described further below.
A
Class
The
A Class pays the funds’ distributor 0.25% annually of the average daily net
asset value of the A Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services and for distribution
services, including past distribution services. This payment is fixed at 0.25%
and is not based on expenses incurred by the distributor.
C
Class
The
C Class pays the funds’ distributor 1.00% annually of the average daily net
asset value of the funds’ C Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services and 0.75% of which is
paid for distribution services, including past distribution services. This
payment is fixed at 1.00% and is not based on expenses incurred by the
distributor.
R
Class
The
R Class pays the funds’ distributor 0.50% annually of the average daily net
asset value of the R Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services and for distribution
services, including past distribution services. This payment is fixed at 0.50%
and is not based on expenses incurred by the distributor. During the fiscal year
ended March 31, 2022, the aggregate amount of fees paid under each class plan
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
A
Class |
C
Class |
R
Class |
|
Ginnie
Mae |
$41,278 |
$10,348 |
$74,588 |
|
Government
Bond |
$69,739 |
$22,124 |
$11,076 |
|
Inflation-Adjusted
Bond |
$374,509 |
$104,796 |
$170,623 |
|
Short-Term
Government |
$21,418 |
$29,025 |
$14,366 |
The
distributor then makes these payments to the financial intermediaries (including
underwriters and broker-dealers, who may use some of the proceeds to compensate
sales personnel) who offer the A, C and R Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments
may be made for a variety of individual shareholder services, including, but not
limited to:
(a)providing
individualized and customized investment advisory services, including the
consideration of shareholder profiles and specific goals;
(b)creating
investment models and asset allocation models for use by shareholders in
selecting appropriate funds;
(c)conducting
proprietary research about investment choices and the market in
general;
(d)periodic
rebalancing of shareholder accounts to ensure compliance with the selected asset
allocation;
(e)consolidating
shareholder accounts in one place;
(f)paying
service fees for providing personal, continuing services to investors, as
contemplated by the Conduct Rules of FINRA; and
(g)other
individual services.
Individual
shareholder services do not include those activities and expenses that are
primarily intended to result in the sale of additional shares of the funds.
Distribution
services include any activity undertaken or expense incurred that is primarily
intended to result in the sale of A, C and R Class shares, which services may
include but are not limited to:
(a)paying
sales commissions, on-going commissions and other payments to brokers, dealers,
financial institutions or others who sell A, C and/or R Class shares pursuant to
selling agreements;
(b)compensating
registered representatives or other employees of the distributor who engage in
or support distribution of the funds’ A, C and/or R Class shares;
(c)compensating
and paying expenses (including overhead and telephone expenses) of the
distributor;
(d)printing
prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e)preparing,
printing and distributing sales literature and advertising materials provided to
the funds’ shareholders and prospective shareholders;
(f)receiving
and answering correspondence from prospective shareholders, including
distributing prospectuses, statements of additional information, and shareholder
reports;
(g)providing
facilities to answer questions from prospective shareholders about fund
shares;
(h)complying
with federal and state securities laws pertaining to the sale of fund
shares;
(i)assisting
shareholders in completing application forms and selecting dividend and other
account options;
(j)providing
other reasonable assistance in connection with the distribution of fund
shares;
(k)organizing
and conducting sales seminars and payments in the form of transactional and
compensation or promotional incentives;
(l)profit
on the foregoing; and
(m)such
other distribution and services activities as the advisor determines may be paid
for by the funds pursuant to the terms of the agreement between the corporation
and the funds’ distributor and in accordance with Rule 12b-1 of the Investment
Company Act.
The
net asset value (NAV) for each class of each fund is calculated by adding the
value of all portfolio securities and other assets attributable to the class,
deducting liabilities and dividing the result by the number of shares of the
class outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
All
classes of the funds except the A Class are offered at their NAV. The A Class of
the funds is offered at its public offering price, which is the NAV plus the
appropriate sales charge. This calculation may be expressed as a
formula:
Offering
Price = NAV/(1 – Sales Charge as a % of Offering Price)
For
example, for Ginnie Mae, Government Bond and Inflation-Adjusted Bond, if the NAV
of the fund’s A Class shares is $5.00, the public offering price would be
$5.00/(1 – 4.50%) = $5.24.
For
example, for Short-Term Government, if the NAV of the fund’s A Class shares is
$5.00, the public offering price would be $5.00/(1 – 2.25%) =
$5.12.
Each
fund’s NAV per share is calculated as of the close of regular
business on
the New York Stock Exchange (the NYSE) each day the NYSE is open for business.
The NYSE usually closes at 4 p.m. Eastern time. The NYSE typically observes the
following holidays: New Year’s Day, Martin Luther King Jr. Day, Presidents’ Day,
Good Friday, Memorial Day, Juneteenth
National
Independence
Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Although the funds expect
the same holidays to be observed in the future, the NYSE may modify its holiday
schedule at any time.
Capital
Preservation
Money
market funds operate pursuant to Investment Company Act Rule 2a-7, which permits
valuation of portfolio securities on the basis of amortized cost. This method
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium paid at the time of
purchase. Although this method provides certainty in valuation, it generally
disregards the effect of fluctuating interest rates on an instrument’s market
value. Consequently, the instrument’s amortized cost value may be higher or
lower than its market value, and this discrepancy may be reflected in the funds’
yields. During periods of declining interest rates, for example, the daily yield
on fund shares computed as described above may be higher than that of a fund
with identical investments priced at market value. The converse would apply in a
period of rising interest rates.
As
required by Rule 2a-7, the Board of Trustees has adopted procedures designed to
stabilize, to the extent reasonably possible, a money market fund’s price per
share as computed for the purposes of sales and redemptions at $1.00. While the
day-to-day operation of the fund has been delegated to the portfolio managers,
the quality requirements established by the procedures limit investments to
certain instruments that the Board of Trustees has determined present minimal
credit risks and that have been rated in one of the two highest rating
categories as determined by a rating agency or, in the case of unrated
securities, of comparable quality. The procedures require review of the money
market fund’s portfolio holdings at such intervals as are reasonable in light of
current market conditions to determine whether the money market fund’s
market-based
NAVs
deviate from the per-share value based on amortized cost. The procedures also
prescribe the action to be taken by the advisor if such deviation should exceed
0.25%.
Actions
the advisor and the Board of Trustees may consider under these circumstances
include (i) selling portfolio securities prior to maturity, (ii) withholding
dividends or distributions from capital, (iii) authorizing a one-time dividend
adjustment, (iv) discounting share purchases and initiating redemptions in kind,
or (v) valuing portfolio securities at market price for purposes of calculating
NAV.
Ginnie
Mae, Government Bond, Inflation-Adjusted Bond and Short-Term
Government
Debt
securities and swap agreements are generally valued using evaluated prices
obtained from approved independent pricing services or at
the most
recent mean of the bid and asked prices
provided by investment
dealers in accordance with the valuation policies and procedures. Pricing
services will generally provide evaluated prices based on accepted industry
conventions, which may require the
pricing service
to exercise its own discretion. Evaluated prices
are commonly
derived through utilization of market models that take into consideration
various market factors, assumptions, and security characteristics including, but
not limited to; trade data, quotations from broker-dealers and active market
makers, relevant yield curve and spread data, related sector levels,
creditworthiness, trade data or market information on comparable securities and
other relevant security-specific information. Pricing services may exercise
discretion including, but not limited to; selecting and designing
the valuation
methodology, determining
the source
and relevance of inputs and assumptions, and assessing price challenges received
from its clients. Pricing services may provide prices when
market quotations
are not available or when certain pricing inputs may be stale. The
use
of different
models or inputs may result in different
pricing services determining
a different price for the same security. Pricing services
generally value
fixed-income securities assuming orderly transactions of an
institutional round
lot size but may consider trades
of smaller
sizes in their models. The fund may hold or transact in such securities in
smaller lot sizes, sometimes referred
to as
“odd-lots.” Securities may trade at different prices when transacted in
different lot sizes. The
methods used by the pricing service and the valuations so established are
reviewed by the advisor under the oversight
of the Board of Trustees. There are a number of pricing services available, and
the advisor, on the basis of ongoing evaluation of these services, may use other
pricing services or discontinue the use of any pricing service in whole or in
part.
Securities
maturing within 60 days of the valuation date may be valued at cost, plus or
minus any amortized discount or premium, unless the trustees determine that this
would not result in fair valuation of a given security. Other assets and
securities for which quotations are not readily available are valued in good
faith using methods approved by the Board of Trustees.
Futures
contracts are generally valued at the settlement price as provided by the
exchange or clearing corporation.
The
value of an exchange-traded foreign security is determined in its national
currency as of the close of trading on the foreign exchange on which it is
traded or as of the close of business on the NYSE, if that is earlier. That
value is then translated to dollars at the prevailing foreign exchange rate at
the time the funds’ NAV is determined.
Trading
in securities on European,
African
and Asian securities exchanges and over-the-counter markets is normally
completed at various times before the close of business on each day that the
NYSE is open. The funds may apply model-derived factors to the closing prices of
equity securities traded on foreign securities exchanges. Factors are based on
observable market data as provided by an independent pricing service. If an
event were to occur after the value of a security was established, but before
the NAV was determined, that was likely to materially change the NAV, then that
security would be valued as determined in accordance with procedures adopted by
the Board of Trustees.
Trading
of these securities in foreign markets may not take place on every day that the
NYSE is open. In addition, trading may take place in various foreign markets and
on some electronic trading networks on Saturdays or on other days when the NYSE
is not open and on which the funds’ NAVs are not calculated. Therefore, these
calculations do not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such calculation, and the
value of the funds’ portfolios may be affected on days when shares of the funds
may not be purchased or redeemed.
Valuations
are determined in accordance with applicable federal securities laws,
regulations promulgated by the SEC and accounting principles generally accepted
in the United States. The SEC recently adopted Rule 2a-5 under the Investment
Company Act of 1940, which, among other things, establishes an updated
regulatory framework for registered investment companies’ valuation practices.
Effective September 8, 2022, the value of securities and other assets and
liabilities held by the fund will be determined by the advisor, as the valuation
designee, pursuant to its valuation policies and procedures. The fund’s board
oversees the valuation designee and at least annually will review its valuation
policies and procedures.
Each
fund intends to qualify annually as a regulated investment company (RIC) under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). RICs
generally are not subject to federal and state income taxes. To qualify as a RIC
a fund must, among other requirements, distribute substantially all of its net
investment income and net realized capital gains (if any) to investors each
year. If a fund were not eligible to be treated as a RIC, it would become liable
for taxes at the fund level on all its income, significantly reducing its
distributions to investors and eliminating investors’ ability to treat
distributions received from the fund in the same manner in which they were
realized by the fund. Under certain circumstances, the Code allows funds to cure
deficiencies that would otherwise result in the loss of RIC status, including by
paying a fund-level tax.
To
qualify as a RIC, a fund must meet certain requirements of the Code, among which
are requirements relating to sources of its income and diversification of its
assets. A fund is also required to distribute 90% of its investment company
taxable income each year. Additionally, a fund must declare dividends by
December 31 of each year equal to at least 98% of ordinary income (as of
December 31) and 98.2% of capital gains (as of October 31) to avoid the
nondeductible 4% federal excise tax on any undistributed amounts.
Certain
bonds purchased by the funds may be treated as bonds that were originally issued
at a discount. Original issue discount represents interest for federal income
tax purposes and generally can be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash is actually received by a fund until the maturity of the bond,
original issue discount is treated for federal income tax purposes as income
earned by a fund over the term of the bond, and therefore is subject to the
distribution requirements of the Code. The annual amount of income earned on
such a bond by a fund generally is determined on the basis of a constant yield
to maturity that takes into account the semiannual compounding of accrued
interest.
In
addition, some of the bonds may be purchased by a fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a fund elects to include market discount in
income in tax years to which it is attributable or if the amount is considered
de minimis). Generally, market discount accrues on a daily basis for each day
the bond is held by a fund on a constant yield to maturity basis. In the case of
any debt security having a fixed maturity date of not more than one year from
its date of issue, the gain realized on disposition generally will be treated as
short-term capital gain. If a fund holds the foregoing kinds of securities, it
may be required to pay out as an income distribution each year an amount that is
greater than the total amount of cash interest the fund actually received, which
distributions may be made from the assets of the fund or, if necessary, by
disposition of portfolio securities, including at a time when such disposition
may not otherwise be advantageous.
A
fund’s transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund, defer fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require a fund to mark-to-market certain types of the positions in its
portfolio (i.e., treat them as if they were sold), which may cause the fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the distribution requirements of the Code for
relief from income and excise taxes. A fund will monitor its transactions and
may make such tax elections as fund management deems appropriate with respect to
these transactions.
Under
the Code, gains or losses attributable to fluctuations in exchange rates that
occur between the time a fund accrues income or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time a
fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, in disposing of debt securities
denominated
in foreign currencies, certain forward currency contracts, or other instruments,
gains or losses attributable to fluctuations in the value of a foreign currency
between the date the security, contract or other instrument is acquired and the
date it is disposed of are also usually treated as ordinary income or loss.
Under Section 988 of the Code, these gains or losses may increase or decrease
the amount of a fund’s investment company taxable income distributed to
shareholders as ordinary income. This treatment could increase or decrease a
fund’s ordinary income distributions, which may cause some or all of a fund’s
previously distributed income to be classified as a return of capital.
A
fund’s investments in foreign securities may be subject to withholding and other
taxes imposed by foreign countries. However, tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Any foreign
taxes paid by a fund will reduce its dividend distribution to
investors.
As
of March 31, 2022,
the funds in the table below had the following capital loss carryovers. When a
fund has a capital loss carryover, it does not make capital gains distributions
until the loss has been offset. The Regulated Investment Company Modernization
Act of 2010 allows the funds to carry forward capital losses incurred in future
taxable years for an unlimited period.
|
|
|
|
|
|
|
Fund |
Unlimited |
|
Capital
Preservation |
$(2,319) |
|
Ginnie
Mae |
$(68,110,808) |
|
Government
Bond |
— |
|
Inflation-Adjusted
Bond |
$(1,006,228) |
|
Short-Term
Government |
— |
If
you have not complied with certain provisions of the Internal Revenue Code and
Regulations, either American Century Investments or your financial intermediary
is required by federal law to withhold and remit to the IRS the applicable
federal withholding rate of reportable payments (which may include dividends,
capital gains distributions and redemption proceeds). Those regulations require
you to certify that the Social Security number or tax identification number you
provide is correct and that you are not subject to withholding for previous
under-reporting to the IRS. You will be asked to make the appropriate
certification on your account application. Payments reported by us to the IRS
that omit your Social Security number or tax identification number will subject
us to a nonrefundable penalty of $50, which will be charged against your account
if you fail to provide the certification by the time the report is
filed.
If
fund shares are purchased through taxable accounts, distributions either of cash
or additional shares of net investment income and net short-term capital gains
are taxable to you as ordinary income, unless they are designated as qualified
dividend income and you meet a minimum required holding period with respect to
your shares of a fund, in which case such distributions are taxed at the same
rates as long-term capital gains. Qualified dividend income is a dividend
received by a fund from the stock of a domestic or qualifying foreign
corporation, provided that the fund has held the stock for a required holding
period and the stock was not on loan at the time of the dividend. The required
holding period for qualified dividend income is met if the underlying shares are
held at least 60 days in the 121-day period beginning 60 days prior to the
ex-dividend date. Dividends received by the funds on shares of stock of domestic
corporations may qualify for the 70% dividends-received deduction when
distributed to corporate shareholders to the extent that the fund held those
shares for more than 45 days. The funds do not expect a significant portion of
their distributions to be qualified dividend income or to qualify for the
corporate dividends-received deduction.
Distributions
from gains on assets held by a fund longer than 12 months are taxable as
long-term gains regardless of the length of time you have held your shares in
the fund. If you purchase shares in a fund and sell them at a loss within six
months, your loss on the sale of those shares will be treated as a long-term
capital loss to the extent of any long-term capital gains dividend you received
on those shares.
Each
fund may use the “equalization method” of accounting to allocate a portion of
its earnings and profits to redemption proceeds. Although using this method
generally will not affect a fund’s total returns, it may reduce the amount that
a fund would otherwise distribute to continuing shareholders by reducing the
effect of redemptions of fund shares on fund distributions to
shareholders.
A
redemption of shares of the fund (including a redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
you generally will recognize gain or loss in an amount equal to the difference
between the basis of the shares and the amount received. If a loss is realized
on the redemption of fund shares, the reinvestment in additional fund shares
within 30 days before or after the redemption may be subject to the “wash sale”
rules of the Code, resulting in a postponement of the recognition of such loss
for federal income tax purposes.
A
3.8% Medicare contribution tax is imposed on net investment income, including
interest, dividends and capital gains, provided you meet specified income
levels.
Distributions
also may be subject to state and local taxes, even if all or a substantial part
of these distributions are derived from interest on U.S. government obligations
which, if you received them directly, would be exempt from state income tax.
However, most but not all states allow this tax exemption to pass through to
fund shareholders when a fund pays distributions to its investors. You should
consult your tax advisor about the tax status of these distributions in your
state.
The
information above is only a summary of some of the tax considerations affecting
the funds and their U.S. investors. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.
The
funds’
financial statements for
the fiscal year ended March 31, 2022
have been audited by Deloitte
& Touche
LLP, independent registered public accounting firm. Their Reports
of Independent Registered Public Accounting Firm and the financial statements
included in the funds’ annual
reports
for the fiscal year ended March 31, 2022
are incorporated herein by reference.
As
of June 30, 2022,
the following shareholders owned more than 5% of the outstanding shares of a
class of the fund. The table shows shares owned of record unless otherwise
noted.
|
|
|
|
|
|
|
|
|
|
Fund/
Class |
Shareholder |
Percentage
of
Outstanding Shares
Owned Of Record |
|
Capital
Preservation |
|
|
Investor
Class |
|
|
Pershing
LLC
Jersey City, NJ |
7% |
|
Ginnie
Mae |
|
|
Investor
Class |
|
|
Charles
Schwab & Co Inc
San Francisco, CA |
19% |
|
I
Class |
|
|
Charles
Schwab & Co Inc
San Francisco, CA |
38% |
|
American
Enterprise Investment Svc
Minneapolis, MN |
33% |
|
Pershing
LLC
Jersey City, NJ |
16% |
|
National
Financial Services LLC
Jersey City, NJ |
7% |
|
A
Class |
|
|
National
Financial Services LLC
Jersey City, NJ |
17% |
|
American
United Life Group Retirement Annuity
Indianapolis, IN |
14% |
|
Pershing
LLC
Jersey City, NJ |
11% |
|
Wells
Fargo Clearing Services LLC
Saint Louis, MO |
8% |
|
C
Class |
|
|
Wells
Fargo Clearing Services LLC
Saint Louis, MO |
56% |
|
LPL
Financial
San Diego, CA |
19% |
|
American
Enterprise Inv Svcs
Minneapolis, MN |
13% |
|
National
Financial Services LLC
Jersey City, NJ |
7% |
|
R
Class |
|
|
Sammons
Financial Network LLC
West Des Moines, IA |
78% |
|
Massachusetts
Mutual Insurance Com
Springfield, MA |
13% |
|
R5
Class |
|
|
National
Financial Services LLC
Jersey City, NJ |
50% |
|
TD
Ameritrade Inc
Omaha, NE |
16% |
|
Charles
Schwab & Co Inc
San Francisco, CA |
11% |
|
DCGT
Trustee and/or Custodian
Des Moines, IA |
5% |
|
|
|
|
|
|
|
|
|
|
Fund/
Class |
Shareholder |
Percentage
of
Outstanding Shares
Owned Of Record |
|
Government
Bond |
|
|
Investor
Class |
|
|
Charles
Schwab & Co Inc
San Francisco, CA |
21% |
|
National
Financial Services LLC
Jersey City, NJ |
10% |
|
MLPF&S
Jacksonville, FL |
8% |
|
Fidelity
FIIOC TR FBO Certain Employee Benefit Plans
c/o
Fidelity Investments
Covington,
KY |
7% |
|
I
Class |
|
|
Lincoln
Investment Planning LLC FBO Lincoln Customers
Ft. Washington,
PA |
31% |
|
American
Enterprise Investment Svc
Minneapolis, MN |
27% |
|
Charles
Schwab & Co Inc
San
Francisco, CA
Includes
10.80% registered to a Special Custody Account for the
Exclusive
Benefit of Customers and 9.13% registered to a Special
Custody
A/C FBO Customers |
20% |
|
Pershing
LLC
Jersey City, NJ |
6% |
|
Wells
Fargo Clearing Services LLC
Saint Louis, MO |
6% |
|
A
Class |
|
|
MLPF&S
Jacksonville, FL |
20% |
|
Great-West
Trust Company LLC
Greenwood Vlg, CO |
13% |
|
State
St Bk/Tr as TTEE FBO ADP Access Product
Boston, MA |
8% |
|
Valic
Retirement Services
FBO AIGFSB (Cust) (Ttee) FBO Retirement
Plans
Houston, TX |
7% |
|
DCGT
Trustee and/or Custodian
Des Moines, IA |
7% |
|
American
Enterprise Investment Svc
Minneapolis, MN |
6% |
|
C
Class |
|
American
Enterprise Inv Svcs
Minneapolis, MN |
69% |
|
National
Financial Services LLC
Jersey City, NJ |
10% |
|
LPL
Financial
San Diego, CA |
7% |
|
Wells
Fargo Clearing Services LLC
Saint Louis, MO |
6% |
|
|
|
|
|
|
|
|
|
|
Fund/
Class |
Shareholder |
Percentage
of
Outstanding Shares
Owned Of Record |
|
R
Class |
|
|
State
St Bk/Tr as TTEE FBO ADP Access Product
Boston, MA |
13% |
|
Kevin
and Zofia Lavoie TTEE
FBO Vision Point 401(k)
c/o Fascore
LLC
Greenwood
Village, CO
Shares
owned of record and beneficially |
11% |
|
MLPF&S
Jacksonville,
FL |
7% |
|
R5
Class |
|
|
Fidelity
FIIOC TR FBO Certain Employee Benefit Plans
c/o
Fidelity Investments
Covington,
KY |
27% |
|
Charles
Schwab & Co Inc
San Francisco, CA |
21% |
|
MLPF&S
Jacksonville, FL |
12% |
|
National
Financial Services LLC
Jersey City, NJ |
8% |
|
DCGT
Trustee and/or Custodian
Des Moines, IA |
8% |
|
Inflation-Adjusted
Bond |
|
|
Investor
Class |
|
|
Charles
Schwab & Co Inc
San Francisco, CA |
15% |
|
American
Century Services LLC SSB&T Custodian
One Choice Portfolio Moderate
Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
10% |
|
American
Century Services LLC SSB&T Custodian
One Choice Portfolio
Conservative Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
9% |
|
American
Century Services LLC SSB&T Custodian
One Choice Portfolio Very
Conservative Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
5% |
|
I
Class |
|
|
Pershing
LLC
Jersey City, NJ |
23% |
|
MLPF&S
Jacksonville, FL |
17% |
|
Charles
Schwab & Co Inc
San Francisco, CA |
16% |
|
Spec
Cdy A/C Excl Ben Cust UBSFSI
Weehawken, NJ |
13% |
|
American
Enterprise Investment Svc
Minneapolis, MN |
12% |
|
National
Financial Services LLC
Jersey City, NJ |
9% |
|
Y
Class |
|
|
Pershing
LLC
Jersey City, NJ |
99.93% |
|
|
|
|
|
|
|
|
|
|
Fund/
Class |
Shareholder |
Percentage
of
Outstanding Shares
Owned Of Record |
|
A
Class |
|
|
|
MLPF&S
Jacksonville, FL |
42% |
|
National
Financial Services LLC
Jersey City, NJ |
8% |
|
Nationwide
Trust Company
Columbus, OH |
6% |
|
C
Class |
|
|
MLPF&S
Jacksonville, FL |
48% |
|
Pershing
LLC
Jersey City, NJ |
10% |
|
American
Enterprise Investment Svc
Minneapolis, MN |
7% |
|
Wells
Fargo Clearing Services LLC
Saint Louis, MO |
6% |
|
R
Class |
|
|
|
Sammons
Financial Network LLC
West Des Moines, IA |
47% |
|
State
Street Bk/TR as TTEE and/or Cust FBO ADP Access Product
Boston,
MA |
10% |
|
Massachusetts
Mutual Life Insurance Company
Springfield, MA |
8% |
|
R5
Class |
|
|
|
Charles
Schwab & Co Inc
San Francisco, CA |
29% |
|
National
Financial Services LLC
Jersey
City, NJ |
20% |
|
Great-West
Trust Co LLC
Greenwood
Vlg, CO
Includes
6.12% registered FBO Employee Benefits Clients 401(k) |
9% |
|
MLPF&S
Jacksonville, FL |
7% |
|
Valic
Retirement Services
FBO AIGFSB (Cust) (Ttee) FBO Retirement
Plans
Houston, TX |
6% |
|
R6
Class |
|
|
|
National
Financial Services LLC
Jersey
City, NJ |
18% |
|
MLPF&S
Jacksonville,
FL |
20% |
|
Great-West
Trust Co LLC
Greenwood
Vlg, CO |
7% |
|
DCGT
Trustee and/or Custodian
Des Moines, IA |
6% |
|
|
|
|
|
|
|
|
|
|
Fund/
Class |
Shareholder |
Percentage
of
Outstanding Shares
Owned Of Record |
|
G
Class |
|
|
AC
Retirement Date Trust
Woburn,
MA
Includes
8.87% registered to TD 2030 Trust; 8.022% registered to TD
2035
Trust;
6.21% registered to 2040 Trust; 5.93% registered to 2025 Trust;
and
5.39%
registered to TD 2045 Trust |
44% |
|
American
Century Services LLC SSB&T Custodian
One Choice 2035 Portfolio
Infl-Adj Bond Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
10% |
|
American
Century Services LLC SSB&T Custodian
One Choice 2030 Portfolio
Inflation-Adj Bond Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
9% |
|
American
Century Services LLC SSB&T Custodian
One Choice 2025 Portfolio
Infl-Adj Bond Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
8% |
|
American
Century Services LLC SSB&T Custodian
One Choice In Retirement
Portfolio Infl-Adj Bond Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
7% |
|
American
Century Services LLC SSB&T Custodian
One Choice 2040 Portfolio
Inflation-Adj Bond Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
6% |
|
American
Century Services LLC SSB&T Custodian
One Choice 2045 Portfolio
Infl-Adj Bond Omnibus
Kansas City, MO
Shares
owned of record and beneficially |
5% |
|
Short-Term
Government |
|
|
Investor
Class |
|
|
National
Financial Services LLC
Jersey City, NJ |
13% |
|
Charles
Schwab & Co Inc
San Francisco, CA |
10% |
|
Short-Term
Government |
|
|
I
Class |
|
|
National
Financial Services LLC
Jersey City, NJ |
67% |
|
American
Enterprise Investment Svc
Minneapolis, MN |
17% |
|
Charles
Schwab & Co Inc
San Francisco, CA |
9% |
|
|
|
|
|
|
|
|
|
|
Fund/
Class |
Shareholder |
Percentage
of
Outstanding Shares
Owned Of Record |
|
A
Class |
|
LPL
Financial
San Diego, CA |
46% |
|
National
Financial Services LLC
Jersey City, NJ |
13% |
|
Nationwide
Trust Company
Columbus, OH |
11% |
|
American
Enterprise Investment Svc
Minneapolis, MN |
6% |
|
Nationwide
Life Insurance Company
Columbus, OH |
6% |
|
DCGT
Trustee and/or Custodian FBO Plic Various Retirement Plans
Des Moines,
IA |
5% |
|
C
Class |
|
|
Wells
Fargo Clearing Services LLC
Saint Louis, MO |
69% |
|
Raymond
James
St. Petersburg, FL |
16% |
|
R
Class |
|
|
DCGT
Trustee and/or Custodian FBO Plic Various Retirement Plans
Des Moines,
IA |
5% |
|
R5
Class |
|
|
Biomed
Valley Discoveries Inc.
Kansas City, MO |
82% |
|
Charles
Schwab & Co Inc
San Francisco, CA |
7% |
A
shareholder owning beneficially more than 25% of the trust’s outstanding shares
may be considered a controlling person. The vote of any such person could have a
more significant effect on matters presented at a shareholders’ meeting than
votes of other shareholders. The
funds are unaware of any shareholders, beneficial or of record, who own more
than 25% of the voting securities of the trust. As
of June 30, 2022,
the officers and trustees of the funds, as a group, owned 1.08%
of Ginnie Mae Fund R5 Class, and less
than 1% of all other
classes of the funds’ outstanding shares.
Sales
Charges
The
sales charges applicable to the A and C Classes of the funds are described in
the prospectus for those classes in the section titled Investing
Through a Financial Intermediary.
Shares of the A Class are subject to an initial sales charge, which declines as
the amount of the purchase increases. Additional information regarding
reductions and waivers of the A Class sales charge may be found in the funds’
prospectus.
Shares
of the A and C Classes are subject to a contingent deferred sales charge (CDSC)
upon redemption of the shares in certain circumstances. The specific charges and
when they apply are described in the relevant prospectus. The CDSC may be waived
for certain redemptions by some shareholders, as described in the
prospectus.
An
investor may terminate his relationship with an intermediary at any time. If the
investor does not establish a relationship with a new intermediary and transfer
any accounts to that new intermediary, such accounts may be exchanged to the
Investor Class of the fund, if such class is available. The investor will be the
shareholder of record of such accounts. In this situation, any applicable CDSCs
will be charged when the exchange is made.
No
CDSCs were paid to the distributor for the A Class shares in the fiscal year
ended March 31, 2022.
The aggregate CDSCs paid to the distributor for the C Class shares in the fiscal
year ended March 31, 2022,
were:
Ginnie
Mae —
Government
Bond $240
Inflation-Adjusted
Bond $2,568
Short-Term
Government $26
Payments
to Dealers
The
funds’ distributor expects to pay dealer commissions to the financial
intermediaries who sell A and/or C Class shares of the funds at the time of such
sales. Payments for A Class shares for Ginnie Mae, Government Bond and
Inflation-Adjusted Bond will be as follows:
|
|
|
|
|
|
|
Purchase
Amount |
Dealer
Commission as a % of Offering Price |
|
Less
than $100,000 |
4.00% |
|
$100,000
- $249,999 |
3.00% |
|
$250,000
- $499,999 |
2.00% |
|
$500,000
- $999,999 |
1.75% |
|
$1,000,000
- $3,999,999 |
0.75% |
|
$4,000,000
- $9,999,999 |
0.50% |
|
$10,000,000
or more |
0.25% |
Payments
for A Class shares for Short-Term Government will be as follows:
|
|
|
|
|
|
|
Purchase
Amount |
Dealer
Commission as a % of Offering Price |
|
Less
than $100,000 |
2.00% |
|
$100,000
- $249,999 |
1.50% |
|
$250,000
- $499,999 |
1.25% |
|
$500,000
- $3,999,999 |
0.75% |
|
$4,000,000
- $9,999,999 |
0.50% |
|
$10,000,000
or more |
0.25% |
No
dealer commission will be paid on purchases by employer-sponsored retirement
plans. For this purpose, employer-sponsored retirement plans do not include SEP
IRAs, SIMPLE IRAs or SARSEPs. Payments will equal 1.00% of the purchase price of
the C Class shares sold by the financial intermediary. The distributor will
retain the 12b-1 fee paid by the C Class of funds for the first 12 months after
the shares are purchased. This fee is intended in part to permit the distributor
to recoup a portion of on-going sales commissions to dealers plus financing
costs, if any. Beginning with the first day of the 13th month, the distributor
will make the C Class distribution and individual shareholder services fee
payments described above to the financial intermediaries involved on a quarterly
basis. In addition, C Class purchases, A Class purchases greater than $1,000,000
for all funds other than Short-Term Government, and A Class purchases greater
than $500,000 for Short-Term Government are subject to a CDSC as described in
the prospectus.
From
time to time, the distributor may make additional payments to dealers, including
but not limited to payment assistance for conferences and seminars, provision of
sales or training programs for dealer employees and/or the public (including, in
some cases, payment for travel expenses for registered representatives and other
dealer employees who participate), advertising and sales campaigns about a fund
or funds, and assistance in financing dealer-sponsored events. Other payments
may be offered as well, and all such payments will be consistent with applicable
law, including the then-current rules of the Financial Industry Regulatory
Authority. Such payments will not change the price paid by investors for shares
of the funds.
Information
about buying, selling, exchanging and, if applicable, converting fund shares is
contained in the funds’ prospectus. The prospectus is available to investors
without charge and may be obtained by calling us.
Employer-Sponsored
Retirement Plans
Certain
group employer-sponsored retirement plans that hold a single account for all
plan participants with the fund, or that are part of a retirement plan or
platform offered by banks, broker-dealers, financial advisors or insurance
companies, or serviced by retirement recordkeepers are eligible to purchase
Investor, A, C, R, R5 and R6 Class shares. Employer-sponsored retirement plans
are not eligible to purchase I or Y Class shares. A and C Class purchases are
available at net asset value with no dealer commission paid to the financial
professional, and do not incur a CDSC. A, C and R Class shares purchased in
employer-sponsored retirement plans are subject to applicable distribution and
service (12b-1) fees, which the financial intermediary begins receiving
immediately at the time of purchase. American Century does not impose minimum
initial investment amount, plan size or participant number requirements by class
for employer-sponsored retirement plans; however, financial intermediaries or
plan recordkeepers may require plans to meet different
requirements.
Examples
of employer-sponsored retirement plans include the following:
•401(a)
plans
•pension
plans
•profit
sharing plans
•401(k)
plans (including plans with a Roth 401(k) feature, SIMPLE 401(k) plans and Solo
401(k) plans)
•money
purchase plans
•target
benefit plans
•Taft-Hartley
multi-employer pension plans
•SERP
and “Top Hat” plans
•ERISA
trusts
•employee
benefit plans and trusts
•employer-sponsored
health plans
•457
plans
•KEOGH
or HR(10) plans
•employer-sponsored
403(b) plans (including plans with a Roth 403(b) feature)
•nonqualified
deferred compensation plans
•nonqualified
excess benefit plans
•nonqualified
retirement plans
Traditional
and Roth IRAs are not considered employer-sponsored retirement plans, and SIMPLE
IRAs, SEP IRAs and SARSEPs are collectively referred to as Business IRAs.
Business IRAs that (i) held shares of an A Class fund prior to March 1, 2009
that received sales charge waivers or (ii) held shares of an Advisor Class fund
that was renamed A Class on March 1, 2010, may permit additional purchases by
new and existing participants in A Class shares without an initial sales charge.
R
Class IRA Accounts established prior to August 1, 2006 may make additional
purchases.
Waiver
of Minimum Initial Investment Amounts — I Class
A
financial intermediary, upon receiving prior approval from American Century
Investments, may waive applicable minimum initial investment amounts per
shareholder for I Class shares in the following situations:
•Broker-dealers,
banks, trust companies, registered investment advisors and other financial
intermediaries may make I Class shares available with no initial investment
minimum in fee based advisory programs or accounts where such program or account
is traded omnibus by the financial intermediary;
•Qualified
Tuition Programs under Section 529 that have entered into an agreement with the
distributor; and
•Certain
other situations deemed appropriate by American Century
Investments.
As
described in the prospectuses, the funds invest in fixed-income securities.
Those investments, however, are subject to certain credit quality restrictions,
as noted in the prospectuses and in this statement of additional information.
The following are examples of the rating categories referenced in the prospectus
disclosure.
|
|
|
|
|
|
| Ratings
of Corporate and Municipal Debt Securities |
| Standard
& Poor’s Long-Term Issue Credit Ratings* |
| Category |
Definition |
| AAA |
An
obligation rated ‘AAA’ has the highest rating assigned by Standard &
Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong. |
| AA |
An
obligation rated ‘AA’ differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitment on
the obligation is very strong. |
| A |
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 commitment on the obligation is still strong. |
| BBB |
An
obligation rated ‘BBB’ exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation. |
| BB;B;
CCC; CC; and C |
Obligations
rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ 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 exposures to adverse conditions. |
| BB |
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
commitment on the obligation. |
| B |
An
obligation rated ‘B’ is more vulnerable to nonpayment than obligations
rated ‘BB’, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s capacity or
willingness to meet its financial commitment on the
obligation. |
| CCC |
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 commitment 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 commitment on the
obligation. |
| CC |
An
obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The
‘CC’ rating is used when a default has not yet occurred, but Standard
& Poor’s expects default to be a virtual certainty, regardless of the
anticipated time to default. |
| C |
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 to obligations that are rated higher. |
| D |
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 Standard
& Poor’s 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 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 exchange offer. |
| NR |
This
indicates that no rating has been requested, or that there is insufficient
information on which to base a rating, or that Standard & Poor’s does
not rate a particular obligation as a matter of
policy. |
* The
ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating
categories.
|
|
|
|
|
|
| Moody’s
Investors Service, Inc. Global Long-Term Rating Scale |
| Category |
Definition |
| Aaa |
Obligations
rated Aaa are judged to be of the highest quality, subject to the lowest
level of credit risk. |
| Aa |
Obligations
rated Aa are judged to be of high quality and are subject to very low
credit risk. |
| A |
Obligations
rated A are judged to be upper-medium grade and are subject to low credit
risk. |
| Baa |
Obligations
rated Baa are judged to be medium-grade and subject to moderate credit
risk and as such may possess certain speculative
characteristics. |
|
|
|
|
|
|
| Ba |
Obligations
rated Ba are judged to be speculative and are subject to substantial
credit risk. |
| B |
Obligations
rated B are considered speculative and are subject to high credit
risk. |
| Caa |
Obligations
rated Caa are judged to be speculative of poor standing and are subject to
very high credit risk. |
| Ca |
Obligations
rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and interest. |
| C |
Obligations
rated C are the lowest rated and are typically in default, with little
prospect for recovery of principal or
interest. |
Note:
Moody’s 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.
|
|
|
|
|
|
| Fitch
Investors Service, Inc. Long-Term Ratings |
| Category |
Definition |
| AAA |
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. |
| AA |
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. |
| A |
High
credit quality. ‘A’
ratings denote expectations of low credit risk. The capacity for payment
of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings. |
| BBB |
Good
credit quality. ‘BBB’
ratings indicate that expectations of credit 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. |
| BB |
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. |
| B |
Highly
speculative. ‘B’
ratings indicate that material credit risk is present. |
| CCC |
Substantial
credit risk. ‘CCC’
ratings indicate that substantial credit risk is
present. |
| CC |
Very
high levels of credit risk. ‘CC’
ratings indicate very high levels of credit risk. |
| C |
Exceptionally
high levels of credit risk. ‘C’
indicates exceptionally high levels of credit
risk. |
Defaulted
obligations typically are not assigned ‘RD’ or ‘D’ ratings, but are instead
rated in the ‘B’ to ‘C’ rating categories, depending upon their recovery
prospects and other relevant characteristics. This approach better aligns
obligations that have comparable overall expected loss but varying vulnerability
to default and loss.
Notes:
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’.
|
|
|
|
|
|
| Standard
& Poor’s Corporate Short-Term Note Ratings |
| Category |
Definition |
| A-1 |
A
short-term obligation rated ‘A-1’ is rated in the highest category by
Standard & Poor’s. The obligor’s capacity to meet its financial
commitment 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 commitment on these obligations
is extremely strong. |
| A-2 |
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 higher rating categories. However, the obligor’s capacity
to meet its financial commitment on the obligation is
satisfactory. |
| A-3 |
A
short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation. |
|
|
|
|
|
|
| B |
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. |
| C |
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 commitment on the
obligation. |
| D |
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
Standard & Poor’s 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 exchange offer.
|
|
|
|
|
|
|
| Moody’s
Global Short-Term Rating Scale |
| Category |
Definition |
| P-1 |
Issuers
(or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations. |
| P-2 |
Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations. |
| P-3 |
Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to
repay short-term obligations. |
| NP |
Issuers
(or supporting institutions) rated Not Prime do not fall within any of the
Prime rating categories. |
|
|
|
|
|
|
| Fitch
Investors Service, Inc. Short-Term Ratings |
| Category |
Definition |
| F1 |
Highest
short-term credit quality. Indicates
the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong
credit feature. |
| F2 |
Good
short-term credit quality. Good
intrinsic capacity for timely payment of financial
commitments. |
| F3 |
Fair
short-term credit quality. The
intrinsic capacity for timely payment of financial commitments is
adequate. |
| B |
Speculative
short-term credit quality. Minimal
capacity for timely payment of financial commitments, plus heightened
vulnerability to near term adverse changes in financial and economic
conditions. |
| C |
High
short-term default risk. Default
is a real possibility. |
| RD |
Restricted
default. Indicates
an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically
applicable to entity ratings only. |
| D |
Default
Indicates
a broad-based default event for an entity, or the default of a short-term
obligation. |
|
|
|
|
|
|
| Standard
& Poor’s Municipal Short-Term Note Ratings |
| Category |
Definition |
| SP-1 |
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.
|
| SP-2 |
Satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes. |
| SP-3 |
Speculative
capacity to pay principal and interest. |
|
|
|
|
|
|
| Moody’s
US Municipal Short-Term Debt Ratings |
| Category |
Definition |
| MIG
1 |
This
designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
|
| MIG
2 |
This
designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group. |
| MIG
3 |
This
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. |
| SG |
This
designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
|
|
|
|
|
|
|
| Moody’s
Demand Obligation Ratings |
| Category |
Definition |
| VMIG
1 |
This
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 that ensure the timely
payment of purchase price upon demand. |
| VMIG
2 |
This
designation denotes strong credit quality. Good protection is afforded by
the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of
purchase price upon demand. |
| VMIG
3 |
This
designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely
payment of purchase price upon demand. |
| SG |
This
designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does
not have an investment grade short-term rating or may lack the structural
and/or legal protections necessary to ensure the timely payment of
purchase price upon demand. |
American
Century Investment Management, Inc. (Advisor)
is the investment manager for a variety of advisory clients, including the
American Century family of funds. In such capacity, the Advisor has been
delegated the authority to vote proxies with respect to investments held in the
accounts it manages. The following is a statement of the proxy voting policies
that have been adopted by the Advisor. In the exercise of proxy voting authority
which has been delegated to it by particular clients, the Advisor will apply the
following policies in accordance with, and subject to, any specific policies
that have been adopted by the client and communicated to and accepted by the
Advisor in writing.
A.General
Principles
In
providing the service of voting client proxies, the Advisor is guided by general
fiduciary principles, must act prudently, solely in the interest of its clients,
and must not subordinate client interests to unrelated objectives. Except as
otherwise indicated in these Policies, the Advisor will vote all proxies with
respect to investments held in the client accounts it manages. The Advisor will
attempt to consider all factors of its vote that could affect the value of the
investment. Although in most instances the Advisor will vote proxies
consistently across all client accounts, the votes will be based on the best
interests of each client. As a result, accounts managed by the Advisor may at
times vote differently on the same proposals. Examples of when an account’s vote
might differ from other accounts managed by the Advisor include, but are not
limited to, proxy contests and proposed mergers. In short, the Advisor will vote
proxies in the manner that it believes will do the most to maximize shareholder
value.
B.Specific
Proxy Matters
1. Routine
Matters
a. Election
of Directors
(1) Generally.
The
Advisor will generally support the election of directors that result in a board
made up of a majority of independent directors. In general, the Advisor will
vote in favor of management’s director nominees if they are running unopposed.
The Advisor believes that management is in the best possible position to
evaluate the qualifications of directors and the needs and dynamics of a
particular board. The Advisor of course maintains the ability to vote against
any candidate whom it feels is not qualified or if there are specific concerns
about the individual, such as allegations of criminal wrongdoing or breach of
fiduciary responsibilities. Additional information the Advisor may consider
concerning director nominees include, but is not limited to, whether (1) there
is an adequate explanation for repeated absences at board meetings, (2) the
nominee receives non-board fee compensation, or (3) there is a family
relationship between the nominee and the company’s chief executive officer or
controlling shareholder. When management’s nominees are opposed in a proxy
contest, the Advisor will evaluate which nominees’ publicly-announced management
policies and goals are most likely to maximize shareholder value, as well as the
past performance of the incumbents.
(2) Committee
Service. The
Advisor will withhold votes for non-independent directors who serve on the
audit, compensation, and/or nominating committees of the board.
(3) Classification
of Boards. The
Advisor will support proposals that seek to declassify boards. Conversely, the
Advisor will oppose efforts to adopt classified board structures.
(4) Majority
Independent Board. The
Advisor will support proposals calling for a majority of independent directors
on a board. The Advisor believes that a majority of independent directors can
help to facilitate objective decision making and enhances accountability to
shareholders.
(5) Majority
Vote Standard for Director Elections.
The
Advisor will vote in favor of proposals calling for directors to be elected by
an affirmative majority of the votes cast in a board election, provided that the
proposal allows for a plurality voting standard in the case of contested
elections. The Advisor may consider voting against such shareholder proposals
where a company’s board has adopted an alternative measure, such as a director
resignation policy, that provides a meaningful alternative to the majority
voting standard and appropriately addresses situations where an incumbent
director fails to receive the support of the majority of the votes cast in an
uncontested election.
(6) Withholding
Campaigns. The
Advisor will support proposals calling for shareholders to withhold votes for
directors where such actions will advance the principles set forth in paragraphs
(1) through (5) above.
b. Ratification
of Selection of Auditors
The
Advisor will generally rely on the judgment of the issuer’s audit committee in
selecting the independent auditors who will provide the best service to the
company. The Advisor believes that independence of the auditors is paramount and
will vote against auditors whose independence appears to be impaired. The
Advisor will vote against proposed auditors in those circumstances where (1) an
auditor has a financial interest in or association with the company, and is
therefore not independent; (2) non-audit fees comprise more than 50% of the
total fees paid by the company to the audit firm; or (3) there
is
reason to believe that the independent auditor has previously rendered an
opinion to the issuer that is either inaccurate or not indicative of the
company’s financial position.
2. Compensation
Matters
a. Executive
Compensation
(1) Advisory
Vote on Compensation. The
Advisor believes there are more effective ways to convey concerns about
compensation than through an advisory vote on compensation (such as voting
against specific excessive incentive plans or withholding votes from
compensation committee members). The Advisor will consider and vote on a
case-by-case basis on say-on-pay proposals and will generally support management
proposals unless specific concerns exist, including if the Advisor concludes
that executive compensation is (i) misaligned with shareholder interests, (ii)
unreasonable in amount, or (iii) not in the aggregate meaningfully tied to the
company’s performance.
(2) Frequency
of Advisory Votes on Compensation. The
Advisor generally supports the triennial option for the frequency of say-on-pay
proposals, but will consider management recommendations for an alternative
approach.
b. Equity
Based Compensation Plans
The
Advisor believes that equity-based incentive plans are economically significant
issues upon which shareholders are entitled to vote. The Advisor recognizes that
equity-based compensation plans can be useful in attracting and maintaining
desirable employees. The cost associated with such plans must be measured if
plans are to be used appropriately to maximize shareholder value. The Advisor
will conduct a case-by-case analysis of each stock option, stock bonus or
similar plan or amendment, and generally approve management’s recommendations
with respect to adoption of or amendments to a company’s equity-based
compensation plans, provided that the total number of shares reserved under all
of a company’s plans is reasonable and not excessively dilutive.
The
Advisor will review equity-based compensation plans or amendments thereto on a
case-by-case basis. Factors that will be considered in the determination include
the company’s overall capitalization, the performance of the company relative to
its peers, and the maturity of the company and its industry; for example,
technology companies often use options broadly throughout its employee base
which may justify somewhat greater dilution.
Amendments
which are proposed in order to bring a company’s plan within applicable legal
requirements will be reviewed by the Advisor’s legal counsel; amendments to
executive bonus plans to comply with IRS Section 162(m) disclosure requirements,
for example, are generally approved.
The
Advisor will generally vote against the adoption of plans or plan amendments
that:
•Provide
for immediate vesting of all stock options in the event of a change of control
of the company without reasonable safeguards against abuse (see
Anti-Takeover
Proposals
below);
•Reset
outstanding stock options at a lower strike price unless accompanied by a
corresponding and proportionate reduction in the number of shares designated.
The Advisor will generally oppose adoption of stock option plans that explicitly
or historically permit repricing of stock options, regardless of the number of
shares reserved for issuance, since their effect is impossible to
evaluate;
•Establish
restriction periods shorter than three years for restricted stock
grants;
•Do
not reasonably associate awards to performance of the company; or
•Are
excessively dilutive to the company.
3. Anti-Takeover
Proposals
In
general, the Advisor will vote against any proposal, whether made by management
or shareholders, which the Advisor believes would materially discourage a
potential acquisition or takeover. In most cases an acquisition or takeover of a
particular company will increase share value. The adoption of anti-takeover
measures may prevent or frustrate a bid from being made, may prevent
consummation of the acquisition, and may have a negative effect on share price
when no acquisition proposal is pending. The items below discuss specific
anti-takeover proposals.
a. Cumulative
Voting
The
Advisor will vote in favor of any proposal to adopt cumulative voting and will
vote against any proposal to eliminate cumulative voting that is already in
place, except in cases where a company has a staggered board. Cumulative voting
gives minority shareholders a stronger voice in the company and a greater chance
for representation on the board. The Advisor believes that the elimination of
cumulative voting constitutes an anti-takeover measure.
b. Staggered
Board
If
a company has a “staggered board,” its directors are elected for terms of more
than one year and only a segment of the board stands for election in any year.
Therefore, a potential acquiror cannot replace the entire board in one year even
if it controls a majority of the votes. Although staggered boards may provide
some degree of continuity and stability of leadership
and
direction to the board of directors, the Advisor believes that staggered boards
are primarily an anti-takeover device and will vote against establishing them
and for eliminating them. However, the Advisor does not necessarily vote against
the re-election of directors serving on staggered boards.
c. “Blank
Check” Preferred Stock
Blank
check preferred stock gives the board of directors the ability to issue
preferred stock, without further shareholder approval, with such rights,
preferences, privileges and restrictions as may be set by the board. In response
to a hostile takeover attempt, the board could issue such stock to a friendly
party or “white knight” or could establish conversion or other rights in the
preferred stock which would dilute the common stock and make an acquisition
impossible or less attractive. The argument in favor of blank check preferred
stock is that it gives the board flexibility in pursuing financing, acquisitions
or other proper corporate purposes without incurring the time or expense of a
shareholder vote. Generally, the Advisor will vote against blank check preferred
stock. However, the Advisor may vote in favor of blank check preferred if the
proxy statement discloses that such stock is limited to use for a specific,
proper corporate objective as a financing instrument.
d. Elimination
of Preemptive Rights
When
a company grants preemptive rights, existing shareholders are given an
opportunity to maintain their proportional ownership when new shares are issued.
A proposal to eliminate preemptive rights is a request from management to revoke
that right.
While
preemptive rights will protect the shareholder from having its equity diluted,
it may also decrease a company’s ability to raise capital through stock
offerings or use stock for acquisitions or other proper corporate purposes.
Preemptive rights may therefore result in a lower market value for the company’s
stock. In the long term, shareholders could be adversely affected by preemptive
rights. The Advisor generally votes against proposals to grant preemptive
rights, and for proposals to eliminate preemptive rights.
e. Non-targeted
Share Repurchase
A
non-targeted share repurchase is generally used by company management to prevent
the value of stock held by existing shareholders from deteriorating. A
non-targeted share repurchase may reflect management’s belief in the favorable
business prospects of the company. The Advisor finds no disadvantageous effects
of a non-targeted share repurchase and will generally vote for the approval of a
non-targeted share repurchase subject to analysis of the company’s financial
condition.
f. Increase
in Authorized Common Stock
The
issuance of new common stock can also be viewed as an anti-takeover measure,
although its effect on shareholder value would appear to be less significant
than the adoption of blank check preferred. The Advisor will evaluate the amount
of the proposed increase and the purpose or purposes for which the increase is
sought. If the increase is not excessive and is sought for proper corporate
purposes, the increase will be approved. Proper corporate purposes might
include, for example, the creation of additional stock to accommodate a stock
split or stock dividend, additional stock required for a proposed acquisition,
or additional stock required to be reserved upon exercise of employee stock
option plans or employee stock purchase plans. Generally, the Advisor will vote
in favor of an increase in authorized common stock of up to 100%; increases in
excess of 100% are evaluated on a case-by-case basis, and will be voted
affirmatively if management has provided sound justification for the
increase.
g. “Supermajority”
Voting Provisions or Super Voting Share Classes
A
“supermajority” voting provision is a provision placed in a company’s charter
documents which would require a “supermajority” (ranging from 66 to 90%) of
shareholders and shareholder votes to approve any type of acquisition of the
company. A super voting share class grants one class of shareholders a greater
per-share vote than those of shareholders of other voting classes. The Advisor
believes that these are standard anti-takeover measures and will generally vote
against them. The supermajority provision makes an acquisition more
time-consuming and expensive for the acquiror. A super voting share class favors
one group of shareholders disproportionately to economic interest. Both are
often proposed in conjunction with other anti-takeover measures.
h. “Fair
Price” Amendments
This
is another type of charter amendment that would require an offeror to pay a
“fair” and uniform price to all shareholders in an acquisition. In general, fair
price amendments are designed to protect shareholders from coercive, two-tier
tender offers in which some shareholders may be merged out on disadvantageous
terms. Fair price amendments also have an anti-takeover impact, although their
adoption is generally believed to have less of a negative effect on stock price
than other anti-takeover measures. The Advisor will carefully examine all fair
price proposals. In general, the Advisor will vote against fair price proposals
unless the Advisor concludes that it is likely that the share price will not be
negatively affected and the proposal will not have the effect of discouraging
acquisition proposals.
i. Limiting
the Right to Call Special Shareholder Meetings.
The
corporation statutes of many states allow minority shareholders at a certain
threshold level of ownership (frequently 10%) to call a special meeting of
shareholders. This right can be eliminated (or the threshold increased) by
amendment to the company’s charter documents. The Advisor believes that the
right to call a special shareholder meeting is significant for minority
shareholders; the elimination of such right will be viewed as an anti-takeover
measure and the Advisor will generally vote against proposals attempting to
eliminate this right and for proposals attempting to restore it.
j. Poison
Pills or Shareholder Rights Plans
Many
companies have now adopted some version of a poison pill plan (also known as a
shareholder rights plan). Poison pill plans generally provide for the issuance
of additional equity securities or rights to purchase equity securities upon the
occurrence of certain hostile events, such as the acquisition of a large block
of stock.
The
basic argument against poison pills is that they depress share value, discourage
offers for the company and serve to “entrench” management. The basic argument in
favor of poison pills is that they give management more time and leverage to
deal with a takeover bid and, as a result, shareholders may receive a better
price. The Advisor believes that the potential benefits of a poison pill plan
are outweighed by the potential detriments. The Advisor will generally vote
against all forms of poison pills.
The
Advisor will, however, consider on a case-by-case basis poison pills that are
very limited in time and preclusive effect. The Advisor will generally vote in
favor of such a poison pill if it is linked to a business strategy that will -
in our view - likely result in greater value for shareholders, if the term is
less than three years, and if shareholder approval is required to reinstate the
expired plan or adopt a new plan at the end of this term.
k. Golden
Parachutes
Golden
parachute arrangements provide substantial compensation to executives who are
terminated as a result of a takeover or change in control of their company. The
existence of such plans in reasonable amounts probably has only a slight
anti-takeover effect. In voting, the Advisor will evaluate the specifics of the
plan presented.
l. Reincorporation
Reincorporation
in a new state is often proposed as one part of a package of anti-takeover
measures. Several states (such as Pennsylvania, Ohio and Indiana) now provide
some type of legislation that greatly discourages takeovers. Management believes
that Delaware in particular is beneficial as a corporate domicile because of the
well-developed body of statutes and case law dealing with corporate
acquisitions.
The
Advisor will examine reincorporation proposals on a case-by-case basis.
Generally, if the Advisor believes that the reincorporation will result in
greater protection from takeovers, the reincorporation proposal will be opposed.
The Advisor will also oppose reincorporation proposals involving jurisdictions
that specify that directors can recognize non-shareholder interests over those
of shareholders. When reincorporation is proposed for a legitimate business
purpose and without the negative effects identified above, the Advisor will
generally vote affirmatively.
m. Confidential
Voting
Companies
that have not previously adopted a “confidential voting” policy allow management
to view the results of shareholder votes. This gives management the opportunity
to contact those shareholders voting against management in an effort to change
their votes.
Proponents
of secret ballots argue that confidential voting enables shareholders to vote on
all issues on the basis of merit without pressure from management to influence
their decision. Opponents argue that confidential voting is more expensive and
unnecessary; also, holding shares in a nominee name maintains shareholders’
confidentiality. The Advisor believes that the only way to insure anonymity of
votes is through confidential voting, and that the benefits of confidential
voting outweigh the incremental additional cost of administering a confidential
voting system. Therefore, the Advisor will generally vote in favor of any
proposal to adopt confidential voting.
n. Opting
In or Out of State Takeover Laws
State
takeover laws typically are designed to make it more difficult to acquire a
corporation organized in that state. The Advisor believes that the decision of
whether or not to accept or reject offers of merger or acquisition should be
made by the shareholders, without unreasonably restrictive state laws that may
impose ownership thresholds or waiting periods on potential acquirors.
Therefore, the Advisor will generally vote in favor of opting out of restrictive
state takeover laws.
4. Transaction
Related Proposals
The
Advisor will review transaction related proposals, such as mergers,
acquisitions, and corporate reorganizations, on a case-by-case basis, taking
into consideration the impact of the transaction on each client account. In some
instances, such as the approval of a proposed merger, a transaction may have a
differential impact on client accounts depending on the securities
held
in each account. For example, whether a merger is in the best interest of a
client account may be influenced by whether an account holds, and in what
proportion, the stock of both the acquirer and the acquiror. In these
circumstances, the Advisor may determine that it is in the best interests of the
accounts to vote the accounts’ shares differently on proposals related to the
same transaction.
5. Other
Matters
a. Proposals
Involving Environmental, Social, and Governance (ESG)
Matters
The
Advisor believes that ESG issues can potentially impact an issuer’s long-term
financial performance and has developed an analytical framework, as well as a
proprietary assessment tool, to integrate risks and opportunities stemming from
ESG issues into our investment process. This ESG integration process extends to
our proxy voting practices in that our ESG Proxy Team analyzes on a case-by-case
basis the financial materiality and potential risks or economic impact of the
ESG issues underpinning proxy proposals and makes voting recommendations based
thereon for the Advisor’s consideration. The ESG Proxy Team will generally
recommend support for well-targeted ESG proposals if it believes that there is a
rational linkage between a proposal, its economic impact, and its potential to
maximize long-term shareholder value.
Where
the economic effect of such proposals is unclear and there is not a specific
written client-mandate, the Advisor believes it is generally impossible to know
how to vote in a manner that would accurately reflect the views of the Advisor’s
clients, and
therefore,
the Advisor will generally rely on management’s assessment of the economic
effect if the Advisor believes the assessment is not unreasonable.
Shareholders
may also introduce proposals which are the subject of existing law or
regulation. Examples of such proposals would include a proposal to require
disclosure of a company’s contributions to political action committees or a
proposal to require a company to adopt a non-smoking workplace policy. The
Advisor believes that such proposals may be better addressed outside the
corporate arena and, absent a potential economic impact, will generally vote
with management’s recommendation. In addition, the Advisor will generally vote
against any proposal which would require a company to adopt practices or
procedures which go beyond the requirements of existing, directly applicable
law.
b. Anti-Greenmail
Proposals
“Anti-greenmail”
proposals generally limit the right of a corporation, without a shareholder
vote, to pay a premium or buy out a 5% or greater shareholder. Management often
argues that they should not be restricted from negotiating a deal to buy out a
significant shareholder at a premium if they believe it is in the best interest
of the company. Institutional shareholders generally believe that all
shareholders should be able to vote on such a significant use of corporate
assets. The Advisor believes that any repurchase by the company at a premium
price of a large block of stock should be subject to a shareholder vote.
Accordingly, it will generally vote in favor of anti-greenmail
proposals.
c. Indemnification
The
Advisor will generally vote in favor of a corporation’s proposal to indemnify
its officers and directors in accordance with applicable state law.
Indemnification arrangements are often necessary in order to attract and retain
qualified directors. The adoption of such proposals appears to have little
effect on share value.
d. Non-Stock
Incentive Plans
Management
may propose a variety of cash-based incentive or bonus plans to stimulate
employee performance. In general, the cash or other corporate assets required
for most incentive plans is not material, and the Advisor will vote in favor of
such proposals, particularly when the proposal is recommended in order to comply
with IRC Section 162(m) regarding salary disclosure requirements. Case-by-case
determinations will be made of the appropriateness of the amount of shareholder
value transferred by proposed plans.
e. Director
Tenure
These
proposals ask that age and term restrictions be placed on the board of
directors. The Advisor believes that these types of blanket restrictions are not
necessarily in the best interests of shareholders and therefore will vote
against such proposals, unless they have been recommended by
management.
f. Directors’
Stock Options Plans
The
Advisor believes that stock options are an appropriate form of compensation for
directors, and the Advisor will generally vote for director stock option plans
which are reasonable and do not result in excessive shareholder dilution.
Analysis of such proposals will be made on a case-by-case basis, and will take
into account total board compensation and the company’s total exposure to stock
option plan dilution.
g. Director
Share Ownership
The
Advisor will generally vote against shareholder proposals which would require
directors to hold a minimum number of the company’s shares to serve on the Board
of Directors, in the belief that such ownership should be at the discretion of
Board members.
h. Non-U.S.
Proxies
The
Advisor will generally evaluate non-U.S. proxies in the context of the voting
policies expressed herein but will also, where feasible, take into consideration
differing laws, regulations, and practices in the relevant foreign market in
determining if and how to vote. There may also be circumstances when
practicalities and costs involved with non-U.S. investing make it
disadvantageous to vote shares. For instance, the Advisor generally does not
vote proxies in circumstances where share blocking restrictions apply, when
meeting attendance is required in person, or when current share ownership
disclosure is required.
C.Use
of Proxy Advisory Services
The
Adviser may retain proxy advisory firms to provide services in connection with
voting proxies, including, without limitation, to provide information on
shareholder meeting dates and proxy materials, translate proxy materials printed
in a foreign language, provide research on proxy proposals and voting
recommendations in accordance with the voting policies expressed herein, provide
systems to assist with casting the proxy votes, and provide reports and assist
with preparation of filings concerning the proxies voted.
Prior
to the selection of a proxy advisory firm and periodically thereafter, the
Advisor will consider whether the proxy advisory firm has the capacity and
competency to adequately analyze proxy issues and the ability to make
recommendations based on material accurate information in an impartial manner.
Such considerations may include some or all of the following (i) periodic
sampling of votes cast through the firm’s systems to determine that votes are in
accordance with the Advisor’s policies and its clients best interests, (ii)
onsite visits to the proxy advisory firm’s office and/or discussions with the
firm to determine whether the firm continues to have the resources
(e.g.,
staffing, personnel, technology, etc.) capacity and competency to carry out its
obligations to the Advisor, (iii) a review of the firm’s policies and
procedures, with a focus on those relating to identifying and addressing
conflicts of interest and monitoring that current and accurate information is
used in creating recommendations, (iv) requesting that the firm notify the
Advisor if there is a change in the firm’s material policies and procedures,
particularly with respect to conflicts, or material business practices (e.g.,
entering or exiting new lines of business), and reviewing any such change, and
(v) in case of an error made by the firm, discussing the error with the firm and
determining whether appropriate corrective and preventative action is being
taken. In the event the Advisor discovers an error in the research or voting
recommendations provided by the firm, it will take reasonable steps to
investigate the error and seek to determine whether the firm is taking
reasonable steps to reduce similar errors in the future.
While
the Advisor takes into account information from many different sources,
including independent proxy advisory services, the decision on how to vote
proxies will be made in accordance with these policies.
D.Monitoring
Potential Conflicts of Interest
Corporate
management has a strong interest in the outcome of proposals submitted to
shareholders. As a consequence, management often seeks to influence large
shareholders to vote with their recommendations on particularly controversial
matters. In the vast majority of cases, these communications with large
shareholders amount to little more than advocacy for management’s positions and
give the Advisor’s staff the opportunity to ask additional questions about the
matter being presented. Companies with which the Advisor has direct business
relationships could theoretically use these relationships to attempt to unduly
influence the manner in which the Advisor votes on matters for its clients. To
ensure that such a conflict of interest does not affect proxy votes cast for the
Advisor’s clients, our proxy voting personnel regularly catalog companies with
whom the Advisor has significant business relationships; all discretionary
(including case-by-case) voting for these companies will be voted by the client
or an appropriate fiduciary responsible for the client (e.g., a committee of the
independent directors of a fund or the trustee of a retirement
plan).
In
addition, to avoid any potential conflict of interest that may arise when one
American Century fund owns shares of another American Century fund, the Advisor
will “echo vote” such shares, if possible. Echo voting means the Advisor will
vote the shares in the same proportion as the vote of all of the other holders
of the fund’s shares. So, for example, if shareholders of a fund cast 80% of
their votes in favor of a proposal and 20% against the proposal, any American
Century fund that owns shares of such fund will cast 80% of its shares in favor
of the proposal and 20% against. When this is not possible (as in the case of
the “NT” funds, where the other American Century funds are the only
shareholders), the shares of the underlying fund (e.g.,
the “NT” fund) will be voted in the same proportion as the vote of the
shareholders of the corresponding American Century policy portfolio for
proposals common to both funds. For example, NT Growth Fund shares will be echo
voted in accordance with the votes of the Growth Fund shareholders. In the case
where the policy portfolio does not have a common proposal, shares will be voted
in consultation with a committee of the independent directors.
************************************************************
The
voting policies expressed above are of course subject to modification in certain
circumstances and will be reexamined from time to time. With respect to matters
that do not fit in the categories stated above, the Advisor will exercise its
best judgment as a fiduciary to vote in the manner which will most enhance
shareholder value.
Case-by-case
determinations will be made by the Advisor’s staff, which is overseen by the
General Counsel of the Advisor, in consultation with equity managers. Electronic
records will be kept of all votes made.
Notes
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American
Century Investments
americancentury.com |
|
Retail
Investors
P.O. Box 419200
Kansas City, Missouri 64141-6200
1-800-345-2021 or 816-531-5575 |
Financial
Professionals
P.O. Box 419385
Kansas City, Missouri 64141-6385
1-800-345-6488 |
Investment
Company Act File No. 811-04363
CL-SAI-92488
2208
