2020-10-16FixedIncomeFunds-Retail-January
WELLS FARGO FUNDS
TRUST
PART B
WELLS FARGO FIXED INCOME
FUNDS
STATEMENT OF ADDITIONAL
INFORMATION
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Statement
of Additional Information January
1, 2021 |
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Fund |
A |
C |
A2 |
R6 |
Administrator |
Institutional |
Wells
Fargo Adjustable Rate Government Fund |
ESAAX |
ESACX |
- |
- |
ESADX |
EKIZX |
Wells
Fargo Conservative Income Fund |
- |
- |
WCIAX |
- |
- |
WCIIX |
Wells
Fargo Core Plus Bond Fund |
STYAX |
WFIPX |
- |
STYJX |
WIPDX |
WIPIX |
Wells
Fargo Government Securities Fund |
SGVDX |
WGSCX |
- |
- |
WGSDX |
SGVIX |
Wells
Fargo High Yield Bond Fund |
EKHAX |
EKHCX |
- |
- |
EKHYX |
EKHIX |
Wells
Fargo Short Duration Government Bond Fund |
MSDAX |
MSDCX |
- |
MSDRX |
MNSGX |
WSGIX |
Wells
Fargo Short-Term Bond Plus Fund (formerly Wells
Fargo Short-Term Bond Fund) |
SSTVX |
WFSHX |
- |
SSTYX |
- |
SSHIX |
Wells
Fargo Short-Term High Yield Bond Fund |
SSTHX |
WFHYX |
- |
- |
WDHYX |
STYIX |
Wells
Fargo Ultra Short-Term Income Fund |
SADAX |
WUSTX |
WUSNX |
- |
WUSDX |
SADIX |
Wells
Fargo Funds Trust
(the “Trust”) is an open-end, management investment company. This Statement of
Additional Information (“SAI”) contains additional information
about the above referenced series of the Trust in the Wells Fargo family of
funds - (each, a “Fund” and collectively, the “Funds”).
This SAI is
not a prospectus and should be read in conjunction with the Funds’ Prospectuses
(each a “Prospectus” and collectively the “Prospectuses”) dated January 1,
2021. The audited financial statements for the Funds, which include the
portfolios of investments and report of the independent registered public
accounting
firm for the fiscal year ended August 31,
2020, are hereby incorporated by reference to the Funds’ Annual
Reports dated as
of August 31,
2020. The Prospectuses,
Annual Reports and Semi-Annual Reports may be obtained free of charge by
visiting wfam.com, calling 1-800-222-8222 or writing to Wells Fargo
Funds, P.O. Box 219967, Kansas City, MO 64121-9967.
INCMS2/FASAI18
1-21
HISTORICAL
FUND INFORMATION
The Trust
was organized as a Delaware statutory trust on March 10, 1999. On March 25,
1999, the Board of Trustees
of Norwest Advantage Funds (“Norwest”), the Board of Directors of Stagecoach
Funds, Inc. (“Stagecoach”)
and the Board of Trustees of the Trust (the “Board”), approved an Agreement and
Plan of Reorganization
providing for, among other things, the transfer of the assets and stated
liabilities of various predecessor
Norwest and Stagecoach portfolios to certain Funds of the Trust (the
“Reorganization”). Prior to November
5, 1999, the effective date of the Reorganization, the Trust had only
nominal assets.
On
December 16, 2002, the Boards of Trustees of The Montgomery Funds and The
Montgomery Funds II (collectively,
“Montgomery”) approved an Agreement and Plan of Reorganization providing for,
among other things,
the transfer of the assets and stated liabilities of various predecessor
Montgomery portfolios into various
Funds of the Trust. The effective date of the reorganization was June 9,
2003.
On
February 3, 2004, the Board, and on February 18, 2004, the Board of Trustees of
The Advisors’ Inner Circle Fund (“AIC
Trust”), approved an Agreement and Plan of Reorganization providing for, among
other things, the transfer
of the assets and stated liabilities of various predecessor AIC Trust portfolios
into various Funds of the Trust. The
effective date of the reorganization was July 26, 2004.
In August
and September 2004, the Boards of Directors of the Strong family of funds
(“Strong”) and the Board approved
an Agreement and Plan of Reorganization providing for, among other things, the
transfer of the assets and
stated liabilities of various predecessor Strong mutual funds into various Funds
of the Trust. The effective
date of the reorganization was April 8, 2005.
On
December 30, 2009, the Board of Trustees of Evergreen Funds (“Evergreen”), and
on January 11, 2010, the Board,
approved an Agreement and Plan of Reorganization providing for, among other
things, the transfer of the assets
and stated liabilities of various predecessor Evergreen portfolios and Wells
Fargo Advantage Funds portfolios
to certain Funds of the Trust. The effective date of the reorganization was July
12, 2010 for certain Evergreen
Funds, and July 19, 2010 for the remainder of the Evergreen Funds.
On
December 15, 2015, the Wells Fargo Advantage Funds changed its name to the Wells
Fargo Funds.
The
Adjustable
Rate Government Fund commenced
operations on July 12, 2010, as successor to the Evergreen Adjustable
Rate Fund. The predecessor fund commenced operations on October 1,
1991.
The
Conservative
Income Fund commenced
operations on May 31, 2013.
The
Core
Plus Bond Fund commenced
operations on November 8, 1999, as successor to the Stagecoach Strategic
Income Fund. The predecessor Stagecoach Strategic Income Fund commenced
operations on July 13, 1998. The
Fund changed its name from the Wells Fargo Income Plus Fund to the Wells Fargo
Core Plus Bond Fund on
February 1, 2016.
The
Government
Securities Fund commenced
operations on April 11, 2005, as successor to the Strong Government
Securities Fund. The predecessor Strong Government Securities Fund commenced
operations on October
29, 1986.
The
High
Yield Bond Fund commenced
operations on July 9, 2010, as successor to the Evergreen High Income
Fund. The
predecessor fund commenced operations on September 11, 1935.
The
Short
Duration Government Bond Fund commenced
operations on June 9, 2003, as successor to the Montgomery
Short Duration Government Bond Fund. The predecessor fund commenced operations
on December
18, 1992. The Fund changed its name from the Montgomery Short Duration
Government Bond Fund to the
Short Duration Government Bond Fund effective April 11, 2005.
The
Short-Term
Bond Plus Fund commenced
operations on April 11, 2005, as successor to the Strong Short-Term
Bond Fund and the Strong Short-Term Income Fund. The predecessor Strong
Short-Term Bond Fund
commenced operations on August 31, 1987 and the predecessor Strong Short-Term
Income Fund commenced
operations on October 31, 2002. The Fund changed its name from the Wells Fargo
Short-Term Bond Fund
to the Wells Fargo Short-Term Bond Plus Fund on August 3,
2020.
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The
Short-Term
High Yield Bond Fund commenced
operations on April 11, 2005, as successor to the Strong Short-Term
High Yield Bond Fund. The predecessor Strong Short-Term High Yield Bond Fund
commenced operations
on June 30, 1997.
The
Ultra
Short-Term Income Fund commenced
operations on April 11, 2005, as successor to the Strong Ultra Short-Term
Income Fund. The predecessor Strong Ultra Short-Term Income Fund commenced
operations on November
25, 1988.
FUND
INVESTMENT POLICIES AND RISKS
Fundamental Investment
Policies
Each Fund
has adopted the following fundamental investment policies; that is, they may not
be changed without
approval by the holders of a majority (as defined under the 1940 Act) of the
outstanding voting securities
of each Fund.
The
Funds may not:
(1)
purchase the securities of issuers conducting their principal business activity
in the same industry if, immediately
after the purchase and as a result thereof, the value of a Fund’s investments in
that industry would equal or
exceed 25% of the current value of the Fund’s total assets, provided that this
restriction does not limit a Fund’s
investments in (i) securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities,
(ii) securities of other investment companies, or (iii) repurchase agreements;
and does not limit
Wells Fargo Conservative Income Fund’s investments in the banking
industry.
(2)
purchase securities of any issuer if, as a result, with respect to 75% of a
Fund’s total assets, more than 5% of the value
of its total assets would be invested in the securities of any one issuer or the
Fund’s ownership would be more
than 10% of the outstanding voting securities of such issuer, provided that this
restriction does not limit a
Fund’s investments in securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities,
or investments in securities of other investment companies;
(3) borrow
money, except to the extent permitted under the 1940 Act, including the rules,
regulations and any exemptive
orders obtained thereunder;
(4) issue
senior securities, except to the extent permitted under the 1940 Act, including
the rules, regulations and any
exemptive orders obtained thereunder;
(5) make
loans to other parties if, as a result, the aggregate value of such loans would
exceed one-third of a Fund’s
total assets. For the purposes of this limitation, entering into repurchase
agreements, lending securities and
acquiring any debt securities are not deemed to be the making of
loans;
(6)
underwrite securities of other issuers, except to the extent that the purchase
of permitted investments directly
from the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in
accordance with a Fund’s investment program may be deemed to be an
underwriting;
(7)
purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall
not prevent a Fund from investing in securities or other instruments backed by
real estate or securities of
companies engaged in the real estate business); or
(8)
purchase or sell commodities, provided that (i) currency will not be deemed to
be a commodity for purposes of this
restriction, (ii) this restriction does not limit the purchase or sale of
futures contracts, forward contracts or
options, and (iii) this restriction does not limit the purchase or sale of
securities or other instruments backed by
commodities or the purchase or sale of commodities acquired as a result of
ownership of securities or other instruments.
Non-Fundamental Investment
Policies
Each Fund
has adopted the following non-fundamental policies; that is, they may be changed
by the Trustees at any time
without approval of the Fund’s shareholders.
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(1) Each
Fund may invest in shares of other investment companies to the extent permitted
under the 1940 Act, including
the rules, regulations and any exemptive orders obtained thereunder, provided
however, that no Fund that has
knowledge that its shares are purchased by another investment company investor
pursuant to Section 12(d)(1)(G)
of the 1940 Act will acquire any securities of registered open-end management
investment companies
or registered unit investment trusts in reliance on Section 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
(2) Each
Fund may not acquire any illiquid investment if, immediately after the
acquisition, the Fund would have invested
more than 15% of its net assets in illiquid investments that are
assets.
(3) Each
Fund may invest in financial instruments subject to the Commodity Exchange Act
of 1936, as amended (“CEA”),
including futures, options on futures, and swaps (“commodity interests”),
consistent with its investment
policies and the 1940 Act, including the rules, regulations and interpretations
of the Securities and Exchange
Commission (“SEC”) thereunder or any exemptive orders obtained thereunder, and
consistent with investment
in commodity interests that would allow the Fund’s investment adviser to claim
an exclusion from being a
“commodity pool operator” as defined by the CEA.
(4) Each
Fund may lend securities from its portfolio to approved brokers, dealers and
financial institutions, to the extent
permitted under the 1940 Act, including the rules, regulations and exemptions
thereunder, which currently
limit such activities to one-third of the value of the Fund’s total assets
(including the value of the collateral
received). Any such loans of portfolio securities will be fully collateralized
based on values that are marked-to-market
daily.
(5) Each
Fund may not make investments for the purpose of exercising control or
management, provided that this
restriction does not limit the Fund’s investments in securities of other
investment companies or investments
in entities created under the laws of foreign countries to facilitate investment
in securities of that country.
(6) Each
Fund may not purchase securities on margin (except for short-term credits
necessary for the clearance of
transactions).
(7) Each
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 (short sales “against the box”), and provided that
transactions in futures contracts
and options are not deemed to constitute selling securities short.
(8) Each
Fund that is subject to Rule 35d-1 (the “Names Rule”) under the 1940 Act, and
that has a non-fundamental
policy or policies in place to comply with the Names Rule, has adopted the
following policy:
Shareholders
will receive at least 60 days’ notice of any change to a Fund’s non-fundamental
policy complying with the
Names Rule. The notice will be provided in Plain English in a separate written
document, and will contain
the following prominent statement or similar statement in bold-face type:
“Important Notice Regarding
Change in Investment Policy.” This statement will appear on both the notice and
the envelope in which it
is delivered, unless it is delivered separately from other communications to
investors, in which case the statement
will appear either on the notice or the envelope in which the notice is
delivered.
Further Explanation of Investment
Policies
With
respect to repurchase agreements, each Fund invests only in repurchase
agreements that are fully collateralized
by securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. For purposes
of each Fund’s fundamental investment policy with respect to concentration, the
Fund does not consider
such repurchase agreements to constitute an industry or group of industries
because the Fund chooses to
look through such securities to the underlying collateral, which is itself
excepted from the Fund’s concentration
policy. In addition, each Fund does not consider mortgage-backed securities and
asset-backed securities,
whether government-issued or privately issued, to represent interests in any
particular industry or group of
industries, and therefore the 25% concentration restriction noted above does not
limit to investments in such
securities.
Notwithstanding
the foregoing policies, any other investment companies in which the Funds may
invest have adopted
their own investment policies, which may be more or less restrictive than those
listed above, thereby
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allowing the
Funds to participate in certain investment strategies indirectly that are
prohibited under the fundamental
and non-fundamental investment policies listed above.
Additional Approved Investment Strategies and
Certain Associated Risks
In
addition to the principal investment strategies set forth in the Prospectus(es),
the Funds may also use futures,
options or swap agreements, as well as other derivatives, to manage risk or to
enhance return. Please refer to a
Fund’s Prospectuses for information regarding the Fund’s anticipated use of
derivatives, if any, as a principal
investment strategy. Please note that even if a Fund’s Prospectuses do not
currently include information
regarding derivatives, or only includes information regarding certain derivative
instruments, the Fund may
use any of the derivative securities described below, at any time, and to any
extent consistent with the Fund’s
other principal investment strategies.
DERIVATIVE
SECURITIES
Derivatives
are financial instruments that derive their value, at least in part, from the
value of another security or asset,
the level of an index (e.g., the S&P 500 Index) or a rate (e.g., the Euro
Interbank Offered Rate (“Euribor”)),
or the relative change in two or more reference assets, indices or rates. The
most common types of derivatives
are forward contracts, futures, options and swap agreements. Some forms of
derivative instruments,
such as exchange-traded futures and options on securities, commodities, or
indices, are traded on regulated
exchanges, like the Chicago Board of Trade and the Chicago Mercantile Exchange.
These types of derivative
instruments are standardized contracts that can easily be bought and sold, and
whose market values are
determined and published daily. Non-standardized derivative instruments, on the
other hand, tend to be more
specialized or complex, and may be harder to value. Other common types of
derivative instruments include
forward foreign currency contracts, linked securities and structured products,
participation notes and agreements,
collateralized mortgage obligations, inverse floaters, stripped securities,
warrants, and swaptions.
A Fund may
take advantage of opportunities to invest in a type of derivative that is not
presently contemplated for use by
the Fund, or that is not currently available, but that may be developed in the
future, to the extent such
opportunities are both consistent with the Fund’s investment objective and
legally permissible. The trading markets
for less traditional and/or newer types of derivative instruments are less
developed than the markets for
traditional types of derivative instruments and provide less certainty with
respect to how such instruments will
perform in various economic scenarios.
A Fund may
use derivative instruments for a variety of reasons, including: i) to employ
leverage to enhance returns;
ii) to increase or decrease exposure to particular securities or markets; iii)
to protect against possible unfavorable
changes in the market value of securities held in, or to be purchased for, its
portfolio (i.e., to hedge); iv) to
protect its unrealized gains reflected in the value of its portfolio; v) to
facilitate the sale of portfolio securities
for investment purposes; vi) to reduce transaction costs; vii) to manage the
effective maturity or duration
of its portfolio; and/or viii) to maintain cash reserves while remaining fully
invested.
The risks
associated with the use of derivative instruments are different from, and
potentially much greater than, the
risks associated with investing directly in the underlying instruments on which
the derivatives are based. The
value of some derivative instruments in which a Fund may invest may be
particularly sensitive to changes in
prevailing interest rates, and, like the other investments of the Fund, the
ability of the Fund to successfully
utilize derivative instruments may depend, in part, upon the ability of the
sub-adviser to forecast interest
rates and other economic factors correctly. If the sub-adviser incorrectly
forecasts such factors and has taken
positions in derivatives contrary to prevailing market trends, the Fund could be
exposed to additional, unforeseen
risks, including the risk of loss.
Because
certain derivatives have a leverage component, adverse changes in the value or
level of the underlying asset,
reference rate, or index can result in a loss substantially greater than the
amount invested in the derivative
itself. The risk of loss is heightened when a Fund uses derivative instruments
to enhance its returns or as a
substitute for a position or security, rather than solely to hedge or offset the
risk of a position or security held by a
Fund. Certain derivatives have the potential for unlimited loss, regardless of
the size of the initial investment.
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Additional
risks of derivative instruments include, but are not limited to: i) the risk of
disruption of a Fund’s ability to
trade in derivative instruments because of regulatory compliance problems or
regulatory changes; ii) credit
risk of counterparties to derivative contracts; and iii) market risk (i.e.,
exposure to adverse price changes). The
possibility of default by the issuer or the issuer’s credit provider may be
greater for derivative instruments than for
other types of instruments. The sub-adviser utilizes a variety of internal risk
management procedures to ensure
that derivatives are closely monitored, and that their use is consistent with a
particular Fund’s investment
objective, policies, restrictions and quality standards, and does not expose
such Fund to undue risk.
A hedging
strategy may fail if the correlation between the value of the derivative
instruments and the other investments
in a Fund’s portfolio is not consistent with the sub-adviser’s expectations. If
the sub-adviser’s expectations
are not met, it is possible that the hedging strategy will not only fail to
protect the value of a Fund’s
portfolio, but the Fund may also lose money on the derivative instrument
itself.
In the
case of credit derivatives, which are a form of derivative that includes credit
default swaps and total return
swaps, payments of principal and interest are tied to the performance of one or
more reference obligations
or assets. The same general risks inherent in derivative transactions are
present. However, credit derivative
transactions also carry with them greater risks of imperfect correlation between
the performance and price
of the underlying reference security or asset, and the general performance of
the designated interest rate or
index which is the basis for the periodic payment.
Certain
derivative transactions may be modified or terminated only by mutual consent of
a Fund and its counterparty
and certain derivative transactions may be terminated by the counterparty or the
Fund, as the case may
be, upon the occurrence of certain Fund-related or counterparty-related events,
which may result in losses or
gains to the Fund based on the market value of the derivative transactions
entered into between the Fund and
the counterparty. In addition, such early terminations may result in taxable
events and accelerate gain or loss
recognition for tax purposes. It may not be possible for a Fund to modify,
terminate, or offset the Fund’s obligations
or the Fund’s exposure to the risks associated with a derivative transaction
prior to its termination or
maturity date, which may create a possibility of increased volatility and/or
decreased liquidity to the Fund. Upon the
expiration or termination of a particular contract, a Fund may wish to retain a
Fund’s position in the derivative
instrument by entering into a similar contract, but may be unable to do so if
the counterparty to the original
contract is unwilling to enter into the new contract and no other appropriate
counterparty can be found, which
could cause the Fund not to be able to maintain certain desired investment
exposures or not to be able to hedge
other investment positions or risks, which could cause losses to the Fund.
Furthermore, after such an expiration
or termination of a particular contract, a Fund may have fewer counterparties
with which to engage in
additional derivative transactions, which could lead to potentially greater
exposure to one or more counterparties
and which could increase the cost of entering into certain derivatives. In such
cases, the Fund may lose
money.
The Funds
might not employ any of the strategies described herein, and no assurance can be
given that any strategy
used will succeed. Also, with some derivative strategies, there is the risk that
a Fund may not be able to find a
suitable counterparty for a derivative transaction. In addition, some
over-the-counter (“OTC”) derivative instruments
may be illiquid. Derivative instruments traded in the OTC market are also
subject to the risk that the other
party will not meet its obligations. The use of derivative instruments may also
increase the amount and
accelerate the timing of taxes payable by shareholders.
A Fund’s
use of derivative instruments also is subject to broadly applicable investment
policies. For example, a Fund may
not invest more than a specified percentage of its assets in “illiquid
securities,” including those derivative
instruments that are not transferable or that do not have active secondary
markets.
Because
certain derivatives may involve leverage, and a Fund could lose more than it
invested, federal securities laws,
regulations and guidance may require a Fund to segregate or “earmark” assets in
order to reduce the risks associated
with such derivatives, or to otherwise hold instruments that offset the Fund’s
current obligations from
derivatives. This process is known as “cover.” A Fund will not enter into any
derivative transactions unless it
earmarks cash or liquid assets with a value at least sufficient to cover its
current obligations under a derivative transaction
or otherwise covers the transaction in accordance with applicable SEC guidance.
If a large portion of
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a Fund’s
assets is earmarked or otherwise used for cover, it could affect portfolio
management or the Fund’s ability to
meet redemption requests or other current obligations.
In the
case of swaps, futures contracts, options, forward contracts and other
derivative instruments that do not cash
settle a Fund must earmark liquid assets equal to the full notional amount of
the instrument while the positions
are open, to the extent there is not a permissible offsetting position or a
contractual “netting” agreement
with respect to swaps (other than credit default swaps where the Fund is the
protection seller). Conversely,
with respect to swaps, futures contracts, options, forward contracts and other
derivative instruments
that are required to cash settle, a Fund may earmark liquid assets in an amount
equal to the Fund’s daily
marked-to-market net obligations (i.e., the Fund’s daily net liability) under
the instrument, if any, rather than its
full notional amount. Forwards and futures contracts that do not cash settle may
be treated as cash settled
for asset segregation purposes when a Fund has entered into contractual
arrangements with a third party
futures commission merchant (“FCM”) or other counterparty to offset the Fund’s
exposure under the contract,
and, failing that, to assign their delivery obligations under the contract to
the counterparty. The Funds reserve
the right to modify their asset segregation policies in the future in their
discretion, consistent with the Investment
Company Act of 1940 and SEC or SEC-staff guidance. By earmarking assets equal to
only its net obligations
under certain instruments, a Fund will have the ability to employ leverage to a
greater extent than if the Fund
were required to earmark assets equal to the full notional amount of the
instrument.
When a
Fund buys or sells a derivative that is cleared through a central clearing
party, an initial margin deposit with a FCM
is typically required subject to certain exceptions for uncleared swaps under
applicable rules. If the value of a
Fund’s derivatives that are cleared through a central clearing party decline,
the Fund will be required to make
additional “variation margin” payments to the FCM. If the value of a Fund’s
derivatives that are cleared through a
central clearing party increases, the FCM will be required to make additional
“variation margin” payments
to the Fund. This process is known as “marking-to-market” and is calculated on a
daily basis.
Central
clearing arrangements with respect to derivative instruments may be less
favorable to the Funds than bilateral
arrangements, because the Funds may be required to provide greater amounts of
margin for cleared transactions
than for bilateral transactions. Also, in contrast to bilateral derivatives
transactions, following a period of
notice to a Fund, a central clearing party generally can require termination of
existing cleared transactions
at any time or increase margin requirements.
While some
strategies involving derivative instruments can reduce the risk of loss, they
can also reduce the opportunity
for gain, or even result in losses by offsetting favorable price movements in
related investments or otherwise.
This is due, in part, to: i) the possible inability of a Fund to purchase or
sell a portfolio security at a time that
otherwise would be favorable; ii) the possible need to sell a portfolio security
at a disadvantageous time
because the Fund is required to maintain asset coverage or offsetting positions
in connection with transactions
in derivative instruments; and/or iii) the possible inability of a Fund to close
out or liquidate its derivatives
positions. Accordingly, there is the risk that such strategies may fail to serve
their intended purposes,
and may reduce returns or increase volatility. These strategies also entail
transactional expenses.
It is
possible that current and/or future legislation and regulation with respect to
derivative instruments may limit or
prevent a Fund from using such instruments as a part of its investment strategy,
and could ultimately prevent a
Fund from being able to achieve its investment objective. For example, Title VII
of the Dodd-Frank Act made broad
changes to the OTC derivatives market and granted significant authority to the
SEC and the CFTC to
regulate OTC derivatives and market participants. Other provisions of the
Dodd-Frank Act include: i) position limits
that may impact a Fund’s ability to invest in futures, options and swaps in a
manner that efficiently meets its
investment objective; ii) capital and margin requirements; and iii) the
mandatory use of clearinghouse mechanisms
for many OTC derivative transactions. In addition, the SEC, CFTC and exchanges
are authorized to take
extraordinary actions in the event of a market emergency, including, for
example, the implementation or reduction
of speculative position limits, the implementation of higher margin
requirements, the establishment of daily
price limits and the suspension of trading. The regulation of futures, options
and swaps transactions in the United
States is subject to modification by government and judicial action. Changes to
U.S. tax laws may affect the
use of derivatives by the Funds. It is impossible to fully predict the effects
of past, present or future legislation
and regulation in this area, but the effects could be substantial and
adverse.
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The SEC
has adopted a new regulatory framework, including new Rule 18f-4 under the 1940
Act (“Rule 18f-4”), governing
the Funds’ use of derivatives. Funds will be required to comply with Rule 18f-4
by the third quarter of 2022. Once
implemented, Rule 18f-4 will impose a limit on the amount of derivatives
exposure a Fund may take on (based
on a measure of risk of loss to the Fund), as well as require a Fund to adopt a
derivatives risk management
program and/or policies and procedures reasonably designed to manage the Fund’s
derivatives risks.
This new regulatory framework will also eliminate the asset segregation
framework currently used by the Funds to
comply with Section 18 of the 1940 Act.
Futures Contracts. A futures
contract is an agreement to buy or sell a security or other asset at a set price
on a future
date. An option on a future gives the holder of the option the right, which may
or may not be exercised, to buy or
sell a position in a futures contract from or to the writer of the option, at a
specified price on or before a
specified expiration date. Futures contracts and options on futures are
standardized and exchange-traded, where the
exchange serves as the ultimate counterparty for all contracts. Consequently,
the primary credit risk on such
contracts is the creditworthiness of the exchange. In addition, futures
contracts and options on futures are
subject to market risk (i.e., exposure to adverse price changes).
An
interest rate, commodity, foreign currency or index futures contract provides
for the future sale or purchase of a
specified quantity of a financial instrument, commodity, foreign currency or the
cash value of an index at a specified
price and time. A futures contract on an index is an agreement pursuant to which
a party agrees to pay or receive
an amount of cash equal to the difference between the value of the index at the
close of the last trading
day of the contract and the price at which the index contract was originally
written. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of these securities
is made. A public market exists in futures contracts covering a number of
indexes as well as financial instruments
and foreign currencies. To the extent that a Fund may invest in foreign
currency-denominated securities,
it also may invest in foreign currency futures contracts and options thereon.
Certain of the Funds also may invest
in commodity futures contracts and options thereon. A commodity futures contract
is an agreement
to buy or sell a commodity, such as an energy, agricultural or metal commodity
at a later date at a price and
quantity agreed-upon when the contract is bought or sold.
Futures
contracts often call for making or taking delivery of an underlying asset;
however, futures are exchange-traded,
so that a party can close out its position on the exchange for cash, without
ever having to make or
take delivery of an asset. Closing out a futures position is affected by
purchasing or selling an offsetting contract
for the same aggregate amount with the same delivery date; however, there can be
no assurance that a liquid
market will exist at a time a Fund seeks to close out an exchange-traded
position, including options positions.
A Fund may
purchase and write call and put options on futures contracts. The holder of an
option on a futures contract
has the right, in return for the premium paid, to assume a long position (call)
or short position (put) in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise of a call option,
the holder acquires a long position in the futures contract and the writer is
assigned the opposite short position.
In the case of a put option, the opposite is true. A call option is “in the
money” if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is “in the money” if the exercise
price exceeds the value of the futures contract that is the subject of the
option. The potential loss related to
the purchase of futures options is limited to the premium paid for the option
(plus transaction costs). Because
the value of the option is fixed at the time of sale, there are no daily cash
payments to reflect changes in the
value of the underlying contract; however, the value of the option may change
daily, and that change would be
reflected in the net asset value (“NAV”) of a Fund.
To the
extent securities are segregated or “earmarked” to cover a Fund’s obligations
under futures contracts and
related options, such use will not eliminate the risk of leverage, which may
exaggerate the effect of any increase
or decrease in the market value of a Fund’s portfolio, and may require
liquidation of portfolio positions when it is
not advantageous to do so.
There are
several risks associated with the use of futures contracts and options on
futures as hedging instruments.
A purchase or sale of a futures contract may result in losses in excess of the
amount invested in the
futures contract. There can be no guarantee that there will be a correlation
between price movements in a
8 |
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hedging
vehicle and the securities being hedged. In addition, there are significant
differences between securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to
achieve its objectives. The degree of imperfection of correlation depends on
circumstances such as variations
in speculative market demand for futures and options on futures contracts for
securities, including technical
influences in futures and options trading, and differences between the financial
instruments being hedged and
the instruments underlying the standard contracts available for trading in such
respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when and how to hedge involves
the exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Futures
contracts on U.S. Government securities have historically been highly correlated
to their respective underlying
U.S. Government securities. However, to the extent a Fund enters into such
futures contracts, the value of
the futures will not fluctuate in direct proportion to the value of the Fund’s
holdings of U.S. Government
securities. Thus, the anticipated spread between the price of a futures contract
and its respective underlying
security may be affected by differences in the nature of their respective
markets. The spread may also be
affected by differences in initial and variation margin requirements, the
liquidity of such markets and the participation
of speculators in such markets.
There are
several additional risks associated with transactions in commodity futures
contracts, including but not
limited to:
■ |
Storage:
Unlike the financial futures markets, in the commodity futures markets
there are costs of physical storage
associated with purchasing the underlying commodity. The price of the
commodity futures contract will
reflect the storage costs of purchasing the physical commodity, including
the time value of money invested
in the physical commodity. To the extent that the storage costs for an
underlying commodity change while a
Fund is invested in futures contracts on that commodity, the value of the
futures contract may change proportionately. |
■ |
Reinvestment:
In the commodity futures markets, producers of the underlying commodity
may decide to hedge
the price risk of selling the commodity by selling futures contracts today
to lock in the price of the commodity
at delivery tomorrow. In order to induce speculators to purchase the other
side of the same futures
contract, the commodity producer generally must sell the futures contract
at a lower price than the expected
future spot price. Conversely, if most hedgers in the futures market are
purchasing futures contracts
to hedge against a rise in prices, then speculators will only sell the
other side of the futures contract at a
higher futures price than the expected future spot price of the commodity.
The changing nature of the hedgers
and speculators in the commodity markets will influence whether futures
prices are above or below the
expected future spot price, which can have significant implications for a
Fund. If the nature of hedgers and speculators
in futures markets has shifted when it is time for a Fund to reinvest the
proceeds of a maturing contract
in a new futures contract, the Fund might reinvest at higher or lower
futures prices, or choose to pursue
other investments. |
■ |
Other
Economic Factors: The commodities which underlie commodity futures
contracts may be subject to additional
economic and non-economic variables, such as drought, floods, weather,
livestock disease, embargoes,
tariffs, and international economic, political and regulatory
developments. These factors may have a
larger impact on commodity prices and commodity-linked instruments,
including futures contracts, than on
traditional securities. Certain commodities are also subject to limited
pricing flexibility because of supply
and demand factors. Others are subject to broad price fluctuations as a
result of the volatility of the prices
for certain raw materials and the instability of supplies of other
materials. These additional variables may
create additional investment risks which subject a Fund’s investments to
greater volatility than investments
in traditional securities. |
The
requirements for qualification as a regulated investment company may limit the
extent to which a Fund may enter
into futures and options on futures positions. Unless otherwise noted in the
section entitled “Non-Fundamental
Investment Policies,” each of the Funds has claimed an exclusion from the
definition of “Commodity
Pool Operator” (“CPO”) found in Rule 4.5 of the Commodity Exchange Act (“CEA”).
Accordingly, the
manager of each such Fund, as well as each sub-adviser, is not subject to
registration or regulation as a CPO with
respect to the Funds under the CEA.
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Options. A Fund
may purchase and sell both put and call options on various instruments,
including, but not limited
to, fixed-income or other securities or indices in standardized contracts traded
on foreign or domestic securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on an
OTC market, and agreements,
sometimes called cash puts, which may accompany the purchase of a new issue of
bonds from a dealer. A
Fund may also write covered straddles consisting of a combination of calls and
puts written on the same
underlying securities or indices.
An option
on a security (or index) is a contract that gives the holder of the option, in
return for a premium, the right to
buy from (in the case of a call) or sell to (in the case of a put) the writer of
the option the security underlying
the option (or the cash value of the index) at a specified exercise price often
at any time during the term of
the option for American options or only at expiration for European options. The
writer of an option on a security
has the obligation upon exercise of the option to deliver the underlying
security upon payment of the exercise
price (in the case of a call) or to pay the exercise price upon delivery of the
underlying security (in the case of a
put). Certain put options written by a Fund may be structured to have an
exercise price that is less than the market
value of the underlying securities that would be received by the Fund. Upon
exercise, the writer of an option on
an index is obligated to pay the difference between the cash value of the index
and the exercise price multiplied
by the specified multiplier for the index option. An index is designed to
reflect features of a particular financial
or securities market, a specific group of financial instruments or securities,
or certain economic indicators.
If an
option written by a Fund expires unexercised, the Fund realizes a capital gain
equal to the premium received
at the time the option was written. If an option purchased by a Fund expires
unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange-traded
option may be closed out by an offsetting purchase or sale of an option of the
same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however,
that a closing purchase or sale transaction can be effected when a Fund
desires.
A Fund may
sell put or call options it has previously purchased, which could result in a
net gain or loss depending on whether
the amount realized on the sale is more or less than the premium and other
transaction costs paid on the put
or call option which is sold. Prior to exercise or expiration, an option may be
closed out by an offsetting
purchase or sale of an option of the same series. A Fund will realize a capital
gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it
is more, the Fund will realize a capital loss. If the premium received from a
closing sale transaction is more than
the premium paid to purchase the option, the Fund will realize a capital gain
or, if it is less, the Fund will
realize a capital loss. The principal factors affecting the market value of a
put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise
price of the option, the volatility of the underlying security or index, and the
time remaining until the expiration
date.
The value
of an option purchased or written is marked to market daily and is valued at the
closing price on the exchange
on which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between
the last bid and ask prices.
There are
several risks associated with transactions in options on securities and on
indexes. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether,
when and how to use options involves the exercise of skill and judgment, and
even a well-conceived transaction
may be unsuccessful to some degree because of market behavior or unexpected
events.
The writer
of an American option typically has no control over the time when it may be
required to fulfill its obligation
as a writer of the option. Once an option writer has received an exercise
notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying
security at the exercise price. To the extent a Fund writes a put option, the
Fund has assumed the obligation
during the option period to purchase the underlying investment from the put
buyer at the option’s exercise
price if the put buyer exercises its option, regardless of whether the value of
the underlying investment falls
below the exercise price. This means that a Fund that writes a put option may be
required to take delivery
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of the
underlying investment and make payment for such investment at the exercise
price. This may result in losses to
the Fund and may result in the Fund holding the underlying investment for some
period of time when it is
disadvantageous to do so.
If a put
or call option purchased by a Fund is not sold when it has remaining value, and
if the market price of the underlying
security remains equal to or greater than the exercise price (in the case of a
put), or remains less than or equal
to the exercise price (in the case of a call), the Fund will lose its entire
investment in the option. Also, where a
put or call option on a particular security is purchased to hedge against price
movements in a related security,
the price of the put or call option may move more or less than the price of the
related security.
If trading
were suspended in an option purchased by a Fund, the Fund would not be able to
close out the option. If
restrictions on exercise were imposed, the Fund might be unable to exercise an
option it has purchased. Except to
the extent that a call option on an index written by a Fund is covered by an
option on the same index purchased
by the Fund, movements in the index may result in a loss to the Fund; however,
such losses may be mitigated
by changes in the value of the Fund’s securities during the period the option
was outstanding.
To the
extent that a Fund writes a call option on a security it holds in its portfolio
and intends to use such security
as the sole means of “covering” its obligation under the call option, the Fund
has, in return for the premium on
the option, given up the opportunity to profit from a price increase in the
underlying security above the
exercise price during the option period, but, as long as its obligation under
such call option continues, has retained
the risk of loss should the price of the underlying security
decline.
Foreign
Currency Options. Funds
that may invest in foreign currency-denominated securities may buy or sell put
and call
options on foreign currencies. These Funds may buy or sell put and call options
on foreign currencies either on
exchanges or in the OTC market. A put option on a foreign currency gives the
purchaser of the option the right
to sell a foreign currency at the exercise price until the option expires. A
call option on a foreign currency
gives the purchaser of the option the right to purchase the currency at the
exercise price until the option
expires. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the
ability of a Fund to reduce foreign currency risk using such options. OTC
options differ from exchange-traded
options in that they are bilateral contracts with price and other terms
negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options. Under definitions
adopted by the CFTC and SEC, many foreign currency options are considered swaps
for certain purposes,
including determination of whether such instruments need to be exchange-traded
and centrally cleared.
Stock
Index Options. A Fund
may purchase and write (i.e., sell) put and call options on stock indices to
gain exposure
to comparable market positions in the underlying securities or to manage risk
(i.e., hedge) on direct investments
in the underlying securities. A stock index fluctuates with changes of the
market values of the stocks
included in the index. For example, some stock index options are based on a
broad market index, such as the
S&P 500 Index or a narrower market index, such as the S&P 100 Index.
Indices may also be based on an industry
or market segment. A Fund may, for the purpose of hedging its portfolio, subject
to applicable securities
regulations, purchase and write put and call options on stock indices listed on
foreign and domestic stock
exchanges. The effectiveness of purchasing or writing stock index options will
depend upon the extent to which
price movements of the securities in a Fund’s portfolio correlate with price
movements of the stock index selected.
Because the value of an index option depends upon movements in the level of the
index rather than the price
of a particular stock, whether a Fund will realize a gain or loss from
purchasing or writing stock index options
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain
indices, in an industry or market segment, rather than movements in the price of
particular stock.
There is a
key difference between stock options and stock index options in connection with
their exercise. In the case of
stock options, the underlying security, common stock, is delivered. However,
upon the exercise of a stock
index option, settlement does not occur by delivery of the securities comprising
the index. The option holder who
exercises the stock index option receives an amount of cash if the closing level
of the stock index upon which
the option is based is greater than (in the case of a call) or less than (in the
case of a put) the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the stock
index and the exercise price of the option expressed in dollars times a
specified multiple.
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11 |
Swap Agreements. Swap
agreements are derivative instruments that can be individually negotiated and
structured
to include exposure to a variety of different types of investments or market
factors. Depending on their
structure, swap agreements may increase or decrease a Fund’s exposure to long-
or short-term interest rates,
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or
inflation rates. A Fund may enter into a variety of swap agreements, including
interest rate, index, commodity,
equity, credit default and currency exchange rate, among others, each of which
may include special features,
such as caps, collars and floors.
Swap
agreements are usually entered into without an upfront payment because the value
of each party’s position
is the same. The market values of the underlying commitments will change over
time, resulting in one of the
commitments being worth more than the other and the net market value creating a
risk exposure for one party or
the other.
A Fund may
enter into swap agreements for any legal purpose consistent with its investment
objectives and policies,
such as attempting 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, to
protect against currency fluctuations,
as a duration management technique, to protect against any increase in the price
of securities a Fund
anticipates purchasing at a later date, or to gain exposure to certain markets
in a more cost efficient manner.
OTC swap
agreements are bilateral contracts entered into primarily by institutional
investors for periods ranging
from a few weeks to more than one year. In a standard OTC swap transaction, two
parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments
or instruments. 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 change in value of a
particular dollar amount invested
at a particular interest rate, in a particular foreign (non-U.S.) currency, or
in a “basket” of securities or commodities
representing a particular index. A “quanto” or “differential” swap combines both
an interest rate and a
currency transaction. Certain swap agreements, such as interest rate swaps, are
traded on exchanges and cleared
through central clearing counterparties. Other forms of swap agreements include
interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest
rates exceed a specified rate, or “cap”; interest rate floors, under which, in
return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified rate, or “floor”;
and interest rate collars, under which a party sells a cap and purchases a floor
or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels. A total return swap
agreement is a contract in which one party agrees to make periodic payments to
another party based on the change
in market value of underlying assets, which may include a single stock, a basket
of stocks, or a stock index
during the specified period, in return for periodic payments based on a fixed or
variable interest rate or the total
return from other underlying assets. Consistent with a Fund’s investment
objectives and general investment
policies, certain of the Funds may invest in commodity swap agreements. For
example, an investment
in a commodity swap agreement may involve the exchange of floating-rate interest
payments for the total
return on a commodity index. In a total return commodity swap, a Fund will
receive the price appreciation
of a commodity index, a portion of the index, or a single commodity in exchange
for paying an agreed-upon
fee. If the commodity swap is for one period, a Fund may pay a fixed fee,
established at the outset of the
swap. However, if the term of the commodity swap is more than one period, with
interim swap payments, a Fund may
pay an adjustable or floating fee. With a “floating” rate, the fee may be pegged
to a base rate, such as
Euribor, and is adjusted each period. Therefore, if interest rates increase over
the term of the swap contract, a Fund may
be required to pay a higher fee at each swap reset date.
A Fund may
also enter into combinations of swap agreements in order to achieve certain
economic results. For example, a
Fund may enter into two swap transactions, one of which offsets the other for a
period of time. After the
offsetting swap transaction expires, the Fund would be left with the economic
exposure provided by the remaining
swap transaction. The intent of such an arrangement would be to lock in certain
terms of the remaining
swap transaction that a Fund may wish to gain exposure to in the future without
having that exposure
during the period the offsetting swap is in place.
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Most types
of swap agreements entered into by the Funds will calculate the obligations of
the parties to the agreement
on a “net basis.” Consequently, a Fund’s current obligations (or rights) under a
swap agreement will generally
be equal only to the net amount to be paid or received under the agreement based
on the relative values of
the positions held by each party to the agreement (the “net amount”). A Fund’s
current obligations under a
swap agreement will be accrued daily (offset against any amounts owed to the
Fund), and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the segregation or
“earmarking” of cash or
other liquid assets to limit the extent of any potential leveraging of the
Fund’s portfolio. Obligations under swap
agreements so covered will not be construed to be “senior securities” for
purposes of a Fund’s investment
restriction concerning senior securities.
Swap
agreements are sophisticated instruments that typically involve a small
investment of cash relative to the magnitude
of risks assumed. As a result, swaps can be highly volatile and may have a
considerable impact on a Fund’s
performance. Depending on how they are used, swap agreements may increase or
decrease the overall volatility
of a Fund’s investments and its share price and yield. Additionally, the extent
to which a Fund’s use of swap
agreements will be successful in furthering its investment objective will depend
on the sub-adviser’s ability to
correctly predict whether certain types of investments are likely to produce
greater returns than other investments.
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. When a
counterparty’s obligations are not fully
secured by collateral, then a Fund is essentially an unsecured creditor of the
counterparty. If the counterparty
defaults, the Fund will have contractual remedies, but there is no assurance
that a counterparty will be
able to meet its obligations pursuant to such contracts or that, in the event of
default, the Fund will succeed in
enforcing contractual remedies. Counterparty risk still exists even if a
counterparty’s obligations are secured by
collateral because a Fund’s interest in collateral may not be perfected or
additional collateral may not be
promptly posted as required. Counterparty risk also may be more pronounced if a
counterparty’s obligations
exceed the amount of collateral held by a Fund (if any), the Fund is unable to
exercise its interest in collateral
upon default by the counterparty, or the termination value of the instrument
varies significantly from the
marked-to-market value of the instrument. The sub-adviser will closely monitor
the credit of a swap agreement
counterparty in order to attempt to minimize this risk. Certain restrictions
imposed on the Funds by the
Internal Revenue Code may limit the Funds’ ability to use swap agreements. The
swaps market is subject to increasing
regulations, in both U.S. and non-U.S. markets. It is possible that developments
in the swaps market, including
additional government regulation, could adversely affect a Fund’s ability to
terminate existing swap agreements
or to realize amounts to be received under such agreements.
The use of
swaps is a highly specialized activity that requires investment techniques, risk
analyses and tax planning
different from those associated with traditional investments. The use of a swap
requires an understanding,
not only of the reference asset, interest rate, or index, but also of the terms
of the swap agreement,
without the benefit of observing the performance of the swap under all possible
market conditions. Because
OTC swap agreements are bilateral contracts that may be subject to contractual
restrictions on transferability
and termination, and because they may have remaining terms of greater than seven
days, OTC swap
agreements may be considered illiquid and subject to a Fund’s limitation on
investments in illiquid securities.
To the extent that a swap is not liquid, it may not be possible to initiate a
transaction or liquidate a position
at an advantageous time or price, which may result in significant
losses.
Moreover,
like most other investments, swap agreements are subject to the risk that the
market value of the instrument
will change in a way detrimental to a Fund’s interest. A Fund bears the risk
that the sub-adviser will not
accurately forecast future market trends or the values of assets, reference
rates, indexes, or other economic factors in
establishing swap positions for the Fund. If the sub-adviser attempts to use a
swap as a hedge on, or as a
substitute for, a portfolio investment, the Fund will be exposed to the risk
that the swap will have or will develop an
imperfect correlation with the portfolio investment. This could cause
substantial losses for the Fund. While
hedging strategies involving swap instruments can reduce the risk of loss, they
can also reduce the opportunity
for gain or even result in losses by offsetting favorable price movements in
other Fund investments.
In addition, because swap transactions generally do not involve the delivery of
securities or other underlying
assets or principal, the risk of loss with respect to swap agreements and
swaptions (described below)
Wells
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13 |
generally
is limited to the net amount of payments that a Fund is contractually obligated
to make. There is also a risk of
a default by the other party to a swap agreement or swaption, in which case a
Fund may not receive the net amount
of payments that such Fund contractually is entitled to receive.
Many swaps
are complex, and their valuation often requires modeling and judgment, which
increases the risk of mispricing
or incorrect valuation. The pricing models used may not produce valuations that
are consistent with the values
a Fund realizes when it closes or sells an over-the-counter derivative.
Valuation risk is more pronounced
when a Fund enters into an over-the-counter swap with specialized terms, because
the market value of a
swap, in some cases, is partially determined by reference to similar derivatives
with more standardized
terms. Incorrect valuations may result in increased cash payment requirements to
counterparties, undercollateralization
and/or errors in calculation of a Fund’s net asset value.
A Fund
also may enter into options to enter into a swap agreement (“swaptions”). These
transactions give a party the
right (but not the obligation), in return for payment of a premium, to enter
into a new swap agreement
or to shorten, extend, cancel or otherwise modify an existing swap agreement, at
some designated future
time on specified terms. A Fund may write (sell) and purchase put and call
swaptions. Depending on the terms of
the particular option agreement, a Fund will generally incur a greater degree of
risk when it writes a swaption
than it will incur when it purchases a swaption. When a Fund purchases a
swaption, it risks losing only the amount
of the premium it has paid should it decide to let the option expire
unexercised. However, when a Fund
writes a swaption, upon exercise of the option the Fund will become obligated
according to the terms of the
underlying agreement.
Commodity-Linked
Swap Agreements.
Commodity-linked swaps are two-party contracts in which the parties agree to
exchange the return or interest rate on one instrument for the return of a
particular commodity, commodity
index or commodities futures or options contract. The payment streams are
calculated by reference to an
agreed upon notional amount. A one-period swap contract operates in a manner
similar to a forward or futures
contract because there is an agreement to swap a commodity for cash at only one
forward date. A Fund may engage
in swap transactions that have more than one period and more than one exchange
of commodities.
In a total
return commodity swap, a Fund will receive the price appreciation of a commodity
index, a portion of the index,
or a single commodity in exchange for paying an agreed-upon fee. If the
commodity swap is for one period,
the Fund will pay a fixed fee, established at the outset of the swap. However,
if the term of the commodity
swap is more than one period, with interim swap payments, the Fund will pay an
adjustable or floating
fee. With a “floating” rate, the fee is pegged to a base rate such as Euribor,
and is adjusted each period. Therefore,
if interest rates increase over the term of the swap contract, a Fund may be
required to pay a higher fee at
each swap reset date.
A Fund’s
ability to invest in commodity-linked swaps may be adversely affected by changes
in legislation, regulations
or other legally binding authority. Under the Internal Revenue Code of 1986, as
amended (the “Code”), a
Fund must derive at least 90% of its gross income from qualifying sources to
qualify as a regulated investment
company. The Internal Revenue Service has also issued a revenue ruling which
holds that income derived
from commodity-linked swaps is not qualifying income with respect to the 90%
threshold. As a result, a Fund’s
ability to directly invest in commodity-linked swaps as part of its investment
strategy is limited to a maximum of
10% of its gross income. Failure to comply with the restrictions in the Code and
any future legislation
or guidance may cause a Fund to fail to qualify as a regulated investment
company, which may adversely
impact a shareholder’s return. Alternatively, a Fund may forego such
investments, which could adversely
affect the Fund’s ability to achieve its investment goal.
Credit
Default Swap Agreements. A Fund
may enter into OTC and cleared credit default swap agreements, which
may
reference one or more debt securities or obligations that are or are not
currently held by a Fund. The protection
“buyer” in an OTC credit default swap agreement is generally obligated to pay
the protection “seller” an upfront
or a periodic stream of payments over the term of the contract until a credit
event, such as a default, on a
reference obligation has occurred. If a credit event occurs, the seller
generally must pay the buyer the “par value”
(full notional value) of the swap in exchange for an equal face amount of
deliverable obligations of the reference
entity described in the swap, or the seller may be required to deliver the
related net cash amount, if the swap
is cash settled. A Fund may be either the buyer or seller in the transaction. If
a Fund is a buyer and no
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credit
event occurs, the Fund may recover nothing if the swap is held through its
termination date. However, if a credit
event occurs, the buyer generally may elect to receive the full notional value
of the swap in exchange for an equal
face amount of deliverable obligations of the reference entity whose value may
have significantly decreased.
As a seller, a Fund generally receives an upfront payment or a fixed rate of
income throughout the term of
the swap provided that there is no credit event. As the seller, a Fund would
effectively add leverage to its
portfolio because, in addition to its total net assets, a Fund would be subject
to investment exposure on the notional
amount of the swap.
The spread
of a credit default swap is the annual amount the protection buyer must pay the
protection seller over the
length of the contract, expressed as a percentage of the notional amount. Market
perceived credit risk increases
as spreads widen; market perceived credit risk decreases as spreads narrow.
Wider credit spreads and decreasing
market values, when compared to the notional amount of the swap, represent a
deterioration of the credit
soundness of the issuer of the reference obligation and a greater likelihood or
risk of default or other credit
event occurring as defined under the terms of the agreement. For credit default
swap agreements on asset-backed
securities and credit indices, the quoted market prices and resulting values, as
well as the annual payment
rate, serve as an indication of the current status of the payment/performance
risk. A Fund’s obligations
under a credit default swap agreement will be accrued daily (offset against any
amounts owing to the
Fund).
Credit
default swap agreements sold by a Fund may involve greater risks than if a Fund
had invested in the reference
obligation directly because, in addition to general market risks, credit default
swaps are subject to illiquidity
risk and counterparty credit risk (with respect to OTC credit default swaps). A
Fund will enter into uncleared
credit default swap agreements generally with counterparties that meet certain
standards of creditworthiness.
A buyer generally also will lose its investment and recover nothing should no
credit event occur and
the swap is held to its termination date. If a credit event were to occur, the
value of any deliverable obligation
received by the seller, coupled with the upfront or periodic payments previously
received, may be less than the
full notional value it pays to the buyer, resulting in a loss of value to the
seller. In addition, there may be disputes
between the buyer and seller of a credit default swap agreement or within the
swaps market as a whole as to
whether a credit event has occurred or what the payment should be. Such disputes
could result in litigation or other
delays, and the outcome could be adverse for the buyer or seller.
Interest
Rate Swap Agreements. Interest
rate swap agreements may be used to obtain or preserve a desired return or
spread at a lower cost than through a direct investment in an instrument that
yields the desired return or spread.
They are financial instruments that involve the exchange of one type of interest
rate cash flow for another
type of interest rate cash flow on specified dates in the future. In a standard
interest rate swap transaction,
two parties agree to exchange their respective commitments to pay fixed or
floating interest rates on a
predetermined specified (notional) amount. The swap agreement’s notional amount
is the predetermined basis for
calculating the obligations that the swap counterparties have agreed to
exchange. Under most swap agreements,
the obligations of the parties are exchanged on a net basis. The two payment
streams are netted out, with
each party receiving or paying, as the case may be, only the net amount of the
two payments. Interest rate swaps
can be based on various measures of interest rates, including Euribor, swap
rates, Treasury rates and foreign
interest rates.
Swap
agreements will tend to shift a Fund’s investment exposure from one type of
investment to another. For example,
if a Fund agreed to pay fixed rates in exchange for floating rates while holding
fixed-rate bonds, the swap would
tend to decrease a Fund’s exposure to long-term interest rates. Another example
is if a Fund agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease a Fund’s
exposure to U.S. interest rates and increase its exposure to foreign currency
and interest rates.
Total
Return Swap Agreements. Total
return swap agreements are contracts in which one party agrees to make
periodic
payments to another party based on the change in market value of the assets
underlying the contract, which may
include a specified security, basket of securities or securities indices during
the specified period, in return for
periodic payments based on a fixed or variable interest rate or the total return
from other underlying assets.
Total return swap agreements may be used to obtain exposure to a security or
market without owning or taking
physical custody of such security or investing directly in such market. Total
return swap agreements
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may
effectively add leverage to a Fund’s portfolio because, in addition to its total
net assets, a Fund would be subject to
investment exposure on the notional amount of the swap.
Total
return swap agreements are subject to the risk that a counterparty will default
on its payment obligations to a Fund
thereunder, and conversely, that a Fund will not be able to meet its obligation
to the counterparty. Generally,
a Fund will enter into total return swaps on a net basis (i.e., the two payment
streams are netted against
one another with a Fund receiving or paying, as the case may be, only the net
amount of the two payments).
Contracts
for Differences. Contracts
for differences are swap arrangements in which the parties agree that their
return (or
loss) will be based on the relative performance of two different groups or
baskets of securities. Often, one or
both baskets will be an established securities index. A Fund’s return will be
based on changes in value of theoretical
long futures positions in the securities comprising one basket (with an
aggregate face value equal to the
notional amount of the contract for differences) and theoretical short futures
positions in the securities comprising
the other basket. A Fund also may use actual long and short futures positions
and achieve similar market
exposure by netting the payment obligations of the two contracts. A Fund
typically enters into contracts
for differences (and analogous futures positions) when the sub-adviser believes
that the basket of securities
constituting the long position will outperform the basket constituting the short
position. If the short basket
outperforms the long basket, a Fund will realize a loss, even in circumstances
when the securities in both the long
and short baskets appreciate in value.
Cross-Currency
Swap Agreements. Cross
currency swap agreements are similar to interest rate swaps, except that they
involve multiple currencies. A Fund may enter into a cross currency swap
agreement when it has exposure
to one currency and desires exposure to a different currency. Typically, the
interest rates that determine
the currency swap payments are fixed, although occasionally one or both parties
may pay a floating rate of
interest. Unlike an interest rate swap agreement, however, the principal amounts
are exchanged at the beginning
of the contract and returned at the end of the contract. In addition to paying
and receiving amounts at the
beginning and termination of the agreements, both sides will have to pay in full
periodically based upon the
currency they have borrowed. Changes in foreign exchange currency rates and
changes in interest rates may negatively
affect currency swaps.
Volatility,
Variance and Correlation Swap Agreements. A Fund
also may enter into forward volatility agreements, also known
as volatility swaps. In a volatility swap, the counterparties agree to make
payments in connection with
changes in the volatility (i.e., the magnitude of change over a specified period
of time) of an underlying reference
instrument, such as a currency, rate, index, security or other financial
instrument. Volatility swaps permit the
parties to attempt to hedge volatility risk and/or take positions on the
projected future volatility of an
underlying reference instrument. For example, a Fund may enter into a volatility
swap in order to take the position
that the reference instrument’s volatility will increase over a particular
period of time. If the reference instrument’s
volatility does increase over the specified time, the Fund will receive a
payment from its counterparty
based upon the amount by which the reference instrument’s realized volatility
level exceeds a volatility
level agreed upon by the parties. If the reference instrument’s volatility does
not increase over the specified
time, the Fund will make a payment to the counterparty based upon the amount by
which the reference
instrument’s realized volatility level falls below the volatility level agreed
upon by the parties. Payments
on a volatility swap will be greater if they are based upon the mathematical
square of volatility (i.e., the
measured volatility multiplied by itself, which is referred to as “variance”).
This type of a volatility swap is frequently
referred to as a variance swap. Certain of the Funds may engage in variance
swaps. Correlation swaps are
contracts that provide exposure to increases or decreases in the correlation
between the prices of different assets or
different market rates. Certain of the Funds may engage in variance swaps and
correlation swaps.
Interest Rate Futures Contracts and Options
on Interest Rate Futures Contracts. A Fund
may invest in interest rate
futures contracts and options on interest rate futures contracts for various
investment reasons, including to serve
as a substitute for a comparable market position in the underlying securities. A
Fund may also sell options on
interest rate futures contracts as part of closing purchase transactions to
terminate its options positions.
No assurance can be given that such closing transactions can be effected or as
to the degree of
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correlation
between price movements in the options on interest rate futures and price
movements in a Fund’s portfolio
securities which are the subject of the transaction.
Bond
prices are established in both the cash market and the futures market. In the
cash market, bonds are purchased
and sold with payment for the full purchase price of the bond being made in
cash, generally within five
business days after the trade. In the futures market, a contract is made to
purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have tended to
move generally in the aggregate in concert with the cash market prices and have
maintained fairly predictable
relationships. Accordingly, a Fund may use interest rate futures contracts as a
defense, or hedge, against
anticipated interest rate changes. A Fund presently could accomplish a similar
result to that which it hopes to
achieve through the use of interest rate futures contracts by selling bonds with
long maturities and investing
in bonds with short maturities when interest rates are expected to increase, or
conversely, selling bonds with
short maturities and investing in bonds with long maturities when interest rates
are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to
be achieved, perhaps at a lower cost and without changing the rate of interest
being earned by a Fund, through
using futures contracts.
Inverse Floaters. Inverse
floaters (also known as “residual interest bonds”) are inverse floating rate
debt securities.
The interest rate on an inverse floater varies inversely with a floating rate
(which may be reset periodically
by a “Dutch” auction, a remarketing agent or by reference to a short-term
tax-exempt interest rate index). A
change in the interest rate on the referenced security or index will inversely
affect the rate of interest paid on an
inverse floater. That is, income on inverse floating rate debt securities will
decrease when interest rates
increase, and will increase when interest rates decrease.
Markets
for inverse floaters may be less developed and more volatile, and may experience
less or varying degrees of
liquidity relative to markets for more traditional securities, especially during
periods of instability in credit
markets. The value of an inverse floater is generally more volatile than that of
a traditional fixed-rate bond
having similar credit quality, redemption provisions and maturity. Inverse
floaters may have interest rate adjustment
formulas that generally reduce or, in the extreme cases, eliminate the interest
paid to a Fund when short-term
interest rates rise, and increase the interest paid to a Fund when short-term
interest rates fall. The value of
an inverse floater also tends to fall faster than the value of a fixed-rate bond
when interest rates rise, and
conversely, the value of an inverse floater tends to rise more rapidly when
interest rates fall. Inverse floaters tend to
underperform fixed-rate bonds in a rising long-term interest rate environment,
but tend to outperform fixed-rate
bonds when long-term interest rates decline.
Inverse
floaters have the effect of providing a degree of investment leverage because
they may increase or decrease
in value in response to changes (e.g., changes in market interest rates) at a
rate that is a multiple of the rate at
which fixed-rate securities increase or decrease in response to the same
changes. As a result, the market values of
such securities are generally more volatile than the market values of fixed-rate
securities (especially during
periods when interest rates are fluctuating). A Fund could lose money and its
net asset value could decline if
movements in interest rates are incorrectly anticipated. To seek to limit the
volatility of these securities,
a Fund may purchase inverse floating obligations that have shorter-term
maturities or that contain limitations
on the extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid.
Furthermore, where such a security includes a contingent liability, in the event
of an adverse movement in the
underlying index or interest rate, a Fund may be required to pay substantial
additional margin to maintain the
position.
A Fund may
either participate in structuring an inverse floater or purchase an inverse
floater in the secondary market.
When structuring an inverse floater, a Fund will transfer fixed-rate securities
held in the Fund’s portfolio
to a trust. The trust then typically issues the inverse floaters and the
floating rate notes that are collateralized
by the cash flows of the fixed-rate securities. In return for the transfer of
the securities to the trust, the
Fund receives the inverse floaters and cash associated with the sale of the
notes from the trust.
Inverse
floaters are sometimes created by depositing municipal securities in a tender
option bond trust (“TOB Trust”).
In a tender option bond (“TOB”) transaction, a TOB Trust issues a floating rate
certificate (“TOB Floater”)
and a residual interest certificate (“TOB Residual”) and utilizes the proceeds
of such issuance to
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purchase a
fixed-rate municipal bond (“Fixed-Rate Bond”) that either is owned or identified
by a Fund. The TOB Floater is
generally issued to third party investors (typically a money market fund) and
the TOB Residual is generally
issued to the Fund that sold or identified the Fixed-Rate Bond. The TOB Trust
divides the income stream
provided by the Fixed-Rate Bond to create two securities, the TOB Floater, which
is a short-term security,
and the TOB Residual, which is a longer-term security. The interest rates
payable on the TOB Residual issued to
a Fund bear an inverse relationship to the interest rate on the TOB Floater. The
interest rate on the TOB
Floater is reset by a remarketing process typically every 7 to 35 days. After
income is paid on the TOB Floater at
current rates, the residual income from the Fixed-Rate Bond goes to the TOB
Residual. Therefore, rising
short-term rates result in lower income for the TOB Residual, and vice versa. In
the case of a TOB Trust that
utilizes the cash received (less transaction expenses) from the issuance of the
TOB Floater and TOB Residual
to purchase the Fixed Rate Bond from a Fund, the Fund may then invest the cash
received in additional securities,
generating leverage for the Fund.
The TOB
Residual may be more volatile and less liquid than other municipal bonds of
comparable maturity. In most
circumstances, the TOB Residual holder bears substantially all of the underlying
Fixed-Rate Bond’s downside
investment risk and also benefits from any appreciation in the value of the
underlying Fixed-Rate Bond.
Investments in a TOB Residual typically will involve greater risk than
investments in Fixed-Rate Bonds.
The TOB
Residual held by a Fund provides the Fund with the right to: i) cause the
holders of the TOB Floater to tender
their notes at par; and ii) cause the sale of the Fixed-Rate Bond held by the
TOB Trust, thereby collapsing the TOB
Trust. TOB Trusts are generally supported by a liquidity facility provided by a
third-party bank or other financial
institution (the “Liquidity Provider”) that provides for the purchase of TOB
Floaters that cannot be remarketed.
The holders of the TOB Floaters have the right to tender their certificates in
exchange for payment of par
plus accrued interest on a periodic basis (typically weekly) or on the
occurrence of certain mandatory tender
events. The tendered TOB Floaters are remarketed by a remarketing agent, which
is typically an affiliated
entity of the Liquidity Provider. If the TOB Floaters cannot be remarketed, the
TOB Floaters are purchased
by the TOB Trust either from the proceeds of a loan from the Liquidity Provider
or from a liquidation of the
Fixed-Rate Bond.
The TOB
Trust may also be collapsed without the consent of a Fund, as the TOB Residual
holder, upon the occurrence
of certain “tender option termination events” (or “TOTEs”), as defined in the
TOB Trust agreements. Such
termination events typically include the bankruptcy or default of the municipal
bond, a substantial downgrade
in credit quality of the municipal bond, or a judgment or ruling that interest
on the Fixed-Rate Bond is subject
to federal income taxation. Upon the occurrence of a termination event, the TOB
Trust would generally
be liquidated in full with the proceeds typically applied first to any accrued
fees owed to the trustee, remarketing
agent and liquidity provider, and then to the holders of the TOB Floater up to
par plus accrued interest
owed on the TOB Floater and a portion of gain share, if any, with the balance
paid out to the TOB Residual
holder. In the case of a mandatory termination event (“MTE”), after the payment
of fees, the TOB Floater
holders would be paid before the TOB Residual holders (i.e., the Fund). In
contrast, in the case of a TOTE, after
payment of fees, the TOB Floater holders and the TOB Residual holders would be
paid pro rata in proportion
to the respective face values of their certificates.
Participation
Notes.
Participation notes (“P-notes”) are participation interest notes that are issued
by banks and
broker-dealers and are designed to offer a return linked to a particular equity,
debt, currency or market. An investment
in a P-note involves additional risks beyond the risks normally associated with
a direct investment in the
underlying security, and the P-note’s performance may differ from the underlying
security’s performance. While the
holder of a P-note is entitled to receive from the bank or issuing broker-dealer
any dividends paid on the
underlying security, the holder is not entitled to the same rights (e.g., voting
rights) as an owner of the underlying
stock. P-notes are considered general unsecured contractual obligations of the
banks or broker-dealers
that issue them. As such, a Fund must rely on the creditworthiness of the issuer
of a P-note for their
investment returns on such P-note, and would have no rights against the issuer
of the underlying security. There is
also no assurance that there will be a secondary trading market for a P-note or
that the trading price of a P-note
will equal the value of the underlying security. Additionally, issuers of
P-notes and the calculation agent may
have broad authority to control the foreign exchange rates related to the
P-notes and discretion to adjust the
P-note’s terms in response to certain events.
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Stock Index Futures Contracts and Options on
Stock Index Futures Contracts. Stock
index futures and options on stock
index futures provide exposure to comparable market positions in the underlying
securities or to manage
risk (i.e., hedge) on direct investments in the underlying securities. A stock
index future obligates the seller to
deliver (and the purchaser to take), effectively, an amount of cash equal to a
specific dollar amount times the
difference between the value of a specific stock index at the close of the last
trading day of the contract
and the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made.
With respect to stock indices that are permitted investments, each Fund intends
to purchase and sell futures
contracts on the stock index for which it can obtain the best price with
consideration also given to liquidity.
Options on
stock index futures give the purchaser the right, in return for the premium
paid, to assume a position
in a stock index futures contract (a long position if the option is a call and a
short position if the option is a put),
at a specified exercise price at any time during the period of the option. Upon
exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by
delivery of the accumulated balance in the writer’s futures margin account,
which represents the amount by which the
market price of the stock index futures contract, at exercise, exceeds (in the
case of a call) or is less than (in
the case of a put) the exercise price of the option on the stock index future.
If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a
loss of the premium paid.
Synthetic Convertible
Securities. Synthetic
convertible securities are derivative positions composed of two or more
different securities whose investment characteristics, taken together, resemble
those of convertible securities.
For example, a Fund may purchase a non-convertible debt security and a warrant
or option, which enables a
Fund to have a convertible-like position with respect to a company, group of
companies or a stock index.
Synthetic convertible securities are typically offered by financial institutions
and investment banks in private
placement transactions. Upon conversion, a Fund generally receives an amount in
cash equal to the difference
between the conversion price and the then current value of the underlying
security. Unlike a true convertible
security, a synthetic convertible comprises two or more separate securities,
each with its own market
value. Therefore, the market value of a synthetic convertible is the sum of the
values of its fixed-income component
and its convertible component. For this reason, the values of a synthetic
convertible and a true convertible
security may respond differently to market fluctuations. In addition to the
general risks of convertible
securities and the special risks of enhanced convertible securities, there are
risks unique to synthetic convertible
securities. In addition, the component parts of a synthetic convertible security
may be purchased simultaneously
or separately; and the holder of a synthetic convertible faces the risk that the
price of the stock, or the
level of the market index underlying the convertibility component will decline.
Exposure to more than one issuer or
participant will increase the number of parties upon which the investment
depends and the complexity of that
investment and, as a result, increase a Fund’s credit risk and valuation risk. A
Fund only invests in synthetic
convertibles with respect to companies whose corporate debt securities are rated
“A” or higher by Moody’s or
S&P and will not invest more than 15% of its net assets in such synthetic
securities and other illiquid securities.
Permitted Investment Activities and Certain
Associated Risks
Set forth
below are descriptions of permitted investment activities for the Funds and
certain of their associated risks. The
activities are organized into various categories. To the extent that an activity
overlaps two or more categories,
the activity is referenced only once in this section. Not all of the Funds
participate in all of the investment
activities described below. In addition, with respect to any particular Fund, to
the extent that an investment
activity is described in such Fund’s Prospectus as being part of its principal
investment strategy, the information
provided below regarding such investment activity is intended to supplement, but
not supersede, the
information contained in the Prospectus, and the Fund may engage in such
investment activity in accordance
with the limitations set forth in the Prospectus. To the extent an investment
activity is described in this SAI
that is not referenced in the Prospectus, a Fund under normal circumstances will
not engage in such investment
activity with more than 15% of its assets unless otherwise specified below.
Unless otherwise noted
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or
required by applicable law, the percentage limitations included in this SAI
apply at the time of purchase of a security.
For
purposes of monitoring the investment policies and restrictions of the Funds
(with the exception of the loans of
portfolio securities policy described below), the amount of any securities
lending collateral held by a Fund will
be excluded in calculating total assets.
DEBT
SECURITIES
Debt
securities include bonds, corporate debt securities and similar instruments,
issued by various U.S. and non-U.S.
public- or private-sector entities. The issuer of a debt security has a
contractual obligation to pay interest
at a stated rate on specific dates and to repay principal (the debt security’s
face value) periodically or on a
specified maturity date. An issuer may have the right to redeem or “call” a debt
security before maturity, in which case
the investor may have to reinvest the proceeds at lower market rates. The value
of fixed-rate debt securities
will tend to fall when interest rates rise, and rise when interest rates fall.
The values of “floating-rate” or
“variable-rate” debt securities, on the other hand, fluctuate much less in
response to market interest-rate movements
than the value of fixed-rate debt securities. Debt securities may be senior or
subordinated obligations.
Senior obligations, including certain bonds and corporate debt securities,
generally have the first claim on a
corporation’s earnings and assets and, in the event of liquidation, are paid
before subordinated debt. Debt
securities may be unsecured (backed only by the issuer’s general
creditworthiness) or secured (also backed by
specified collateral).
Debt
securities are interest-bearing investments that promise a stable stream of
income; however, the prices of such
securities are inversely affected by changes in interest rates and, therefore,
are subject to the risk of market
price fluctuations. Longer-term securities are affected to a greater extent by
changes in interest rates than
shorter-term securities. The values of debt securities also may be affected by
changes in the credit rating or
financial condition of the issuing entities. Certain securities that may be
purchased by a Fund, such as those rated
“Baa” or lower by Moody’s Investors Service, Inc. (“Moody’s”) and “BBB” or lower
by Standard & Poor’s Rating
Group (“S&P”) and Fitch Investors Service, Inc. (“Fitch”) tend to be subject
to greater issuer credit risk, to greater
market fluctuations and pricing uncertainty, and to less liquidity than
lower-yielding, higher-rated debt securities.
A Fund could lose money if the issuer fails to meet its financial obligations.
If a security held by a Fund is
downgraded, such Fund may continue to hold the security until such time as the
Fund’s sub-adviser determines
it to be advantageous for the Fund to sell the security. Investing in debt
securities is subject to certain
risks including, among others, credit and interest rate risk, as more fully
described in this section.
A Fund may
purchase instruments that are not rated if, as determined by the Fund’s
sub-adviser, such obligations
are of investment quality comparable to other rated investments that are
permitted to be purchased
by such Fund. After purchase by a Fund, a security may cease to be rated, or its
rating may be reduced
below the minimum required for purchase by such Fund. Neither event will require
a sale of such security
by the Fund. To the extent the ratings given by Moody’s, Fitch or S&P may
change as a result of changes in
such organizations’ rating systems, a Fund will attempt to use comparable
ratings as standards for investments
in accordance with the investment policies contained in its Prospectus and in
this SAI.
Certain of
the debt obligations a Fund may purchase (including certificates of
participation, commercial paper and other
short-term obligations) may be backed by a letter of credit from a bank or
insurance company. A letter of
credit guarantees that payment to a lender will be received on time and for the
correct amount, and is typically
unconditional and irrevocable. In the event that the indebted party is unable to
make payment on the debt
obligation, the bank or insurance company will be required to cover the full or
remaining amount of the debt
obligation.
Corporate
debt securities are long and short term fixed-income securities typically issued
by businesses to finance
their operations. The issuer of a corporate debt security has a contractual
obligation to pay interest at a stated
rate on specific dates and to repay principal periodically or on a specified
maturity date. The rate of interest
on a corporate debt security may be fixed, floating, or variable, and could vary
directly or inversely with respect to
a reference rate. An issuer may have the right to redeem or “call” a corporate
debt security before maturity,
in which case the investor may have to reinvest the proceeds at lower market
rates. The value of fixed-rate
corporate debt securities will tend to fall when interest rates rise and rise
when interest rates fall.
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Senior
obligations generally have the first claim on a corporation’s earnings and
assets and, in the event of liquidation,
are paid before subordinated debt. Corporate debt securities may be unsecured
(backed only by the issuer’s
general creditworthiness) or secured (also backed by specified collateral).
Because of the wide range of types and
maturities of corporate debt securities, as well as the range of
creditworthiness of issuers, corporate debt
securities can have widely varying risk/return profiles.
LIBOR Transition. The
Funds’ investments, payment obligations and financing terms may be based on
floating rates,
such as London Inter-bank Offered Rate (“LIBOR”), Euro Interbank Offered Rate
(“EURIBOR”) and other similar
types of reference rates (each, a “Reference Rate”). On July 27, 2017, the Chief
Executive of the U.K. Financial
Conduct Authority (“FCA”), which regulates LIBOR, announced that the FCA will no
longer persuade nor compel
banks to submit rates for the calculation of LIBOR and certain other Reference
Rates after 2021. Such
announcement indicates that the continuation of LIBOR and other Reference Rates
on the current basis cannot and
will not be guaranteed after 2021. This announcement and any additional
regulatory or market changes
may have an adverse impact on a Fund’s investments, performance or financial
condition. Until then, the Funds
may continue to invest in instruments that reference such rates or otherwise use
such Reference Rates due
to favorable liquidity or pricing.
In advance
of 2021, regulators and market participants will work together to identify or
develop successor Reference
Rates and how the calculation of associated spreads (if any) should be adjusted.
Additionally, prior to 2021, it
is expected that industry trade associations and participants will focus on the
transition mechanisms by which the
Reference Rates and spreads (if any) in existing contracts or instruments may be
amended, whether through
market-wide protocols, fallback contractual provisions, bespoke negotiations or
amendments or otherwise.
Nonetheless, the termination of certain Reference Rates presents risks to the
Funds. At this time, it is not
possible to exhaustively identify or predict the effect of any such changes, any
establishment of alternative
Reference Rates or any other reforms to Reference Rates that may be enacted in
the UK or elsewhere.
The elimination of a Reference Rate, or any other changes or reforms to the
determination or supervision
of Reference Rates, could have an adverse impact on the market for, or value of
any, securities or payments
linked to those Reference Rates and other financial obligations held by a Fund,
or on its overall financial
condition or results of operations. In addition, any substitute Reference Rate,
and any pricing adjustments
imposed by a regulator or by counterparties or otherwise, may adversely affect a
Fund’s performance
and/or net asset value.
Negative Interest
Rates. Certain
countries have recently experienced negative interest rates on deposits and
debt
instruments have traded at negative yields. A negative interest rate policy is
an unconventional central bank
monetary policy tool where nominal target interest rates are set with a negative
value (i.e., below zero percent)
intended to help create self-sustaining growth in the local economy. Negative
interest rates may become
more prevalent among non-U.S. issuers, and potentially within the U.S. To the
extent a Fund has a bank deposit or
holds a debt instrument with a negative interest rate to maturity, the Fund
would generate a negative
return on that investment. While negative yields can be expected to reduce
demand for fixed-income investments
trading at a negative interest rate, investors may be willing to continue to
purchase such investments
for a number of reasons including, but not limited to, price insensitivity,
arbitrage opportunities across
fixed-income markets or rules-based investment strategies. If negative interest
rates become more prevalent
in the market, it is expected that investors will seek to reallocate assets to
other income-producing assets
such as investment grade and high-yield debt instruments, or equity investments
that pay a dividend. This
increased demand for higher yielding assets may cause the price of such
instruments to rise while triggering
a corresponding decrease in yield and the value of debt instruments over
time.
Asset-Backed
Securities.
Asset-backed securities are securities that are secured or “backed” by pools of
various types of
assets on which cash payments are due at fixed intervals over set periods of
time. Asset-backed securities
are created in a process called securitization. In a securitization transaction,
an originator of loans or an owner
of accounts receivable of a certain type of asset class sells such underlying
assets to a special purpose entity, so
that there is no recourse to such originator or owner. Payments of principal and
interest on asset-backed
securities typically are tied to payments made on the pool of underlying assets
in the related securitization.
Such payments on the underlying assets are effectively “passed through” to the
asset-backed security
holders on a monthly or other regular, periodic basis. The level of seniority of
a particular asset-backed
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security
will determine the priority in which the holder of such asset-backed security is
paid, relative to other security
holders and parties in such securitization. Examples of underlying assets
include consumer loans or receivables,
home equity loans, credit card loans, student loans, automobile loans or leases,
and timeshares, although
other types of receivables or assets also may be used as underlying
assets.
While
asset-backed securities typically have a fixed, stated maturity date, low
prevailing interest rates may lead to an
increase in the prepayments made on the underlying assets. This may cause the
outstanding balances due on the
underlying assets to be paid down more rapidly. As a result, a decrease in the
originally anticipated interest
from such underlying securities may occur, causing the asset-backed securities
to pay-down in whole or in part
prior to their original stated maturity date. Prepayment proceeds would then
have to be reinvested at the lower
prevailing interest rates. Conversely, prepayments on the underlying assets may
be less than anticipated,
especially during periods of high or rising interest rates, causing an extension
in the duration of the asset-backed
securities. The impact of any prepayments made on the underlying assets may be
difficult to predict
and may result in greater volatility.
Delinquencies
or losses that exceed the anticipated amounts for a given securitization could
adversely impact the
payments made on the related asset-backed securities. This is a reason why, as
part of a securitization, asset-backed
securities are often accompanied by some form of credit enhancement, such as a
guaranty, insurance
policy, or subordination. Credit protection in the form of derivative contracts
may also be purchased. In certain
securitization transactions, insurance, credit protection, or both may be
purchased with respect to only the
most senior classes of asset-backed securities, on the underlying collateral
pool, or both. The extent and type
of credit enhancement varies across securitization transactions.
Asset-backed
securities carry additional risks including, but not limited to, the possibility
that: i) the creditworthiness
of the credit support provider may deteriorate; and ii) such securities may
become less liquid or harder
to value as a result of market conditions or other circumstances.
Money Market
Instruments. Money
market instruments provide short-term funds to businesses, financial
institutions
and governments. They are debt instruments issued with maturities of thirteen
months or less, and that are
determined to present minimal credit risk. Because of their short-term
maturities and by whom these debt
instruments are issued, money market instruments are extremely liquid and
provide relatively few risks. Common
money market instruments include Treasury bills, certificates of deposit,
commercial paper, banker’s acceptances,
and repurchase agreements among others.
Adjustable Rate
Obligations.
Adjustable rate obligations include demand notes, medium term notes, bonds,
commercial
paper, and certificates of participation in such instruments. The interest rate
on adjustable rate obligations
may be floating or variable. For certain adjustable-rate obligations, the rate
rises and declines based on the
movement of a reference index of interest rates and is adjusted periodically
according to a specified formula.
Adjustable-rate securities generally are less sensitive to interest rate
changes, but may lose value if their
interest rates do not rise as much, or as quickly, as interest rates in general.
Conversely, adjustable-rate securities
generally will not increase in value if interest rates decline. When a Fund
holds adjustable-rate securities,
a reduction in market or reference interest rates will reduce the income
received from such securities.
Adjustable-rate
obligations include floating- and variable-rate obligations. The interest rate
on a variable-rate demand
obligation is adjusted automatically at specified intervals, while the interest
rate on floating-rate obligations
is adjusted when the rate on the underlying index changes. These obligations
typically have long-stated
maturities and may have a conditional or unconditional demand feature that
permits the holder to demand
payment of principal at any time or at specified intervals. Variable-rate demand
notes also include master
demand notes that are obligations that permit a Fund to invest fluctuating
amounts, which may change daily
without penalty, pursuant to direct arrangements between the Fund, as lender,
and the borrower. The borrower
may have a right, after a given period, to prepay at its discretion the
outstanding principal amount of the
obligations plus accrued interest upon a specified number of days’ notice to the
holders of such obligations. For more
information, refer to “Variable Amount Master Demand Notes.”
Some
adjustable rate obligations may be secured by letters of credit or other credit
support arrangements provided
by banks. Such credit support arrangements often include unconditional and
irrevocable letters of credit
that are issued by a third party, usually a bank, which assumes the obligation
for payment of principal and
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interest
in the event of default by the issuer. Letters of credit are designed to enhance
liquidity and ensure repayment
of principal and any accrued interest if the underlying variable rate demand
obligation should default.
Some variable rate obligations feature other credit enhancements, such as
standby bond purchase agreements
(“SBPAs”). A SBPA can feature a liquidity facility that is designed to provide
funding for the purchase
price of variable rate obligations that fail to be remarketed. The liquidity
facility provider is obligated solely to
advance funds for the purchase of tendered variable rate bonds that fail to be
remarketed and does not
guarantee the repayment of principal or interest. The liquidity facility
provider’s obligations under the SBPA are
subject to conditions, including the continued creditworthiness of the
underlying borrower or issuer, and the facility
may terminate upon the occurrence of certain events of default or at the
expiration of its term. In addition,
a liquidity facility provider may fail to perform its obligations.
A Fund may
be unable to timely dispose of a variable rate obligation if the issuer defaults
and the letter of credit or
liquidity facility provider fails to perform its obligations or the facility
otherwise terminates and a successor letter of
credit or liquidity provider is not immediately obtained. The potential adverse
impact to a Fund resulting
from the inability of a letter of credit or liquidity facility provider to meet
its obligations could be magnified
to the extent the provider also furnishes credit support for other variable-rate
obligations held by the Fund.
In the
case of adjustable-rate securities that are not subject to a demand feature, a
Fund is reliant on the secondary
market for liquidity. In addition, there generally is no established secondary
market for master demand
notes because they are direct lending arrangements between the lender and
borrower. Accordingly, where
these obligations are not secured by letters of credit, SBPAs or other credit
support arrangements, a Fund is
dependent on the ability of the borrower to pay principal and interest in
accordance with the terms of the
obligations. The failure by a Fund to receive scheduled interest or principal
payments on a loan would adversely
affect the income of the Fund and would likely reduce the value of its assets,
which would be reflected in a
reduction in the Fund’s NAV.
Adjustable-rate
obligations may or may not be rated by nationally recognized statistical ratings
organizations (e.g.,
Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Rating Group
(“S&P”), or Fitch Investors Service,
Inc. (“Fitch”)). Adjustable-rate obligations are subject to credit and other
risks generally associated with debt
securities.
Bank Obligations. Bank
obligations include certificates of deposit, time deposits, bankers’
acceptances, and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic
banks, domestic and foreign branches of foreign banks, domestic savings and loan
associations and other
banking institutions. Certificates of deposit are negotiable certificates
evidencing the obligation of a bank to repay
funds deposited with it for a specified period of time. Time deposits are
non-negotiable deposits maintained
in a banking institution for a specified period of time at a stated interest
rate. Bankers’ acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments
reflect the obligation both of the bank and of the customer to pay the face
amount of the instrument
upon maturity. Other short-term obligations may include uninsured, direct
obligations of the banking
institution bearing fixed, floating or variable interest rates.
The
activities of U.S. banks and most foreign banks are subject to comprehensive
regulations. New legislation or regulations,
or changes in interpretation and enforcement of existing laws or regulations,
may affect the manner of
operations and profitability of domestic banks. With respect to such obligations
issued by foreign branches
of domestic banks, foreign subsidiaries of domestic banks, and domestic and
foreign branches of foreign
banks, a Fund may be subject to additional investment risks that are different
in some respects from those
incurred by a Fund that invests only in debt obligations of domestic issuers.
Such risks include political, regulatory
or economic developments, the possible imposition of foreign withholding and
other taxes (at potentially
confiscatory levels) on amounts realized on such obligations, the possible
establishment of exchange controls
or the adoption of other foreign governmental restrictions that might adversely
affect the payment of principal
and interest on these obligations and the possible seizure or nationalization of
foreign deposits. In addition,
foreign branches of domestic banks and foreign banks may be subject to less
stringent reserve
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requirements
and to different regulatory, accounting, auditing, reporting and recordkeeping
standards than those
applicable to domestic branches of U.S. banks.
Banks may
be particularly susceptible to certain economic factors, such as interest rate
changes or adverse developments
in the market for real estate. Fiscal and monetary policy and general economic
cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby impact
the earnings and financial conditions
of banks. Further, the traditional banking industry is experiencing increased
competition from alternative
types of financial institutions.
Collateralized Debt Obligations
(“CDOs”). CDOs pool
together assets that generate cash flow, and repackages these
pools into discrete tranches that can be sold to investors. CDOs include
collateralized loan obligations (“CLOs”),
collateralized bond obligations (“CBOs”), and other similarly structured
securities. CLOs and CBOs are distinguished
by their underlying securities. CLOs are securities comprised of bundles of
corporate loans; CBOs are
securities backed by a collection of bonds or other CDOs.
The
tranches in a CDO vary substantially in their risk profiles and level of yield.
Tranches bear losses in the reverse
order of their seniority with respect to one another. The most junior tranche is
generally the tranche that bears
the highest level of risk, but also generally bears the highest coupon rates.
The senior tranches are generally
safer because they have first priority on payback from the collateral in the
event of default. As a result, the senior
tranches of a CDO generally have a higher credit rating and offer lower coupon
rates than the junior tranches.
Despite the protection, even the most senior tranches can experience substantial
losses due to the rate of
actual defaults on the underlying collateral. The type of collateral used as
underlying securities in a particular
CDO therefore may substantially impact the risk associated with purchasing the
securities.
CDOs can
also be divided into two main categories: cash and synthetic. Cash CDOs are
secured by cash assets, such as
loans and corporate bonds. Synthetic CDOs are secured by credit default swaps or
other noncash assets that
provide exposure to a portfolio of fixed-income assets.
Cash CDOs
can be further subdivided into two types: cash flow and market value. Cash flow
and market value CDOs
differ from each other in the manner by which cash flow is generated to pay the
security holders, the manner in
which the structure is credit-enhanced, and how the pool of underlying
collateral is managed. Cash flow CDOs
are collateralized by a pool of high-yield bonds or loans, which pay principal
and interest on a regular basis.
Credit enhancement is achieved by having subordinated tranches of securities.
The most senior/highest-rated
tranche will be the last to be affected by any interruption of cash flow from
the underlying assets. In
a cash flow CDO, the collateral manager endeavors to maintain a minimum level of
diversification and weighted
average rating among the underlying assets in an effort to mitigate severity of
loss. Market value CDOs
receive payments based on the mark-to-market returns on the underlying
collateral. Credit enhancement for market
value CDOs is achieved by specific overcollateralization levels in the form of
advance rates assigned to each
underlying collateral asset. Because principal and interest payments on the
securities come from collateral
cash flows and sales of collateral, which the collateral manager monitors,
returns on market value CDOs are
substantially related to the collateral manager’s performance.
CDOs carry
the risk of uncertainty of timing of cash flows. Such a risk depends on the type
of collateral, the degree of
diversification, and the specific tranche in which a Fund invests. Typically,
CDOs are issued through private
offerings and are not registered under the securities laws. However, an active
dealer market may exist for such
securities, thereby allowing such securities to trade consistent with an
exemption from registration under Rule
144A under the Securities Act of 1933, as amended. Further risks include the
possibility that distributions
from the collateral will not be adequate to make interest payments, and that the
quality of the collateral
may decline in value or default.
Commercial Paper.
Commercial paper is a short-term, promissory note issued by a bank, corporation
or other borrower
to finance short-term credit needs. Commercial paper is typically unsecured but
it may be supported by letters
of credit, surety bonds or other forms of collateral. Commercial paper may be
sold at par or on a discount
basis and typically has a maturity from 1 to 270 days. Like bonds, and other
fixed-income securities, commercial
paper prices are susceptible to fluctuations in interest rates. As interest
rates rise, commercial paper
prices typically will decline and vice versa. The short-term nature of a
commercial paper investment, however,
makes it less susceptible to such volatility than many other securities.
Variable amount master
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demand
notes are a type of commercial paper. They are demand obligations that permit
the investment of fluctuating
amounts at varying market rates of interest pursuant to arrangements between the
issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of
the outstanding indebtedness on the notes.
Dollar Roll
Transactions. Dollar
roll transactions are transactions wherein a Fund sells fixed-income securities
and
simultaneously makes a commitment to purchase similar, but not identical,
securities at a later date from the same
party and at a predetermined price. Mortgage-backed security dollar rolls and
U.S. Treasury dollar rolls are types
of dollar rolls. Like a forward commitment, during the roll period, no payment
is made by a Fund for the
securities purchased, and no interest or principal payments on the securities
purchased accrue to the Fund, but the
Fund assumes the risk of ownership. A Fund is compensated for entering into
dollar roll transactions by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Dollar roll transactions may
result in higher transaction costs for
a Fund.
Like other
when-issued securities or firm commitment agreements, dollar roll transactions
involve the risk that the market
value of the securities sold by a Fund may decline below the price at which the
Fund is committed to purchase
similar securities. In the event the buyer of securities from a Fund under a
dollar roll transaction becomes
insolvent, the Fund’s use of the proceeds of the transaction may be restricted
pending a determination
by the other party, or its trustee or receiver, whether to enforce the Fund’s
obligation to repurchase
the securities. A Fund will engage in dollar roll transactions for the purpose
of acquiring securities for its
portfolio and not for investment leverage.
High-Yield
Securities.
High-yield securities (also known as “junk bonds”) are debt securities that are
rated below investment-grade,
or are unrated and deemed by the Fund’s sub-adviser to be below
investment-grade, or are in default
at the time of purchase. These securities are considered to be high-risk
investments and have a much greater
risk of default (or in the case of bonds currently in default, of not returning
principal). High-yield securities
also tend to be more volatile than higher-rated securities of similar maturity.
The value of these debt securities
can be affected by overall economic conditions, interest rates, and the
creditworthiness of the individual
issuers. These securities tend to be less liquid and more difficult to value
than higher-rated securities. If market
quotations are not readily available for the Funds’ lower-rated or nonrated
securities, these securities will be
valued by a method that the Funds’ Boards believe reflects their fair
value.
The market
values of certain high yield and comparable unrated securities tend to be more
sensitive to individual
corporate developments and changes in economic conditions than investment-grade
securities. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and
liquidity of high yield securities, especially in a thinly traded market. In
addition, issuers of high yield and
comparable unrated securities often are highly leveraged and may not have more
traditional methods of financing
available to them. Their ability to service their debt obligations, especially
during an economic downturn
or during sustained periods of high interest rates, may be
impaired.
High yield
and comparable unrated securities are typically unsecured and frequently are
subordinated to senior indebtedness.
A Fund may incur additional expenses to the extent that it is required to seek
recovery upon a default in
the payment of principal or interest on its portfolio holdings. The existence of
limited trading markets for high
yield and comparable unrated securities may diminish a Fund’s ability to: i)
obtain accurate market quotations
for purposes of valuing such securities and calculating its net asset value; and
ii) sell the securities either to
meet redemption requests or to respond to changes in the economy or in financial
markets.
Inflation-Protected Debt
Securities.
Inflation-protected debt securities, including Treasury Inflation-Protected
Securities
(“TIPS”), are instruments whose principal is adjusted for inflation, as
indicated by specific indexes. For example,
the principal of TIPS is adjusted for inflation as indicated by the Consumer
Price Index. As inflation falls, the
principal value of inflation-protected securities will be adjusted downward and
the interest payable will be
reduced. As inflation rises, the principal value of inflation-protected
securities will be adjusted upward, and the
interest payable will be increased. A Fund’s yield and return will reflect both
any inflation adjustment to interest
income and the inflation adjustment to principal.
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While
these securities are designed to protect holders from long term inflationary
trends, short term increases in
inflation may lead to a decline in value. If interest rates rise due to reasons
other than inflation (for example, due to
changes in currency exchange rates), holders of these securities may not be
protected to the extent that the
increase is not reflected in the debt securities’ inflationary measure. Income
fluctuations associated with changes in
market interest rates are expected to be low; however, income fluctuations
associated with changes in
inflation are expected to be high. The value of inflation-indexed bonds is
expected to change in response to changes in
real interest rates. Real interest rates are tied to the relationship between
nominal interest rates and the rate
of inflation. If nominal interest rates increase at a faster rate than
inflation, real interest rates may rise, leading to
a decrease in value of inflation-indexed bonds. In certain interest rate
environments, such as when real
interest rates are rising faster than nominal interest rates, inflation indexed
bonds may experience greater losses
than other fixed-income securities with similar durations.
For
federal income tax purposes, both interest payments and the difference between
original principal and the inflation-adjusted
principal of inflation-protected debt securities will be treated as interest
income subject to taxation.
Interest payments are taxable when received or accrued. The inflation adjustment
to 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.
Inflation-protected
debt securities are subject to greater risk than traditional debt securities if
interest rates rise in a
low inflation environment. Generally, the value of an inflation-protected debt
security will fall when real interest
rates rise and will rise when real interest rates fall.
Loan
Participations. A loan
participation gives a Fund an undivided proportionate interest in a partnership
or trust that
owns a loan or instrument originated by a bank or other financial institution.
Typically, loan participations
are offered by banks or other financial institutions or lending syndicates and
are acquired by multiple
investors. Principal and interest payments are passed through to the holder of
the loan participation. Loan
participations may carry a demand feature permitting the holder to tender the
participations back to the bank or
other institution. Loan participations, however, typically do not provide the
holder with any right to enforce
compliance by the borrower, nor any rights of set-off against the borrower, and
the holder may not directly
benefit from any collateral supporting the loan in which it purchased a loan
participation. As a result, the holder may
assume the credit risk of both the borrower and the lender that is selling the
loan participation.
Loan
participations in which a Fund may invest are subject generally to the same
risks as debt securities in which the Fund
may invest. Loan participations in which a Fund invests may be made to finance
highly leveraged corporate
acquisitions. The highly leveraged capital structure of the borrowers in such
transactions may make such loan
participations especially vulnerable to adverse changes in economic or market
conditions. Loan participations
generally are subject to restrictions on transfer, and only limited
opportunities may exist to sell such loan
participations in secondary markets. As a result, a Fund may be unable to sell
loan participations at a time when
it may otherwise be desirable to do so, or may be able to sell them only at a
price below their fair market
value. Market bids may be unavailable for loan participations from time to time;
a Fund may find it difficult
to establish a fair value for loan participations held by it. Many loan
participations in which a Fund invests
may be unrated, and the Fund’s sub-adviser will be required to rely exclusively
on its analysis of the borrower
in determining whether to acquire, or to continue to hold, a loan participation.
In addition, under legal theories
of lender liability, a Fund potentially might be held liable as a
co-lender.
Mortgage-Backed
Securities.
Mortgage-backed securities, also called mortgage pass-through securities, are
issued in
securitizations (see “Asset-Backed Securities” section) and represent interests
in “pools” of underlying mortgage
loans that serve as collateral for such securities. These mortgage loans may
have either fixed or adjustable
interest rates. A guarantee or other form of credit support may be attached to a
mortgage-backed security
to protect against default on obligations. Similar to asset-backed securities,
the monthly payments made by
the individual borrowers on the underlying mortgage loans are effectively
“passed through” to the holders of
the mortgage-backed securities (net of administrative and other fees paid to
various parties) as monthly
principal and interest payments. Some mortgage-backed securities make payments
of both principal and
interest at a range of specified intervals, while others make semiannual
interest payments at a predetermined
rate and repay principal only at maturity. An economic downturn—particularly one
that
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contributes
to an increase in delinquencies and defaults on residential mortgages, falling
home prices, and unemployment—may
adversely affect the market for and value of mortgage-backed
securities.
The stated
maturities of mortgage-backed securities may be shortened by unscheduled
prepayments of principal
on the underlying mortgage loans, and the expected maturities may be extended in
rising interest-rate environments.
Therefore, it is not possible to predict accurately the maturity of a particular
mortgage-backed security.
Variations in the maturities of mortgage-backed securities resulting from
prepayments will affect the yield of
each such security and the portfolio as a whole. Rates of prepayment of
principal on the underlying mortgage
loans in mortgage-backed securitizations that are faster than expected may
expose the holder to a lower rate
of return upon reinvestment of proceeds at lower prevailing interest rates.
Also, if a mortgage-backed
security has been purchased at a premium and is backed by underlying mortgage
loans that are
subject to prepayment, the value of the premium would effectively be lost or
reduced if prepayments are made on
such underlying collateral. Conversely, to the extent a mortgage-backed security
is purchased at a discount,
both a scheduled payment of principal and an unscheduled payment of principal
would increase current
and total returns, as well as accelerate the recognition of income.
Mortgage-backed
securities are subject to credit risk, which includes the risk that the holder
may not receive all or part of
its interest or principal because the issuer, or any credit enhancer and/or the
underlying mortgage borrowers
have defaulted on their obligations. Credit risk is increased for
mortgage-backed securities that are subordinated
to another security (i.e., if the holder of a mortgage-backed security is
entitled to receive payments
only after payment obligations to holders of the other security are satisfied).
The more deeply subordinated
the security, the greater the credit risk associated with the security will
be.
In
addition, the Funds may purchase some mortgage-backed securities through private
placements that are restricted
as to further sale. Mortgage-backed securities issued by private issuers,
whether or not such obligations
are subject to guarantees by the private issuer, typically entail greater credit
risk than mortgage-backed
securities guaranteed by a government association or government-sponsored
enterprise. The
performance of mortgage-backed securities issued by private issuers depends, in
part, on the financial health of
any guarantees and the performance of the mortgage pool backing such securities.
An unexpectedly high rate
of defaults on mortgages held by a mortgage pool may limit substantially the
pool’s ability to make payments
of principal or interest to the holder of such mortgage-backed securities,
particularly if such securities
are subordinated, thereby reducing the value of such securities and, in some
cases, rendering them worthless.
The risk of such defaults is generally higher in the case of mortgage pools that
include “subprime” mortgages.
Like other
fixed-income securities, when interest rates rise, the value of mortgage-backed
securities generally will
decline and may decline more than other fixed-income securities as the expected
maturity extends. Conversely,
when interest rates decline, the value of mortgage-backed securities having
underlying collateral with
prepayment features may not increase as much as other fixed-income securities as
the expected maturity shortens.
Payment of principal and interest on some mortgage-backed securities issued or
guaranteed by a government
agency (but not the market value of the securities themselves) is guaranteed by
a U.S. Government
sponsored entity, such as Government National Mortgage Association (“GNMA”), the
Federal National
Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation
(“FHLMC”). Unlike FHLMC and
FNMA, which act as both issuers and guarantors of mortgage-backed securities,
GNMA only provides
guarantees of mortgage-backed securities. Only GNMA guarantees are backed by the
full faith and credit of
the U.S. Government. Mortgage-backed securities issued or guaranteed by FHLMC or
FNMA are not backed by
the full faith and credit of the U.S. Government. FHLMC and FNMA are authorized
to borrow money from the
U.S. Treasury or the capital markets, but there can be no assurance that they
will be able to raise funds as needed
or that their existing capital will be sufficient to satisfy their guarantee
obligations. Mortgage-backed securities
created by private issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers) may be supported
by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. Mortgage-backed securities
that are not insured or guaranteed generally offer a higher rate of return in
the form of interest payments,
but also expose the holders to greater credit risk.
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Adjustable-Rate
Mortgage Securities (“ARMS”). ARMS
represent an ownership interest in a pool of mortgage loans that
generally carry adjustable interest rates, and in some cases principal repayment
rates, that are reset periodically.
ARMS are issued, guaranteed or otherwise sponsored by governmental agencies such
as GNMA, by government-sponsored
entities such as FNMA or FHLMC, or by private issuers. Mortgage loans underlying
ARMS
typically provide for a fixed initial mortgage interest rate for a specified
period of time and, thereafter, the
interest rate may be subject to periodic adjustments based on changes in an
applicable index rate. Adjustable
interest rates can cause payment increases that some borrowers may find
difficult to make.
The
mortgage loans underlying ARMS guaranteed by GNMA are typically federally
insured by the Federal Housing
Administration or guaranteed by the Department of Veterans Affairs, whereas the
mortgage loans underlying
ARMS issued by FNMA or FHLMC are typically conventional residential mortgages
which are not so insured or
guaranteed, but which conform to specific underwriting, size and maturity
standards. ARMS are also offered by
private issuers.
As a
result of adjustable interest rates, the yields on ARMS typically lag behind
changes in the prevailing market interest
rate. This results in ARMS generally experiencing less decline in value during
periods of rising interest rates than
traditional long-term, fixed-rate mortgage-backed securities. On the other hand,
during periods of declining
interest rates, the interest rates on the underlying mortgages may reset
downward with a similar lag. As a
result, the values of ARMS are expected to rise less than the values of
securities backed by fixed-rate mortgages
during periods of declining interest rates.
Collateralized
Mortgage Obligations (“CMOs”). CMOs are
debt obligations that may be collateralized by whole mortgage
loans, but are more typically collateralized by portfolios of mortgage-backed
securities guaranteed by GNMA,
FHLMC, or FNMA, and divided into classes. CMOs are structured into multiple
classes, often referred to as
“tranches,” with each class bearing a different stated maturity and entitled to
a different schedule for payments
of principal and interest, including pre-payments. Payments of principal on the
underlying securities, including
prepayments, are first “passed through” to investors holding the class of
securities with the shortest maturity;
investors holding classes of securities with longer maturities receive payments
on their securities only after the
more senior classes have been retired. A longer duration or greater sensitivity
to interest rate fluctuations
generally increases the risk level of a CMO. CMOs may be less liquid and may
exhibit greater price volatility
than other types of mortgage-backed securities. Examples of CMOs include
commercial mortgage-backed
securities and adjustable-rate mortgage securities.
Commercial
Mortgage-Backed Securities (“CMBS”). CMBS are
securities that reflect an interest in, and are secured
by, mortgage loans on commercial real property, such as loans for hotels,
restaurants, shopping centers,
office buildings, and apartment buildings. Interest and principal payments from
the underlying loans are passed
through to CMBS holders according to a schedule of payments. Because the
underlying commercial mortgage
loans tend to be structured with prepayment penalties, CMBS generally carry less
prepayment risk than
securities backed by residential mortgage loans.
Investing
in CMBS expose a Fund to the risks of investing in the commercial real estate
securing the underlying mortgage
loans. These risks include the effects of local and other economic conditions on
real estate markets, the
ability of tenants to make loan payments and the ability of a commercial
property to attract and retain tenants.
The value of CMBS may change because of: i) actual or perceived changes in the
creditworthiness of the
borrowers or their tenants; ii) deterioration in the general state of commercial
real estate or in the types of properties
backing the CMBS; or iii) overall economic conditions. Credit quality of the
CMBS depends primarily on the
quality of the loans themselves and on the structure of the particular deal.
While CMBS are sold both in public
transactions registered with the SEC and in private placement transactions, CMBS
may be less liquid and exhibit
greater price volatility than other types of mortgage-backed or asset-backed
securities.
Stripped Securities
The
following Funds are limited to investing up to 10% of their total assets in
stripped mortgage-backed securities:
Government Securities Fund, Short-Term Bond Plus Fund, Short-Term High Yield
Bond Fund, and Ultra
Short-Term Income Fund. Short Duration Government Bond Fund is limited to
investing up to 10% of its total
assets in stripped treasury and stripped mortgage-backed securities, including
zero coupon bonds. Securities
issued by the U.S. Treasury and certain securities issued by government
authorities and
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government-sponsored
enterprises are eligible to be stripped into interest components and principal
components.
Stripped securities are purchased by the Funds at a discount to their face
value. These securities generally
are structured to make a lump-sum payment at maturity and do not make periodic
payments of principal
or interest. Hence, the duration of these securities tends to be longer and they
are therefore more sensitive
to interest-rate fluctuations than similar securities that offer periodic
payments over time. SMBS are often
structured with two classes that receive different proportions of the interest
and principal distributions on a pool
of mortgage assets. SMBS that are structured to receive interest only are
extremely sensitive to changes in
the prevailing interest rates as well as the rate of principal payments
(including prepayments) on the related
underlying mortgage assets, and are therefore much more volatile than SMBS that
receive principal only.
Stripped
securities may also include participations in trusts that hold U.S. Treasury
securities where the trust participations
evidence ownership in either the future interest payments or the future
principal payments on the
obligations. These participations are normally issued at a discount to their
“face value,” and can exhibit greater
price volatility than ordinary debt securities.
Municipal Bonds. Municipal
bonds are debt obligations of a governmental entity issued to obtain funds for
various
public purposes that obligate the municipality to pay the holder a specified sum
of money at specified intervals
and to repay the principal amount of the loan at maturity. The two principal
classifications of municipal bonds are
“general obligation” and “revenue” bonds. General obligation bonds are
typically, but not always, supported
by the municipality’s general taxing authority, while revenue bonds are
supported by the revenues from one
or more particular project, facility, class of facilities, or activity. The
revenue bond classification encompasses
industrial revenue bonds (“IRBs”) (formerly known as industrial development
bonds). IRBs are organized
by a government entity but the proceeds are directed to a private, for-profit
business. IRBs are backed by
the credit and security of the private, for-profit business. IRBs are typically
used to support a specific project,
such as to build or acquire factories or other heavy equipment and tools. With
an IRB, the sponsoring government
entity holds title to the underlying collateral until the bonds are paid in
full. In certain circumstances,
this may provide a federal tax exempt status to the bonds, and many times a
property tax exemption
on the collateral. With an IRB, the sponsoring government entity is not
responsible for bond repayment
and the bonds do not affect the government’s credit rating. Under the Internal
Revenue Code, certain
revenue bonds are considered “private activity bonds” and interest paid on such
bonds is treated as an item of
tax preference for purposes of calculating federal alternative minimum tax
liability.
Certain of
the municipal obligations held by the Funds may be insured as to the timely
payment of principal and interest.
The insurance policies usually are obtained by the issuer of the municipal
obligation at the time of its original
issuance. In the event that the issuer defaults on interest or principal
payment, the insurer will be notified
and will be required to make payment to the bondholders. Although the insurance
feature is designed to reduce
certain financial risks, the premiums for insurance and the higher market price
sometimes paid for insured
obligations may reduce the Funds’ current yield. To the extent that securities
held by the Funds are insured as
to principal and interest payments by insurers whose claims-paying ability
rating is downgraded by a nationally
recognized statistical ratings organization (e.g., Moody’s, S&P, or Fitch ),
the value of such securities may be
affected. There is, however, no guarantee that the insurer will meet its
obligations. Moreover, the insurance
does not guarantee the market value of the insured obligation or the net asset
value of the Funds’ shares. In
addition, such insurance does not protect against market fluctuations caused by
changes in interest rates and
other factors. The Funds also may purchase municipal obligations that are
additionally secured by bank
credit agreements or escrow accounts. The credit quality of companies which
provide such credit enhancements
will affect the value of those securities.
The risks
associated with municipal bonds vary. Local and national market forces—such as
declines in real estate prices and
general business activity—may result in decreasing tax bases, fluctuations in
interest rates, and increasing
construction costs, all of which could reduce the ability of certain issuers of
municipal bonds to repay their
obligations. Certain issuers of municipal bonds have also been unable to obtain
additional financing through,
or must pay higher interest rates on, new issues, which may reduce revenues
available for issuers of municipal
bonds to pay existing obligations.
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Because of
the large number of different issuers of municipal bonds, the variance in size
of bonds issued, and the range
of maturities within the issues, most municipal bonds do not trade on a daily
basis, and many trade only
rarely. Because of this, the spread between the bid and offer may be wider, and
the time needed to purchase
or sell a particular bond may be longer than for other securities.
Municipal
securities are typically issued together with an opinion of bond counsel to the
issuer that the interest paid on
those securities will be excludable from gross income for federal income tax
purposes. Such opinion may have been
issued as of a date prior to the date that a Fund acquired the municipal
security. Subsequent to a Fund’s
acquisition of such a municipal security, however, the security may be
determined to pay, or to have paid, taxable
income. As a result, the treatment of dividends previously paid or to be paid by
a Fund as “exempt-interest
dividends” could be adversely affected, subjecting the Fund’s shareholders to
increased federal
income tax liabilities. Under highly unusual circumstances, the Internal Revenue
Service may determine that a
municipal bond issued as tax-exempt should in fact be taxable. If any Fund held
such a bond, it might have to
distribute taxable income, or reclassify as taxable, ordinary income that was
previously distributed as exempt-interest
dividends.
Changes or
proposed changes in state or federal tax laws could impact the value of
municipal debt securities that a
Fund may purchase. Also, the failure or possible failure of such debt issuances
to qualify for tax-exempt treatment
may cause the prices of such municipal securities to decline, possibly adversely
affecting the value of a Fund’s
portfolio. Such a failure could also result in additional taxable income to a
Fund and/or shareholders.
Municipal
Leases. Municipal
leases are obligations in privately arranged loans to state or local government
borrowers
and may take the form of a lease, installment purchase or conditional sales
contract (which typically provide
for the title to the leased asset to pass to the governmental issuer). They are
issued by state and local governments
and authorities to acquire land, equipment, and facilities. An investor may
purchase these obligations
directly, or it may purchase participation interests in such obligations.
Interest income from such obligations
is generally exempt from local and state taxes in the state of issuance.
“Participations” in such leases are
undivided interests in a portion of the total obligation. Participations entitle
their holders to receive a pro rata share
of all payments under the lease. Municipal leases and participations therein
frequently involve special risks.
Municipal
leases may be subject to greater risks than general obligation or revenue bonds.
In most cases, municipal
leases are not backed by the taxing authority of the issuers and may have
limited marketability. Certain
municipal lease obligations contain “non-appropriation” clauses, which provide
that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such
purpose in the relevant years. Investments in municipal leases are thus subject
to the risk that the legislative
body will not make the necessary appropriation and the issuer fails to meet its
obligation. Municipal leases may
also be subject to “abatement risk.” The leases underlying certain municipal
lease obligations may state that
lease payments are subject to partial or full abatement. That abatement might
occur, for example, if material
damage to or destruction of the leased property interferes with the lessee’s use
of the property. However,
in some cases that risk might be reduced by insurance covering the leased
property, or by the use of credit
enhancements such as letters of credit to back lease payments, or perhaps by the
lessee’s maintenance of reserve
monies for lease payments. While the obligation might be secured by the lease,
it might be difficult to dispose of
that property in case of a default.
Municipal
Market Data Rate Locks. A
municipal market data rate lock (“MMD Rate Lock”) permits an issuer that
anticipates
issuing municipal bonds in the future to, in effect, lock in a specified
interest rate. A MMD Rate Lock also
permits an investor (e.g., a Fund) to lock in a specified rate for a portion of
its portfolio in order to: i) preserve
returns on a particular investment or a portion of its portfolio; ii) manage
duration; and/or iii) protect against
increases in the prices of securities to be purchased at a later date. By using
an MMD Rate Lock, a Fund can create
a synthetic long or short position, allowing the Fund to select what the
sub-adviser believes is an attractive
part of the yield curve. A Fund will ordinarily use these transactions as a
hedge or for duration or risk management,
but may enter into them to enhance income or gains, or to increase yield, for
example, during periods of
steep interest rate yield curves (i.e., wide differences between short term and
long term interest rates).
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A MMD Rate
Lock is a contract between the investor and the MMD Rate Lock provider pursuant
to which the parties
agree to make payments to each other on a notional amount, contingent upon
whether the Municipal Market
Data AAA General Obligation Scale is above or below a specified level on the
expiration date of the contract.
For example, if a Fund buys an MMD Rate Lock and the Municipal Market Data AAA
General Obligation
Scale is below the specified level on the expiration date, the counterparty to
the contract will make a payment to
the Fund equal to the specified level minus the actual level, multiplied by the
notional amount of the
contract. If the Municipal Market Data AAA General Obligation Scale is above the
specified level on the expiration
date, the Fund will make a payment to the counterparty equal to the actual level
minus the specified level,
multiplied by the notional amount of the contract. In connection with
investments in MMD Rate Locks, there is a
risk that municipal yields will move in the opposite direction than anticipated
by a Fund, which would cause the
Fund to make payments to its counterparty in the transaction that could
adversely affect the Fund’s performance.
Stand-by
Commitments. A Fund
may purchase municipal securities together with the right to resell the
underlying
municipal securities to the seller or a third party (typically an institution
such as a bank or broker-dealer
that is believed to continually satisfy credit quality requirements) at an
agreed-upon price or yield within
specified periods prior to their maturity dates. Such a right to resell is
commonly known as a stand-by commitment,
and the aggregate price that a Fund pays for securities with a stand-by
commitment may be higher
than the price that otherwise would be paid. The primary purpose of this
practice is to permit a Fund to be as
fully invested as practicable in municipal securities while preserving the
necessary flexibility and liquidity to meet
unanticipated redemptions. In this regard, a Fund acquires stand-by commitments
solely to facilitate portfolio
liquidity and does not exercise its rights thereunder for trading
purposes.
When a
Fund pays directly or indirectly for a stand-by commitment, its cost is
reflected as unrealized depreciation
for the period during which the commitment is held. Stand-by commitments do not
affect the average
weighted maturity of a Fund’s portfolio of securities.
The
principal risk of stand-by commitments is that the writer of a commitment may
default on its obligation to repurchase
the securities when a Fund exercises its stand-by commitment. Stand-by
commitments are not separately
marketable and there may be differences between the maturity of the underlying
security and the maturity
of the commitment.
Taxable
Municipal Obligations. Certain
municipal obligations may be subject to federal income tax for a variety of
reasons.
Taxable municipal obligations are typically issued by municipalities or their
agencies for purposes which do not
qualify for federal tax exemption, but do qualify for state and local tax
exemptions. For example, a taxable
municipal obligation would not qualify for the federal income exemption where
(a) the governmental entity did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities,
(b) the governmental entity exceeds certain regulatory limitations on the cost
of issuance for tax-exempt
financing, or (c) the governmental entity finances public or private activities
that do not qualify for the
federal income tax exemption. These non-qualifying activities might include, for
example, certain types of multi-family
housing, certain professional and local sports facilities, refinancing of
certain municipal debt, and borrowing
to replenish a municipality’s underfunded pension plan. Generally, payments on
taxable municipal obligations
depend on the revenues generated by the projects, excise taxes or state
appropriations, or whether the debt
obligations can be backed by the government’s taxing power. Due to federal
taxation, taxable municipal
obligations typically offer yields more comparable to other taxable sectors such
as corporate bonds or agency
bonds than to other municipal obligations.
U.S.
Territories, Commonwealths and Possessions Obligations. A Fund
may invest in municipal securities issued by certain
territories, commonwealths and possessions of the United States, including but
not limited to, Puerto Rico,
Guam, and the U.S. Virgin Islands, that pay interest that is exempt from federal
income tax and state personal
income tax. The value of these securities may be highly sensitive to events
affecting the fiscal stability of the
issuers. These issuers may face significant financial difficulties for various
reasons, including as the result of events
that cannot be reasonably anticipated or controlled, such as social conflict or
unrest, labor disruption and
natural disasters. In particular, economic, legislative, regulatory or political
developments affecting the ability of
the issuers to pay interest or repay principal may significantly affect the
value of a Fund’s investments.
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These
developments can include or arise from, for example, insolvency of an issuer,
uncertainties related to the tax status
of the securities, tax base erosion, state or federal constitutional limits on
tax increases or other actions,
budget deficits and other financial difficulties, or changes in the credit
ratings assigned to the issuers. The value
of a Fund’s shares will be negatively impacted to the extent it invests in such
securities. Further, there may be a
limited market for certain of these municipal securities, and the Fund could
face illiquidity risks.
Municipal
securities issued by Puerto Rico and its agencies and instrumentalities have
been subject to multiple credit
downgrades as a result of Puerto Rico’s ongoing fiscal challenges and
uncertainty about its ability to make full
repayment on these obligations. The majority of Puerto Rico’s debt is issued by
the major public agencies
that are responsible for many of the island’s public functions, such as water,
wastewater, highways, electricity,
education and public construction. Certain risks specific to Puerto Rico concern
state taxes, e-commerce
spending, and underfunded pension liabilities. Any debt restructuring could
reduce the principal amount
due, the interest rate, the maturity and other terms of Puerto Rico municipal
securities, which could adversely
affect the value of such securities.
Municipal
Notes. Municipal
notes generally are used to provide short-term operating or capital needs and
typically
have maturities of one year or less. Notes sold as interim financing in
anticipation of collection of taxes, a bond
sale or receipt of other revenues are usually general obligations of the issuer.
The values of outstanding municipal
securities will vary as a result of changing market evaluations of the ability
of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values also will change in
response to changes in the interest
rates payable on new issues of municipal securities (i.e., market risk). The
category includes, but is not limited
to, tax anticipation notes, bond anticipation notes, revenue anticipation notes,
revenue anticipation warrants,
and tax and revenue anticipation notes.
U.S. Government
Obligations. U.S.
Government obligations include direct obligations of the U.S. Treasury,
including
Treasury bills, notes and bonds, the principal and interest payments of which
are backed by the full faith and
credit of the U.S. This category also includes other securities issued by U.S.
Government agencies or U.S.
Government sponsored entities, such as the Government National Mortgage
Association (“GNMA”), Federal
National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage
Corporation (“FHLMC”). U.S.
Government Obligations issued by U.S. Government agencies or
government-sponsored entities may not be backed
by the full faith and credit of the U.S. Government.
GNMA, a
wholly owned U.S. Government corporation, is authorized to guarantee, with the
full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA
and backed by pools of mortgages insured by the Federal Housing Administration
or the Department of
Veterans Affairs. Securities issued by FNMA and FHLMC are not backed by the full
faith and credit of the U.S. Government.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest
by FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC guarantees the timely
payment of interest and ultimate collection or scheduled payment of principal,
but its guarantees are not backed by
the full faith and credit of the U.S. Government.
While U.S.
Treasury obligations are backed by the “full faith and credit” of the U.S.
Government, such securities are
nonetheless subject to risk. U.S. Government obligations are subject to low but
varying degrees of credit risk, and
are still subject to interest rate and market risk. From time to time,
uncertainty regarding congressional
action to increase the statutory debt ceiling could: i) increase the risk that
the U.S. Government may
default on payments on certain U.S. Government securities; ii) cause the credit
rating of the U.S. Government
to be downgraded or increase volatility in both stock and bond markets; iii)
result in higher interest rates; iv)
reduce prices of U.S. Treasury securities; and/or v) increase the costs of
certain kinds of debt. U.S. Government
obligations may be adversely affected by a default by, or decline in the credit
quality of, the U.S. Government.
In the past, U.S. sovereign credit has experienced downgrades, and there can be
no guarantee that it will
not be downgraded in the future. Further, if a U.S. Government-sponsored entity
is negatively impacted by
legislative or regulatory action, is unable to meet its obligations, or its
creditworthiness declines, the performance
of a Fund that holds securities of the entity will be adversely
impacted.
Under the
direction of the Federal Housing Finance Agency (“FHFA”), FNMA and FHLMC have
entered into a joint
initiative to develop a common securitization platform for the issuance of a
uniform mortgage-backed
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security
(the “Single Security Initiative”) that aligns the characteristics of FNMA and
FHLMC certificates. The Single
Security Initiative was implemented in June 2019, and the effects it may have on
the market for mortgage-backed
securities are uncertain.
Variable Amount Master Demand
Notes. Variable
amount master demand notes are obligations that permit the investment
of fluctuating amounts at varying market rates of interest pursuant to
arrangements between the issuer and
the Funds whereby both parties have the right to vary the amount of the
outstanding indebtedness on the
notes.
Because
these obligations are direct lending arrangements between the lender and
borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for
these obligations, although they are redeemable at face value. For variable
amount master demand notes that
are not secured by letters of credit or other credit support arrangements, a
Fund’s right to recover is dependent
on the ability of the borrower to pay principal and interest on schedule or on
demand. Variable amount
master demand notes that are secured by collateral are subject to the risk that
the collateral securing the notes
will decline in value or have no value. A decline in value of the collateral,
whether as a result of market value
declines, bankruptcy proceedings or otherwise, could cause the note to be
undercollateralized. Variable amount
master demand notes are typically not rated by credit rating agencies, and a
Fund may invest in notes that are
not rated only if the sub-adviser determines, at the time of investment, the
obligations are of comparable
credit quality to the other obligations in which the Fund may
invest.
Zero-Coupon, Step-Up Coupon, and Pay-in-Kind
Securities.
Zero-coupon, step-up coupon, and pay-in-kind securities
are types of debt securities that do not make regular cash interest payments.
Asset-backed securities,
convertible securities, corporate debt securities, foreign securities,
high-yield securities, mortgage-backed
securities, municipal securities, participation interests, stripped securities,
U.S. Government and
related obligations and other types of debt instruments may be structured as
zero-coupon, step-up coupon,
and pay-in-kind securities.
Instead of
making periodic interest payments, zero-coupon securities are sold at discounts
from face value. The interest
earned by the investor from holding this security to maturity is the difference
between the maturity value and
the purchase price. Step-up coupon bonds are debt securities that do not pay
interest for a specified period of
time and then, after the initial period, pay interest at a series of different
rates. Pay-in-kind securities normally
give the issuer an option to pay cash at a coupon payment date or to give the
holder of the security a similar
security with the same coupon rate and a face value equal to the amount of the
coupon payment that would have
been made. To the extent these securities do not pay current cash income, the
market prices of these
securities would generally be more volatile and likely to respond to a greater
degree to changes in interest rates than
the market prices of securities that pay cash interest periodically having
similar maturities and credit qualities.
EQUITY
SECURITIES
Equity
securities represent an ownership interest, or the right to acquire an ownership
interest, in an issuer. Different
types of equity securities provide different voting and dividend rights and
priority in the event of the bankruptcy
and/or insolvency of the issuer. Equity securities include common stocks and
certain preferred stocks,
certain types of convertible securities and warrants (see “Other Securities
Section below”). Equity securities
other than common stock are subject to many of the same risks as common stock,
although possibly to
different degrees. The risks of equity securities are generally magnified in the
case of equity investments in distressed
companies.
Equity
securities fluctuate in value and the prices of equity securities tend to move
by industry, market or sector.
When market conditions favorably affect, or are expected to favorably affect, an
industry, the share prices of
the equity securities of companies in that industry tend to rise. Conversely,
negative news or a poor outlook
for a particular industry can cause the share prices of such securities of
companies in that industry to decline.
Investing in equity securities poses risks specific to an issuer, as well as to
the particular type of company
issuing the equity securities. For example, investing in the equity securities
of small- or mid-capitalization
companies can involve greater risk than is customarily associated with investing
in stocks of larger,
more-established companies. Small- or mid-capitalization companies often have
limited product lines,
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limited
operating histories, limited markets or financial resources, may be dependent on
one or a few key persons
for management, and can be more susceptible to financial losses. Also, their
securities may be thinly traded
(and therefore may have to be sold at a discount from current prices or sold in
small lots over an extended
period of time) and may be subject to wider price swings, thus creating a
greater risk of loss than securities
of larger capitalization companies.
Common Stock. Common
stock represents a unit of equity ownership of a corporation. Owners typically
are entitled
to vote on the election of directors and other important corporate governance
matters, and to receive dividend
payments, if any, on their holdings. However, ownership of common stock does not
entitle owners to participate
in the day-to-day operations of the corporation. Common stocks of domestic and
foreign public corporations
can be listed, and their shares traded, on domestic stock exchanges, such as the
NYSE or the NASDAQ
Stock Market. Domestic and foreign corporations also may have their shares
traded on foreign exchanges,
such as the London Stock Exchange or Tokyo Stock Exchange. Common stock may be
privately placed or
publicly offered.
The price
of common stock is generally affected by corporate earnings, anticipated
dividend payments, types of products
or services offered, projected growth rates, experience of management,
liquidity, and general market conditions.
In the event that a corporation declares bankruptcy or is liquidated, the claims
of secured and unsecured
creditors and owners of bonds and preferred stock take precedence over the
claims of those who own common
stock.
The value
of common stock may fall due to changes in general economic conditions that
impact the market as a whole, as
well as factors that directly relate to a specific company or its industry. Such
general economic conditions
include changes in interest rates, periods of market turbulence or instability,
or general and prolonged
periods of economic decline and cyclical change. It is possible that a drop in
the stock market may depress
the price of most or all of the common stocks in a Fund’s portfolio. Common
stock is also subject to the risk that
investor sentiment toward particular industries will become negative. The value
of a company’s common
stock may fall because of various factors, including an increase in production
costs that negatively impact
other companies in the same region, industry or sector of the market. The value
of common stock also may
decline significantly over a short period of time due to factors specific to a
company, including decisions made by
management or lower demand for the company’s products or services.
Preferred Stock. Preferred
stock represents an equity interest in a company that generally entitles the
holder to receive,
in preference to the holders of other stocks, such as common stocks, dividends
and a fixed share of the proceeds
resulting from a liquidation of the company. Some preferred stock also entitles
holders to receive additional
liquidation proceeds on the same basis as holders of a company’s common stock
and, thus, also represent
an ownership interest in that company. Distributions on preferred stock
generally are taxable as dividend
income, rather than interest payments, for federal income tax
purposes.
Preferred
stock generally has no maturity date, so its market value is dependent on the
issuer’s business prospects
for an indefinite period of time. Preferred stock may pay fixed or adjustable
rates of return. Preferred stock is
subject to issuer-specific and market risks generally applicable to equity
securities. A company generally pays
dividends on its preferred stock only after making required payments to holders
of its bonds and other debt. For
this reason, the value of preferred stock will usually react more strongly than
bonds and other debt to actual or
perceived changes in the company’s financial condition or prospects. Preferred
stock of smaller companies
may be more vulnerable to adverse developments than preferred stock of larger
companies. In addition,
preferred stock is subordinated to all debt obligations in the event of
insolvency, and an issuer’s failure to make a
dividend payment is generally not an event of default entitling the preferred
shareholders to take action.
Auction
preferred stock (“APS”) is a type of adjustable-rate preferred stock with a
dividend determined periodically
in a Dutch auction process by institutional bidders. An APS is distinguished
from standard preferred stock
because its dividends change more frequently. Shares typically are bought and
sold at face values generally
ranging from $100,000 to $500,000 per share. Holders of APS may not be able to
sell their shares if an auction
fails, such as when there are more shares of APS for sale at an auction than
there are purchase bids.
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Trust-preferred
securities, also known as trust-issued securities, are securities that have
characteristics of both debt and
equity instruments and are typically treated by the Funds as debt investments.
Generally, trust-preferred
securities are cumulative preferred stocks issued by a trust that is created by
a financial institution,
such as a bank holding company. The financial institution typically creates the
trust with the objective
of increasing its capital by issuing subordinated debt to the trust in return
for cash proceeds that are reflected
on the financial institution’s balance sheet.
The
primary asset owned by a trust is the subordinated debt issued to the trust by
the financial institution. The financial
institution makes periodic interest payments on the debt as discussed further
below. The financial institution
will own the trust’s common securities, which typically represents a small
percentage of the trust’s capital
structure. The remainder of the trust’s capital structure typically consists of
trust-preferred securities which are
sold to investors. The trust uses the proceeds from selling the trust-preferred
securities to purchase the
subordinated debt issued by the financial institution.
The trust
uses the interest received from the financial institution on its subordinated
debt to make dividend payments
to the holders of the trust-preferred securities. The dividends are generally
paid on a quarterly basis and are
often higher than other dividends potentially available on the financial
institution’s common stocks. The interests
of the holders of the trust-preferred securities are senior to those of the
financial institution’s common
stockholders in the event that the financial institution is liquidated, although
their interests are typically
subordinated to those of other holders of other debt issued by the
institution.
In certain
instances, the structure involves more than one financial institution and thus,
more than one trust. In such a
pooled offering, an additional separate trust may be created. This trust will
issue securities to investors and use
the proceeds to purchase the trust-preferred securities issued by
trust-preferred trust subsidiaries of the
participating financial institutions. In such a structure, the trust-preferred
securities held by the investors are backed
by other trust-preferred securities issued by the trust
subsidiaries.
If a
financial institution is financially unsound and defaults on interest payments
to the trust, the trust will not be able to
make dividend payments to holders of the trust-preferred securities (e.g, a
Fund), as the trust typically
has no business operations other than holding the subordinated debt issued by
the financial institution(s)
and issuing the trust-preferred securities and common stock backed by the
subordinated debt.
Real Estate/REIT
Securities. Common,
preferred and convertible securities of issuers in real estate-related
industries,
real estate-linked derivatives and real estate investment trusts (“REITs”)
provide exposure to the real
estate sector. Each of these types of investments is subject to risks similar to
those associated with direct ownership
of real estate, including loss to casualty or condemnation, increases in
property taxes and operating expenses,
zoning law amendments, changes in interest rates, overbuilding and increased
competition, variations in market
value, and possible environmental liabilities.
REITs are
pooled investment vehicles that own, and typically operate, income-producing
real estate. If a REIT meets
certain requirements, including distributing to shareholders substantially all
of its taxable income (other than net
capital gains), then it is not generally taxed on the income distributed to
shareholders. REITs are subject to
management fees and other expenses, and so the Funds that invest in REITs will
bear their proportionate
share of the costs of the REITs’ operations, which are not shown as acquired
fund fees and expenses
in a Fund’s fee table.
There are
three general categories of REITs: Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs invest
primarily in direct fee ownership or leasehold ownership of real property; they
derive most of their income
from rents. Mortgage REITs invest mostly in mortgages on real estate, which may
secure construction, development
or long-term loans, and the main source of their income is mortgage interest
payments. Hybrid REITs hold
both ownership and mortgage interests in real estate.
Along with
the risks common to different types of real estate-related securities, REITs, no
matter the type, involve
additional risk factors. These include poor performance by the REIT’s manager,
changes to the tax laws, and
failure by the REIT to qualify for tax-free distribution of income or exemption
under the 1940 Act. Furthermore,
REITs are not typically diversified and are heavily dependent on cash flows from
property owners and/or
tenants.
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A Fund or
some of the REITs in which a Fund may invest may be permitted to hold senior or
residual interests in real
estate mortgage investment conduits (“REMICs”) or debt or equity interests in
taxable mortgage pools. A Fund may
also hold interests in “Re-REMICs”, which are interests in securitizations
formed by the contribution of asset
backed or other similar securities into a trust which then issues securities in
various tranches. The Funds may
participate in the creation of a Re-REMIC by contributing assets to the issuing
trust and receiving junior and/or
senior securities in return. An interest in a Re-REMIC security may be riskier
than the securities originally held by
and contributed to the issuing trust, and the holders of the Re-REMIC securities
will bear the costs associated
with the securitization.
FOREIGN
SECURITIES
Unless
otherwise stated in a Fund’s prospectus, the decision on whether stocks and
other securities or investments
are deemed to be “foreign” is based primarily on the issuer’s place of
organization/incorporation, but the
Fund may also consider the issuer’s domicile, principal place of business,
primary stock exchange listing, sources of
revenue or other factors, such as, in the case of asset-backed or other
collateralized securities, the countries
in which the collateral backing the securities is located. Foreign equity
securities include common stocks and
certain preferred stocks, certain types of convertible securities and warrants
(see “Equity Securities” above and
“Other Securities Section” below). Foreign debt securities may be structured as
fixed-, variable- or floating-rate
obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be
privately placed or
publicly offered (see “Debt Securities” above).
Foreign
securities may include securities of issuers in emerging and frontier market
countries, which carry heightened
risks relative to investments in more developed foreign markets. Unless
otherwise stated in a Fund’s
prospectus, countries are generally characterized by a Fund’s sub-adviser as
“emerging market countries”
by reference to a broad market index, by reference to the World Bank’s per
capita income brackets or based on
the sub-adviser’s qualitative judgments about a country’s level of economic and
institutional development,
and include markets commonly referred to as “frontier markets.” An emerging
market is generally
in the earlier stages of its industrialization cycle with a low per capita gross
domestic product (“GDP”) and a low
market capitalization to GDP ratio relative to those in the United States and
the European Union. Frontier
market countries generally have smaller economies and even less developed
capital markets than typical
emerging market countries and, as a result, the risks of investing in emerging
market countries are magnified
in frontier market countries.
Investments
in or exposure to foreign securities involve certain risks not associated with
investments in or exposure
to securities of U.S. companies. For example, foreign markets can be extremely
volatile. Foreign securities
may also be less liquid than securities of U.S. companies so that a Fund may, at
times, be unable to sell foreign
securities at desirable times and/or prices. Brokerage commissions, custodial
costs, currency conversion costs and
other fees are also generally higher for foreign securities. A Fund may have
limited or no legal recourse
in the event of default with respect to certain foreign debt securities,
including those issued by foreign governments.
The
performance of a Fund may also be negatively affected by fluctuations in a
foreign currency’s strength or weakness
relative to the U.S. dollar, particularly to the extent the Fund invests a
significant percentage of its assets in
foreign securities or other assets denominated in non-U.S. currencies. Currency
rates in foreign countries
may fluctuate significantly over short or long periods of time for a number of
reasons, including changes in
interest rates, imposition of currency exchange controls and economic or
political developments in the U.S.
or abroad. A Fund may also incur currency conversion costs when converting
foreign currencies into U.S. dollars
and vice versa.
It may be
difficult to obtain reliable information about the securities and business
operations of certain foreign issuers.
It may also be difficult to evaluate such information, as well as foreign
economic trends, due to foreign regulation
and accounting standards. Governments or trade groups may compel local agents to
hold securities in
designated depositories that are not subject to independent evaluation.
Additionally, investments in certain countries
may subject a Fund to tax rules, the application of which may be uncertain.
Countries may amend or revise
their existing tax laws, regulations and/or procedures in the future, possibly
with retroactive effect. Changes in
or uncertainties regarding the laws, regulations or procedures of a country
could reduce the
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after-tax
profits of a Fund, directly or indirectly, including by reducing the after-tax
profits of companies located in
such countries in which the Fund invests, or result in unexpected tax
liabilities for the Fund.
Global
economies and financial markets have become increasingly interconnected, which
increases the possibility
that conditions in one country or region might adversely impact issuers in a
different country or region.
Any attempt by a Fund to hedge against or otherwise protect its portfolio, or to
profit from such circumstances,
may fail and, accordingly, an investment in a Fund could lose money over short
or long periods. For
example, the economies of many countries or regions in which a Fund may invest
are highly dependent on trading
with certain key trading partners. Reductions in spending on products and
services by these key trading partners,
the institution of tariffs or other trade barriers, or a slowdown in the
economies of key trading partners
may adversely affect the performance of securities in which a Fund may invest.
The severity or duration
of adverse economic conditions may also be affected by policy changes made by
governments or quasi-governmental
organizations. The imposition of sanctions by the United States or another
government on a country
could cause disruptions to the country’s financial system and economy, which
could negatively impact the value
of securities. To the extent a Fund holds securities of an issuer that becomes
subject to sanctions, such
securities may also become less liquid and a Fund may be forced to sell
securities when it otherwise would not have
done so. The risks posed by sanctions may be heightened to the extent a Fund
invests significantly in the
affected country or region or in issuers from the affected country that depend
on global markets.
In
addition, foreign securities may be impacted by economic, political, social,
diplomatic or other conditions or events
(including, for example, military confrontations, war and terrorism), as well as
the seizure, expropriation or
nationalization of a company or its assets or the assets of a particular
investor or category of investors. A foreign
government may also restrict an issuer from paying principal and interest on its
debt obligations to investors
outside the country. It may also be difficult to use foreign laws and courts to
force a foreign issuer to make
principal and interest payments on its debt obligations.
Although
it is not uncommon for governments to enter into trade agreements that would,
among other things, reduce
barriers among countries, increase competition among companies and reduce
government subsidies, there are
no assurances that such agreements will achieve their intended economic
objectives. There is also a possibility
that such trade arrangements: i) will not be implemented; ii) will be
implemented, but not completed; iii) or
will be completed, but then partially or completely unwound. It is also possible
that a significant participant
could choose to abandon a trade agreement, which could diminish its credibility
and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries,
including appreciation or depreciation of currencies, a significant increase in
exchange rate volatility, a resurgence
in economic protectionism and an undermining of confidence in markets. Such
developments could have an
adverse impact on a Fund’s investments in the debt of countries participating in
such trade agreements.
Some
foreign countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly
their equity markets, by foreign entities, like the Funds. For example, certain
countries may require governmental
approval prior to investments by foreign persons or limit the amount of
investment by foreign persons in
a particular company, or limit the investment by foreign persons to only a
specific class of securities of a
company which may have less advantageous terms (including price) than securities
of the company available
for purchase by nationals. Even in instances where there is no individual
investment quota that applies, trading
may be subject to aggregate and daily investment quota limitations that apply to
foreign entities in the aggregate.
Such limitations may restrict a Fund from investing on a timely basis, which
could affect the Fund’s ability to
effectively pursue its investment strategy. Investment quotas are also subject
to change. In instances where
governmental approval is required, there can be no assurance that a Fund will be
able to obtain such approvals
in a timely manner. In addition, changes to restrictions on foreign ownership of
securities subsequent to a
Fund’s purchase of such securities may have an adverse effect on the value of
such shares.
Regulations
that govern the manner in which foreign investors may invest in companies in
certain countries can subject a
Fund to trading, clearance and settlement procedures that could pose risks to
the Fund. For example, a Fund may
be required in certain countries to invest initially through a local broker or
other entity, and then have the shares
purchased re-registered in the name of the Fund. Re-registration may, in some
instances, not be able to occur
on a timely basis, resulting in a delay during which the Fund may be denied
certain of its rights as an
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investor,
including rights as to dividends or to be made aware of certain corporate
actions. In certain other countries,
shares may be held only through a nominee structure whereby a local company
holds purchased shares as
nominee on behalf of foreign investors. The precise nature and rights of a Fund
as the beneficial owner of shares
held through such a nominee structure may not be well defined under local law,
and as a result, should such local
company become insolvent, there is a risk that such shares may not be regarded
as held for the beneficial
ownership of the Fund, but rather as part of the general assets of the local
company available for general
distribution to its creditors.
A Fund’s
foreign debt securities are generally held outside of the United States in the
primary market for the securities
in the custody of certain eligible foreign banks and trust companies (“foreign
sub-custodians”), as permitted
under the 1940 Act. Settlement practices for foreign securities may differ from
those in the United States.
Some countries have limited governmental oversight and regulation of industry
practices, stock exchanges,
depositories, registrars, brokers and listed companies, which increases the risk
of corruption and fraud and
the possibility of losses to a Fund. In particular, under certain circumstances,
foreign securities may settle on
a delayed delivery basis, meaning that a Fund may be required to make payment
for securities before the Fund
has actually received delivery of the securities or deliver securities prior to
the receipt of payment. Typically,
in these cases, the Fund will receive evidence of ownership in accordance with
the generally accepted settlement
practices in the local market entitling the Fund to delivery or payment at a
future date, but there is a risk that
the security will not be delivered to the Fund or that payment will not be
received, although the Fund and its
foreign sub-custodians take reasonable precautions to mitigate this risk. Losses
can also result from lost,
stolen or counterfeit securities; defaults by brokers and banks; failures or
defects of the settlement system; or
poor and improper recordkeeping by registrars and issuers.
There is a
practice in certain foreign markets under which an issuer’s securities are
blocked from trading at the custodian
or sub-custodian level for a specified number of days before and, in certain
instances, after a shareholder
meeting where such shares are voted. This is referred to as “share blocking.”
The blocking period can last
up to several weeks. Share blocking may prevent a Fund from buying or selling
securities during this period,
because during the time shares are blocked, trades in such securities will not
settle. It may be difficult or impossible
to lift blocking restrictions, with the particular requirements varying widely
by country. To avoid these
restrictions, a sub-adviser, on behalf of a Fund, may abstain from voting
proxies in markets that require share
blocking.
Foreign Debt
Securities. Foreign
debt securities may be structured as fixed-, variable- or floating-rate
obligations,
or as zero-coupon, pay-in-kind and step-coupon securities. They include
fixed-income securities of foreign
issuers and securities or contracts payable or denominated in non-U.S.
currencies. Investments in, or exposure
to, foreign debt securities involve certain risks not associated with securities
of U.S. issuers. Unless otherwise
stated in a Fund’s prospectus, the decision on whether a security is deemed to
be “foreign” is based primarily
on the issuer’s place of organization/incorporation, but the Fund may also
consider the issuer’s domicile,
principal place of business, primary stock exchange listing, sources of revenue
or other factors.
Foreign
debt securities may include securities of issuers in emerging and frontier
market countries, which carry heightened
risks relative to investments in more developed foreign markets. Unless
otherwise stated in a Fund’s
prospectus, countries are generally characterized by a Fund’s sub-adviser as
“emerging market countries”
by reference to a broad market index, by reference to the World Bank’s per
capita income brackets or based on
the sub-adviser’s qualitative judgments about a country’s level of economic and
institutional development,
and include markets commonly referred to as “frontier markets.” An emerging
market is generally
in the earlier stages of its industrialization cycle with a low per capita gross
domestic product (“GDP”) and a low
market capitalization to GDP ratio relative to those in the United States and
the European Union. Frontier
market countries generally have smaller economies and even less developed
capital markets than typical
emerging market countries and, as a result, the risks of investing in emerging
market countries are magnified
in frontier market countries.
Investments
in or exposure to foreign debt securities involve certain risks not associated
with investments in or exposure
to securities of U.S. companies. For example, foreign markets can be extremely
volatile. Foreign debt securities
may also be less liquid than securities of U.S. issuers so that a Fund may, at
times, be unable to sell
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foreign
debt securities at desirable times and/or prices. Transaction fees, custodial
costs, currency conversion costs and
other fees are also generally higher for foreign debt securities. A Fund may
have limited or no legal recourse
in the event of default with respect to certain foreign debt securities,
including those issued by foreign governments.
Foreign debt securities carry many of the same risks as other types of foreign
securities. For more
information, refer to “Foreign Securities.”
During
periods of very low or negative interest rates, a Fund’s foreign debt
investments may be unable to generate
or maintain positive returns. Certain countries have recently experienced
negative interest rates on certain
fixed-income instruments. Very low or negative interest rates may magnify
interest rate risk. Changing interest
rates, including rates that fall below zero, may have unpredictable effects on
markets, may result in heightened
market volatility, and may detract from Fund performance to the extent a Fund is
exposed to such interest
rates.
The cost
of servicing foreign debt will also generally be adversely affected by rising
international interest rates, because
many external debt obligations bear interest at rates which are adjusted based
upon international interest
rates. Furthermore, there is a risk of restructuring of certain foreign debt
obligations that could reduce and
reschedule interest and principal payments.
The
performance of a Fund may also be negatively affected by fluctuations in a
foreign currency’s strength or weakness
relative to the U.S. dollar, particularly to the extent the Fund invests a
significant percentage of its assets in
foreign debt securities denominated in non-U.S. currencies. Currency rates in
foreign countries may fluctuate
significantly over short or long periods of time for a number of reasons,
including changes in interest rates,
imposition of currency exchange controls and economic or political developments
in the U.S. or abroad. A Fund may
also incur currency conversion costs when converting foreign currencies into
U.S. dollars and vice versa.
It may be
difficult to obtain reliable information about the securities and business
operations of certain foreign issuers.
It may also be difficult to evaluate such information, as well as foreign
economic trends, due to foreign regulation
and accounting standards. Governments or trade groups may compel local agents to
hold securities in
designated depositories that are not subject to independent evaluation.
Additionally, investments in certain countries
may subject a Fund to tax rules, the application of which may be uncertain.
Countries may amend or revise
their existing tax laws, regulations and/or procedures in the future, possibly
with retroactive effect. Changes in
or uncertainties regarding the laws, regulations or procedures of a country
could reduce the after-tax
profits of a Fund, directly or indirectly, including by reducing the after-tax
profits of companies located in
such countries in which the Fund invests, or result in unexpected tax
liabilities for the Fund.
Global
economies and financial markets have become increasingly interconnected, which
increases the possibility
that conditions in one country or region might adversely impact issuers in a
different country or region.
Any attempt by a Fund to hedge against or otherwise protect its portfolio, or to
profit from such circumstances,
may fail and, accordingly, an investment in a Fund could lose money over short
or long periods. For
example, the economies of many countries or regions in which a Fund may invest
are highly dependent on trading
with certain key trading partners. Reductions in spending on products and
services by these key trading partners,
the institution of tariffs or other trade barriers, or a slowdown in the
economies of key trading partners
may adversely affect the performance of securities in which a Fund may invest.
The severity or duration
of adverse economic conditions may also be affected by policy changes made by
governments or quasi-governmental
organizations. The imposition of sanctions by the United States or another
government on a country
could cause disruptions to the country’s financial system and economy, which
could negatively impact the value
of securities. The risks posed by sanctions may be heightened to the extent a
Fund invests significantly
in the affected country or region or in issuers from the affected country that
depend on global markets.
In
addition, foreign debt securities may be impacted by economic, political,
social, diplomatic or other conditions
or events (including, for example, military confrontations, war and terrorism),
as well as the seizure, expropriation
or nationalization of a company or its assets or the assets of a particular
investor or category of investors.
A foreign government may also restrict an issuer from paying principal and
interest on its debt
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obligations
to investors outside the country. It may also be difficult to use foreign laws
and courts to force a foreign
issuer to make principal and interest payments on its debt
obligations.
Further,
investments in certain countries may subject a Fund to tax rules, the
application of which may be uncertain.
Countries may amend or revise their existing tax laws, regulations and/or
procedures in the future, possibly
with retroactive effect. Changes in, or uncertainties regarding the laws,
regulations or procedures of a country
could reduce the after-tax profits of a Fund, directly or indirectly, including
by reducing the after-tax profits of
companies located in such countries in which the Fund invests, or result in
unexpected tax liabilities for the
Fund.
Although
it is not uncommon for governments to enter into trade agreements that would,
among other things, reduce
barriers among countries, increase competition among companies and reduce
government subsidies, there are
no assurances that such agreements will achieve their intended economic
objectives. There is also a possibility
that such trade arrangements: i) will not be implemented; ii) will be
implemented, but not completed; iii) or
will be completed, but then partially or completely unwound. It is also possible
that a significant participant
could choose to abandon a trade agreement, which could diminish its credibility
and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries,
including appreciation or depreciation of currencies, a significant increase in
exchange rate volatility, a resurgence
in economic protectionism and an undermining of confidence in markets. Such
developments could have an
adverse impact on a Fund’s investments in the debt of countries participating in
such trade agreements.
A Fund’s
foreign debt securities are generally held outside of the United States in the
primary market for the securities
in the custody of certain eligible foreign banks and trust companies (“foreign
sub-custodians”), as permitted
under the 1940 Act. Settlement practices for foreign securities may differ from
those in the United States.
Some countries have limited governmental oversight and regulation of industry
practices, stock exchanges,
depositories, registrars, brokers and listed companies, which increases the risk
of corruption and fraud and
the possibility of losses to a Fund. In particular, under certain circumstances,
foreign securities may settle on
a delayed delivery basis, meaning that a Fund may be required to make payment
for securities before the Fund
has actually received delivery of the securities or deliver securities prior to
the receipt of payment. Typically,
in these cases, the Fund will receive evidence of ownership in accordance with
the generally accepted settlement
practices in the local market entitling the Fund to delivery or payment at a
future date, but there is a risk that
the security will not be delivered to the Fund or that payment will not be
received, although the Fund and its
foreign sub-custodians take reasonable precautions to mitigate this risk. Losses
can also result from lost,
stolen or counterfeit securities; defaults by brokers and banks; failures or
defects of the settlement system; or
poor and improper recordkeeping by registrars and issuers.
Foreign Currency
Contracts. To the
extent that a Fund may i) invest in securities denominated in foreign
currencies,
ii) temporarily hold funds in bank deposits or other money market investments
denominated in foreign
currencies, or iii) engage in foreign currency contract transactions, the Fund
may be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the U.S.
dollar. The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and
demand in the foreign exchange markets. The international balance of payments
and other economic
and financial conditions, market interest rates, government intervention,
speculation and other factors
affect these forces. A Fund may engage in foreign currency transactions in order
to hedge its portfolio and to
attempt to protect it against uncertainty in the level of future foreign
exchange rates in the purchase and sale
of securities. A Fund may also engage in foreign currency transactions to
increase exposure to a foreign currency
or to shift exposure to foreign currency fluctuations from one country to
another.
Forward
foreign currency contracts are also contracts for the future delivery of a
specified currency at a specified
time and at a specified price. These contracts may be bought or sold to protect
a Fund against a possible
loss resulting from an adverse change in the relationship between foreign
currencies and the U.S. dollar or to
increase exposure to a particular foreign currency. These transactions differ
from futures contracts in that they are
usually conducted on a principal basis instead of through an exchange, and
therefore there are no brokerage
fees, margin deposits are negotiated between the parties, and the contracts are
settled through
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different
procedures. The sub-advisers will consider on an ongoing basis the
creditworthiness of the institutions with which
each Fund will enter into such forward foreign currency contracts.
The use of
foreign currency contracts involves the risk of imperfect correlation between
movements in contract prices and
movements in the price of the currencies to which the contracts relate. The
successful use of foreign currency
transaction strategies also depends on the ability of the sub-adviser to
correctly forecast interest rate movements,
currency rate movements and general stock market price movements. There can be
no assurance that the
sub-adviser’s forecasts will be accurate. Accordingly, a Fund may be required to
buy or sell additional currency
on the spot market (and bear the expense of such transaction) if the
sub-adviser’s predictions regarding
the movement of foreign currency or securities markets prove inaccurate. Also,
foreign currency transactions,
like currency exchange rates, can be affected unpredictably by intervention (or
the failure to intervene)
by U.S. or foreign governments or central banks, or by currency controls or
political developments. Such
events may prevent or restrict a Fund’s ability to enter into foreign currency
transactions, force the Fund to exit a
foreign currency transaction at a disadvantageous time or price or result in
penalties for the Fund, any of which
may result in a loss to the Fund. When such contracts are used for hedging
purposes, they are intended to reduce
the risk of loss due to a decline in the value of the hedged currency, but at
the same time, they tend to limit any
potential gain which might result should the value of such currency
increase.
Foreign
currency contracts may be either futures contracts or forward contracts. Similar
to other futures contracts,
a foreign currency futures contract is an agreement for the future delivery of a
specified currency at a specified
time and at a specified price that will be secured by margin deposits, is
regulated by the CFTC and is traded on
designated exchanges. A Fund will incur brokerage fees when it purchases and
sells foreign currency futures
contracts.
Foreign
currency futures contracts carry the same risks as other futures contracts, but
also entail risks associated
with international investing. Similar to other futures contracts, a foreign
currency futures contract is an
agreement for the future delivery of a specified currency at a specified time
and at a specified price that will be secured
by margin deposits, is regulated by the CFTC and is traded on designated
exchanges. A Fund will incur
brokerage fees when it purchases and sells futures contracts.
To the
extent a Fund may invest in securities denominated in foreign currencies, and
may temporarily hold funds in
bank deposits or other money market investments denominated in foreign
currencies, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rates between such
currencies and the U.S. dollar. The rate of exchange between the U.S. dollar and
other currencies is determined
by the forces of supply and demand in the foreign exchange markets. The
international balance of payments
and other economic and financial conditions, government intervention,
speculation and other factors affect
these forces.
If a
decline in the exchange rate for a particular currency is anticipated, a Fund
may enter into a foreign currency futures
position as a hedge. If it is anticipated that an exchange rate for a particular
currency will rise, a Fund may enter
into a foreign currency futures position to hedge against an increase in the
price of securities denominated
in that currency. These foreign currency futures contracts will only be used as
a hedge against anticipated
currency rate changes. Although such contracts are intended to minimize the risk
of loss due to a decline in
the value of the hedged currency, at the same time, they tend to limit any
potential gain which might result
should the value of such currency increase.
The use of
foreign currency futures contracts involves the risk of imperfect correlation
between movements in futures
prices and movements in the price of currencies which are the subject of the
hedge. The successful use of foreign
currency futures contracts also depends on the ability of the sub-adviser to
correctly forecast interest
rate movements, currency rate movements and general stock market price
movements. There can be no
assurance that the sub-adviser’s judgment will be accurate. The use of foreign
currency futures contracts also
exposes a Fund to the general risks of investing in futures contracts,
including: the risk of an illiquid market for the
foreign currency futures contracts and the risk of adverse regulatory actions.
Any of these events may cause a
Fund to be unable to hedge its currency risks, and may cause a Fund to lose
money on its investments in foreign
currency futures contracts.
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Recent
Events in European Countries. A number
of countries in Europe have experienced severe economic and financial
difficulties. Many non-governmental issuers, and even certain governments, have
defaulted on, or been forced to
restructure, their debts; many other issuers have faced difficulties obtaining
credit or refinancing existing
obligations; financial institutions have in many cases required government or
central bank support, have
needed to raise capital, and/or have been impaired in their ability to extend
credit; and financial markets in Europe and
elsewhere have experienced extreme volatility and declines in asset values and
liquidity. These difficulties
may continue, worsen or spread within and beyond Europe. Responses to the
financial problems by European
governments, central banks and others, including austerity measures and reforms,
may not work, may result in
social unrest and may limit future growth and economic recovery or have other
unintended consequences.
Further defaults or restructurings by governments and others of their debt could
have additional adverse
effects on economies, financial markets and asset valuations around the
world.
On June
23, 2016, the citizens of the United Kingdom (“UK”) voted via referendum to
leave the European Union (the
“EU”), a measure commonly referred to as “Brexit.” On March 29, 2017, the UK
formally notified the European
Council of its intention to withdraw from the EU within two years after
providing such notice. Following
several extensions, the UK government and the EU eventually ratified a
withdrawal agreement and the UK
formally left the EU on January 31, 2020. The withdrawal agreement does not in
general address the future
relationship between the parties, which will need to be the subject of a
separate agreement negotiated following
the UK’s exit from the EU.
Brexit has
resulted in volatility in European and global markets and could have significant
negative impacts on financial
markets in the UK and throughout Europe. The longer term economic, legal,
political and social framework
to be put in place between the UK and the EU is unclear at this stage and is
likely to lead to ongoing political
and economic uncertainty and periods of exacerbated volatility in both the UK
and in wider European markets
for some time. This uncertainty may have an adverse effect on the global economy
and on the value of a Fund’s
investments. This may be due to, among other things: fluctuations in asset
values and exchange rates; increased
illiquidity of investments located, traded or listed within the UK, the EU or
elsewhere; changes in the willingness
or ability of counterparties to enter into transactions at the price and terms
on which a Fund is prepared
to transact; and/or changes in legal and regulatory regimes to which certain of
a Fund’s assets are or become
subject. Potential decline in the value of the British Pound and/or the Euro
against other currencies, along with
the potential downgrading of the UK’s sovereign credit rating, may also have an
impact on the performance
of a Fund’s assets or investments economically tied to the UK or the
EU.
The
effects of Brexit will depend, in part, on agreements the UK negotiates to
retain access to EU markets, either
during a transitional period or more permanently, including, but not limited to,
current trade and finance agreements.
Brexit could lead to legal and tax uncertainty and potentially divergent
national laws and regulations,
as the UK determines which EU laws to replace or replicate. The extent of the
impact of the withdrawal
negotiations in the UK and in global markets, as well as any associated adverse
consequences, remain
unclear, and the uncertainty may have a significant negative effect on the value
of a Fund’s investments. Whether or
not a Fund invests in securities of issuers located in Europe or with
significant exposure to European issuers or
countries, these events could result in losses to the Fund, as there may be
negative effects on the value and
liquidity of the Fund’s investments and/or the Fund’s ability to enter into
certain transactions.
Depositary
Receipts. American
Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and
European
Depositary Receipts (“EDRs”) represent interests in securities of foreign
companies that have been deposited
with a U.S. financial institution, such as a bank or trust company, and that
trade on an exchange or over-the-counter
(“OTC”).
A Fund may
invest in depositary receipts through “sponsored” or “unsponsored” facilities. A
sponsored facility is established
jointly by the issuer of the underlying security and a depositary (the issuing
bank or trust company), whereas a
depositary may establish an unsponsored facility without participation by the
issuer of the deposited security.
Holders of
unsponsored depositary receipts generally bear all the costs of such facilities,
and the depositary of an
unsponsored facility frequently is under no obligation to distribute interest
holder communications received from the
issuer of the deposited security or to pass through voting rights to the holders
of such receipts in
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respect of
the deposited securities. The issuers of unsponsored depositary receipts are not
obligated to disclose material
information in the United States; as such, there may be limited information
available regarding such issuers
and/or limited correlation between available information and the market value of
depositary receipts.
ADRs
represent interests in foreign issuers that trade on U.S. exchanges or OTC. ADRs
represent the right to receive
securities of the foreign issuer deposited with the issuing bank or trust
company. Generally, ADRs are denominated
in U.S. dollars and are designed for use in the U.S. securities markets. The
depositaries that issue ADRs are
usually U.S. financial institutions, such as a bank or trust company, but the
underlying securities are issued by
a foreign issuer.
GDRs may
be issued in U.S. dollars or other currencies and are generally designed for use
in securities markets outside
the United States. GDRs represent the right to receive foreign securities and
may be traded on the exchanges
of the depositary’s country. The issuing depositary, which may be a foreign or a
U.S. entity, converts dividends
and the share price into the shareholder’s home currency. EDRs are generally
issued by a European bank and
traded on local exchanges.
Although
an issuing bank or trust company may impose charges for the collection of
dividends on foreign securities
that underlie ADRs, GDRs and EDRs, and for the conversion of ADRs, GDRs and EDRs
into their respective
underlying securities, there are generally no fees imposed on the purchase or
sale of ADRs, GDRs and EDRs,
other than transaction fees ordinarily involved with trading stocks. ADRs, GDRs
and EDRs may be less liquid or
may trade at a lower price than the underlying securities of the issuer.
Additionally, receipt of corporate information
about the underlying issuer may be untimely.
Emerging Market
Securities. Unless
otherwise stated in a Fund’s prospectus, countries are generally characterized
by a Fund’s sub-adviser as “emerging market countries” by reference to a
broad-based market index, by
reference to the World Bank’s per capita income brackets or based on the
sub-adviser’s qualitative judgments
about a country’s level of economic and institutional development, and include
markets commonly referred
to as “frontier markets.” An emerging market is generally in the earlier stages
of its industrialization cycle with
a low per capita gross domestic product (“GDP”) and a low market capitalization
to GDP ratio relative to those
in the United States and the European Union. Frontier market countries generally
have smaller economies
and even less developed capital markets than typical emerging market countries
(which themselves have
increased investment risk relative to investing in more developed markets) and,
as a result, the risks of investing
in emerging market countries are magnified in frontier market
countries.
Investing
in emerging markets may involve risks in addition to and greater than those
generally associated with investing
in the securities markets of developed countries. For example, economies in
emerging market countries
may be dependent on relatively few industries that are more susceptible to local
and global changes. Securities
markets in these countries can also be relatively small and have substantially
lower trading volumes. As a
result, securities issued in these countries may be more volatile and less
liquid, and may be more difficult to value,
than securities issued in countries with more developed economies and/or
markets.
Certain
emerging market countries lack uniform accounting, auditing and financial
reporting and disclosure standards,
have less governmental supervision of financial markets than developed
countries, and have less developed
legal systems than developed countries. Certain governments may be more unstable
and present greater
risks of nationalization or restrictions on foreign ownership of local
companies. Repatriation of investment
income, capital and the proceeds of sales by foreign investors may require
governmental registration
and/or approval in some emerging market countries. Some emerging market
countries may also impose
punitive taxes that could adversely affect the prices of securities. While a
Fund will only invest in markets
where these restrictions are considered acceptable by the Fund’s sub-adviser, a
country could impose new or
additional repatriation restrictions after the Fund’s investment. If this
happens, the Fund’s response might
include, among other things, applying to the appropriate authorities for a
waiver of the restrictions or engaging
in transactions in other markets designed to offset the risks of decline in that
country. Such restrictions
will be considered in relation to a Fund’s liquidity needs and other factors.
Further, some attractive equity
securities may not be available to a Fund if foreign shareholders already hold
the maximum amount legally
permissible.
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While
government involvement in the private sector varies in degree among emerging
market countries, such involvement
may in some cases include government ownership of companies in certain sectors,
wage and price controls
or imposition of trade barriers and other protectionist measures. With respect
to any developing country,
there is no guarantee that some future economic or political crisis will not
lead to price controls, forced mergers of
companies, expropriation, or creation of government monopolies to the possible
detriment of a Fund’s
investments. In addition, rapid fluctuations in inflation rates may have
negative impacts on the economies
and securities markets of certain emerging market countries.
Additionally,
there may be increased settlement risk for transactions in securities of
emerging market issuers. Settlement
systems in emerging market countries are generally less organized than those in
developed markets.
Supervisory authorities may also be unable to apply standards comparable to
those in developed markets.
Thus, there may be risks that settlement may be delayed and that cash or
securities belonging to a Fund may
be in jeopardy because of failures of or defects in the systems. In particular,
market practice may require
that payment be made before receipt of the security being purchased or that
delivery of a security be made
before payment is received. In such cases, default by a broker or bank (the
“counterparty”) through whom the
transaction is effected might cause the Fund to suffer a loss. A Fund will seek,
where possible, to use counterparties
whose financial status is such that this risk is reduced. However, there can be
no certainty that a Fund will
be successful in eliminating this risk, particularly as counterparties operating
in emerging market countries
frequently lack the standing or financial resources of those in developed
countries. There may also be a danger
that, because of uncertainties in the operation of settlement systems in
individual markets, competing claims may
arise with respect to securities held by or to be transferred to a Fund. A Fund
and its shareholders may also
encounter substantial difficulties in obtaining and enforcing judgments against
individuals residing outside of
the U.S. and companies domiciled outside of the U.S.
Taxation
of dividends, interest and capital gains received by a Fund varies among
emerging market countries and, in
some cases, is comparatively high. In addition, emerging market countries
typically have less well-defined
tax laws and procedures, and such laws may permit retroactive taxation so that a
Fund could become
subject in the future to local tax liability that it had not reasonably
anticipated in conducting its investment
activities or valuing its assets.
Sovereign Debt
Obligations. Sovereign
debt instruments are issued or guaranteed by foreign governments or their
agencies, including those of emerging market countries. Sovereign debt may be in
the form of conventional
securities or other types of debt instruments, such as loans or loan
participations. The debt obligations
of a foreign government or entity may not be supported by the full faith and
credit of such foreign government.
Sovereign debt of emerging market countries may involve a high degree of risk,
and may be in default or
present the risk of default. Governmental entities responsible for repayment of
the debt may fail to repay
principal and interest when due, and may require renegotiation or rescheduling
of debt payments. Prospects
for repayment of principal and interest may depend on political and economic
factors. A Fund may have
limited or no legal recourse in the event of default with respect to sovereign
debt obligations. Sovereign debt
instruments and foreign debt securities share many of the same risks. For more
information, refer to “Foreign
Debt Securities.”
Unless
otherwise stated in a Fund’s prospectus, countries are generally characterized
by a Fund’s sub-adviser as “emerging
market countries” by reference to a broad market index, by reference to the
World Bank’s per capita income
brackets or based on the sub-adviser’s qualitative judgments about a country’s
level of economic and institutional
development, and include markets commonly referred to as “frontier markets.” An
emerging market is
generally in the earlier stages of its industrialization cycle with a low per
capita gross domestic product
(“GDP”) and a low market capitalization to GDP ratio relative to those in the
United States and the European
Union. Frontier market countries generally have smaller economies and even less
developed capital markets
than typical emerging market countries and, as a result, the risks of investing
in emerging market countries
are magnified in frontier market countries.
The
performance of sovereign debt instruments may be negatively affected by
fluctuations in a foreign currency’s
strength or weakness relative to the U.S. dollar, particularly to the extent the
Fund invests a significant
percentage of its assets in sovereign debt instruments denominated in non-U.S.
currencies. Currency
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rates in
foreign countries may fluctuate significantly over short or long periods of time
for a number of reasons, including
changes in interest rates, imposition of currency exchange controls and economic
or political developments
in the U.S. or abroad.
Global
economies and financial markets have become increasingly interconnected, which
increases the possibility
that conditions in one country or region might adversely impact issuers in a
different country or region.
Sovereign debt instruments may be impacted by economic, political, social,
diplomatic or other conditions
or events (including, for example, military confrontations, war and terrorism).
Any attempt by a Fund to hedge
against or otherwise protect its portfolio, or to profit from such
circumstances, may fail and, accordingly,
an investment in a Fund could lose money over short or long periods. For
example, the economies of many
countries or regions in which a Fund may invest are highly dependent on trading
with certain key trading
partners. Reductions in spending on products and services by these key trading
partners, the institution of tariffs
or other trade barriers, or a slowdown in the economies of key trading partners
may adversely affect the
performance of securities in which a Fund may invest. The severity or duration
of adverse economic conditions
may also be affected by policy changes made by governments or quasi-governmental
organizations. The
imposition of sanctions by the United States or another government on a country
could cause disruptions to the
country’s financial system and economy, which could negatively impact the value
of securities, including sovereign
debt instruments. The risks posed by sanctions may be heightened to the extent a
Fund invests significantly
in the affected country or region or in issuers from the affected country that
depend on global markets.
Although
it is not uncommon for governments to enter into trade agreements that would,
among other things, reduce
barriers among countries, increase competition among companies and reduce
government subsidies, there are
no assurances that such agreements will achieve their intended economic
objectives. There is also a possibility
that such trade arrangements: i) will not be implemented; ii) will be
implemented, but not completed; iii) or
will be completed, but then partially or completely unwound. It is also possible
that a significant participant
could choose to abandon a trade agreement, which could diminish its credibility
and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries,
including appreciation or depreciation of currencies, a significant increase in
exchange rate volatility, a resurgence
in economic protectionism and an undermining of confidence in markets. Such
developments could have an
adverse impact on a Fund’s investments in the debt of countries participating in
such trade agreements.
Further,
investments in certain countries may subject a Fund to tax rules, the
application of which may be uncertain.
Countries may amend or revise their existing tax laws, regulations and/or
procedures in the future, possibly
with retroactive effect. Changes in, or uncertainties regarding the laws,
regulations or procedures of a country
could directly or indirectly reduce the after-tax profits of a
Fund.
Supranational Entity
Securities. Debt
security investments may include the debt securities of “supranational”
entities,
which are international groups or unions in which the power and influence of
member states transcend national
boundaries or interests in order to share in decision making and vote on issues
concerning the collective
body. They include international organizations designated or supported by
governments to promote economic
reconstruction or development and international banking institutions and related
government agencies,
such as the International Bank for Reconstruction and Development (part of the
World Bank), the European
Union, the Asian Development Bank and the Inter-American Development Bank. The
governmental members of
these supranational entities are “stockholders” that typically make capital
contributions and may be
committed to make additional capital contributions if the entity is unable to
repay its borrowings. There can be no
assurance that the constituent foreign governments will continue to be able or
willing to honor their capitalization
commitments for such entities.
Supranational
Entity Securities are subject to risks in addition to those relating to foreign
government and sovereign
debt securities and debt securities generally. Issuers of such debt securities
may be unwilling to pay interest
and repay principal, or otherwise meet obligations, when due and may require
that the conditions for payment be
renegotiated. The foreign governmental or other organizations supporting such
supranational issuers
may be immune from lawsuits in the event of the issuer’s failure or inability to
pay the obligations when due.
Issuers may be dependent on expected disbursements from foreign governmental or
other organizations.
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OTHER
PERMITTED INVESTMENT ACTIVITIES
Borrowing.
Generally, under the 1940 Act, a Fund may borrow money only from banks in an
amount not exceeding
1/3 of its total assets (including the amount borrowed) less liabilities (other
than borrowings). A Fund may borrow
money for temporary or emergency purposes, including for short-term redemptions
and liquidity needs.
Borrowing involves special risk considerations. Interest costs on borrowings may
fluctuate with changing market
rates of interest and may partially offset or exceed the return earned on
borrowed funds (or on the assets
that were retained rather than sold to meet the needs for which funds were
borrowed). Under adverse market
conditions, a Fund might have to sell portfolio securities to meet interest or
principal payments at a time when
investment considerations would not favor such sales. Reverse repurchase
agreements, dollar roll transactions
and other similar investments that involve a form of leverage have
characteristics similar to borrowings,
but are not considered borrowings if a Fund covers such leverage by maintaining
a segregated account or
otherwise. To help meet short-term redemptions and liquidity needs, the Funds
are parties to a revolving
credit agreement whereby a Fund is permitted to use bank borrowings for
temporary or emergency purposes.
Commodity-Related
Investments. The value
of commodities investments will generally be affected by overall market
movements and factors specific to a particular industry or commodity, which may
include weather, embargoes,
tariffs, and health, political, international and regulatory developments.
Economic and other events (whether
real or perceived) can reduce the demand for commodities, which may reduce
market prices and cause the value
of Fund shares to fall. The frequency and magnitude of such changes cannot be
predicted. Exposure to commodities
and commodities markets may subject a Fund to greater volatility than
investments in traditional securities.
No active trading market may exist for certain commodities investments, which
may impair the ability of
a Fund to sell or to realize the full value of such investments in the event of
the need to liquidate such investments.
In addition, adverse market conditions may impair the liquidity of actively
traded commodities investments.
Certain types of commodities instruments (such as total return swaps and
commodity-linked notes) are
subject to the risk that the counterparty to the instrument will not perform or
will be unable to perform in
accordance with the terms of the instrument.
Certain
commodities are subject to limited pricing flexibility because of supply and
demand factors. Others are subject to
broad price fluctuations as a result of the volatility of the prices for certain
raw materials and the instability
of supplies of other materials. These additional variables may create additional
investment risks and result in
greater volatility than investments in traditional securities. The commodities
that underlie commodity futures
contracts and commodity swaps may be subject to additional economic and
non-economic variables, such as
drought, floods, weather, livestock disease, embargoes, tariffs, and
international economic, political and regulatory
developments. Unlike the financial futures markets, in the commodity futures
markets there are costs of
physical storage associated with purchasing the underlying commodity. The price
of the commodity futures
contract will reflect the storage costs of purchasing the physical commodity,
including the time value of money
invested in the physical commodity. To the extent that the storage costs for an
underlying commodity change
while a Fund is invested in futures contracts on that commodity, the value of
the futures contract may change
proportionately.
In the
commodity futures markets, producers of the underlying commodity may decide to
hedge the price risk of selling
the commodity by selling futures contracts today to lock in the price of the
commodity at delivery tomorrow.
In order to induce speculators to purchase the other side of the same futures
contract, the commodity
producer generally must sell the futures contract at a lower price than the
expected future spot price.
Conversely, if most hedgers in the futures market are purchasing futures
contracts to hedge against a rise in prices,
then speculators will only sell the other side of the futures contract at a
higher futures price than the expected
future spot price of the commodity. The changing nature of the hedgers and
speculators in the commodity
markets will influence whether futures prices are above or below the expected
future spot price, which can
have significant implications for a Fund. If the nature of hedgers and
speculators in futures markets has
shifted when it is time for a Fund to reinvest the proceeds of a maturing
contract in a new futures contract, the Fund
might reinvest at higher or lower futures prices, or choose to pursue other
investments
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Loans of Portfolio
Securities. Portfolio
securities of a Fund may be loaned pursuant to guidelines approved by
the Board
to brokers, dealers and financial institutions, provided: i) the loan is secured
continuously by collateral consisting
of cash, securities of the U.S. Government, its agencies or instrumentalities,
or an irrevocable letter of credit
issued by a bank organized under the laws of the United States, organized under
the laws of a state, or a foreign
bank that has filed an agreement with the Federal Reserve Board to comply with
the same rules and regulations
applicable to U.S. banks in securities credit transactions, initially in an
amount at least equal to 100% of the
value of the loaned securities (which includes any accrued interest or
dividends), with the borrower being obligated,
under certain circumstances, to post additional collateral on a daily
marked-to-market basis, all as described
in further detail in the following paragraph; although the loans may not be
fully supported at all times if, for
example, the instruments in which cash collateral is invested decline in value
or the borrower fails to provide
additional collateral when required in a timely manner or at all; ii) the Fund
may at any time terminate the loan
and request the return of the loaned securities upon sufficient prior
notification; iii) the Fund will receive
any interest or distributions paid on the loaned securities; and iv) the
aggregate market value of loaned securities
will not at any time exceed the limits established under the 1940
Act.
For
lending its securities, a Fund will earn either a fee payable by the borrower
(on loans that are collateralized by U.S.
Government securities or a letter of credit) or the income on instruments
purchased with cash collateral (after
payment of a rebate fee to the borrower and a portion of the investment income
to the securities lending agent).
Cash collateral may be invested on behalf of a Fund by the Fund’s sub-adviser in
U.S. dollar-denominated
short-term money market instruments that are permissible investments for the
Fund and that, at
the time of investment, are considered high-quality. Currently, cash collateral
generated from securities lending is
invested in shares of Securities Lending Cash Investments, LLC (the “Cash
Collateral Fund”). The Cash Collateral
Fund is a Delaware limited liability company that is exempt from registration
under the 1940 Act. The Cash
Collateral Fund is managed by Wells Fargo Funds Management, LLC (“Funds
Management”) and is sub-advised
by Wells Capital Management Incorporated (“Wells Capital Management”). The Cash
Collateral Fund is
required to comply with the credit quality, maturity and other limitations set
forth in Rule 2a-7 under the 1940
Act. The Cash Collateral Fund seeks to provide preservation of principal and
daily liquidity by investing in
high-quality, U.S. dollar-denominated short-term money market instruments. The
Cash Collateral Fund may invest in
securities with fixed, variable, or floating rates of interest. The Cash
Collateral Fund seeks to maintain a stable
price per share of $1.00, although there is no guarantee that this will be
achieved. Income on shares of the Cash
Collateral Fund is reinvested in shares of the Cash Collateral Fund. The net
asset value of a Fund will be affected
by an increase or decrease in the value of the securities loaned by it, and by
an increase or decrease in the value
of instruments purchased with cash collateral received by it.
The
interests in the Cash Collateral Fund are not insured by the FDIC, and are not
deposits, obligations of, or endorsed
or guaranteed in any way by, Wells Fargo Bank or any banking entity. Any losses
in the Cash Collateral Fund will
be borne solely by the Cash Collateral Fund and not by Wells Fargo Bank or its
affiliates.
Loans of
securities involve a risk that the borrower may fail to return the securities
when due or when recalled by a Fund
or may fail to provide additional collateral when required. In either case, a
Fund could experience delays in
recovering securities or could lose all or part of the value of the loaned
securities. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, loans
may be recalled at any time and
generally will be recalled if a material event affecting the investment is
expected to be presented to a shareholder
vote, so that the securities may be voted by a Fund.
Each
lending Fund pays a portion of the income (net of rebate fees) or fees earned by
it from securities lending to a
securities lending agent. Goldman Sachs Bank USA, an unaffiliated third party
doing business as Goldman Sachs
Agency Lending, currently acts as securities lending agent for the Funds,
subject to the overall supervision
of the Funds’ manager.
Investment
Companies. These
securities include shares of other affiliated or unaffiliated open-end
investment companies
(i.e., mutual funds), closed-end funds, exchange-traded funds (“ETFs”), UCITS
funds (pooled investment
vehicles established in accordance with the Undertaking for Collective
Investment in Transferable Securities
adopted by European Union member states) and business development companies. A
Fund may
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invest in
securities of other investment companies up to the limits prescribed in Section
12(d) under the 1940 Act, the
rules and regulations thereunder and any exemptive relief currently or in the
future available to a Fund.
Except
with respect to funds structured as funds-of-funds or so-called master/feeder
funds or other funds whose
strategies otherwise allow such investments, the 1940 Act generally requires
that a fund limit its investments
in another investment company or series thereof so that, as of the time at which
a securities purchase
is made: i) no more than 3% of the outstanding voting stock of any one
investment company or series thereof
will be owned by a fund or by companies controlled by a fund; ii) no more than
5% of the value of its total
assets will be invested in the securities of any one investment company; and
iii) no more than 10% of the value of
its total assets will be invested in the aggregate in securities of other
investment companies.
Other
investment companies in which a Fund invests can be expected to pay fees and
other operating expenses, such as
investment advisory and administration fees, that would be in addition to those
paid by the Fund. Other investment
companies may include ETFs, which are publicly-traded unit investment trusts,
open-end funds or depositary
receipts that seek to track the performance of specific indices or companies in
related industries (e.g.,
passive ETFs), and index funds. A passive ETF or index fund is an investment
company that seeks to track the
performance of an index (before fees and expenses) by holding in its portfolio
either the securities that comprise
the index or a representative sample of the securities in the index. Passive
ETFs or index funds in which the
Funds invest will incur expenses not incurred by their applicable indices.
Certain securities comprising the
indices tracked by passive ETFs or index funds may, from time to time,
temporarily be unavailable, which may
further impede a passive ETF’s or index fund’s ability to track their respective
indices. An actively-managed ETF is an
investment company that seeks to outperform the performance of an
index.
ETFs
generally are subject to the same risks as the underlying securities the ETFs
are designed to track and to the risks
of the specific sector or industry tracked by the ETF. ETFs also are subject to
the risk that their prices may not
totally correlate to the prices of the underlying securities the ETFs are
designed to track and the risk of possible
trading halts due to market conditions or for other reasons. Although ETFs that
track broad market indexes
are typically large and their shares are fairly liquid, ETFs that track more
specific indexes tend to be newer and
smaller, and ETFs have limited redemption features. Additionally, to the extent
an ETF holds securities
traded in markets that close at a different time from the ETF’s listing
exchange, liquidity in such securities
may be reduced after the applicable closing times, and during the time when the
ETF’s listing exchange
is open but after the applicable market closing, fixing or settlement times,
bid/ask spreads and the resulting
premium or discount to the ETF’s shares’ NAV may widen. In 2019, the SEC adopted
a new rule and rule
changes that are expected to change some of the ways that ETFs are currently
offered and operate, and may affect
the ability of a Fund to invest in an ETF.
In
addition, a Fund may invest in the securities of closed-end investment
companies. Because shares of closed-end
investment companies trade on a stock exchange or in the OTC market, they may
trade at a premium or
discount to their net asset values, which may be substantial, and their
potential lack of liquidity could
result in greater volatility. In addition, closed-end investment companies may
employ leverage, which also subjects
the closed-end investment company to increased risks such as increased
volatility. Moreover, closed-end
investment companies incur their own fees and expenses.
Under the
1940 Act and rules and regulations thereunder, a Fund may purchase shares of
other affiliated Funds, including
the money market Funds, subject to certain conditions. Investing in affiliated
Funds may present certain
actual or potential conflicts of interest. The SEC has adopted a new regulatory
framework, including new Rule
12d1-4 under the 1940 Act, for fund-of-funds arrangements. While this new
regulatory framework permits
the Funds to enter into more types of fund-of-funds structures without an
exemptive order, it also imposes
several conditions, including: (i) limits on ownership and voting of acquired
fund shares; (ii) evaluations and
findings by investment advisers of funds in fund-of-funds arrangements; (iii)
investment agreements between
investment advisers of funds in fund-of-funds arrangements; and (iv) limits on
complex fund-of-funds structures.
Private Placement and Other Restricted
Securities. Private
placement securities are securities sold in offerings that are
exempt from registration under the 1933 Act. They are generally eligible for
sale only to certain eligible investors.
Private placements often may offer attractive opportunities for investment not
otherwise available
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on the
open market. However, private placement and other “restricted” securities
typically cannot be resold without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144A (a
“Rule 144A Security”)), and may not be readily marketable because they are
subject to legal or contractual
delays in or restrictions on resale. Asset-backed securities, common stock,
convertible securities, corporate
debt securities, foreign securities, high-yield securities, money market
instruments, mortgage-backed
securities, municipal securities, participation interests, preferred stock and
other types of equity and
debt instruments may be privately placed or restricted securities.
Private
placement and other restricted securities typically may be resold only to
qualified institutional buyers, or in a
privately negotiated transaction, or to a limited number of qualified
purchasers, or in limited quantities after they
have been held for a specified period of time and other conditions are met for
an exemption from registration.
Private placement and other restricted securities may be considered illiquid
securities, as they typically
are subject to restrictions on resale as a matter of contract or under federal
securities laws. Because there may
be relatively few potential qualified purchasers for such securities, especially
under adverse market or economic
conditions, or in the event of adverse changes in the financial condition of the
issuer, a Fund could find it
more difficult to sell such securities when it may be advisable to do so or it
may be able to sell such securities
only at prices lower than if such securities were more widely held and traded.
At times, it also may be more
difficult to determine the fair value of such securities for purposes of
computing a Fund’s net asset value due to the
absence of an active trading market. Delay or difficulty in selling such
securities may result in a loss to a Fund.
Restricted securities that are “illiquid” are subject to each Fund’s policy of
not investing or holding more than 15%
of its net assets in illiquid securities. The term “illiquid” in this context
refers to securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has
valued the securities.
The
manager typically will evaluate the liquidity characteristics of each Rule 144A
Security proposed for purchase
by a Fund on a case-by-case basis and will consider the following factors, among
others, in its evaluation:
i) the frequency of trades and quotes for the Rule 144A Security; ii) the number
of dealers willing to purchase
or sell the Rule 144A Security and the number of other potential purchasers;
iii) dealer undertakings to make a
market in the Rule 144A Security; and iv) the nature of the Rule 144A Security
and the nature of the marketplace
trades (e.g., the time needed to dispose of the Rule 144A Security, the method
of soliciting offers and the
mechanics of transfer).
The
manager will apply a similar process to evaluating the liquidity characteristics
of other restricted securities. A
restricted security that is deemed to be liquid when purchased may not continue
to be deemed to be liquid for as long as
it is held by a Fund. As a result of the resale restrictions on 144A securities,
there is a greater risk that they will
become illiquid than securities registered with the SEC.
Convertible
Securities. A
convertible security is a bond, debenture, note, preferred stock, or other
security that may be
converted or exchanged (by the holder or by the issuer) within a specified
period of time into a certain amount of
common stock of the same or a different issuer. As such, convertible securities
combine the investment
characteristics of debt and equity securities. A convertible security provides a
fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market
price advance in its underlying common stock.
As with a
straight fixed-income security, a convertible security tends to increase in
market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security
also tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced by
both interest-rate and market
movements, a convertible security tends not to be as sensitive to interest rate
changes as a similar fixed-income
security, and tends not to be as sensitive to share price changes as its
underlying stock.
Investing
in convertible securities is subject to certain risks in addition to those
generally associated with debt securities.
Certain convertible securities, particularly securities that are convertible
into securities of an issuer other than
the issuer of the convertible security, may be or become illiquid and,
therefore, may be more difficult to resell
in a timely fashion or for a fair price, which could result in investment
losses.
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The
creditworthiness of the issuer of a convertible security is important because
the holder of a convertible security
will typically have recourse only to the issuer. In addition, a convertible
security may be subject to conversion
or redemption by the issuer, but only after a specified date and under
circumstances established at the time
the security is issued. This feature may require a holder to convert the
security into the underlying common
stock, even if the value of the underlying common stock has declined
substantially. In addition, companies
that issue convertible securities frequently are small- or mid-capitalization
companies and, accordingly,
carry the risks associated with investments in such companies.
While the
Funds use the same criteria to evaluate the credit quality of a convertible debt
security that they would use
for a more conventional debt security, a convertible preferred stock is treated
like a preferred stock for a
Fund’s credit evaluation, as well as financial reporting and investment
limitation purposes.
Contingent
Convertible Bonds.
Contingent convertible bonds are a type of convertible security typically issued
by non-U.S.
banks. Unlike more traditional convertible securities, which typically may
convert into equity after the issuer’s
common stock has reached a certain strike price, the trigger event for a
contingent convertible bond is typically
a decline in the issuing bank’s capital threshold below a specified level.
Contingent convertible bonds typically
are subordinated to other debt instruments of the issuer and generally rank
junior to the claims of all holders of
unsubordinated obligations of the issuer. Coupon payments on contingent
convertible securities may be
discretionary and may be cancelled by the issuer. Contingent convertible bonds
are a new form of instrument,
and the market and regulatory environment for contingent convertible bonds is
evolving. Therefore,
it is uncertain how the overall market for contingent convertible bonds would
react to a triggering event or
coupon suspension applicable to one issuer. A Fund may lose money on its
investment in a contingent convertible
bond when holders of the issuer’s equity securities do not.
Exchange-Traded
Notes.
Exchange-traded notes (“ETNs”) are generally notes representing debt of an
issuer, usually a
financial institution. ETNs combine aspects of both bonds and ETFs. An ETN’s
returns are based on the performance
of one or more underlying assets, reference rates or indexes, minus fees and
expenses. Similar to ETFs, ETNs
are listed on an exchange and traded in the secondary market. However, unlike an
ETF, an ETN can be held
until the ETN’s maturity, at which time the issuer will pay a return linked to
the performance of the specific
asset, index or rate (“reference instrument”) to which the ETN is linked minus
certain fees. Unlike regular
bonds, ETNs do not make periodic interest payments, and principal is not
protected.
The value
of an ETN may be influenced by, among other things, time to maturity, levels of
supply and demand for the
ETN, volatility and lack of liquidity in underlying markets, changes in the
applicable interest rates, the performance
of the reference instrument, changes in the issuer’s credit rating and economic,
legal, political or geographic
events that affect the reference instrument. An ETN that is tied to a reference
instrument may not replicate
the performance of the reference instrument. ETNs also incur certain expenses
not incurred by their applicable
reference instrument. Some ETNs that use leverage can, at times, be relatively
illiquid and, thus, they may be
difficult to purchase or sell at a fair price. Levered ETNs are subject to the
same risk as other instruments
that use leverage in any form. While leverage allows for greater potential
returns, the potential for loss is
also greater. Finally, additional losses may be incurred if the investment loses
value because, in addition to the
money lost on the investment, the loan still needs to be repaid.
Because
the return on an ETN is dependent on the issuer’s ability or willingness to meet
its obligations, the value of
the ETN may change due to a change in the issuer’s credit rating, despite there
being no change in the underlying
reference instrument. The market value of ETN shares may differ from the value
of the reference instrument.
This difference in price may be due to the fact that the supply and demand in
the market for ETN shares at
any point in time is not always identical to the supply and demand in the market
for the assets underlying
the reference instrument that the ETN seeks to track.
There may
be restrictions on a Fund’s right to redeem its investment in an ETN, which is
generally designed to be held
until maturity. A Fund’s decision to sell its ETN holdings may be limited by the
unavailability or limited nature of
a secondary market. A Fund could lose some or all of the amount invested in an
ETN.
Illiquid
Securities. Pursuant
to Rule 22e-4 under the 1940 Act, a Fund (other than a money market Fund) may
not
acquire any “illiquid investment” if, immediately after the acquisition, the
Fund would have invested more than 15%
of its net assets in illiquid investments that are assets. An “illiquid
investment” is any investment that
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such a
Fund reasonably expects cannot be sold or disposed of in current market
conditions in seven calendar days or
less without the sale or disposition significantly changing the market value of
the investment. Illiquid investments
include repurchase agreements with a notice or demand period of more than seven
days, certain over-the-counter
derivative instruments, and securities and other financial instruments that are
not readily marketable,
unless, based upon a review of the relevant market, trading and
investment-specific considerations, those
investments are determined not to be illiquid. The Funds (other than the money
market Funds) have implemented
a liquidity risk management program and related procedures to identify illiquid
investments pursuant
to Rule 22e-4, and the Board has approved the designation of the Funds
Management to administer the
liquidity risk management program and related procedures. The money market Funds
may invest up to 5% of its net
assets in illiquid investments. The 15% and 5% limits are applied as of the date
a Fund purchases an illiquid
investment. It is possible that a Fund’s holding of illiquid investment could
exceed the 15% limit (5% for the money
market Funds), for example as a result of market developments or
redemptions.
Each Fund
may purchase certain restricted securities that can be resold to institutional
investors and which may be
determined not to be illiquid investments pursuant to the Trust’s liquidity risk
management program. In many
cases, those securities are traded in the institutional market under Rule 144A
under the 1933 Act and are called
Rule 144A securities.
Investments
in illiquid investments involve more risks than investments in similar
securities that are readily marketable.
Illiquid investments may trade at a discount from comparable, more liquid
investments. Investment of a
Fund’s assets in illiquid investments may restrict the ability of the Fund to
dispose of its investments in a timely
fashion and for a fair price as well as its ability to take advantage of market
opportunities. The risks associated
with illiquidity will be particularly acute where a Fund’s operations require
cash, such as when a Fund has net
redemptions, and could result in the Fund borrowing to meet short-term cash
requirements or incurring losses on
the sale of illiquid investments.
Illiquid
investments are often restricted securities sold in private placement
transactions between issuers and their
purchasers and may be neither listed on an exchange nor traded in other
established markets. In many cases, the
privately placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to
contractual restrictions on resale. To the extent privately placed securities
may be resold in privately negotiated
transactions, the prices realized from the sales could be less than those
originally paid by the Fund or less than
the fair value of the securities. In addition, issuers whose securities are not
publicly traded may not be subject to
the disclosure and other investor protection requirements that may be applicable
if their securities were
publicly traded. If any privately placed securities held by a Fund are required
to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of
registration. Private placement investments may involve investments in smaller,
less seasoned issuers, which may
involve greater risks than investments in more established companies. These
issuers may have limited product
lines, markets or financial resources, or they may be dependent on a limited
management group. In making
investments in private placement securities, a Fund may obtain access to
material non-public information,
which may restrict the Fund’s ability to conduct transactions in those
securities.
Master Limited
Partnerships. Master
limited partnerships (“MLPs”) are publicly traded partnerships primarily
engaged in
the transportation, storage, processing, refining, marketing, exploration,
production, and mining of minerals
and natural resources. Investments in securities of MLPs involve risks that
differ from investments in common
stock, including risks related to limited control and limited rights to vote on
matters affecting the MLP, risks
related to potential conflicts of interest between the MLP and the MLP’s general
partner, cash flow risks,
dilution risks and risks related to the general partner’s right to require
unit-holders to sell their common units at
an undesirable time or price. Certain MLP securities may trade in lower volumes
due to their smaller capitalizations.
Accordingly, those MLPs may be subject to more abrupt or erratic price movements
and may lack
sufficient market liquidity to enable a Fund to effect sales at an advantageous
time or without a substantial decline in
price. MLPs are generally considered interest-rate sensitive investments. During
periods of interest rate
volatility, these investments may not provide attractive returns. Depending on
the state of interest rates in general,
the use of MLPs could enhance or harm the overall performance of a Fund. MLPs
are subject to various risks
related to the underlying operating companies they control, including dependence
upon specialized
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management
skills and the risk that such companies may lack or have limited operating
histories. The success of a Fund’s
investments also will vary depending on the underlying industry represented by
the MLP’s portfolio.
A Fund
must recognize income that it receives from underlying MLPs for tax purposes,
even if the Fund does not
receive cash distributions from the MLPs in an amount necessary to pay such tax
liability. In addition, a percentage
of a distribution received by a Fund as the holder of an MLP interest may be
treated as a return of capital,
which would reduce the Fund’s adjusted tax basis in the interests of the MLP,
which will result in an increase
in the amount of income or gain (or decrease in the amount of loss) that will be
recognized by the Fund for tax
purposes upon the sale of any such interests or upon subsequent distributions in
respect of such interests.
Furthermore, any return of capital distribution received from the MLP may
require the Fund to restate
the character of its distributions and amend any shareholder tax reporting
previously issued. MLPs do not pay
U.S. federal income tax at the partnership level. Rather, each partner is
allocated a share of the partnership’s
income, gains, losses, deductions and expenses. A change in current tax law, or
a change in the underlying
business mix of a given MLP, could result in an MLP being treated as a
corporation for U.S. federal income tax
purposes, which would result in the MLP being required to pay U.S. federal
income tax (as well as state and
local income taxes) on its taxable income. The classification of an MLP as a
corporation for U.S. federal income tax
purposes would have the effect of reducing the amount of cash available for
distribution by the MLP. If
any MLP in which a Fund invests were treated as a corporation for U.S. federal
income tax purposes, it could
result in a reduction of the value of a Fund’s investment in the MLP and lower
income to a Fund.
Repurchase
Agreements. A
repurchase agreement is an agreement wherein a Fund purchases a security for a
relatively
short period of time (usually less than or up to seven days) and, at the time of
purchase, the seller agrees to
repurchase that security from the Fund at a mutually agreed upon time and price
(representing the Fund’s
cost plus interest). The repurchase agreement specifies the yield during the
purchaser’s holding period. Entering
into repurchase agreements allows a Fund to earn a return on cash in the Fund’s
portfolio that would otherwise
remain un-invested.
Repurchase
agreements also may be viewed as loans made by a Fund that are collateralized by
the securities subject to
repurchase, which may consist of a variety of security types. The maturities of
the underlying securities
in a repurchase agreement transaction may be greater than twelve months,
although the maximum term of a
repurchase agreement will always be less than twelve months. Repurchase
agreements may involve risks in
the event of default or insolvency of the counterparty that has agreed to
repurchase the securities from a Fund,
including possible delays or restrictions upon the Fund’s ability to sell the
underlying security and additional
expenses in seeking to enforce the Fund’s rights and recover any losses.
Although the Fund seeks to limit the
credit risk under a repurchase agreement by carefully selecting counterparties
and accepting only high quality
collateral, some credit risk remains. The counterparty could default, which may
make it necessary for the Fund to
incur expenses to liquidate the collateral. In addition, the collateral may
decline in value before it can be liquidated
by the Fund.
A Fund may
enter into reverse repurchase agreements under which the Fund sells portfolio
securities and agrees to
repurchase them at an agreed-upon future date and price. Use of a reverse
repurchase agreement may be
preferable to a regular sale and later repurchase of securities, because it
avoids certain market risks and transaction
costs. At the time a Fund enters into a reverse repurchase agreement, it will
segregate cash or other liquid
assets having a value equal to or greater than the repurchase price (including
accrued interest), and will subsequently
monitor the account to ensure that the value of such segregated assets continues
to be equal to or greater
than the repurchase price.
In the
event that the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent,
a Fund’s use of proceeds from the agreement may be restricted pending a
determination by the other party, or
its trustee or receiver, whether to enforce a Fund’s obligation to repurchase
the securities. Reverse repurchase
agreements may be viewed as a form of borrowing.
Short Sales. A short
sale is a transaction in which a Fund sells a security it may not own in
anticipation of a decline in
market value of that security. When a Fund makes a short sale, the proceeds it
receives are retained by the
broker until the Fund replaces the borrowed security. In order to deliver the
security to the buyer, a Fund must
arrange through a broker to borrow the security and, in so doing, the Fund
becomes obligated to replace
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the
security borrowed at its market price at the time of replacement, whatever that
price may be. Short sales “against
the box” means that a Fund owns the securities, which are placed in a segregated
account until the transaction
is closed out, or has the right to obtain securities equivalent in kind and
amount to the securities sold
short. A Fund’s ability to enter into short sales transactions is limited by the
requirements of the 1940 Act.
Short
positions in futures and options create opportunities to increase a Fund’s
return but, at the same time, involve
special risk considerations and may be considered speculative. Since a Fund in
effect profits from a decline in
the price of the futures or options sold short without having to invest the full
purchase price of the futures or
options on the date of the short sale, a Fund’s NAV per share will tend to
increase more when the futures or
options it has sold short decrease in value, and to decrease more when the
futures or options it has sold short
increase in value, than would otherwise be the case if it had not engaged in
such short sales. Short sales
theoretically involve unlimited loss potential, as the market price of futures
or options sold short may continuously
increase, although a Fund may mitigate such losses by replacing the futures or
options sold short before the
market price has increased significantly. Under adverse market conditions, a
Fund might have difficulty
purchasing futures or options to meet its short sale delivery obligations, and
might have to sell portfolio
securities to raise the capital necessary to meet its short sale obligations at
a time when fundamental investment
considerations would not favor such sales.
If a Fund
makes a short sale “against the box,” it would not immediately deliver the
securities sold and would not
receive the proceeds from the sale. The seller is said to have a short position
in the securities sold until it delivers
the securities sold, at which time it receives the proceeds of the sale. A
sub-adviser’s decision to make a short sale
“against the box” may be a technique to hedge against market risks when the
sub-adviser believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Fund or a security
convertible into or exchangeable for such security. In such case, any future
losses in the Fund’s long position
would be reduced by a gain in the short position. Short sale transactions may
have adverse tax consequences
to a Fund and its shareholders.
In the
view of the SEC, a short sale involves the creation of a “senior security,” as
such term is defined in the 1940 Act,
unless the sale is “against the box,” and the securities sold are placed in a
segregated account, or unless a
Fund’s obligation to deliver the securities sold short is “covered” by
segregating cash or other liquid assets in
an amount equal to the difference between the current market value of the
securities sold short and any cash
or liquid securities required to be deposited as collateral with a broker in
connection with the transaction.
Collateral deposited with a broker will be marked-to-market daily, and any
amounts deposited with a broker
or in a segregated account will not have the effect of limiting a Fund’s
potential losses on a short sale.
To avoid
limitations under the 1940 Act on borrowing by investment companies, all short
sales not “against the box” will
be “covered” by segregating cash, U.S. Government securities or other liquid
debt or equity securities in an
amount equal to the market value of its delivery obligation. A Fund will not
make short sales of futures or options
not “against the box” or maintain a short position if doing so could create
liabilities or require collateral deposits
and segregation of assets totaling more than a specified percentage of the value
of the Fund’s total assets.
Warrants. Warrants
are instruments, typically issued with preferred stock or bonds, that give the
holder the right to
purchase a given number of shares of common stock at a specified price, usually
during a specified period of
time. The price usually represents a premium over the applicable market value of
the common stock at the time
of the warrant’s issuance. Warrants have no voting rights with respect to the
common stock, receive no
dividends and have no rights with respect to the assets of the issuer. Warrants
do not pay a fixed dividend. Investments
in warrants involve certain risks, including the possible lack of a liquid
market for the resale of the warrants,
potential price fluctuations as a result of speculation or other factors and
failure of the price of the common
stock to rise. A warrant becomes worthless if it is not exercised within the
specified time period.
When-Issued and Delayed-Delivery Transactions
and Forward Commitments. Certain
securities may be purchased
or sold on a when-issued or delayed-delivery basis, and contracts to purchase or
sell securities for a fixed
price at a future date beyond customary settlement time may also be made.
Delivery and payment on such transactions
normally take place within 120 days after the date of the commitment to
purchase. Securities purchased
or sold on a when-issued, delayed-delivery or forward commitment basis involve a
risk of loss if the
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value of
the security to be purchased declines, or the value of the security to be sold
increases, before the settlement
date.
Each Fund
has a segregated account where it may maintain cash, U.S. Government obligations
or other high-quality
debt instruments in an amount at least equal in value to its commitments to
purchase when-issued securities.
If the value of these assets declines, a Fund will place additional liquid
assets in the account on a daily basis so
that the value of the assets in the account is at least equal to the amount of
such commitments.
Other Risks
Large Shareholder
Risk To the
extent a large number of shares of a Fund is held by a single shareholder or a
small
group of shareholders, the Fund is subject to the risk that redemption by those
shareholders of all or a large
portion of their shares will adversely affect the Fund’s performance by forcing
the Fund to sell securities, potentially
at disadvantageous prices, to raise the cash needed to satisfy such redemption
requests. This risk may be
heightened during periods of declining or illiquid markets, or to the extent
that such large shareholders have short
investment horizons or unpredictable cash flow needs. Such redemptions may also
increase transaction
costs and/or have adverse tax consequences for remaining
shareholders.
Liquidation Risk. There can
be no assurance that a Fund will grow to or maintain a viable size and, pursuant
to the
Declaration of Trust, the Board is authorized to close and/or liquidate a Fund
at any time. In the event of the liquidation
of a Fund, the expenses, timing and tax consequences of such liquidation may not
be favorable to some or
all of the Fund’s shareholders. In addition, pursuant to section 619 of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act and certain rules promulgated thereunder (collectively
known as the “Volcker
Rule”), if the Manager and/or its affiliates own 25% or more of the outstanding
shares of a Fund after the
permitted seeding period following the Fund’s inception, the Fund will be
subject to restrictions on trading that will
adversely impact the Fund’s ability to execute its investment strategy. Should
this occur, a Fund may be liquidated,
or the Manager and/or its affiliates may be required to reduce their ownership
interests in the Fund, either of
which may result in gains or losses, increased transaction and other costs and
adverse tax consequences.
In addition, other large shareholders controlling a significant portion of a
Fund’s shares, such as other
funds, institutional investors, financial intermediaries, individuals and other
accounts, may elect to redeem a
portion or all of their shares at any time, and the Fund may no longer be able
to maintain a viable size after
meeting the redemption request. In these circumstances, a Fund’s board may
determine to liquidate the Fund or a
particular class of the Fund. For a list of shareholders that own, of record
and/or beneficially, 5% or more of
the outstanding shares of a class or 25% or more of the outstanding shares of a
Fund, please see the section
entitled “Control Persons and Principal Fund Holders”.
Other
factors and events that may lead to the liquidation of a Fund include changes in
laws or regulations governing
the Fund or affecting the type of assets in which the Fund invests, or economic
developments or trends
having a significant adverse impact on the business or operations of the
Fund.
After a
Fund liquidation is announced, such Fund may begin to experience greater
redemption activity as the Fund
approaches its liquidation date. As portfolio managers effect portfolio
transactions to meet redemptions and
prepare the Fund for liquidation, the Fund may not meet its investment objective
and principal investment strategies.
The Fund will incur transaction costs as a result of these portfolio
transactions which will indirectly be borne
by the Fund’s shareholders. The Fund may be required to make a distribution of
income and capital gains
realized, if any, from liquidating its portfolio. It is anticipated that any
distribution would be paid to shareholders
prior to liquidation. Shareholders of the Fund on the date of liquidation would
receive a distribution
of their account proceeds on the settlement date in complete redemption of their
shares. In the event of a
liquidation, please consult with a tax advisor to determine your specific tax
consequences, if any.
Operational and Cybersecurity
Risks. Fund
operations, including business, financial, accounting, data processing
systems or
other operating systems and facilities may be disrupted, disabled or damaged as
a result of a number of
factors, including events that are wholly or partially beyond our control. For
example, there could be electrical
or telecommunications outages; degradation or loss of internet or web services;
natural disasters, such as
earthquakes, tornados and hurricanes; disease pandemics; or events arising from
local or larger scale political
or social events, as well as terrorist acts.
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Fargo - Fixed Income Funds |
The Funds
are also subject to the risk of potential cyber incidents, which may include,
but are not limited to, the harming of
or unauthorized access to digital systems (for example, through “hacking” or
infection by computer viruses or
other malicious software code), denial-of-service attacks on websites, and the
inadvertent or intentional
release of confidential or proprietary information. Cyber incidents may, among
other things, harm Fund
operations, result in financial losses to a Fund and its shareholders, cause the
release of confidential or highly
restricted information, and result in regulatory penalties, reputational damage,
and/or increased compliance,
reimbursement or other compensation costs. Fund operations that may be disrupted
or halted due to a cyber
incident include trading, the processing of shareholder transactions, and the
calculation of a Fund’s net asset
value.
Issues
affecting operating systems and facilities through cyber incidents, any of the
scenarios described above, or other
factors, may harm the Funds by affecting a Fund’s manager, sub-adviser(s), or
other service providers, or issuers
of securities in which a Fund invests. Although the Funds have business
continuity plans and other safeguards
in place, including what the Funds believe to be robust information security
procedures and controls, there is
no guarantee that these measures will prevent cyber incidents or prevent or
ameliorate the effects of significant
and widespread disruption to our physical infrastructure or operating systems.
Furthermore, the Funds
cannot directly control the security or other measures taken by unaffiliated
service providers or the issuers of
securities in which the Funds invest. Such risks at issuers of securities in
which the Funds invest could result in
material adverse consequences for such issuers, and may cause a Fund’s
investment in such securities to lose
value.
COVID-19/Coronavirus. A recent
outbreak of respiratory disease caused by a novel coronavirus was detected in
Wuhan
City, Hubei Province, China and has since spread globally. The disease,
coronavirus disease 2019 (abbreviated
as“COVID-19”), and concern about its spread has resulted in disruptions to
global markets, including
through borderclosings, restrictions on travel and large gatherings, expedited
and enhanced health screenings,
quarantines,cancellations, business and school closings, disruptions to
employment and supply chains,
reduced productivity, and reduced customer and client activity in multiple
markets and sectors. On March 11,
2020, the World Health Organization announced that it had made the
assessment that COVID-19 can be
characterized as a pandemic. The impacts of COVID-19, and other epidemics and
pandemics that may arise in
the future, could adversely affect the economies of many nations, particular
regions, or the entire global economy,
individual companies and investment products, and the market in general. The
full extent of such impacts
cannot necessarily be foreseen at the present time. The impacts maybe short term
or may last for an extended
period of time, and may exacerbate other pre-existing political, social and
economic risks in certain countries.
The risk of further spreading of COVID-19 has led to significant uncertainty and
volatility in the financial
markets. The value of a Fund and the securities in which a Fund invests may be
adversely affected by impacts
caused by COVID-19 and other epidemics and pandemics that may arise in the
future.
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Fargo - Fixed Income Funds |
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55 |
TRUSTEES
AND OFFICERS
The
following information supplements, and should be read in conjunction with, the
section in each
Prospectus entitled
“Management of the Funds.”
General
The
following table provides basic information about the Trustees and those Officers
of the Trust who perform policy-making
functions.. Each of the Trustees and Officers listed below acts in identical
capacities for the Wells Fargo
family of funds which consists of, as of August 31,
2020, 143 series
comprising Wells Fargo Funds Trust, Wells
Fargo Variable Trust, Wells Fargo Master Trust and four closed-end
funds (collectively the “Fund Complex”
or the “Trusts”). The business address of each Trustee and Officer is 525 Market
Street, 12th Floor, San
Francisco, CA 94105. Each Trustee and Officer serves an indefinite term, with
the Trustees subject to retirement
from service as required pursuant to the Trust’s retirement policy at the end of
the calendar year in which a
Trustee turns 75.
Information
for Trustees, all of whom are not “interested” persons of the Trust, as that
term is defined under the 1940
Act (“Independent Trustees”), appears below. In addition to the Officers listed
below, the Funds have appointed
an Anti-Money Laundering Compliance Officer.
|
|
|
|
Name
and Year of Birth |
Position
Held with
Registrant/Length
of Service1
|
Principal
Occupation(s) During Past 5 Years or Longer |
Current
Other Public Company or Investment
Company Directorships |
|
|
INDEPENDENT
TRUSTEES |
|
William
R. Ebsworth (Born
1957) |
Trustee,
since 2015 |
Retired.
From 1984 to 2013, equities analyst,
portfolio manager, research director
and chief investment officer at Fidelity
Management and Research Company
in Boston, Tokyo, and Hong Kong, and
retired in 2013 as Chief Investment Officer
of Fidelity Strategic Advisers, Inc. where
he led a team of investment professionals
managing client assets. Prior thereto,
Board member of Hong Kong Securities
Clearing Co., Hong Kong Options Clearing
Corp., the Thailand International Fund,
Ltd., Fidelity Investments Life Insurance
Company, and Empire Fidelity Investments
Life Insurance Company. Audit Committee
Chair and Investment Committee
Chair of the Vincent Memorial Hospital
Endowment (non-profit organization).
Mr. Ebsworth is a CFA® charterholder. |
N/A |
Jane
A. Freeman (Born
1953) |
Trustee,
since 2015;
Chair Liaison,
since 2018 |
Retired.
From 2012 to 2014 and 1999 to 2008,
Chief Financial Officer of Scientific Learning
Corporation. From 2008 to 2012, Ms.
Freeman provided consulting services related
to strategic business projects. Prior to
1999, Portfolio Manager at Rockefeller & Co.
and Scudder, Stevens & Clark. Board member
of the Harding Loevner Funds from
1996 to 2014, serving as both Lead Independent
Director and chair of the Audit Committee.
Board member of the Russell Exchange
Traded Funds Trust from 2011 to 2012
and the chair of the Audit Committee. Ms.
Freeman is also an inactive Chartered Financial
Analyst. |
N/A |
56 |
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Fargo - Fixed Income Funds |
|
|
|
|
Name
and Year of Birth |
Position
Held with
Registrant/Length
of Service1 |
Principal
Occupation(s) During Past 5 Years or Longer |
Current
Other Public Company or Investment
Company Directorships |
Isaiah
Harris, Jr. (Born
1952) |
Trustee,
since 2009;
Audit Committee
Chair,
since 2019 |
Retired.
Chairman of the Board of CIGNA Corporation
since 2009, and Director since 2005.
From 2003 to 2011, Director of Deluxe
Corporation. Prior thereto, President
and CEO of BellSouth Advertising and
Publishing Corp. from 2005 to 2007, President
and CEO of BellSouth Enterprises from
2004 to 2005 and President of BellSouth
Consumer Services from 2000 to 2003.
Emeritus member of the Iowa State University
Foundation Board of Governors. Emeritus
Member of the Advisory Board of Iowa
State University School of Business. Advisory
Board Member, Palm Harbor Academy
(private school). Mr. Harris is a certified
public accountant (inactive status). |
CIGNA
Corporation |
Judith
M. Johnson (Born
1949) |
Trustee,
since 2008 |
Retired.
Prior thereto, Chief Executive Officer
and Chief Investment Officer of Minneapolis
Employees Retirement Fund from
1996 to 2008. Ms. Johnson is an attorney,
certified public accountant and a certified
managerial accountant. |
N/A |
David
F. Larcker (Born
1950) |
Trustee,
since 2009 |
James
Irvin Miller Professor of Accounting at
the Graduate School of Business (Emeritus),
Stanford University, Director of the
Corporate Governance Research Initiative
and Senior Faculty of The Rock Center
for Corporate Governance since 2006.
From 2005 to 2008, Professor of Accounting
at the Graduate School of Business,
Stanford University. Prior thereto, Ernst
& Young Professor of Accounting at The
Wharton School, University of Pennsylvania
from 1985 to 2005. |
N/A |
Olivia
S. Mitchell (Born
1953) |
Trustee,
since 2006;
Nominating
and
Governance
Committee
Chair,
since 2018 |
International
Foundation of Employee Benefit
Plans Professor, Wharton School of the
University of Pennsylvania since 1993. Director
of Wharton’s Pension Research Council
and Boettner Center on Pensions & Retirement
Research, and Research Associate
at the National Bureau of Economic
Research. Previously, Cornell University
Professor from 1978 to 1993. |
N/A |
Timothy
J. Penny (Born
1951) |
Trustee,
since 1996;
Chair, since
2018 |
President
and Chief Executive Officer of Southern
Minnesota Initiative Foundation, a
non-profit organization, since 2007. Member
of the Board of Trustees of NorthStar
Education Finance, Inc., a non-profit
organization, since 2007. |
N/A |
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Fargo - Fixed Income Funds |
|
57 |
|
|
|
|
Name
and Year of Birth |
Position
Held with
Registrant/Length
of Service1 |
Principal
Occupation(s) During Past 5 Years or Longer |
Current
Other Public Company or Investment
Company Directorships |
James
G. Polisson (Born
1959) |
Trustee,
since 2018 |
Retired.
Chief Marketing Officer, Source (ETF)
UK Services, Ltd, from 2015 to 2017. From
2012 to 2015, Principal of The Polisson
Group, LLC, a management consulting,
corporate advisory and principal investing
company. Chief Executive Officer and
Managing Director at Russell Investments,
Global Exchange Traded Funds
from 2010 to 2012. Managing Director
of Barclays Global Investors from 1998
to 2010 and Global Chief Marketing Officer
for iShares and Barclays Global Investors
from 2000 to 2010. Trustee of the
San Francisco Mechanics’ Institute, a non-profit
organization, from 2013 to 2015.
Board member of the Russell Exchange
Traded Fund Trust from 2011 to 2012.
Director of Barclays Global Investors Holdings
Deutschland GmbH from 2006 to 2009.
Mr. Polisson is an attorney and has a retired
status with the Massachusetts and District
of Columbia Bar Associations. |
N/A |
Pamela
Wheelock (Born
1959) |
Trustee,
since January
2020; previously
Trustee
from January
2018 to
July 2019 |
Board
member of the Destination Medical Center
Economic Development Agency, Rochester,
Minnesota since 2019. Interim President
of the McKnight Foundation from
January to September 2020. Acting Commissioner,
Minnesota Department of Human
Services, July 2019 through September
2019. Human Services Manager (part-time),
Minnesota Department of Human
Services, October 2019 through December
2019. Chief Operating Officer, Twin
Cities Habitat for Humanity from 2017
to 2019. Vice President of University Services,
University of Minnesota from 2012
to 2016. Prior thereto, on the Board of
Directors, Governance Committee and Finance
Committee for the Minnesota Philanthropy
Partners (Saint Paul Foundation)
from 2012 to 2018, Interim Chief
Executive Officer of Blue Cross Blue Shield
of Minnesota from 2011 to 2012, Chairman
of the Board from 2009 to 2012 and
Board Director from 2003 to 2015. Vice
President, Leadership and Community Engagement,
Bush Foundation, Saint Paul, Minnesota
(a private foundation) from 2009
to 2011. Executive Vice President and Chief
Financial Officer, Minnesota Sports and
Entertainment from 2004 to 2009 and Senior
Vice President from 2002 to 2004. Executive
Vice President of the Minnesota Wild
Foundation from 2004 to 2008. Commissioner
of Finance, State of Minnesota,
from 1999 to 2002. Currently Board
Chair of the Minnesota Wild Foundation
since 2010. |
N/A |
1. |
Length
of service dates reflect the Trustee’s commencement of service with the
Trust’s predecessor entities, where
applicable. |
58 |
|
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Fargo - Fixed Income Funds |
|
|
|
Name
and Year of Birth |
Position
Held with Registrant/Length
of
Service1
|
Principal
Occupation(s) During Past 5 Years or Longer |
|
|
OFFICERS |
Andrew
Owen (Born
1960) |
President,
since 2017 |
Executive
Vice President of Wells Fargo & Company and Head of Affiliated
Managers,
Wells Fargo Asset Management, since 2014. In addition, Mr. Owen
is currently President, Chief Executive Officer and Director of Wells
Fargo
Funds Management, LLC since 2017. Prior thereto, Executive Vice
President
responsible for marketing, investments and product development
for
Wells Fargo Funds Management, LLC, from 2009 to 2014. |
Jeremy
DePalma (Born
1974)2
|
Treasurer,
since 2012;
Assistant Treasurer,
since 2009 |
Senior
Vice President of Wells Fargo Funds Management, LLC since 2009.
Senior
Vice President of Evergreen Investment Management Company, LLC
from
2008 to 2010 and head of the Fund Reporting and Control Team within
Fund Administration from 2005 to 2010. |
Nancy
Wiser (Born
1967)2
|
Treasurer,
since 2012 |
Executive
Vice President of Wells Fargo Funds Management since 2011. Chief
Operating Officer and Chief Compliance Officer at LightBox Capital
Management
LLC, from 2008 to 2011. |
Michelle
Rhee (Born
1966) |
Chief
Legal Officer,
since 2019 |
Secretary
of Wells Fargo Funds Management, LLC and Chief Legal Counsel of
Wells Fargo Asset Management since 2018. Deputy General Counsel of
Wells
Fargo Bank, N.A. since 2020 and Assistant General Counsel of Wells
Fargo
Bank, N.A. from 2018-2020. Associate General Counsel and Managing
Director of Bank of America Corporation from 2004 to
2018. |
Catherine
Kennedy (Born
1969) |
Secretary,
since 2019 |
Vice
President of Wells Fargo Funds Management, LLC and Senior Counsel
of
the Wells Fargo Legal Department since 2010. Vice President and
Senior Counsel
of Evergreen Investment Management Company, LLC from 1998 to
2010. |
Michael
H. Whitaker (Born
1967) |
Chief
Compliance Officer,
since 2016 |
Chief
Compliance Officer of Wells Fargo Asset Management since 2016. Senior
Vice President and Chief Compliance Officer for Fidelity Investments
from 2007 to 2016. |
1. |
Length
of service dates reflect the Trustee’s commencement of service with the
Trust’s predecessor entities, where applicable. |
2. |
Nancy
Wiser currently serves as Treasurer of 66
funds in the Fund Complex. Jeremy DePalma currently serves as Treasurer of
77
funds in the Fund Complex and Assistant
Treasurer of 66
funds in the Fund Complex. |
The
Trust’s Declaration of Trust, as amended and restated from time to time (the
“Declaration of Trust”), does not set
forth any specific qualifications to serve as a Trustee other than that no
person shall stand for initial election
or appointment as a Trustee if such person has already reached the age of 72.
The Charter and the Statement
of Governance Principles of the Nominating and Governance Committee also do not
set forth any specific
qualifications, but do set forth certain factors that the Nominating and
Governance Committee may take into
account in considering Trustee candidates and a process for evaluating potential
conflicts of interest, which
identifies certain disqualifying conflicts. All of the current Trustees are
Independent Trustees. Among the attributes
or skills common to all Trustees are their ability to review critically,
evaluate, question and discuss information
provided to them, to interact effectively with the other Trustees, Wells Fargo
Funds Management, LLC
(“Funds Management” or the “Manager”), sub-advisers, other service providers,
counsel and the independent
registered public accounting firm, and to exercise effective and independent
business judgment in the
performance of their duties as Trustees. Each Trustee’s ability to perform his
or her duties effectively has been
attained through the Trustee’s business, consulting, public service,
professional and/or academic positions and
through experience from service as a board member of the Trust and the other
Trusts in the Fund Complex (and/or in
other capacities, including for any predecessor funds), other registered
investment companies, public companies,
and/or non-profit entities or other organizations. Each Trustee’s ability to
perform his or her duties effectively
also has been enhanced by his or her educational background, professional
training, and/or other life experiences.
The specific experience, qualifications, attributes and/or skills that led to
the conclusion that a Trustee
should serve as a Trustee of the Trusts in the Fund Complex are as set forth
below.
William
R. Ebsworth. Mr.
Ebsworth has served as a Trustee of the Trusts in the Fund Complex since January
1, 2015. He
also served as a Trustee of Asset Allocation Trust from 2015 to 2018. From 1984
to 2013, he was employed
as an equities analyst, portfolio manager and research director at Fidelity
Management and Research Company in
Boston, Tokyo, and Hong Kong, and retired in 2013 as Chief Investment Officer of
Fidelity Strategic
Advisers, Inc., where he led a team of investment professionals managing client
assets. Prior thereto,
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Fargo - Fixed Income Funds |
|
59 |
he was a
Board member of Hong Kong Securities Clearing Co., Hong Kong Options Clearing
Corp., the Thailand International
Fund, Ltd., Fidelity Investments Life Insurance Company, and Empire Fidelity
Investments Life Insurance
Company. Mr. Ebsworth is a CFA®
charterholder.
Jane
A. Freeman. Ms.
Freeman has served as a Trustee of the Trusts in the Fund Complex since January
1, 2015. She also
served as a Trustee of Asset Allocation Trust from 2015 to 2018. From 2012 to
2014 and 1999 to 2008, Ms.
Freeman served as the Chief Financial Officer of Scientific Learning
Corporation. From 2008 to 2012, Ms.
Freeman provided consulting services related to strategic business projects.
Prior to joining Scientific Learning,
Ms. Freeman was employed as a portfolio manager at Rockefeller & Co. and
Scudder, Stevens & Clark. She served
as a board member of the Harding Loevner Funds from 1996 to 2014, serving as
both Lead Independent
Director and chair of the Audit Committee. She also served as a board member of
the Russell Exchange
Traded Funds Trust from 2011 to 2012, and as chair of the Audit Committee. Ms.
Freeman is also an inactive Chartered
Financial Analyst.
Isaiah
Harris, Jr. Mr.
Harris has served as a Trustee of the Trusts in the Fund Complex since 2009 and
as Chair of the Audit
Committee since 2019 and was an Advisory Board Member from 2008 to 2009. He also
served as a Trustee of
Asset Allocation Trust from 2010 to 2018. He has been the Chairman of the Board
of CIGNA Corporation
since 2009, and has been a director of CIGNA Corporation since 2005. He served
as a director of Deluxe
Corporation from 2003 to 2011. As a director of these and other public
companies, he has served on board
committees, including Governance, Audit and Compensation Committees. Mr. Harris
served in senior executive
positions, including as president, chief executive officer, vice president of
finance and/or chief financial
officer, of operating companies for approximately 20 years.
Judith
M. Johnson. Ms.
Johnson has served as a Trustee of the Trusts in the Fund Complex since 2008 and
as Chair of
the Audit Committee from 2009 to 2018. She has also served as a trustee and
chair of the audit committee
of Asset Allocation Trust from 2010 to 2018. She served as the Chief Executive
Officer and Chief Investment
Officer of the Minneapolis Employees Retirement Fund for twelve years until her
retirement in 2008. Ms.
Johnson is a licensed attorney, as well as a certified public accountant and a
certified managerial accountant.
Ms. Johnson has been determined by the Board to be an audit committee financial
expert, as such term is
defined in the applicable rules of the SEC.
David
F. Larcker. Mr.
Larcker has served as a Trustee of the Trusts in the Fund Complex since 2009 and
was an Advisory
Board Member from 2008 to 2009. He also served as a Trustee of Asset Allocation
Trust from 2010 to 2018. Mr.
Larcker is the James Irvin Miller Professor of Accounting at the Graduate School
of Business (Emeritus)
of Stanford University. He is also the Morgan Stanley Director of the Center for
Leadership Development
and Research and Co-director of The Rock Center for Corporate Governance at
Stanford University.
He has been a professor of accounting for over 30 years. He has written numerous
articles on a range of topics,
including managerial accounting, financial statement analysis and corporate
governance.
Olivia
S. Mitchell. Ms.
Mitchell has served as a Trustee of the Trusts in the Fund Complex since 2006
and as chair of
the Nominating and Governance Committee since 2018. She also served as a
Trustee of Asset Allocation Trust from
2010 to 2018. Ms. Mitchell is the International Foundation of Employee Benefit
Plans Professor at the
Wharton School of the University of Pennsylvania, where she is also Professor of
Insurance/Risk Management
and Business Economics/Policy. She also serves in senior positions with academic
and policy organizations
that conduct research on pensions, retirement, insurance, risk management and
related topics, including
as Executive Director of the Pension Research Council and Director of the
Boettner Center on Pensions
and Retirement Research, both at the University of Pennsylvania. She has taught
on, and served as a consultant
on economics, insurance, and risk management, served as Department Chair,
advised numerous governmental
entities, and written numerous articles and books on topics including retirement
systems, private and social
insurance, and health and retirement policy.
Timothy
J. Penny. Mr.
Penny has served as a Trustee of the Trusts in the Fund Complex and their
predecessor funds
since 1996, and Chairman of the Board of Trustees since 2018. He also served as
a Trustee of Asset Allocation
Trust from 2010 to 2018. He has been President and Chief Executive Officer of
Southern Minnesota Initiative
Foundation since 2007. He also serves as a member of the board of another
non-profit organization.
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Fargo - Fixed Income Funds |
Mr. Penny
was a member of the U.S. House of Representatives for 12 years representing
Southeastern Minnesota’s
First Congressional District.
James
G. Polisson. Mr.
Polisson has served as a Trustee of the Trusts in the Fund Complex since 2018
and was an Advisory
Board member in 2017. Mr. Polisson has extensive experience in the financial
services industry, including
over 15 years in the ETF industry. From 2015 to July 31, 2017, Mr. Polisson was
the Chief Marketing Officer of
Source (ETF) UK Services, Ltd., one of the largest providers of exchange-traded
products in Europe. From 2012
to 2015, Mr. Polisson was Principal of The Polisson Group, LLC, a management
consulting, corporate advisory
and principal investing firm. Prior to 2012, Mr. Polisson was Chief Executive
Officer and Managing Director
of Russell Investments’ global ETF business from 2010 to 2012. He was also a
member of the Board of Trustees
of Russell Exchange Traded Funds Trust, where he served as Chairman, President
and Chief Executive Officer,
from 2011 to 2012. Mr. Polisson also served as Chief Marketing Officer for
Barclays Global Investors from 2000
to 2010, where he led global marketing for the iShares ETF
business.
Pamela
Wheelock. Ms.
Wheelock has served as a Trustee of the Trusts in the Fund Complex since January
2020 and
previously from January 2018 until July 2019 and was an Advisory Board member in
2017. Ms. Wheelock has been a
Board member of the Destination Medical Center Economic Development Agency in
Rochester, Minnesota
since 2019. She was Interim President of the McKnight Foundation from January to
September 2020. She
served as the acting Commissioner of the Minnesota Department of Human Services
from July 2019 through
September 2019 and as the Human Services Manager (part-time) of the Minnesota
Department of Human
Services from October 2019 through December 2019. Ms. Wheelock has more than 25
years of leadership
experience in the private, public and nonprofit sectors. Ms. Wheelock was the
Chief Operating Officer of Twin
Cities Habitat for Humanity from 2017 through 2019. Prior to joining Habitat for
Humanity in 2017, Ms.
Wheelock was on the Board of Directors, Governance Committee and Finance
Committee for the Minnesota
Philanthropy Partners (Saint Paul Foundation) and the Vice President of
University Services at the University
of Minnesota from 2012, where she served as chief operations officer of the
University. She also served as
Interim President and Chief Executive Officer of Blue Cross Blue Shield of
Minnesota from 2011 to 2012, Vice
President of the Bush Foundation from 2009 to 2011, and Executive Vice President
and Chief Financial
Officer of Minnesota Sports and Entertainment from 2004 to 2009. Ms. Wheelock
served as the Executive
Budget Officer and Finance Commissioner for the State of Minnesota from 1999 to
2002.
Board of Trustees - Leadership Structure and
Oversight Responsibilities
Overall
responsibility for oversight of the Trust and the Funds rests with the Board of
Trustees. The Board has engaged
Funds Management to manage the Funds on a day-to day basis. The Board is
responsible for overseeing
Funds Management and other service providers in the operation of the Trust in
accordance with the provisions
of the 1940 Act, applicable provisions of Delaware law, other applicable laws
and the Declaration of Trust. The
Board is currently composed of nine members, each of whom is an Independent
Trustee. The Board currently
conducts regular in-person meetings five times a year. In addition, the Board
may hold special in-person
or telephonic meetings or informal conference calls to discuss specific matters
that may arise or require
action between regular meetings. The Independent Trustees have engaged
independent legal counsel to assist
them in performing their oversight responsibilities.
The Board
has appointed an Independent Trustee to serve in the role of Chairman. The
Chairman’s role is to preside at
all meetings of the Board and to act as a liaison with respect to
governance-related matters with service
providers, officers, attorneys, and other Trustees generally between meetings.
The Chairman may also perform
such other functions as may be delegated by the Board from time to time.Timothy
Penny serves as chairman
of the Board. In order to assist the Chairman in maintaining effective
communications with the other Trustees
and Funds Management, the Board has appointed a Chair Liaison to work with the
Chairman to coordinate
Trustee communications and to help coordinate timely responses to Trustee
inquiries relating to board
governance and fiduciary matters. The Chair Liaison serves for a one-year term,
which may be extended with the
approval of the Board. Except for any duties specified herein or pursuant to the
Trust’s charter document,
the designation of Chairman or Chair Liaison does not impose on such Independent
Trustee any duties,
obligations or liability that are greater than the duties, obligations or
liability imposed on such person as a member
of the Board generally.
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Fargo - Fixed Income Funds |
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61 |
The Board
also has established a Nominating and Governance Committee, an Audit
Committee, a Valuation Committee
and a Dividend Committee to assist the Board in the oversight and direction
of the business and affairs of
the Trust, and from time to time may establish informal working groups to
review and address the policies
and practices of the Trust with respect to certain specified matters.
Additionally, the Board has established
investment teams to review in detail the performance of each of the Funds, to
meet with portfolio managers,
and to report back to the full Board. The Board occasionally engages independent
consultants to assist it
in evaluating initiatives or proposals. The Board believes that the Board’s
current leadership structure is appropriate
because it allows the Board to exercise informed and independent judgment over
matters under its purview,
and it allocates areas of responsibility among committees of Trustees and the
full Board in a manner that
enhances effective oversight. The leadership structure of the Board may be
changed, at any time and in the discretion
of the Board, including in response to changes in circumstances or the
characteristics of the Trust.
The Funds
and Trusts are subject to a number of risks, including investment, compliance,
operational, liquidity and
valuation risks, among others. Day-to-day risk management functions are subsumed
within the responsibilities
of Funds Management, the sub-advisers and other service providers (depending on
the nature of the
risk), who carry out the Funds’ investment management and business affairs. Each
of Funds Management,
the sub-advisers and other service providers have their own, independent
approach to risk management,
and their policies and methods of carrying out risk management functions will
depend, in part, on their
individual priorities, resources and controls.
Risk
oversight forms part of the Board’s general oversight of the Funds and Trusts
and is addressed as part of various
Board and Committee activities. The Board recognizes that it is not possible to
identify all of the risks that may
affect a Fund or to develop processes and controls to eliminate or mitigate
their occurrence or effects and that
it is necessary for the Funds to bear certain risks (such as investment-related
risks) to pursue their goals. As
part of its regular oversight of the Trusts, the Board, directly or through a
Committee, interacts with and
reviews reports from, among others, Funds Management, sub-advisers, the Chief
Compliance Officer of the Funds, the
Chief Risk Officer of Funds Management, the independent registered public
accounting firm for the Funds, and
internal compliance auditors for Funds Management or its affiliates, as
appropriate, regarding risks faced by
the Funds and relevant risk functions. The Board, with the assistance of its
investment teams, also reviews
investment policies and risks in connection with its review of the Funds’
performance, and considers information
regarding the oversight of liquidity risks from Funds Management’s investment
personnel. The Board has
appointed a Chief Compliance Officer who oversees the implementation and testing
of the Funds’ compliance
program and regularly reports to the Board regarding compliance matters for the
Funds and their principal
service providers. Funds Management has appointed a Chief Risk Officer to
enhance the framework around the
assessment, management, measurement and monitoring of risk indicators and other
risk matters concerning
the Funds and develop periodic reporting of risk management matters to the
Board. In addition, as part of
the Board’s periodic review of the Funds’ advisory, subadvisory and other
service provider agreements, the Board
may consider risk management aspects of their operations and the functions for
which they are responsible.
With respect to valuation, the Board oversees a management valuation team
comprised of officers and
employees of Funds Management, has approved and periodically reviews written
valuation policies and procedures applicable
to valuing Fund portfolio investments, and has established a valuation committee
of Trustees.
The Board may, at any time and in its discretion, change the manner in which it
conducts its risk oversight
role.
Committees.
As noted
above, the Board has established a standing Nominating and Governance Committee,
a standing Audit Committee,
a standing Valuation Committee and a standing Dividend Committee to assist the
Board in the oversight
and direction of the business and affairs of the Trust. The Nominating and
Governance Committee and Audit
Committee operate pursuant to charters approved by the Board. The Valuation
Committee’s responsibilities
are set forth in Valuation Procedures approved by the Board, and the Dividend
Committee’s responsibilities
were set forth by the Board when it established the Committee. Each Independent
Trustee is a member of
the Trust’s Nominating and Governance Committee, Audit Committee and Valuation
Committee. The
Dividend Committee is comprised of three Independent
Trustees.
62 |
|
Wells
Fargo - Fixed Income Funds |
(1)
Nominating
and Governance Committee. Except
with respect to any trustee nomination made by an eligible shareholder
or shareholder group as permitted by applicable law and applicable provisions of
the Declaration of Trust and
any By-Laws of a Trust, the Committee shall make all nominations for membership
on the Board of Trustees
of each Trust. The Committee shall evaluate each candidate’s qualifications for
Board membership and his or her
independence from the Funds’ manager, sub-adviser(s) and principal
underwriter(s) and, as it deems appropriate,
other principal service providers. Olivia Mitchell serves as the chairman of the
Nominating and Governance
Committee.
The Nominating
and Governance Committee has adopted procedures by which a shareholder may
properly submit a
nominee recommendation for the Committee’s consideration, which are set forth in
Appendix A to the Trusts’
Nominating and Governance Committee Charter. The shareholder must submit any
such recommendation
(a “Shareholder Recommendation”) in writing to the Trust, to the attention of
the Trust’s Secretary,
at the address of the principal executive offices of the Trust. The Shareholder
Recommendation must include:
(i) a statement in writing setting forth (A) the name, age, date of birth,
business address, residence address,
and nationality of the person recommended by the shareholder (the “candidate”),
(B) the series (and, if applicable,
class) and number of all shares of the Trust owned of record or beneficially by
the candidate, as reported
to such shareholder by the candidate; (C) any other information regarding the
candidate called for with respect to
director nominees by paragraphs (a), (d), (e), and (f ) of Item 401 of
Regulation S-K or paragraph (b) of Item 22
of Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”), adopted by the SEC (or the corresponding provisions of any regulation or
rule subsequently adopted by
the SEC or any successor agency applicable to the Trust); (D) any other
information regarding the candidate
that would be required to be disclosed if the candidate were a nominee in a
proxy statement or other filing
required to be made in connection with solicitation of proxies for election of
directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder; and (E)
whether the recommending
shareholder believes that the candidate is or will be an “interested person” of
the Trust (as defined in
the 1940 Act) and information regarding the candidate that will be sufficient
for the Trust to make such
determination; (ii) the written and signed consent of the candidate to be named
as a nominee and to serve as a
Trustee if elected; (iii) the recommending shareholder’s name as it appears on
the Trust’s books; (iv) the series
(and, if applicable, class) and number of all shares of the Trust owned
beneficially and of record by the recommending
shareholder; and (v) a description of all arrangements or understandings between
the recommending
shareholder and the candidate and any other person or persons (including their
names) pursuant to which
the recommendation is being made by the recommending shareholder. In addition,
the Nominating and
Governance Committee may require the candidate to interview in person or furnish
such other information as it may
reasonably require or deem necessary to determine the eligibility of such
candidate to serve as a Trustee of
the Trust. The Nominating and Governance Committee has full discretion to
reject candidates recommended
by shareholders, and there is no assurance that any such person properly
recommended and considered
by the Committee will be nominated for election to the Board. In the event of
any conflict or inconsistency
with respect to the requirements applicable to a Shareholder Recommendation as
between those established
in the procedures and those in the By-Laws of a Closed-End Fund, the
requirements of the By-Laws of such
Closed-End Fund shall control.
The Nominating
and Governance Committee may from time-to-time propose nominations of one or
more individuals
to serve as members of an “advisory board,” as such term is defined in Section
2(a)(1) of the 1940 Act.
(2)
Audit
Committee. The Audit
Committee oversees the Funds’ accounting and financial reporting policies,
including
their internal controls over financial reporting; oversees the quality and
objectivity of the Funds’ financial
statements and the independent audit thereof; and interacts with the Funds’
independent registered public
accounting firm on behalf of the full Board and with appropriate officers of the
Trust. Isaiah Harris, Jr. serves as
the chairman of the Audit Committee.
(3)
Valuation
Committee. The Board
has delegated to the Valuation Committee the authority to take any action
regarding
the valuation of portfolio securities that the Valuation Committee deems
necessary or appropriate, including
determining the fair value of securities between regularly scheduled Board
meetings in instances where that
determination has not otherwise been delegated to the valuation team
(“Management Valuation
Wells
Fargo - Fixed Income Funds |
|
63 |
Team”) of
Funds Management. The Board considers for ratification at each quarterly meeting
any valuation actions
taken during the previous quarter by the Valuation Committee or by the
Management Valuation Team other than
pursuant to Board-approved methodologies. Any one member of the Valuation
Committee may constitute
a quorum for a meeting of the committee.
(4)
Dividend
Committee. The Board
has delegated to the Dividend Committee the responsibility to review and
approve
certain dividend amount determinations made by a separate committee composed of
representatives from Funds
Management and certain sub-advisers (“Management Open-End Dividend Committee”).
The Board has
delegated to the Management Open-End Dividend Committee the authority to
determine periodic dividend
amounts subject to certain Board-approved parameters to be paid by each of the
Core Plus Bond Fund, Diversified
Income Builder Fund, Emerging Markets Equity Income Fund, Income Plus Fund,
International Bond Fund,
Managed Account CoreBuilder Shares - Series CP and Real Return Fund. Under
certain circumstances, the Dividend
Committee must review and consider for approval, as it deems appropriate,
recommendations of the Management
Open-End Dividend Committee.
The
committees met the following number of times during the most recently completed
fiscal year:
|
|
|
Committee
Name |
|
Committee
Meetings During Last Fiscal Year |
Audit
Committee |
|
8 |
Nominating
and Governance Committee |
|
4 |
Valuation
Committee |
|
1 |
Dividend
Committee |
|
0 |
Compensation. The
Trustees do not receive any retirement benefits or deferred compensation from
the Trust or any other
member of the Fund Complex. The Trust’s Officers are not compensated by the
Trust for their services.
Listed below is the compensation that was paid to each current Trustee by a Fund
and the Fund Complex
for the most recently completed fiscal period:
|
|
|
|
Trustee
Compensation |
Trustee
|
|
Compensation
from each Fund |
Total
Compensation from
the Fund Complex1
|
William
R. Ebsworth |
|
$2,296 |
$326,000 |
Jane
A. Freeman |
|
$2,437 |
$346,000 |
Isaiah
Harris, Jr. |
|
$2,496 |
$354,500 |
Judith
M. Johnson |
|
$2,296 |
$326,000 |
David
F. Larcker |
|
$2,296 |
$326,000 |
Olivia
S. Mitchell |
|
$2,437 |
$346,000 |
Timothy
J. Penny |
|
$2,824 |
$401,000 |
James
G. Polisson |
|
$2,296 |
$326,000 |
Pamela
Wheelock2
|
|
$1,757 |
$249,500 |
1. |
As of
August 31, 2020, there were 143 series in the Fund
Complex. |
2. |
Effective
July 15, 2019, Ms. Wheelock resigned her position as Trustee. The Board
reappointed Ms. Wheelock as Trustee effective January 1,
2020. |
Beneficial
Equity Ownership Information. The
following table contains specific information about the dollar range
of equity
securities beneficially owned by each Trustee as of December 31, 2019 in each
Fund and
the aggregate
dollar range of equity securities in other Funds in the Fund Complex overseen by
the Trustees, stated as one of
the following ranges: A = $0; B = $1 - $10,000; C = 10,001 - $50,000; D =
$50,001 - $100,000; and E = Over
$100,000.
|
|
|
|
|
|
|
|
|
|
Fund
|
Ebsworth |
Freeman |
Harris |
Johnson |
Larcker |
Mitchell |
Penny |
Polisson |
Wheelock |
Adjustable
Rate Government Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
Conservative
Income Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
Core
Plus Bond Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
64 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
|
|
|
|
|
|
|
Fund
|
Ebsworth |
Freeman |
Harris |
Johnson |
Larcker |
Mitchell |
Penny |
Polisson |
Wheelock |
Government
Securities Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
High
Yield Bond Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
Short
Duration Government Bond Fund |
A |
A |
E |
A |
A |
A |
A |
A |
A |
Short-Term
Bond Plus Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
Short-Term
High Yield Bond Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
Ultra
Short-Term Income Fund |
A |
A |
A |
A |
A |
A |
A |
A |
A |
Aggregate
Dollar Range of Equity Securities in
All Funds Overseen by Trustee in Fund Complex1
|
E |
E |
E |
E |
E |
E |
E |
E |
E |
1. |
Includes
Trustee ownership in shares of funds within the entire Wells Fargo Fund
Complex (consisting of 149 funds). |
Ownership
of Securities of Certain Entities. As of the
calendar year ended December 31, 2019, none of the Independent
Trustees and/or their immediate family members owned securities of the manager,
any sub-advisers,
or the distributor, or any entity directly or indirectly controlling, controlled
by, or under common control
with the manager, any sub-advisers, or the distributor.
MANAGER
AND OTHER SERVICE PROVIDERS
Manager and Class-Level
Administrator
Funds
Management, an indirect wholly owned subsidiary of Wells Fargo & Company and
an affiliate of Wells Fargo
Bank, is the manager and class-level administrator for the Funds. Funds
Management provides advisory and
Fund-level administrative services to the Funds under an investment management
agreement (the “Management
Agreement”) and provides class-level administrative services to the Funds under
a class-level administration
agreement (the “Class-Level Administration Agreement”). Under the Management
Agreement, Funds
Management is responsible for, among other services, (i) implementing the
investment objectives and strategies
of the Funds, (ii) supervising the applicable Sub-Adviser(s), (iii) providing
Fund-level administrative services
in connection with the Funds’ operations, (iv) developing and implementing
procedures for monitoring compliance
with regulatory requirements and compliance with the Funds’ investment
objectives, policies and restrictions,
and (v) providing any other Fund-level administrative services reasonably
necessary for the operation
of the Funds other than those services that are provided by the Funds’ transfer
and dividend disbursing
agent, custodian, and fund accountant. Funds Management also furnishes office
space and certain facilities
required for conducting the Funds’ business together with ordinary clerical and
bookkeeping services.
Under the
Class-Level Administration Agreement, Funds Management is responsible for, among
other services, (i)
coordinating, supervising and paying the applicable transfer agent and various
sub-transfer agents and omnibus
account servicers and record-keepers, (ii) coordinating the preparation and
filing of registration statements,
notices, shareholder reports and other information materials, including
prospectuses, proxies and other
shareholder communications for a class, (iii) receiving and tabulating
class-specific shareholder votes, (iv) reviewing
bills submitted to a Fund and, upon determining that a bill is appropriate,
allocating amounts to the appropriate
classes thereof and instructing the Funds’ custodian to pay such bills, and (v)
assembling and disseminating
information concerning class performance, expenses, distributions and
administration. Funds Management
has agreed to pay all of the Funds’ fees and expenses for services provided by
the Funds’ transfer agent and
various sub-transfer agents and omnibus account servicers and record-keepers out
of the fees it receives
pursuant to the Class-Level Administration Agreement.
As
compensation for its services under the Management Agreement, Funds Management
is entitled to receive a monthly
fee at the annual rates indicated below of each Fund’s average daily net
assets:
|
|
|
|
Fund
|
|
Fee |
|
Conservative
Income Fund and Ultra Short-Term Income
Fund |
|
First
$1B Next
$4B Next
$5B Over
$10B |
0.250% 0.225% 0.190% 0.180% |
Wells
Fargo - Fixed Income Funds |
|
65 |
|
|
|
|
Fund
|
|
Fee |
|
Adjustable
Rate Government Fund, Short Duration Government
Bond Fund and Short-Term Bond Plus Fund
|
|
First
$1B Next
$4B Next
$3B Next
$2B Over
$10B |
0.350% 0.325% 0.290% 0.265% 0.255% |
Core
Plus Bond Fund and Government Securities Fund
|
|
First
$500M Next
$500M Next
$2B Next
$2B Next
$5B Over
$10B |
0.450% 0.425% 0.400% 0.375% 0.340% 0.320% |
Short-Term
High Yield Bond Fund |
|
First
$500M Next
$500M Next
$2B Next
$2B Next
$5B Over
$10B |
0.500% 0.475% 0.450% 0.425% 0.390% 0.380% |
High
Yield Bond Fund |
|
First
$500M Next
$500M Next
$2B Next
$2B Next
$5B Over
$10B |
0.550% 0.525% 0.500% 0.475% 0.440% 0.430% |
Management Fees
Paid. The
amounts shown below reflect fees paid to and waived by Funds Management
under the
Management Agreement for the past three fiscal years or periods.
|
|
|
Management
Fees Paid |
Fund/Fiscal
Year or Period |
Management
Fees Paid |
Management
Fees Waived |
August
31, 2020 |
|
|
Adjustable
Rate Government Fund |
$803,851 |
$251,402 |
Conservative
Income Fund |
$554,311 |
$403,706 |
Core
Plus Bond Fund |
$3,056,753 |
$1,587,638 |
Government
Securities Fund |
$2,473,480 |
$382,600 |
High
Yield Bond Fund |
$1,567,251 |
$407,336 |
Short
Duration Government Bond Fund |
$1,818,258 |
$178,071 |
Short-Term
Bond Plus Fund |
$1,288,272 |
$256,257 |
Short-Term
High Yield Bond Fund |
$3,136,619 |
$950,091 |
Ultra
Short-Term Income Fund |
$2,225,163 |
$1,182,252 |
August
31, 2019 |
|
|
Adjustable
Rate Government Fund |
$881,667 |
$276,928 |
Conservative
Income Fund |
$629,380 |
$440,605 |
Core
Plus Bond Fund |
$1,735,427 |
$1,157,708 |
Government
Securities Fund |
$2,448,936 |
$402,617 |
High
Yield Bond Fund |
$1,819,500 |
$449,310 |
Short
Duration Government Bond Fund |
$1,861,786 |
$195,267 |
Short-Term
Bond Plus Fund |
$1,229,138 |
$248,873 |
Short-Term
High Yield Bond Fund |
$3,734,701 |
$1,043,596 |
Ultra
Short-Term Income Fund |
$2,558,524 |
$1,019,910 |
August
31, 2018 |
|
|
Adjustable
Rate Government Fund |
$1,440,594 |
$210,158 |
Conservative
Income Fund |
$725,359 |
$456,592 |
Core
Plus Bond Fund |
$1,502,973 |
$1,095,315 |
66 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
Management
Fees Paid |
Fund/Fiscal
Year or Period |
Management
Fees Paid |
Management
Fees Waived |
Government
Securities Fund |
$3,218,909 |
$382,845 |
High
Yield Bond Fund |
$2,349,643 |
$469,195 |
Short
Duration Government Bond Fund |
$2,438,088 |
$134,745 |
Short-Term
Bond Plus Fund |
$1,443,683 |
$124,416 |
Short-Term
High Yield Bond Fund |
$4,828,791 |
$1,192,022 |
Ultra
Short-Term Income Fund |
$2,931,864 |
$1,252,546 |
For
providing class-level administrative services to the Funds pursuant to the
Class-Level Administration Agreement,
including paying the Funds’
fees and expenses for services provided by the Funds’
transfer agent and
various sub-transfer agents and omnibus account servicers and record-keepers,
Funds Management is entitled
to receive an annual fee at the rates indicated below, as a percentage of the
total net assets of each Class:
|
|
|
|
|
Class-Level
Administrator
Fee |
Share
Class |
|
%
of Total Net Assets |
Class
A |
|
0.16% |
Class
C |
|
0.16% |
Class
A2 |
|
0.16% |
Class
R6 |
|
0.03% |
Administrator
Class |
|
0.10% |
Institutional
Class |
|
0.08% |
Administrative Service Fees
Paid. The
amounts shown below reflect fees paid to and waived by Funds Management
under the Class-Level Administration Agreement for the past three fiscal years
or periods.
|
|
|
Administrative
Service Fees Paid |
Fund/Fiscal
Year or Period |
Administrative
Service Fees Paid |
Administrative
Service Fees Waived |
August
31, 2020 |
|
|
Adjustable
Rate Government Fund |
$266,021 |
$69,658 |
Conservative
Income Fund |
$306,577 |
$0 |
Core
Plus Bond Fund |
$996,355 |
$54,447 |
Government
Securities Fund |
$533,539 |
$225,802 |
High
Yield Bond Fund |
$420,787 |
$83,187 |
Short
Duration Government Bond Fund |
$285,809 |
$191,090 |
Short-Term
Bond Plus Fund |
$363,312 |
$108,766 |
Short-Term
High Yield Bond Fund |
$701,898 |
$100,680 |
Ultra
Short-Term Income Fund |
$988,080 |
$32,194 |
August
31, 2019 |
|
|
Adjustable
Rate Government Fund |
$298,491 |
$75,701 |
Conservative
Income Fund |
$342,395 |
$0 |
Core
Plus Bond Fund |
$681,057 |
$18,495 |
Government
Securities Fund |
$565,901 |
$195,833 |
High
Yield Bond Fund |
$480,980 |
$87,779 |
Short
Duration Government Bond Fund |
$293,986 |
$203,337 |
Short-Term
Bond Plus Fund |
$357,936 |
$109,970 |
Wells
Fargo - Fixed Income Funds |
|
67 |
|
|
|
Administrative
Service Fees Paid |
Fund/Fiscal
Year or Period |
Administrative
Service Fees Paid |
Administrative
Service Fees Waived |
Short-Term
High Yield Bond Fund |
$819,113 |
$127,227 |
Ultra
Short-Term Income Fund |
$842,008 |
$167,429 |
August
31, 2018 |
|
|
Adjustable
Rate Government Fund |
$421,040 |
$106,304 |
Conservative
Income Fund |
$378,224 |
$0 |
Core
Plus Bond Fund |
$650,027 |
$19,139 |
Government
Securities Fund |
$679,296 |
$303,319 |
High
Yield Bond Fund |
$582,532 |
$114,053 |
Short
Duration Government Bond Fund |
$355,602 |
$261,866 |
Short-Term
Bond Plus Fund |
$380,273 |
$151,061 |
Short-Term
High Yield Bond Fund |
$1,057,288 |
$162,975 |
Ultra
Short-Term Income Fund |
$986,819 |
$205,416 |
General. Each
Fund’s Management Agreement will continue in effect provided the continuance is
approved annually
(i) by the holders of a majority of the respective Fund’s outstanding voting
securities or by the Board and (ii)
by a majority of the Trustees who are not parties to the Management Agreement or
“interested persons”
(as defined under the 1940 Act) of any such party. The Management Agreement may
be terminated at any time
by vote of the Board or by vote of a majority of a Fund’s outstanding voting
securities, or by Funds Management
on 60 days’ written notice. It will terminate automatically if
assigned.
For each Fund,
the Class-Level Administration Agreement will continue in effect provided the
continuance is approved
annually by the Board, including a majority of the Trustees who are not
“interested persons” (as defined
under the 1940 Act) of any party to the Class-Level Administration Agreement.
The Class-Level Administration
Agreement may be terminated on 60 days’ written notice by either
party.
Conflicts of
Interest. Wells
Fargo & Company is a diversified financial services company providing
banking, insurance,
investment, mortgage and consumer financial services. The involvement of various
subsidiaries of Wells
Fargo & Company, including Funds Management, in the management and operation
of the Fund and in providing
other services or managing other accounts gives rise to certain actual and
potential conflicts of interest.
For
example, certain investments may be appropriate for a Fund and also for other
clients advised by Funds Management
and its affiliates, and there may be market or regulatory limits on the amount
of such investments,
which may cause competition for limited positions. Also, various clients and
proprietary accounts of Funds
Management and its affiliates may at times take positions that are adverse to a
Fund. Funds Management
applies various policies to address these situations, but a Fund may nonetheless
incur losses or underperformance
during periods when Wells Fargo & Company, its affiliates and their clients
achieve gains or outperformance.
Wells
Fargo & Company may have interests in or provide services to portfolio
companies or Fund shareholders or
intermediaries that may not be fully aligned with the interests of all
investors. Funds Management and its affiliates
serve in multiple roles, including as manager and, for most Wells Fargo Funds,
sub-adviser, as well as class-level
administrator and principal underwriter.
These are
all considerations of which an investor should be aware and which may cause
conflicts that could disadvantage
a Fund. Funds Management has instituted business and compliance policies,
procedures and disclosures
that are designed to identify, monitor and mitigate such conflicts of
interest.
Fund Expenses. From
time to time, service providers to a Fund,
including Funds Management and/or its affiliates,
may contractually agree to waive fees from a Fund in
whole or in part. In addition, such service providers
may voluntarily waive all or a portion of any fees to which they
are entitled and/or reimburse certain expenses
as they may determine from time to time. A Funds’
service providers may discontinue or
68 |
|
Wells
Fargo - Fixed Income Funds |
modify
these voluntary actions at any time without notice. Any such contractual or
voluntary waiver will reduce expenses
and, accordingly, have a favorable impact on a Fund’s
performance. Such contractual and voluntary waivers may differ depending on
share class.
Except for
the expenses borne by Funds Management, the Trust bears all costs of its
operations, including the compensation
of the Independent Trustees; investment management, shareholder
services and class-level administrative
fees; payments pursuant to any 12b-1 Plan; interest charges; taxes; fees and
expenses of its independent
auditors, legal counsel, transfer agent and distribution disbursing agent;
expenses of redeeming shares;
expenses of preparing and printing prospectuses (except the expense of printing
and mailing prospectuses
used for promotional purposes, unless otherwise payable pursuant to a 12b-1
Plan), shareholders’ reports,
notices, proxy statements and reports to regulatory agencies; insurance premiums
and certain expenses
relating to insurance coverage; trade association membership dues (including
membership dues in the Investment
Company Institute allocable to a Fund);
brokerage and other expenses connected with the execution
of portfolio transactions; fees and expenses of its custodian, including those
for keeping books and accounts
and calculating the NAV per share of a Fund;
expenses of shareholders’ meetings; expenses relating to the
issuance, registration and qualification of a Fund’s
shares; pricing services, organizational expenses and any extraordinary
expenses. Expenses attributable to a Fund are
charged against the Fund’s assets. General expenses
of the Trust are allocated among all of the series of the Trust, including the
Funds, in a manner proportionate
to the net assets of each Fund, on a transactional basis, or on such other basis
as the Board deems
equitable.
Sub-Adviser
Funds
Management has engaged Wells Capital Management Incorporated (“Wells Capital
Management” or the “Sub-Adviser”),
an indirect wholly owned subsidiary of Wells Fargo & Company and an
affiliate of Funds Management,
to serve as investment sub-adviser to the Funds. Subject to the direction of the
Trust’s Board and the
overall supervision and control of Funds Management and the Trust, the
Sub-Adviser makes recommendations
regarding the investment and reinvestment of the Funds’ assets. The Sub-Adviser
furnishes to Funds
Management periodic reports on the investment activity and performance of the
Funds. The Sub-Adviser
also furnishes such additional reports and information as Funds Management and
the Trust’s Board and
Officers may reasonably request. Funds Management may, from time to time and in
its sole discretion,
allocate and reallocate services provided by and fees paid to Wells Capital
Management.
For
providing investment sub-advisory services to the Funds, the Sub-Adviser is
entitled to receive monthly fees at
the annual rates indicated below of each Fund’s average daily net assets. These
fees may be paid by Funds
Management or directly by the Funds. If a sub-advisory fee is paid directly by a
Fund, the compensation paid to
Funds Management for advisory fees will be reduced accordingly.
|
|
|
|
Fund
|
|
Fee |
|
Adjustable
Rate Government Fund |
|
First
$100M Next
$200M Next
$200M Over
$500M |
0.200% 0.175% 0.150% 0.100% |
Conservative
Income Fund |
|
First
$100M Next
$200M Over
$300M |
0.100% 0.080% 0.050% |
Core
Plus Bond Fund and Government Securities Fund
|
|
First
$100M Next
$200M Next
$200M Over
$500M |
0.200% 0.175% 0.150% 0.100% |
High
Yield Bond Fund and Short-Term High Yield Bond
Fund |
|
First
$100M Next
$200M Next
$200M Over
$500M |
0.350% 0.300% 0.250% 0.200% |
Short
Duration Government Bond Fund, Short-Term
Bond Plus Fund and Ultra Short-Term Income
Fund |
|
First
$100M Next
$200M Over
$300M |
0.150% 0.100% 0.050% |
Wells
Fargo - Fixed Income Funds |
|
69 |
Portfolio Managers
The
following information supplements, and should be read in conjunction with, the
section in each Prospectus entitled
“The Sub-Adviser and Portfolio Managers.” The information in this section is
provided as of August 31,
2020, the
most recent fiscal year end for the Funds
managed by the portfolio managers listed below (each, a “Portfolio
Manager” and together, the “Portfolio Managers”). The Portfolio Managers manage
the investment activities
of the Funds on a
day-to-day basis as follows.
|
|
|
Fund
|
Sub-Adviser |
Portfolio
Managers |
Adjustable
Rate Government Fund |
Wells
Capital Management |
Christopher
Y. Kauffman, CFA Michal
Stanczyk |
Conservative
Income Fund |
Wells
Capital Management |
Andrew
M. Greenberg, CFA Anthony
J. Melville, CFA Jeffrey
L. Weaver, CFA |
Core
Plus Bond Fund |
Wells
Capital Management |
Christopher
Y. Kauffman, CFA Jay
N. Mueller, CFA Janet
S. Rilling, CFA, CPA Michael
J. Schueller, CFA Noah
M. Wise, CFA |
Government
Securities Fund |
Wells
Capital Management |
Christopher
Y. Kauffman, CFA Jay
N. Mueller, CFA Michal
Stanczyk |
High
Yield Bond Fund |
Wells
Capital Management |
Robert
Junkin Margaret
D. Patel |
Short
Duration Government Bond Fund |
Wells
Capital Management |
Maulik
Bhansali, CFA Jarad
Vasquez |
Short-Term
Bond Plus Fund |
Wells
Capital Management |
Christopher
Y. Kauffman, CFA Jay
N. Mueller, CFA Janet
S. Rilling, CFA, CPA Michael
J. Schueller, CFA Noah
M. Wise, CFA |
Short-Term
High Yield Bond Fund |
Wells
Capital Management |
Chris
Lee, CFA Michael
J. Schueller, CFA |
Ultra
Short-Term Income Fund |
Wells
Capital Management |
Christopher
Y. Kauffman, CFA Jay
N. Mueller, CFA Michael
J. Schueller, CFA Noah
M. Wise, CFA |
Management of Other
Accounts. The
following table(s) provide information relating to other accounts managed
by the
Portfolio Manager(s). The table(s) do not include the Funds or
any personal brokerage accounts of the Portfolio
Manager(s) and their families.
|
|
|
Maulik
Bhansali, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
8 |
|
Total
Assets Managed |
$20.24B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
5 |
|
Total
Assets Managed |
$3.04B |
|
Number
of Accounts Subject to Performance Fee |
1 |
|
Assets
of Accounts Subject to Performance Fee |
$36.55M |
|
Other
Accounts |
|
|
Number
of Accounts |
33 |
|
Total
Assets Managed |
$13.24B |
70 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
|
Number
of Accounts Subject to Performance Fee |
2 |
|
Assets
of Accounts Subject to Performance Fee |
$652.43M |
|
|
|
Andrew
M. Greenberg, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
14 |
|
Total
Assets Managed |
$6.79B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Robert
Junkin |
Registered
Investment Companies |
|
|
Number
of Accounts |
1 |
|
Total
Assets Managed |
$1.09B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Christopher
Y. Kauffman, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
4 |
|
Total
Assets Managed |
$803.82M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
Wells
Fargo - Fixed Income Funds |
|
71 |
|
|
|
|
Other
Accounts |
|
|
Number
of Accounts |
3 |
|
Total
Assets Managed |
$297.44M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Chris
Lee, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
5 |
|
Total
Assets Managed |
$1.33B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
4 |
|
Total
Assets Managed |
$384.25M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
5 |
|
Total
Assets Managed |
$398.71M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Anthony
J. Melville, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Companies |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
25 |
|
Total
Assets Managed |
$7.52B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Jay
N. Mueller, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
3 |
|
Total
Assets Managed |
$337.37M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Companies |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
72 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
4 |
|
Total
Assets Managed |
$108.31M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Margaret
D. Patel |
Registered
Investment Companies |
|
|
Number
of Accounts |
2 |
|
Total
Assets Managed |
$1.49B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
0 |
|
Total
Assets Managed |
$0 |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
1 |
|
Total
Assets Managed |
$11.34M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Janet
S. Rilling, CFA, CPA |
Registered
Investment Companies |
|
|
Number
of Accounts |
6 |
|
Total
Assets Managed |
$1.21B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
8 |
|
Total
Assets Managed |
$3.75B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
16 |
|
Total
Assets Managed |
$4.42B |
|
Number
of Accounts Subject to Performance Fee |
1 |
|
Assets
of Accounts Subject to Performance Fee |
$1.10B |
|
|
|
Michael
J. Schueller, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
10 |
|
Total
Assets Managed |
$1.92B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Companies |
|
Wells
Fargo - Fixed Income Funds |
|
73 |
|
|
|
|
Number
of Accounts |
5 |
|
Total
Assets Managed |
$478.27M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
6 |
|
Total
Assets Managed |
$437.11M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Michal
Stanczyk |
Registered
Investment Companies |
|
|
Number
of Accounts |
3 |
|
Total
Assets Managed |
$646.43M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
4 |
|
Total
Assets Managed |
$1.35B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
2 |
|
Total
Assets Managed |
$2.13B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Jarad
Vasquez |
Registered
Investment Companies |
|
|
Number
of Accounts |
8 |
|
Total
Assets Managed |
$20.24B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
5 |
|
Total
Assets Managed |
$3.04B |
|
Number
of Accounts Subject to Performance Fee |
1 |
|
Assets
of Accounts Subject to Performance Fee |
36.55M |
|
Other
Accounts |
|
|
Number
of Accounts |
33 |
|
Total
Assets Managed |
$13.24B |
|
Number
of Accounts Subject to Performance Fee |
2 |
|
Assets
of Accounts Subject to Performance Fee |
$652.43M |
|
|
|
Jeffrey
L. Weaver, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
8 |
|
Total
Assets Managed |
$217.40B |
|
Number
of Accounts Subject to Performance Fee |
0 |
74 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
1 |
|
Total
Assets Managed |
$963.14M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
4 |
|
Total
Assets Managed |
$1.29B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
|
|
Noah
M. Wise, CFA |
Registered
Investment Companies |
|
|
Number
of Accounts |
5 |
|
Total
Assets Managed |
$507.35M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Pooled Investment Vehicles |
|
|
Number
of Accounts |
2 |
|
Total
Assets Managed |
$2.40B |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
|
Other
Accounts |
|
|
Number
of Accounts |
9 |
|
Total
Assets Managed |
$896.27M |
|
Number
of Accounts Subject to Performance Fee |
0 |
|
Assets
of Accounts Subject to Performance Fee |
$0 |
Material Conflicts of
Interest. The
Portfolio Managers face inherent conflicts of interest in their day-to-day
management
of the Funds and
other accounts because the Funds may
have different investment objectives, strategies
and risk profiles than the other accounts managed by the Portfolio Managers. For
instance, to the extent
that the Portfolio Managers manage accounts with different investment strategies
than the Funds,
they may from
time to time be inclined to purchase securities, including initial public
offerings, for one account but not for a
Fund. Additionally, some of the accounts managed by the Portfolio Managers may
have different fee structures,
including performance fees, which are or have the potential to be higher or
lower, in some cases significantly
higher or lower, than the fees paid by the Funds. The
differences in fee structures may provide an incentive
to the Portfolio Managers to allocate more favorable trades to the higher-paying
accounts.
To
minimize the effects of these inherent conflicts of interest, each firm listed
below has adopted and implemented
policies and procedures, including brokerage and trade allocation policies and
procedures, intended
to address the potential conflicts associated with managing portfolios for
multiple clients and are designed
to ensure that all clients are treated fairly and equitably. Accordingly,
security block purchases are allocated
to all accounts with similar objectives in a fair and equitable
manner.
Wells
Capital Management. Wells
Capital Management’s Portfolio Managers often provide investment management
for separate accounts advised in the same or similar investment style as that
provided to mutual funds.
While management of multiple accounts could potentially lead to conflicts of
interest over various issues such as
trade allocation, fee disparities and research acquisition, Wells Capital
Management has implemented
Wells
Fargo - Fixed Income Funds |
|
75 |
policies
and procedures for the express purpose of ensuring that clients are treated
fairly and that potential conflicts
of interest are minimized.
Compensation. The
Portfolio Managers were compensated by their employing Sub-Adviser using the
following compensation
structure:
Wells
Capital Management. The
compensation structure for Wells Capital Management’s Portfolio Managers
includes a
competitive fixed base salary plus variable incentives, payable annually and
over a longer term period. Wells
Capital Management participates in third party investment management
compensation surveys for market-based
compensation information to help support individual pay decisions. In addition
to surveys, Wells Capital
Management also considers prior professional experience, tenure, seniority and a
Portfolio Manager’s team size,
scope and assets under management when determining his/her fixed base salary. In
addition, Portfolio
Managers, who meet the eligibility requirements, may participate in Wells
Fargo’s 401(k) plan that features a
limited matching contribution. Eligibility for and participation in this plan is
on the same basis for all employees.
Wells
Capital Management’s investment incentive program plays an important role in
aligning the interests of our
portfolio managers, investment team members, clients and shareholders. Incentive
awards for portfolio managers
are determined based on a review of relative investment and business/team
performance. Investment
performance is generally evaluated for 1, 3, and 5 year performance results,
with a predominant weighting
on the 3- and 5- year time periods, versus the relevant benchmarks and/or peer
groups consistent with the
investment style. In the case of each Fund, the benchmark(s) against which the
performance of the Fund’s
portfolio may be compared for these purposes generally are indicated in the
“Average Annual Total Returns”
table in the Prospectus. Once determined, incentives are awarded to portfolio
managers annually, with a portion
awarded as annual cash and a portion awarded as long term incentive. The long
term portion of incentives
generally carry a pro-rated vesting schedule over a three year period. For many
of our portfolio managers,
Wells Capital Management further requires a portion of their annual long-term
award be allocated directly
into each strategy they manage through a deferred compensation vehicle. In
addition, our investment team
members who are eligible for long term awards also have the opportunity to
invest up to 100% of their awards
into investment strategies they support (through a deferred compensation
vehicle).
Beneficial Ownership in the
Funds. The
following table shows for each Portfolio Manager the dollar value of
Fund
equity securities beneficially owned by the Portfolio Manager, stated as one of
the following ranges:
$0;
$1 -
$10,000;
$10,001 -
$50,000;
$50,001 -
$100,000;
$100,001 -
$500,000;
$500,001 -
$1,000,000; and
over
$1,000,000.
|
|
|
Portfolio
Manager |
Fund |
Beneficial
Ownership |
Wells
Capital Management1
|
|
|
Maulik
Bhansali, CFA |
Short
Duration Government Bond Fund |
$100,001-$500,000 |
Andrew
M. Greenberg, CFA |
Conservative
Income Fund |
$0 |
Robert
Junkin |
High
Yield Bond Fund |
$10,001-$50,000 |
Christopher
Y. Kauffman, CFA |
Adjustable
Rate Government Fund Core
Plus Bond Fund Government
Securities Fund Short-Term
Bond Plus Fund Ultra
Short-Term Income Fund |
$1-$10,000 $1-$10,000 $1-$10,000 $1-$10,000 $1-$10,000 |
Chris
Lee, CFA |
Short-Term
High Yield Bond Fund |
$0 |
Anthony
J. Melville, CFA |
Conservative
Income Fund |
$0 |
76 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
Portfolio
Manager |
Fund |
Beneficial
Ownership |
Wells
Capital Management1 |
|
|
Jay
N. Mueller, CFA |
Core
Plus Bond Fund Government
Securities Fund Short-Term
Bond Plus Fund Ultra
Short-Term Income Fund |
$0 $0 $10,001-$50,000 $10,001-$50,000 |
Margaret
D. Patel |
High
Yield Bond Fund |
$50,001-$100,000 |
Janet
S. Rilling, CFA, CPA |
Core
Plus Bond Fund Short-Term
Bond Plus Fund |
$100,001-$500,000 $0 |
Michael
J. Schueller, CFA |
Core
Plus Bond Fund Short-Term
Bond Plus Fund Short-Term
High Yield Bond Fund Ultra
Short-Term Income Fund |
$10,001-$50,000 $10,001-$50,000 $10,001-$50,000 $10,001-$50,000 |
Michal
Stanczyk |
Adjustable
Rate Government Fund Government
Securities Fund |
$0 $0 |
Jarad
Vasquez |
Short
Duration Government Bond Fund |
$100,001-$500,000 |
Jeffrey
L. Weaver, CFA |
Conservative
Income Fund |
$0 |
Noah
M. Wise, CFA |
Core
Plus Bond Fund Short-Term
Bond Plus Fund Ultra
Short-Term Income Fund |
$50,001-$100,000 $10,001-
$50,000 $10,001-
$50,000 |
1. |
Amounts
included in the table above may include notional investments held by the
portfolio manager through a deferred compensation
vehicle. |
Distributor and Shareholder Servicing
Agent
Wells
Fargo Funds Distributor, LLC (the “Distributor”), an affiliate of Funds
Management located at 525 Market Street,
San Francisco, California 94105, serves as the distributor to the Wells Fargo
Funds.
Each Fund
has adopted a distribution plan (the “12b-1 Plan”) pursuant to Rule 12b-1 under
the 1940 Act (the “Rule”)
for the classes of shares listed in the table below. The 12b-1 Plan was adopted
by the Board, including a majority
of the Trustees who were not “interested persons” (as defined under the 1940
Act) of the Fund and who had no
direct or indirect financial interest in the operation of the 12b-1 Plan or in
any agreement related to the 12b-1
Plan (the “Non-Interested Trustees”).
Under the
12b-1 Plan and pursuant to the related Distribution Agreement, each applicable
class pays the Distributor,
on a monthly basis, an annual fee up to the amount indicated in the table. The
Distributor may retain any
portion of the total distribution fee to compensate it for distribution-related
services provided by it or to
reimburse it for other distribution-related expenses. The Distributor’s
distribution-related revenues from the 12b-1
Plan may be more or less than distribution-related expenses incurred during the
period.
|
|
|
|
Fund
|
|
|
Class
C |
Adjustable
Rate Government Fund |
|
|
0.75% |
Conservative
Income Fund |
|
|
N/A |
Core
Plus Bond Fund |
|
|
0.75% |
Government
Securities Fund |
|
|
0.75% |
High
Yield Bond Fund |
|
|
0.75% |
Short
Duration Government Bond Fund |
|
|
0.75% |
Short-Term
Bond Plus Fund |
|
|
0.75% |
Short-Term
High Yield Bond Fund |
|
|
0.75% |
Ultra
Short-Term Income Fund |
|
|
0.75% |
For the
fiscal year ended August 31,
2020, the Funds paid the Distributor the following fees for distribution-related
services.
Wells
Fargo - Fixed Income Funds |
|
77 |
|
|
|
|
Distribution
Fees |
|
|
|
Fund
|
Total
Distribution Fee Paid
by Fund |
Compensation
Paid to Distributor |
Compensation
to Broker/Dealers |
Adjustable
Rate Government Fund |
|
|
|
Class
C |
$40,657 |
$3,330 |
$37,327 |
Core
Plus Bond Fund |
|
|
|
Class
C |
$164,776 |
$60,751 |
$104,025 |
Government
Securities Fund |
|
|
|
Class
C |
$78,285 |
$5,401 |
$72,884 |
High
Yield Bond Fund |
|
|
|
Class
C |
$71,552 |
$2,804 |
$68,748 |
Short
Duration Government Bond Fund |
|
|
|
Class
C |
$64,796 |
$6,150 |
$58,646 |
Short-Term
Bond Plus Fund |
|
|
|
Class
C |
$43,064 |
$6,021 |
$37,043 |
Short-Term
High Yield Bond Fund |
|
|
|
Class
C |
$385,991 |
$26,738 |
$359,253 |
Ultra
Short-Term Income Fund |
|
|
|
Class
C |
$34,474 |
$7,690 |
$26,784 |
General. The
12b-1 Plan and Distribution Agreement will continue in effect from year to year
if such continuance
is approved at least annually by vote of a majority of both the Trustees and the
Non-Interested Trustees.
The Distribution Agreement will terminate automatically if assigned, and may be
terminated at any time,
without payment of any penalty, on not less than 60 days’ written notice, by the
Trust’s Board, by a vote of a
majority of the outstanding voting securities of the Fund or by the
Distributor. The 12b-1 Plan may not be amended to
increase materially the amounts payable thereunder by the relevant class of a
Fund without approval
by a vote of a majority of the outstanding voting securities of such class, and
no material amendment to the
12b-1 Plan shall be made unless approved by vote of a majority of both the
Trustees and Non-Interested Trustees.
The 12b-1 Plan provides that, if and to the extent any shareholder servicing
payments are deemed to be
payments for the financing of any activity primarily intended to result in the
sale of Fund shares, such payments
are deemed to have been approved under the 12b-1 Plan.
Servicing Agent
Each Fund
has adopted a Shareholder Servicing Plan (the “Servicing Plan”) for its Class A,
Class C, Class A2 and Administrator
Class, as applicable, shares and has entered into a related Shareholder
Servicing Agreement with the
Distributor and Funds Management. Under this agreement, the Distributor and
Funds Management are authorized
to provide or engage third parties to provide, pursuant to an Administrative and
Shareholder Services
Agreement, shareholder support services. For providing these services, the
Distributor, Funds Management
and third parties are entitled to an annual fee from the applicable class of the
Fund of up to 0.25% of the
average daily net assets of such class owned of record or beneficially by their
customers.
General. The
Servicing Plan will continue in effect from year to year if such continuance is
approved by vote of a majority
vote of both the Trustees and the Non-Interested Trustees. No material amendment
to the Servicing Plan may
be made except by such a vote.
Underwriting Commissions
The
Distributor serves as the principal underwriter distributing securities of
the Funds on a
continuous basis.
For the
fiscal periods listed below, the aggregate amounts of underwriting commissions
paid to and retained by the
Distributor are as follows:
78 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
|
Underwriting
Commissions Paid |
|
|
|
Fund/Fiscal
Year or Period |
|
Aggregate
Total Underwriting
Commissions |
Underwriting
Commissions
Retained |
August
31, 2020 |
|
|
|
Adjustable
Rate Government Fund |
|
$2,437 |
$2,437 |
Conservative
Income Fund |
|
$0 |
$0 |
Core
Plus Bond Fund |
|
$19,973 |
$19,973 |
Government
Securities Fund |
|
$5,808 |
$5,808 |
High
Yield Bond Fund |
|
$1,675 |
$1,675 |
Short
Duration Government Bond Fund |
|
$2,320 |
$2,320 |
Short-Term
Bond Plus Fund |
|
$2,141 |
$2,141 |
Short-Term
High Yield Bond Fund |
|
$6,372 |
$6,372 |
Ultra
Short-Term Income Fund |
|
$11,609 |
$11,609 |
August
31, 2019 |
|
|
|
Adjustable
Rate Government Fund |
|
$1,400 |
$1,400 |
Conservative
Income Fund |
|
$0 |
$0 |
Core
Plus Bond Fund |
|
$10,078 |
$10,078 |
Government
Securities Fund |
|
$5,216 |
$5,216 |
High
Yield Bond Fund |
|
$6,400 |
$6,400 |
Short
Duration Government Bond Fund |
|
$1,735 |
$1,735 |
Short-Term
Bond Plus Fund |
|
$2,946 |
$2,946 |
Short-Term
High Yield Bond Fund |
|
$4,669 |
$4,669 |
Ultra
Short-Term Income Fund |
|
$965 |
$965 |
August
31, 2018 |
|
|
|
Adjustable
Rate Government Fund |
|
$569 |
$569 |
Conservative
Income Fund |
|
$0 |
$0 |
Core
Plus Bond Fund |
|
$20,779 |
$20,779 |
Government
Securities Fund |
|
$33,695 |
$33,695 |
High
Yield Bond Fund |
|
$4,390 |
$4,390 |
Short
Duration Government Bond Fund |
|
$1,507 |
$1,507 |
Short-Term
Bond Plus Fund |
|
$5,877 |
$5,877 |
Short-Term
High Yield Bond Fund |
|
$9,216 |
$9,216 |
Ultra
Short-Term Income Fund |
|
$1,181 |
$1,181 |
Custodian and Fund
Accountant
State
Street Bank and Trust Company (“State Street”), located at State Street
Financial Center, One Lincoln Street
Boston, Massachusetts 02111, acts as Custodian and fund accountant for the
Funds. As
Custodian, State Street,
among other things, maintains a custody account or accounts in the name of each
Fund, handles the receipt
and delivery of securities, selects and monitors foreign sub-custodians as the
Fund’s global custody manager,
determines income and collects interest on each Fund’s investments and maintains
certain books and records.
As fund accountant, State Street is responsible for calculating each Fund’s
daily net asset value per share and
for maintaining its portfolio and general accounting records. For its services,
State Street is entitled to receive
certain transaction fees, asset-based fees and out-of-pocket
costs.
Securities Lending
Agent
Goldman
Sachs Bank USA, d/b/a Goldman Sachs Agency Lending (the “Securities Lending
Agent”) serves as the securities
lending agent to the Funds responsible for the implementation and administration
of the Funds’ securities
lending program including facilitating the lending of the Funds’ available
securities to approved
Wells
Fargo - Fixed Income Funds |
|
79 |
borrowers
and negotiating the terms and conditions of each loan with a borrower. The
Securities Lending Agent ensures
that all substitute interest, dividends, and other distributions paid with
respect to loaned securities is credited
to each Fund’s relevant account on the date such amounts are delivered by the
borrower to the Securities
Lending Agent.
The
Securities Lending Agent ensures that all collateral received in connection with
securities loans is invested in the
Cash Collateral Fund, as described above in the section entitled “Permitted
Investment Activities and Certain
Associated Risks – Loans of Portfolio Securities”. The Securities Lending Agent
monitors the marked value of
the collateral delivered in connection with a securities loan so that such
collateral equals to at least 102% of
the market value of any domestic securities loaned or 105% of the market value
of any foreign securities
loaned. The loaned securities are marked to market on a daily basis, and
additional collateral is required
to be paid to maintain coverage. At the termination of the loan, the Securities
Lending Agent returns the
collateral to the borrower upon the return of the loaned
securities.
The
Securities Lending Agent maintains records of all loans and makes available to
the Funds a monthly statement
describing the loans made and the income derived from the loans during the
period. The Securities Lending
Agent performs compliance monitoring and testing of the securities lending
program and provides quarterly
report to the Funds’ Board of Trustees.
For the
fiscal year ended August 31,
2020, the Funds listed in the table below earned income and paid fees and
compensation
to the Securities Lending Agent as follows:
|
|
|
|
|
|
|
|
|
|
Fees
and/or compensation for securities lending activities
and related services: |
|
|
|
|
|
|
|
Adjustable
Rate
Government
Fund1
|
Conservative
Income
Fund |
Core
Plus
Bond
Fund |
Government
Securities
Fund1
|
High
Yield
Bond
Fund |
Short
Duration
Government
Bond
Fund1
|
Short-Term
Bond
Plus
Fund |
Short-Term
High
Yield
Bond
Fund |
Ultra
Short-Term
Income
Fund |
Gross
income from securities
lending activities
|
- |
$0 |
$154,949 |
- |
$158,825 |
- |
$16,067 |
$44,122 |
$149,714 |
Fees
paid to Securities Lending
Agent from revenue
split |
- |
$0 |
$(7,001) |
- |
$(3,835) |
- |
$(688) |
$(1,592) |
$(4,124) |
Fees
paid for any cash collateral
management
services (including
fees deducted
from a pooled
cash collateral reinvestment
vehicle) that
are not included in
the revenue split |
- |
$0 |
$(3,456) |
- |
$(3,365) |
- |
$(354) |
$(955) |
$(3,244) |
Administrative
fees not
included in the revenue
split |
- |
$0 |
$0 |
- |
$0 |
- |
$0 |
$0 |
$0 |
Indemnification
fees not
included in the revenue
split |
- |
$0 |
$0 |
- |
$0 |
- |
$0 |
$0 |
$0 |
Rebate
(paid to borrow)
|
- |
$0 |
$(81,471) |
- |
$(117,094) |
- |
$(8,835) |
$(27,238) |
$(105,220) |
Other
fees not included
in revenue split
|
- |
$0 |
$0 |
- |
$0 |
- |
$0 |
$0 |
$0 |
Aggregate
fees and/or
compensation for securities
lending activities
|
- |
$0 |
$(91,928) |
- |
$(124,294) |
- |
$(9,877) |
$(29,785) |
$(112,588) |
80 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
|
|
|
|
|
|
|
Fees
and/or compensation for securities lending activities
and related services: |
|
|
|
|
|
|
|
Adjustable
Rate
Government
Fund1 |
Conservative
Income
Fund |
Core
Plus
Bond
Fund |
Government
Securities
Fund1 |
High
Yield
Bond
Fund |
Short
Duration
Government
Bond
Fund1 |
Short-Term
Bond
Plus
Fund |
Short-Term
High
Yield
Bond
Fund |
Ultra
Short-Term
Income
Fund |
Net
income from securities
lending activities
|
- |
$0 |
$63,021 |
- |
$34,531 |
- |
$6,190 |
$14,337 |
$37,126 |
1. |
The
Fund
is not able to participate in the securities lending
program. |
Transfer and Distribution Disbursing
Agent
DST Asset
Manager Solutions, Inc. (“DST”), located at Two Thousand Crown Colony
Drive, Quincy, Massachusetts
02169, acts as transfer and distribution disbursing agent for the Wells Fargo
Funds. For providing
such services, DST is entitled to receive fees from the
Administrator.
Independent Registered Public Accounting
Firm
KPMG LLP
(“KPMG”) has been selected as the independent registered public accounting firm
for the Funds.
KPMG
provides audit services, tax return preparation and assistance and consultation
in connection with review of certain
SEC filings. KPMG’s address is Two Financial Center, 60 South Street, Boston, MA
02111.
Code of Ethics
The Fund
Complex, Funds Management, the Distributor and the Sub-Adviser each has adopted
a code of ethics which
contains policies on personal securities transactions by “access persons” as
defined in each of the codes. These
policies comply with Rule 17j-1 under the 1940 Act and Rule 204A-1 under the
Investment Advisers Act of 1940,
as applicable. Each code of ethics, among other things, permits access persons
to invest in certain securities,
subject to various restrictions and requirements. To facilitate enforcement, the
codes of ethics generally
require that an access person submit reports to a designated compliance person
regarding personal securities
transactions. The codes of ethics for the Fund Complex, Funds Management, the
Distributor and the Sub-Adviser
are on public file with, and are available from, the SEC.
Proxy Voting Policies and
Procedures
The Trusts
have adopted policies and procedures for the Funds (“Fund Proxy Voting
Procedures”) that are used to
determine how to vote proxies relating to portfolio securities held by the Funds
of the Trusts. The Fund Proxy
Voting Procedures are designed to ensure that proxies are voted in the best
interests of Fund shareholders,
without regard to any relationship that any affiliated person of a Fund (or an
affiliated person of such
affiliated person) may have with the issuer of the security and with the goal of
maximizing value to shareholders
consistent with governing laws and the investment policies of each Fund. While
securities are not purchased
to exercise control or to seek to effect corporate change through share
ownership activism, the Funds
support sound corporate governance practices within companies in which they
invest. The Board of the Trusts has
delegated the responsibility for voting proxies relating to the Funds’ portfolio
securities to Funds Management.
Funds Management utilizes the Wells Fargo Asset Management Proxy Voting Policies
and Procedures,
included below, to ensure that proxies relating to the Funds’ portfolio
securities are voted in shareholders’
best interests.
Wells Fargo Asset Management Proxy Voting
Policies and Procedures
Wells
Fargo Asset Management (“WFAM”) Stewardship
As
fiduciaries, we are committed to effective stewardship of the assets we manage
on behalf of our clients. To us, good
stewardship reflects responsible, active ownership and includes both engaging
with investee companies
and voting proxies in a manner that we believe will maximize the long-term value
of our investments.
Wells
Fargo - Fixed Income Funds |
|
81 |
Scope
of Policies and Procedures
In
conjunction with the WFAM Engagement Policy, these Proxy Voting Policies and
Procedures (“Policies and Procedures”)
sets out how WFAM complies with applicable regulatory requirements in respect of
how we exercise
voting rights when we invest in shares traded on a regulated market on behalf of
a client.
With
respect to client accounts of Funds Management, this includes, among others,
Wells Fargo Funds Trust, Wells
Fargo Master Trust, Wells Fargo Variable Trust, Wells Fargo Global Dividend
Opportunity Fund, Wells Fargo
Income Opportunities Fund, Wells Fargo Multi-Sector Income Fund, Wells Fargo
Utilities and High Income
Fund (the “Trusts”). It also includes Wells Fargo (Lux) Worldwide Fund and
Worldwide Alternative Fund SICAV-SIF,
both domiciled in Luxembourg (the “Luxembourg Funds”). Aside from the investment
funds managed by
Funds Management, WFAM also offers medium term note programs, managed for
issuers of such notes
domiciled in Luxembourg. Hereafter, all series of the Trusts, and all such
Trusts not having separate series, and all
sub-funds of the Luxembourg Fund, as well as the MTN issuers, are referred to as
the “Investment Products”.
In addition, these Policies and Procedures are used to determine how to vote
proxies for the assets managed on
behalf of WFAM’s other clients. Not all clients delegate proxy-voting authority
to WFAM. WFAM will not
vote proxies, or provide advice to clients on how to vote proxies in the absence
of specific delegation of authority,
a pre-existing contractual agreement, or an obligation under applicable law
(e.g., securities that are held in an
investment advisory account for which WFAM exercises no investment discretion
are not voted by WFAM).
Luxembourg
Products
WFAML has
delegated the portfolio management of the Luxembourg Funds it manages to WFAM
and the responsibility
for exercising voting rights in conjunction with such delegation; as such, these
Policies and Procedures
shall apply to the portfolio management of the Fund. The respective portfolio
management may also
delegate the responsibility for exercising voting rights to the Proxy Voting
Vendor, with the prior consent of WFAML.
Responsibility for exercising voting rights has also been delegated to WFAM with
respect to the Worldwide
Alternative Fund SICAV-SIF and to the MTN issuers.
Voting
Philosophy
WFAM has
adopted these Policies and Procedures to ensure that proxies are voted in the
best interests of clients
and Investment Product investors, without regard to any relationship that any
affiliated person of WFAM or
the Investment Product (or an affiliated person of such affiliated person) may
have with the issuer. WFAM
exercises its voting responsibility as a fiduciary with the goal of maximizing
value to clients consistent with
governing laws and the investment policies of each client. While securities are
not purchased to exercise control or
to seek to effect corporate change through share ownership activism, WFAM
supports sound corporate
governance practices at companies in which client assets are invested. WFAM has
established an appropriate
strategy determining when and how the voting rights related to the instruments
held in portfolios managed
are exercised, so that these rights are exclusively reserved to the relevant
Investment Product and its investors.
Proxy
Administrator
The proxy
voting process is administered by WellsCap’s Operations Department (“Proxy
Administrator”), who reports to
WFAM’s Chief Operations Officer. The Proxy Administrator is responsible for
administering and overseeing
the proxy voting process to ensure the implementation of the Policies and
Procedures, including regular
operational reviews, typically conducted on a weekly basis. The Proxy
Administrator monitors third party
voting of proxies to ensure it is being done in a timely and responsible manner,
including review of scheduled
vendor reports. The Proxy Administrator in conjunction with the WFAM Proxy
Governance Committee
reviews the continuing appropriateness of the Policies and Procedures set forth
herein, and recommends
revisions as necessary.
Third
Party Proxy Voting Vendor
WFAM has
retained a third-party proxy voting service, Institutional Shareholder Services
Inc. (“ISS”), to assist in the
implementation of certain proxy voting-related functions including: 1.)
Providing research on proxy matters 2.)
Providing technology to facilitate the sharing of research and discussions
related to proxy votes 3.) Vote proxies in
accordance with WFAM’s guidelines 4.) Handle administrative and reporting items
5.) Maintain
82 |
|
Wells
Fargo - Fixed Income Funds |
records of
proxy statements received in connection with proxy votes and provide
copies/analyses upon request. Except in
instances where clients have retained voting authority, WFAM retains the
responsibility for proxy voting
decisions.
Proxy
Committee and Sub-Committees
WFAM
Proxy Governance Committee
The WFAM
Proxy Governance Committee shall be responsible for overseeing the proxy voting
process to ensure its
implementation in conformance with these Policies and Procedures. The WFAM Proxy
Governance Committee
shall coordinate with WFAM Compliance to monitor ISS, the proxy voting agent
currently retained by WFAM,
to determine that ISS is accurately applying the Policies and Procedures as set
forth herein and operates
as an independent proxy voting agent. WFAM’s ISS Vendor Oversight process
includes an assessment of ISS’
Policy and Procedures (“P&P”), including conflict controls and monitoring,
receipt and review of routine performance-related
reporting by ISS to WFAM and periodic onsite due diligence meetings. Due
diligence meetings
typically include: meetings with key staff, P&P related presentations and
discussions, technology-related
demonstrations and assessments, and some sample testing, if appropriate. The
WFAM Proxy
Governance Committee shall review the continuing appropriateness of the Policies
and Procedures set forth
herein. The WFAM Proxy Governance Committee may delegate certain powers and
responsibilities to a proxy
voting sub-committee. The WFAM Proxy Governance Committee reviews and, in
accordance with these Policies
and Procedures, votes on issues that have been escalated from the Proxy Voting
Sub-Committee. Members of
the WFAM Proxy Governance Committee also oversee the implementation of WFAM
Proxy Governance
Committee recommendations for the respective functional areas in WFAM that they
represent.
Proxy
Voting Sub-Committee
Among
other delegated matters, the Proxy Voting Sub-Committee, in accordance with
these Policies and Procedures,
reviews and votes on routine proxy proposals that it considers under these
Policies and Procedures in a
timely manner. If necessary, the Proxy Voting Sub-Committee escalates issues to
the WFAM Proxy Governance
Committee that are determined to be material by the Proxy Voting Sub-Committee
or otherwise in
accordance with these Policies and Procedures. The Proxy Voting Sub-Committee
coordinates with Wells Fargo
Asset Management Investment Analytics and Compliance teams to review the
performance and independence
of ISS in exercising its proxy voting responsibilities.
Meetings;
Committee Actions
The WFAM
Proxy Governance Committee shall convene or act through written consent,
including through the use of
electronic systems of record, of a majority of WFAM Proxy Governance Committee
members as needed and when
discretionary voting determinations need to be considered. Any sub-committee of
the WFAM Proxy Governance
Committee shall have the authority on matters delegated to it to act by vote or
written consent, including
through the use of electronic systems of record, of a majority of the
sub-committee members available
at that time. The WFAM Proxy Governance Committee shall also meet quarterly to
review the Policies and
Procedures.
Membership
Members
are selected based on subject matter expertise for the specific deliverables the
committee is required to
complete. The voting members of the WFAM Proxy Governance Committee are
identified in the WFAM Proxy
Charter. Changes to the membership of the WFAM Proxy Governance Committee will
be made only with approval
of the WFAM Proxy Governance Committee. Upon departure from Wells Fargo Asset
Management, a member’s
position on the WFAM Proxy Governance Committee will automatically
terminate.
Voting
Procedures
Unless
otherwise required by applicable law, proxies will be voted in accordance with
the following steps and in the
following order of consideration:
|
1.
First, any voting items related to WFAM “Top-of-House” voting principles
(as described below under the heading
“WFAM Proxy Voting Principles/Guidelines”) will generally be voted in
accordance with a custom voting policy
with ISS (“Custom Policy”) designed to implement the WFAM’s Top-of-House
voting principles. |
Wells
Fargo - Fixed Income Funds |
|
83 |
|
2.
Second, any voting items for meetings deemed of “high importance” (e.g.,
proxy contests, mergers and acquisitions,
capitalization proposals and anti-takeover proposals) where ISS opposes
management recommendations
will be referred to the Portfolio Management teams for recommendation or
the Proxy Voting Sub-Committee
(or escalated to the WFAM Proxy Governance -Committee) for case-by-case
review and vote determination. |
|
3.
Third, with respect to any voting items where ISS Sustainability Voting
Guidelines provide a different recommendation
than ISS Standard Voting Guidelines, the following steps are
taken: |
|
|
a.
The WFAM Investment Analytics team evaluates the matter for materiality
and any other relevant considerations. b.
If the Investment Analytics team recommends further review, the voting
item is then referred to the Portfolio
Management teams for recommendation or the Proxy Voting Sub-Committee (or
escalated to the WFAM
Proxy Governance Committee) for case-by-case review and vote
determination. c.
If the Investment Analytics team does not recommend further review, the
matter is voted in accordance with
ISS Standard Voting Guidelines. |
|
4.
Fourth, any remaining proposals are voted in accordance with ISS Standard
Voting Guidelines. |
Commitment
to the Principles of Responsible Investment
As a
signatory to the Principles for Responsible Investment, WFAM has integrated
certain environmental, social, and
governance factors into its investment processes, which includes the proxy
process. As described under Voting
Procedures above, WFAM considers ISS’s Sustainability Voting Guidelines as a
point of reference in certain
cases deemed to be material to a company’s long-term shareholder
value.
Voting
Discretion
In all
cases, the WFAM Proxy Governance Committee (and any sub-committee thereof) will
exercise its voting discretion
in accordance with the voting philosophy of these Policies and Procedures. In
cases where a proxy item is
forwarded by ISS to the WFAM Proxy Governance Committee or a sub-committee
thereof, the WFAM Proxy
Governance Committee or its sub-committee may be assisted in its voting decision
through receipt of: (i) independent
research and voting recommendations provided by ISS or other independent
sources; (ii) input from the
investment sub-adviser responsible for purchasing the security; and (iii)
information provided by company
management and shareholder groups.
Portfolio
Manager and Sub-Adviser Input
The WFAM
Proxy Governance Committee (and any sub-committee thereof) may consult with
portfolio management
teams and Fund sub-advisers on specific proxy voting issues as it deems
appropriate. In addition, portfolio
management teams or Fund sub-advisers may proactively make recommendations to
the WFAM Proxy
Governance Committee regarding any proxy voting issue. In this regard, the
process takes into consideration
expressed views of portfolio management teams and Fund sub-advisers given their
deep knowledge
of investee companies. For any proxy vote, portfolio management teams and
Investment Product advisers
and sub-advisers may make a case to vote against the ISS or WFAM Proxy
Governance Committee’s recommendation
(which is described under Voting Procedures above). Any portfolio management
team’s or Investment
Product adviser’s or sub-adviser’s opinion should be documented in a brief
write-up for consideration
by the Proxy Voting Sub-Committee who will determine, or escalate to the WFAM
Proxy Governance
Committee, the final voting decision.
Consistent
Voting
Proxies
will be voted consistently on the same matter when securities of an issuer are
held by multiple client accounts
unless there are special circumstances such as, for example, proposals
concerning corporate actions such as
mergers, tender offers, and acquisitions or as reasonably necessary to implement
specified proxy voting guidelines
as established by a client (e.g. Taft Hartley ISS Guidelines or custom proxy
guidelines).
Governance
and Oversight
WFAM
Top-of-House Proxy Voting Principles/Guidelines.
The
following reflects WFAM’s Top-of-House Voting Principles in effect as of the
date of these Policies and Procedures.
WFAM has put in place a custom voting policy with ISS to implement these voting
principles.
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We believe
that Boards of Directors of investee companies should have strong, independent
leadership and should
adopt structures and practices that enhance their effectiveness. We recognize
that the optimal board size and
governance structure can vary by company size, industry, region of operations,
and circumstances specific
to the company.
■ |
We
generally vote for the election of Directors in uncontested elections. We
reserve the right to vote on a case-by-case
basis when directors fail to meet their duties as a board member, such as
failing to act in the best
economic interest of shareholders; failing to maintain independent audit,
compensation, nominating committees;
and failing to attend at least 75% of meetings,
etc. |
■ |
We
generally vote for an independent board that has a majority of outside
directors who are not affiliated with
the top executives and have minimal or no business dealings with the
company to avoid potential conflicts
of interests. |
■ |
Generally
speaking, we believe Directors serving on an excessive number of boards
could result in time constraints
and an inability to fulfill their
duties. |
■ |
We
generally support adopting a declassified board structure for public
operating and holding companies. We reserve
the right to vote on a case-by-case basis when companies have certain
long-term business commitments. |
■ |
We
generally support annual election of directors of public operating and
holding companies. We reserve the right
to vote on a case-by-case basis when companies have certain long-term
business commitments. |
■ |
We
believe a well-composed board should embody multiple dimensions of
diversity in order to bring personal and
professional experiences to bear and create a constructive debate of
competing perspectives and opinions
in the boardroom. Diversity should consider factors such as gender,
ethnicity, and age as well as professional
factors such as area of expertise, industry experience and geographic
location. |
We believe
it is the responsibility of the Board of Directors to create, enhance, and
protect shareholder value and that
companies should strive to maximize shareholder rights and
representation.
■ |
We
believe that companies should adopt a one-share, one-vote standard and
avoid adopting share structures that
create unequal voting rights among their shareholders. We will normally
support proposals seeking to establish
that shareholders are entitled to voting rights in proportion to their
economic interests |
■ |
We
believe that directors of public operating and holding companies should be
elected by a majority of the shares
voted. We reserve the right to vote on a case-by-case basis when companies
have certain long-term business
commitments. This ensures that directors of public operating and holding
companies who are not broadly
supported by shareholders are not elected to serve as their
representatives. We will normally support proposals
seeking to introduce bylaws requiring a majority vote standard for
director elections. |
■ |
We
believe a simple majority voting standard should be required to pass
proposals. We will normally support proposals
seeking to introduce bylaws requiring a simple majority
vote. |
■ |
We
believe that shareholders who own a meaningful stake in the company and
have owned such stake for a sufficient
period of time should have, in the form of proxy access, the ability to
nominate directors to appear on the
management ballot at shareholder meetings. In general we support
market-standardized proxy access proposals
and we will analyze them based on various criteria such as threshold
ownership levels, a minimum holding
period, and the % and/or number of directors that are subject to
nomination. |
■ |
We
believe that shareholders should have the right to call a special meeting
and not wait for company management
to schedule a meeting if there is sufficiently high shareholder support
for doing so on issues of substantial
importance. In general we support the right to call a special meeting if
there is balance between a reasonable
threshold of shareholders and a hurdle high enough to also avoid the waste
of corporate resources for
narrowly supported interests. We will evaluate the issues of importance on
the basis of serving all shareholders
well and not structured for the benefit of a dominant shareholder over
others. |
Practical
Limitations to Proxy Voting
While WFAM
uses its reasonable best efforts to vote proxies, in certain circumstances, it
may be impractical or impossible
for WFAM to vote proxies (e.g., limited value or unjustifiable
costs).
Securities
on Loan
As a
general matter, securities on loan will not be recalled to facilitate proxy
voting (in which case the borrower
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of the
security shall be entitled to vote the proxy). However, as it relates to
portfolio holdings of the Investment Products,
if the WFAM Proxy Governance Committee is aware of an item in time to recall the
security and has determined
in good faith that the importance of the matter to be voted upon outweighs the
loss in lending revenue
that would result from recalling the security (e.g., if there is a controversial
upcoming merger or acquisition,
or some other significant matter), the security will be recalled for
voting.
Share
Blocking
Proxy
voting in certain countries requires ‘share blocking’. Shareholders wishing to
vote their proxies must deposit
their shares with a designated depositary before the date of the meeting.
Consequently, the shares may not be
sold in the period preceding the proxy vote. Absent compelling reasons, WFAM
believes that the benefit derived
from voting these shares is outweighed by the burden of limited trading.
Therefore, if share blocking is required
in certain markets, WFAM will not participate and refrain from voting proxies
for those clients impacted
by share blocking.
Conflicts
of Interest
We always
seek to place the interests of our clients first and to identify and manage any
conflicts of interest, including
those that arise from proxy voting or engagement. WFAM acts as a fiduciary with
respect to its asset management
activities and therefore we must act in the best interest of our clients and
address conflicts that arise.
Conflicts
of interest are identified and managed through a strict and objective
application of our voting policy and
procedures. WFAM may have a conflict of interest regarding a proxy to be voted
upon if, for example, WFAM or
its affiliates (such as a sub-adviser or principal underwriter) have other
relationships with the issuer of the proxy.
This type of conflict is generally mitigated by the information barriers between
WFAM and its affiliates
and our commitment as a fiduciary to independent judgement. However, when the
WFAM Proxy Governance
Committee becomes aware of a conflict of interest (that gets uncovered through
the WFAM Proxy Voting
Policy and Procedures), it takes additional steps to mitigate the conflict, by
using any of the following methods:
|
1.
Instructing ISS to vote in accordance with its
recommendation; |
|
2.
Disclosing the conflict to the relevant Board and obtaining its consent
before voting; |
|
3.
Submitting the matter to the relevant Board to exercise its authority to
vote on such matter; |
|
4.
Engaging an independent fiduciary who will direct the vote on such
matter, |
|
5.
Consulting with Legal and Compliance and, if necessary, outside legal
counsel for guidance on resolving the conflict
of interest, |
|
6.
Voting in proportion to other shareholders (“mirror voting”) following
consultation with the Board of the Funds
if the conflict pertains to a matter involving a portfolio holding of the
Funds; or |
|
7.
Voting in other ways that are consistent with WFAM’s obligation to vote in
the best interests of its clients. |
Vendor
Oversight
The WFAM
Proxy Administrator monitors the ISS proxy process against specific criteria in
order to identify potential
issues relating to account reconciliation, unknown and rejected ballot reviews,
upcoming proxy reviews,
share reconciliation oversight, etc.
Other
Provisions
Policy
Review and Ad Hoc Meetings
The WFAM
Proxy Governance Committee meets at least annually to review this Policy and
consider any appropriate
changes. Meetings may be convened more frequently (for example, to discuss a
specific proxy agenda or
proposal) as requested by the Manager of Proxy Administrator, any member of the
WFAM Proxy Governance
Committee, or WFAM’s Chief Compliance Officer. The WFAM Proxy Governance
Committee includes
representation from Portfolio Management, Operations, Investment Analytics and,
in a non-voting consultative
capacity, Compliance.
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Records
Retention
The WFAM
Proxy Administrator will maintain the following records relating to the
implementation of the Policies
and Procedures:
■ |
A copy
of these proxy voting policies and
procedures; |
■ |
Proxy
statements received for client securities (which will be satisfied by
relying on ISS); |
■ |
Records
of votes cast on behalf of Investment Products and separate account
clients (which ISS maintains on behalf
of WFAM); |
■ |
Records
of each written client request for proxy voting records and WFAM’s written
response to any client request
(written or oral) for such records; and |
■ |
Any
documents prepared by WFAM or ISS that were material to making a proxy
voting decision. |
Such proxy
voting books and records shall be maintained at an office of WFAM in an easily
accessible place for a period of
six years.
Compliance
with Regional Regulations and Client Delegation Arrangements
U.S.
Regulation
These
Policies and Procedures have been written in compliance with Rule 206(4)-6 of
the Investment Advisers Act of
1940. Proxy voting records for WFAM’s mutual funds are disclosed on Form N-PX
annually, as required by Section
30 and Rule 30b1-4 of the Investment Company Act of 1940, to the Securities and
Exchange Commission
(“SEC”).
E.U.
Regulation
These
Policies and Procedures have been established, implemented and maintained, as
they apply to WFAML and WFAMI
Ltd, in accordance the EU Shareholder Rights Directive II (EU 2017/828) (“SRD
II”). Specific to WFAML, the
Policies and Procedures also comply with Article 23 of CSSF Regulation No. 10-4,
and the CSSF Circular
18/698.
Disclosure
of policies and procedures
A summary
of the proxy voting policy and procedures are disclosed on WFAM’s
website.
In
addition, WFAM will disclose to its separate clients (i.e. proxy votes for
assets managed on behalf of WFAM’s other
clients as per a delegation arrangement) a summary description of its proxy
voting policy and procedures via
mail.
Disclosure
of proxy voting resultsWFAM will
provide to clients proxy statements and any records as to how WFAM voted proxies
on behalf of clients,
quarterly or upon request. For assistance, clients may contact their
relationship manager, call WFAM at 1-800-259-3305
or e-mail [email protected] to request a record of proxies
voted on their behalf.
WFAM will
publish high-level proxy voting statistics in periodic reports. However, except
as otherwise required by law,
WFAM has a general policy of not disclosing to any issuer specific or third
party how its separate account client
proxies are voted.
Policies and Procedures for Disclosure of
Fund Portfolio Holdings
I.
Scope of Policies and
Procedures. The
following policies and procedures (the “Procedures”) govern the disclosure
of portfolio holdings and any ongoing arrangements to make available information
about portfolio holdings
for the separate series of Wells Fargo Funds Trust (“Funds Trust”), Wells Fargo
Master Trust (“Master Trust”),
Wells Fargo Variable Trust (“Variable Trust”) (each of Funds Trust, Master Trust
and Variable Trust are referred
to collectively herein as the “Funds” or individually as the “Fund”) now
existing or hereafter created.
II.
Disclosure
Philosophy. The Funds
have adopted these Procedures to ensure that the disclosure of a Fund’s
portfolio
holdings is accomplished in a manner that is consistent with a Fund’s fiduciary
duty to its shareholders. For
purposes of these Procedures, the term “portfolio holdings” means the stock,
bond and derivative positions held by a
Fund and includes the cash investments held by the Fund.
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Under no
circumstances shall Wells Fargo Funds Management, LLC (“Funds Management”),
Wells Fargo Asset Management
(“WFAM”) or the Funds receive any compensation in return for the disclosure of
information about a
Fund’s portfolio holdings or for any ongoing arrangements to make available
information about a Fund’s
portfolio holdings.
III.
Disclosure of Fund Portfolio
Holdings. The
complete portfolio holdings and top ten holdings information referenced
below (except for the Funds of Master Trust (“Master Portfolios”) and Funds of
Variable Trust) will be
available on the Funds’ website until updated for the next applicable period.
Funds Management may withhold
any portion of a Fund’s portfolio holdings from online disclosure when deemed to
be in the best interest
of the Fund. Once holdings information has been posted on the website, it may be
further disseminated without
restriction.
A.
Complete Holdings. The
complete portfolio holdings for each Fund (except for Money Market Funds and
Alternative
Funds and Master Portfolios) shall be made publicly available monthly on the
Funds’ website (www.wfam.com),
on a one-month delayed basis. Money Market Fund portfolio holdings shall be made
publicly available
on the Funds’ website, on a 1-day delayed basis. In addition to the foregoing,
each Money Market Fund shall post
on its website such portfolio holdings and other information required by Rule
2a-7 under the Investment
Company Act of 1940, as amended. The categories of information included on the
website may differ
slightly from what is included in the Funds’ financial statements.
B.
Top Ten Holdings. Top ten
holdings information (excluding derivative positions) for each Fund (except for
Money
Market Funds, Alternative Funds and Master Portfolios) shall be made publicly
available on the Funds’ website on
a monthly, seven-day or more delayed basis.
C.
Fund of Funds
Structures.
1. The
underlying funds held by a Fund that operates as a fund of funds and invests
exclusively in multiple affiliated
underlying funds or multiple unaffiliated underlying funds or in a combination
of affiliated and unaffiliated
underlying funds (“fund of funds”) shall be posted to the Funds’ website on a
monthly, one-month delayed
basis.
2. The
individual holdings of the underlying master funds held by Funds that operate as
a feeder fund in a master-feeder
structure shall be posted to the Funds’ website on a monthly, one-month delayed
basis.
3. A
change to the underlying funds held by a fund of funds or changes in fund of
funds’ target allocations between or
among its fixed-income and/or equity investments may be posted to the Funds’
website simultaneous
with the occurrence of the change.
D.
Alternative
Funds.
The
following holdings disclosure policy applies to Alternative
Funds:
1.
Complete Holdings as of Fiscal Quarter
Ends. As of
each fiscal quarter end, each Alternative Fund’s complete portfolio
holdings shall be made publicly available quarterly on the Funds’ website, on a
one-month delayed basis.
2.
Holdings as of Other Month
Ends. As of
each month end other than a month end that coincides with a fiscal quarter
end, each Alternative Fund shall make publicly available monthly on the Funds’
website, on a one-month delayed
basis, the following: (i) all portfolio holdings held long other than any put
options on equity securities; (ii)
portfolio holdings held short other than short positions in equity securities of
single issuers; and (iii) the aggregate
dollar value of each of the following: (a) equity securities of single issuers
held short, and (b) any put options on
equity securities held long.
3.
Top Ten Holdings. Each
Alternative Fund shall make publicly available on the Funds’ website on a
monthly, seven-day
or more delayed basis information about its top ten holdings information,
provided that the following
holdings shall be excluded: (i) derivative positions; and (ii) equity securities
of single issuers held short.
E.
Master
Portfolios.
1. The
complete portfolio holdings of Master Portfolios shall be posted to the Funds’
website on a semi-annual, one-month
delayed basis.
Furthermore,
each Fund shall file such forms and portfolio holdings information in filings
made with the SEC in the manner
specified on such forms and with such frequency as required by such forms and
applicable SEC rules and
regulations.
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IV.
List of Approved
Recipients. The
following list describes the limited circumstances in which a Fund’s portfolio
holdings
may be disclosed to select third parties in advance of the monthly release on
the Funds’ website. In each
instance, a determination will be made by Funds Management that such advance
disclosure is supported by a
legitimate business purpose and that the recipients, where feasible, are subject
to an independent duty or contractual
obligation not to disclose or trade on the nonpublic information.
A.
Wells Fargo
Affiliates. Team
members of Wells Fargo & Co. (“Wells Fargo”) and its affiliates who perform
risk management
functions and provide other services to the Fund(s), as well as the third-party
service providers utilized
by them to perform such functions and provide such services, shall have full
daily access to the portfolio holdings
of the Fund(s).
B.
Sub-Advisers.
Sub-advisers shall have full daily access to fund holdings for the Fund(s) for
which they have direct
management responsibility. Sub-advisers may also release to and discuss
portfolio holdings with various broker/dealers
for purposes of analyzing the impact of existing and future market changes on
the prices, availability/demand
and liquidity of such securities, as well as for the purpose of assisting
portfolio managers in the
trading of such securities.
A new Fund
sub-adviser may periodically receive full portfolio holdings information for
such Fund from the date of Board
approval through the date upon which they take over day-to-day investment
management activities. Such
disclosure will be subject to confidential treatment.
C.
Money Market Portfolio Management
Team. The money
market portfolio management team at Wells Capital
Management Incorporated (“Wells Capital Management”) shall have full daily
access to daily transaction information
across the Wells Fargo Funds for purposes of anticipating money market sweep
activity which in turn helps
to enhance liquidity management within the money market funds.
D.
Funds Management/Wells Fargo Funds
Distributor, LLC (“Funds Distributor”).
1. Funds
Management personnel that deal directly with the processing, settlement, review,
control, auditing, reporting,
and/or valuation of portfolio trades shall have full daily access to Fund
portfolio holdings through access to
the fund accountant’s system.
2. Funds
Management personnel that deal directly with investment review and analysis of
the Funds shall have full daily
access to Fund portfolio holdings through Factset, a program that is used, among
other things, to evaluate
portfolio characteristics against available benchmarks.
3. Funds
Management and Funds Distributor personnel may be given advance disclosure of
any changes to the underlying
funds in a fund of funds structure or changes in a Fund’s target allocations
that result in a shift between or
among asset classes.
E.
External Servicing
Agents. Portfolio
holdings may be disclosed to servicing agents in connection with the
day-to-day
operations and management of the funds. These recipients include, but are not
limited to: a fund’s auditors;
a fund’s custodians; a fund’s accountants; proxy voting service providers; class
action processing service
providers; pricing service vendors; prime brokers; securities lending agents;
counsel to a fund or its independent
Trustees; regulatory authorities; third parties that assist in the review,
processing and/or analysis of Fund
portfolio transactions, portfolio accounting and reconciliation, portfolio
performance, trade order management,
portfolio data analytics, electronic order matching and other analytical or
operational systems and
services in connection with supporting a fund’s operations; a fund’s insurers;
financial printers; and providers of
electronic systems providing access to materials for meetings of a fund’s board
of Trustees.
F.
Rating Agencies.
Nationally Recognized Statistical Ratings Organizations may receive full Fund
holdings for rating
purposes.
G.
Reorganizations. Entities
hired as trading advisors that assist with the analysis and trading associated
with transitioning
portfolios may receive full portfolio holdings of both the target fund and the
acquiring fund. In addition,
the portfolio managers of the target fund and acquiring fund may receive full
portfolio holdings of the acquiring
fund and target fund, respectively, in order to assist with aligning the
portfolios prior to the closing date of
the reorganization.
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H.
Investment Company
Institute. The
Investment Company Institute may receive information about full money
market Fund holdings concurrently at the time each money market Fund files with
the SEC a report containing
such information.
I.
In-Kind
Redemptions. In
connection with satisfying in-kind redemption requests made to Funds, the
redeeming
shareholders and their advisers and service providers may receive full Fund
holdings as reasonably necessary
to operationally process such redemptions.
V.
Additions to List of Approved
Recipients. Any
additions to the list of approved recipients requires approval by the
President, Chief Legal Officer and Chief Compliance Officer of the Funds based
on a review of: (i) the type of fund
involved; (ii) the purpose for receiving the holdings information; (iii) the
intended use of the information; (iv) the
frequency of the information to be provided; (v) the length of the lag, if any,
between the date of the information
and the date on which the information will be disclosed; (vi) the proposed
recipient’s relationship to the Funds;
(vii) the ability of Funds Management to monitor that such information will be
used by the proposed recipient
in accordance with the stated purpose for the disclosure; (viii) whether a
confidentiality agreement will be in
place with such proposed recipient; and (ix) whether any potential conflicts
exist regarding such disclosure between
the interests of Fund shareholders, on the one hand, and those of the Fund’s
investment adviser, principal
underwriter, or any affiliated person of the Fund.
VI.
Commentaries. Funds
Management and WFAM may disclose any views, opinions, judgments, advice or
commentary,
or any analytical, statistical, performance or other information in connection
with or relating to a Fund or
its portfolio holdings (including historical holdings information), or any
changes to the portfolio holdings
of a Fund. The portfolio commentary and statistical information may be provided
to members of the press,
shareholders in the Funds, persons considering investment in the Funds or
representatives of such shareholders
or potential shareholders. The content and nature of the information provided to
each of these persons
may differ.
Certain of
the information described above will be included in periodic fund commentaries
(e.g., quarterly, monthly,
etc.) and will contain information that includes, among other things, top
contributors/detractors from fund
performance and significant portfolio changes during the relevant period (e.g.,
calendar quarter, month, etc.).
This information will be posted contemporaneously with their distribution on the
Funds’ website.
No person
shall receive any of the information described above if, in the sole judgment of
Funds Management and WFAM,
the information could be used in a manner that would be harmful to the
Funds.
VII.
Other Investment
Products. Funds
Management, WFAM and/or their affiliates manage other investment products,
including investment companies, offshore funds, and separate accounts. Many of
these other investment
products have strategies that are the same or substantially similar to those of
the Funds and thus may have
the same or substantially similar portfolio holdings. The provision of the
portfolio holdings of these other
investment products is excluded from these procedures. Similarly, the provision
of a model or reference portfolio
to clients, investors and, in some cases, third-party sponsors, in connection
with the management or other
investment products is excluded from these procedures, even if the model or
reference portfolio is the same as or
substantially similar to that of a Fund, provided (1) the model or reference
portfolio is not characterized
or otherwise identified to the recipient, explicitly or implicitly, as being the
portfolio of a Fund and (2) the
degree of overlap with the Fund’s portfolio or with any portion thereof is not
communicated, identified or
confirmed to the recipient.
VIII.
Board Approval. The Board
shall review these Procedures, including the list of approved recipients, as
often as they
deem appropriate, but not less often than annually, and will consider for
approval any changes that they deem
appropriate.
IX.
Education
Component. In order
to promote strict compliance with these Procedures, Funds Management
has
informed its employees, and other parties possessing Fund portfolio holdings
information (such as sub-advisers,
the fund accounting agent and the custodian), of the limited circumstances in
which the Funds’ portfolio
holdings may be disclosed in advance of the monthly disclosure on the Funds’
website and the ramifications,
including possible dismissal, if disclosure is made in contravention of these
Procedures.
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BROKERAGE
The Trust
has no obligation to deal with any broker-dealer or group of broker-dealers in
the execution of transactions
in portfolio securities. Subject to the supervision of the Board and the
supervision of the Manager, the
Sub-Advisers are responsible for the Funds’ portfolio decisions and the placing
of portfolio transactions. In placing
orders, it is the policy of the Sub-Advisers to obtain the best overall results
taking into account various factors,
including, but not limited to, the size and type of transaction involved; the
broker-dealer’s risk in positioning
the securities involved; the nature and character of the market for the
security; the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities
of the broker-dealer; the reputation, reliability, experience and financial
condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions; and
the reasonableness of the spread
or commission. While the Sub-Advisers generally seek reasonably competitive
spreads or commissions,
the Funds will not necessarily be paying the lowest spread or commission
available.
Purchases
and sales of equity securities on a securities exchange are effected through
broker-dealers who charge a
negotiated commission for their services. Orders may be directed to any
broker-dealer including, to the extent
and in the manner permitted by applicable law, affiliated broker-dealers.
However, the Funds and Funds
Management have adopted a policy pursuant to Rule 12b-1(h) under the 1940 Act
that prohibits the Funds from
directing portfolio brokerage to brokers who sell Fund shares as compensation
for such selling efforts.
In the over-the-counter market, securities are generally traded on a “net” basis
with broker-dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually
includes a profit to the broker-dealer. In underwritten offerings, securities
are purchased at a fixed price that
includes an amount of compensation to the underwriter, generally referred to as
the underwriter’s concession
or discount.
In placing
orders for portfolio securities of the Fund, the Fund’s Sub-Adviser is required
to give primary consideration
to obtaining the most favorable price and efficient execution. This means that
the Sub-Adviser will seek
to execute each transaction at a price and commission, if any, that provide the
most favorable total cost or
proceeds reasonably attainable in the circumstances. Commission rates are
established pursuant to negotiations
with the broker-dealer based, in part, on the quality and quantity of execution
services provided by the
broker-dealer and in the light of generally prevailing rates. Furthermore, the
Manager oversees the trade execution
procedures of the Sub-Adviser to ensure that such procedures are in place, that
they are adhered to, and that
adjustments are made to the procedures to address ongoing changes in the
marketplace.
The
Sub-Adviser may, in circumstances in which two or more broker-dealers are in a
position to offer comparable
results for a portfolio transaction, give preference to a broker-dealer that has
provided statistical or other
research services to the Sub-Adviser. In selecting a broker-dealer under these
circumstances, the Sub-Adviser
will consider, in addition to the factors listed above, the quality of the
research provided by the broker-dealer.
The
Sub-Adviser may pay higher commissions than those obtainable from other
broker-dealers in exchange for such
research services. The research services generally include: (1) furnishing
advice as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and the
advisability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors
and trends, portfolio strategy, and the performance of accounts; and (3)
effecting securities transactions
and performing functions incidental thereto. By allocating transactions in this
manner, a Sub-Adviser
is able to supplement its research and analysis with the views and information
of securities firms. Information
so received will be in addition to, and not in lieu of, the services required to
be performed by the Sub-Adviser
under the advisory contracts, and the expenses of the Sub-Adviser will not
necessarily be reduced as a
result of the receipt of this supplemental research information. Furthermore,
research services furnished by broker-dealers
through which a sub-adviser places securities transactions for a Fund may be
used by the Sub-Adviser
in servicing its other accounts, and not all of these services may be used by
the Sub-Adviser in connection
with advising the Funds.
Portfolio Turnover. The
portfolio turnover rate is not a limiting factor when a Sub-Adviser deems
portfolio changes
appropriate. Changes may be made in the portfolios consistent with the
investment objectives and
Wells
Fargo - Fixed Income Funds |
|
91 |
policies
of the Funds whenever such changes are believed to be in the best interests of
the Funds and their shareholders.
The portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities
by the average monthly value of a Fund’s portfolio securities. For purposes of
this calculation, portfolio
securities exclude all securities having a maturity when purchased of one year
or less. Portfolio turnover
generally involves some expenses to the Funds, including brokerage commissions
or dealer mark-ups and other
transaction costs on the sale of securities and the reinvestment in other
securities. Portfolio turnover may also
result in adverse tax consequences to a Fund’s shareholders.
The table
below shows each Fund’s portfolio turnover rates for the two most recent fiscal
years:
|
|
|
|
Fund
|
|
August
31, 2020 |
August
31, 2019 |
Adjustable
Rate Government Fund |
|
9% |
5% |
Conservative
Income Fund |
|
102% |
171% |
Core
Plus Bond Fund |
|
130% |
89% |
Government
Securities Fund |
|
111% |
178% |
High
Yield Bond Fund |
|
34% |
26% |
Short
Duration Government Bond Fund |
|
395% |
635% |
Short-Term
Bond Plus Fund |
|
88% |
43% |
Short-Term
High Yield Bond Fund |
|
78% |
44% |
Ultra
Short-Term Income Fund |
|
68% |
36% |
Brokerage
Commissions. Below
are the brokerage commissions paid for the last three fiscal years
by each Fund
to: (1)
all brokers and; (2) Wells Fargo Clearing Services, LLC, an affiliate of Wells
Fargo & Company.
|
|
|
|
Fund/Period
Ended |
|
Total
Paid to All Brokers |
Total
Paid to Wells Fargo Clearing
Services, LLC |
August
31, 2020 |
|
|
|
Adjustable
Rate Government Fund |
|
$0 |
$0 |
Conservative
Income Fund |
|
$0 |
$0 |
Core
Plus Bond Fund |
|
$67,365 |
$0 |
Government
Securities Fund |
|
$0 |
$0 |
High
Yield Bond Fund |
|
$11,798 |
$0 |
Short
Duration Government Bond Fund |
|
$0 |
$0 |
Short-Term
Bond Plus Fund |
|
$40,779 |
$0 |
Short-Term
High Yield Bond Fund |
|
$0 |
$0 |
Ultra
Short-Term Income Fund |
|
$36,168 |
$0 |
August
31, 2019 |
|
|
|
Adjustable
Rate Government Fund |
|
$0 |
$0 |
Conservative
Income Fund |
|
$0 |
$0 |
Core
Plus Bond Fund |
|
$20,515 |
$0 |
Government
Securities Fund |
|
$0 |
$0 |
High
Yield Bond Fund |
|
$28,432 |
$0 |
Short
Duration Government Bond Fund |
|
$19,102 |
$0 |
Short-Term
Bond Plus Fund |
|
$0 |
$0 |
Short-Term
High Yield Bond Fund |
|
$0 |
$0 |
Ultra
Short-Term Income Fund |
|
$17,160 |
$0 |
August
31, 2018 |
|
|
|
Adjustable
Rate Government Fund |
|
$0 |
$0 |
Conservative
Income Fund |
|
$0 |
$0 |
Core
Plus Bond Fund |
|
$12,139 |
$0 |
92 |
|
Wells
Fargo - Fixed Income Funds |
|
|
|
|
Fund/Period
Ended |
|
Total
Paid to All Brokers |
Total
Paid to Wells Fargo Clearing
Services, LLC |
Government
Securities Fund |
|
$0 |
$0 |
High
Yield Bond Fund |
|
$20,028 |
$0 |
Short
Duration Government Bond Fund |
|
$0 |
$0 |
Short-Term
Bond Plus Fund |
|
$0 |
$0 |
Short-Term
High Yield Bond Fund |
|
$0 |
$0 |
Ultra
Short-Term Income Fund |
|
$0 |
$0 |
Commissions Paid to Brokers that Provide
Research Services. For the
fiscal year ended August 31,
2020, the Funds did
not pay commissions to brokers that provided research services.
Securities of Regular
Broker-Dealers.
The Funds are
required to identify any securities of their
“regular brokers or
dealers” (as defined under the 1940 Act) or of their
parents that the Funds may
hold at the close of their
most
recent fiscal year. As of August 31,
2020, the following Funds held
securities of their
regular broker-dealers
or of their parents as indicated in the amounts shown below:
|
|
|
|
Fund
|
|
Regular
Broker or Dealer |
Value |
Conservative
Income Fund |
|
Bank
of America Corporation |
$3,091,163 |
|
|
Citigroup
Incorporated |
$2,092,606 |
|
|
Goldman
Sachs |
$3,614,280 |
|
|
HSBC |
$3,140,720 |
|
|
JPMorgan
Chase & Company |
$1,007,218 |
Core
Plus Bond Fund |
|
Citigroup
Incorporated |
$8,784,047 |
|
|
Credit
Suisse |
$5,125,773 |
|
|
Goldman
Sachs |
$4,644,235 |
|
|
JPMorgan
Chase & Company |
$3,669,567 |
|
|
Morgan
Stanley |
$3,611,408 |
High
Yield Bond Fund |
|
Bank
of America Corporation |
$3,366,150 |
Government
Securities Fund |
|
JPMorgan
Chase & Company |
$5,409,998 |
|
|
Morgan
Stanley |
$4,749,008 |
Short
Duration Government Bond Fund |
|
Citigroup
Incorporated |
$487,176 |
|
|
Credit
Suisse |
$3,174,449 |
|
|
Goldman
Sachs |
$250,792 |
Short-Term
Bond Plus Fund |
|
Bank
of America Corporation |
$4,164,516 |
|
|
Citigroup
Incorporated |
$4,973,622 |
|
|
Credit
Suisse |
$6,281,734 |
|
|
Goldman
Sachs |
$9,994,986 |
|
|
JPMorgan
Chase & Company |
$11,168,776 |
|
|
Morgan
Stanley |
$3,005,504 |
Ultra
Short Term Income Fund |
|
Citigroup
Incorporated |
$14,243,356 |
|
|
Credit
Suisse |
$17,304,705 |
|
|
Goldman
Sachs |
$19,502,411 |
|
|
JPMorgan
Chase & Company |
$20,241,056 |
|
|
Morgan
Stanley |
$15,004,730 |
Wells
Fargo - Fixed Income Funds |
|
93 |
DETERMINATION
OF NET ASSET VALUE
A Fund’s
NAV is the value of a single share. The NAV is calculated as of the close of
regular trading on the New York Stock
Exchange (“NYSE”) (generally 4:00 p.m. Eastern time) on each day that the NYSE
is open, although a Fund may
deviate from this calculation time under unusual or unexpected circumstances.
The NAV is calculated separately
for each class of shares of a multiple-class Fund. The most recent NAV for each
class of a Fund is available
at wfam.com. To calculate the NAV of a Fund’s shares, the Fund’s assets are
valued and totaled, liabilities
are subtracted, and the balance, called net assets, is divided by the number of
shares outstanding. The price at
which a purchase or redemption request is processed is based on the next NAV
calculated after the request is
received in good order. Generally, NAV is not calculated, and purchase and
redemption requests are not
processed, on days that the NYSE is closed for trading; however under unusual or
unexpected circumstances a Fund may
elect to remain open even on days that the NYSE is closed or closes early. To
the extent that a Fund’s
assets are traded in various markets on days when the Fund is closed, the value
of the Fund’s assets may be
affected on days when you are unable to buy or sell Fund shares. Conversely,
trading in some of a Fund’s assets may
not occur on days when the Fund is open.
With
respect to any portion of a Fund’s assets that may be invested in other mutual
funds, the value of the Fund’s
shares is based on the NAV of the shares of the other mutual funds in which the
Fund invests. The valuation
methods used by mutual funds in pricing their shares, including the
circumstances under which they will use
fair value pricing and the effects of using fair value pricing, are included in
the Prospectuses of such funds. To
the extent a Fund invests a portion of its assets in non-registered investment
vehicles, the Fund’s interests
in the non-registered vehicles are fair valued at NAV.
With
respect to a Fund’s assets invested directly in securities, the Fund’s
investments are generally valued at current
market prices. Equity securities, options and futures are generally valued at
the official closing price or, if none,
the last reported sales price on the primary exchange or market on which they
are listed (closing price). Equity
securities that are not traded primarily on an exchange are generally valued at
the quoted bid price obtained
from a broker-dealer.
Debt
securities are valued at the evaluated bid price provided by an independent
pricing service or, if a reliable price is
not available, the quoted bid price from an independent
broker-dealer.
We are
required to depart from these general valuation methods and use fair value
pricing methods to determine
the values of certain investments if we believe that the closing price or the
quoted bid price of a security,
including a security that trades primarily on a foreign exchange, does not
accurately reflect its current market
value at the time as of which a Fund calculates its NAV. The closing price or
the quoted bid price of a security
may not reflect its current market value if, among other things, a significant
event occurs after the closing
price or quoted bid price but before the time as of which a Fund calculates its
NAV that materially affects
the value of the security. We use various criteria, including a systemic
evaluation of U.S. market moves after the
close of foreign markets, in deciding whether a foreign security’s market price
is still reliable and, if not, what
fair market value to assign to the security. In addition, we use fair value
pricing to determine the value of
investments in securities and other assets, including illiquid securities, for
which current market quotations or
evaluated prices from a pricing service or broker-dealer are not readily
available.
The fair
value of a Fund’s securities and other assets is determined in good faith
pursuant to policies and procedures
adopted by the Fund’s Board of Trustees. In light of the judgment involved in
making fair value decisions,
there can be no assurance that a fair value assigned to a particular security is
accurate or that it reflects
the price that the Fund could obtain for such security if it were to sell the
security at the time as of which fair
value pricing is determined. Such fair value pricing may result in NAVs that are
higher or lower than NAVs based
on the closing price or quoted bid price.
94 |
|
Wells
Fargo - Fixed Income Funds |
ADDITIONAL
PURCHASE AND REDEMPTION INFORMATION
Payment
for shares may, in the discretion of the Manager, be made in the form of
securities that are permissible
investments for a Fund. For further information about this form of payment,
please contact the Distributor.
In connection with an in-kind securities payment, the Funds will require, among
other things, that the
securities be valued on the day of purchase in accordance with the pricing
methods used by a Fund and that such Fund
receives satisfactory assurances that (i) it will have good and marketable title
to the securities received
by it; (ii) that the securities are in proper form for transfer to the Fund; and
(iii) adequate information will be
provided concerning the basis and other matters relating to the
securities.
Each Fund
reserves the right to reject any purchase orders, and under the 1940 Act, may
suspend the right of redemption
or postpone the date of payment upon redemption for any period during which the
NYSE is closed (other
than customary weekend and holiday closings), or during which trading is
restricted, or during which, as determined
by SEC rule, regulation or order, an emergency exists as a result of which
disposal or valuation of portfolio
securities is not reasonably practicable, or for such periods as the SEC may
permit. In lieu of making cash
payments, the Fund reserves the right to determine in its sole discretion,
including under stressed market conditions,
to satisfy one or more redemption requests by making payments in securities. In
addition, the Fund may redeem
shares involuntarily to reimburse the Fund for any losses sustained by reason of
the failure of a shareholder
to make full payment for shares purchased or to collect any charge relating to a
transaction effected
for the benefit of a shareholder which is applicable to shares of the Fund as
provided from time to time in the
Prospectuses.
Computation
of Class A Offering Price. Class A
shares are sold at their NAV plus a sales charge. Below is an example of
the method of computing the offering price of Class A shares of each Fund.
The example assumes a purchase
of Class A shares of each Fund
aggregating less than $50,000 based upon the NAV of each
Fund’s Class A
shares as of its most recent fiscal year end.
|
|
|
|
Computation
of Class A Offering Price |
Fund
|
Net
Asset Value Per Share |
Sales
Charge Per Share1
|
Offering
Price Per Share |
Adjustable
Rate Government Fund (A) |
$8.92 |
2.00% |
$9.10 |
Core
Plus Bond Fund (A) |
$13.77 |
4.50% |
$14.42 |
Government
Securities Fund (A) |
$11.67 |
4.50% |
$12.22 |
High
Yield Bond Fund (A) |
$3.33 |
4.50% |
$3.49 |
Short
Duration Government Bond Fund (A) |
$9.85 |
2.00% |
$10.05 |
Short-Term
Bond Plus Fund (A) |
$9.09 |
2.00% |
$9.28 |
Short-Term
High Yield Bond Fund (A) |
$8.09 |
3.00% |
$8.34 |
Ultra
Short-Term Income Fund (A) |
$8.60 |
2.00% |
$8.78 |
1. |
The
sales charge you pay may differ slightly from the amounts listed here due
to rounding calculations. |
Online Purchases and Redemptions for Existing
Wells Fargo Funds Account Holders. All
shareholders with an existing
Wells Fargo Funds account may purchase additional shares of funds or classes of
funds within the Wells Fargo Fund
family of funds that they already own and redeem existing shares online. For
purchases, such account
holders must have a bank account linked to their Wells Fargo Funds account.
Redemptions may be deposited
into a linked bank account or mailed via check to the shareholder’s address of
record. Online account access is
available for institutional clients. Shareholders should contact Investor
Services at 1-800-222-8222 or log on at
wfam.com for further details. Shareholders who hold their shares in a brokerage
account should contact
their selling agent.
Extraordinary Circumstances Affecting
Redemptions. Under
the extraordinary circumstances discussed under Section
22(e) under the 1940 Act, we may suspend the right of redemption or postpone the
date of payment of a
redemption for longer than seven days for each Fund. Generally, those
extraordinary circumstances are when: (i) the
NYSE is closed or trading thereon is restricted; (ii) an emergency exists which
makes the disposal by a Fund of
securities it owns, or the fair determination of the value of the Fund’s net
assets not reasonable or
Wells
Fargo - Fixed Income Funds |
|
95 |
practical;
or (iii) the SEC, by order, permits the suspension of the right of redemption
for the protection of shareholders.
Purchases and Redemptions Through Brokers
and/or Their Affiliates. A broker
may charge transaction fees on the
purchase and/or sale of Fund shares in addition to those fees described in the
Prospectuses in the Summary of
Expenses. The Trust has authorized one or more brokers to receive on its behalf
purchase and redemption orders,
and such brokers are authorized to designate other intermediaries to receive
purchase and redemption orders on
the Trust’s behalf. The Trust will be deemed to have received a purchase or
redemption order for Fund shares
when an authorized broker or, if applicable, a broker’s authorized designee,
receives the order, and such orders
will be priced at the Fund’s NAV next calculated after they are received by the
authorized broker or the broker’s
designee.
Reduced Sales Charges for Former C&B
Portfolio Shareholders.
Shareholders who purchased shares of the C&B Portfolios
directly from the C&B Portfolios, and who became Wells Fargo Fund
shareholders in the reorganization
between the Advisors’ Inner Circle Fund and the Trust effective July 26, 2004
may purchase Class A
shares of any Wells Fargo Fund at NAV. However, beginning on July 1, 2013, this
privilege will only be available
to those former C&B Portfolio shareholders whose shares are held directly
with the Fund. Please see your
account representative for details.
Reduced Sales Charges for Former Montgomery
Fund Shareholders. Former
Montgomery Fund Class P and Class R
shareholders who purchased their shares directly from the Montgomery Funds and
became Wells Fargo Fund
shareholders in the reorganization, may purchase Class A shares of any Wells
Fargo Fund at NAV. However,
beginning on July 1, 2013, this privilege will only be available to those former
Montgomery Fund shareholders
whose shares are held directly with the Fund. Shareholders who did not
purchase such shares directly
from the Montgomery Funds may purchase additional shares in the respective
acquiring Wells Fargo Fund at
NAV. However, beginning on July 1, 2013, this privilege will only be available
to those former Montgomery
Fund shareholders whose shares are held directly with the Fund.
Reduced Sales Charges for Certain Former
Advisor Class Shareholders. Investors
who held Advisor Class shares of a Wells
Fargo Fund at the close of business on June 20, 2008 (the “Eligibility Time”),
may purchase Class A shares of
any Wells Fargo Fund at NAV, so long as the following conditions are met: (1)
any purchases at NAV are
limited to Class A shares of the same Fund in which the investor held Advisor
Class shares at the Eligibility Time; (2)
share purchases are made in the same account through which the investor held
Advisor Class shares at the
Eligibility Time; (3) the owner of the account remains the same as the account
owner at the Eligibility Time; and (4)
following the Eligibility Time, the account maintains a positive account balance
at some time during a period of
at least six months in length. Investors who held Advisor Class shares at the
Eligibility Time are also eligible
to exchange their Class A shares for Class A shares of another Wells Fargo Fund
without imposition of any Class
A sales charges and would be eligible to make additional purchases of Class A
shares of such other Fund at
NAV in the account holding the shares received in exchange. The eligibility of
such investors that hold Fund
shares through an account maintained by a financial institution is also subject
to the following additional limitation.
In the event that such an investor’s relationship with and/or the services such
investor receives from the
financial institution subsequently change, such investor shall thereafter no
longer be eligible to purchase Class A
shares at NAV. Please consult with your financial representative for further
details.
Reduced Sales Charges for Certain Former
Evergreen Fund Shareholders. Former
Evergreen Class IS shareholders
who received Class A shares of a Fund as a result of a reorganization can
continue to purchase Class A
shares of that Fund and any other Wells Fargo Fund purchased subsequently by
exchange at NAV, without
paying the customary sales load, after which subsequent purchases of shares of
the subsequent Fund may also
be made at NAV. However, beginning on July 31, 2012, this privilege
will only be available to those former
Evergreen Fund shareholders whose shares are held directly with the
Fund.
Former
Evergreen Class R shareholders who received Class A shares of a Fund as a result
of a reorganization can continue
to purchase Class A shares of that Fund and any other Wells Fargo Fund purchased
subsequently by exchange
at NAV, without paying the customary sales load, after which subsequent
purchases of shares of the subsequent
Fund may also be made at NAV. However, beginning on July 31, 2012, this
privilege will only be available
to those former Evergreen Fund shareholders whose shares are held directly with
the Fund.
96 |
|
Wells
Fargo - Fixed Income Funds |
Certain
investors in acquired funds who became investors in the Evergreen Funds and
subsequently became Wells
Fargo Fund shareholders in a reorganization, including former Class IS
shareholders of Evergreen Strategic
Value Fund and Evergreen Limited Duration Fund, former Investor Class
shareholders of Undiscovered
Managers Funds, former shareholders of the GMO Global Balanced Allocation Fund,
the GMO Pelican
Fund and America’s Utility Fund, former shareholders of an Atlas Fund and
shareholders of record on October
12, 1990 (and members of their immediate families) in any series of the Salem
Funds in existence on that date,
may purchase Class A shares of any Wells Fargo Fund at NAV. However, beginning
on July 1, 2013, this
privilege will only be available to former Evergreen Fund shareholders whose
shares are held directly with the
Fund.
Reduced Sales Charges for Affiliated
Funds. Any
affiliated fund that invests in a Wells Fargo Fund may purchase Class A
shares of such Fund at NAV.
Reduced Sales Charges for Certain Holders of
Class C Shares. No CDSC
is imposed on redemptions of Class C shares
where a Fund did not pay a sales commission at the time of
purchase.
Reduced Sales Charges for Certain Former
Investor Class Shareholders. Former
Investor Class shareholders who received
Class A shares of a Fund as a result of a conversion at the close of business on
October 23, 2015, can continue
to purchase Class A shares of that Fund and any other Wells Fargo Fund purchased
subsequently by exchange
at NAV, without paying the customary sales load, after which subsequent
purchases of shares of the subsequent
Fund may also be made at NAV.
Elimination of Minimum Initial Investment
Amount for Administrator Class Shares for Eligible
Investors. An
“Eligible
Investor” (as defined below) may purchase Administrator Class shares of the
Wells Fargo Funds without
meeting the minimum initial investment amount. Eligible Investors
include:
■ |
Clients
of sub-advisers to those Funds which offer an Administrator Class who are
clients of such subadvisers at the
time of their purchase of such Administrator Class
shares; |
■ |
Clients
of Wells Capital Management who are clients of Wells Capital Management at
the time of their purchase
of Administrator Class shares; and |
■ |
Clients
of Wells Fargo Institutional Retirement Trust (IRT) who are clients of IRT
at the time of their purchase of
Administrator Class shares. |
Related
shareholders or shareholder accounts may be aggregated in order to meet the
minimum initial investment
requirement for Administrator Class shares. The following are examples of
relationships that may qualify
for aggregation:
■ |
Related
business entities, including: (i) corporations and their subsidiaries;
(ii) general and limited partners; and
(iii) other business entities under common ownership or
control. |
■ |
Shareholder
accounts that share a common tax-id
number. |
■ |
Accounts
over which the shareholder has individual or shared authority to buy or
sell shares on behalf of the account
(i.e., a trust account or a solely owned business
account). |
Any of the
minimum initial investment waivers listed above may be modified or discontinued
at any time.
Elimination of Minimum Initial Investment
Amount for Institutional Class Shares for Eligible
Investors. An
“Eligible
Investor” (as defined below) may purchase Institutional Class shares of the
Wells Fargo Funds without meeting
the minimum initial investment amount. Eligible Investors include:
■ |
Clients
of sub-advisers to those Funds which offer an Institutional Class who are
clients of such sub-advisers at the
time of their purchase of such Institutional Class
shares; |
■ |
Clients
of Wells Capital Management who are clients of Wells Capital Management at
the time of their purchase
of Institutional Class shares; and |
■ |
Clients
of Wells Fargo Institutional Retirement Trust (IRT) who are clients of IRT
at the time of their purchase of
Institutional Class shares. |
Related
shareholders or shareholder accounts may be aggregated in order to meet the
minimum initial investment
requirement for Institutional Class shares. The following are examples of
relationships that may qualify
for aggregation:
Wells
Fargo - Fixed Income Funds |
|
97 |
■ |
Related
business entities, including: (i) corporations and their subsidiaries;
(ii) general and limited partners; and
(iii) other business entities under common ownership or
control. |
■ |
Shareholder
accounts that share a common tax-id
number. |
■ |
Accounts
over which the shareholder has individual or shared authority to buy or
sell shares on behalf of the account
(i.e., a trust account or a solely owned business
account). |
Former
Institutional Class shareholders of an Evergreen Fund (including former Class Y
shareholders of an Evergreen
Fund, former SouthTrust shareholders and former Vestaur Securities Fund
shareholders who became Institutional
Class shareholders of an Evergreen Fund) who received Institutional Class shares
of a Wells Fargo Fund in
connection with the reorganization of their Evergreen Fund may purchase
Institutional Class shares at their
former minimum investment amount.
Former
Institutional Class shareholders of Golden Large Cap Core Fund or Golden Small
Cap Core Fund who received
Institutional Class shares of Wells Fargo Large Cap Core Fund or Wells Fargo
Small Cap Core Fund in connection
with the reorganization of their Fund may purchase Institutional Class shares of
any Wells Fargo Fund at
their former minimum investment amount.
Any of the
minimum initial investment waivers listed above may be modified or discontinued
at any time.
Waiver of Minimum Initial and Subsequent
Investment Amounts for All Share Classes for Special Operational
Accounts. Shares
of any and all share classes of the Wells Fargo Funds may be acquired in special
operational accounts
(as defined below) without meeting the applicable minimum initial or subsequent
investment amounts.
Special operational accounts are designated accounts held by Funds Management or
its affiliate that are used
exclusively for addressing operational matters related to shareholder accounts,
such as testing of account
functions.
Compensation to Financial Professionals and
Intermediaries. Set forth
below is a list of the member firms of FINRA to
which the Manager, the Distributor or their affiliates made payments out of
their revenues in connection
with the sale and distribution of shares of the Funds or for services to the
Funds and their shareholders
in the year ending December 31, 2019 (“Additional Payments”). (Such payments are
in addition to any
amounts paid to such FINRA firms in the form of dealer reallowances or fees for
shareholder servicing or distribution.
The payments are discussed in further detail in the Prospectuses under the title
“Compensation to Financial
Professionals and Intermediaries”). Any additions, modifications, or deletions
to the member firms identified
in this list that have occurred since December 31, 2019, are not
reflected:
FINRA member firms
■ |
ADP
Broker-Dealer, Inc. |
■ |
Alight
Financial Solutions, LLC |
■ |
Ameriprise
Financial Services, Inc. |
■ |
Broadridge
Business Process Outsourcing, LLC |
■ |
Charles
Schwab & Co., Inc. |
■ |
Citigroup
Global Markets, Inc. |
■ |
Fidelity
Brokerage Services LLC |
■ |
Goldman,
Sachs & Co. LLC |
■ |
Hightower
Securities, LLC |
■ |
Institutional
Bond Network, LLC |
■ |
Institutional
Cash Distributors, LLC |
■ |
Janney
Montgomery Scott LLC |
■ |
J.P.
Morgan Securities LLC |
■ |
Merrill
Lynch, Pierce, Fenner & Smith,
Incorporated |
■ |
Mid
Atlantic Capital Corporation |
■ |
Mid
Atlantic Clearing & Settlement
Corporation |
98 |
|
Wells
Fargo - Fixed Income Funds |
■ |
Nationwide
Investment Services Corporation |
■ |
OneAmerica
Securities, Inc. |
■ |
PNC
Capital Markets LLC |
■ |
Raymond
James & Associates, Inc. |
■ |
Raymond
James Financial Services, Inc. |
■ |
RBC
Capital Markets, LLC |
■ |
Robert
W. Baird & Co. Incorporated |
■ |
State
Street Global Markets, LLC |
■ |
Stifel,
Nicolaus & Company, Incorporated |
■ |
UBS
Financial Services Inc. |
■ |
VALIC
Financial Advisors, Inc. |
■ |
Wells
Fargo Clearing Services, LLC |
■ |
Wells
Fargo Securities, LLC |
In
addition to member firms of FINRA, Additional Payments are also made to other
selling and shareholder servicing
agents, and to affiliates of selling and shareholder servicing agents that sell
shares of or provide services
to the Funds and their shareholders, such as banks, insurance companies and plan
administrators. These
firms are not included on the list above, although they may be affiliated with
companies on the above list.
No
compensation is paid to broker-dealers or other financial intermediaries (such
as banks) from Fund assets on sales of
Class R6 shares and related services. Class R6 shares do not carry sales
commissions or pay Rule 12b-1 fees, or
make payments to financial intermediaries to assist in, or in connection with,
the sale of the Fund’s shares.
None of the Fund’s Manager, the distributor or their affiliates makes any type
of administrative or service
payments to financial intermediaries in connection with investments in Class R6
shares.
Also not
included on the list above are other subsidiaries of Wells Fargo & Company
who may receive revenue from the
Manager, the Distributor or their affiliates through intra-company compensation
arrangements and for
financial, distribution, administrative and operational services.
U.S.
FEDERAL INCOME TAXES
The
following information supplements and should be read in conjunction with the
section in each Prospectus entitled
“Taxes.” Each Prospectus generally describes the U.S. federal income tax
treatment of distributions by the Funds.
This section of the SAI provides additional information concerning certain
material U.S. federal income
taxes. It is based on the Internal Revenue Code of 1986, as amended (the
“Code”), applicable Treasury Regulations,
judicial authority, and administrative rulings and practice, all as of the date
of this SAI and all of which are
subject to change, including changes with retroactive effect. Except as
specifically set forth below, the following
discussion does not address any state, local or foreign tax
matters.
A
shareholder’s tax treatment may vary depending upon the shareholder’s particular
situation. Except as specifically
set forth below, this discussion applies only to U.S. individual shareholders
holding Fund shares as capital
assets within the meaning of Section 1221 of the Code. A shareholder may also be
subject to special rules not
discussed below if they are a certain kind of shareholder, including, but not
limited to: an insurance company; a
tax-exempt organization; a shareholder holding a Fund’s shares through
tax-advantaged accounts (such as
an individual retirement account (an “IRA”), a 401(k) plan account or other
qualified retirement account);
a financial institution or broker-dealer; a person who is neither a citizen nor
resident of the United States or
entity that is not organized under the laws of the United States or political
subdivision thereof; a shareholder
who holds Fund shares as part of a hedge, straddle or conversion transaction; a
shareholder subject to the
alternative minimum tax; or an entity taxable as a partnership for U.S. federal
income tax purposes and
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Fargo - Fixed Income Funds |
|
99 |
investors
in such an entity. The summary discussion that follows may not be considered to
be individual tax advice and
may not be relied upon by any shareholder.
The Trust
has not requested and will not request an advance ruling from the Internal
Revenue Service (the “IRS”) as
to the U.S. federal income tax matters described below. The IRS could adopt
positions contrary to those
discussed below and such positions could be sustained. In addition, the
following discussion and the discussions
in each Prospectus applicable to each shareholder address only some of the
material U.S. federal income tax
considerations generally affecting investments in the Funds.
On
December 22, 2017, new tax legislation was enacted which includes significant
changes in tax rates, restrictions
on miscellaneous itemized deductions, changes to the dividends received
deduction, restrictions on the
deduction of interest and the international operations of domestic businesses.
Certain changes have sunset provisions,
which are important to note. Because the tax legislation is recently enacted,
and Treasury Regulations
and additional guidance interpreting the legislation are continuing to be
issued, there is still uncertainty
in how the legislation will affect the Fund’s investments and shareholders and
whether such legislation
could have an adverse effect on a Fund’s investments or the taxation of the
shareholders of a Fund. Shareholders
are urged and advised to consult their own tax advisor with respect to the
impact of this legislation.
Prospective
shareholders are urged to consult their own tax advisers and financial planners
regarding the U.S. federal
tax consequences of an investment in a Fund, the application of state, local or
foreign laws, and the effect
of any possible changes in applicable tax laws on their investment in the
Funds.
Qualification as a Regulated Investment
Company. It is
intended that each Fund qualify as a regulated investment
company (“RIC”) under Subchapter M of Subtitle A, Chapter 1 of the Code. Each
Fund will be treated as a
separate entity for U.S. federal income tax purposes. Thus, the provisions of
the Code applicable to RICs generally
will apply separately to each Fund even though each Fund is a series of the
Trust. Furthermore, each Fund will
separately determine its income, gains, losses and expenses for U.S. federal
income tax purposes.
In order
to qualify as a RIC under the Code, each Fund must, among other things, derive
at least 90% of its gross income
each taxable year generally from (i) dividends, interest, certain payments with
respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income attributable
to its business of investing in such stock, securities or foreign currencies
(including, but not limited to, gains
from options, futures or forward contracts) and (ii) net income derived from an
interest in a qualified publicly
traded partnership, as defined in the Code (together with (i) the “qualifying
income requirement”). Future
U.S. Treasury regulations may (possibly retroactively) exclude from qualifying
income foreign currency gains that
are not directly related to a Fund’s principal business of investing in stock,
securities or options and futures
with respect to stock or securities. In general, for purposes of this 90% gross
income requirement, income
derived from a partnership, except a qualified publicly traded partnership, will
be treated as qualifying income
only to the extent such income is attributable to items of income of the
partnership which would be qualifying
income if realized by the RIC.
Each Fund
must also diversify its holdings so that, at the end of each quarter of the
Fund’s taxable year: (i) at least 50%
of the fair market value of its assets consists of (A) cash and cash items
(including receivables), U.S. government
securities and securities of other RICs, and (B) securities of any one issuer
(other than those described
in clause (A)) to the extent such securities do not exceed 5% of the value of
the Fund’s total assets and do not
exceed 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of
the Fund’s total assets consists of the securities of any one issuer (other than
those described in clause (i)(A)),
the securities of two or more issuers the Fund controls and which are engaged in
the same, similar or related
trades or businesses, or the securities of one or more qualified publicly traded
partnerships (together with (i),
the “diversification requirement”). In addition, for purposes of meeting this
diversification requirement, the term
“outstanding voting securities of such issuer” includes the equity securities of
a qualified publicly traded
partnership. The qualifying income and diversification requirements applicable
to a Fund may limit the extent to
which it can engage in transactions in options, futures contracts, forward
contracts and swap agreements.
100 |
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Fargo - Fixed Income Funds |
If a Fund
fails to satisfy the qualifying income or diversification requirements in any
taxable year, such Fund may be
eligible for relief provisions if the failures are due to reasonable cause and
not willful neglect and if a penalty tax is
paid with respect to each failure to satisfy the applicable requirements.
Additionally, relief is provided for certain de
minimis failures of the diversification requirements where the Fund corrects the
failure within a specified
period. If the applicable relief provisions are not available or cannot be met,
such Fund will be taxed in the same
manner as an ordinary corporation, described below.
In
addition, with respect to each taxable year, each Fund generally must distribute
to its shareholders at least 90% of its
investment company taxable income, which generally includes its ordinary income
and the excess of any net
short-term capital gain over net long-term capital loss, and at least 90% of its
net tax-exempt interest income
earned for the taxable year. If a Fund meets all of the RIC qualification
requirements, it generally will not be subject
to U.S. federal income tax on any of the investment company taxable income and
net capital gain (i.e., the excess
of net long-term capital gain over net short-term capital loss) it distributes
to its shareholders. For this
purpose, a Fund generally must make the distributions in the same year that it
realizes the income and gain, although
in certain circumstances, a Fund may make the distributions in the following
taxable year. Shareholders
generally are taxed on any distributions from a Fund in the year they are
actually distributed. However,
if a Fund declares a distribution to shareholders of record in October, November
or December of one year and
pays the distribution by January 31 of the following year, the Fund and its
shareholders will be treated as if the
Fund paid the distribution by December 31 of the first taxable year. Each Fund
intends to distribute its net income
and gain in a timely manner to maintain its status as a RIC and eliminate
fund-level U.S. federal income
taxation of such income and gain. However, no assurance can be given that a Fund
will not be subject to U.S.
federal income taxation.
Moreover,
the Funds may retain for investment all or a portion of their net capital gain.
If a Fund retains any net capital
gain, it will be subject to a tax at regular corporate rates on the amount
retained, but may report the retained
amount as undistributed capital gain in a written statement furnished to its
shareholders, who (i) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on
such undistributed amount against their U.S. federal income tax liabilities, if
any, and to claim refunds to the
extent the credit exceeds such liabilities. For U.S. federal income tax
purposes, the tax basis of shares owned by a
shareholder of the Fund will be increased by an amount equal to the difference
between the amount of
undistributed capital gain included in the shareholder’s gross income and the
tax deemed paid by the shareholder
under clause (ii) of the preceding sentence. A Fund is not required to, and
there can be no assurance that it
will, make this designation if it retains all or a portion of its net capital
gain in a taxable year.
If, for
any taxable year, a Fund fails to qualify as a RIC, and is not eligible for
relief as described above, it will be taxed in
the same manner as an ordinary corporation without any deduction for its
distributions to shareholders,
and all distributions from the Fund’s current and accumulated earnings and
profits (including any distributions
of its net tax-exempt income and net long-term capital gain) to its shareholders
will be taxable as dividend
income. To re-qualify to be taxed as a RIC in a subsequent year, the Fund may be
required to distribute to its
shareholders its earnings and profits attributable to non-RIC years reduced by
an interest charge on 50% of such
earnings and profits payable by the Fund to the IRS. In addition, if a Fund
initially qualifies as a RIC but subsequently
fails to qualify as a RIC for a period greater than two taxable years, the Fund
generally would be required
to recognize and pay tax on any net unrealized gain (the excess of aggregate
gain, including items of income,
over aggregate loss that would have been realized if the Fund had been
liquidated) or, alternatively, be subject to
tax on such unrealized gain recognized for a period of five years, in order to
re-qualify as a RIC in a subsequent
year.
Equalization
Accounting. Each Fund
may use the so-called “equalization method” of accounting to allocate a
portion of
its “earnings and profits,” which generally equals a Fund’s undistributed
investment company taxable income and
net capital gain, with certain adjustments, to redemption proceeds. This method
permits a Fund to achieve
more balanced distributions for both continuing and redeeming shareholders.
Although using this method
generally will not affect a Fund’s total returns, it may reduce the amount that
the Fund would otherwise distribute
to continuing shareholders by reducing the effect of redemptions of Fund shares
on Fund
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Fargo - Fixed Income Funds |
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101 |
distributions
to shareholders. However, the IRS may not have expressly sanctioned the
particular equalization method
used by a Fund, and, thus, a Fund’s use of this method may be subject to IRS
scrutiny.
Capital Loss
Carry-Forwards. For net
capital losses realized in taxable years beginning before January 1, 2011, a
Fund is
permitted to carry forward a net capital loss to offset its capital gain, if
any, realized during the eight years
following the year of the loss, and such capital loss carry-forward is treated
as a short-term capital loss in the year
to which it is carried. For net capital losses realized in taxable years
beginning on or after January 1, 2011, a
Fund is permitted to carry forward a net capital loss to offset its capital gain
indefinitely. For capital losses
realized in taxable years beginning after January 1, 2011, the excess of a
Fund’s net short-term capital loss over
its net long-term capital gain is treated as a short-term capital loss arising
on the first day of the Fund’s
next taxable year and the excess of a Fund’s net long-term capital loss over its
net short-term capital gain is
treated as a long-term capital loss arising on the first day of the Fund’s next
taxable year. If future capital gain is
offset by carried-forward capital losses, such future capital gain is not
subject to fund-level U.S. federal income
tax, regardless of whether it is distributed to shareholders. Accordingly, the
Funds do not expect to distribute
any such offsetting capital gain. The Funds cannot carry back or carry forward
any net operating losses.
If a Fund
engages in a reorganization, either as an acquiring fund or acquired fund, its
capital loss carry-forwards (if any),
its unrealized losses (if any), and any such losses of other funds participating
in the reorganization may be subject
to limitations that could make such losses, in particular losses realized in
taxable years beginning before
January 1, 2011, substantially unusable. Various Funds in the Fund Complex have
engaged in reorganizations
in the past and/or may engage in reorganizations in the future.
As of a
Fund’s most recent fiscal year end, the Fund had capital loss carry-forwards
approximating the amount indicated
for U.S. federal income tax purposes in the table set forth below, expiring in
the year indicated (if applicable):
|
|
|
|
Post-January
1, 2011 Capital Loss Carry-Forwards |
|
|
|
Fund
|
|
Short-Term |
Long-Term |
Adjustable
Rate Government Fund |
|
$0 |
$35,267 |
Conservative
Income Fund |
|
$3,032,650 |
$0 |
Government
Securities Fund |
|
$4,706,777 |
$0 |
High
Yield Bond Fund |
|
$16,415,740 |
$41,199,521 |
Short
Duration Government Bond Fund |
|
$39,018,647 |
$36,448,663 |
Short-Term
High Yield Bond Fund |
|
$15,482,218 |
$31,825,898 |
Ultra
Short-Term Income Fund |
|
$3,429,987 |
$28,918,817 |
Excise Tax. If a Fund
fails to distribute by December 31 of each calendar year at least the sum of 98%
of its ordinary
income for that year (excluding capital gains and losses), 98.2% of its capital
gain net income (adjusted for
certain net ordinary losses) for the 12-month period ending on October 31 of
that year, and any of its ordinary
income and capital gain net income from previous years that was not distributed
during such years, the Fund will
be subject to a nondeductible 4% U.S federal excise tax on the undistributed
amounts (other than to the extent
of its tax-exempt interest income, if any). For these purposes, a Fund will be
treated as having distributed
any amount on which it is subject to corporate level U.S. federal income tax for
the taxable year ending
within the calendar year. Each Fund generally intends to actually, or be deemed
to, distribute substantially
all of its ordinary income and capital gain net income, if any, by the end of
each calendar year and thus
expects not to be subject to the excise tax. However, no assurance can be given
that a Fund will not be subject to
the excise tax. Moreover, each Fund reserves the right to pay an excise tax
rather than make an additional
distribution when circumstances warrant (for example, the amount of excise tax
to be paid by a Fund is
determined to be de minimis).
Investment through Master
Portfolio. A Fund
that invests its assets through one or more master portfolios will seek to
continue to qualify as a RIC. Each master portfolio will be treated as a
non-publicly traded partnership
102 |
|
Wells
Fargo - Fixed Income Funds |
(or, in
the event that a Fund is the sole investor in the corresponding master
portfolio, as disregarded from the Fund) for
U.S. federal income tax purposes rather than as a RIC or a corporation under the
Code. Under the rules applicable
to a non-publicly traded partnership (or disregarded entity), a proportionate
share of any interest, dividends,
gains and losses of a master portfolio will be deemed to have been realized
(i.e., “passed-through”) by its
investors, including the corresponding Fund, regardless of whether any amounts
are actually distributed by the master
portfolio. Each investor in a master portfolio will be taxed on such share, as
determined in accordance
with the governing instruments of the particular master portfolio, the Code and
U.S. Treasury regulations,
in determining such investor’s U.S. federal income tax liability. Therefore, to
the extent a master portfolio
were to accrue but not distribute any income or gains, the corresponding Fund
would be deemed to have
realized its proportionate share of such income or gains without receipt of any
corresponding distribution. However,
each of the master portfolios will seek to minimize recognition by its investors
(such as a corresponding
Fund) of income and gains without a corresponding distribution. Furthermore,
each master portfolio
intends to manage its assets, income and distributions in such a way that an
investor in a master portfolio
will be able to continue to qualify as a RIC by investing its assets through the
master portfolio.
Taxation of
Investments. In
general, realized gains or losses on the sale of securities held by a Fund will
be treated as
capital gains or losses, and long-term capital gains or losses if the Fund has
held the disposed securities
for more than one year at the time of disposition.
If a Fund
purchases a debt obligation with original issue discount (“OID”) (generally, a
debt obligation with a purchase
price at original issuance less than its principal amount, such as a zero-coupon
bond), which generally includes
“payment-in-kind” or “PIK” bonds, the Fund generally is required to annually
include in its taxable income a
portion of the OID as ordinary income, even though the Fund may not receive cash
payments attributable
to the OID until a later date, potentially until maturity or disposition of the
obligation. A portion of the OID
includible in income with respect to certain high-yield corporate discount
obligations may be treated as a dividend
for U.S. federal income tax purposes. Similarly, if a Fund purchases a debt
obligation with market discount
(generally a debt obligation with a purchase price after original issuance less
than its principal amount (reduced
by any OID)) and a Fund elects to include market discount in income as it
accrues, the Fund generally is required
to annually include in its taxable income a portion of the market discount as
ordinary income, even though the
Acquiring Fund may not receive cash payments attributable to the market discount
until a later date,
potentially until maturity or disposition of the obligation. A Fund generally
will be required to make cash distributions
to shareholders representing the OID or market discount income on debt
obligations that is currently
includible in income, even though the cash representing such income may not have
been received by a Fund. Cash
to pay such distributions may be obtained from sales proceeds of securities held
by the Fund which a Fund
otherwise might have continued to hold; obtaining such cash might be
disadvantageous for the Fund.
If a Fund
invests in distressed debt obligations or obligations of issuers that later
become distressed, including debt
obligations of issuers not currently paying interest or who are in default,
special tax issues may exist for the Fund.
U.S. federal income tax rules are not entirely clear about issues such as when a
Fund may cease to accrue
interest, OID, or market discount, when and to what extent deductions may be
taken for bad debts or worthless
securities, and how payments received on obligations in default should be
allocated between principal and
income. A Fund may be required to include in income certain fees that are
treated as OID and required to be included
in income for financial statement purposes when received (rather than when
accrued into income under
current law). These and other related issues will be addressed by a Fund when,
as, and if it invests in such securities,
in order to seek to ensure that it distributes sufficient income to not become
subject to U.S. federal income or
excise tax.
If an
option granted by a Fund is sold, lapses or is otherwise terminated through a
closing transaction, such as a repurchase
by the Fund of the option from its holder, the Fund will realize a short-term
capital gain or loss, depending
on whether the premium income is greater or less than the amount paid by the
Fund in the closing transaction.
Some capital losses realized by a Fund in the sale, exchange, exercise, or other
disposition of an option may
be deferred if they result from a position that is part of a “straddle,”
discussed below. If securities are sold
by a Fund pursuant to the exercise of a covered call option granted by it, the
Fund generally will add the premium
received to the sale price of the securities delivered in determining the amount
of gain or loss on the
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Fargo - Fixed Income Funds |
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103 |
sale. If
securities are purchased by a Fund pursuant to the exercise of a put option
granted by it, the Fund generally
will subtract the premium received from its cost basis in the securities
purchased.
Some
regulated futures contracts, certain foreign currency contracts, and non-equity,
listed options used by a Fund will
be deemed “Section 1256 contracts.” A Fund will be required to “mark-to-market”
any such contracts held at
the end of the taxable year by treating them as if they had been sold on the
last day of that year at market
value. Provided such positions are held as capital assets and are not part of a
“hedging transaction” nor part of a
“straddle,” 60% of any net gain or loss realized on all dispositions of Section
1256 contracts, including deemed
dispositions under the “mark-to-market” rule, generally will be treated as
long-term capital gain or loss, and
the remaining 40% will be treated as short-term capital gain or loss (although
certain foreign currency gains and
losses from such contracts may be treated as ordinary income or loss (as
described below)). These provisions
may require a Fund to recognize income or gains without a concurrent receipt of
cash. Transactions that
qualify as designated hedges are exempt from the mark-to-market rule and the
“60%/40%” rule and may require
the Fund to defer the recognition of losses on certain futures contracts,
foreign currency contracts and non-equity
options.
Foreign
currency gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated
debt obligations, certain options, futures contracts, forward contracts, and
similar instruments
relating to foreign currency, foreign currencies, or payables or receivables
denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary
income or loss and may affect the amount and timing of recognition of the Fund’s
income. Under future
U.S. Treasury regulations, any such transactions that are not directly related
to a Fund’s investments in stock or
securities (or its options contracts or futures contracts with respect to stock
or securities) may have to be limited
in order to enable the Fund to satisfy the 90% income test described above. If
the net foreign currency
loss exceeds a Fund’s net investment company taxable income (computed without
regard to such loss) for a
taxable year, the resulting ordinary loss for such year will not be deductible
by the Fund or its shareholders in future
years.
Offsetting
positions held by a Fund involving certain derivative instruments, such as
financial forward, futures, and
options contracts, may be considered, for U.S. federal income tax purposes, to
constitute “straddles.” “Straddles”
are defined to include “offsetting positions” in actively traded personal
property. The tax treatment of
“straddles” is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the
provisions of Section 1256. If a Fund is treated as entering into a “straddle”
and at least one (but not all) of the Fund’s
positions in derivative contracts comprising a part of such straddle is governed
by Section 1256 of the Code,
described above, then such straddle could be characterized as a “mixed
straddle.” A Fund may make one or
more elections with respect to “mixed straddles.” Depending upon which election
is made, if any, the results
with respect to a Fund may differ. Generally, to the extent the straddle rules
apply to positions established
by a Fund, losses realized by the Fund may be deferred to the extent of
unrealized gain in any offsetting
positions. Moreover, as a result of the straddle rules, short-term capital loss
on straddle positions may be
recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term
capital gain. In addition, the existence of a straddle may affect the holding
period of the offsetting positions.
As a result, the straddle rules could cause distributions that would otherwise
constitute qualified dividend
income (defined below) to fail to satisfy the applicable holding period
requirements (described below) and
therefore to be taxed as ordinary income. Furthermore, the Fund may be required
to capitalize, rather than deduct
currently, any interest expense and carrying charges applicable to a position
that is part of a straddle, including
any interest expense on indebtedness incurred or continued to purchase or carry
any positions that are part
of a straddle. Because the application of the straddle rules may affect the
character and timing of gains and losses
from affected straddle positions, the amount which must be distributed to
shareholders, and which will be
taxed to shareholders as ordinary income or long-term capital gain, may be
increased or decreased substantially
as compared to the situation where a Fund had not engaged in such
transactions.
If a Fund
enters into a “constructive sale” of any appreciated financial position in
stock, a partnership interest, or certain
debt instruments, the Fund will be treated as if it had sold and immediately
repurchased the property and must
recognize gain (but not loss) with respect to that position. A constructive sale
of an appreciated financial
position occurs when a Fund enters into certain offsetting transactions with
respect to the same or
104 |
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substantially
identical property, including: (i) a short sale; (ii) an offsetting notional
principal contract; (iii) a futures or
forward contract; or (iv) other transactions identified in future U.S. Treasury
regulations. The character
of the gain from constructive sales will depend upon a Fund’s holding period in
the appreciated financial
position. Losses realized from a sale of a position that was previously the
subject of a constructive sale will be
recognized when the position is subsequently disposed of. The character of such
losses will depend upon a Fund’s
holding period in the position and the application of various loss deferral
provisions in the Code. Constructive
sale treatment does not apply to certain closed transactions, including if such
a transaction is closed on
or before the 30th day after the close of the Fund’s taxable year and the Fund
holds the appreciated financial
position unhedged throughout the 60-day period beginning with the day such
transaction was closed.
The amount
of long-term capital gain a Fund may recognize from certain derivative
transactions with respect to interests
in certain pass-through entities is limited under the Code’s constructive
ownership rules. The amount of
long-term capital gain is limited to the amount of such gain a Fund would have
had if the Fund directly invested
in the pass-through entity during the term of the derivative contract. Any gain
in excess of this amount is
treated as ordinary income. An interest charge is imposed on the amount of gain
that is treated as ordinary
income.
In
addition, a Fund’s transactions in securities and certain types of derivatives
(e.g., options, futures contracts, forward
contracts, and swap agreements) may be subject to other special tax rules, such
as the wash sale rules or the
short sale rules, the effect of which may be to accelerate income to the Fund,
defer losses to the Fund, cause
adjustments to the holding periods of the Fund’s securities, convert long-term
capital gains into short-term
capital gains, and/or convert short-term capital losses into long- term capital
losses. These rules could
therefore affect the amount, timing, and character of distributions to
shareholders.
Rules
governing the U.S. federal income tax aspects of derivatives, including swap
agreements, are not entirely clear in
certain respects, particularly in light of IRS revenue rulings that held that
income from a derivative contract
with respect to a commodity index is not qualifying income for a RIC.
Accordingly, while each Fund intends to
account for such transactions in a manner it deems appropriate, the IRS might
not accept such treatment.
If the IRS did not accept such treatment, the status of a Fund as a RIC might be
jeopardized. Certain requirements
that must be met under the Code in order for each Fund to qualify as a RIC may
limit the extent to which a
Fund will be able to engage in derivatives transactions.
Certain
Funds may invest in a wholly-owned subsidiary classified as a controlled foreign
corporation, or “CFC,” for
federal income tax purposes. As a result, a Fund may be required to include in
its gross income for federal income tax
purposes all or a significant portion of the income of such subsidiary, referred
to as subpart F income,
whether or not the subsidiary makes a distribution to such Fund. Distributions
by a CFC to a Fund will not be
taxable to such Fund to the extent that the Fund has previously recognized
subpart F income. This subpart F
income is generally treated as ordinary income, regardless of the character of
the CFC’s underlying income.
In 2016,
the IRS and Treasury issued proposed regulations that require a passive foreign
investment company or a CFC,
including those that invest in certain commodities investments, to distribute
income in order for the income to
satisfy the Qualifying Income Requirement. Therefore, to the extent a Fund
invests directly in a CFC of PFIC,
the IRS may contest the Fund’s characterization of the income produced by such
assets as qualifying income
which, if successful, could cause the Fund to fail to qualify as a RIC. Each
Fund and its investment manager
plan to direct investments of the Fund’s assets in conformance with the proposed
regulations, IRS guidance,
and the advice of counsel. In addition, a Fund may not have more than 25% of the
value of its assets invested
in a subsidiary to meet the Diversification Requirement. The value of a Fund’s
subsidiary may be volatile
and it may be difficult for such Fund to continue to have less than 25% of the
value of its assets invested in a
subsidiary. Accordingly, each Fund’s ability to invest in a subsidiary may be
limited by the Qualifying Income Requirement
or Diversification Requirement. Each Fund will account for its investments in a
subsidiary in a manner it
deems to be appropriate. However, the IRS might not accept such treatment. If
the IRS did not accept such
treatment, the status of such Fund as a RIC might be jeopardized.
A Fund may
invest in real estate investment trusts (“REITs”). Investments in REIT equity
securities may require a Fund to
accrue and distribute income not yet received. To generate sufficient cash to
make the requisite
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distributions,
the Fund may be required to sell securities in its portfolio (including when it
is not advantageous to do so)
that it otherwise would have continued to hold. A Fund’s investments in REIT
equity securities may at other
times result in the Fund’s receipt of cash in excess of the REIT’s earnings. If
the Fund distributes these amounts,
these distributions could constitute a return of capital to Fund shareholders
for U.S. federal income tax
purposes. Dividends received by the Fund from a REIT generally will not
constitute qualified dividend income and
will not qualify for the dividends-received deduction. In addition, between 2018
and 2025, a direct REIT
shareholder may claim a 20% “qualified business income” deduction for ordinary
REIT dividends, and proposed
regulations issued in January 2019 (on which taxpayers may currently rely)
permit a RIC to pass through to
its shareholders the special character of this income. Ordinary dividends
received by a Fund from a REIT will
generally not constitute qualified dividend income, which would be eligible for
tax at a reduced rate.
A Fund may
invest directly or indirectly in residual interests in real estate mortgage
investment conduits (“REMICs”)
or in other interests that may be treated as taxable mortgage pools (“TMPs”) for
U.S. federal income tax
purposes. Under IRS guidance, a Fund must allocate “excess inclusion income”
received directly or indirectly
from REMIC residual interests or TMPs to its shareholders in proportion to
dividends paid to such shareholders,
with the same consequences as if the shareholders had invested in the REMIC
residual interests or TMPs
directly.
In
general, excess inclusion income allocated to shareholders (i) cannot be offset
by net operating losses (subject
to a limited exception for certain thrift institutions), (ii) constitutes
unrelated business taxable income to Keogh,
401(k) and qualified pension plans, as well as investment retirement accounts
and certain other tax exempt
entities, thereby potentially requiring such an entity, which otherwise might
not be required to file a tax return, to
file a tax return and pay tax on such income, and (iii) in the case of a foreign
shareholder, does not qualify
for any reduction, by treaty or otherwise, in the 30% U.S. federal withholding
tax. In addition, if at any time
during any taxable year a “disqualified organization” (as defined in the Code)
is a record holder of a share in a Fund,
then the Fund will be subject to a tax equal to that portion of its excess
inclusion income for the taxable year that
is allocable to the disqualified organization, multiplied by the highest federal
corporate income tax rate. To
the extent permitted under the 1940 Act, a Fund may elect to specially allocate
any such tax to the applicable
disqualified organization, and thus reduce such shareholder’s distributions for
the year by the amount of the tax
that relates to such shareholder’s interest in the Fund. The Funds have not yet
determined whether such an
election will be made.
“Passive
foreign investment companies” (“PFICs”) are generally defined as foreign
corporations with respect to which at
least 75% of their gross income for their taxable year is income from passive
sources (such as interest, dividends,
certain rents and royalties, or capital gains) or at least 50% of their assets
on average produce such passive
income. If a Fund acquires any equity interest in a PFIC, the Fund could be
subject to U.S. federal income tax and
interest charges on “excess distributions” received from the PFIC or on gain
from the sale of such equity interest
in the PFIC, even if all income or gain actually received by the Fund is timely
distributed to its shareholders.
Excess distributions will be characterized as ordinary income even though,
absent the application of PFIC
rules, some excess distributions may have been classified as capital
gain.
A Fund
will not be permitted to pass through to its shareholders any credit or
deduction for taxes and interest charges
incurred with respect to PFICs. Elections may be available that would ameliorate
these adverse tax consequences,
but such elections could require a Fund to recognize taxable income or gain
without the concurrent
receipt of cash. Investments in PFICs could also result in the treatment of
associated capital gains as ordinary
income. The Funds may attempt to limit and/or manage their holdings in PFICs to
minimize their tax liability
or maximize their returns from these investments but there can be no assurance
that they will be able to do so.
Moreover, because it is not always possible to identify a foreign corporation as
a PFIC in advance of acquiring
shares in the corporation, a Fund may incur the tax and interest charges
described above in some instances.
Dividends paid by PFICs will not be eligible to be treated as qualified dividend
income.
In
addition to the investments described above, prospective shareholders should be
aware that other investments
made by the Funds may involve complex tax rules that may result in income or
gain recognition by the Funds
without corresponding current cash receipts. Although the Funds seek to avoid
significant non-cash income,
such non-cash income could be recognized by the Funds, in which case the Funds
may distribute cash
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derived
from other sources in order to meet the minimum distribution requirements
described above. In this regard,
the Funds could be required at times to liquidate investments prematurely in
order to satisfy their minimum
distribution requirements.
Taxation of
Distributions. Except
for exempt-interest dividends (defined below) paid out by “Tax-Free Funds”,
distributions
paid out of a Fund’s current and accumulated earnings and profits (as determined
at the end of the year),
whether paid in cash or reinvested in the Fund, generally are deemed to be
taxable distributions and must be
reported by each shareholder who is required to file a U.S. federal income tax
return. Dividends and distributions
on a Fund’s shares are generally subject to U.S. federal income tax as described
herein to the extent
they do not exceed the Fund’s realized income and gains, even though such
dividends and distributions may
economically represent a return of a particular shareholder’s investment. Such
distributions are likely to occur in
respect of shares acquired at a time when the Fund’s net asset value reflects
gains that are either unrealized,
or realized but not distributed. For U.S. federal income tax purposes, a Fund’s
earnings and profits, described
above, are determined at the end of the Fund’s taxable year and are allocated
pro rata to distributions paid over
the entire year. Distributions in excess of a Fund’s current and accumulated
earnings and profits will first be
treated as a return of capital up to the amount of a shareholder’s tax basis in
the shareholder’s Fund shares and
then as capital gain. A Fund may make distributions in excess of its earnings
and profits, from time to
time.
For U.S.
federal income tax purposes, distributions of investment income are generally
taxable as ordinary income,
and distributions of gains from the sale of investments that a Fund owned for
one year or less will be taxable as
ordinary income. Distributions properly designated by a Fund as capital gain
dividends will be taxable to
shareholders as long-term capital gain (to the extent such distributions do not
exceed the Fund’s net capital gain for
the taxable year), regardless of how long a shareholder has held Fund shares,
and do not qualify as dividends
for purposes of the dividends-received deduction or as qualified dividend
income. Each Fund will report
capital gain dividends, if any, in a written statement furnished to its
shareholders after the close of the Fund’s
taxable year.
Fluctuations
in foreign currency exchange rates may result in foreign exchange gain or loss
on transactions in foreign
currencies, foreign currency-denominated debt obligations, and certain foreign
currency options, futures
contracts and forward contracts. Such gains or losses are generally
characterized as ordinary income or loss for
tax purposes. The Fund must make certain distributions in order to not become
subject to U.S. federal income or
excise tax, and the timing of and character of transactions such as foreign
currency-related gains and losses may
result in the fund paying a distribution treated as a return of capital. Such
distribution is nontaxable to the
extent of the recipient’s basis in its shares.
Sales and Exchanges of Fund
Shares. If a
shareholder sells, pursuant to a cash or in-kind redemption, or exchanges
the shareholder’s Fund shares, subject to the discussion below, the shareholder
generally will recognize
a taxable capital gain or loss on the difference between the amount received for
the shares (or deemed
received in the case of an exchange) and the shareholder’s tax basis in the
shares. This gain or loss will be
long-term capital gain or loss if the shareholder has held such Fund shares for
more than one year at the time of the
sale or exchange, and short-term otherwise.
If a
shareholder sells or exchanges Fund shares within 90 days of having acquired
such shares and if, before January 31
of the calendar year following the calendar year of the sale or exchange, as a
result of having initially acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund
or a different RIC, the sales charge previously incurred in acquiring the Fund’s
shares generally shall not be
taken into account (to the extent the previous sales charges do not exceed the
reduction in sales charges on the new
purchase) for the purpose of determining the amount of gain or loss on the
disposition, but generally
will be treated as having been incurred in the new purchase. Also, if a
shareholder recognizes a loss on a disposition
of Fund shares, the loss will be disallowed under the “wash sale” rules to the
extent the shareholder purchases
substantially identical shares within the 61-day period beginning 30 days before
and ending 30 days after the
disposition. Any disallowed loss generally will be reflected in an adjustment to
the tax basis of the purchased
shares.
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If a
shareholder receives a capital gain dividend with respect to any Fund share and
such Fund share is held for six months
or less, then (unless otherwise disallowed) any loss on the sale or exchange of
that Fund share will be treated as
a long-term capital loss to the extent of the capital gain dividend. If such
loss is incurred from the redemption
of shares pursuant to a periodic redemption plan then U.S. Treasury regulations
may permit an exception
to this six-month rule. No such regulations have been issued as of the date of
this SAI.
In
addition, if a shareholder of a Tax-Free Fund holds such Fund shares for six
months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends (defined
below) received with respect to the shares. If such loss is incurred from the
redemption of shares pursuant
to a periodic redemption plan then U.S. Treasury regulations may permit an
exception to this six-month
rule. Such a loss will also not be disallowed where the loss is incurred with
respect to shares of a Fund that
declares exempt-interest dividends on a daily basis in an amount equal to at
least 90% of its net-tax exempt
interest and distributes such dividends on a monthly, or more frequent, basis.
Additionally, where a Fund
regularly distributes at least 90% of its net tax-exempt interest, if any, the
Treasury Department is authorized
to issue regulations reducing the six month holding period requirement to a
period of not less than the
greater of 31 days or the period between regular distributions. No such
regulations have been issued as of the date
of this filing.
Foreign Taxes. Amounts
realized by a Fund from sources within foreign countries may be subject to
withholding and other
taxes imposed by such countries. Although in some countries a portion of these
taxes is recoverable by the
Fund, the unrecovered portion of foreign withholding taxes will reduce the
income received from such securities.
If more than 50% of the value of a Fund’s total assets at the close of its
taxable year consists of securities
of foreign corporations, the Fund will be eligible to file an annual election
with the IRS pursuant to which the
Fund may pass-through to its shareholders on a pro rata basis certain foreign
income and similar taxes paid
by the Fund, and such taxes may be claimed, subject to certain limitations,
either as a tax credit or deduction
by the shareholders. However, even if a Fund qualifies for the election for any
year, it may decide not to make
the election for such year. If a Fund does not so elect, then shareholders will
not be entitled to claim a credit or
deduction with respect to foreign taxes paid or withheld. If a Fund does elect
to “pass through” its foreign
taxes paid in a taxable year, the Fund will furnish a written statement to its
shareholders reporting such shareholders
proportionate share of the Funds’ foreign taxes paid.
Even if a
Fund qualifies for the election, foreign income and similar taxes will only pass
through to the Fund’s shareholders
if the Fund and its shareholders meet certain holding period requirements.
Specifically, (i) the shareholders
must have held the Fund shares for at least 16 days during the 31-day period
beginning 15 days prior to
the date upon which the shareholders became entitled to receive Fund
distributions corresponding with the pass
through of such foreign taxes paid by the Fund, and (ii) with respect to
dividends received by the Fund on foreign
shares giving rise to such foreign taxes, the Fund must have held the shares for
at least 16 days during the
31-day period beginning 15 days prior to the date upon which the Fund became
entitled to the dividend.
These holding periods increase for certain dividends on preferred stock. A Fund
may choose not to make the
election if the Fund has not satisfied its holding requirement.
If a Fund
makes the election, the Fund will not be permitted to claim a credit or
deduction for foreign taxes paid in that
year, and the Fund’s dividends-paid deduction will be increased by the amount of
foreign taxes paid that year. Fund
shareholders that have satisfied the holding period requirements and certain
other requirements shall
include their proportionate share of the foreign taxes paid by the Fund in their
gross income and treat that amount as
paid by them for the purpose of the foreign tax credit or deduction. If the
shareholder claims a credit for
foreign taxes paid, the credit will be limited to the extent it exceeds the
shareholder’s federal income tax attributable
to foreign source taxable income. If the credit is attributable, wholly or in
part, to qualified dividend income (as
defined below), special rules will be used to limit the credit in a manner that
reflects any resulting dividend
rate differential.
In
general, an individual with $300 ($600 if married filing jointly) or
less of creditable foreign taxes may elect to be exempt
from the foreign source taxable income and qualified dividend income limitations
if the individual has no
foreign source income other than qualified passive income. A deduction for
foreign taxes paid may only be claimed
by shareholders that itemize their deductions. Notably, for tax years between
2018 and 2025,
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miscellaneous
itemized deductions are suspended for non-corporate taxpayers. Accordingly,
during this time period,
individuals may be more likely to take advantage of a foreign tax credit.
Shareholders should consult their tax
advisers regarding the impact of these changes on their personal
situation.
U.S. Federal Income Tax
Rates.
Noncorporate Fund shareholders (i.e., individuals, trusts and estates) currently
are taxed
at a maximum rate of 37% on ordinary income and 20% on long-term capital
gain.
In
general, “qualified dividend income” realized by noncorporate Fund
shareholders is taxable at the same rate as net
capital gain. Generally, qualified dividend income is dividend income
attributable to certain U.S. and foreign
corporations, as long as certain holding period requirements are met. All
dividend income, other than qualified
dividend income, generally will be taxed at the same rate as ordinary income. If
95% or more of a Fund’s gross
income (excluding net long-term capital gain over net short-term capital loss)
constitutes qualified dividend
income, all of its distributions (other than capital gain dividends) will be
generally treated as qualified dividend
income in the hands of individual shareholders, as long as they have owned their
Fund shares for at least 61
days during the 121-day period beginning 60 days before the Fund’s ex-dividend
date (or, in the case of certain
preferred stock, 91 days during the 181-day period beginning 90 days before such
date). In general, if less than
95% of a Fund’s income is attributable to qualified dividend income, then only
the portion of the Fund’s
distributions that is attributable to qualified dividend income and designated
as such in a timely manner will be so
treated in the hands of individual shareholders. Payments received by a Fund
from securities lending, repurchase,
and other derivative transactions ordinarily will not qualify as qualified
dividend income. The rules attributable
to the qualification of Fund distributions as qualified dividend income are
complex, including the holding
period requirements. Individual Fund shareholders therefore are urged to consult
their own tax advisers and
financial planners. Income and bond Funds typically do not distribute
significant amounts of “qualified dividend
income” eligible for reductions in individual U.S. federal income tax
rates.
The
maximum stated corporate U.S. federal income tax rate applicable to ordinary
income and net capital gain currently
is 21%. Actual marginal tax rates may be higher for some shareholders, for
example, through reductions
in deductions. Subject to limitations and other rules, a corporate shareholder
of a Fund may not be eligible
for the dividends received deduction on Fund distributions attributable to
dividends received by the Fund from
domestic corporations, which, if received directly by the corporate shareholder,
would qualify for such a
deduction. For eligible corporate shareholders, the dividends-received deduction
may be subject to certain
reductions, and a distribution by a Fund attributable to dividends of a domestic
corporation will be eligible
for the deduction only if certain holding period and other requirements are met.
These requirements are complex;
therefore, corporate shareholders of the Funds are urged to consult their own
tax advisers and financial
planners. The amount of tax payable by any taxpayer will be affected by a
combination of tax laws covering,
for example, deductions, credits, deferrals, exemptions, sources of income and
other matters.
Noncorporate
Fund shareholders with income exceeding $200,000 ($250,000 if married and filing
jointly) generally
will be subject to a 3.8% tax on their “net investment income,” which ordinarily
includes taxable distributions
received from the Funds and taxable gain on the disposition of Fund
shares.
Backup Withholding. A Fund is
generally required to withhold and remit to the U.S. Treasury, subject to
certain exemptions
(such as for certain corporate or foreign shareholders), an amount equal to 24%
of all distributions and
redemption proceeds (including proceeds from exchanges and redemptions in-kind)
paid or credited to a Fund
shareholder if (i) the shareholder fails to furnish the Fund with a correct
“taxpayer identification number” (“TIN”),
(ii) the shareholder fails to certify under penalties of perjury that the TIN
provided is correct, (iii) the shareholder
fails to make certain other certifications, or (iv) the IRS notifies the Fund
that the shareholder’s TIN is
incorrect or that the shareholder is otherwise subject to backup withholding.
Backup withholding is not an additional
tax imposed on the shareholder. The shareholder may apply amounts withheld as a
credit against the shareholder’s
U.S. federal income tax liability and may obtain a refund of any excess amounts
withheld, provided that the
required information is furnished to the IRS. If a shareholder fails to furnish
a valid TIN upon request, the
shareholder can also be subject to IRS penalties. A shareholder may generally
avoid backup withholding by furnishing
a properly completed IRS Form W-9. State backup withholding may also be required
to be withheld by the
Funds under certain circumstances.
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Foreign
Shareholders. For
purposes of this discussion, “foreign shareholders” include: (i) nonresident
alien individuals,
(ii) foreign trusts (i.e., a trust other than a trust with respect to which a
U.S. court is able to exercise primary
supervision over administration of that trust and one or more U.S. persons have
authority to control substantial
decisions of that trust), (iii) foreign estates (i.e., the income of which is
not subject to U.S. tax regardless
of source), and (iv) foreign corporations.
Distributions
made to foreign shareholders attributable to net investment income generally are
subject to U.S. federal
income tax withholding at a 30% rate (or such lower rate provided under an
applicable income tax treaty).
Notwithstanding the foregoing, if a distribution described above is effectively
connected with the conduct of
a trade or business carried on by a foreign shareholder within the United States
(or, if an income tax treaty
applies, is attributable to a permanent establishment in the United States),
federal income tax withholding
and exemptions attributable to foreign persons will not apply. Instead, the
distribution will be subject to
withholding at the highest applicable U.S. tax rate (currently 37% in the case
of individuals and 21% in the case
of corporations) and the foreign shareholder will be subject to federal income
tax reporting requirements
generally applicable to U.S. persons described above.
Under U.S.
federal tax law, a foreign shareholder is not, in general, subject to federal
income tax or withholding tax on
capital gains (and is not allowed a deduction for losses) realized on the sale
of shares of the Funds and on long-term
capital gains dividends, provided that the Funds obtain a properly completed and
signed certificate of foreign
status, unless (i) such gains or distributions are effectively connected with
the conduct of a trade or business
carried on by the foreign shareholder within the United States (or, if an income
tax treaty applies, are attributable
to a permanent establishment in the United States of the foreign shareholder);
(ii) in the case of an individual
foreign shareholder, the shareholder is present in the United States for a
period or periods aggregating
183 days or more during the year of the sale and certain other conditions are
met; or (iii) the shares of the
Funds constitute U.S. real property interests (“USRPIs”), as described
below.
Under
current law, if a Fund is considered to be a “United States Real Property
Holding Corporation” (as defined in the
Code and Treasury Regulations), then distributions attributable to certain
underlying real estate investment
trust (“REIT”) investments and redemption proceeds paid to a foreign shareholder
that owns at least 5%
of a Fund, generally will cause the foreign shareholder to treat such gain or
distribution as income effectively
connected with a trade or business in the United States, subject to such gain or
distribution withholding
tax and cause the foreign shareholder to be required to file a federal income
tax return. In addition, in any
year when at least 50% of a Fund’s assets are USRPIs (as defined in the Code and
Treasury Regulations), distributions
of the Fund that are attributable to gains from the sale or exchange of shares
in USRPIs may be subject to
U.S. withholding tax (regardless of such shareholder’s percentage interest in
the Fund) and may require
the foreign shareholder to file a U.S. federal income tax return in order to
receive a refund (if any) of the withheld
amount.
Subject to
the additional rules described herein, federal income tax withholding will apply
to distributions attributable
to dividends and other investment income distributed by the Funds. The federal
income tax withholding
rate may be reduced (and, in some cases, eliminated) under an applicable tax
treaty between the United
States and the foreign shareholder’s country of residence or incorporation. In
order to qualify for treaty benefits,
a foreign shareholder must comply with applicable certification requirements
relating to its foreign status
(generally by providing a Fund with a properly completed Form
W-8BEN).
Pursuant
to the Foreign Account Tax Compliance Act (“FATCA”), a 30% withholding tax
generally is imposed on payments
of interest and dividends to (i) foreign financial institutions including
non-U.S. investment funds and (ii)
certain other foreign entities, unless the foreign financial institution or
foreign entity provides the withholding
agent with documentation sufficient to show that it is compliant with FATCA
(generally by providing
the Fund with a properly completed Form W-8BEN or Form W-8BEN-E, as applicable).
If the payment is subject
to the 30% withholding tax under FATCA, a foreign shareholder will not be
subject to the 30% withholding
tax described above on the same income. Under proposed regulations, FATCA
withholding on the gross
proceeds of share redemptions and certain capital gain distributions, scheduled
to take effect beginning January 1,
2019, has been eliminated. Such proposed regulations are subject to
change.
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Before
investing in a Fund’s shares, a prospective foreign shareholder should consult
with its own tax advisors,
including whether the shareholder’s investment can qualify for benefits under an
applicable income tax
treaty.
Tax-Deferred Plans. Shares of
the Funds may be available for a variety of tax-deferred retirement and other
tax-advantaged
plans and accounts. However, shares of a Tax-Free Fund may not be suitable for
tax-deferred, retirement
and other tax-advantaged plans and accounts, since such plans and accounts are
generally tax-exempt
and, therefore, would not benefit from the tax-exempt status of certain
distributions from the Tax-Free
Fund (discussed below). Such distributions may ultimately be taxable to the
beneficiaries when distributed
to them.
Prospective
investors should contact their tax advisers and financial planners regarding the
tax consequences to them
of holding Fund shares through such plans and/or accounts.
Tax-Exempt
Shareholders. Shares of
a Tax-Free Fund may not be suitable for tax-exempt shareholders since
such
shareholders generally would not benefit from the tax-exempt status of
distributions from the Tax-Free Funds
(discussed below). Tax-exempt shareholders should contact their tax advisers and
financial planners regarding
the tax consequences to them of an investment in the Funds.
Any
investment in residual interests of a collateralized mortgage obligation that
has elected to be treated as a REMIC can
create complex U.S. federal income tax consequences, especially if a Fund has
state or local governments
or other tax-exempt organizations as shareholders.
Special
tax consequences apply to charitable remainder trusts (“CRTs”) (as defined in
Section 664 of the Code) that
invest in RICs that invest directly or indirectly in residual interests in
REMICs or equity interests in TMPs. CRTs are
urged to consult their own tax advisers and financial planners concerning these
special tax consequences.
Foreign Bank and Financial Accounts and
Foreign Financial Assets Reporting Requirements. A
shareholder that owns
directly or indirectly more than 50% by vote or value of the Fund, is urged and
advised to consult its own tax
adviser regarding its filing obligations with respect to IRS Form FinCEN114,
Report of Foreign Bank and Financial
Accounts.
Also,
under recently enacted rules, subject to exceptions, individuals (and, to the
extent provided in forthcoming future
U.S. Treasury regulations, certain domestic entities) must report annually their
interests in “specified foreign
financial assets” on their U.S. federal income tax returns. It is currently
unclear whether and under what circumstances
stockholders would be required to report their indirect interests in the Fund’s
“specified foreign financial
assets” (if any) under these new rules.
Shareholders
may be subject to substantial penalties for failure to comply with these
reporting requirements. Shareholders
are urged and advised to consult their own tax advisers to determine whether
these reporting requirements
are applicable to them.
Tax Shelter Reporting
Regulations.
Generally, under U.S. Treasury regulations, if an individual shareholder
recognizes
a loss of $2 million or more or if a corporate shareholder recognizes a loss of
$10 million or more, the shareholder
must file with the IRS a disclosure statement on Form 8886. The fact that a
loss is reportable under these
regulations does not affect the legal determination of whether the taxpayer’s
treatment of the loss is proper.
Shareholders should consult their own tax advisers to determine the
applicability of these regulations in light of
their individual circumstances.
Additional Considerations for the Tax-Free
Funds. If at
least 50% of the value of a Fund’s total assets at the close of
each quarter of its taxable years consists of debt obligations that generate
interest exempt from U.S. federal
income tax under Section 103 of the Internal Revenue Code, then the Fund may
qualify to pass through to its
shareholders the tax-exempt character of its income from such debt obligations
by paying exempt-interest
dividends. The Tax-Free Funds intend to so qualify and are designed to provide
shareholders with
income exempt from U.S. federal income tax in the form of exempt-interest
dividends. “Exempt-interest dividends”
are dividends (other than capital gain dividends) paid by a RIC that are
properly reported as such in a written
statement furnished to shareholders.
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Each
Tax-Free Fund will report to its shareholders the portion of the distributions
for the taxable year that constitutes
exempt-interest dividends. The designated portion cannot exceed the excess of
the amount of interest
excludable from gross income under Section 103 of the Internal Revenue Code
received by a Tax-Free Fund
during the taxable year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the
Internal Revenue Code. Interest on indebtedness incurred to purchase or carry
shares of the Tax-Free Funds will not
be deductible to the extent that the Tax-Free Funds’ distributions are exempt
from U.S. federal income tax. In
addition, an investment in a Tax-Free Fund may result in liability for U.S.
federal alternative minimum tax (“AMT”)
for noncorporate shareholders. Certain deductions and exemptions have been
designated “tax preference
items” which must be added back to taxable income for purposes of calculating
the U.S. federal AMT for
noncorporate shareholders. Tax preference items include tax-exempt interest on
certain “private activity bonds.” To
the extent a Tax-Free Fund invests in certain private activity bonds, its
shareholders will be required to report
that portion of the Fund’s distributions attributable to income from the bonds
as a tax preference item in
determining noncorporate shareholders’ U.S. federal AMT, if any. Shareholders
will be notified of the tax status of
distributions made by a Tax-Free Fund.
Persons
who may be “substantial users” (or “related persons” of substantial users) of
facilities financed by private
activity bonds should consult their tax advisers before purchasing shares in a
Tax-Free Fund. Furthermore,
noncorporate shareholders will not be permitted to deduct any of their share of
a Tax-Free Fund’s expenses
in computing their U.S. federal AMT. As of the date of this filing, individuals
are subject to the U.S. federal
AMT at a maximum rate of 28%. Corporations are not subject to the U.S. federal
AMT for taxable years beginning
after December 31, 2017. Shareholders with questions or concerns about the U.S.
federal AMT should
consult own their own tax advisers.
The IRS is
paying increased attention to whether debt obligations intended to produce
interest exempt from U.S.
federal income tax in fact meet the requirements for such exemption. Ordinarily,
the Tax-Free Funds rely on
opinions from the issuer’s bond counsel that interest on the issuer’s debt
obligation will be exempt from U.S. federal
income tax. However, no assurance can be given that the IRS will not
successfully challenge such exemption,
which could cause interest on the debt obligation to be taxable and could
jeopardize a Tax-Free Fund’s
ability to pay any exempt-interest dividends. Similar challenges may occur as to
state-specific exemptions.
A
shareholder who receives Social Security or railroad retirement benefits should
consult the shareholder’s own tax
adviser to determine what effect, if any, an investment in a Tax-Free Fund may
have on the U.S. federal taxation
of such benefits. Exempt-interest dividends are included in income for purposes
of determining the amount of
benefits that are taxable.
Distributions
of a Tax-Free Fund’s income other than exempt-interest dividends generally will
be taxable to shareholders.
Gains realized by a Tax-Free Fund on the sale or exchange of investments that
generate tax-exempt
income will also be taxable to shareholders.
Although
exempt-interest dividends are generally exempt from U.S. federal income tax,
there may not be a similar
exemption under the laws of a particular state or local taxing jurisdiction.
Thus, exempt-interest dividends
may be subject to state and local taxes. You should consult your own tax advisor
to discuss the tax consequences
of your investment in a Tax-Free Fund.
Legislative
Proposals.
Prospective shareholders should recognize that the present U.S. federal income
tax treatment
of the Funds and their shareholders may be modified by legislative, judicial or
administrative actions at any
time, which may be retroactive in effect. The rules dealing with U.S. federal
income taxation are constantly
under review by Congress, the IRS and the Treasury Department, and statutory
changes as well as promulgation
of new regulations, revisions to existing statutes, and revised interpretations
of established concepts
occur frequently. You should consult your advisors concerning the status of
legislative proposals that may
pertain to holding Fund shares.
Cost Basis Reporting
Each Fund
or its delegate is required to report cost basis information for
shareholders who are individuals and S Corporations
to the Internal Revenue Service for redemptions of Fund shares acquired on or
after January 1,
112 |
|
Wells
Fargo - Fixed Income Funds |
2012. This
information will also be reported to a shareholder on Form 1099-B and the IRS
each year. If a shareholder
is a corporation and has not instructed a Fund that it is a C corporation by
written instruction, the Fund will
treat the shareholder as an S corporation and file a Form
1099-B.
Fund
shareholders should consult their tax advisors to obtain more information about
how the new cost basis rules
apply to them and determine which cost basis method allowed by the Internal
Revenue Service is best for their tax
situation. Methods allowed by the IRS include, but are not limited
to:
■ |
Average
Cost. The
cost per share is determined by dividing the aggregate cost amount by the
total shares in the
account. The basis of the shares redeemed is determined by multiplying the
shares redeemed by the cost per
share. Starting in 2012, accounts may maintain two separate average costs:
one average for covered shares
and a separate average for noncovered shares. Under the Average Cost
method, noncovered shares are generally
depleted first. |
■ |
First
in first out (FIFO).
Shares acquired first in the shareholder’s account are the first shares
depleted and determine
the shareholder’s cost basis. The basis of the shares redeemed is
determined by the adjusted purchase
price of each date the shares were
acquired. |
■ |
Specific
Identification. A
shareholder selects the shares to be redeemed from any of the purchase
lots that still
have shares remaining. The basis of the shares redeemed is determined by
the adjusted purchase price of each
date the shares were acquired. |
In the
absence of a shareholder method election, the Fund will apply its default
method, Average Cost. If the Average
Cost method is applied either by default or at the shareholder’s election, the
shareholder’s ability to change
such election once a sale occurs will be limited under the IRS rules. After an
election has been made, but before a
disposition of shares occurs, a shareholder may make a retroactive change to an
alternate method. The cost basis
method a shareholder elects may not be changed with respect to a redemption of
shares after the settlement
date of the redemption. At any time, a shareholder may designate a new election
for future purchases.
Redemptions
of shares acquired prior to January 1, 2012 will continue to be reported using
the Average Cost method, if
available, and will not be reported to the IRS.
Money Market Fund
Shares. The cost
basis reporting rules described above do not apply to shares in money
market
funds. Beginning in 2016, pursuant to SEC rules, certain money market funds
began using a floating net asset
value rather than a stable net asset value. However, the IRS has issued
regulations that permit taxpayers to utilize
a simplified method of accounting for gains and losses from redemptions of
shares in money market funds that
have a floating net asset value (the “NAV method”). If taxpayers properly elect
the NAV method, taxpayers
will not compute gain or loss for each redemption. Instead, taxpayers utilizing
the NAV method, will aggregate
the gains and losses for a period and report the aggregate gain or loss on an
annual basis. If taxpayers do not
elect the NAV method, the wash sales rules shall not apply to losses generated
by the redemption of money
market shares. Any capital gains or losses reported utilizing the NAV method
will be short-term capital gains or
losses.
CONTROL
PERSONS AND PRINCIPAL FUND HOLDERS
The Funds
are nine series of the Trust in the Wells Fargo family of funds. The Trust was
organized as a Delaware statutory
trust on March 10, 1999.
Most of
the Trust’s series are authorized to issue multiple classes of shares, one class
generally subject to a front-end
sales charge and, in some cases, classes subject to a CDSC, that are offered to
retail investors. Certain of the
Trust’s series also are authorized to issue other classes of shares, which are
sold primarily to institutional investors.
Each share in a series represents an equal, proportionate interest in the series
with all other shares. Shareholders
bear their pro rata portion of a series’ operating expenses, except for certain
class-specific expenses
(e.g., any state securities registration fees, shareholder servicing fees or
distribution fees that may be paid under
Rule 12b-1) that are allocated to a particular class. Please contact Investor
Services at 1-800-222-8222
if you would like additional information about other series or classes of shares
offered.
Wells
Fargo - Fixed Income Funds |
|
113 |
With
respect to matters affecting one class but not another, shareholders vote as a
class; for example, the approval
of a Plan. Subject to the foregoing, all shares of a Fund have equal voting
rights and will be voted in the aggregate,
and not by series, except where voting by a series is required by law or where
the matter involved only
affects one series. For example, a change in a Fund’s fundamental investment
policy affects only one series and would
be voted upon only by shareholders of the Fund involved. Additionally, approval
of an advisory agreement,
since it affects only one Fund, is a matter to be determined separately by each
series. Approval by the
shareholders of one series is effective as to that series whether or not
sufficient votes are received from the shareholders
of the other series to approve the proposal as to those series.
As used in
the Prospectus(es) and in this SAI, the term “majority,” when referring to
approvals to be obtained from
shareholders of a class of shares of a Fund means the vote of the lesser of (i)
67% of the shares of the class represented
at a meeting if the holders of more than 50% of the outstanding shares of the
class are present in person or
by proxy, or (ii) more than 50% of the outstanding shares of the class of the
Fund. The term “majority,”
when referring to approvals to be obtained from shareholders of the Fund, means
the vote of the lesser of
(i) 67% of the shares of the Fund represented at a meeting if the holders of
more than 50% of the outstanding
shares of the Fund are present in person or by proxy, or (ii) more than 50% of
the outstanding shares of
the Fund. The term “majority,” when referring to the approvals to be obtained
from shareholders of the Trust
as a whole, means the vote of the lesser of (i) 67% of the Trust’s shares
represented at a meeting if the
holders of more than 50% of the Trust’s outstanding shares are present in person
or by proxy, or (ii) more than 50%
of the Trust’s outstanding shares.
Shareholders
are not entitled to any preemptive rights. All shares are issued in
uncertificated form only, and, when
issued will be fully paid and non-assessable by the Trust. The Trust may
dispense with an annual meeting of
shareholders in any year in which it is not required to elect Trustees under the
1940 Act.
Each share
of a class of a Fund represents an equal proportional interest in the Fund with
each other share of the same
class and is entitled to such dividends and distributions out of the income
earned on the assets belonging
to the Fund as are declared in the discretion of the Trustees. In the event of
the liquidation or dissolution
of the Trust, shareholders of a Fund are entitled to receive the assets
attributable to that Fund that are
available for distribution, and a distribution of any general assets not
attributable to a particular Fund that are
available for distribution in such manner and on such basis as the Trustees in
their sole discretion may determine.
From time
to time, the Manager and/or its affiliates may invest seed capital in a Fund.
These investments are generally
intended to enable the Fund to commence investment operations and/or achieve
sufficient scale. The Manager
and/or its affiliates may redeem some or all of its seed capital investment in a
Fund at any time and without
prior notice, including at a time when such Fund has not otherwise achieved
sufficient scale. The redemption
of seed capital may adversely affect a Fund and its shareholders, including by
causing the Fund to realize
gains that will be distributed and may be taxable to remaining shareholders of
the Fund, increasing the Fund’s
operating expense ratio and transaction costs and leaving the Fund with
remaining assets that are insufficient
to support the Fund’s continued operation.
Set forth
below as of December 1, 2020, the following owned of record and/or beneficially
5% or more of the outstanding
shares of a class or 25% or more of the outstanding shares of a Fund, as
applicable. Additionally, as of
December 1, 2020, the Trustees and Officers of the Trust, as a group,
beneficially owned less than 1% of the outstanding
shares of the Trust.
114 |
|
Wells
Fargo - Fixed Income Funds |
|
|
Principal
Fund Holders |
|
Adjustable
Rate Government Fund Class
A |
|
Wells
Fargo Clearing Services LLC Special
Custody Account for the Exclusive
Benefit of Customer 2801
Market Street Saint
Louis, MO 63103-2523 |
36.39% |
MLPF&S
For The Sole Benefit of
Its Customers Attn:
Mutual Fund Administration 4800
Deer Lake Dr E FL 3 Jacksonville,
FL 32246-6484 |
14.51% |
Raymond
James Omnibus
for Mutual Funds Attn:
Courtney Waller 880
Carillon Pkwy St
Petersburg, FL 33716-1100 |
8.55% |
Morgan
Stanley Smith Barney LLC For
The Exclusive Benefit Of Its Customer 1 New
York Plaza, Floor 12 New
York, NY 10004-1965 |
7.78% |
Adjustable
Rate Government Fund Class
C |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
25.61% |
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
20.78% |
UBS
WM USA Omni
Account M/F 1000
Harbor Blvd., 5th Floor Weehawken,
NJ 07086-6761 |
10.60% |
Raymond
James Omnibus
for Mutual funds Attn:
Courtney Waller 880
Carillon Pkwy St
Petersburg, FL 33716-1100 |
10.57% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
7.68% |
LPL
Financial Omnibus
Customer Account Attn:
Mutual Fund Trading 4707
Executive Drive San
Diego, CA 92121-3091 |
5.76% |
Adjustable
Rate Government Fund Administrator
Class |
|
Charles
Schwab & CO Inc Special
Custody A/C FBO Customers Attn:
Mutual Funds 211
Main Street San
Francisco, CA 94105 |
42.23% |
Wells
Fargo - Fixed Income Funds |
|
115 |
|
|
Principal
Fund Holders |
|
Charles
Schwab & CO Inc Special
Custody A/C FBO Customers Attn:
Mutual Funds 211
Main Street San
Francisco, CA 94105 |
35.08% |
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
7.40% |
Pershing
LLC 1
Pershing Plz Jersey
City, NJ 07399-0002 |
6.03% |
Adjustable
Rate Government Fund Institutional
Class |
|
UBS
WM USA OMNI
Account M/F 1000
Harbor Blvd Weehawken,
NJ 07086-6761 |
12.87% |
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
12.64% |
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
12.25% |
Seattle
Times Company Attn
Nathaniel T Brown 1000
Denny Way Seattle,
WA 98109-5323 |
9.91% |
MLPF&S
For The Sole Benefit of
Its Customers Attn:
Mutual Fund Administration 4800
Deer Lake Dr E FL 3 Jacksonville,
FL 32246-6484 |
8.61% |
Nippon
Dynawave Packaging Company LLC Attn:
Tim Hill 3401
Industrial Way Longview,
WA 98632-9285 |
7.51% |
Conservative
Income Fund Class
A2 |
|
Wells
Fargo Bank NA Cust
For the Rollover IRA of Roberta
Sagan W145S7057
Brentwood Dr Muskego,
WI 53150-3113 |
41.92% |
Everen
Cap Corp For WFAM Hldgs LLC FBO
WFFM-WFF Seed Account MAC
#A0103-109 525
Market St, Floor 10 San
Francisco, CA 95105-2718 |
16.85% |
Wells
Fargo Bank NA Cust Roth
Contribution IRA Suresh
Duraisamy 4046
Plus Yew Cir Liverpool,
NY 13090-1116 |
15.97% |
116 |
|
Wells
Fargo - Fixed Income Funds |
|
|
Principal
Fund Holders |
|
Wells
Fargo Bank NA Cust Roth
Contribution IRA Diane
L Ording John
C Ording POA 2495
Nikki Pl Billings,
MT 59102-2037 |
10.15% |
Wells
Fargo Bank NA Cust
For the Rollover IRA of Doris
G Elliott 8027
Indiantown Rd King
George, VA 22485-3607 |
6.74% |
Conservative
Income Fund Institutional
Class |
|
Kean
University Attn:
A Brannen / J Antonowicz 1000
Morris Ave Union,
NJ 07083-7131 |
18.98% |
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
17.37% |
Granite
Rock Company Attn:
Steve Snodgrass 350
Technology Dr Watsonville,
GA 95076-2488 |
7.80% |
Ariel
Corporation Attn
David M Stuller 35
Blackjack Road Mount
Vernon, OH 43050-9482 |
7.16% |
Jas D
Eason Attn:
Daren Cottle 2150
S 1300 E Ste 450 Salt
Lake City, UT 84106-4374 |
5.90% |
Core
Plus Bond Fund Class
A |
|
Wells
Fargo Clearing Services LLC Special
Custody Account for the Exclusive
Benefit of Customer 2801
Market Street Saint
Louis, MO 63103-2523 |
14.39% |
Charles
Schwab & Co Inc Special
Custody Account Exclusively
FBO the Customers 211
Main Street San
Francisco, CA 94105-1905 |
8.81% |
National
Financial Services LLC For
Exclusive Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
8.44% |
Core
Plus Bond Fund Class
C |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
49.13% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
14.14% |
Wells
Fargo - Fixed Income Funds |
|
117 |
|
|
Principal
Fund Holders |
|
Morgan
Stanley Smith Barney LLC For
the Exclusive Benefit of its Customer 1 New
York Plz Floor 12 New
York, NY 10004-1965 |
8.69% |
Raymond
James Omnibus
for Mutual funds Attn:
Courtney Waller 880
Carillon Pkwy St
Petersburg, FL 33716-1100 |
8.43% |
MLPF&S For
The Sole Benefit of Its Customers Attn:
Fund Admin 4800
Deer Lake Dr. E, 2nd Floor Jacksonville,
FL 32246-6484 |
6.86% |
Core
Plus Bond Fund Class
R6 |
|
Saxon
& Co PO
Box 94597 Cleveland,
OH 44101-4597 |
22.86% |
Wells
Fargo Bank NA FBO IBC
401H Plan PO
Box 1533 Minneapolis,
MN 55480-1533 |
19.34% |
Wells
Fargo Bank NA FBO Caravel
Wells Cap DRH Active PO
Box 1533 Minneapolis,
MN 55480-1533 |
17.20% |
T
Rowe Price Retmnt Services Inc FBO
Retirement Plan Clients 4515
Painters Mill Rd. Owings
Mills, MD 21117-4903 |
8.43% |
Attn:
NPIO Trade Desk DCGT
As TTEE and/or Custodian FBO
PLIC Various Retirement Plans Omnibus 711
High Street Des
Moines, IA 50392-0001 |
8.23% |
National
Financial Services LLC 499
Washington Blvd Jersey
City, NJ 07310-1995 |
6.15% |
Core
Plus Bond Fund Administrator
Class |
|
Charles
Schwab & Co Inc Special
Custody Account Exclusively
FBO the Customers 211
Main Street San
Francisco, CA 94105-1905 |
74.99% |
C/O
Fascore LLC Great-West
Trust Company LLC TTEE F Great
West IRA Advantage 8515
E Orchard Rd 2T2 Greenwood
Village, CO 80111-5002 |
16.01% |
Core
Plus Bond Fund Institutional
Class |
|
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
29.72% |
118 |
|
Wells
Fargo - Fixed Income Funds |
|
|
Principal
Fund Holders |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
20.02% |
MLPF&S For
The Sole Benefit of Its Customers Attn:
Mutual Fund Administration 4800
Deer Lake Dr E FL 3 Jacksonville,
FL 32246-6484 |
8.64% |
Raymond
James Omnibus
for Mutual funds Attn:
Courtney Waller 880
Carillon Pkwy St
Petersburg, FL 33716-1100 |
6.22% |
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
6.15% |
Government
Securities Fund Class
A |
|
Charles
Schwab & Co Inc 211
Main Street San
Francisco, CA 94105-1905 |
13.76% |
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
12.69% |
National
Financial Services LLC For
Exclusive Benefit Of Our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
10.41% |
MLPF&S For
The Sole Benefit of Its Customers Attn:
Fund Admin 4800
Deer Lake Dr. E, 2nd Floor Jacksonville,
FL 32246-6484 |
9.04% |
Government
Securities Fund Class
C |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St St.
Louis, MO 63103-2523 |
38.45% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
22.78% |
MLPF&S For
The Sole Benefit of Its Customers Attn:
Fund Admin 4800
Deer Lake Dr. E, 2nd Floor Jacksonville,
FL 32246-6484 |
12.40% |
Pershing
LLC 1
Pershing Plz Jersey
City, NJ 07399-0002 |
6.40% |
Government
Securities Fund Administrator
Class |
|
Wells
Fargo - Fixed Income Funds |
|
119 |
|
|
Principal
Fund Holders |
|
National
Financial Services, LLC For
Exclusive Benefit Of Our Customers Attn:
Mutual Fund Dept. 4th Floor 499
Washington Blvd. Jersey
City, NJ 07310-1995 |
24.02% |
Charles
Schwab & Co Inc Special
Custody Account FBO Exclusive
Benefit of Customers Reinvest
Account 211
Main Street San
Francisco, CA 94105-1905 |
15.79% |
Wells
Fargo Bank FBO Various
Retirement Plans 1525
West WT Harris Blvd Charlotte,
NC 28288-1076 |
11.02% |
Attn:
NPIO Trader Desk DCGT
As TTEE and/or Cust FBO
PFG-WF Merger Onibus Acct For Various
Retirement Plans 711
High Street Des
Moines, IA 50392-0001 |
9.04% |
Government
Securities Fund Institutional
Class |
|
MLPF&S For
The Sole Benefit of Its Customers Attn:
Fund Admin 4800
Deer Lake Dr. E, 2nd Floor Jacksonville,
FL 32246-6484 |
23.52% |
National
Financial Services Corp For
Exclusive Benefit Of Our Customers Attn:
Mutual Funds Dept. 4th Floor 499
Washington Blvd. Jersey
City, NJ 07310-1995 |
18.19% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
12.56% |
Charles
Schwab & Co Inc Special
Custody Account FBO Customers Attn
Mutual Funds 211
Main Street San
Francisco, CA 94105-1905 |
7.86% |
Morgan
Stanley Smith Barney LLC For
the Exclusive Benefit of its Customer 1 New
York Plz Floor 12 New
York, NY 10004-1965 |
5.86% |
High
Yield Bond Fund Class
A |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
20.74% |
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
7.00% |
High
Yield Bond Fund Class
C |
|
120 |
|
Wells
Fargo - Fixed Income Funds |
|
|
Principal
Fund Holders |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St St.
Louis, MO 63103-2523 |
43.14% |
Pershing
LLC 1
Pershing Plz Jersey
City, NJ 07399-0002 |
15.04% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
8.16% |
Raymond
James Omnibus
for Mutual Funds Attn:
Courtney Waller 880
Carillon Pkwy St
Petersburg, FL 33716-1100 |
7.72% |
RBC
Capital Markets LLC Mutual
Fund Omnibus Processing Omnibus Attn
Mutual Fund Ops Manager 60 S
6th Street Minneapolis,
MN 55402-4413 |
5.23% |
High
Yield Bond Fund Administrator
Class |
|
Charles
Schwab & Co Inc Special
Custody Account FBO For
Exclusive Benefit of Customers Reinvest
Account 211
Main Street San
Francisco, CA 94105-1905 |
78.20% |
High
Yield Bond Fund Institutional
Class |
|
Morgan
Stanley Smith Barney LLC For
the Exclusive Benefit of its Customer 1 New
York Plz Floor 12 New
York, NY 10004-1965 |
20.51% |
Wells
Fargo Spectrum Moderate Growth 525
Market Street, Floor 12 San
Francisco, CA 94105-2720 |
11.75% |
Wells
Fargo Spectrum Conservative Growth 525
Market Street, Floor 12 San
Francisco, CA 94105-2720 |
9.95% |
Wells
Fargo Spectrum Growth 525
Market Street, Floor 12 San
Francisco, CA 94105-2720 |
9.89% |
UBS
WM USA OMNI
Account M/F 1000
Harbor Blvd Weehawken,
NJ 07086-6761 |
7.01% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
6.92% |
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
6.03% |
Short
Duration Government Bond Fund Class
A |
|
Wells
Fargo - Fixed Income Funds |
|
121 |
|
|
Principal
Fund Holders |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St St.
Louis, MO 63103-2523 |
72.78% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
6.27% |
Short
Duration Government Bond Fund Class
C |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St St.
Louis, MO 63103-2523 |
87.45% |
Short
Duration Government Bond Fund Administrator
Class |
|
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
43.18% |
Charles
Schwab & Co Inc Special
Custody Account Exclusively
FBO the Customers 211
Main Street San
Francisco, CA 94105-1905 |
29.18% |
Wells
Fargo Bank FBO Various
Retirement Plans 1525
West WT Harris Blvd Charlotte,
NC 28262-8522 |
10.36% |
Short
Duration Government Bond Fund Institutional
Class |
|
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
22.41% |
Wells
Fargo Clearing Services LLC Special
Custody Account For The Exclusive
Benefit of Customer 2801
Market Street Saint
Louis, MO 63103-2523 |
16.56% |
The
Northern Trust Company Trustee Mayo
FDN SEG PIMCO LIQU PO
Box 92956 Chicago,
IL 60675-0001 |
16.07% |
Wells
Fargo Bank NA FBO
Collins John E. Admin TUA PO
Box 1533 Minneapolis,
MN 55480-1533 |
8.42% |
Voya
Institutional Trust Company 1
Orange Way #B3N Windsor,
CT 06095-4773 |
5.31% |
Voya
Institutional Trust Company FBO
City and County of San Francisco 30
Braintree Hill Office Park Braintree,
MA 02184-8747 |
5.25% |
Short
Duration Government Bond Fund Class
R6 |
|
122 |
|
Wells
Fargo - Fixed Income Funds |
|
|
Principal
Fund Holders |
|
National
Financial Services LLC 499
Washington Blvd Jersey
City, NJ 07310-1995 |
28.02% |
Vanguard
Fiduciary Trust Company Attn:
Outside Funds PO
Box 2600 Valley
Forge, PA 19482-2600 |
18.24% |
TIAA,
FSB Cut/TTEE FBO: Retirement
Plans For Which TIAA
Acts As Recordkeeper Attn:
Trust Operations 211
N. Broadway, Suite 1000 Saint
Louis, MO 63102-2748 |
15.06% |
Ascensus
Trust Company FBO Des
Architects and Engineers PSP PO
Box 10758 Fargo,
ND 58106-0758 |
12.96% |
Wells
Fargo Bank NA FBO
Omnibus Cash Cash PO
Box 1533 Minneapolis,
MN 55480-1533 |
10.53% |
Benefit
Trust Company For the Benefit
of Various American Northwest
Retirement Plans PO
Box 12765 Overland
Park, KS 66282-2765 |
8.62% |
Short-Term
Bond Plus Fund Class
A |
|
Wells
Fargo Clearing Services LLC Special
Custody Account For The Exclusive
Benefit of Customer 2801
Market Street Saint
Louis, MO 63103-2523 |
16.26% |
National
Financial Services LLC For
Exclusive Benefit of our Customers Attn:
Mutual Fund Dept 4th Fl 499
Washington Blvd Jersey
City, NJ 07310-1995 |
12.20% |
Charles
Schwab & Co Inc 211
Main Street San
Francisco, CA 94105-1905 |
10.54% |
Short-Term
Bond Plus Fund Class
C |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St St.
Louis, MO 63103-2523 |
64.65% |
National
Financial Services LLC For Exclusive
Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
7.10% |
American
Enterprise Investment Services 707
2nd Ave. South Minneapolis,
MN 55402-2450 |
11.02% |
Short-Term
Bond Plus Fund Class
R6 |
|
Wells
Fargo - Fixed Income Funds |
|
123 |
|
|
Principal
Fund Holders |
|
Wells
Fargo Bank NA Omnibus
Cash Cash PO
Box 1533 Minneapolis,
MN 55480-1533 |
99.75% |
Short-Term
Bond Plus Fund Institutional
Class |
|
MLPF&S For
The Sole Benefit of Its Customers Attn:
Fund Admin 4800
Deer Lake Dr. E, 2nd Floor Jacksonville,
FL 32246-6484 |
24.07% |
National
Financial Services, LLC For
Exclusive Benefit Of Our Customers Attn:
Mutual Fund Dept. 4th Floor 499
Washington Blvd. Jersey
City, NJ 07310-1995 |
17.22% |
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
13.92% |
Cognizant
US Foundation 500
Franklin W Burr Blvd. Teaneck,
NJ 07666-6804 |
10.14% |
United
Furniture Workers Insurance
Fund Attn
Dee Anne Walker 1910
Air Lane Dr Nashville,
TN 37210-3810 |
8.26% |
Western
Governors University 4001
S 700 E Suite 700 Salt
Lake City, UT 84107-2533 |
6.74% |
Short-Term
High Yield Bond Fund Class
A |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
26.82% |
National
Financial Services, LLC For
Exclusive Benefit Of Our Customers Attn
Mutual Fund Dept. 4th Floor 499
Washington Blvd. Jersey
City, NJ 07310-1995 |
15.39% |
Charles
Schwab & Co Inc Special
Custody Account Attn:
Mutual Funds 211
Main Street San
Francisco, CA 94105-1905 |
10.19% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
6.64% |
Morgan
Stanley Smith Barney For
the Exclusive Benefit of its Customers 1 New
York Plz, Floor 12 New
York, NY 10004-1965 |
5.04% |
Short-Term
High Yield Bond Fund Class
C |
|
124 |
|
Wells
Fargo - Fixed Income Funds |
|
|
Principal
Fund Holders |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St St.
Louis, MO 63103-2523 |
65.84% |
American
Enterprise Investment Services 707
2nd Ave., South Minneapolis,
MN 55402-2405 |
13.94% |
Short-Term
High Yield Bond Fund Administrator
Class |
|
Charles
Schwab & Co Inc Special
Custody Account Attn:
Mutual Funds 211
Main Street San
Francisco, CA 94105-1905 |
76.55% |
TD
Ameritrade Inc FBO
Our Customers PO
Box 2226 Omaha,
NE 68103-2226 |
9.88% |
Short-Term
High Yield Bond Fund Institutional
Class |
|
Morgan
Stanley Smith Barney LLC For
the Exclusive Benefit of its Customer 1 New
York Plz Floor 12 New
York, NY 10004-1965 |
17.45% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
14.33% |
UBS
WM USA Omni
Account M/F Special
Custody Account EBOC 1000
Harbor Blvd Weehawken,
NJ 07086-6761 |
14.26% |
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
9.07% |
National
Financial Services LLC For
Exclusive Benefit of our Customers Attn:
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
7.60% |
Charles
Schwab & Co Inc Special
Custody a/c FBO Customers Attn
Mutual Funds 211
Main Street San
Francisco, CA 94105-1905 |
5.53% |
Ultra
Short-Term Income Fund Class
A |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St St.
Louis, MO 63103-2523 |
29.43% |
National
Financial Services, LLC For
Exclusive Benefit Of Our Customers Attn
Mutual Fund Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
18.59% |
Wells
Fargo - Fixed Income Funds |
|
125 |
|
|
Principal
Fund Holders |
|
Charles
Schwab & Co Inc Speical
Custody a/c FBO Customers Attn
Mutual Funds 211
Main Street San
Francisco, CA 94105-1905 |
5.08% |
Ultra
Short-Term Income Fund Class
C |
|
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
58.13% |
American
Enterprise Investment Services 707
2nd Ave South Minneapolis,
MN 55402-2405 |
8.82% |
LPL
Financial Omnibus
Customer Account Attn:
Mutual Fund Trading 4707
Executive Drive San
Diego, CA 92121-3091 |
7.19% |
MLPF&S
For The Sole Benefit of
Its Customers Attn:
Mutual Fund Administration 4800
Deer Lake Dr E FL 3 Jacksonville,
FL 32246-6484 |
5.86% |
Raymond
James Omnibus
for Mutual Funds Attn:
Courtney Waller 880
Carillon Pkwy St
Petersburg, FL 33716-1100 |
5.29% |
Ultra
Short-Term Income Fund Class
A2 |
|
Morgan
Stanley Smith Barney For
the Exclusive Benefit of its Customers 1 New
York Plz, Floor 12 New
York, NY 10004-1932 |
99.60% |
Ultra
Short-Term Income Fund Administrator
Class |
|
Wells
Fargo Clearing Services LLC Special
Custody Account For The Exclusive
Benefit of Customer 2801
Market Street Saint
Louis, MO 63103-2523 |
26.31% |
Charles
Schwab & Co Inc 211
Main Street San
Francisco, CA 94105-1905 |
26.29% |
Raymond
James & Assoc Inc FBO
Diane Duncan Mayer TTEE U/W
David W Duncan FBO
David W Duncan Trust 921
Abbots Ln Denton,
TX 76205-8906 |
18.63% |
Wells
Fargo Bank NA Iasis
Executive Savings Plan 1525
West WT Harris Blvd Charlotte,
NC 28288-1076 |
8.13% |
Pershing
LLC 1
Pershing Plz Jersey
City, NJ 07399-0002 |
5.34% |
126 |
|
Wells
Fargo - Fixed Income Funds |
|
|
Principal
Fund Holders |
|
Ultra
Short-Term Income Fund Institutional
Class |
|
MLPF&S For
The Sole Benefit of Its Customers Attn:
Fund Admin 4800
Deer Lake Dr. E, 2nd Floor Jacksonville,
FL 32246-6484 |
27.03% |
Wells
Fargo Bank NA FBO Omnibus
Account Cash/Cash PO
Box 1533 Minneapolis,
MN 55480-1533 |
22.37% |
Wells
Fargo Clearing Services LLC Special
Custody Acct for the Exclusive
Benefit of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
18.24% |
For
purposes of the 1940 Act, any person who owns directly or through one or more
controlled companies more than 25%
of the voting securities of a company is presumed to “control” such company.
Accordingly, to the extent
that a person identified in the foregoing table is identified as the beneficial
owner of more than 25% of a Fund, or
is identified as the record owner of more than 25% of a Fund and has voting
and/or investment powers, it may be
presumed to control such Fund. A controlling person’s vote could have a more
significant effect on matters
presented to shareholders for approval than the vote of other Fund
shareholders.
Wells
Fargo - Fixed Income Funds |
|
127 |