STATEMENT
OF ADDITIONAL INFORMATION
Dated
August 28,
2023
AIM
Sector Funds (Invesco Sector Funds)
This Statement of
Additional Information (the SAI) relates to each portfolio (each a Fund,
collectively the Funds) of AIM Sector Funds (Invesco Sector Funds) (the
Trust) listed below. Each Fund offers separate classes of shares as
follows:
|
Fund |
A |
C |
R |
Y |
R5 |
R6 |
Investor |
Prospectus
Date |
|
Invesco
Comstock Fund |
ACSTX |
ACSYX |
ACSRX |
ACSDX |
ACSHX |
ICSFX |
N/A |
August
28, 2023 |
|
Invesco
Comstock Select Fund |
CGRWX |
CGRCX |
CGRNX |
CGRYX |
IOVVX |
OGRIX |
N/A |
August
28, 2023 |
|
Invesco
Dividend Income Fund |
IAUTX |
IUTCX |
IRTCX |
IAUYX |
FSIUX |
IFUTX |
FSTUX |
August
28, 2023 |
|
Invesco
Energy Fund |
IENAX |
IEFCX |
N/A |
IENYX |
IENIX |
IENSX |
FSTEX |
August
28, 2023 |
|
Invesco
Gold & Special Minerals Fund |
OPGSX |
OGMCX |
OGMNX |
OGMYX |
IOGYX |
OGMIX |
N/A |
August
28, 2023 |
|
Invesco
Small Cap Value Fund |
VSCAX |
VSMCX |
VSRAX |
VSMIX |
N/A |
SMVSX |
N/A |
August
28, 2023 |
|
Invesco
Technology Fund |
ITYAX |
ITHCX |
N/A |
ITYYX |
FTPIX |
FTPSX |
FTCHX |
August
28, 2023 |
|
Invesco
Value Opportunities Fund |
VVOAX |
VVOCX |
VVORX |
VVOIX |
VVONX |
VVOSX |
N/A |
August
28, 2023 |
This SAI is not a
Prospectus, and it should be read in conjunction with the Prospectuses for the
Funds listed above. Invesco Comstock Select Fund and Invesco Gold & Special
Minerals Fund were organized on May 24, 2019 for the purpose of acquiring the
assets and liabilities of corresponding predecessor funds (as defined below).
Portions of each Fund's financial statements are incorporated into this SAI by
reference to each Fund’s most recent shareholder report for its fiscal year
ended April
30, 2023.
You may obtain,
without charge, a copy of any Prospectus and/or shareholder report for any Fund
listed above from an authorized dealer or by writing to:
Invesco
Investment Services, Inc.
P.O. Box 219078
Kansas City, MO 64121-9078
P.O. Box 219078
Kansas City, MO 64121-9078
or by calling (800)
959-4246
or on the Internet:
http://www.invesco.com/us
Any reference to
the term “Fund” or “Funds” throughout this SAI refers to each Fund named above
unless otherwise indicated.
ASEF-SOAI-1
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ii
GENERAL
INFORMATION ABOUT THE TRUST
Fund
History
AIM
Sector Funds (Invesco Sector Funds) (the Trust) is a Delaware statutory trust
registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end series management
investment company. The Trust was organized as a Delaware statutory trust on
July 24, 2003. Under the Trust's Agreement and Declaration of Trust, as amended,
(the Trust Agreement), the Board of Trustees of the Trust (the Board) is
authorized to create new series of shares without the necessity of a vote of
shareholders of the Trust.
Prior
to April 30, 2010, the Trust was known as AIM Sector Funds.
The
following table shows each Fund’s current name and Fund history:
|
Fund
Name |
Fund
History |
|
Invesco
Comstock Fund |
Prior
to September 24, 2012, Invesco Comstock Fund was known as Invesco Van
Kampen
Comstock
Fund.
On
June 1, 2010, Invesco Van Kampen Comstock Fund assumed the assets and
liabilities of
Van
Kampen Comstock Fund. |
|
Invesco
Comstock Select Fund |
Prior
to February 28, 2020, Invesco Comstock Select Fund was known as Invesco
Oppenheimer
Value Fund.
On
May 24, 2019, Invesco Comstock Select Fund assumed the assets and
liabilities of its
predecessor
fund Oppenheimer Value Fund. |
|
Invesco
Dividend Income Fund |
Prior
to February 6, 2013, Invesco Dividend Income Fund was known as Invesco
Utilities Fund.
Prior
to April 30, 2010, Invesco Utilities Fund was known as AIM Utilities
Fund. |
|
Invesco
Energy Fund |
Prior
to April 30, 2010, Invesco Energy Fund was known as AIM Energy
Fund. |
|
Invesco
Gold & Special Minerals
Fund |
Prior
to September 30, 2020, Invesco Gold & Special Minerals Fund was known
as Invesco
Oppenheimer
Gold & Special Minerals Fund.
On
May 24, 2019, Invesco Oppenheimer Gold & Special Minerals Fund assumed
the assets
and
liabilities of its predecessor fund Oppenheimer Gold & Special
Minerals Fund. |
|
Invesco
Small Cap Value Fund |
Prior
to September 24, 2012, Invesco Small Cap Value Fund was known as Van
Kampen Small
Cap
Value Fund.
On
June 1, 2010, Invesco Van Kampen Small Cap Value Fund assumed the assets
and
liabilities
of Van Kampen Small Cap Value Fund. |
|
Invesco
Technology Fund |
Prior
to April 30, 2010, Invesco Technology Fund was known as AIM Technology
Fund. |
|
Invesco
Value Opportunities Fund |
Prior
to September 24, 2012, Invesco Value Opportunities Fund was known as
Invesco Van
Kampen
Value Opportunities Fund.
On
June 1, 2010, Invesco Van Kampen Value Opportunities Fund assumed the
assets and
liabilities
of Van Kampen Value Opportunities
Fund. |
Shares
of Beneficial Interest
Shares
of beneficial interest of the Trust are redeemable at their net asset value at
the option of the shareholder or at
the option of the Trust, in accordance with any applicable provisions of the
Trust Agreement and applicable law, subject in certain circumstances to a
contingent deferred sales charge, if applicable.
The
Trust allocates cash and property it receives from the issue or sale of shares,
together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds thereof, to the appropriate Fund, subject only to the rights of
creditors of that Fund. These assets constitute the assets belonging to each
Fund, are segregated on the Trust’s books, and are charged with the liabilities
and expenses of such Fund and its respective classes. The Trust allocates any
general liabilities and expenses of the Trust not readily identifiable as
belonging to a particular Fund primarily on the basis of relative net assets or
other relevant factors, subject to oversight by the Board.
Each
share of each Fund represents an equal pro rata interest in that Fund with each
other share and is entitled to
dividends and other distributions with respect to the Fund, which may be from
income, capital gains,
capital or
distributions in kind, as declared by the Board.
1
Each
class of shares of a Fund represents a proportionate undivided interest in the
net assets belonging to that Fund.
Differing sales charges and expenses will result in differing net asset values
and dividends and distributions. Upon any liquidation of the Trust,
shareholders of each class are entitled to share pro rata in the net assets
belonging to the applicable Fund allocable to such class available for
distribution after satisfaction of, or reasonable provision for, the outstanding
liabilities of the Fund allocable to such class.
The
Trust Agreement provides that each shareholder, by virtue of having become a
shareholder of the Trust, is bound by
terms of the Trust Agreement and the Trust’s Bylaws. Ownership of shares does
not make shareholders third party beneficiaries of any contract entered into by
the Trust.
The
Trust is not required to hold annual or regular meetings of shareholders.
Meetings of shareholders of a Fund or class
will be held for any purpose determined by the Board, including from time to
time to consider matters requiring a vote of such shareholders in accordance
with the requirements of the 1940 Act, state law or the provisions of the Trust
Agreement. It is not expected that shareholder meetings will be held
annually.
The
Trust Agreement provides that the Board may authorize (i) a merger,
consolidation or sale of assets (including, but not
limited to, mergers, consolidations or sales of assets between two Funds, or
between a Fund and a series of any other registered investment company), and
(ii) the combination of two or more classes of shares of a Fund into a single
class, each without shareholder approval but subject to applicable requirements
under the 1940 Act and state law.
Each
share of a Fund generally has the same voting, dividend, liquidation and other
rights; however, each class of shares of
a Fund is subject to different sales loads, conversion features, exchange
privileges and class-specific expenses, as applicable.
Except
as specifically noted above, shareholders of each Fund are entitled to one vote
per share (with proportionate
voting for fractional shares), irrespective of the relative net asset value of
the shares of the Fund. However, on matters affecting an individual Fund or
class of shares, a separate vote of shareholders of that Fund or class is
required. Shareholders of a Fund or class are not entitled to vote on any matter
which does not affect that Fund or class but that requires a separate vote of
another Fund or class. An example of a matter that would be voted on separately
by shareholders of each Fund is the approval of the advisory agreement with
Invesco Advisers, Inc. (the Adviser or Invesco).
When
issued, shares of each Fund are fully paid and nonassessable, have no preemptive
or subscription rights, and are
freely transferable. Shares do not have cumulative voting rights in connection
with the election of Trustees or on any other matter.
Under
Delaware law, shareholders of a Delaware statutory trust shall be entitled to
the same limitation of personal liability
extended to shareholders of private for-profit corporations organized under
Delaware law. There is a remote possibility, however, that shareholders could,
under certain circumstances, be held liable for the obligations of the Trust to
the extent the courts of another state, which does not recognize such limited
liability, were to apply the laws of such state to a controversy involving such
obligations. The Trust Agreement disclaims shareholder personal liability for
the debts, liabilities, obligations and expenses of the Trust and requires that
every undertaking of the Trust or the Board relating to the Trust or any Fund
include a recitation limiting such obligation to the Trust and its assets or to
one or more of the Funds and the assets belonging thereto. The Trust Agreement
provides for indemnification out of the property of a Fund (or class, as
applicable) for all losses and expenses of any shareholder of such Fund held
personally liable solely on account of being or having been a
shareholder.
The
trustees and officers of the Trust will not be liable for any act, omission or
obligation of the Trust or any trustee or
officer; however, a trustee or officer is not protected against any liability to
the Trust or to the shareholders to which a trustee or officer would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office
with the Trust or applicable Fund (Disabling Conduct). The Trust’s Bylaws
generally provide for indemnification by the Trust of the trustees, officers and
employees or agents of the Trust, provided that such persons have not engaged in
Disabling Conduct. Indemnification does not extend to judgments or amounts paid
in settlement in any actions by or in the right of the Trust. The Trust
Agreement also authorizes the purchase of liability
2
insurance
on behalf of trustees and officers with Fund assets. The Trust’s Bylaws provide
for the advancement of
payments of expenses to current and former trustees, officers and employees or
agents of the Trust, or anyone serving at their request, in connection with the
preparation and presentation of a defense to any claim, action, suit or
proceeding, for which such person would be entitled to indemnification; provided
that any advancement of expenses would be reimbursed unless it is ultimately
determined that such person is entitled to indemnification for such
expenses.
The
Trust Agreement provides that any Trustee who serves as chair of the
Board,
a
member or chair of a committee of the Board, lead independent Trustee, or an
expert on any topic or in any area (including an audit committee financial
expert), or in any other special appointment will not be subject to any greater
standard of care or liability because of such position.
The
Trust Agreement provides a detailed process for the bringing of derivative
actions by shareholders. A shareholder may
only bring a derivative action on behalf of the Trust if certain conditions are
met. Among other things, such conditions: (i) require shareholder(s) to make a
pre-suit demand on the Trustees (unless such effort is not likely to succeed
because a majority of the Board or the committee established to consider the
merits of such action are not independent Trustees under Delaware law); (ii)
require 10% of the beneficial owners to join in the pre-suit demand, or if a
pre-suit demand is not required, require 10% of beneficial owners to join in the
demand for the Board to commence such action; and (iii) afford the Trustees a
reasonable amount of time to consider the request and investigate the basis of
the claims (including designating a committee to consider the demand and hiring
counsel or other advisers). These conditions generally are intended to provide
the Trustees with the ability to pursue a claim if they believe doing so would
be in the best interests of the Trust and its shareholders and to preclude the
pursuit of claims that the Trustees determine to be without merit or otherwise
not in the Trust’s best interest to pursue. Insofar as the federal securities
laws supersede state law, these provisions do not apply to shareholder
derivative claims that arise under the federal securities laws.
The
Trust Agreement also generally requires that actions by shareholders in
connection with or against the Trust or a Fund
be brought only in certain Delaware courts,
provided that
actions arising under the U.S. federal securities laws are required to be
brought in the United States District Court for the Southern District of New
York and that the right to jury trial be waived to the fullest extent permitted
by law. These provisions may result in increased shareholder costs in pursuing a
shareholder derivative claim and/or may limit a shareholder's ability to bring a
claim in a different forum.
Share
Certificates
Shareholders
of the Funds do not have the right to demand or require the Trust to issue share
certificates and share
certificates are not issued. Any certificate previously issued with respect to
any shares is deemed to be cancelled without any requirement for surrender to
the Trust.
DESCRIPTION
OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
Classification
The
Trust is an open-end management investment company. Each of the Funds (except
for Invesco Comstock Select
Fund, Invesco Energy Fund, Invesco Gold & Special Minerals Fund and Invesco
Technology Fund) is classified as “diversified” for purposes of the 1940 Act.
Invesco Comstock Select Fund, Invesco Energy Fund, Invesco Gold & Special
Minerals Fund and Invesco Technology Fund are classified as “non-diversified”
for purposes of the 1940 Act, which means each Fund can invest a greater
percentage of its assets in a small number of issuers or any one issuer than a
diversified fund can. However,
Invesco Gold & Special Minerals Fund is currently managed as a diversified
fund and it is anticipated that, as of December 23, 2023, the Fund will no
longer be classified as a non-diversified fund and all references to the Fund
operating as non-diversified are removed from the Fund’s prospectus and
SAI.
3
Investment
Strategies and Risks
Set
forth below are detailed descriptions of the various types of securities and
investment techniques that Invesco and/or the
Sub-Advisers (as defined herein) may use in managing the Funds, as well as the
risks associated with those types of securities and investment techniques. The
descriptions of the types of securities and investment techniques below
supplement the discussion of principal investment strategies and risks contained
in each Fund's Prospectus. Where a particular type of security or investment
technique is not discussed in a Fund’s Prospectus, that security or investment
technique is not a principal investment strategy.
A
Fund may invest in all of the following types of investments (unless otherwise
indicated). A Fund might not invest in all
of these types of securities or use all of these techniques at any one time.
Invesco and/or the Sub-Advisers may invest in other types of securities and may
use other investment techniques in managing the Funds as well as securities and
techniques not described. A Fund’s transactions in a particular type of security
or use of a particular technique are subject to limitations imposed by a Fund’s
investment objective, policies and restrictions described in that Fund’s
Prospectus and/or this SAI, as well as the federal securities laws.
Unless
a Fund’s prospectus or this SAI states that a percentage limitation or
fundamental or non-fundamental restriction
applies on an ongoing basis, it applies only at the time a Fund makes an
investment. That means a Fund is not required to sell securities to meet the
percentage limits or investment restrictions if the value of the investment
increases in proportion to the size of a Fund. Percentage limits on borrowing
apply on an ongoing basis.
Invesco
Gold & Special Minerals Fund will seek to gain exposure to the commodity
market through investments in a
wholly-owned subsidiary of the Fund organized under the laws of the Cayman
Islands (the Subsidiary). It is expected that the Subsidiary will invest in gold
bullion and other precious metals, Gold ETFs (as defined in the Fund’s
prospectus), commodity-linked derivatives related to gold or other special
minerals (including commodity futures, financial futures, options and swap
contracts), and certain, fixed income securities and other investments that may
serve as margin or collateral for its derivatives positions.
The
Funds' investment objectives, policies, strategies and practices described below
are non-fundamental and may be changed
without approval of the holders of the Funds’ voting securities, unless
otherwise indicated.
Equity
Investments
Common
Stock.
Common stock is issued by a company principally to raise cash for business
purposes and represents an equity or ownership interest in the issuing company.
Common stockholders are typically entitled to vote on important matters of the
issuing company, including the selection of directors, and may receive dividends
on their holdings. A Fund participates in the success or failure of any company
in which it holds common stock. In the event a company is liquidated or declares
bankruptcy, the claims of bondholders, other debt holders, owners of preferred
stock and general creditors take precedence over the claims of those who own
common stock.
The
prices of common stocks change in response to many factors including the
historical and prospective earnings of the
issuing company, the value of its assets, general economic conditions, interest
rates, investor perceptions and market liquidity.
Over-the-Counter
Securities. Securities of
small- and mid-capitalization issuers may be traded on securities exchanges or
in the over-the-counter market. The over-the-counter markets, both in the U.S.
and abroad, may have less liquidity than securities exchanges. That lack of
liquidity can affect the price the Fund is able to obtain when it wants to sell
a security, because if there are fewer buyers and less demand for a particular
security, the Fund might not be able to sell it at an acceptable price or might
have to reduce the price in writing in order to dispose of the security. There
are a number of over-the-counter markets in the U.S., as well as those abroad,
as long as a dealer is willing to make a market in a particular
security.
4
Preferred
Stock. Preferred stock,
unlike common stock, often offers a specified dividend rate payable from a
company’s earnings. Preferred stock also generally has a preference over common
stock on the distribution of a company’s assets in the event the company is
liquidated or declares bankruptcy; however, the rights of preferred stockholders
on the distribution of a company’s assets in the event of a liquidation or
bankruptcy are generally subordinate to the rights of the company’s debt holders
and general creditors. If interest rates rise, the fixed dividend on preferred
stocks may be less attractive, causing the price of preferred stocks to
decline.
Some
fixed rate preferred stock may have mandatory sinking fund provisions which
provide for the stock to be retired or
redeemed on a predetermined schedule, as well as call/redemption provisions
prior to maturity, which can limit the benefit of any decline in interest rates
that might positively affect the price of preferred stocks. Preferred stock
dividends may be “cumulative,” requiring all or a portion of prior unpaid
dividends to be paid before dividends are paid on the issuer’s common stock.
Preferred stock may be “participating,” which means that it may be entitled to a
dividend exceeding the stated dividend in certain cases. In some cases an issuer
may offer auction rate preferred stock, which means that the interest to be paid
is set by auction and will often be reset at stated intervals.
Equity-Linked
Securities. Equity-linked
securities are instruments whose value is based upon the value of one or more
underlying equity securities, a reference rate or an index. Equity-linked
securities come in many forms and may include features, among others, such as
the following: (i) may be issued by the issuer of the underlying equity security
or by a company other than the one to which the instrument is linked (usually an
investment bank), (ii) may convert into equity securities, such as common stock,
within a stated period from the issue date or may be redeemed for cash or some
combination of cash and the linked security at a value based upon the value of
the underlying equity security within a stated period from the issue date, (iii)
may have various conversion features prior to maturity at the option of the
holder or the issuer or both, (iv) may limit the appreciation value with caps or
collars of the value of the underlying equity security and (v) may have fixed,
variable or no interest payments during the life of the security which reflect
the actual or a structured return relative to the underlying dividends of the
linked equity security. Investments in equity-linked securities may subject a
Fund to additional risks not ordinarily associated with investments in other
equity securities. Because equity-linked securities are sometimes issued by a
third party other than the issuer of the linked security, a Fund is subject to
risks if the underlying equity security, reference rate or index underperforms
or if the issuer defaults on the payment of the dividend or the common stock at
maturity. In addition, the trading market for particular equity-linked
securities may be less liquid, making it difficult for a Fund to dispose of a
particular security when necessary and reduced liquidity in the secondary market
for any such securities may make it more difficult to obtain market quotations
for valuing the Fund’s portfolio.
Small-
and Mid-Capitalization Companies.
Small-capitalization (small-cap) companies may be either established or newer
companies, including “unseasoned” companies that have typically been in
operation for less than three years. Mid-capitalization (mid-cap) companies are
generally companies that have completed their initial start-up cycle, and in
many cases have established markets and developed seasoned market teams.
While smaller companies might offer greater opportunities for gain than larger
companies, they also involve greater risk of loss. They may be more sensitive to
changes in a company’s earnings expectations and may experience more abrupt and
erratic price movements. Small- and mid-cap companies’ securities often trade in
lower volumes and in many instances, are traded over-the-counter or on a
regional securities exchange, where the frequency and volume of trading is
substantially less than is typical for securities of larger companies traded on
national securities exchanges. Therefore, the securities of smaller companies
may be subject to wider price fluctuations and it might be harder for the Fund
to dispose of its holdings at an acceptable price when it wants to sell them.
Small- and mid-cap companies may not have established markets for their products
or services and may have fewer customers and product lines. They may have more
limited access to financial resources and may not have the financial strength to
sustain them through business downturns or adverse market conditions. Since
small- and mid-cap companies typically reinvest a high proportion of their
earnings in their business, they may not pay dividends for some time,
particularly if they are newer companies. Small- and mid-cap companies may have
unseasoned management or less depth in management skill than larger, more
established companies. They may be more reliant on the efforts of
5
particular
members of their management team and management changes may pose a greater risk
to the success of the
business. Securities of small, unseasoned companies may be particularly
volatile, especially in the short-term, and may have very limited liquidity in a
declining market. It may take a substantial period of time to realize a gain on
an investment in a small- or mid-cap company, if any gain is realized at
all.
When
the Fund invests in smaller company securities that might trade infrequently,
investors might seek to trade Fund
shares based on their knowledge or understanding of the value of those
securities (this is sometimes referred to as “price arbitrage”). If such price
arbitrage were successful, it might interfere with the efficient management of
the Fund’s portfolio and the Fund may be required to sell securities at
disadvantageous times or prices to satisfy the liquidity requirements created by
that activity. Successful price arbitrage might also dilute the value of fund
shares held by other shareholders.
Convertible
Securities. Convertible
securities are generally bonds, debentures, notes, preferred stocks or other
securities or investments that may be converted or exchanged (by the holder or
by the issuer) into shares of the underlying common stock (or cash or securities
of equivalent value) at a stated exchange ratio or predetermined price (the
conversion price). A convertible security is designed to provide current income
and also the potential for capital appreciation through the conversion feature,
which enables the holder to benefit from increases in the market price of the
underlying common stock. A convertible security may be called for redemption or
conversion by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible security
held by a Fund is called for redemption or conversion, the Fund could be
required to tender it for redemption, convert it into the underlying common
stock, or sell it to a third party, which may have an adverse effect on the
Fund’s ability to achieve its investment objectives. Convertible securities have
general characteristics similar to both debt and equity securities.
A
convertible security generally entitles the holder to receive interest paid or
accrued until the convertible security matures or
is redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to non-convertible debt obligations and are
designed to provide for a stable stream of income with generally higher yields
than common stocks. However, there can be no assurance of current income because
the issuers of the convertible securities may default on their obligations.
Convertible securities rank senior to common stock in a corporation’s capital
structure and, therefore, generally entail less risk than the corporation’s
common stock. Convertible securities are subordinate in rank to any senior debt
obligations of the issuer, and, therefore, an issuer’s convertible securities
entail more risk than its debt obligations. Moreover, convertible securities are
often rated below investment grade or not rated because they fall below debt
obligations and just above common stock in order of preference or priority on an
issuer’s balance sheet. To the extent that a Fund invests in convertible
securities with credit ratings below investment grade, such securities may have
a higher likelihood of default, although this may be somewhat offset by the
convertibility feature.
Convertible
securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar credit
quality because of the potential for capital appreciation. The common stock
underlying convertible securities may be issued by a different entity than the
issuer of the convertible securities.
The
value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its “investment value.” The
investment value of the convertible security typically will fluctuate based on
the credit quality of the issuer and will fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its “conversion value,” which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock, and will therefore be subject to risks relating to the activities
of the issuer and general market and economic conditions. Depending upon the
relationship of the conversion price to the market value of the underlying
security, a convertible security may trade more like an equity security than a
debt instrument.
6
If,
because of a low price of the common stock, the conversion value is
substantially below the investment value of the
convertible security, the price of the convertible security is governed
principally by its investment value. Generally, if the conversion value of a
convertible security increases to a point that approximates or exceeds its
investment value, the value of the security will be principally influenced by
its conversion value. A convertible security will sell at a premium over its
conversion value to the extent investors place value on the right to acquire the
underlying common stock while holding an income-producing security.
While
a Fund uses the same criteria to rate a convertible debt security that it uses
to rate a more conventional debt
security, a convertible preferred stock is treated like a preferred stock for
the Fund’s financial reporting, credit rating and investment limitation
purposes.
Contingent
Convertible Securities (CoCos). CoCos (also
referred to as contingent capital securities) are a form of hybrid fixed income
security typically issued by non-U.S. banks that may either convert into common
stock of the issuer or undergo a principal write-down by a predetermined
percentage upon the occurrence of a “trigger” event, such as if (a) the issuer’s
capital ratio falls below a specified level or (b) certain regulatory events,
such as a change in regulatory capital requirements, affect the issuer’s
continued viability. Unlike traditional convertible securities, the conversion
is not voluntary and the equity conversion or principal write-down features are
tailored to the issuing banking institution and its regulatory requirements. In
certain circumstances, CoCos may be automatically written down to zero, thereby
cancelling the securities, and investors (including a Fund) could lose the
entire value of their investment even as the issuer remains in business. If such
an event occurs, an investor may not have any rights to repayment of the
principal amount of the securities that has not become due. Additionally, an
investor may not be able to collect interest payments or dividends on such
securities.
CoCos
are subject to credit, interest rate and market risks associated with fixed
income and equity securities
generally, along with risks typically applicable to convertible securities.
CoCos are also subject to loss absorption risk because coupon payments can
potentially be cancelled or deferred at the issuer’s discretion or at the
request of the relevant regulatory authority in order to help the bank absorb
losses. Additionally, certain call provisions permit an issuer to repurchase
CoCos if the regulatory environment or tax treatment of the security (e.g., tax
deductibility of interest payments) changes. This may result in a potential loss
to the Fund if the price at which the issuer calls or repurchases the CoCos is
lower than the initial purchase price by the Fund.
CoCos
are subordinate in rank to traditional convertible securities and other debt
obligations of an issuer in the issuer’s
capital structure, and therefore, CoCos entail more risk than an issuer’s other
debt obligations.
CoCos
are generally speculative and their market value may fluctuate based on a number
of unpredictable
factors, including, but not limited to, the creditworthiness of the issuer
and/or fluctuations in the issuer’s capital ratios, supply and demand for CoCos,
general market conditions and available liquidity, and economic, financial and
political events affecting the particular issuer or markets in
general.
Enhanced
Convertible Securities. “Enhanced”
convertible securities are equity-linked hybrid securities that automatically
convert to equity securities on a specified date. Enhanced convertibles have
been designed with a variety of payoff structures, and are known by a variety of
different names. Three features common to enhanced convertible securities are
(i) conversion to equity securities at the maturity of the convertible (as
opposed to conversion at the option of the security holder in the case of
ordinary convertibles); (ii) capped or limited appreciation potential relative
to the underlying common stock; and (iii) dividend yields that are typically
higher than that on the underlying common stock. Thus, enhanced convertible
securities offer holders the opportunity to obtain higher current income than
would be available from a traditional equity security issued by the same company
in return for reduced participation in the appreciation potential of the
underlying common stock. Other forms of enhanced convertible securities may
involve arrangements with no interest or dividend payments made until maturity
of the security or an enhanced principal amount received at maturity based on
the yield and value of the underlying equity security during the security’s term
or at maturity.
Synthetic
Convertible Securities. A synthetic
convertible security is a derivative position composed of two or more distinct
securities whose investment characteristics, taken together, resemble those of
traditional
7
convertible
securities, i.e., fixed income and the right to acquire the underlying equity
security. 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 security or
index.
Synthetic
convertibles are typically offered by financial institutions in private
placement transactions and are typically sold
back to the offering institution. Upon conversion, the holder generally receives
from the offering institution an amount in cash equal to the difference between
the conversion price and the then-current value of the underlying security.
Synthetic convertible securities differ from true convertible securities in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Purchasing a synthetic convertible security
may provide greater flexibility than purchasing a traditional convertible
security, including the ability to combine components representing distinct
issuers, or to combine a fixed income security with a call option on a stock
index, when the Adviser determines that such a combination would better further
a Fund’s investment goals. In addition, the component parts of a synthetic
convertible security may be purchased simultaneously or separately.
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. In addition, in purchasing a
synthetic convertible security, a Fund may have counterparty risk with respect
to the financial institution or investment bank that offers the
instrument.
Alternative
Entity Securities. Alternative entity
securities are the securities of entities that are formed as limited
partnerships, limited liability companies, business trusts or other
non-corporate entities that are similar to common or preferred stock of
corporations.
Initial
Public Offerings. Initial Public
Offerings (IPOs) of securities issued by unseasoned companies with little or no
operating history are risky and their prices are highly volatile, but they can
result in very large gains in their initial trading. Attractive IPOs are often
oversubscribed and may not be available to a Fund, or only in very limited
quantities. Thus, when a Fund’s size is smaller, any gains from IPOs will have
an exaggerated impact on the Fund’s reported performance than when the Fund is
larger. A Fund may engage in short-term trading in connection with its IPO
investments, which could produce higher trading costs and adverse tax
consequences. There can be no assurance that a Fund will have favorable IPO
investment opportunities.
Special
Purpose Acquisition Companies. Special purpose
acquisition companies (“SPACs”) are investment entities, acquired through
stocks, warrants and other securities, that pool funds to seek potential
acquisition or merger opportunities. A SPAC is a publicly traded company that
raises funds through an initial public offering (“IPO”) for the purpose of
acquiring or merging with another company to be identified subsequent to the
SPAC’s IPO. The securities of a SPAC are often issued in “units” that include
one share of common stock and one right or warrant (or partial right or warrant)
conveying the right to purchase additional common shares or partial shares of
the SPAC. In some cases, the rights and warrants may be separated from the
common stock at the election of the holder, after which they may become freely
tradeable. If a Fund purchases shares of a SPAC in an IPO it will generally bear
a sales commission, which may be significant.
Unless
and until a business combination transaction is completed, a SPAC generally
invests its assets (which are
constituted solely by the proceeds of the IPO), less a portion retained to cover
expenses, in U.S. government securities, money market funds and similar
investments whose returns or yields may be significantly lower than those of a
Fund’s other investments. If an acquisition or merger that meets the
requirements for the SPAC is not completed within a pre-established period of
time, the invested funds are returned to the SPAC’s shareholders, less certain
permitted expenses, and any rights or warrants issued by the SPAC will expire
worthless. Under any circumstances in which a Fund receives a refund of all or a
portion of its original investment in a SPAC, the returns on that investment may
be negligible, and a Fund may be subject to opportunity costs to the extent that
alternative investments would have produced higher returns. Further, a Fund may
be delayed in receiving any redemption or liquidation proceeds from a SPAC to
which it is entitled.
8
Because
SPACs are in essence “blank check” companies without operating histories or
ongoing business operations (other
than identifying and pursuing acquisition or merger opportunities), the
potential for the long term capital appreciation of their securities is
dependent on the ability of the SPAC’s sponsor to identify and complete a
profitable business combination. There is no guarantee that the SPACs in which a
Fund invests will complete a business combination or that any transaction
completed by the SPACs in which a Fund invests will be profitable. Even if a
SPAC in which a Fund has invested identifies a desirable acquisition or merger
target and reaches agreement with that company as to the terms of the business
combination, there can be no guarantee that the transaction will ultimately be
consummated because, among other conditions that must be satisfied, a requisite
number of shareholders of the SPAC or of the target company do not vote in favor
of the transaction. The values of investments in SPACs may be highly volatile
and may depreciate significantly over time. Some SPACs may pursue acquisitions
or mergers only within certain industries or regions, which may ultimately lead
to an increase in the volatility of their prices following completion of a
business combination. In addition, some of these securities may be considered
illiquid and/or subject to restrictions on resale, leaving a Fund unable to sell
its interest in a SPAC or able to sell its interest only at a price below what
that Fund believes is the SPAC interest’s intrinsic value. Additionally, an
investment in a SPAC may be diluted by additional later offerings of interests
in the SPAC or by other investors exercising their warrants to purchase shares
of the SPAC.
Due
to the risk of the loss of sponsors’ and other initial investors’ capital if an
acquisition or merger is not consummated,
sponsors of SPACs may be incentivized to consummate business combinations at
less attractive valuations at the expense of SPAC shareholders. In addition, as
the number of SPACs grows, there is greater competition among SPACs and
traditional purchasers of companies, which further increases the likelihood that
SPAC sponsors may be incentivized to consummate acquisitions or mergers at less
attractive valuations, as well as the risk that SPACs cannot successfully
complete business combinations.
Equity-Linked
Notes (ELNs). ELNs are hybrid
derivative-type instruments, in a single note form, that are specially designed
to combine the characteristics of one or more reference securities (such as a
single stock, exchange-traded fund, exchange-traded note, or an index or basket
of securities (underlying securities)) and a related equity derivative, such as
a put or call option. Generally, when purchasing an ELN, a Fund pays the
counterparty the current value of the underlying securities plus a commission.
Upon the maturity of the note, the Fund generally receives the par value of the
note plus a return based on the appreciation of the underlying securities. A
Fund may or may not hold an ELN until its maturity. If the underlying securities
have depreciated in value or if their price fluctuates outside of a preset
range, depending on the type of ELN, the Fund may receive only the principal
amount of the note, or may lose the entire principal invested in the ELN. ELNs
are available with an assortment of features, including periodic coupon
payments; limitations on participation in the appreciation of the underlying
securities; and different protection levels on the Fund’s principal investment.
A Fund will only invest in ELNs for which the underlying security is a
permissible investment for the Fund in accordance with its investment policies
and restrictions. ELNs are generally in two types: (1) those that provide for
protection of a Fund’s principal in exchange for limited participation in the
appreciation of the underlying securities, and (2) those that do not provide for
such protection and subject a Fund to the risk of loss of its principal
investment.
Investments
in ELNs possess the risks associated with the underlying securities, such as
management risk, market risk
and, as applicable, foreign securities and currency risks. In addition, as a
note, ELNs are also subject to certain debt securities risks, such as interest
rate and credit risk. An investment in an ELN also bears the risk that the ELN
issuer will default or become bankrupt. In such an event, the Fund may have
difficulty being repaid, or fail to be repaid, the principal amount of, or
income from, its investment. ELNs may be structured to be subordinated or
unsubordinated to other classes of debt holders' right of payment. A downgrade
or impairment to the credit rating of the issuer may also negatively impact the
price of the ELN. The Fund may also experience liquidity issues when investing
in ELNs, as ELN transactions generally take place in the over-the-counter
institutional investment market as well as in privately negotiated transactions
with ELN issuers. The secondary market for ELNs may be limited, and the lack of
liquidity may make ELNs difficult to sell at a desirable time and price and
value. The price of an ELN may not correlate with the price of the underlying
securities or a fixed-income investment. As the holder of an ELN, the Fund
generally has no
9
rights
to the underlying securities, including no voting rights or rights to receive
dividends. The Adviser’s ability to accurately
forecast movements in the underlying securities will determine the success of
the Fund’s ELNs investments. Should the prices of the underlying securities move
in an unexpected manner, the Fund may not achieve the anticipated benefits of
its ELN investments, and it may realize losses, which could be significant and
could include the Fund’s entire principal investment.
Metal
and Mineral Investments. Invesco Gold &
Special Minerals Fund may invest in gold or silver bullion, in other precious
metals, in metals naturally occurring with precious metals or minerals, in
certificates representing an ownership interest in those metals, and in gold or
silver coins. These investments are referred to as “Metal Investments.” The Fund
will treat investments in exchange-traded funds and other exchange-traded
products that invest in gold bullion (Gold ETFs) as “Metal Investments” for
purposes of this investment strategy. Current income is not a criterion used to
select portfolio securities. However, certain debt securities can be selected
for the Fund’s portfolio for defensive purposes (including debt securities that
the Adviser believes might offer some opportunities for capital appreciation
when stocks are disfavored).
Risks
of Concentrating Investments in Mining Securities, Metal Investments and Gold
ETFs.
Investments in
Mining Securities, Metal Investments and Gold ETFs involve additional risks and
considerations not typically associated with other types of investments: (1) the
risk of substantial price fluctuations of gold and precious metals; (2) the
concentration of gold supply is in the following territories, including but not
limited to China, Australia, the Commonwealth of Independent States (the former
Soviet Union), Canada, the United States and South Africa, and the prevailing
economic and political conditions of these countries may have a direct effect on
the production and marketing of gold and sales of central bank gold holdings;
(3) unpredictable international monetary policies, economic and political
conditions; (4) possible U.S. governmental regulation of Metal Investments, as
well as foreign regulation of such investments; and (5) possible adverse tax
consequences for the Fund in making Metal Investments, if, as a result, it fails
to qualify as a “regulated investment company” under the Internal Revenue Code
of 1986, as amended (Code). These risks are discussed in greater detail
below.
•
Risk of Price
Fluctuations. The prices of precious and strategic metals are affected by
various factors such as economic conditions, political events, governmental
monetary and regulatory policies and market events. The prices of Mining
Securities and Metal Investments held by the Fund may fluctuate sharply, which
will affect the value of the Fund’s shares.
•
Concentration of
Source of Gold Supply and Control of Gold Sales. Currently, the major producers
of gold include, but are not limited to, China, Australia, the Commonwealth of
Independent States (which includes Russia and certain other countries that were
part of the former Soviet Union), Canada, the United States and the Republic of
South Africa. Economic and political conditions in those countries may have a
direct effect on the production and marketing of gold and on sales of central
bank gold holdings. In South Africa, the activities of companies engaged in gold
mining are subject to the policies adopted by the Ministry of Mines. The Reserve
Bank of South Africa, as the sole authorized sales agent for South African gold,
has an influence on the price and timing of sales of South African gold.
Political and social conditions in South Africa are still somewhat unsettled and
may pose certain risks to the Fund (in addition to the risks described under the
caption “Foreign Securities”), because the Fund may hold a portion of its assets
in securities of South African issuers.
•
Unpredictable
International Monetary Policies, Economic and Political Conditions. There is the
possibility that unusual international monetary or political conditions may make
the Fund’s portfolio assets less liquid, or that the value of the Fund’s assets
might be more volatile, than would be the case with other investments. In
particular, the price of gold is affected by its direct and indirect use to
settle net balance of payments deficits and surpluses between nations. Because
the prices of precious or strategic metals may be affected by unpredictable
international monetary policies and economic conditions, there may be greater
likelihood of a more dramatic fluctuation of the market prices of the Fund’s
investments than of other investments.
•
Commodities
Regulations. The trading of Metal Investments in the United States could become
subject to the rules that govern the trading of agricultural and certain other
commodities and
10
commodity futures.
The absence of regulation may adversely affect the continued development of an
orderly market in Metal Investments trading in the United States. The
development of a regulated futures market in Metal Investments trading may
affect the development of a market in, and the price of, Metal Investments in
the United States.
•
Effect on the
Fund’s Tax Status. By making Metal Investments, the Fund risks failing to
qualify as a regulated investment company under the Code. If the Fund should
fail to qualify and certain cure provisions do not apply, it would lose the
beneficial tax treatment accorded to regulated investment companies under
Subchapter M of the Code. Failure to qualify would occur if in any fiscal year
the Fund either (a) derived more than 10% of its gross income (as defined in the
Code, which disregards losses for this purpose) from sales or other dispositions
of Metal Investments and/or Gold ETFs, or (b) held more than 50% of its net
assets in the form of Metal Investments and/or Gold ETFs or in securities not
meeting certain tests under the Code or (c) held more than 25% of its total
assets in the form of a single Metal Investment either directly through Gold
ETFs or by derivative contract (see “Dividends, Distributions and Tax Matters”).
Accordingly, the Fund will endeavor to manage its portfolio within the
limitations described above, and the Fund has adopted an investment strategy
limiting the amount of its total assets that can be invested in Metal
Investments and/or Gold ETFs. There can be no assurance that the Fund will
qualify in every fiscal year. Furthermore, to comply with the limitations
described above, the Fund may be required to make investment decisions the
Adviser would otherwise not make, foregoing the opportunity to realize gains, if
necessary, to permit the Fund to qualify.
Investments
in Wholly-Owned Subsidiary. Invesco Gold &
Special Minerals Fund may invest consistent with the limitation in the
prospectus in a wholly-owned and controlled Subsidiary which will invest in gold
bullion and other precious metals, Gold ETFs (as defined in the Fund’s
prospectus), commodity-linked derivatives related to gold or other special
minerals (including commodity futures, financial futures, options and swap
contracts), and certain fixed income securities and other investments that may
serve as margin or collateral for its derivative positions. As a result, the
Fund may be considered to be investing indirectly in these investments through
its Subsidiary.
The
Subsidiary will not be registered under the 1940 Act but will be subject to
certain of the investor protections of that
Act. The Fund, as sole shareholders of the Subsidiary, will not have all of the
protections offered to investors in registered investment companies. However,
since the Fund wholly-owns and controls the Subsidiary, and the Fund and the
Subsidiary are managed by the Adviser, it is unlikely that the Subsidiary will
take action contrary to the interests of the Fund or its shareholders. The
Fund’s Trustees have oversight responsibility for the investment activities of
the Fund, including its investments in the Subsidiary, and the Fund’s role as
sole shareholder of the Subsidiary. Also, in managing the Subsidiary’s
portfolio, the Adviser will be subject to the same operational guidelines that
apply to the management of the Fund.
Changes
in the laws of the United States and/or the Cayman Islands, under which the Fund
and the Subsidiary is
organized, could result in the inability of the Fund or the Subsidiary to
operate as described in this SAI and could negatively affect the Fund and its
shareholders. For example, the government of the Cayman Islands does not
currently impose any income, corporate or capital gains tax, estate duty,
inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman
Islands law changes such that the Subsidiary must pay Cayman Islands taxes, the
Fund’s shareholders would likely suffer decreased investment
returns.
Foreign
Investments
Foreign
Securities. Foreign securities
are equity or debt securities issued by issuers outside the United States, and
include securities in the form of American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
securities representing underlying securities of foreign issuers (foreign
securities). ADRs are receipts, issued by U.S. banks, for the shares of foreign
corporations, held by the bank issuing the receipt. ADRs are typically issued in
registered form, denominated in U.S. dollars and designed for use in the U.S.
securities markets. GDRs are bank certificates issued in more than one country
for shares in a foreign company. The shares are held by a foreign branch of an
international
11
bank.
GDRs trade as domestic shares but are offered for sale globally through the
various bank branches. GDRs are typically
used by private markets to raise capital and are denominated in either U.S.
dollars or foreign currencies. EDRs are similar to ADRs and GDRs, except they
are typically issued by European banks or trust companies, denominated in
foreign currencies and designed for use outside the U.S. securities markets.
ADRs, EDRs and GDRs entitle the holder to all dividends and capital gains on the
underlying foreign securities, less any fees paid to the bank. Purchasing ADRs,
EDRs or GDRs gives a Fund the ability to purchase the functional equivalent of
foreign securities without going to the foreign securities markets to do so.
ADRs, EDRs or GDRs that are “sponsored” are those where the foreign corporation
whose shares are represented by the ADR, EDR or GDR is actively involved in the
issuance of the ADR, EDR or GDR and generally provides material information
about the corporation to the U.S. market. An “unsponsored” ADR, EDR or GDR
program is one where the foreign corporation whose shares are held by the bank
is not obligated to disclose material information in the United States, and,
therefore, the market value of the ADR, EDR or GDR may not reflect important
facts known only to the foreign company.
Foreign
debt securities include corporate debt securities of foreign issuers, certain
foreign bank obligations (see
“Bank Instruments”) and U.S. dollar or foreign currency denominated obligations
of foreign governments or their subdivisions, agencies and instrumentalities
(see “Foreign Government Obligations”), international agencies and supranational
entities.
The
Funds consider various factors when determining whether a company is in a
particular country or in a particular
region/continent, including whether (1) it is organized under the laws of a
country or in a country in a particular region/continent; (2) it has a principal
office in a country or in a country in a particular region/continent; (3) it
derives 50% or more of its total revenues from businesses in a country or in a
country in a particular region/continent; (4) its securities are traded
principally on a security exchange, or in an over-the-counter (OTC) market, in a
particular country or in a country in a particular region/continent; and/or (5)
its “country of risk" as determined by a third party service provider such as
Bloomberg. The issuer's “country of risk” is determined based on a number of
criteria, including its country of domicile, the primary stock exchange on which
it trades, the location from which the majority of its revenue comes, and its
reporting currency.
Investments
by a Fund in foreign securities, including ADRs, EDRs and GDRs, whether
denominated in U.S. dollars or
foreign currencies, may entail all of the risks set forth below in addition to
those accompanying an investment in issuers in the United States.
Currency
Risk.
The value in U.S. dollars of a Fund’s non-dollar-denominated foreign investments
will be affected by changes in currency exchange rates. The U.S. dollar value of
a foreign security decreases when the value of the U.S. dollar rises against the
foreign currency in which the security is denominated and increases when the
value of the U.S. dollar falls against such currency.
Political
and Economic Risk. The economies of
many countries may not be as developed as that of the United States’ economy and
may be subject to significantly different forces. Political, economic or social
instability and development, expropriation or confiscatory taxation, and
limitations on the removal of funds or other assets could also adversely affect
the value of portfolio investments. Certain foreign companies may be subject to
sanctions, embargoes, or other governmental actions that may impair or otherwise
limit the ability to invest in, receive, hold or sell the securities of such
companies. These factors may affect the value of investments in those companies.
In addition, certain companies may operate in, or have dealings with, countries
that the U.S. government has identified as state sponsors of terrorism. As a
result, such companies may be subject to specific constraints or regulations
under U.S. law and, additionally, may be subject to negative investor
perception, either of which could adversely affect such companies'
performance.
Regulatory
Risk.
Foreign companies may not be registered with the SEC and are generally not
subject to the regulatory controls and disclosure requirements imposed on U.S.
issuers and, as a consequence, there is generally less publicly available
information about foreign securities than is available about domestic
securities. Foreign companies may not be subject to uniform accounting, auditing
and financial reporting standards, corporate governance practices and
requirements comparable to those applicable to domestic companies. Therefore,
financial information about foreign companies may be incomplete, or may not be
comparable to the information available on U.S. companies. Income from foreign
securities owned by the
12
Funds
may be reduced by a withholding tax at the source, which tax would reduce
dividend income payable to Fund
shareholders.
There
is generally less government supervision and regulation of securities exchanges,
brokers, dealers, and listed
companies in foreign countries than in the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Foreign markets may also have different clearance and
settlement procedures. If a Fund experiences settlement problems, it may result
in temporary periods when a portion of that Fund’s assets are uninvested and
could cause it to miss attractive investment opportunities or create a potential
liability to that Fund arising out of its inability to fulfill a contract to
sell such securities.
Market
Risk.
Investing in foreign markets generally involves certain risks not typically
associated with investing in the United States. The securities markets in many
foreign countries will have substantially lower trading volume than the U.S.
markets. As a result, the securities of some foreign companies may be less
liquid and experience more price volatility than comparable domestic securities.
Obtaining and/or enforcing judgments in foreign countries may be more difficult,
and there is generally less government regulation and supervision of foreign
stock exchanges, brokers and issuers, each of which may make it more difficult
to enforce contractual obligations. Increased custodian costs as well as
administrative costs (such as the need to use foreign custodians) may also be
associated with the maintenance of assets in foreign jurisdictions. In addition,
transaction costs in foreign securities markets are likely to be higher, since
brokerage commission rates in foreign countries are likely to be higher than in
the United States.
Risks
of Developing/Emerging Market Countries. A Fund may invest
in securities of companies located in developing and emerging market countries
subject to limits included in each Fund's prospectus. Unless a Fund’s
prospectus includes a different definition, the Fund considers developing and
emerging market countries to be those countries that are (i) generally
recognized to be an emerging market country by the international financial
community, including the World Bank, (ii) determined by the Adviser to be an
emerging market country or (iii) its “country of risk” is an emerging market
country as determined by a third party service provider such as Bloomberg. As of
the date of this SAI, the Adviser considers “emerging market countries” to
generally include every country in the world except those countries included in
the MSCI World Index. The Adviser has broad discretion to identify countries
that it considers to be emerging market countries and may consider various
factors in determining whether to classify a country as an emerging market
country, including a country’s relative interest rates, inflation rates,
exchange rates, monetary and fiscal policies, trade and current account
balances, legal and political developments and any other specific factors the
Adviser believes to be relevant. Because emerging market equity and emerging
market debt are distinct asset classes, a country may be deemed an emerging
market country with respect to its equity only, its debt only, both its equity
and debt, or neither.
Investments
in developing and emerging market countries present risks in addition to, or
greater than, those presented by
investments in foreign issuers generally, and may include the following
risks:
i. Restriction, to
varying degrees, on foreign investment in stocks;
ii. Repatriation of
investment income, capital, and the proceeds of sales in foreign countries may
require foreign governmental registration and/or approval;
iii. Greater risk
of fluctuation in the value of foreign investments due to changes in currency
exchange rates, currency control regulations or currency devaluation. In
addition, there may be higher rates of inflation and more rapid and extreme
fluctuations in inflation rates and greater sensitivity to interest rate
changes;
iv. Inflation and
rapid fluctuations in inflation rates may have negative effects on the economies
and securities markets of certain developing and emerging market
countries;
v. Many of the
developing and emerging market countries’ securities markets are relatively
small or less diverse, have low trading volumes, suffer periods of relative
illiquidity, and are characterized by significant price volatility;
13
vi. There is a risk
in developing and emerging market countries that a future economic or political
crisis could lead to price controls, forced mergers of companies, expropriation
or confiscatory taxation, seizure, nationalization, or creation of government
monopolies;
vii. Investments in
such securities markets may be subject to unexpected market
closures;
viii. The taxation
systems at the federal, regional and local levels in developing or emerging
market countries may be less transparent and inconsistently enforced, and
subject to sudden change. Developing or emerging market countries may also have
a higher degree of corruption and fraud than developed market countries, as well
as counterparties and financial institutions with less financial sophistication,
creditworthiness and/or resources;
ix. Less developed
legal systems allowing for enforcement of private property rights and/or redress
for injuries to private property, such as bankruptcy. The ability to bring and
enforce actions in developing or emerging market countries, or to obtain
information needed to pursue or enforce such actions, may be limited and
shareholder claims may be difficult or impossible to pursue; and
x. Less stringent
regulatory, disclosure, financial reporting, accounting, auditing and
recordkeeping standards than companies in more developed countries and, as a
result, the nature and quality of such information may vary. Information about
such companies may be less available and reliable and, therefore, the ability to
conduct adequate due diligence in developing or emerging markets may be limited
which can impede the Fund's ability to evaluate such companies. In addition,
certain developing or emerging market countries may impose material limitations
on Public Company Accounting Oversight Board (“PCAOB”) inspection, investigation
and enforcement capabilities which can hinder the PCAOB’s ability to engage in
independent oversight or inspection of accounting firms located in or operating
in certain developing or emerging markets.
There
is no
guarantee that the quality of financial reporting or the audits conducted by
audit firms of developing or emerging market issuers meet PCAOB
standards.
Frontier
Markets. The risks
associated with investments in frontier market countries include all the risks
associated with investments in developing and emerging markets. These risks are
magnified for frontier market countries because frontier markets countries
generally have smaller economies, even less developed capital markets, and are
traditionally less accessible than traditional emerging and developing markets.
As a result, investments in companies in frontier markets countries are
generally subject to a higher risk of loss than investments in companies in
traditional emerging and developing market countries due to less developed
securities markets, different settlement procedures, greater price volatility,
less developed governments and economies, more government restrictions, and the
limited ability of foreign entities to participate in certain privatization
programs. Investments in companies operating in frontier market countries are
highly speculative in nature.
Investing
in Greater China Risk. Investments in
companies located or operating in Greater China involve risks not associated
with investments in Western nations, such as nationalization, expropriation, or
confiscation of property; difficulty in obtaining and/or enforcing judgments;
alteration or discontinuation of economic reforms; military conflicts, either
internal or with other countries; inflation, currency fluctuations and
fluctuations in inflation and interest rates that may have negative effects on
the economy and securities markets of Greater China; and Greater China’s
dependency on the economies of other Asian countries, many of which are
developing countries. Events in any one country within Greater China may impact
the other countries in the region or Greater China as a whole. For example,
changes to their political and economic relationships with the mainland China
could adversely impact the Fund’s investments in Taiwan and Hong
Kong.
Certain
securities issued by companies located or operating in Greater China, such as
China A-shares, are subject to
trading restrictions, quota limitations, and clearing and settlement risks.
Significant portions of the Chinese securities markets may become rapidly
illiquid, as Chinese issuers have the ability to suspend the trading of their
equity securities, and have shown a willingness to exercise that option in
response to market volatility and other events. The liquidity of Chinese
securities may shrink or disappear suddenly and
14
without
warning as a result of adverse economic, market or political events, or adverse
investor perceptions, whether or not
accurate.
Export
growth continues to be a major driver of China’s rapid economic growth. As a
result, a reduction in spending on Chinese
products and services, the institution of tariffs or other trade barriers, or a
downturn in any of the economies of China’s key trading partners may have an
adverse impact on the Chinese economy. The current political climate has
intensified concerns about a potential trade war between China and the United
States, as each country has recently imposed tariffs on the other country’s
products. These actions may trigger a significant reduction in international
trade, the oversupply of certain manufactured goods, substantial price
reductions of goods and possible failure of individual companies and/or large
segments of China’s export industry, which could have a negative impact on the
Fund’s performance. Events such as these and their consequences are difficult to
predict and it is unclear whether further tariffs may be imposed or other
escalating actions may be taken in the future.
Additionally,
developing countries, such as those in Greater China, may subject the Fund’s
investments to a number of tax
rules, and the application of many of those rules may be uncertain. Moreover,
China has implemented a number of tax reforms in recent years, and may amend or
revise its existing tax laws and/or procedures in the future, possibly with
retroactive effect. Changes in applicable Chinese tax law could reduce the
after-tax profits of the Fund, directly or indirectly, including by reducing the
after-tax profits of companies in China in which the Fund invests. Chinese taxes
that may apply to the Fund’s investments include income tax or withholding tax
on dividends, interest or gains earned by the Fund, business tax and stamp duty.
Uncertainties in Chinese tax rules could result in unexpected tax liabilities
for the Fund. Additionally,
any
difficulties of the PCAOB to inspect audit work papers and practices of
PCAOB-registered accounting firms in China with respect to their audit work of
U.S. reporting companies may impose significant additional risks associated with
investments in China.
Risks
of Investing in Chinese Variable Interest Entities. Many Chinese
companies have created a special structure, which is based in China, known as a
variable interest entity (“VIE”) as a means to circumvent limits on direct
foreign ownership of equity in Chinese operating companies in certain sectors,
such as internet, media, education and telecommunications, imposed by the
Chinese government. Typically in such an arrangement, a China-based operating
company establishes an offshore “holding” company in another jurisdiction that
likely does not have the same disclosure, reporting, and governance requirements
as the United States. The holding company issues shares, i.e., is “listed”, on a
foreign exchange such as the New York Stock Exchange or the Hong Kong Stock
Exchange. The listed holding company enters into service and other contracts
with the China-based operating company, typically through the China-based VIE.
The VIE must be owned by Chinese nationals (and/or other Chinese companies),
which often are the VIE’s founders, in order to obtain the licenses and/or
assets required to operate in the restricted or prohibited sector in China. The
operations and financial position of the VIE are included in consolidated
financial statements of the listed holding company. Foreign investors, including
mutual funds and ETFs (such as the Fund), hold stock in the listed holding
company rather than directly in the China-based operating company.
The
VIE structure allows foreign shareholders to exert a degree of control and
obtain economic benefits arising from the
operating company but without formal legal ownership because the listed holding
company’s control over the operating company is predicated entirely on contracts
with the VIE. The listed holding company is distinct from the underlying
operating company, and an investment in the listed holding company represents
exposure to a company that maintains service contracts with the operating
company, not equity ownership.
Investments
in companies that use VIEs may pose additional risks because the investment is
made through the listed
holding company’s service and other contractual arrangements with the underlying
Chinese operating company. As a result, such investment may limit the rights of
an investor with respect to the underlying Chinese operating company. The
contractual arrangements between the VIE and the operating company may not be as
effective in providing operational control as direct equity ownership. The
Chinese government could determine at any time and without notice that the
underlying contractual arrangements on which control of the VIE is based violate
Chinese law. While VIEs are a longstanding industry practice, well
15
known
to Chinese officials and regulators, VIEs historically have
not been formally recognized under Chinese law. The owners of the VIE could
decide to breach the contractual arrangements with the listed holding company
and it is uncertain whether the contractual arrangements, which may be subject
to conflicts of interest between the legal owners of the VIE and foreign
investors, would be enforced by Chinese courts or arbitration bodies.
Prohibitions of these structures by the Chinese government, or the inability to
enforce such contracts, from which the shell company derives its value, would
likely cause the VIE-structured holding(s) to suffer significant, detrimental,
and possibly permanent loss, and in turn, adversely affect the Fund’s returns
and net asset value.
The
Chinese government previously placed restrictions on China-based companies
raising capital offshore in certain
sectors, including through VIEs, and investors face uncertainty about future
actions by the Chinese government that could significantly affect the operating
company’s financial performance and the enforceability of the contractual
arrangements underlying the VIE structure. It is uncertain whether Chinese
officials or regulators will withdraw their acceptance of the VIE structure, or
whether any new laws, rules or regulations relating to VIE structures will be
adopted and what impact such laws may have on foreign investors. There is a risk
that China might prohibit the existence of VIEs or sever their ability to
transmit economic and governance rights to foreign individuals and entities; if
so, the market value of any associated portfolio holdings would likely suffer
substantial, detrimental, and possibly permanent loss.
Chinese
companies, including those listed on U.S. exchanges, are generally not subject
to the same degree of
regulatory requirements, accounting standards or auditor oversight as companies
in more developed countries. As a result, information about VIEs may be less
reliable or complete. Foreign companies with securities listed on U.S.
exchanges, including those that utilize VIEs, may be delisted if they do not
meet the requirements of the listing exchange, the Public Company Accounting
Oversight Board (“PCAOB”) and the U.S. government, which could significantly
decrease the liquidity and value of such securities. Actions by the U.S.
government, such as delisting of certain Chinese companies from U.S. securities
exchanges or otherwise restricting their operations in the U.S., may negatively
impact the liquidity and value of such securities.
Risks
of Investments in China A-shares through the Stock Connect Program. The Shanghai-Hong
Kong Stock Connect program and the Shenzhen-Hong Kong Stock Connect program
(both programs collectively referred to as the Connect Program) are securities
trading and clearing programs through which the Funds can trade eligible listed
China A-shares. The Connect Program is subject to quota limitations and an
investor cannot purchase and sell the same security on the same trading day,
which may restrict a Fund’s ability to invest in China A-shares through the
Connect Program and to enter into or exit trades on a timely basis. The Shanghai
and Shenzhen markets may be open at a time when the Connect Program is not
trading, with the result that prices of China A-shares may fluctuate at times
when the Fund is unable to add to or exit its position. Only certain China
A-shares are eligible to be accessed through the Connect Program. Such
securities may lose their eligibility at any time, in which case they could be
sold but could no longer be purchased through the Connect Program. Because the
Connect Program is still relatively in its early stages, the actual effect on
the market for trading China A-shares with the introduction of large numbers of
foreign investors is currently unknown. The Connect Program is subject to
regulations promulgated by regulatory authorities for the Shanghai Stock
Exchange, the Stock Exchange of Hong Kong Limited, and the Shenzhen Stock
Exchange, and further regulations or restrictions, such as limitations on
redemptions or suspension of trading, may adversely impact the Connect Program,
if the authorities believe it necessary to assure orderly markets or for other
reasons. There is no guarantee that all three exchanges will continue to support
the Connect Program in the future and no assurance that further regulations will
not adversely affect the availability of securities under Stock Connect or other
operational arrangements.
Investments
in China A-shares may not be covered by the securities investor protection
programs of the exchanges and,
without the protection of such programs, will be subject to the risk of default
by the broker. In the event that the depository of the Shanghai Stock Exchange
and the Shenzhen Stock Exchange defaulted, a Fund may not be able to recover
fully its losses from the depository or may be delayed in receiving proceeds as
part of any recovery process. In addition, because all trades on the Connect
Program in respect of eligible China A-shares must be settled in Renminbi (RMB),
the Chinese currency, the Funds investing
16
through
the Connect Program must have timely access to a reliable supply of offshore
RMB, which cannot be guaranteed. The
existence of a liquid trading market for China A-shares may depend on whether
there is supply of, and demand for, such China A-shares. Market volatility and
settlement difficulties in the China A-shares markets may also result in
significant fluctuations in the prices of the securities traded on such
markets.
China
A-shares purchased through the Connect Program are held in nominee name and not
the Fund’s name as the
beneficial owner. It is possible, therefore, that a Fund’s ability to exercise
its rights as a shareholder and to pursue claims against the issuer of China
A-shares may be limited because the nominee structure has not been tested in
Chinese courts, as Chinese courts generally have limited experience in applying
the concept of beneficial ownership and the law in that area continues to
evolve. In addition, a Fund may not be able to participate in corporate actions
affecting China A-shares held through the Connect Program due to time
constraints or for other operational reasons.
Trades
on the Connect Program are subject to certain requirements prior to trading. If
these requirements are not completed
prior to the market opening, a Fund cannot sell the shares on that trading day.
In addition, these requirements may limit the number of brokers that a Fund may
use to execute trades. If an investor holds 5% or more of the total shares
issued by a China A-share issuer, whether or not such shares were acquired
through the Stock Connect Program, the investor must return any profits obtained
from the purchase and sale of those shares if both transactions occur within a
six-month period. If a Fund holds 5% or more of the total shares of a China
A-share issuer through its Connect Program investments, its profits may be
subject to these limitations. All accounts managed by the Adviser and/or its
affiliates will be aggregated for purposes of this 5% limitation, which makes it
more likely that a Fund's profits may be subject to these
limitations.
Risks
of Investments in the China Interbank Bond Market through the Bond Connect
Program.
Certain Funds may
invest in China onshore bonds traded on the China Interbank Bond Market (CIBM)
through the China – Hong Kong Bond Connect Program (Bond Connect). In
China, the Hong Kong Monetary Authority Central Moneymarkets Unit holds Bond
Connect securities on behalf of ultimate investors (such as the Funds) in
accounts maintained with a China-based custodian (either the China Central
Depository & Clearing Co. or the Shanghai Clearing House). This
recordkeeping system subjects a Fund to various risks, including the risks of
settlement delays and counterparty default of the China custodian and Hong Kong
custody agent. In addition, the Fund may have a limited ability to enforce
rights as a bondholder because enforcing the ownership rights of a beneficial
holder of Bond Connect securities is untested and courts in China have limited
experience in applying the concept of beneficial ownership.
Bond
Connect uses the trading infrastructure of both Hong Kong and China and is not
available on trading holidays in
Hong Kong. As a result, prices of securities purchased through Bond Connect may
fluctuate at times when the Fund is unable to add to or exit its position.
Securities offered through Bond Connect may lose their eligibility for trading
through Bond Connect at any time. If Bond Connect securities lose their
eligibility for trading through Bond Connect, they may be sold but can no longer
be purchased through Bond Connect.
Because
Bond Connect trades are settled in RMB, the Funds investing through Bond Connect
must have timely access to a
reliable supply of offshore RMB, which cannot be guaranteed.
Market
volatility and potential lack of liquidity due to low trading volume of certain
bonds on the CIBM may result in prices of
such bonds fluctuating significantly, exposing a Fund to liquidity and
volatility risks. The bid-ask spreads of the prices of such securities may be
large, and a Fund may therefore incur significant costs and may suffer losses
when selling such investments. Bonds traded on the CIBM may be difficult or
impossible to sell, which may impact a Fund’s ability to acquire or dispose of
such securities at their expected prices.
Bond
Connect is relatively new and its effects on the Chinese interbank bond market
are uncertain. Trading through
Bond Connect is performed through newly developed trading platforms and
operational systems, and in the event of systems malfunctions or extreme market
conditions, trading via Bond Connect could be disrupted. There can be no
assurance as to Bond Connect’s continued existence or whether future
17
developments
regarding Bond Connect (including further interpretation and guidance provided
by regulators in Hong Kong and
China) may restrict or adversely affect the Fund’s investments or returns.
Finally, uncertainties in China tax rules governing taxation of income and gains
from investments via Bond Connect could result in unexpected tax liabilities for
a Fund.
Passive
Foreign Investment Companies. Under U.S. tax
laws, passive foreign investment companies (PFICs) are those foreign
corporations which generate primarily “passive” income. Passive income is
defined as any income that is considered foreign personal holding company income
under the Code. For federal tax purposes, a foreign corporation is deemed to be
a PFIC if 75% or more of its gross income during a taxable year is passive
income or if 50% or more of its assets during a taxable year are assets that
produce, or are held to produce, passive income.
Foreign
mutual funds are generally deemed to be PFICs, since nearly all of the income of
a mutual fund is passive income.
Foreign mutual funds investments may be used to gain exposure to the securities
of companies in countries that limit or prohibit direct foreign investment;
however, investments in foreign mutual funds by a Fund are subject to limits
under the Investment Company Act.
Other
types of foreign corporations may also be considered PFICs if their percentage
of passive income or passive assets
exceeds the limits described above. A determination as to whether a foreign
corporation is considered a PFIC is based on an interpretation of complex
provisions of the tax law. Accordingly, there can be no assurance that a
conclusion regarding a corporation's status as a PFIC will not be challenged by
the Internal Revenue Service (IRS) and conclusions as to a corporation's PFIC
status may vary depending on who is doing the analysis. Unless a Fund makes an
election with respect to its investment in a PFIC, which election may not always
be possible, income from the disposition of a PFIC investment and from certain
PFIC distributions may be subject to adverse tax treatment. The application of
the PFIC rules may affect, among other things, the character of gains, the
amount of gain or loss and the timing of the recognition of income with respect
to PFIC shares, and may subject a Fund to tax on certain income from PFIC
shares. Federal tax laws impose severe tax penalties for failure to properly
report investment income from PFICs. Although every effort is made to ensure
compliance with federal tax reporting requirements for these investments,
foreign corporations that are PFICs for federal tax purposes may not always be
recognized as such or may not provide a Fund with all information required to
report, or make an election with respect to, such investment.
A
foreign issuer will not be treated as a PFIC with respect to a shareholder if
such issuer is a controlled foreign corporation
for U.S. federal income tax purposes (CFC) and the shareholder holds (directly,
indirectly, or constructively) 10% or more of the voting interests in or total
value of such issuer. In such a case, the shareholder generally would be
required to include in gross income each year, as ordinary income, its share of
certain amounts of a CFC’s income, whether or not the CFC distributes such
shareholder’s share of such amounts to it. Under proposed regulations, such
income will be considered “qualifying income” for purposes of a shareholder’s
qualification as a regulated investment company only to the extent such income
is timely distributed to that shareholder.
Additional
risks of investing in other investment companies are described under “Other
Investment Companies.”
Foreign
Government Obligations. Debt securities
issued by foreign governments are often, but not always, supported by the full
faith and credit of the foreign governments, or their subdivisions, agencies or
instrumentalities, that issue them. These securities involve the risks discussed
above under “Foreign Securities”. Additionally, the issuer of the debt or the
governmental authorities that control repayment of the debt may be unwilling or
unable to pay interest or repay principal when due. Political or economic
changes or the balance of trade may affect a country’s willingness or ability to
service its debt obligations. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt obligations, especially debt
obligations issued by the governments of developing countries. Foreign
government obligations of developing countries, and some structures of emerging
market debt securities, both of which are generally below investment grade, are
sometimes referred to as “Brady Bonds.” The failure of a sovereign debtor to
implement economic reforms, achieve specified levels of economic performance, or
repay principal or interest when due
18
may
result in the cancellation of third-party commitments to lend funds to the
sovereign debtor, which may impair the debtor’s
ability or willingness to service its debts.
Foreign
Exchange Transactions. Each Fund may
invest in foreign currency-denominated securities and has the authority to
purchase and sell put and call options on foreign currencies (foreign currency
options), foreign currency futures contracts and related options, and
currency-related swaps, and may engage in foreign currency transactions either
on a spot (i.e., for prompt delivery and settlement) basis at the rate
prevailing in the currency exchange market at the time or through forward
foreign currency contracts (see “Forward Foreign Currency Contracts”). The use
of these instruments may result in a loss to a Fund if the counterparty to the
transaction (particularly with respect to OTC derivatives, as discussed further
below) does not perform as promised, including because of such counterparty’s
bankruptcy or insolvency.
The
Funds will incur costs in converting assets from one currency to another.
Foreign exchange dealers may charge a fee
for conversion. In addition, dealers may realize a profit based on the
difference between the prices at which they buy and sell various currencies in
the spot and forward markets.
A
Fund will generally engage in these foreign exchange transactions in order to
complete a purchase or sale of foreign
currency denominated securities. The Funds may also use foreign currency
options, forward foreign currency contracts, foreign currency futures contracts
and currency-related swap contracts to increase or reduce exposure to a foreign
currency, to shift exposure from one foreign currency to another in a cross
currency hedge or to enhance returns. These transactions are intended to
minimize the risk of loss due to a decline in the value of the hedged
currencies; however, at the same time, they tend to limit any potential gain
which might result should the value of such currencies increase.
A
Fund may purchase and sell foreign currency futures contracts and purchase and
write foreign currency options to increase
or decrease its exposure to different foreign currencies. A Fund may also
purchase and write foreign currency options in connection with foreign currency
futures contracts or forward foreign currency contracts. Foreign currency
futures contracts are traded on exchanges and have standard contract sizes and
delivery dates. Most foreign currency futures contracts call for payment or
delivery in U.S. dollars. The uses and risks of foreign currency futures
contracts are similar to those of futures contracts relating to securities or
indices (see “Futures Contracts”). Foreign currency futures contracts’ values
can be expected to correlate with exchange rates but may not reflect other
factors that affect the value of the Fund’s investments.
Whether
or not any hedging strategy will be successful is highly uncertain, and use of
hedging strategies may leave a Fund in
a less advantageous position than if a hedge had not been established. Moreover,
it is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward foreign currency contract.
Accordingly, a Fund may be required to buy or sell additional currency on the
spot market (and bear the expense of such transaction) if Invesco’s or the
Sub-Advisers’ predictions regarding the movement of foreign currency or
securities markets prove inaccurate.
A
Fund may hold a portion of its assets in bank deposits denominated in foreign
currencies, so as to facilitate
investment in foreign securities as well as protect against currency
fluctuations and the need to convert such assets into U.S. dollars (thereby also
reducing transaction costs). To the extent these monies are converted back into
U.S. dollars, the value of the assets so maintained will be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations. Foreign exchange transactions may involve some of the risks
of investments in foreign securities. For a discussion of tax considerations
relating to foreign currency transactions, see “Dividends, Distributions and Tax
Matters — Tax Matters — Tax Treatment of Portfolio Transactions — Foreign
currency transactions.”
Under
definitions adopted by the Commodity Futures Trading Commission (CFTC) and the
U.S. Securities and
Exchange Commission (SEC), non-deliverable foreign exchange forwards and OTC
foreign exchange options are considered “swaps.” These instruments are therefore
included in the definition of “commodity interests” for purposes of determining
whether fund service providers qualify for certain exemptions and exclusions
from regulation by the CFTC. Although non-deliverable forward foreign currency
contracts have historically been traded in the OTC market, as swaps they may in
the future be regulated to be
19
centrally
cleared and traded on public execution facilities. For more information, see
“Forward Foreign Currency Contracts”
and “Swaps.”
Floating
Rate Corporate Loans and Corporate Debt Securities of Non-U.S.
Borrowers. Floating rate
loans and debt securities made to and issued by non-U.S. borrowers in which the
Funds invest will be U.S. dollar-denominated or otherwise provide for payment in
U.S. dollars, and the borrower will meet the credit quality standards
established by Invesco and the Sub-Advisers for U.S. borrowers. The Funds
similarly may invest in floating rate loans and floating rate debt securities
made to and issued by U.S. borrowers with significant non-U.S.
dollar-denominated revenues; provided that the loans are U.S. dollar-denominated
or otherwise provide for payment to the Funds in U.S. dollars. In all cases
where the floating rate loans or floating rate debt securities are not
denominated in U.S. dollars, provisions will be made for payments to the
lenders, including the Funds, in U.S. dollars pursuant to foreign currency
swaps.
Foreign
Bank Obligations. Foreign bank
obligations include certificates of deposit, banker’s acceptances and fixed time
deposits and other obligations (a) denominated in U.S. dollars and issued by a
foreign branch of a domestic bank (Eurodollar Obligations), (b) denominated in
U.S. dollars and issued by a domestic branch of a foreign bank (Yankee Dollar
Obligations), or (c) issued by foreign branches of foreign banks. Foreign banks
are not generally subject to examination by any U.S. government agency or
instrumentality.
Foreign
Debt Securities. Foreign debt
securities are debt securities that are issued and/or settled outside the United
States and may be backed by foreign guarantees. Debt securities issued by a
corporation or other issuer domiciled outside the United States that are dollar
denominated and traded in the United States are not considered foreign
securities. Although denominated in U.S. dollars, Foreign Debt Securities may
entail some or all of the risks set forth below.
Risks
Related to Russian Invasion of Ukraine. In late February
2022, Russian military forces invaded Ukraine, significantly amplifying already
existing geopolitical tensions among Russia, Ukraine, Europe, the North Atlantic
Treaty Organization (NATO), and the West. Russia’s invasion, the responses of
countries and political bodies to Russia’s actions, and the potential for wider
conflict may increase financial market volatility and could have severe adverse
effects on regional and global economic markets, including the markets for
certain securities and commodities such as oil and natural gas.
Following
Russia’s actions, various countries, including the U.S., Canada, the United
Kingdom, Germany, and France, among
others, as well as the European Union, issued broad-ranging economic sanctions
against Russia. The sanctions freeze certain Russian assets and prohibit trading
by individuals and entities in certain Russian securities,
engaging in certain
private transactions, and doing business with certain Russian corporate
entities, large financial institutions, officials and oligarchs. The sanctions
include a commitment by certain countries and the European Union to remove
selected Russian banks from the Society for Worldwide Interbank Financial
Telecommunications, commonly called “SWIFT,” the electronic network that
connects banks globally, and imposed restrictive measures to prevent the Russian
Central Bank from undermining the impact of the sanctions. A number of large
corporations have since
withdrawn from
Russia or suspended or curtailed their Russia-based operations.
The
imposition of these current sanctions (and the potential for further sanctions
in response to Russia’s continued military
activity) and other actions undertaken by countries and businesses may adversely
impact various sectors of the Russian economy, including, but not limited to,
the financials, energy, metals and mining, engineering, and defense and
defense-related materials sectors. Such actions also may result in the decline
of the value and liquidity of Russian securities, a weakening of the ruble, and
could impair the ability of a Fund to buy, sell, receive, or deliver those
securities. Moreover, the measures could adversely affect global financial and
energy markets and thereby negatively affect the value of a Fund’s investments
beyond any direct exposure to Russian issuers or those of adjoining geographic
regions.
In
response to sanctions, the Russian Central Bank raised its interest rates and
banned sales of local securities by
foreigners. Russia also prevented the export of certain goods and payments to
foreign shareholders of Russian securities. Russia may take additional
countermeasures or retaliatory actions, which
20
may
further impair the value and liquidity of Russian securities and Fund
investments. Such actions could, for example, include
restricting gas exports to other countries, the seizure of U.S. and European
residents’
assets, or
undertaking or provoking other military conflict elsewhere in Europe, any of
which could exacerbate negative consequences on global financial markets and the
economy. The actions discussed above could have a negative effect on the
performance of Funds that have exposure to Russia. While diplomatic efforts have
been ongoing, the conflict between Russia and Ukraine is unpredictable and has
the potential to result in broader military actions. The duration of the ongoing
conflict and corresponding sanctions and related events cannot be predicted and
may result in a negative impact on Fund performance and the value of Fund
investments, particularly as it relates to Russian exposure.
Exchange-Traded
Funds
Exchange-Traded
Funds (ETFs). Most ETFs are
registered under the 1940 Act as investment companies, although others may not
be registered as investment companies and are registered as commodity pools.
Therefore, a Fund’s purchase of shares of an ETF may be subject to the
restrictions on investments in other investment companies discussed under “Other
Investment Companies.” ETFs have management fees, which increase their cost. The
Fund may invest in ETFs advised by unaffiliated advisers as well as ETFs advised
by Invesco Capital Management LLC (Invesco Capital). Invesco, the Sub-Advisers
and Invesco Capital are affiliates of each other as they are all indirect
wholly-owned subsidiaries of Invesco Ltd.
Generally,
ETFs hold portfolios of securities, commodities and/or currencies that are
designed to replicate, as
closely as possible before expenses, the performance of a specified market
index. The performance results of ETFs will not replicate exactly the
performance of the pertinent index due to transaction and other expenses,
including fees to service providers, borne by ETFs. Furthermore, there can be no
assurance that the portfolio of securities, commodities and/or currencies
purchased by an ETF will replicate a particular index. Some ETFs are actively
managed and instead of replicating a particular index they seek to outperform
it, or outperform a basket of securities or price of a commodity or
currency.
Only
Authorized Participants (APs) may engage in creation or redemption transactions
directly with ETFs. ETF shares are sold
to and redeemed by APs at net asset value only in large blocks called creation
units and redemption units, respectively. Such market makers have no obligation
to submit creation or redemption orders; consequently, there is no assurance
that market makers will establish or maintain an active trading market for ETF
shares. In addition, to the extent that APs exit the business or are unable to
proceed with creation and/or redemption orders with respect to an ETF and no
other AP is able to step forward to create or redeem units of an ETF, an ETF’s
shares may be more likely to trade at a premium or discount to net asset value
and possibly face trading halts and/or delisting. ETF shares may be purchased
and sold by all other investors in secondary market trading on national
securities exchanges, which allows investors to purchase and sell ETF shares at
their market price throughout the day.
Investments
in ETFs generally present the same primary risks as an investment in a
conventional mutual fund that has the
same investment objective, strategy and policies. Investments in ETFs further
involve the same risks associated with a direct investment in the types of
securities, commodities and/or currencies included in the indices the ETFs are
designed to replicate. In addition, shares of an ETF may trade at a market price
that is higher or lower than their net asset value and an active trading market
in such shares may not develop or continue. Moreover, trading of an ETF’s shares
may be halted if the listing exchange’s officials deem such action to be
appropriate, the shares are de-listed from the exchange, or the activation of
market-wide “circuit breakers” (which are tied to large decreases in stock
prices) halts stock trading generally.
Exchange-Traded
Notes
Exchange-Traded
Notes (ETNs). ETNs are senior,
unsecured, unsubordinated debt securities whose returns are linked to the
performance of a particular market benchmark or strategy, minus applicable fees.
ETNs are traded on an exchange (e.g., the New York Stock Exchange) during normal
trading hours; however, investors can also hold the ETN until maturity. At
maturity, the issuer pays to the investor a cash amount equal to the principal
amount, subject to the day’s market benchmark or strategy factor. ETNs do not
make periodic coupon payments or provide principal protection. ETNs are subject
to credit risk, including the credit risk of
21
the
issuer, and the value of the ETN may drop due to a downgrade in the issuer’s
credit rating, despite the underlying market
benchmark or strategy remaining unchanged. The value of an ETN may also be
influenced by time to maturity, level of supply and demand for the ETN,
volatility and lack of liquidity in underlying assets, changes in the applicable
interest rates, changes in the issuer’s credit rating, and economic, legal,
political, or geographic events that affect the referenced underlying asset.
When a Fund invests in ETNs it will bear its proportionate share of any fees and
expenses borne by the ETN. A decision to sell ETN holdings may be limited by the
availability of a secondary market. In addition, although an ETN may be listed
on an exchange, the issuer may not be required to maintain the listing, and
there can be no assurance that a secondary market will exist for an
ETN.
ETNs
are also subject to tax risk. No assurance can be given that the Internal
Revenue Service (IRS) will accept, or a court
will uphold, how ETNs are characterized or treated for tax purposes. Further,
the IRS and Congress are considering proposals that would change the timing and
character of income and gains from ETNs.
An
ETN that is tied to a specific market benchmark or strategy may not be able to
replicate and maintain exactly the
composition and relative weighting of securities, commodities or other
components in the applicable market benchmark or strategy. 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. Leveraged ETNs are subject to the same risk
as other instruments that use leverage in any form.
The
market value of ETNs may differ from their market benchmark or strategy. This
difference in price may be due to the
fact that the supply and demand in the market for ETNs at any point in time is
not always identical to the supply and demand in the market for the securities,
commodities or other components underlying the market benchmark or strategy that
the ETN seeks to track. As a result, there may be times when an ETN trades at a
premium or discount to its market benchmark or strategy.
Debt
Investments
U.S.
Government Obligations. U.S. government
obligations are obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities, including bills, notes and bonds issued by the
U.S. Treasury, as well as "stripped" or "zero coupon" U.S. Treasury
Obligations.
U.S.
government obligations may be, (i) supported by the full faith and credit of the
U.S. Treasury, (ii) supported by the
right of the issuer to borrow from the U.S. Treasury, (iii) supported by the
discretionary authority of the U.S. government to purchase the agency’s
obligations, or (iv) supported only by the credit of the instrumentality. There
is a risk that the U.S. government may choose not to provide financial support
to U.S. government-sponsored agencies or instrumentalities if it is not legally
obligated to do so. In that case, if the issuer were to default, a Fund holding
securities of such issuer might not be able to recover its investment from the
U.S. government. For example, while the U.S. government has provided financial
support to Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC), no assurance can be given that the U.S. government
will always do so, since the U.S. government is not so obligated by law. There
also is no guarantee that the government would support Federal Home Loan Banks.
Accordingly, securities of FNMA, FHLMC and Federal Home Loan Banks, and other
agencies, may involve a risk of non-payment of principal and interest. Any
downgrade of the credit rating of the securities issued by the U.S. government
may result in a downgrade of securities issued by its agencies or
instrumentalities, including government-sponsored entities. Additionally, from
time to time uncertainty regarding the status of negotiations in the U.S.
government to increase the statutory debt limit, commonly called the “debt
ceiling,” could increase the risk that the U.S. government may default on
payments on certain U.S. government securities, cause the credit rating of the
U.S. government to be downgraded, increase volatility in the stock and bond
markets, result in higher interest rates, reduce prices of U.S. Treasury
securities, and/or increase the costs of various kinds of debt. 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 that entity will be adversely
impacted.
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Inflation-Indexed
Bonds. Inflation-indexed
bonds are fixed income securities whose principal value is periodically adjusted
according to the rate of inflation. Two structures are common. The U.S. Treasury
and some other issuers use a structure that accrues inflation into the principal
value of the bond. Most other issuers pay out the Consumer Price Index (CPI)
accruals as part of a semiannual coupon.
Inflation-indexed
securities issued by the U.S. Treasury have maturities of five, ten or thirty
years, although it is
possible that securities with other maturities will be issued in the future. The
U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed
percentage of the inflation-adjusted principal amount. For example, if a fund
purchased an inflation-indexed bond with a par value of $1,000 and a 3% real
rate of return coupon (payable 1.5% semi-annually), and inflation over the first
six months was 1%, the mid-year par value of the bond would be $1,010 and the
first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If
inflation during the second half of the year resulted in the whole years’
inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and
the second semiannual interest payment would be $15.45 ($1,030 times
1.5%).
If
the periodic adjustment rate measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted
downward, and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment of the
original bond principal upon maturity (as adjusted for inflation) is guaranteed
in the case of U.S. Treasury inflation-indexed bonds, even during a period of
deflation. However, the current market value of the bonds is not guaranteed, and
will fluctuate. The Fund may also invest in other inflation related bonds which
may or may not provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal.
The
value of inflation-indexed bonds is expected to change in response to changes in
real interest rates. Real interest rates
in turn are tied to the relationship between nominal interest rates and the rate
of inflation. Therefore, if inflation were to rise at a faster rate than nominal
interest rates, real interest rates might decline, leading to an increase in
value of inflation-indexed bonds. In contrast, if nominal interest rates
increased at a faster rate than inflation, real interest rates might rise,
leading to a decrease in value of inflation-indexed bonds.
While
these securities are expected to be protected 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),
investors in these securities may not be protected to the extent that the
increase is not reflected in the bond’s inflation measure.
The
periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer
Price Index for Urban Consumers (CPI-U),
which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is
a measurement of changes in the cost of living, made up of components such as
housing, food, transportation and energy. Inflation-indexed bonds issued by a
foreign government are generally adjusted to reflect a comparable inflation
index, calculated by that government. There can be no assurance that the CPI-U
or any foreign inflation index will accurately measure the real rate of
inflation in the prices of goods and services. Moreover, there can be no
assurance that the rate of inflation in a foreign country will be correlated to
the rate of inflation in the United States.
Any
increase in the principal amount of an inflation-indexed bond will be considered
taxable ordinary income, even though
investors do not receive their principal until maturity.
Temporary
Investments. Each Fund may
invest a portion of its assets in affiliated money market funds or in other
types of money market instruments in which those funds would invest or other
short-term U.S. government securities for cash management purposes. Each Fund
may invest up to 100% of its assets in investments that may be inconsistent with
the Fund's principal investment strategies for temporary defensive purposes in
anticipation of or in response to adverse market, economic, political or other
conditions, or atypical circumstances such as unusually large cash inflows or
redemptions. As a result, a Fund may not achieve its investment
objective.
23
Changing
Interest Rates. In a low or
negative interest rate environment, debt securities may trade at, or be issued
with, negative yields, which means the purchaser of the security may receive at
maturity less than the total amount invested. In addition, in a negative
interest rate environment, if a bank charges negative interest, instead of
receiving interest on deposits, a depositor must pay the bank fees to keep money
with the bank. To the extent a Fund holds a negatively-yielding debt security or
has a bank deposit with a negative interest rate, the Fund would generate a
negative return on that investment. Cash positions may also subject a Fund to
increased counterparty risk to the Fund's bank. Debt market conditions are
highly unpredictable and some parts of the market are subject to dislocations.
In the past, the U.S. government and certain foreign central banks have taken
steps to stabilize markets by, among other things, reducing interest rates. To
the extent such actions are pursued, they present heightened risks to debt
securities, and such risks could be even further heightened if these actions are
unexpectedly or suddenly reversed or are ineffective in achieving their desired
outcomes. In recent years, the U.S. government began implementing increases to
the federal funds interest rate and there may be further rate increases. As
interest rates rise, there is risk that rates across the financial system also
may rise. To the extent rates increase substantially and/or rapidly, the Funds
may be subject to significant losses.
In
a low
or negative interest rate environment, some investors may seek to reallocate
assets to other income-producing assets. This may cause the price of such higher
yielding instruments to rise, could further reduce the value of instruments with
a negative yield, and may limit a Fund's ability to locate fixed income
instruments containing the desired risk/return profile. Changing interest rates,
including, rates that fall below zero, could have unpredictable effects on the
markets and may expose fixed income markets to heightened volatility, increased
redemptions, and potential illiquidity.
With
respect to a money market fund, which seeks to maintain a stable $1.00 price per
share, a low or negative interest
rate environment could impact the money market fund’s ability to maintain a
stable $1.00 share price. During a low or negative interest rate environment,
such money market fund may reduce the number of shares outstanding on a pro rata
basis through reverse stock splits, negative dividends or other mechanisms to
seek to maintain a stable $1.00 price per share, to the extent permissible by
applicable law and its organizational documents. Alternatively, the money market
fund may discontinue using the amortized cost method of valuation to maintain a
stable $1.00 price per share and establish a fluctuating NAV per share rounded
to four decimal places by using available market quotations or
equivalents.
Mortgage-Backed
and Asset-Backed Securities. Each Fund may
invest in mortgage-backed and asset-backed securities including commercial
mortgage-backed securities (CMBS) and residential mortgage-backed securities
(RMBS). Mortgage-backed securities are mortgage-related securities issued
or guaranteed by the U.S. government, its agencies and instrumentalities, or
issued by non-government entities, such as commercial banks and other private
lenders. Mortgage-related securities represent ownership in pools of mortgage
loans assembled for sale to investors by various government agencies such as the
Government National Mortgage Association (GNMA) and government-related
organizations such as the FNMA and the FHLMC, as well as by non-government
issuers such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies. Although certain
mortgage-related securities are guaranteed by a third party or otherwise
similarly secured, the market value of the security, which may fluctuate, is not
so secured. These securities differ from conventional bonds in that the
principal is paid back to the investor as payments are made on the underlying
mortgages in the pool. Accordingly, a Fund receives monthly scheduled payments
of principal and interest along with any unscheduled principal prepayments on
the underlying mortgages. Because these scheduled and unscheduled principal
payments must be reinvested at prevailing interest rates, mortgage-backed
securities do not provide an effective means of locking in long-term interest
rates for the investor.
In
addition, there are a number of important differences among the agencies and
instrumentalities of the U.S. government
that issue mortgage-related securities and among the securities they issue.
Mortgage-related securities issued by GNMA include GNMA Mortgage Pass-Through
Certificates (also known as Ginnie Maes) which are guaranteed as to the timely
payment of principal and interest. That guarantee is backed by the full faith
and credit of the U.S. Treasury. GNMA is a corporation wholly-owned by the U.S.
government within the Department of Housing and Urban Development.
Mortgage-related securities issued by FNMA
24
include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as Fannie Maes)
and are guaranteed as to
payment of principal and interest by FNMA itself and backed by a line of credit
with the U.S. Treasury. FNMA is a government-sponsored entity (GSE) wholly-owned
by public stockholders. Mortgage-related securities issued by FHLMC include
FHLMC Mortgage Participation Certificates (also known as Freddie Macs) and are
guaranteed as to payment of principal and interest by FHLMC itself and backed by
a line of credit with the U.S. Treasury. FHLMC is a GSE wholly-owned by public
stockholders.
Another
type of mortgage-related security issued by GSEs, such as FNMA and FHLMC, is
credit risk transfer
securities. GSE credit risk transfer securities are unguaranteed and unsecured
fixed or floating rate general obligations issued by GSEs, which are typically
issued at par and have stated final maturities. In addition, GSE credit risk
transfer securities are structured so that: (i) interest is paid directly by the
issuing GSE; and (ii) principal is paid by the issuing GSE in accordance with
the principal payments and default performance of a pool of residential mortgage
loans acquired by the GSE. The issuing GSE selects the pool of mortgage loans
based on that GSE’s eligibility criteria, and the performance of the credit risk
transfer securities will be directly affected by the selection of such
underlying mortgage loans.
GSE
credit risk transfer securities are not directly linked to or backed by the
underlying mortgage loans. Thus, although the
payment of principal and interest on such securities is tied to the performance
of the pool of underlying mortgage loans, in no circumstances will the actual
cash flow from the underlying mortgage loans be paid or otherwise made available
to the holders of the securities and the holders of the securities will have no
interest in the underlying mortgage loans. As a result, in the event that a GSE
fails to pay principal or interest on its credit risk transfer securities or
goes through a bankruptcy, insolvency or similar proceeding, holders of such
credit risk transfer securities will have no direct recourse to the underlying
mortgage loans. Such holders will receive recovery on par with other unsecured
note holders (agency debentures) in such a scenario.
GSE
credit risk transfer securities are issued in multiple tranches, which are
allocated certain principal repayments and
credit losses corresponding to the seniority of the particular tranche. Each
tranche will have credit exposure to the underlying mortgage loans and the yield
to maturity will be directly related to the amount and timing of certain defined
credit events on the underlying mortgage loans, any prepayments by borrowers and
any removals of a mortgage loan from the pool. Because credit risk exposure is
allocated in accordance with the seniority of the particular tranche, principal
losses will be first allocated to the most junior or subordinate tranches, thus
making the most subordinate tranches subject to increased sensitivity to
dramatic housing downturns. In addition, many credit risk transfer securities
have collateral performance triggers (such as those based on credit enhancement,
delinquencies or defaults) that could shut off principal payments to subordinate
tranches.
The
risks associated with an investment in GSE credit risk transfer securities will
be different than the risks associated
with an investment in mortgage-backed securities issued by GSEs, because some or
all of the mortgage default or credit risk associated with the underlying
mortgage loans in credit risk transfer securities is transferred to investors,
such as the Fund. As a result, investors in GSE credit risk transfer securities
could lose some or all of their investment in these securities if the underlying
mortgage loans default.
The
Funds may also invest in credit risk transfer securities issued by private
entities, such as banks or other financial
institutions. Credit risk transfer securities issued by private entities are
structured similarly to those issued by GSEs, and are generally subject to the
same types of risks, including credit, prepayment, extension, interest rate and
market risks.
On
September 7, 2008, FNMA and FHLMC were placed under the conservatorship of the
Federal Housing Finance
Agency (FHFA) to provide stability in the financial markets, mortgage
availability and taxpayer protection by preserving FNMA and FHLMC’s assets and
property and putting FNMA and FHLMC in a sound and solvent position. Under the
conservatorship, the management of FNMA and FHLMC was replaced.
25
Since
2009, both FNMA and FHLMC have received significant capital support through U.S.
Treasury preferred stock
purchases and Federal Reserve purchases of the entities’ mortgage-backed
securities.
In
February 2011, the Obama Administration produced a report to Congress outlining
proposals to wind down FNMA and FHLMC
and reduce the government’s role in the mortgage market. In December 2011,
Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 which,
among other provisions, requires that FNMA and FHLMC increase their
single-family guaranty fees by at least 10 basis points and remit this increase
to Treasury with respect to all loans acquired by FNMA or FHLMC on or after
April 1, 2012 and before January 1, 2022. Discussions among policymakers
continue, however, as to whether FNMA and FHLMC should be nationalized,
privatized, restructured, or eliminated altogether. FNMA reported in the third
quarter of 2016 that it expected "continued significant uncertainty" regarding
its future and the housing finance system, including how long FNMA will continue
to exist in its current form, the extent of its role in the market, how long it
will be in conservatorship, what form it will have and what ownership interest,
if any, current common and preferred stockholders will hold after the
conservatorship is terminated, and whether FNMA will continue to exist following
conservatorship. FHLMC faces similar uncertainty about its future role. If FNMA
and FHLMC are taken out of conservatorship, it is unclear how the capital
structure of FNMA and FHLMC would be constructed and what effects, if any, there
may be on FNMA’s and FHLMC’s creditworthiness and guarantees of certain
mortgage-backed securities. It is also unclear whether the U.S. Treasury would
continue to enforce its rights or perform its obligations related to senior
preferred stock. Should FNMA’s and FHLMC’s conservatorship end, there could be
an adverse impact on the value of their securities, which could cause Fund
losses. FNMA and FHLMC also are the subject of several continuing legal actions
and investigations over certain accounting, disclosure or corporate governance
matters, which (along with any resulting financial restatements) may continue to
have an adverse effect on the guaranteeing entities. Importantly, the future of
the entities is in question as the U.S. government considers multiple options
regarding the future of FNMA and FHLMC.
Under
the direction of the FHFA, FNMA and FHLMC have entered into a joint initiative
to develop a common
securitization platform for the issuance of a uniform mortgage-backed security
(the “Single Security Initiative”) that aligns the characteristics of FNMA and
FHLMC certificates. The Single Security Initiative seeks to support the overall
liquidity of the TBA market. FNMA and FHLMC began issuing uniform
mortgage-backed security in June 2019, and while the initial effects of the
issuance of uniform mortgage-backed securities on the market for
mortgage-related securities have been relatively minimal, the long-term effects
are still uncertain.
Asset-backed
securities are structured like mortgage-backed securities, but instead of
mortgage loans or interests in
mortgage loans, the underlying assets may include such items as motor vehicle
installment sales contracts or installment loan contracts, leases of various
types of real and personal property, and receivables from credit card agreements
and from sales of personal property. Regular payments received on
asset-backed securities include both interest and principal. Asset-backed
securities typically have no U.S. government backing. Additionally, the
ability of an issuer of asset-backed securities to enforce its security interest
in the underlying assets may be limited.
If
a Fund purchases a mortgage-backed or other asset-backed security at a premium,
the premium may be lost if there is
a decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying collateral. As with other
interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. Although the value of a mortgage-backed
or other asset-backed security may decline when interest rates rise, the
converse is not necessarily true, since in periods of declining interest rates
the mortgages and loans underlying the securities are prone to prepayment,
thereby shortening the average life of the security and shortening the period of
time over which income at the higher rate is received. When interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the period
of time over which income at the lower rate is received. For these and other
reasons, a mortgage-backed or other asset-backed security’s average maturity may
be shortened or lengthened as a result of interest rate fluctuations and,
therefore, it is not possible to predict accurately the security’s return. In
addition, while the trading market for short-term mortgages and asset-backed
securities is ordinarily quite liquid, in times of financial stress the trading
market for these securities may become restricted.
26
CMBS
and RMBS generally offer a higher rate of interest than government and
government-related mortgage-backed
securities because there are no direct or indirect government or government
agency guarantees of payment. The risk of loss due to default on CMBS and RMBS
is historically higher because neither the U.S. government nor an agency or
instrumentality have guaranteed them. CMBS and RMBS whose underlying assets are
neither U.S. government securities nor U.S. government insured mortgages, to the
extent that real properties securing such assets may be located in the same
geographical region, may also be subject to a greater risk of default than other
comparable securities in the event of adverse economic, political or business
developments that may affect such region and, ultimately, the ability of
property owners to make payments of principal and interest on the underlying
mortgages. Non-government mortgage-backed securities are generally subject to
greater price volatility than those issued, guaranteed or sponsored by
government entities because of the greater risk of default in adverse market
conditions. Where a guarantee is provided by a private guarantor, the Fund is
subject to the credit risk of such guarantor, especially when the guarantor
doubles as the originator.
Collateralized
Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. A CMO is a
type of mortgage-backed security that creates separate classes with varying
maturities and interest rates, called tranches. Similar to a bond, interest and
prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs
are structured into multiple classes, each bearing a different fixed or floating
interest rate and stated maturity.
Actual maturity and average life will depend upon the prepayment experience of
the collateral. CMOs provide for a modified form of call protection through a de
facto breakdown of the underlying pool of mortgages according to how quickly the
loans are repaid. Monthly payment of principal received from the pool of
underlying mortgages, including prepayments, is first returned to investors
holding the shortest maturity class. Investors holding the longer maturity
classes receive principal only after the first class has been retired. An
investor is partially guarded against a sooner than desired return of principal
because of the sequential payments.
In
a typical CMO transaction, a corporation (issuer) issues multiple series (i.e.,
Series A, B, C and Z) of CMO bonds (Bonds).
Proceeds of the Bond offering are used to purchase mortgages or mortgage
pass-through certificates (Collateral). The Collateral is pledged to a third
party trustee as security for the Bonds. Principal and interest payments from
the Collateral are used to pay principal on the Bonds in the following order:
Series A, B, C and Z. The Series A, B, and C Bonds all bear current interest.
Interest on a Series Z Bond is accrued and added to principal and a like amount
is paid as principal on the Series A, B, or C Bond is currently being paid off.
Only after the Series A, B, and C Bonds are paid in full does the Series Z Bond
begin to receive payment. With some CMOs, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations) to
borrow against their loan portfolios.
CMOs
that are issued or guaranteed by the U.S. government or by any of its agencies
or instrumentalities will be considered
U.S. government securities by the Funds, while other CMOs, even if
collateralized by U.S. government securities, will have the same status as other
privately issued securities for purposes of applying the Funds' diversification
tests.
FHLMC
CMOs are debt obligations of FHLMC issued in multiple classes having different
maturity dates which are secured
by the pledge of a pool of conventional mortgage loans purchased by FHLMC.
Payments of principal and interest on the FHLMC CMOs are made semiannually. The
amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC’s mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the FHLMC CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC’s minimum sinking fund obligation for any payment
date are paid to the holders of the FHLMC CMOs as additional sinking fund
payments. Because of the “pass-through” nature of all principal payments
received on the collateral pool in excess of FHLMC’s minimum sinking fund
27
requirement,
the rate at which principal of the FHLMC CMOs is actually repaid is likely to be
such that each class of bonds will
be retired in advance of its scheduled maturity date. If collection of principal
(including prepayments) on the mortgage loans during any semiannual payment
period is not sufficient to meet the FHLMC CMO’s minimum sinking fund obligation
on the next sinking fund payment date, FHLMC agrees to make up the deficiency
from its general funds.
Classes
of CMOs may also include interest only securities (IOs) and principal only
securities (POs). IOs and POs are
stripped mortgage-backed securities representing interests in a pool of
mortgages the cash flow from which has been separated into interest and
principal components. IOs receive the interest portion of the cash flow while
POs receive the principal portion. IOs and POs can be extremely volatile in
response to changes in interest rates. As interest rates rise and fall, the
value of IOs tends to move in the same direction as interest rates. POs perform
best when prepayments on the underlying mortgages rise since this increases the
rate at which the investment is returned and the yield to maturity on the PO.
When payments on mortgages underlying a PO are slow, the life of the PO is
lengthened and the yield to maturity is reduced.
CMOs
are generally subject to the same risks as mortgage-backed securities. In
addition, CMOs may be subject to credit
risk because the issuer or credit enhancer has defaulted on its obligations and
a Fund may not receive all or part of its principal. Obligations issued by U.S.
government-related entities are guaranteed as to the payment of principal and
interest, but are not backed by the full faith and credit of the U.S.
government. The performance of private label mortgage-backed securities, issued
by private institutions, is based on the financial health of those institutions.
Although GNMA guarantees timely payment of GNMA certificates even if homeowners
delay or default, tracking the “pass-through” payments may, at times, be
difficult.
Collateralized
Debt Obligations (CDOs). A CDO is a
security backed by a pool of bonds, loans and other debt obligations. CDOs are
not limited to investing in one type of debt and accordingly, a CDO may own
corporate bonds, commercial loans, asset-backed securities, residential
mortgage-backed securities, commercial mortgage-backed securities, and emerging
market debt. The CDO’s securities are typically divided into several classes, or
bond tranches, that have differing levels of investment grade or credit
tolerances. Most CDO issues are structured in a way that enables the senior bond
classes and mezzanine classes to receive investment-grade credit ratings. Credit
risk is shifted to the most junior class of securities. If any defaults occur in
the assets backing a CDO, the senior bond classes are first in line to receive
principal and interest payments, followed by the mezzanine classes and finally
by the lowest rated (or non-rated) class, which is known as the equity tranche.
Similar in structure to a collateralized mortgage obligation (described above)
CDOs are unique in that they represent different types of debt and credit
risk.
Collateralized
Loan Obligations (CLOs). CLOs are debt
instruments backed solely by a pool of other debt securities. The risks of an
investment in a CLO depend largely on the type of the collateral securities and
the class of the CLO in which a Fund invests. Some CLOs have credit ratings, but
are typically issued in various classes with various priorities. Normally, CLOs
are privately offered and sold (that is, they are not registered under the
securities laws) and may be characterized by a Fund as illiquid investments;
however, an active dealer market may exist for CLOs that qualify for Rule 144A
transactions. In addition to the normal interest rate, default and other risks
of fixed income securities, CLOs carry additional risks, including the
possibility that distributions from collateral securities will not be adequate
to make interest or other payments, the quality of the collateral may decline in
value or default a Fund may invest in CLOs that are subordinate to other
classes, values may be volatile, and disputes with the issuer may produce
unexpected investment results.
Credit
Linked Notes (CLNs). A CLN is a
security structured and issued by an issuer, which may be a bank, broker or
special purpose vehicle. If a CLN is issued by a special purpose vehicle, the
special purpose vehicle will typically be collateralized by AAA-rated
securities, but some CLNs are not collateralized. The performance and payment of
principal and interest is tied to that of a reference obligation which may be a
particular security, basket of securities, credit default swap, basket of credit
default swaps, or index. The reference obligation may be denominated in foreign
currencies. Risks of CLNs include those risks associated with the underlying
reference obligation including, but not limited to, market risk, interest rate
risk, credit risk,
28
default
risk and foreign currency risk. In the case of a CLN created with credit default
swaps, the structure will be “funded” such
that the par amount of the security will represent the maximum loss that could
be incurred on the investment and no leverage is introduced. An investor in a
CLN also bears counterparty risk or the risk that the issuer of the CLN will
default or become bankrupt and not make timely payments of principal and
interest on the structured security. Should the issuer default or declare
bankruptcy, the CLN holder may not receive any compensation. In return for these
risks, the CLN holder receives a higher yield. As with most derivative
instruments, valuation of a CLN may be difficult due to the complexity of the
security.
Bank
Instruments. Bank instruments
are unsecured interest bearing bank deposits. Bank instruments include, but are
not limited to, certificates of deposit, time deposits, and banker’s acceptances
from U.S. or foreign banks, as well as Eurodollar certificates of deposit
(Eurodollar CDs) and Eurodollar time deposits of foreign branches of domestic
banks. Some certificates of deposit are negotiable interest-bearing instruments
with a specific maturity issued by banks and savings and loan institutions in
exchange for the deposit of funds, and can typically be traded in the secondary
market prior to maturity. Other certificates of deposit, like time deposits, are
non-negotiable receipts issued by a bank in exchange for the deposit of funds
which earns a specified rate of interest over a definite period of time;
however, it cannot be traded in the secondary market. A banker’s acceptance is a
bill of exchange or time draft drawn on and accepted by a commercial
bank.
An
investment in Eurodollar CDs or Eurodollar time deposits may involve some of the
same risks that are described for
Foreign Securities.
Commercial
Instruments. Commercial
instruments include commercial paper, master notes and other short-term
corporate instruments, that are denominated in U.S. dollars or foreign
currencies.
Commercial
instruments are a type of instrument issued by large banks and corporations to
raise money to meet their
short-term debt obligations, and are only backed by the issuing bank or
corporation’s promise to pay the face amount on the maturity date specified on
the note. Commercial paper consists of short-term promissory notes issued by
corporations. Commercial paper may be traded in the secondary market after its
issuance. Master notes are demand notes that permit the investment of
fluctuating amounts of money at varying rates of interest pursuant to
arrangements with issuers who meet certain credit quality criteria. The interest
rate on a master note may fluctuate based on changes in specified interest rates
or may be reset periodically according to a prescribed formula or may be a set
rate. Although there is no secondary market in master demand notes, if such
notes have a demand feature, the payee may demand payment of the principal
amount of the note upon relatively short notice. Master notes are generally
illiquid and therefore typically subject to the Funds' percentage limitations
for investments in illiquid investments. Commercial instruments may not be
registered with the SEC.
Synthetic
Municipal Instruments. Synthetic
municipal instruments are instruments, the value of and return on which are
derived from underlying securities. Synthetic municipal instruments in
which the Funds may invest include tender option bonds, and fixed or variable
rate trust certificates. These types of instruments involve the deposit into a
trust or custodial account of one or more long-term tax-exempt bonds or notes
(Underlying Bonds), and the sale of certificates evidencing interests in the
trust or custodial account to investors such as the Funds. The trustee or
custodian receives the long-term fixed rate interest payments on the Underlying
Bonds, and pays certificate holders fixed rates or short-term floating or
variable interest rates which are reset periodically. A “tender option bond”
provides a certificate holder with the conditional right to sell its certificate
to the sponsor or some designated third party at specified intervals and receive
the par value of the certificate plus accrued interest (a demand feature). A
"fixed rate trust certificate" evidences an interest in a trust entitling a
certificate holder to fixed future interest and/or principal payments on the
Underlying Bonds. A “variable rate trust certificate” evidences an interest in a
trust entitling the certificate holder to receive variable rate interest based
on prevailing short-term interest rates and also typically provides the
certificate holder with the conditional demand feature (the right to tender its
certificate at par value plus accrued interest under certain
conditions).
All
synthetic municipal instruments must meet the minimum quality standards for the
Funds' investments and must present
minimal credit risks. In selecting synthetic municipal instruments for the
Funds, Invesco
29
considers
the creditworthiness of the issuer of the Underlying Bond, the sponsor and the
party providing certificate holders
with a conditional right to sell their certificates at stated times and prices
(a demand feature).
Typically,
a certificate holder cannot exercise the demand feature until the occurrence of
certain conditions, such as
where the issuer of the Underlying Bond defaults on interest payments. Moreover,
because synthetic municipal instruments involve a trust or custodial account and
a third party conditional demand feature, they involve complexities and
potential risks that may not be present where a municipal security is owned
directly.
The
tax-exempt character of the interest paid to certificate holders is based on the
assumption that the holders have an
ownership interest in the Underlying Bonds; however, the IRS has not issued a
ruling addressing this issue. In the event the IRS issues an adverse ruling or
successfully litigates this issue, it is possible that the interest paid to the
Funds on certain synthetic municipal instruments would be deemed to be taxable.
The Funds rely on opinions of special tax counsel on this ownership question and
opinions of bond counsel regarding the tax-exempt character of interest paid on
the Underlying Bonds.
Municipal
Securities. Municipal
Securities are typically debt obligations of states, territories or possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest on which, in the
opinion of bond counsel or other counsel to the issuers of such securities, is,
at the time of issuance, exempt from federal income tax. The issuers of
municipal securities obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, highways,
bridges, schools, hospitals, housing, mass transportation, streets and water and
sewer works. Other public purposes for which municipal securities may be issued
include refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to other public institutions and
facilities.
Certain
types of municipal securities are issued to obtain funding for privately
operated facilities. The credit and quality
of private activity debt securities are dependent on the private facility or
user, who is responsible for the interest payment and principal
repayment.
The
two major classifications of Municipal Securities are bonds and notes. Municipal
bonds are municipal debt obligations in
which the issuer is obligated to repay the original (or “principal”) payment
amount on a certain maturity date along with interest. A municipal bond’s
maturity date (the date when the issuer of the bond repays the principal) may be
years in the future. Short-term bonds mature in one to three years, while
long-term bonds usually do not mature for more than a decade. Notes are
short-term instruments which usually mature in less than two years. Most notes
are general obligations of the issuing municipalities or agencies and are sold
in anticipation of a bond sale, collection of taxes or receipt of other
revenues. Municipal notes also include tax, revenue notes and revenue and bond
anticipation notes (discussed more fully below) of short maturity, generally
less than three years, which are issued to obtain temporary funds for various
public purposes.
Municipal
debt securities may also be classified as general obligation or revenue
obligations (or "special delegation
securities"). General obligation securities are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and
interest.
Revenue
debt obligations, such as revenue bonds and revenue notes, are usually payable
only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source but not from
the general taxing power. The principal and interest payments for industrial
development bonds or pollution control bonds are often the sole responsibility
of the industrial user and therefore may not be backed by the taxing power of
the issuing municipality. The interest paid on such bonds may be exempt from
federal income tax, although current federal tax laws place substantial
limitations on the purposes and size of such issues. Such obligations are
considered to be Municipal Securities provided that the interest paid thereon,
in the opinion of bond counsel, qualifies as exempt from federal income tax.
However, interest on municipal securities may give rise to a federal alternative
minimum tax (AMT) liability for noncorporate taxpayers and may have other
collateral federal
30
income
tax consequences. There is a risk that some or all of the interest received by
the Fund from tax-exempt municipal
securities might become taxable as a result of tax law changes or determinations
of the IRS.
Another
type of revenue obligations is pre-refunded bonds, which are typically issued to
refinance debt. In other words,
pre-refunded bonds result from the advance refunding of bonds that are not
currently redeemable. The proceeds from the issue of the lower yield and/or
longer maturing pre-refunding bond will usually be used to purchase U.S.
government obligations, such as U.S. Treasury securities, which are held in an
escrow account and used to pay interest and principal payments until the
scheduled call date of the original bond issue occurs. Like other fixed income
securities, pre-refunded bonds are subject to interest rate, market, credit, and
reinvestment risks. However, because pre-refunded bonds are generally
collateralized with U.S. government obligations, such pre-refunded bonds have
essentially the same risks of default as an AAA-rated security. The Fund will
treat such pre-refunded securities as investment-grade securities,
notwithstanding the fact that the issuer of such securities may have a lower
rating (such as a below-investment-grade rating) from one or more rating
agencies.
Within
these principal classifications of municipal securities, there are a variety of
types of municipal securities,
including but not limited to, fixed and variable rate securities, variable rate
demand notes, municipal leases, custodial receipts, participation certificates,
inverse floating rate securities, and derivative municipal
securities.
After
purchase by a Fund, an issue of Municipal Securities may cease to be rated by
Moody's Investors Service, Inc.
(Moody's) or S&P Global Ratings Services (S&P), or another nationally
recognized statistical rating organization (NRSRO), or the rating of such a
security may be reduced below the minimum credit quality rating required for
purchase by the Fund. Neither event would require a Fund to dispose of the
security. To the extent that the ratings applied by Moody’s, S&P or another
NRSRO to Municipal Securities may change as a result of changes in these rating
systems, a Fund will attempt to use comparable credit quality ratings as
standards for its investments in Municipal Securities.
The
yields on Municipal Securities are dependent on a variety of factors, including
general economic and monetary
conditions, money market factors, conditions of the Municipal Securities market,
size of a particular offering, and maturity and rating of the obligation.
Because many Municipal Securities are issued to finance similar projects,
especially those related to education, health care, transportation and various
utilities, conditions in those sectors and the financial condition of an
individual municipal issuer can affect the overall municipal market. The market
values of the Municipal Securities held by a Fund will be affected by changes in
the yields available on similar securities. If yields increase following the
purchase of a Municipal Security, the market value of such Municipal Security
will generally decrease. Conversely, if yields decrease, the market value of a
Municipal Security will generally increase. The ratings of S&P and Moody’s
represent their opinions of the quality of the municipal securities they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal securities
with the same maturity, coupon and rating may have different yields while
municipal securities of the same maturity and coupon with different ratings may
have the same yield.
Certain
of the municipal securities in which the Funds may invest represent relatively
recent innovations in the municipal
securities markets and the markets for such securities may be less developed
than the market for conventional fixed rate municipal securities.
Under
normal market conditions, longer-term municipal securities generally provide a
higher yield than shorter-term
municipal securities. The Funds have no limitation as to the maturity of
municipal securities in which they may invest. The Adviser may adjust the
average maturity of a Fund’s portfolio from time to time depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates.
The
net asset value of a Fund will change with changes in the value of its portfolio
securities. With fixed income municipal
securities, the net asset value of a Fund can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities
31
generally
can be expected to rise. Conversely, when interest rates rise, the value of a
portfolio invested in fixed income
securities generally can be expected to decline. The prices of longer term
municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.
Municipal
Securities, like other debt obligations, are subject to the credit risk of
nonpayment. The ability of issuers of
municipal securities to make timely payments of interest and principal may be
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such nonpayment would result in a reduction of income to a
Fund, and could result in a reduction in the value of the municipal securities
experiencing nonpayment and a potential decrease in the net asset value of the
Fund. In addition, a Fund may incur expenses to work out or restructure a
distressed or defaulted security.
The
Funds may invest in Municipal Securities with credit enhancements such as
letters of credit and municipal bond
insurance. The Funds may invest in Municipal Securities that are insured by
financial insurance companies. Since a limited number of entities provide such
insurance, a Fund may invest more than 25% of its assets in securities insured
by the same insurance company. If a Fund invests in Municipal Securities backed
by insurance companies and other financial institutions, changes in the
financial condition of these institutions could cause losses to the Fund and
affect share price. Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying Municipal Bond should default. These credit
enhancements do not guarantee payments or repayments on the Municipal Securities
and a downgrade in the credit enhancer could affect the value of the Municipal
Security.
If
the IRS determines that an issuer of a Municipal Security has not complied with
applicable tax requirements,
interest from the security could be treated as taxable, which could result in a
decline in the security’s value. In addition, there could be changes in
applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on Municipal Securities or otherwise adversely
affect the current federal or state tax status of Municipal Securities. For
example, 2017 legislation commonly known as the Tax Cuts and Jobs Act repeals
the exclusion from gross income for interest on pre-refunded municipal
securities effective for such bonds issued after December 31, 2017.
Taxable
municipal securities are debt securities issued by or on behalf of states and
their political subdivisions, the
District of Columbia, and possessions of the United States, the interest on
which is not exempt from federal income tax. Taxable investments include, for
example, hedging instruments, repurchase agreements, and many of the types of
securities the Fund would buy for temporary defensive purposes.
At
times, in connection with the restructuring of a municipal bond issuer either
outside of bankruptcy court in a negotiated
workout or in the context of bankruptcy proceedings, the Fund may determine or
be required to accept equity or taxable debt securities, or the underlying
collateral (which may include real estate or loans) from the issuer in exchange
for all or a portion of the Fund’s holdings in the municipal security. Although
the Adviser will attempt to sell those assets as soon as reasonably practicable
in most cases, depending upon, among other things, the Adviser’s valuation of
the potential value of such assets in relation to the price that could be
obtained by the Fund at any given time upon sale thereof, the Fund may determine
to hold such securities or assets in its portfolio for limited period of time in
order to liquidate the assets in a manner that maximizes their value to the
Fund.
Municipal
Securities also include the following securities:
•
Bond Anticipation
Notes usually are general obligations of state and local governmental issuers
which are sold to obtain interim financing for projects that will eventually be
funded through the sale of long-term debt obligations or bonds.
•
Revenue
Anticipation Debt Securities, including bonds, notes, and certificates, are
issued by governments or governmental bodies with the expectation that future
revenues from a designated source will be used to repay the securities. In
general, they also constitute general obligations of the issuer.
32
•
Tax Anticipation
Notes are issued by state and local governments to finance the current
operations of such governments. Repayment is generally to be derived from
specific future tax revenues.
•
Tax-Exempt
Commercial Paper (Municipal Paper) is similar to taxable commercial paper,
except that tax-exempt commercial paper is issued by states, municipalities and
their agencies.
•
Tax-Exempt
Mandatory Paydown Securities (TEMPS) are fixed rate term bonds carrying a
short-term maturity, usually three to four years beyond the expected redemption.
TEMPS are structured as bullet repayments, with required optional redemptions as
entrance fees are collected.
•
Zero Coupon and
Pay-in-Kind Securities do not immediately produce cash income. These securities
are issued at an original issue discount, with the full value, including accrued
interest, paid at maturity. Interest income may be reportable annually, even
though no annual payments are made. Market prices of zero coupon bonds tend to
be more volatile than bonds that pay interest regularly. Pay-in-kind securities
are securities that have interest payable by delivery of additional securities.
Upon maturity, the holder is entitled to receive the aggregate par value of the
securities. Zero coupon and pay-in-kind securities may be subject to greater
fluctuation in value and less liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer’s financial condition, fluctuation in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative. Special tax
considerations are associated with investing in certain lower-grade securities,
such as zero coupon or pay-in-kind securities.
•
Capital
Appreciation Bonds are municipal securities in which the investment return on
the initial principal payment is reinvested at a compounded rate until the bond
matures. The principal and interest are due on maturity. Thus, like zero coupon
securities, investors must wait until maturity to receive interest and
principal, which increases the interest rate and credit risks.
•
Payments in lieu of
taxes (also known as PILOTs) are voluntary payments by, for instance the U.S.
government or nonprofits, to local governments that help offset losses in or
otherwise serve as a substitute for property taxes.
•
Converted Auction
Rate Securities (CARS) are a structure that combines the debt service deferral
feature of Capital Appreciation Bonds (CABS) with Auction Rate Securities. The
CARS pay no debt service until a specific date, then they incrementally convert
to conventional Auction Rate Securities. At each conversion date the issuer has
the ability to call and pay down any amount of the CARS.
Some
bonds may be “callable,” allowing the issuer to redeem them before their
maturity date. To protect bondholders,
callable bonds may be issued with provisions that prevent them from being called
for a period of time. Typically, that is 5 to 10 years from the issuance date.
When interest rates decline, if the call protection on a bond has expired, it is
more likely that the issuer may call the bond. If that occurs, the Fund might
have to reinvest the proceeds of the called bond in investments that pay a lower
rate of return, which could reduce the Fund’s yield.
Inverse
Floating Rate Interests. Inverse floating
rate interests
(Inverse
Floaters)
are
issued in connection with municipal tender option bond (TOB) financing
transactions to generate leverage for the Fund. Such instruments are created by
a special purpose trust (a TOB Trust) that holds long-term fixed rate
bonds
sold
to it by the Fund (the underlying security), and issues two classes of
beneficial interests: short-term floating rate interests
(Floaters), which
are sold to other investors, and Inverse Floaters, which are purchased by the
Fund. The Floaters have first priority on the cash flow from the underlying
security held by the TOB Trust, have a tender option feature that allows holders
to tender the Floaters back to the TOB Trust for their par amount and accrued
interest at specified intervals and bear interest at prevailing short-term
interest rates. Tendered Floaters are remarketed for sale to other investors for
their par amount and accrued interest by a remarketing agent to the TOB Trust
and are ultimately supported by a liquidity facility provided by a bank, upon
which the TOB Trust can draw funds to pay such amount to holders of Tendered
Floaters that cannot be remarketed. The Fund,
as
holder of the Inverse
Floaters, is paid
the residual cash flow from the underlying
33
security.
Accordingly, the Inverse Floaters provide the Fund with leveraged exposure to
the underlying security. When short-term interest rates rise or fall, the
interest payable on
the
Floaters issued by a TOB Trust will, respectively, rise or fall, leaving less or
more, respectively,
residual interest
cash flow from the underlying security available for payment on the Inverse
Floaters. Thus, as short-term interest rates rise,
Inverse Floaters
produce less income for the Fund,
and as
short-term interest rates decline,
Inverse Floaters
produce more income for the Fund.
The
price of Inverse Floaters is expected to decline when interest rates rise and
increase when interest rates decline,
in
either case generally more so than the price of a bond with a similar maturity,
because of the effect of leverage. As a result, the price of Inverse Floaters is
typically more volatile than the price of bonds with similar maturities,
especially if the relevant TOB Trust is structured to provide the holder of the
Inverse Floaters relatively greater leveraged exposure to the underlying
security (e.g., if the par amount of the Floaters, as a percentage of the par
amount of the underlying security, is relatively greater). Upon the occurrence
of certain adverse events (including a credit ratings downgrade of the
underlying security or a substantial decrease in the market value of the
underlying security), a TOB Trust may be collapsed by the remarketing agent or
liquidity provider and the underlying security liquidated, and the Fund could
lose the entire amount of its investment in the Inverse Floater and may, in some
cases, be contractually required to pay the shortfall, if any, between the
liquidation value of the underlying security and the principal amount of the
Floaters. Consequently, in a rising interest rate environment, the Fund’s
investments in Inverse Floaters could negatively impact the Fund’s performance
and yield, especially when those Inverse Floaters provide the Fund with
relatively greater
leveraged exposure
to the underlying securities held by the relevant TOB Trusts.
Final
rules implementing section 619 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Volcker Rule)
prohibit banking entities and their affiliates from sponsoring and/or providing
certain services to TOB Trusts, which constitute “covered funds” under the
Volcker Rule. As a result of the Volcker Rule, the Fund, as holder of Inverse
Floaters, is required to perform certain duties in connection with TOB financing
transactions previously performed by banking entities. These duties may
alternatively be performed by a non-bank third-party service provider. A Fund’s
expanded role in TOB financing transactions as a result of the Volcker Rule may
increase its operational and regulatory risk.
Further,
the SEC and various banking agencies have adopted rules implementing credit risk
retention requirements for
asset-backed securities (the Risk Retention Rules), which apply to TOB financing
transactions and TOB Trusts. The Risk Retention Rules require the sponsor of a
TOB Trust, which is deemed to be the Fund (as holder of the related Inverse
Floaters), to retain at least 5% of the credit risk of the underlying security
held by the TOB Trust. As applicable, the Fund has adopted policies and
procedures intended to comply with the Risk Retention Rules. The Risk Retention
Rules may adversely affect the Fund’s
ability to engage
in TOB financing transactions or increase the costs of such transactions in
certain circumstances.
There
can be no assurances that TOB financing
transactions will continue to be a viable or cost-effective form of leverage.
The
unavailability of
TOB financing transactions or an increase in the cost of financing
provided by TOB
transactions may adversely affect the Fund’s net asset value, distribution rate
and ability to achieve its investment objective.
Municipal
Lease Obligations. Municipal leases
obligations are issued by state and local governments or authorities to finance
the acquisition of land, equipment and facilities, such as state and municipal
vehicles, telecommunications and computer equipment, and other capital
assets. Municipal lease obligations, a type of Municipal Security, may
take the form of a lease, an installment purchase contract or a conditional
sales contract. Interest payments on qualifying municipal lease obligations are
generally exempt from federal income taxes.
Municipal
lease obligations are generally subject to greater risks than general obligation
or revenue bonds. State laws
set forth requirements that states or municipalities must meet in order to issue
municipal obligations, and such obligations may contain a covenant by the issuer
to budget for, appropriate, and make payments due under the obligation. However,
certain municipal lease obligations may contain "non-appropriation" clauses
which provide that the issuer is not obligated to make payments on the
obligation in
34
future
years unless funds have been appropriated for this purpose each year. If not
enough money is appropriated to
make the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligation. In such an event, there is no
assurance that the property's private sector or re-leasing value will be enough
to make all outstanding payments on the municipal lease obligation or that the
payments will continue to be tax-free. Additionally, it may be difficult to
dispose of the underlying capital asset in the event of non-appropriation or
other default. Direct investments by the Fund in municipal lease obligations may
be deemed illiquid and therefore subject to the Funds' percentage limitations
for illiquid investments and the risks of holding illiquid
investments.
Municipal
Forward Contracts. A municipal
forward contract is an agreement by a Fund to purchase a Municipal Security on a
when-issued basis with a longer-than-standard settlement period, in some cases
with the settlement date taking place up to five years from the date of
purchase. Municipal forward contracts typically carry a substantial yield
premium to compensate the buyer for the risks associated with a long when-issued
period, including shifts in market interest rates that could materially impact
the principal value of the bond, deterioration in the credit quality of the
issuer, loss of alternative investment options during the when-issued period and
failure of the issuer to complete various steps required to issue the
bonds.
Investment
Grade Debt Obligations. Each Fund may
invest in U.S. dollar-denominated debt obligations issued or guaranteed by U.S.
corporations or U.S. commercial banks, U.S. dollar-denominated obligations of
foreign issuers or debt obligations of foreign issuers denominated in foreign
currencies. Debt obligations include, among others, bonds, notes, debentures and
variable rate demand notes.
The
Adviser considers investment grade securities to include: (i) securities rated
BBB- or higher by S&P or Baa3 or higher
by Moody’s or an equivalent rating by another NRSRO, (ii) short-term securities
with comparable NRSRO ratings, or (iii) unrated securities determined by the
Adviser to be of comparable quality, each at the time of purchase. The
descriptions of debt securities ratings are found in Appendix A.
In
choosing corporate debt securities on behalf of a Fund, portfolio managers may
consider:
i.
general economic
and financial conditions;
ii.
the specific
issuer’s (a) business and management, (b) cash flow, (c) earnings coverage of
interest and dividends, (d) ability to operate under adverse economic
conditions, (e) fair market value of assets, and (f) in the case of foreign
issuers, unique political, economic or social conditions applicable to such
issuer’s country; and,
iii.
other
considerations deemed appropriate.
Debt
securities are subject to a variety of risks, such as interest rate risk, income
risk, prepayment risk, inflation risk,
credit risk, currency risk and default risk.
Non-Investment
Grade Debt Obligations (Junk Bonds). Bonds rated below
or determined to be below investment grade (as defined above in “Investment
Grade Debt Obligations”) are commonly referred to as “junk bonds.” Analysis of
the creditworthiness of junk bond issuers is more complex than that of
investment-grade issuers and the success of a Fund’s adviser in managing these
decisions is more dependent upon its own credit analysis than is the case with
investment-grade bonds.
The
capacity of junk bonds to pay interest and repay principal is considered
speculative. While junk bonds may provide an
opportunity for greater income and gains, they are subject to greater risks than
higher-rated debt securities. The prices of and yields on junk bonds may
fluctuate to a greater extent than those of higher-rated debt securities. Junk
bonds are generally more sensitive to individual issuer developments, economic
conditions and regulatory changes than higher-rated bonds. Issuers of junk bonds
are often smaller, less-seasoned companies or companies that are highly
leveraged with more traditional methods of financing unavailable to them. Junk
bonds are generally at a higher risk of default because such issues are often
unsecured or otherwise subordinated to claims of the issuer’s other creditors.
If a junk bond issuer defaults, a Fund may incur additional expenses to seek
recovery. The secondary markets in which junk bonds are traded may be thin and
less liquid than the market for higher-rated debt securities and a Fund may have
difficulty selling certain junk bonds at the desired time and price. Less
liquidity in secondary trading markets could
35
adversely
affect the price at which a Fund could sell a particular junk bond, and could
cause large fluctuations in the net asset
value of that Fund’s shares. The lack of a liquid secondary market may also make
it more difficult for a Fund to obtain accurate market quotations in valuing
junk bond assets and elements of judgment may play a greater role in the
valuation.
Floating
Rate Corporate Loans and Corporate Debt Securities. Floating rate
loans consist generally of obligations of companies and other entities
(collectively, borrowers) incurred for the purpose of reorganizing the assets
and liabilities of a borrower; acquiring another company; taking over control of
a company (leveraged buyout); temporary refinancing; or financing internal
growth or other general business purposes. Floating rate loans are often
obligations of borrowers who have incurred a significant percentage of debt
compared to equity issued and thus are highly leveraged.
Floating
rate loans may include both term loans, which are generally fully funded at the
time of a Fund’s investment, and
revolving loans, which may require a Fund to make additional investments in the
loans as required under the terms of the loan agreement. A revolving credit loan
agreement may require a Fund to increase its investment in a loan at a time when
a Fund might not otherwise have done so, even if the borrower’s condition makes
it unlikely that the loan will be repaid.
A
floating rate loan is generally offered as part of a lending syndicate to banks
and other financial institutions and is
administered in accordance with the terms of the loan agreement by an agent bank
who is responsible for collection of principal and interest and fee payments
from the borrower and apportioning those payments to all lenders who are parties
to the agreement. Typically, the agent is given broad discretion to enforce the
loan agreement and is compensated by the borrower for its services.
Floating
rate loans may be acquired by direct investment as a lender at the inception of
the loan or by assignment of a
portion of a floating rate loan previously made to a different lender or by
purchase of a participation interest. If a Fund makes a direct investment in a
loan as one of the lenders, it generally acquires the loan at par. This means a
Fund receives a return at the full interest rate for the loan. If a Fund
acquires its interest in loans in the secondary market or acquires a
participation interest, the loans may be purchased or sold above, at, or below
par, which can result in a yield that is below, equal to, or above the stated
interest rate of the loan. At times, a Fund may be able to invest in floating
rate loans only through assignments or participations.
A
participation interest represents a fractional interest in a floating rate loan
held by the lender selling a Fund the
participation interest. In the case of participations, a Fund will not have any
direct contractual relationship with the borrower, a Fund’s rights to consent to
modifications of the loan are limited and it is dependent upon the participating
lender to enforce each Fund’s rights upon a default.
A
Fund may be subject to the credit of both the agent and the lender from whom the
Fund acquires a participation
interest. These credit risks may include delay in receiving payments of
principal and interest paid by the borrower to the agent or, in the case of a
participation, offsets by the lender's regulator against payments received from
the borrower. In the event of the borrower's bankruptcy, the borrower's
obligation to repay the floating rate loan may be subject to defenses that the
borrower can assert as a result of improper conduct by the agent.
Historically,
floating rate loans have not been registered with the SEC or any state
securities commission or listed on any
securities exchange. As a result, the amount of public information available
about a specific floating rate loan has been historically less extensive than if
the floating rate loan were registered or exchange traded.
Although
loan investments are generally subject to certain restrictive covenants in favor
of the investor, certain of the
loans in which a Fund may invest may be issued or offered as “covenant lite”
loans, which have few or no financial maintenance covenants. “Financial
maintenance covenants” are those that require a borrower to maintain certain
financial metrics during the life of the loan, such as maintaining certain
levels of cash flow or limiting leverage. These covenants are
included to permit the lender to
monitor the borrower’s performance and declare an event of default
if breached, allowing the lender to renegotiate the terms of the loan
or take other actions intended to help
mitigate losses. Accordingly, a Fund may
36
experience
relatively greater difficulty or delays in enforcing its rights on its holdings
of covenant lite loans than its holdings
of loans or securities with financial maintenance covenants, which may result in
losses to the Fund, especially during a downturn in the credit cycle. Although
covenant lite loans contain few or no financial maintenance covenants,
information necessary to monitor a borrower’s financial performance may be
available without covenants to lenders and the public alike, and can be used to
detect such early warning signs as deterioration of a borrower’s financial
condition or results. When such information is available, the Adviser will seek
to take appropriate action without the help of covenants in the
loans.
Floating
rate debt securities are typically in the form of notes or bonds issued in
public or private placements in the
securities markets. Floating rate debt securities will typically have
substantially similar terms to floating rate loans, but will not be in the form
of participations or assignments.
The
floating rate loans and debt securities in which a Fund invests will, in most
instances, be secured and senior to other
indebtedness of the borrower. Each floating rate loan and debt security will
generally be secured by collateral such as accounts receivable, inventory,
equipment, real estate, intangible assets such as trademarks, copyrights and
patents, and securities of subsidiaries or affiliates. The value of the
collateral generally will be determined by reference to financial statements of
the borrower, by an independent appraisal, by obtaining the market value of such
collateral, in the case of cash or securities if readily ascertainable, or by
other customary valuation techniques considered appropriate by Invesco and/or
the Sub-Advisers. The value of collateral may decline after a Fund’s investment,
and collateral may be difficult to sell in the event of default. Consequently,
the Fund may not receive all the payments to which it is entitled. A Fund’s
assets may be invested in unsecured floating rate loans and debt securities or
subordinated floating rate loans and debt securities, which may or may not be
secured. If the borrower defaults on an unsecured loan or security, there is no
specific collateral on which the lender can foreclose. If the borrower defaults
on a subordinated loan or security, the collateral may not be sufficient to
cover both the senior and subordinated loans and securities.
Most
borrowers pay their debts from cash flow generated by their businesses. If a
borrower’s cash flow is insufficient to pay
its debts, it may attempt to restructure its debts rather than sell collateral.
Borrowers may try to restructure their debts by filing for protection under the
federal bankruptcy laws or negotiating a work-out. If a borrower becomes
involved in a bankruptcy proceeding, access to collateral may be limited by
bankruptcy and other laws. If a court decides that access to collateral is
limited or voidable, a Fund may not recover the full amount of principal and
interest that is due.
A
borrower must comply with certain restrictive covenants contained in the loan
agreement or indenture (in the case of
floating rate debt securities). In addition to requiring the scheduled payment
of principal and interest, these covenants may include restrictions on the
payment of dividends and other distributions to the borrower’s shareholders,
provisions requiring compliance with specific financial ratios, and limits on
total indebtedness. The agreement may also require the prepayment of the
floating rate loans or debt securities from excess cash flow. A breach of a
covenant that is not waived by the agent (or lenders directly) is normally an
event of default, which provides the agent and lenders the right to call for
repayment of the outstanding floating rate loan or debt security.
Purchasers
of floating rate loans may receive and/or pay certain fees. These fees are in
addition to interest payments
and may include commitment fees, facility fees, and prepayment penalty fees.
When a Fund buys a floating rate loan, it may receive a facility fee, and when
it sells a floating rate loan, it may pay an assignment fee.
It
is expected that the majority of floating rate loans and debt securities will
have stated maturities of three to ten years.
However, because floating rate loans and debt securities are frequently prepaid,
it is expected that the average maturity will be three to five years. The degree
to which borrowers prepay floating rate loans and debt securities, whether as a
contractual requirement or at the borrower’s election, may be affected by
general business conditions, the borrower’s financial condition and competitive
conditions among lenders. Prepayments cannot be predicted with accuracy.
Prepayments may result in a Fund’s investing in floating rate loans and debt
securities with lower yields.
37
Loans,
Loan Participations and Assignments. Loans and loan
participations are interests in amounts owed by a corporate, governmental or
other borrowers to another party. They may represent amounts owed to lenders or
lending syndicates, to suppliers of goods or services, or to other parties. A
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the lender selling the participation and only
upon receipt by the lender of the payments from the borrower. In connection with
purchasing participations, a Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan, nor any rights of set-off against the borrower, and a Fund may not
directly benefit from any collateral supporting the loan in which it has
purchased the participation. In addition, a Fund's rights to consent to
modifications of the loan are limited and it is dependent upon the participating
lender to enforce a Fund's rights upon a default. As a result, a Fund will
be subject to the credit risk of the borrower, the lender, and the agent who is
responsible for collection of principal and interest and fee payments from the
borrower and apportioning those payments to all lenders who are parties to the
loan agreement. In the event of the insolvency of the lender selling a
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower. Credit
risks relating to the agent may include delay in receiving payments of principal
and interest paid by the borrower to the agent. In the event of the borrower's
bankruptcy, the borrower's obligation to repay the loan may be subject to
defenses that the borrower can assert as a result of improper conduct by the
agent.
When
a Fund purchases assignments from lenders, it acquires direct rights against the
borrower on the loan. However,
because assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by a Fund
as the purchaser of an assignment may differ from, and be more limited than,
those held by the assigning lender. In addition, if the loan is foreclosed, a
Fund could be part owner of any collateral and could bear the costs and
liabilities of owning and disposing of the collateral.
Investments
in loans, loan participations and assignments present the possibility that a
Fund could be held liable as a
co-lender under emerging legal theories of lender liability. The Fund
anticipates that loans, loan participations and assignments could be sold only
to a limited number of institutional investors. If there is no active secondary
market for a loan, it may be more difficult to sell the interests in such a loan
at a price that is acceptable or to even obtain pricing information. In
addition, some loans, loan participations and assignments may not be rated by
major rating agencies. Loans held by a Fund might not be considered securities
for purposes of the Securities Act of 1933, as amended (the 1933 Act), or the
Securities Exchange Act of 1934, as amended (the Exchange Act), and therefore a
risk exists that purchasers, such as the Fund, may not be entitled to rely on
the anti-fraud provisions of those Acts.
The
secondary market for certain floating rate loans may be subject to irregular
trading activity, wide bid/ask spreads and
extended trade settlement periods (in some cases, longer than seven
days).
Public
Bank Loans. Public bank loans
are privately negotiated loans for which information about the issuer has been
made publicly available. Public loans are made by banks or other financial
institutions, and may be rated investment grade (as defined above in “Investment
Grade Debt Obligations”) or below investment grade. However, public bank loans
are not registered under the 1933 Act and are not publicly traded. They usually
are second lien loans normally lower in priority of payment to senior loans, but
have seniority in a company’s capital structure to other claims, such as
subordinated corporate bonds or publicly-issued equity so that in the event of
bankruptcy or liquidation, the company is required to pay down these second lien
loans prior to such other lower-ranked claims on their assets. Bank loans
normally pay floating rates that reset frequently, and as a result, protect
investors from increases in interest rates.
Bank
loans generally are negotiated between a borrower and several financial
institutional lenders represented by one
or more lenders acting as agent of all the lenders. The agent is responsible for
negotiating the loan agreement that establishes the terms and conditions of the
loan and the rights of the borrower and the lenders, monitoring any collateral,
and collecting principal and interest on the loan. By investing in a loan, a
Fund becomes a member of a syndicate of lenders. Certain bank loans are
illiquid, meaning the Fund may not be able to sell them quickly at a fair price.
Illiquid investments are also difficult to value. To the extent a bank loan has
been deemed illiquid, it will be subject to a Fund’s restrictions on illiquid
investments. The
38
secondary
market for bank loans may be subject to irregular trading activity, wide bid/ask
spreads and extended trade
settlement periods.
Bank
loans are subject to the risk of default. Default in the payment of interest or
principal on a loan will result in a
reduction of income to a Fund, a reduction in the value of the loan, and a
potential decrease in the Fund’s net asset value. The risk of default will
increase in the event of an economic downturn or a substantial increase in
interest rates. Bank loans are subject to the risk that the cash flow of the
borrower and property securing the loan or debt, if any, may be insufficient to
meet scheduled payments. As discussed above, however, because bank loans reside
higher in the capital structure than high yield bonds, default losses have been
historically lower in the bank loan market. Bank loans that are rated below
investment grade share the same risks of other below investment grade
securities.
Structured
Notes and Indexed Securities. Each Fund may
invest in structured notes or other indexed securities. Structured notes
are derivative debt instruments, the interest rate or principal of which is
linked to currencies, interest rates, commodities, indices or other financial
indicators (reference instruments). Indexed securities may include structured
notes and other securities wherein the interest rate or principal is determined
by a reference instrument.
Most
structured notes and indexed securities are fixed income securities that have
maturities of three years or less. The
interest rate or the principal amount payable at maturity of an indexed security
may vary based on changes in one or more specified reference instruments, such
as a floating interest rate compared with a fixed interest rate. The reference
instrument need not be related to the terms of the indexed security. Structured
notes and indexed securities may be positively or negatively indexed (i.e.,
their principal value or interest rates may increase or decrease if the
underlying reference instrument appreciates), and may have return
characteristics similar to direct investments in the underlying reference
instrument or to one or more options on the underlying reference
instrument.
Structured
notes and indexed securities may entail a greater degree of market risk than
other types of debt securities
because the investor bears the risk of the reference instrument. Structured
notes or indexed securities also may be more volatile, less liquid, and more
difficult to accurately price than less complex securities and instruments or
more traditional debt securities. In addition to the credit risk of the
structured note or indexed security’s issuer and the normal risks of price
changes in response to changes in interest rates, the principal amount of
structured notes or indexed securities may decrease as a result of changes in
the value of the underlying reference instruments. Further, in the case of
certain structured notes or indexed securities in which the interest rate, or
exchange rate in the case of currency, is linked to a reference instrument, the
rate may be increased or decreased or the terms may provide that, under certain
circumstances, the principal amount payable on maturity may be reduced to zero
resulting in a loss to the Fund.
U.S.
Corporate Debt Obligations. Corporate debt
obligations are debt obligations issued or guaranteed by corporations that are
denominated in U.S. dollars. Such investments may include, among others,
commercial paper, bonds, notes, debentures, variable rate demand notes, master
notes, funding agreements and other short-term corporate instruments. Commercial
paper consists of short-term promissory notes issued by corporations. Commercial
paper may be traded in the secondary market after its issuance. Variable rate
demand notes are securities with a variable interest which is readjusted on
pre-established dates. Variable rate demand notes are subject to payment of
principal and accrued interest (usually within seven days) on a Fund’s demand.
Master notes are negotiated notes that permit the investment of fluctuating
amounts of money at varying rates of interest pursuant to arrangements with
issuers who meet the credit quality criteria of the Fund. The interest rate on a
master note may fluctuate based upon changes in specified interest rates or be
reset periodically according to a prescribed formula or may be a set rate.
Although there is no secondary market in master notes, if such notes have a
demand feature, the payee may demand payment of the principal amount of the note
upon relatively short notice. Funding agreements are agreements between an
insurance company and a Fund covering underlying demand notes. Although there is
no secondary market in funding agreements, if the underlying notes have a demand
feature, the payee may demand payment of the
39
principal
amount of the note upon relatively short notice. Master notes and funding
agreements are generally illiquid and
therefore subject to the Funds' percentage limitation for illiquid
investments.
Qualifying
Hybrid Instruments. “Qualifying hybrid
instruments” are commodity-linked notes that are excluded from regulation under
the Commodity Exchange Act and the rules thereunder.
Other
Investments
Regulation
S Securities. Regulation S
securities of U.S. and non-U.S. issuers are offered through private offerings
without registration with the SEC pursuant to Regulation S of the 1933 Act.
Offerings of Regulation S securities may be conducted outside of the United
States, and Regulation S securities may be relatively less liquid as a result of
legal or contractual restrictions on resale. Although Regulation S securities
may be resold in privately negotiated transactions, the price realized from
these sales could be less than that originally paid by a Fund. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements that would be applicable
if their securities were publicly traded. Accordingly, Regulation S securities
may involve a high degree of business and financial risk and may result in
substantial losses.
Real
Estate Investment Trusts (REITs). Each Fund may
invest in equity interests and/or debt obligations issued by REITs. REITs are
trusts that sell equity or debt securities to investors and use the proceeds to
invest in real estate or interest therein. A REIT may focus on particular
projects, such as apartment complexes, or geographic regions, such as the
southeastern United States or both. Equity REITs invest the majority of their
assets directly in real property and derive income primarily from the collection
of rents. Equity REITs can also realize capital gains by selling property that
has appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments.
Investments
in REITs may be subject to many of the same risks as direct investments in real
estate. These risks include
difficulties in valuing and trading real estate, declines in the value of real
estate, risks related to general and local economic conditions, adverse changes
in the climate for real estate, environmental liability risks, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to tenants, heavy cash flow dependency and increases in
interest rates. To the extent that a Fund invests in REITs, the Fund could
conceivably acquire real estate directly as a result of a default on the REIT
interests or obligations it owns.
In
addition to the risks of direct real estate investment described above, equity
REITs may be affected by any changes in the
value of the underlying property owned by the trusts, while mortgage REITs may
be affected by the quality of any credit extended. REITs are also subject to the
following risks: they are dependent upon management skill and on cash flows; are
not diversified; are subject to defaults by borrowers, self-liquidation, and the
possibility of failing to maintain an exemption from the 1940 Act; and are
subject to interest rate risk. A Fund that invests in REITs will bear a
proportionate share of the expenses of the REITs.
Furthermore,
for tax reasons, a REIT may impose limits on how much of its securities any one
investor may own. These
ownership limitations (also called “excess share provisions”) may be based on
ownership of securities by multiple funds and accounts managed by the same
investment adviser and typically result in adverse consequences (such as
automatic divesture of voting and dividend rights for shares that exceed the
excess share provision) to investors who exceed the limit. A REIT’s excess share
provision may result in a Fund being unable to purchase (or otherwise obtain
economic exposure to) the desired amounts of certain REITs. In some
circumstances, a Fund may seek and obtain a waiver from a REIT to exceed the
REIT’s ownership limitations without being subject to the adverse consequences
of exceeding such limit were a waiver not obtained, provided that the Fund
complies with the provisions of the waiver.
40
Other
Investment Companies. Unless otherwise
indicated in this SAI or in a Fund’s prospectus, a Fund may purchase shares of
other investment companies, including exchange-traded funds (“ETFs”),
non-exchange traded U.S. registered open-end investment companies (mutual
funds), closed-end investment companies, or non-U.S. investment companies traded
on foreign exchanges. When a Fund purchases shares of another investment
company, the Fund will indirectly bear its proportionate share of the advisory
fees and other operating expenses of such investment company and will be subject
to the risks associated with the portfolio investments of the underlying
investment company.
A
Fund’s investment in the securities of other investment companies is subject to
the applicable provisions of the
1940 Act and the rules thereunder. Specifically, Section 12(d)(1) of the 1940
Act contains various limitations on the ability of a registered investment
company (an “acquiring fund”) to acquire shares of another registered investment
company (an “acquired fund”). Under these limits, an acquiring fund generally
cannot (i) purchase more than 3% of the total outstanding voting stock of an
acquired fund; (ii) invest more than 5% of its total assets in securities issued
by an acquired company; and (iii) invest more than 10% of its total assets in
securities issued by other investment companies. Likewise, an acquired fund, as
well as its principal underwriter or any broker or dealer registered under the
Exchange Act, cannot knowingly sell more than 3% of the total outstanding voting
stock of the acquired fund to an acquiring fund, or more than 10% of the total
outstanding voting stock of the acquired fund to acquiring funds
generally.
Rule
12d1-4 under the 1940 Act
allows
a fund to acquire the securities of another investment company in excess of the
limitations imposed by Section 12 without obtaining an exemptive order from the
SEC, subject to certain limitations and conditions. Among those conditions is
the requirement that, prior to a fund relying on Rule 12d1-4 to acquire
securities of another fund in excess of the limits of Section 12(d)(1), the
acquiring fund must enter into a Fund of Funds Agreement with the acquired fund.
(This requirement does not apply when the acquiring fund’s investment adviser
acts as the acquired fund’s investment adviser and does not act as sub-adviser
to either fund.)
Rule
12d1-4 also is designed to limit the use of complex fund structures. Under Rule
12d1-4, an acquired fund is prohibited
from purchasing or otherwise acquiring the securities of another investment
company or private fund if, immediately after the purchase, the securities of
investment companies and private funds owned by the acquired fund have an
aggregate value in excess of 10% of the value of the acquired fund’s total
assets, subject to certain limited exceptions. Accordingly, to the extent a
Fund’s shares are sold to other investment companies in reliance on Rule 12d1-4,
the Fund will be limited in the amount it could invest in other investment
companies and private funds.
In
addition to Rule 12d1-4, the 1940 Act and related rules provide other exemptions
from these restrictions. For
example, these limitations do not apply to investments by a Fund in investment
companies that are money market funds, including money market funds that have
the Adviser or an affiliate of the Adviser as an investment
adviser.
Limited
Partnerships. A limited
partnership interest entitles the Fund to participate in the investment return
of the partnership’s assets as defined by the agreement among the partners. As a
limited partner, the Fund generally is not permitted to participate in the
management of the partnership. However, unlike a general partner whose liability
is not limited, a limited partner’s liability generally is limited to the amount
of its commitment to the partnership.
Master
Limited Partnerships (MLPs). MLPs generally are
limited partnerships (or limited liability companies), the common units of which
are listed and traded on a national securities exchange or over-the-counter.
MLPs generally have two classes of partners, the general partner and the limited
partners. The general partner normally controls the MLP through an equity
interest plus units that are subordinated to the common (publicly traded) units
for an initial period and then only converting to common if certain financial
tests are met. The general partner also generally receives a larger portion of
the net income as incentive. As cash flow grows, the general partner receives a
greater interest in the incremental income compared to the interest of limited
partners.
41
MLP
common units represent an equity ownership interest in a partnership, providing
limited voting rights and entitling the
holder to a share of the company’s success through distributions and/or capital
appreciation. Unlike shareholders of a corporation, common unit holders do not
elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets,
removal of the general partner or material amendments to the partnership
agreement. MLPs are required by their partnership agreements to distribute a
large percentage of their current operating earnings. Common unit holders
generally have first right to a minimum quarterly distribution (MQD) prior to
distributions to the convertible subordinated unit holders or the general
partner (including incentive distributions). Common unit holders typically have
arrearage rights if the MQD is not met. In the event of liquidation, MLP common
unit holders have first right to the partnership’s remaining assets after
bondholders, other debt holders, and preferred unit holders have been paid in
full.
The
general partner or managing member interest in an MLP is typically retained by
the original sponsors of an MLP, such as
its founders, corporate partners and entities that sell assets to the MLP. The
holder of the general partner or managing member interest can be liable in
certain circumstances for amounts greater than the amount of the holder’s
investment in the general partner or managing member. General partner or
managing member interests often confer direct board participation rights in, and
in many cases control over the operations of, the MLP. General partner or
managing member interests can be privately held or owned by publicly traded
entities. General partner or managing member interests receive cash
distributions, typically in an amount of up to 2% of available cash, which is
contractually defined in the partnership or limited liability company agreement.
In addition, holders of general partner or managing member interests typically
receive incentive distribution rights (IDRs), which provide them with an
increasing share of the entity’s aggregate cash distributions upon the payment
of per common unit distributions that exceed specified threshold levels above
the MQD. Incentive distributions to a general partner are designed to encourage
the general partner, who controls and operates the partnership, to maximize the
partnership’s cash flow and increase distributions to the limited partners. Due
to the IDRs, general partners of MLPs have higher distribution growth prospects
than their underlying MLPs, but quarterly incentive distribution payments would
also decline at a greater rate than the decline rate in quarterly distributions
to common and subordinated unit holders in the event of a reduction in the MLP’s
quarterly distribution. The ability of the limited partners or members to remove
the general partner or managing member without cause is typically very limited.
In addition, some MLPs permit the holder of IDRs to reset, under specified
circumstances, the incentive distribution levels and receive compensation in
exchange for the distribution rights given up in the reset.
Some
companies in which a Fund may invest have been organized as limited liability
companies (MLP LLCs). Such MLP
LLCs generally are treated in the same manner as MLPs for federal income tax
purposes (i.e., generally taxed as partnerships). MLP LLC common units trade on
a national securities exchange or OTC. In contrast to MLPs, MLP LLCs have no
general partner and there are generally no incentives that entitle management or
other unitholders to increased percentages of cash distributions as
distributions reach higher target levels. In addition, MLP LLC common
unitholders typically have voting rights with respect to the MLP LLC, whereas
MLP common units have limited voting rights.
Investments
in securities of an MLP 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, and may be subject to more abrupt or erratic
price movements and lower market liquidity. MLPs are generally considered
interest-rate sensitive investments. During periods of interest rate volatility,
these investments may not provide attractive returns.
There
are also certain tax risks undertaken by the Fund when it invests in MLPs. MLPs
are generally treated as
partnerships for U.S. federal income tax purposes. Partnerships do not pay U.S.
federal income tax at the partnership level, subject to the application of
certain partnership audit rules. 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
42
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. This would have
the effect of reducing the amount of cash available for distribution by the MLP
and could result in a reduction in the value of the Fund’s investment in the MLP
and lower income to the Fund. Also, to the extent a distribution received by a
Fund from an MLP is treated as a return of capital, the Fund’s adjusted tax
basis in the interests of the MLP will be reduced, which may increase the Fund’s
tax liability upon the sale of the interests in the MLP or upon subsequent
distributions in respect of such interests.
Private
Equity and Debt Investments. Privately issued
securities, which include private investments in public equity (PIPEs), and
private debt investments, involve an extraordinarily high degree of business and
financial risk and can result in substantial or complete losses. Some portfolio
companies in which the Fund may invest may be operating at a loss or with
substantial variations in operating results from period to period and may need
substantial additional capital to support expansion or to achieve or maintain
competitive positions. Such companies may face intense competition, including
competition from companies with much greater financial resources, much more
extensive development, production, marketing and service capabilities and a much
larger number of qualified managerial and technical personnel. The Fund can
offer no assurance that the marketing efforts of any particular portfolio
company will be successful or that its business will succeed. Additionally,
privately held companies are not subject to SEC reporting requirements or the
reporting requirements of publicly traded companies in applicable jurisdictions,
are not required to maintain their accounting records in accordance with
generally accepted accounting principles, and are not required to maintain
effective internal controls over financial reporting. As a result, the Adviser
may not have timely or accurate information about the business, financial
conditions and results of operations of the privately held companies in which
the Fund invests. The more limited financial information and lack of publicly
available prices require a Fund to determine a fair value for such investments
in accordance with the valuation policy approved by the Board and related
procedures. Difficulty in valuing such investments may make it difficult to
accurately determine a Fund's exposure to privately issued securities. The
Fund’s NAV could be adversely affected if the Fund’s determinations regarding
the fair value of the Fund’s investments were materially higher than the values
that the Fund ultimately realizes upon the disposal of such investments. In
addition, input from the Adviser’s investment professionals as part of the
Fund’s valuation process could result in a conflict of interest as the Adviser’s
management fee is based, in part, on the value of the Fund’s assets.
Investments
in private companies may be considered to be illiquid and may be difficult to
sell at a desirable time or
at the prices at which the Fund has valued the investments. Additional risks
include that the Fund could be subject to contingent liabilities in the event a
private issuer is acquired by another company during the period it is held by
the Fund; and that the company may be using excessive leverage. Privately issued
debt securities can often be below investment grade quality and frequently are
unrated.
Private
Investments in Public Equity. Private
investments in public equity (PIPES) are equity securities in a private
placement that are issued by issuers who have outstanding, publicly-traded
equity securities of the same class. Shares in PIPES generally are not
registered with the SEC until after a certain time period from the date the
private sale is completed. This restricted period can last many months. Until
the public registration process is completed, PIPES are restricted as to resale
and the Fund cannot freely trade the securities. Generally, such restrictions
cause the PIPES to be illiquid during this time. PIPES may contain provisions
that the issuer will pay specified financial penalties to the holder if the
issuer does not publicly register the restricted equity securities within a
specified period of time, but there is no assurance that the restricted equity
securities will be publicly registered, or that the registration will remain in
effect.
Defaulted
Securities. Defaulted
securities are debt securities on which the issuer is not currently making
interest payments. In order to enforce its rights in defaulted securities, a
Fund may be required to participate in legal proceedings or take possession of
and manage assets securing the issuer’s obligations on the defaulted securities.
This could increase operating expenses and adversely affect net asset value.
Risks of defaulted securities may be considerably higher as they are generally
unsecured and subordinated to other creditors of the issuer. Investments in
defaulted securities generally will also be considered illiquid investments
subject to the limitations described herein, except as otherwise may be
determined under the Trust’s applicable policies and
procedures.
43
Variable
or Floating Rate Instruments. Variable or
floating rate instruments are securities that provide for a periodic adjustment
in the interest rate paid on the obligation. The interest rates for securities
with variable interest rates are readjusted on set dates (such as the last day
of the month or calendar quarter) and the interest rates for securities with
floating rates are reset whenever a specified interest rate change occurs.
Variable or floating interest rates generally reduce changes in the market price
of securities from their original purchase price because, upon readjustment,
such rates approximate market rates. Accordingly, as market interest rates
decrease or increase, the potential for capital appreciation or depreciation is
less for variable or floating rate securities than for fixed rate obligations.
Many securities with variable or floating interest rates have a demand feature
allowing the Fund to demand payment of principal and accrued interest prior to
its maturity. The terms of such demand instruments require payment of principal
and accrued interest by the issuer, a guarantor, and/or a liquidity provider.
All variable or floating rate instruments will meet the applicable rating
standards of the Funds. A Fund’s Adviser, or Sub-Adviser, as applicable, may
determine that an unrated floating rate or variable rate demand obligation meets
the Fund’s rating standards by reason of being backed by a letter of credit or
guarantee issued by a bank that meets those rating standards.
The
secondary market for certain floating rate loans may be subject to irregular
trading activity, wide bid/ask spreads and
extended trade settlement periods (in some cases, longer than seven days).
Certain floating rate loans held by a Fund might not be considered securities
for purposes of the Exchange Act and therefore a risk exists that purchasers,
such as the Funds, may not be entitled to rely on the antifraud provisions of
those Acts.
Zero
Coupon and Pay-in-Kind Securities. Zero coupon
securities do not pay interest or principal until final maturity, unlike debt
securities that traditionally provide periodic payments of interest (referred to
as a coupon payment). Investors must wait until maturity to receive interest and
principal, which increases the interest rate and credit risks of a zero coupon
security. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Zero coupon and pay-in-kind
securities may be subject to greater fluctuation in value and lower liquidity in
the event of adverse market conditions than comparably rated securities paying
cash interest at regular interest payment periods. Investors may purchase zero
coupon and pay-in-kind securities at a price below the amount payable at
maturity. The difference between the purchase price and the amount paid at
maturity represents “original issue discount” on the security.
Premium
Securities. Premium securities
are securities bearing coupon rates higher than the then prevailing market
rates.
Premium
securities are typically purchased at a “premium,” in other words, at a price
greater than the principal amount
payable on maturity. The Fund will not amortize the premium paid for such
securities in calculating its net investment income. As a result, in such cases
the purchase of premium securities provides the Fund a higher level of
investment income distributable to shareholders on a current basis than if the
Fund purchased securities bearing current market rates of interest. However, the
yield on these securities would remain at the current market rate. If securities
purchased by the Fund at a premium are called or sold prior to maturity, the
Fund will realize a loss to the extent the call or sale price is less than the
purchase price. Additionally, the Fund will realize a loss of principal if it
holds such securities to maturity.
Stripped
Income Securities. Stripped Income
Securities are obligations representing an interest in all or a portion of the
income or principal components of an underlying or related security, a pool of
securities, or other assets. Stripped income securities may be partially
stripped so that each class receives some interest and some principal. However,
they may be completely stripped, where one class will receive all of the
interest (the interest-only class or the IO class), while the other class will
receive all of the principal (the principal-only class or the PO
class).
The
market values of stripped income securities tend to be more volatile in response
to changes in interest rates than
are conventional income securities. In the case of mortgage-backed stripped
income securities, the yields to maturity of IOs and POs may be very sensitive
to principal repayments (including prepayments) on the underlying mortgages
resulting in a Fund being unable to recoup its initial investment or
44
resulting
in a less than anticipated yield. The market for stripped income securities may
be limited, making it difficult for the
Fund to dispose of its holdings at an acceptable price.
Privatizations. The governments of
certain foreign countries have, to varying degrees, embarked on privatization
programs to sell part or all of their interests in government owned or
controlled companies or enterprises (privatizations). A Fund’s investments in
such privatizations may include: (i) privately negotiated investments in a
government owned or controlled company or enterprise; (ii) investments in the
initial offering of equity securities of a government owned or controlled
company or enterprise; and (iii) investments in the securities of a government
owned or controlled company or enterprise following its initial equity
offering.
In
certain foreign countries, the ability of foreign entities such as the Fund to
participate in privatizations may be limited by
local law, or the terms on which the Fund may be permitted to participate may be
less advantageous than those for local investors. There can be no assurance that
foreign governments will continue to sell companies and enterprises currently
owned or controlled by them, that privatization programs will be successful, or
that foreign governments will not re-nationalize companies or enterprises that
have been privatized. If large blocks of these enterprises are held by a small
group of stockholders the sale of all or some portion of these blocks could have
an adverse effect on the price.
Participation
Notes.
Participation notes, also known as participation certificates, are issued by
banks or broker-dealers and are designed to replicate the performance of foreign
companies or foreign securities markets and can be used by the Fund as an
alternative means to access the securities market of a country. Participation
notes are generally traded OTC. The performance results of participation notes
will not replicate exactly the performance of the foreign company or foreign
securities market that they seek to replicate due to transaction and other
expenses. Investments in participation notes involve the same risks associated
with a direct investment in the underlying foreign companies or foreign
securities market that they seek to replicate. In addition, participation notes
are subject to counterparty risk, currency risk and reinvestment risk.
Counterparty risk is the risk that the broker-dealer or bank that issues them
will not fulfill its contractual obligation to complete the transaction with the
Fund. Participation notes constitute general unsecured contractual obligations
of the banks or broker-dealers that issue them, and a Fund is relying on the
creditworthiness of such banks or broker-dealers and has no rights under a
participation note against the issuer of the underlying assets. Additionally,
there is a currency risk since the dollar value of the Fund’s foreign
investments will be affected by changes in the exchange rates between the dollar
and (a) the currencies in which the notes are denominated, such as euro
denominated participation notes, and (b) the currency of the country in which
the foreign company sits. Also, there is a reinvestment risk because the amounts
from the note may be reinvested in a less valuable investment when the note
matures.
Investment
Techniques
Forward
Commitments, When-Issued and Delayed Delivery Securities. Each Fund may
purchase and sell securities on a forward commitment, when-issued and delayed
delivery basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. Securities purchased or sold on a
forward commitment, when-issued or delayed delivery basis involve delivery and
payment that take place in the future after the trade date or the date of the
commitment to purchase or sell the securities at a pre-determined price and/or
yield. Settlement of such transactions normally occurs a month or more after the
purchase or sale commitment is made. Typically, no interest accrues to the
purchaser until the security is delivered. Forward commitments include “to be
announced” (TBA) transactions, which are contracts for the purchase and sale of
mortgage-backed securities issued or guaranteed by certain U.S.
agencies or
government sponsored enterprises for delivery at a future
settlement date
agreed upon by the two
parties to the
transaction, which is typically a month or more after the trade date of the
transaction.
On
the
trade date of a TBA transaction, the counterparties agree upon certain criteria
for the securities that are to be delivered, including the issuer, maturity,
coupon, face value and price, but the precise securities to be delivered are not
specified.
Instead,
the
actual securities to be delivered,
which
must satisfy the specified criteria, are communicated by the seller to the buyer
shortly before the agreed upon settlement date. Although a Fund generally
intends to acquire or dispose of securities on a forward commitment, when-issued
or delayed delivery basis, a Fund may instead sell these securities or its
commitment before the settlement date if
45
deemed
advisable. This will frequently be the case for TBA transactions
and other forward-settling mortgage-backed securities transactions. No specific
limitation exists as to the percentage of the Fund’s assets which may be used to
acquire securities on a when-issued and delayed delivery basis.
When
purchasing a security on a forward commitment, when-issued or delayed delivery
basis, a Fund assumes the risks
of ownership of the security, including the risk of price and yield
fluctuations, and takes such fluctuations into account when determining its net
asset value. Securities purchased on a forward commitment, when-issued or
delayed delivery basis are subject to changes in value based upon the public’s
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Accordingly, securities acquired on
such a basis may expose a Fund to risks because they may experience such
fluctuations prior to actual delivery. Purchasing securities on a forward
commitment, when-issued or delayed delivery basis may involve the additional
risk that the yield available in the market when the delivery takes place
actually may be higher than that obtained in the transaction itself.
Many
forward commitments, when-issued and delayed delivery transactions, including
TBAs,
are also subject to the risk that a counterparty may become bankrupt or
otherwise fail to perform its obligations due to financial difficulties,
including making payments or fulfilling delivery obligations to a Fund. A Fund
may obtain no or only limited recovery in a bankruptcy or other reorganizational
proceedings, and any recovery may be significantly delayed. With respect to TBA
transactions and other forward-settling mortgage-backed securities
transactions, the
counterparty risk may be mitigated by the exchange of variation margin between
the counterparties on a regular basis as the market value of the deliverable
security fluctuates.
Investment
in these types of securities may increase the possibility that the Fund will
incur short-term gains subject to
federal taxation or short-term losses if the Fund must engage in portfolio
transactions in order to honor its commitment. In the case of a purchase
transaction, the delayed delivery securities, which will not begin to accrue
interest or dividends until the settlement date, will be recorded as an asset of
a Fund and will be subject to the risk of market fluctuation. The purchase price
of the delayed delivery securities is a liability of a Fund until settlement.
TBA transactions and other forward-settling mortgage-backed securities
transactions may be effected pursuant to a collateral agreement with the
counterparty under which the parties exchange collateral consisting of cash or
liquid securities in an amount as specified by the agreement that is based on
the change in the market value of the TBA transactions governed by the
agreement. A Fund or the counterparty will make payments throughout the term of
the transaction as collateral values fluctuate to maintain full
collateralization for the term of the transaction. Collateral will be
marked-to-market every business day. If the counterparty defaults on the
transaction or declares bankruptcy or insolvency, a Fund might incur expenses in
enforcing its rights, or the Fund might experience delay and costs in recovering
collateral or may suffer a loss if the value of the collateral
declines.
Short
Sales.
Each Fund does not currently intend to engage in short sales of securities other
than short sales of securities that a Fund owns or has the right to obtain
(short sales against the box). A Fund (except for Invesco Comstock Fund, Invesco
Comstock Select Fund, Invesco Gold & Special Minerals Fund, Invesco Small
Cap Value Fund and Invesco Value Opportunities Fund) will not sell a security
short if, as a result of such short sale, the aggregate market value of such
securities sold short exceeds 10% of the Fund's total assets.
A
short sale involves the sale of a security which a Fund does not own in the hope
of purchasing the same security at a
later date at a lower price. To make delivery to the buyer, the Fund must borrow
the security from a broker. A Fund normally closes a short sale by purchasing an
equivalent number of shares of the borrowed security on the open market and
delivering them to the broker. A short sale is typically effected when the
Fund’s Adviser believes that the price of a particular security will decline.
Open short positions using options, futures, swaps or forward foreign currency
contracts are not deemed to constitute selling securities short.
To
secure its obligation to deliver the securities sold short to the broker and
repay the securities borrowed, a Fund will be
required to deposit cash or liquid securities with the broker as collateral. In
addition, a Fund may have to pay a fee or rate of interest to borrow the
securities, and while the loan of the security sold short is outstanding, the
Fund is required to pay to the broker the amount of any dividends paid on shares
sold
46
short.
The collateral pledged by the Fund to the broker in connection with short sales
will be marked to market daily. The
collateral pledged does not have the effect of limiting the amount of money that
a Fund may lose on a short sale.
Short
positions create a risk that the Fund will be required to cover them by buying
the security at a time when the security
has appreciated in value, thus resulting in a loss to the Fund. A short position
in a security poses more risk than holding the same security long. Because a
short position loses value as the security’s price increases, the loss on a
short sale is theoretically unlimited. The loss on a long position is limited to
what the Fund originally paid for the security together with any transaction
costs. A Fund may not always be able to borrow a security a Fund seeks to sell
short at a particular time or at an acceptable price. It is possible that the
market value of the securities the Fund holds in long positions will decline at
the same time that the market value of the securities the Fund has sold short
increases, thereby increasing the Fund’s potential volatility and losses.
Because a Fund may be required to pay dividends, interest, premiums and other
expenses in connection with a short sale, any benefit for the Fund resulting
from the short sale will be decreased, and the amount of any ultimate gain or
loss will be decreased or increased, respectively, by the amount of such
expenses.
Short
sales against the box are short sales of securities that a Fund owns or has the
right to obtain (equivalent in kind
or amount to the securities sold short). If a Fund enters into a short sale
against the box, it will be required to set aside securities equivalent in kind
and amount to the securities sold short (or securities convertible or
exchangeable into such securities) and will be required to hold such securities
while the short sale is outstanding. The Fund will incur transaction costs,
including fees or interest expenses, in connection with opening, maintaining,
and closing short sales against the box.
Short
sales against the box result in a “constructive sale” and require a Fund to
recognize any taxable gain unless an
exception to the constructive sale applies. See “Dividends, Distributions and
Tax Matters — Tax Matters — Tax Treatment of Portfolio Transactions — Options,
futures, forward contracts, swap agreements and hedging
transactions.”
Margin
Transactions. The Fund will not
purchase any security on margin, except that each Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of portfolio securities. The payment by a Fund of initial or variation margin in
connection with futures, swaps or options transactions and the use of a reverse
repurchase agreement to finance the purchase of a security will not be
considered the purchase of a security on margin.
Interfund
Loans.
The SEC has issued an exemptive order permitting the Invesco Funds to borrow
money from and lend money to each other for temporary or emergency purposes. The
Invesco Funds’ interfund lending program is subject to a number of conditions,
including the requirements that: (1) an interfund loan generally will occur only
if the interest rate on the loan is more favorable to the borrowing fund than
the interest rate typically available from a bank for a comparable transaction
and the rate is more favorable to the lending fund than the rate available on
overnight repurchase transactions; (2) an Invesco Fund may not lend more than
15% of its net assets through the program (measured at the time of the last
loan); and (3) an Invesco Fund may not lend more than 5% of its net assets to
another Invesco Fund through the program (measured at the time of the loan). A
Fund may participate in the program only if and to the extent that such
participation is consistent with the Fund’s investment objective and investment
policies. Interfund loans have a maximum duration of seven days. Loans may be
called with one day’s notice and may be repaid on any day.
Borrowing. The Funds may
borrow money to the extent permitted under the 1940 Act Laws, Interpretations
and Exemptions (defined below) and Fund Policies. Such borrowings may be
utilized (i) for temporary or emergency purposes; (ii) in anticipation of or in
response to adverse market conditions; or, (iii) for cash management purposes.
All borrowings are limited to an amount not exceeding 33 1/3% of a Fund's total
assets (including the amount borrowed) less liabilities (other than borrowings).
Any borrowings that exceed this amount will be reduced within three business
days to the extent necessary to comply with the 33 1/3% limitation even if it is
not advantageous to sell securities at that time.
47
If
there are unusually heavy redemptions, a Fund may have to sell a portion of its
investment portfolio at a time when it may
not be advantageous to do so. Selling Fund securities under these circumstances
may result in a lower net asset value per share or decreased dividend income, or
both. Invesco and the Sub-Advisers believe that, in the event of abnormally
heavy redemption requests, a Fund's borrowing ability would help to mitigate any
such effects and could make the forced sale of their portfolio securities less
likely.
The
Funds may borrow from a bank, broker-dealer, or another Invesco Fund.
Additionally, the Funds are permitted to
temporarily carry a negative or overdrawn balance in their account with their
custodian bank. To compensate the custodian bank for such overdrafts, the Funds
may either (i) leave funds as a compensating balance in their account so the
custodian bank can be compensated by earning interest on such funds; or (ii)
compensate the custodian bank by paying it an agreed upon rate.
Lending
Portfolio Securities. Each Fund may
lend its portfolio securities (principally to broker-dealers) to generate
additional income. Such loans are callable at any time and are continuously
secured by segregated collateral equal to no less than the market value,
determined daily, of the loaned securities. Such collateral will be cash,
letters of credit, or debt securities issued or guaranteed by the U.S.
government or any of its agencies. Each Fund may lend portfolio securities to
the extent of one-third of its total assets. A Fund will loan its securities
only to parties that Invesco has determined are in good standing and when, in
Invesco’s judgment, the potential income earned would justify the
risks.
Although
voting rights may pass with the lending of portfolio securities, a Fund will be
entitled to call loaned securities,
or otherwise obtain rights to vote or consent, when deemed necessary by Invesco
with respect to a material event affecting securities on loan. The Fund would
receive income in lieu of dividends on loaned securities and may, at the same
time, generate income on the loan collateral or on the investment of any cash
collateral.
If
the borrower defaults on its obligation to return the securities loaned because
of insolvency or other reasons, a Fund
could experience delays and costs in recovering securities loaned or gaining
access to the collateral. If the Fund is not able to recover the securities
loaned, the Fund may sell the collateral and purchase a replacement security in
the market. Lending securities entails a risk of loss to the Fund if and to the
extent that the market value of the loaned securities increases and the
collateral is not increased accordingly.
Any
cash received as collateral for loaned securities will be invested, in
accordance with a Fund’s investment
guidelines, in short-term money market instruments, affiliated unregistered
investment companies that are compliant with Rule 2a-7 or Affiliated Money
Market Funds. Investing this cash subjects that investment to market
appreciation or depreciation. For purposes of determining whether a Fund is
complying with its investment policies, strategies and restrictions, the Fund
will consider the loaned securities as assets of the Fund, but will not consider
any collateral received as a Fund asset. The Fund will bear any loss on the
investment of cash collateral.
For
a discussion of tax considerations relating to lending portfolio securities, see
“Dividends, Distributions and Tax Matters —
Tax Matters — Tax Treatment of Portfolio Transactions — Securities
Lending.”
Repurchase
Agreements. Repurchase
agreements are agreements under which a Fund purchases a security from a
broker-dealer or bank that agrees to repurchase that security at a mutually
agreed upon time and price (which is higher than the purchase price), thereby
resulting in a yield to the Fund during a Fund’s holding period. A Fund may
enter into a “continuing contract” or “open” repurchase agreement under which
the seller is under a continuing obligation to repurchase the underlying
securities from the Fund on demand and the effective interest rate is negotiated
on a daily basis. Repurchase agreements may be viewed as loans made by a Fund
which are collateralized by the securities subject to repurchase.
In
any repurchase agreement, the securities that are subject to the transaction may
be obligations issued by the U.S.
government or its agencies or instrumentalities. The Funds may also engage in
repurchase agreements collateralized by non-government securities that are rated
investment grade or below investment grade by the requisite NRSROs or unrated
securities of comparable quality, loan participations, and equities.
48
If
the seller of a repurchase agreement fails to repurchase the security in
accordance with the terms of the agreement, a Fund
might incur expenses in enforcing its rights, and could experience a loss on the
sale of the security subject to the repurchase agreement to the extent that the
sale proceeds including accrued interest are less than the resale price provided
in the repurchase agreement, including interest. In addition, although the
Bankruptcy Code and other insolvency laws may provide certain protections for
some types of repurchase agreements, if the seller of a repurchase agreement
should be involved in bankruptcy or insolvency proceedings, a Fund may incur
delay and costs in selling the underlying security or may suffer a loss of
principal and interest if the value of the underlying security declines or the
Fund may be deemed to be an unsecured creditor and be required to return the
securities to the seller.
The
Funds may enter into repurchase agreements that involve securities that may be
subject to a court- ordered or other
“stay” in the event of the seller’s bankruptcy or insolvency. A “stay” will
prevent a Fund from selling the securities it holds under a repurchase agreement
until permitted by a court or other authority. In these situations a Fund may be
subject to greater risk that the value of the securities may decline before they
are sold, and that a Fund may experience a loss.
The
securities underlying a repurchase agreement will be marked-to-market every
business day, and if the value of the
securities falls below a specified percentage of the repurchase price (typically
102%), the counterparty will be required to deliver additional collateral to a
Fund in the form of cash or additional securities. Custody of the securities
will be maintained by a Fund’s custodian or sub-custodian for the duration of
the agreement.
The
Funds may invest its cash balances in joint accounts with other Invesco Funds
for the purpose of investing in
repurchase agreements with maturities not to exceed 60 days, and in certain
other money market instruments with remaining maturities not to exceed 90 days.
Repurchase agreements may be considered loans by a Fund under the 1940
Act.
Invesco
Comstock Select Fund and Invesco Gold & Special Minerals Funds will not
enter in a repurchase agreement that
causes more than 10% of its net assets to be subject to repurchase agreements
having a maturity beyond seven days.
Restricted
and Illiquid Investments. 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.
For
purposes of the above 15% limitation, an illiquid investment means any
investment that the Fund reasonably expects
cannot be sold or disposed of in current market conditions in seven calendar
days or less without the sale or disposition significantly changing the market
value of the investment, as determined pursuant to the 1940 Act and applicable
rules and regulations thereunder. Illiquid investments may include a wide
variety of investments, such as, for example: (1) repurchase agreements maturing
in more than seven days (unless the agreements have demand/redemption features);
(2) OTC options contracts and certain other derivatives (including certain swap
agreements); (3) fixed time deposits that are not subject to prepayment or that
provide for withdrawal penalties upon prepayment (other than overnight
deposits); (4) loan interests and other direct debt instruments; (5) municipal
lease obligations; (6) commercial paper issued pursuant to Section 4(2) of the
1933 Act; and (7) securities that are unregistered, that can be sold to
qualified institutional buyers in accordance with Rule 144A under the 1933 Act,
or that are exempt from registration under the 1933 Act or otherwise restricted
under the federal securities laws, including private placement securities sold
pursuant to Regulation S.
Limitations
on the resale of restricted investments may have an adverse effect on their
marketability, which may prevent a
Fund from disposing of them promptly at reasonable prices. The Fund may have to
bear the expense of registering such securities for resale, and the risk of
substantial delays in effecting such registrations. A Fund’s difficulty valuing
and selling restricted securities or illiquid investments may result in a loss
or be costly to the Fund.
If
a substantial market develops for a restricted security or illiquid investment
held by a Fund, it may be treated as a liquid
investment, in accordance with procedures and guidelines adopted by the Board on
behalf of the Funds.
49
Rule
144A Securities. Rule 144A
securities are securities which, while initially privately placed, are eligible
for purchase and resale pursuant to Rule 144A under the 1933 Act. This Rule
permits certain qualified institutional buyers, such as the Funds, to trade in
the securities even though such securities are not registered under the 1933
Act. Pursuant to Rule 22e-4 under the 1940 Act, a Fund will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the Fund’s
restriction on illiquid investments. The determination of whether a Rule 144A
security is liquid or illiquid will take into account relevant market trading,
and investment-specific considerations consistent with applicable SEC guidance.
Additional factors that may be considered include the (i) frequency of trades
and quotes; (ii) number of dealers and potential purchasers; (iii) dealer
undertakings to make a market; and (iv) nature of the security and of market
place trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). Investing in Rule
144A securities could increase the amount of a Fund’s illiquid investments if
qualified institutional buyers are unwilling to purchase such
securities.
Reverse
Repurchase Agreements. Reverse repurchase
agreements are agreements that involve the sale of securities held by a Fund to
financial institutions such as banks and broker-dealers, with an agreement that
the Fund will repurchase the securities at an agreed upon price and date or upon
demand. During the reverse repurchase agreement period, the Fund continues to
receive interest and principal payments on the securities sold, but pays
interest to the other party on the proceeds received. A Fund may employ reverse
repurchase agreements (i) for temporary emergency purposes, such as to meet
unanticipated net redemptions so as to avoid liquidating other portfolio
securities during unfavorable market conditions; (ii) to cover short-term cash
requirements resulting from the timing of trade settlements; or (iii) to take
advantage of market situations where the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest
expense of the transaction.
Reverse
repurchase agreements are a form of leverage and involve the risk that the
market value of securities to be
repurchased by the Fund may decline below the price at which the Fund is
obligated to repurchase the securities, resulting in a requirement for the Fund
to deliver margin to the other party in the amount of the related shortfall, or
that the other party may default on its obligation, so that the Fund is delayed
or prevented from completing the transaction. Leverage may make the Fund’s
returns more volatile and increase the risk of loss. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, a Fund’s use of the proceeds from the sale of the securities 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.
Mortgage
Dollar Rolls. A mortgage dollar
roll (a dollar roll) is a type of transaction that involves the sale by a Fund
of a mortgage-backed security to a financial institution such as a bank or
broker dealer, with an agreement that the Fund will repurchase a substantially
similar (i.e., same type, coupon and maturity) security at an agreed upon price
and date. The mortgage securities that are purchased will bear the same interest
rate as those sold, but will generally be collateralized by different pools of
mortgages with different prepayment histories. During the period between the
sale and repurchase, a Fund will not be entitled to receive interest or
principal payments on the securities sold but is compensated for the difference
between the current sales price and the forward price for the future purchase. A
Fund typically enters into a dollar roll transaction to enhance the Fund’s
return either on an income or total return basis or to manage pre-payment
risk.
Dollar
roll transactions involve the risk that the market value of the securities
retained by a Fund may decline below the
price of the securities that the Fund has sold but is obligated to repurchase
under the agreement. In the event the buyer of securities under a dollar roll
transaction files for bankruptcy or becomes insolvent, a Fund’s use of the
proceeds from the sale of the securities 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.
Unless
the benefits of the sale exceed the income, capital appreciation or gains on the
securities sold as part of the dollar
roll, the investment performance of a Fund will be less than what the
performance would
50
have
been without the use of dollar rolls. The benefits of dollar rolls may depend
upon the Adviser or Sub-Adviser’s ability to predict
mortgage repayments and interest rates. There is no assurance that dollar rolls
can be successfully employed.
Standby
Commitments. Certain Funds may
acquire securities that are subject to standby commitments from banks or other
municipal securities dealers. Under a standby commitment a bank or dealer would
agree to purchase, at the Fund’s option, specified securities at a specified
price. Standby commitments generally increase the cost of the acquisition of the
underlying security, thereby reducing the yield. Standby commitments depend upon
the issuer’s ability to fulfill its obligation upon demand. Although no
definitive creditworthiness criteria are used for this purpose, Invesco reviews
the creditworthiness of the banks and other municipal securities dealers from
which the Funds obtain standby commitments in order to evaluate those
risks.
Derivatives
Each
Fund may invest in derivatives. A derivative is a financial instrument whose
value is dependent upon the value of other
assets, rates or indices, referred to as “underlying reference assets.” These
underlying reference assets may include, among others commodities, stocks,
bonds, interest rates, currency exchange rates or related indices. Derivatives
include, among others, swaps, options, futures and forward foreign currency
contracts. Some derivatives, such as futures and certain options, are traded on
U.S. commodity and securities exchanges, while other derivatives, such as many
types of swap agreements, are privately negotiated and entered into in the OTC
market. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (the Dodd-Frank Act) and implementing rules require certain types of
swaps to be traded on public execution facilities and centrally
cleared.
Derivatives
may be used for “hedging,” which means that they may be used when the portfolio
managers seek to protect the
Fund’s investments from a decline in value, which could result from changes in
interest rates, market prices, currency fluctuations and other market factors.
Derivatives may also be used when the portfolio managers seek to increase
liquidity, implement a tax or cash management strategy, invest in a particular
stock, bond or segment of the market in a more efficient or less expensive way,
modify the characteristics of the Fund’s portfolio investments, for example,
duration, and/or to enhance return. However derivatives are used, their
successful use is not assured and will depend upon, among other factors, the
portfolio managers’ ability to predict and understand relevant market
movements.
Certain
derivatives involve leverage, that is, the amount invested may be smaller than
the full economic exposure of the
derivative instrument and the Fund could lose more than it invested. The
leverage involved in these derivative transactions may result in the Fund’s net
asset value being more sensitive to changes in the value of its
investments.
Commodity
Exchange Act (CEA) Regulation and Exclusions:
With
respect to the Funds, Invesco has claimed an exclusion from the definition of
“commodity pool operator” (CPO)
under the CEA and the rules of the Commodity Futures Trading Commission (CFTC)
and, therefore, is not subject to CFTC registration or regulation as a CPO. In
addition, Invesco is relying upon a related exclusion from the definition of
“commodity trading advisor” (CTA) under the CEA and the rules of the CFTC with
respect to the Funds.
The
terms of the CPO exclusion require the Funds, among other things, to adhere to
certain limits on their investments in
“commodity interests.” Commodity interests include commodity futures, commodity
options and swaps, which in turn include non-deliverable forwards, as further
described below. Because Invesco and the Funds intend to comply with the
terms of the CPO exclusion, the Funds may, in the future, need to adjust
their investment strategies, consistent with their investment objectives, to
limit their investments in these types of instruments. The Funds are not
intended as vehicles for trading in the commodity futures, commodity options or
swaps markets. The CFTC has neither reviewed nor approved Invesco’s reliance on
these exclusions, or the Funds, their investment strategies, their prospectuses
or this SAI.
51
Generally,
the exclusion from CPO regulation on which Invesco relies requires the Funds to
meet one of the following tests
for its commodity interest positions, other than positions entered into for bona
fide hedging purposes (as defined in the rules of the CFTC): either (1) the
aggregate initial margin and premiums required to establish the Fund’s positions
in commodity interests may not exceed 5% of the liquidation value of the Fund’s
portfolio (after taking into account unrealized profits and unrealized losses on
any such positions); or (2) the aggregate net notional value of each Fund’s
commodity interest positions, determined at the time the most recent such
position was established, may not exceed 100% of the liquidation value of the
Fund’s portfolio (after taking into account unrealized profits and unrealized
losses on any such positions). In addition to meeting one of these trading
limitations, each Fund may not market itself as a commodity pool or otherwise as
a vehicle for trading in the commodity futures, commodity options or swaps
markets. If, in the future, a Fund can no longer satisfy these requirements,
Invesco would withdraw its notice claiming an exclusion from the definition of a
CPO, and Invesco would be subject to registration and regulation as a CPO with
respect to the Fund, in accordance with the CFTC rules that allow for
substituted compliance with CFTC disclosure and shareholder reporting
requirements based on Invesco’s compliance with comparable SEC requirements.
However, as a result of CFTC regulation with respect to the Fund, a Fund may
incur additional compliance and other expenses.
General
risks associated with derivatives:
The
use by the Funds of derivatives may involve certain risks, as described
below.
Counterparty
Risk:
The risk that a counterparty under a derivatives agreement will not live up to
its obligations, including because of the counterparty’s bankruptcy or
insolvency. Certain agreements may not contemplate delivery of collateral to
support fully a counterparty’s contractual obligation; therefore, the Fund might
need to rely solely on contractual remedies to satisfy the counterparty’s full
obligation. As with any contractual remedy, there is no guarantee that the Fund
will be successful in pursuing such remedies, particularly in the event of the
counterparty’s bankruptcy or insolvency. Many derivative trading agreements,
such as an ISDA Master Agreement governing OTC swaps, provide for netting of
derivatives transactions governed by the agreement in the event of a default by
either counterparty, pursuant to which the Fund’s and the counterparty’s
obligations under the relevant transactions can be netted and set-off against
each other, in which case a Fund’s obligation or right will be the net amount
owed to or by the counterparty. Netting agreements are intended to function as a
counterparty credit risk mitigant, but in the case of a bankruptcy or insolvency
of the relevant counterparty, are subject to the risk that the insolvency regime
applicable to the counterparty might not recognize the enforceability of the
contractual netting provisions. The Fund will not enter into a derivative
transaction with any counterparty that Invesco and/or the Sub-Advisers believe
does not have the financial resources to honor its obligations under the
transaction. Invesco monitors the financial stability of counterparties. Where
the obligations of the counterparty are guaranteed, Invesco monitors the
financial stability of the guarantor and the counterparty. If a counterparty’s
creditworthiness declines, the value of the derivative would also likely
decline, potentially resulting in losses to the Fund.
Leverage
Risk:
Leverage exists when the Fund can lose more than it originally invests because
it purchases or sells an instrument or enters into a transaction without
investing an amount equal to the full economic exposure of the instrument or
transaction. Leverage may cause the Fund to be more volatile because it may
exaggerate the effect of any increase or decrease in the value of the Fund’s
portfolio securities. The use of some derivatives may result in economic
leverage, which does not result in the possibility of the Fund incurring
obligations beyond its initial investment, but that nonetheless permits the Fund
to gain exposure that is greater than would be the case in an unlevered
instrument.
Liquidity
Risk:
The risk that a particular derivative is difficult to sell or liquidate. If a
derivative transaction is particularly large or if the relevant market is
illiquid, 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 to the Fund.
Pricing
Risk:
The risk that the value of a particular derivative does not move in tandem or as
otherwise expected relative to the corresponding underlying
instruments.
52
Special
Regulatory Risks of Derivatives: The regulation of
derivatives is a rapidly changing area of law and is subject to modification by
government and judicial action. In addition, the SEC, CFTC and the 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.
It
is not possible to predict fully the effects of current or future regulation.
However, it is possible that developments in
government regulation of various types of derivative instruments, such as
speculative position limits on certain types of derivatives, or limits or
restrictions on the counterparties with which the Fund engages in derivative
transactions, may limit or prevent the Fund from using or limit the Fund’s use
of these instruments effectively as a part of its investment strategy, and could
adversely affect the Fund’s ability to achieve its investment objective. Invesco
will continue to monitor developments in the area, particularly to the extent
regulatory changes affect the Fund’s ability to enter into desired swap
agreements. New requirements, even if not directly applicable to the Fund, may
increase the cost of the Fund’s investments and cost of doing
business.
Tax
Risks:
For a discussion of the tax considerations relating to derivative transactions,
see “Dividends, Distributions and Tax Matters — Tax Matters — Tax Treatment of
Portfolio Transactions.”
General
risks of hedging strategies using derivatives:
The
use by the Funds of hedging strategies involves special considerations and
risks, as described below.
Successful
use of hedging transactions depends upon Invesco’s and the Sub-Advisers’ ability
to predict correctly the
direction of changes in the value of the applicable markets and securities,
contracts and/or currencies. While Invesco and the Sub-Advisers are experienced
in the use of derivatives for hedging, there can be no assurance that any
particular hedging strategy will succeed.
In
a hedging transaction, there might be imperfect correlation, or even no
correlation, between the price movements of an
instrument used for hedging and the price movements of the investments being
hedged. Such a lack of correlation might occur due to factors unrelated to the
value of the investments being hedged, such as changing interest rates, market
liquidity, and speculative or other pressures on the markets in which the
hedging instrument is traded.
Hedging
strategies, if successful, can reduce risk of loss by wholly or partially
offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments. Investors should
bear in mind that a Fund is not obligated to actively engage in hedging. For
example, a Fund may not have attempted to hedge its exposure to a particular
foreign currency at a time when doing so might have avoided a loss.
Types
of derivatives:
Swaps. Each Fund may
enter into swap agreements. Generally, swap agreements are contracts
between a Fund and another party (the counterparty) involving the exchange of
payments on specified terms over periods ranging from a few days to multiple
years. A swap agreement may be negotiated bilaterally and traded OTC between the
two parties (for an uncleared swap) or, in some instances, must be transacted
through a futures commission merchant (FCM) and cleared through a clearinghouse
that serves as a central counterparty (for a cleared swap). In a basic swap
transaction, the Fund agrees with its counterparty to exchange the returns (or
differentials in returns) and/or cash flows earned or realized on a particular
asset such as an equity or debt security, commodity, currency, interest rate or
index, calculated with respect to a “notional amount.” The notional amount is
the set amount selected by the parties to use as the basis on which to calculate
the obligations that the parties to a swap agreement have agreed to exchange.
The parties typically do not exchange the notional amount. Instead, they agree
to exchange the returns that would be earned or realized if the notional amount
were invested in given investments or at given interest rates. Examples of
returns that may be exchanged in a swap agreement are those of a particular
security, a
53
particular
fixed or variable interest rate, a particular foreign currency, or a “basket” of
securities representing a particular index.
Swap agreements can also be based on credit and other events. In some cases,
such as cross currency swaps, the swap agreement may require delivery (exchange)
of the entire notional value of one designated currency for another designated
currency.
A
Fund will typically only enter into swap agreements with counterparties who use
standard International Swap and Dealers
Association, Inc.
(“ISDA”) contract
documentation. ISDA establishes industry standards for the documentation of swap
agreements. Virtually all principal swap participants use ISDA documentation
because it has an established set of definitions, contract terms and
counterparty obligations, including provisions for master netting agreements. It
is possible that developments in the swaps market, including potential
government regulation, could adversely affect the Fund’s ability to terminate
existing swap agreements or to realize amounts to be received under such
agreements. Additionally, ISDA master agreements include credit related
contingent features which allow Counterparties to OTC derivatives to terminate
derivative contracts prior to maturity in the event that, for example, the
Fund’s net assets decline by a stated percentage or the Fund fails to meet the
terms of its ISDA master agreements, which would cause the Fund to accelerate
payment of any net liability owed to the counterparty.
Comprehensive
swaps regulation. The Dodd-Frank Act
and analogous international laws enacted after the financial crisis imposed
comprehensive regulatory requirements on swaps and swap market participants. The
U.S. regulatory framework includes: (1) registration and regulation of swap
dealers and major swap participants; (2) requiring central clearing and
electronic execution of standardized swaps on swap execution facilities; (3)
imposing margin requirements on uncleared swap transactions; (4) regulating and
monitoring swap transactions through position limits and large trader reporting
requirements; and (5) imposing record keeping and centralized and public
reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a
small segment of the market referred to as “security-based swaps,” which
includes swaps on single securities or narrow-based indices of securities and
single name credit default swaps.
Uncleared
swaps.
In an uncleared swap, the swap counterparty is typically a brokerage firm, bank
or other financial institution. In the event that one party to the swap
transaction defaults and the transaction is terminated prior to its scheduled
termination date, one of the parties may be required to make an early
termination payment to the other. An early termination payment may be payable by
either the defaulting party or the non-defaulting party, under certain
circumstances, depending upon which of them is “in-the-money” with respect to
the swap at the time of its termination. Early termination payments may be
calculated in various ways, but generally represent the amount that the
“in-the-money” party would have to pay to replace the swap as of the date of its
termination.
During
the term of an uncleared swap, a Fund will be required to pledge to the swap
counterparty, from time to time, an
amount of cash and/or other assets equal to the total net amount (if any) that
would be payable by the Fund to the counterparty if all outstanding swaps
between the parties were terminated on the date in question, including any early
termination payments (variation margin). Periodically, changes in the amount
pledged are made to recognize changes in value of the swap contract resulting
from, among other things market value changes in the underlying investment
referenced in the swap. Likewise, the counterparty will be required to pledge
cash or other assets to cover its obligations to a Fund. However, the amount
pledged will not always be equal to or more than the amount due to the other
party. Therefore, if a counterparty defaults in its obligations to a Fund, the
amount pledged by the counterparty and available to the Fund may not be
sufficient to cover all the amounts due to the Fund and the Fund may sustain a
loss.
Regulations
requiring initial margin to be posted by certain market participants for
uncleared swaps have been adopted and
are being phased in over time. When these rules take effect with respect to the
Funds, if a Fund is deemed to have material swaps exposure (generally, an
average gross notional amount of uncleared swaps and foreign currency forward
contracts at certain measurement dates exceeding $8 billion), it will under
these regulations be required to post initial margin in addition to variation
margin.
Uncleared
swaps are not traded on exchanges. As a result, swap participants may not be as
protected as participants on
organized exchanges. Performance of a swap agreement is the responsibility only
of the swap
54
counterparty
and not of any exchange or clearinghouse. As a result, a Fund is subject to the
risk that a counterparty will
be unable or will refuse to perform under such agreement, including because of
the counterparty’s bankruptcy or insolvency. The Fund risks the loss of the
accrued but unpaid amounts under a swap agreement, which could be substantial,
in the event of a default, insolvency or bankruptcy by a swap counterparty. In
such an event, the Fund will have contractual remedies pursuant to the swap
agreement, but bankruptcy and insolvency laws could affect the Fund’s rights as
a creditor. If the counterparty’s creditworthiness declines, the value of a swap
agreement would likely decline, potentially resulting in losses.
Cleared
Swaps.
Certain standardized swaps are subject to mandatory central clearing and trading
on execution facilities. The Dodd-Frank Act and analogous international laws
will ultimately require the clearing and trading on execution facilities of many
swaps. To date, the CFTC has designated only certain of the most common credit
default index swaps and certain interest rate swaps as subject to mandatory
clearing and certain public execution facilities have made these swaps available
to trade, but it is expected that additional categories of swaps will in the
future be designated as subject to mandatory clearing and trade execution
requirements.
In
a cleared swap, a Fund’s ultimate counterparty is a central clearinghouse rather
than a brokerage firm, bank or other
financial institution. Cleared swaps are submitted for clearing through each
party’s FCM, which must be a member of the clearinghouse that serves as the
central counterparty.
When
a Fund enters into a cleared swap, it must deliver to the clearinghouse (via the
FCM) an amount referred to as
“initial margin.” Initial margin requirements are determined by the
clearinghouse, and are typically calculated as an amount based on the volatility
in market value of the cleared swap over a fixed period, but an FCM may require
additional initial margin above the amount required by the clearinghouse. During
the term of the swap agreement, “variation margin” may also be required to be
paid by the Fund or may be received by the Fund. If the value of the Fund’s
cleared swap declines, the Fund will be required to make additional variation
margin payments to the FCM to settle the change in value. Conversely, if the
market value of the Fund’s position increases, the FCM will post additional
variation margin to the Fund’s account. At the conclusion of the term of the
swap agreement, if the Fund has a loss equal to or greater than the margin
amount, the margin amount is paid to the FCM along with any loss in excess of
the margin amount. If the Fund has a loss of less than the margin amount, the
excess margin is returned to the Fund. If the Fund has a gain, the full margin
amount and the amount of the gain are paid to the Fund.
Central
clearing is designed to reduce counterparty credit risk and increase liquidity
compared to uncleared swaps
because central clearing interposes the central clearinghouse as the
counterparty to each participant’s swap, but it does not eliminate those risks
completely. There is also a risk of loss by a Fund of the initial and variation
margin deposits in the event of bankruptcy or insolvency of the FCM through
which the Fund holds an open position, or the clearinghouse in a swap contract.
The assets of a Fund may not be fully protected in the event of the bankruptcy
or insolvency of the FCM or clearinghouse because the Fund might be limited to
recovering only a pro rata share of all available funds and margin segregated on
behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a
Fund is also subject to the risk that the FCM could use the Fund’s assets to
satisfy its own financial obligations or the payment obligations of another
customer to the clearinghouse. Credit risk of cleared swap participants is
concentrated in a few clearinghouses, and the consequences of insolvency of a
clearinghouse are not clear.
With
cleared swaps, a Fund may not be able to obtain terms as favorable as it would
be able to negotiate for a bilateral,
uncleared swap. In addition, an FCM may unilaterally amend the terms of its
agreement with a Fund, which may include the imposition of position limits or
additional margin requirements with respect to the Fund’s investment in certain
types of swaps. Clearinghouses and FCMs can require termination of existing
cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation
of the swap agreement.
Finally,
a Fund is subject to the risk that, after entering into a cleared swap with an
executing broker, no FCM or
clearinghouse is willing or able to clear the transaction. In such an event, the
Fund may be required to break the trade and make an early termination payment to
the executing broker.
55
Commonly
used swap agreements include:
Credit
Default Swaps (CDS): A CDS is an
agreement between two parties where the first party agrees to make one or more
payments to the second party, while the second party assumes the risk of certain
defaults, generally a failure to pay or bankruptcy of the issuer on a referenced
debt obligation. CDS transactions are typically individually negotiated and
structured. A Fund may enter into CDS to create long or short exposure to
domestic or foreign corporate debt securities or sovereign debt
securities.
A
Fund may buy a CDS (buy credit protection). In this transaction the Fund makes a
stream of payments based on a fixed
interest rate (the premium) over the life of the swap in exchange for a
counterparty (the seller) taking on the risk of default of a referenced debt
obligation (the Reference Obligation). If a credit event occurs for the
Reference Obligation, the Fund would cease making premium payments and it would
deliver defaulted bonds to the seller. In return, the seller would pay the
notional value of the Reference Obligation to the Fund. Alternatively, the two
counterparties may agree to cash settlement in which the seller delivers to the
Fund (buyer) the difference between the market value and the notional value of
the Reference Obligation. If no event of default occurs, the Fund pays the fixed
premium to the seller for the life of the contract, and no other exchange
occurs.
Alternatively,
a Fund may sell a CDS (sell credit protection). In this transaction the Fund
will receive premium payments
from the buyer in exchange for taking the risk of default of the Reference
Obligation. If a credit event occurs for the Reference Obligation, the buyer
would cease to make premium payments to the Fund and deliver the Reference
Obligation to the Fund. In return, the Fund would pay the notional value of the
Reference Obligation to the buyer. Alternatively, the two counterparties may
agree to cash settlement in which the Fund would pay the buyer the difference
between the market value and the notional value of the Reference Obligation. If
no event of default occurs, the Fund receives the premium payments over the life
of the contract, and no other exchange occurs.
Credit
Default Index Swaps (CDX): A CDX is a swap on
an index of CDS. A CDX allows an investor to manage credit risk or to take a
position on a basket of credit entities (such as CDS or CMBS) in a more
efficient manner than transacting in single name CDS. If a credit event occurs
in one of the underlying companies, the protection is paid out via the delivery
of the defaulted bond by the buyer of protection in return for payment of the
notional value of the defaulted bond by the seller of protection or it may be
settled through a cash settlement between the two parties. The underlying
company is then removed from the index. New series of CDX are issued on a
regular basis. A Commercial Mortgage-Backed Index (CMBX) is a type of CDX made
up of 25 tranches of commercial mortgage-backed securities (See “Debt
Instruments — Mortgage-Backed and Asset-Backed Securities”) rather than CDS.
Unlike other CDX contracts where credit events are intended to capture an event
of default, CMBX involves a pay-as-you-go (PAUG) settlement process designed to
capture non-default events that affect the cash flow of the reference
obligation. PAUG involves ongoing, two-way payments over the life of a contract
between the buyer and the seller of protection and is designed to closely mirror
the cash flow of a portfolio of cash commercial mortgage-backed securities. A
CDX index tranche provides access to customized risk, exposing each investor to
losses at different levels of subordination. The lowest part of the capital
structure is called the “equity tranche” as it has exposure to the first losses
experienced in the basket. The mezzanine and senior tranches are higher in the
capital structure but can also be exposed to loss in value. Investments are
subject to liquidity risks as well as other risks associated with investments in
credit default swaps.
Foreign
Exchange Swaps: A foreign exchange
swap involves an agreement between two parties to exchange two different
currencies on a specific date at a fixed rate, and an agreement for the reverse
exchange of those two currencies at a later date and at a fixed rate. Foreign
exchange swaps were exempted from the definition of “swaps” by the U.S. Treasury
and are therefore not subject to many rules under the CEA that apply to swaps,
including the mandatory clearing requirement. They are also not considered
“commodity interests” for purposes of CEA Regulations and Exclusions, discussed
above. However, foreign exchange swaps nevertheless remain subject to the CFTC’s
trade reporting requirements, enhanced anti-evasion authority, and strengthened
business conduct standards.
56
Currency
Swaps:
A currency swap is an agreement between two parties to exchange periodic cash
flows on a notional amount of two or more currencies based on the relative value
differential between them. Currency swaps typically involve the delivery of the
entire notional values of the two designated currencies. In such a situation,
the full notional value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations. A Fund
may also enter into currency swaps on a net basis, which means the two different
currency payment streams under the swap agreement are converted and netted out
to a single cash payment in just one of the currencies.
Because
currency control is of great importance to the issuing governments and
influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These actions
could result in losses to a Fund if it is unable to deliver or receive a
specified currency or funds in settlement of obligations, including swap
transaction obligations. These actions could also have an adverse effect on a
Fund’s swap transactions or cause a Fund’s hedging positions to be rendered
useless, resulting in full currency exposure as well as incurring unnecessary
transaction costs.
Interest
Rate Swaps: An agreement
between two parties pursuant to which the parties exchange a floating rate
payment for a fixed rate payment based on a specified principal or notional
amount. In other words, Party A agrees to pay Party B a fixed interest rate
multiplied by a notional amount and in return Party B agrees to pay Party A a
variable interest rate multiplied by the same notional amount.
Commodity
Swaps:
A commodity 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 a
commodity-based underlying instrument (such as a specific commodity or commodity
index) in return for periodic payments based on a fixed or variable interest
rate or the total return from another commodity-based underlying instrument. In
a total return commodity swap, a Fund receives the price appreciation of a
commodity index, a portion of a commodity index or a single commodity in
exchange for paying an agreed-upon fee.
Total
Return Swaps: An agreement in
which one party makes payments based on a set rate, either fixed or variable,
while the other party makes payments based on the return of an underlying asset,
which includes both the income it generates and any capital gains.
Volatility
and Variance Swaps: A volatility swap
involves an exchange between a Fund and a counterparty of periodic payments
based on the measured volatility of an underlying security, currency, commodity,
interest rate, index or other reference asset over a specified time frame.
Depending on the structure of the swap, either the Fund’s or the counterparty’s
payment obligation will typically be based on the realized volatility of the
reference asset as measured by changes in its price or level over a specified
time period while the other party’s payment obligation will be based on a
specified rate representing expected volatility for the reference asset at the
time the swap is executed, or the measured volatility of a different reference
asset over a specified time period. The Fund will typically make or lose money
on a volatility swap depending on the magnitude of the reference asset’s
volatility, or size of the movements in its price, over a specified time period,
rather than general increases or decreases in the price of the reference asset.
Volatility swaps are often used to speculate on future volatility levels, to
trade the spread between realized and expected volatility, or to decrease the
volatility exposure of other investments held by the Fund. Variance swaps are
similar to volatility swaps except payments are based on the difference between
the implied and measured volatility mathematically squared.
Inflation
Swaps:
Inflation swap agreements are contracts in which one party agrees to pay the
cumulative percentage increase in a price index, such as the Consumer Price
Index, over the term of the swap (with some lag on the referenced inflation
index), and the other party pays a compounded fixed rate. Inflation swap
agreements may be used to protect the net asset value of a Fund against an
unexpected change in the rate of inflation measured by an inflation index. The
value of inflation swap agreements 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.
57
Swaptions: An option on a
swap agreement, also called a “swaption,” is an option that gives the buyer the
right, but not the obligation, to enter into a swap on a future date in exchange
for paying a market-based premium. A receiver swaption gives the owner the right
to receive the total return of a specified asset, reference rate, or index. A
payer swaption gives the owner the right to pay the total return of a specified
asset, reference rate, or index. Swaptions also include options that allow an
existing swap to be terminated or extended by one of the
counterparties.
Swaptions
are considered to be swaps for purposes of CFTC regulation. Although they are
currently traded OTC, the
CFTC may in the future designate certain options on swaps as subject to
mandatory clearing and exchange trading.
Bundled
Securities. Certain Funds may
from time to time invest in Targeted Return Index Securities Trusts (TRAINS) or
similar instruments representing a fractional undivided interest in an
underlying pool of securities often referred to as "Bundled Securities".
Bundled Securities are typically represented by certificates and the Funds will
be permitted at any time to exchange such certificates for the underlying
securities evidenced by such certificates and thus the certificates are
generally subject to the same risks as the underlying securities held in the
trust. The Fund will examine the characteristics of the underlying securities
for compliance with investment criteria but will determine liquidity with
reference to the certificates itself. TRAINS and other trust certificates are
generally not registered under the 1933 Act or the 1940 Act and therefore must
be held by qualified purchasers and resold to qualified institutional buyers
pursuant to Rule 144A under the 1933 Act. Investments in certain TRAINS or other
trust certificates may have the effect of increasing the level of Fund
illiquidity to the extent the Fund, at a particular point in time, may be unable
to find qualified institutional buyers interested in purchasing such
securities.
Options. Each Fund may
invest in options. An option is a contract that gives the purchaser of the
option, in return for the premium paid, the right, but not the obligation, to
buy from (in the case of a call) or sell to (in the case of a put) the writer of
the option at the exercise price during the term of the option (for American
style options) or on a specified date (for European style options), the
security, currency or other instrument underlying the option (or delivery of a
cash settlement price, in the case of certain options, such as an index option
and other cash-settled options). An option on a CDS or a futures contract
(described below) gives the purchaser the right, but not the obligation, to
enter into a CDS or assume a position in a futures contract. Option transactions
present the possibility of large amounts of exposure (or leverage), which may
result in a Fund’s net asset value being more sensitive to changes in the value
of the option.
The
value of an option position will reflect, among other things, the current market
value of the underlying investment, the
time remaining until expiration, the relationship of the exercise price to the
market price of the underlying investment, the price volatility of the
underlying investment and general market and interest rate
conditions.
With
respect to Invesco Gold & Special Minerals Fund, up to 25% of the Fund’s
total assets can be subject to call
options the Fund sells. However, the Fund will not write or purchase any call
option that will cause the value of the Fund’s calls on a particular security to
exceed 3% of the Fund’s total assets. The Fund may buy a call or put only if,
after the purchase, the value of all call and put options held by the Fund will
not exceed 10% of the Fund’s total assets.
With
respect to Invesco Comstock Select Fund, up to 25% of the Fund’s total assets
may be subject to calls the Fund
sells. The Fund may buy a call or put only if, after the purchase, the value of
all call and put options held by the Fund will not exceed 5% of the Fund’s total
assets.
With
respect to each Fund (except for Invesco Gold & Special Minerals Fund and
Invesco Comstock Select Fund), a
Fund will not write (sell) options if, immediately after such sale, the
aggregate value of securities or obligations underlying the outstanding options
would exceed 20% of the Fund’s total assets. A Fund will not purchase
options if, immediately after such purchase, the aggregate premiums paid for
outstanding options would exceed 5% of the Fund’s total assets.
A
Fund may effectively terminate its right or obligation under an option by
entering into an offsetting closing
transaction. For example, a Fund may terminate its obligation under a call or
put option that it had
58
written
by purchasing an identical call or put option, which is known as a closing
purchase transaction. Conversely, a Fund
may terminate a position in a put or call option it had purchased by writing an
identical put or call option, which is known as a closing sale transaction.
Closing transactions permit a Fund to realize profits or limit losses on an
option position prior to its exercise or expiration.
Options
may be either listed on an exchange or traded in OTC markets. Listed options are
tri-party contracts (i.e.,
performance of the obligations of the purchaser and seller are guaranteed by the
exchange or clearing corporation) and have standardized strike prices and
expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates and differ from exchange-traded options in that OTC
options are transacted with dealers directly and not through a clearing
corporation (which guarantees performance). In the case of OTC options, there
can be no assurance that a liquid secondary market will exist for any particular
option at any specific time; therefore the Fund may be required to treat some or
all OTC options as illiquid investments. Although a Fund will enter into OTC
options only with dealers that are expected to be capable of entering into
closing transactions with it, there is no assurance that the Fund will in fact
be able to close out an OTC option position at a favorable price prior to
exercise or expiration. In the event of insolvency of the dealer, a Fund might
be unable to close out an OTC option position at any time prior to its
expiration.
Types
of Options:
Put
Options on Securities. A put option gives
the purchaser the right to sell, to the writer, the underlying security,
contract or foreign currency at the stated exercise price at any time prior to
the expiration date of the option (for American style options) or on a specified
date (for European style options), regardless of the market price or exchange
rate of the security, contract or foreign currency, as the case may be, at the
time of exercise. If the purchaser exercises the put option, the writer of a put
option is obligated to buy the underlying security, contract or foreign currency
for the exercise price.
Call
Options on Securities. A call option
gives the purchaser the right to buy, from the writer, the underlying security,
contract or foreign currency at the stated exercise price at any time prior to
the expiration of the option (for American style options) or on a specified date
(for European style options), regardless of the market price or exchange rate of
the security, contract or foreign currency, as the case may be, at the time of
exercise. If the purchaser exercises the call option, the writer of a call
option is obligated to sell to and deliver the underlying security, contract or
foreign currency to the purchaser of the call option for the exercise
price.
Index
Options. Index options (or
options on securities indices) give the option buyer the right to receive, upon
exercise, a cash settlement amount instead of the securities included in the
relevant index, if the closing level of the securities 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. The amount of cash is equal to
the difference between the closing price of the index on the relevant option
expiration date and the exercise price of the call or put times a specified
multiple (the multiplier), which determines the total dollar value for each
point of such difference.
The
risks of investment in index options may be greater than options on securities,
especially if a Fund writes index call
options. Because index options are settled in cash, when a Fund writes a call on
an index it cannot provide in advance for its potential settlement obligations
by acquiring and holding the underlying securities. A Fund can offset some of
the risk of writing an index call option by holding a diversified portfolio of
securities similar to those included in the underlying index. However, the Fund
cannot, as a practical matter, acquire and hold a portfolio containing exactly
the same securities in the index and, as a result, bears the risk that the value
of the securities held will not be perfectly correlated with the value of the
index.
CDS
Options. A CDS option
transaction gives the buyer the right, but not the obligation, to enter into a
CDS at a specified future date and under specified terms in exchange for paying
a market based purchase price or premium. The writer of the option bears the
risk of any unfavorable move in the value of the CDS relative to the market
value on the exercise date, while the purchaser may allow the option to expire
unexercised.
59
Options
on Futures Contracts. Options on futures
contracts give the holder the right to assume a position in a futures contract
(to buy the futures contract if the option is a call and to sell the futures
contract if the option is a put) at a specified exercise price at any time
during the period of the option.
Option
Techniques:
Writing
Options. A Fund may write
options to generate additional income. As the writer of an option, the Fund may
have no control over when the underlying reference asset must be sold (in the
case of a call option) or purchased (in the case of a put option), if the option
was structured as an American style option, because the option purchaser may
notify the Fund of exercise at any time prior to the expiration of the option.
In addition, if the option is cash-settled instead of deliverable, the Fund is
obligated to pay the option purchaser the difference between the exercise price
and the value of the underlying reference asset, instead of selling or
purchasing the underlying reference asset, if the option is exercised. In
general, options are rarely exercised prior to expiration. Whether or not an
option expires unexercised, the writer retains the amount of the
premium.
A
Fund would write a put option at an exercise price that, reduced by the premium
received on the option, reflects the price
it is willing to pay for the underlying reference asset. In return for the
premium received for writing a put option, the Fund assumes the risk that the
price of the underlying reference asset will decline below the exercise price,
in which case the put option may be exercised and the Fund may suffer a
loss.
In
return for the premium received for writing a call option on a reference asset,
the Fund foregoes the opportunity for
profit from a price increase in the underlying reference asset above the
exercise price so long as the option remains open, but retains the risk of loss
should the price of the reference asset decline.
If
an option that a Fund has written expires, the Fund will realize a gain in the
amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying reference
asset, held by the Fund during the option period. If a call option is exercised,
a Fund will realize a gain or loss from the sale of the underlying reference
asset, which will be increased or offset by the premium received. The obligation
imposed upon the writer of an option is terminated upon the expiration of the
option, or such earlier time at which a Fund effects a closing purchase
transaction by purchasing an option (put or call as the case may be) identical
to that previously sold. However, once a Fund has received an exercise notice,
it cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver (for a call) or purchase (for a
put) the underlying reference asset at the exercise price (if deliverable) or
pay the difference between the exercise price and the value of the underlying
reference asset (if cash-settled).
Purchasing
Options. A Fund may
purchase a put option on an underlying reference asset owned by the Fund in
order to protect against an anticipated decline in the value of the underlying
reference asset held by the Fund; may purchase put options on underlying
reference assets against which it has written other put options; or may
speculate on the value of an underlying reference asset, index or quantitative
measure. The premium paid for the put option and any transaction costs would
reduce any profit realized when the underlying reference asset is delivered upon
the exercise of the put option. Conversely, if the underlying reference asset
does not decline in value, the option may expire worthless and the premium paid
for the protective put would be lost. A put option may also be purchased on an
investment the Fund does not own.
A
Fund may purchase a call option for the purpose of acquiring the underlying
reference asset for its portfolio, or on
underlying reference assets against which it has written other call options. The
Fund is not required to own the underlying reference asset in order to purchase
a call option. If the Fund does not own the underlying position, the purchase of
a call option would enable a Fund to acquire the underlying reference asset at
the exercise price of the call option plus the premium paid. So long as it holds
a call option, rather than the underlying reference asset itself, the Fund is
partially protected from any unexpected increase in the market price of the
underlying reference asset. If the market price does not exceed the exercise
price, the Fund could purchase the underlying reference asset on the open market
and could allow the call option to expire, incurring a loss only to the extent
of the premium paid for the option.
Municipal
Market Data Rate Locks. A Municipal Market
Data Rate Lock (MMD Rate Lock) permits a Fund to lock in a specified municipal
interest rate for a portion of its portfolio to preserve a return on a
60
particular
investment or a portion of its portfolio as a duration management technique or
to protect against any increase in the
price of securities to be purchased at a later date. MMD Rate Locks may be used
for hedging purposes. An MMD Rate Lock is an agreement between two parties, a
Fund and an 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.
MMD
Rate Locks involve the risk that municipal yields will move in the direction
opposite than the direction
anticipated by a Fund. The risk of loss with respect to MMD Rate Locks is
limited to the amount of payments a Fund is contractually obligated to make. If
the other party to an MMD Rate Lock defaults, a Fund's risk of loss consists of
the amount of payments that the Fund contractually is entitled to receive. If
there is a default by the counterparty, a Fund may have contractual remedies
pursuant to the agreements related to the transaction, but they could be
difficult to enforce.
Straddles/Spreads/Collars. Each Fund for
hedging purposes, or for speculative purposes, may enter into straddles, spreads
or collars to adjust the risk and return characteristics of the Fund’s overall
position.
Spread
and straddle options transactions. In “spread”
transactions, a Fund buys and writes a put or buys and writes a call on the same
underlying instrument with the options having different exercise prices,
expiration dates, or both. In “straddles,” a Fund purchases a put option and a
call option or writes a put option and a call option on the same instrument with
the same expiration date and typically the same exercise price. When a Fund
engages in spread and straddle transactions, it seeks to profit from differences
in the option premiums paid and received and in the market prices of the related
options positions when they are closed out or sold. Because these transactions
require the Fund to buy and/or write more than one option simultaneously, the
Fund’s ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the Fund were to
buy or sell a single option. Similarly, costs incurred by the Fund in connection
with these transactions will in many cases be greater than if the Fund were to
buy or sell a single option.
Option
Collars. A Fund also may
use option “collars.” A “collar” position combines a put option purchased by the
Fund (the right of the Fund to sell a specific security within a specified
period) with a call option that is written by the Fund (the right of the
counterparty to buy the same security) in a single instrument. The Fund’s right
to sell the security is typically set at a price that is below the
counterparty’s right to buy the security. Thus, the combined position “collars”
the performance of the underlying security, providing protection from
depreciation below the price specified in the put option, and allowing for
participation in any appreciation up to the price specified by the call
option.
Rights
and Warrants. Rights are equity
securities representing a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance, before the stock is
offered to the general public. A stockholder who purchases rights may be able to
retain the same ownership percentage after the new stock offering. A right
usually enables the stockholder to purchase common stock at a price below the
initial offering price. A Fund that purchases a right takes the risk that
the right might expire worthless because the market value of the common stock
falls below the price fixed by the right.
A
warrant gives the holder the right to purchase securities from the issuer at a
specific price within a certain time frame
and is similar to a call option. The main difference between warrants and call
options is that warrants are issued by the company that will issue the
underlying security, whereas options are not issued by the company. Young,
unseasoned companies often issue warrants to finance their
operations.
Futures
Contracts.
A
futures contract is a standardized agreement to buy or sell a specified amount
of a specified security, currency,
commodity, interest rate or index (or deliver a cash settlement price, in the
case of certain futures such as an index future, interest rate future or
volatility future) for a specified price at a designated future date, time and
place. A “sale” of a futures contract means the acquisition of a contractual
obligation to deliver the underlying instrument or asset called for by the
contract at a specified price on a specified date. A “purchase” of a futures
contract means the acquisition of a contractual obligation to acquire the
underlying instrument or
61
asset
called for by the contract at a specified price on a specified date. Futures
contracts are generally bought and sold on futures
exchanges referred to as designated contract markets and are held through a
broker, known as a futures commission merchant (FCM), that is a member of the
designated contract market and its related clearinghouse. The designated
contract market sets the specifications of the relevant futures contract,
including the date, time and place of delivery or settlement of the contract and
the quantity of the underlying instrument or asset per contract.
The
Fund will only enter into futures contracts that are traded (either domestically
or internationally) on futures exchanges
or certain exempt markets including exempt boards of trade and electronic
trading facilities; and are standardized as to maturity date and underlying
instrument or asset. Futures exchanges and trading thereon in the United States
are regulated under the CEA by the CFTC. Foreign futures exchanges or exempt
markets and trading thereon are not regulated by the CFTC and may not be subject
to the same regulatory controls. In addition, futures contracts that are traded
on non-U.S. exchanges or exempt markets may not be as liquid as those purchased
on CFTC-designated contract markets. For a further discussion of the risks
associated with investments in foreign securities, see “Foreign Investments”
above.
Brokerage
fees are incurred when a futures contract is bought or sold, and margin deposits
must be maintained at all
times when a futures contract is outstanding. “Margin” for a futures contract is
the amount of funds that must be deposited by a Fund with the applicable FCM in
order to initiate trading in the futures contract and maintain its open
positions in futures contract. A margin deposit made when the futures contract
is entered (initial margin) is intended to ensure the Fund’s performance under
the futures contract. The initial margin required for a particular futures
contract is set by the exchange on which the futures contract is traded and may
be significantly modified from time to time by the exchange or the FCM during
the term of the futures contract.
Subsequent
payments, called “variation margin,” received from or paid to the FCM through
which a Fund holds the futures
contract will be made on a daily basis as the futures contract price fluctuates
making the futures contract more or less valuable, a process known as
marking-to-market. When the futures contract is closed out, if the Fund has a
loss equal to or greater than the margin amount, the margin amount is paid to
the FCM along with any loss in excess of the margin amount. If the Fund has a
loss of less than the margin amount, the excess margin is returned to the Fund.
If the Fund has a gain, the full margin amount and the amount of the gain are
paid to the Fund and the FCM pays the Fund any excess gain over the margin
amount.
There
is a risk of loss by a Fund of the initial and variation margin deposits in the
event of bankruptcy or insolvency of the
FCM with which the Fund has an open position in a futures contract. The assets
of a Fund may not be fully protected in the event of the bankruptcy or
insolvency of the FCM or clearinghouse because the Fund might be limited to
recovering only a pro rata share of all available funds and margin segregated on
behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a
Fund is also subject to the risk that the FCM could use the Fund’s assets, which
are held in an omnibus account with assets belonging to the FCM’s other
customers, to satisfy its own financial obligations or the payment obligations
of another customer to the clearinghouse.
Closing
out an open futures contract is effected by entering into an offsetting futures
contract for the same aggregate amount of
the identical underlying instrument or asset and the same delivery or settlement
date. There can be no assurance, however, that a Fund will be able to enter into
an offsetting contract with respect to a particular futures contract at a
particular time. If a Fund is not able to enter into an offsetting contract, it
will continue to be required to maintain the margin deposits on the futures
contract.
In
addition, if a Fund were unable to liquidate a futures contract or an option on
a futures contract position due to the absence
of a liquid secondary market or the imposition of price limits, it could incur
substantial losses. The Fund would continue to be subject to market risk with
respect to the position. In addition, except in the case of purchased options,
the Fund would continue to be required to make daily variation margin
payments.
Types
of Futures Contracts:
62
Commodity
Futures: A commodity
futures contract is an exchange-traded contract to buy or sell a particular
commodity at a specified price at some time in the future. Commodity futures
contracts are highly volatile; therefore, the prices of a Fund’s shares may be
subject to greater volatility to the extent it invests in commodity
futures.
Currency
Futures: A currency futures
contract is a standardized, exchange-traded contract to buy or sell a particular
currency at a specified price at a future date (commonly three months or more).
Currency futures contracts may be highly volatile and thus result in substantial
gains or losses to the Fund.
A
Fund may either exchange the currencies specified at the maturity of a currency
futures contract or, prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. A Fund may also enter into currency futures contracts that do not
provide for physical settlement of the two currencies but instead are settled by
a single cash payment calculated as the difference between the agreed upon
exchange rate and the spot rate at settlement based upon an agreed upon notional
amount. Closing transactions with respect to currency futures contracts are
usually effected with the counterparty to the original currency futures
contract.
Index
Futures: An index futures
contract is an exchange-traded contract that provides for the delivery, at a
designated date, time and place, of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of
trading on the date specified in the contract and the price agreed upon in the
futures contract; no physical delivery of securities comprising the index is
made. Index futures can be based on stock, bond or other indices. Such
indices cannot be purchased or sold directly.
Interest
Rate Futures: An interest rate
futures contract is an exchange-traded contract in which the specified
underlying security is either an interest-bearing fixed income security or an
inter-bank deposit. Two examples of common interest rate futures contracts are
U.S. Treasury futures and Eurodollar futures contracts. The specified security
for U.S. Treasury futures is a U.S. Treasury security. The specified security
for Eurodollar futures is the London Interbank Offered Rate (LIBOR), which is a
daily reference rate based on the interest rates at which banks offer to lend
unsecured funds to other banks in the London wholesale money market.
Dividend
Futures: A dividend futures
contract is an exchange-traded contract to purchase or sell an amount equal to
the total dividends paid by a selected security, basket of securities or index,
over a period of time for a specified price that is based on the expected
dividend payments from the selected security, basket of securities or
index.
Security
Futures: A security futures
contract is an exchange-traded contract to purchase or sell, in the future, a
specified quantity of a security (other than a Treasury security), or a
narrow-based securities index at a certain price.
Options
on Futures Contracts. Options on futures
contracts are similar to options on securities or currencies except that options
on futures contracts give the purchaser the right, in return for the premium
paid, to assume a position in a 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 contract 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 contract margin account.
Forward
Foreign Currency Contracts. Each Fund may
enter into forward foreign currency contracts to hedge against adverse movements
in the foreign currencies in which portfolio securities are denominated. Certain
Funds may also enter into forward foreign currency transactions for speculative
purposes, including to seek additional income or increased returns for the
Fund.
A
forward foreign currency contract is an obligation to buy or sell a particular
currency in exchange for another currency,
which may be U.S. dollars, at a specified exchange rate on a future date.
Forward foreign currency contracts are typically individually negotiated and
privately traded by currency traders and their customers in the interbank
market. A Fund may enter into forward foreign currency contracts with respect to
a specific purchase or sale of a security, or with respect to its portfolio
positions generally.
63
At
the maturity of a forward foreign currency contract, a Fund may either exchange
the currencies specified at the
maturity of the contract or, prior to maturity, a Fund may enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward foreign currency contracts may or may not
be effected with the counterparty to the original forward contract. A Fund may
also enter into forward foreign currency contracts that do not provide for
physical exchange of the two currencies on the settlement date but instead
provide for settlement by a single cash payment calculated as the difference
between the agreed upon exchange rate and the spot rate at settlement based upon
an agreed upon notional amount (non-deliverable forwards).
Under
definitions adopted by the CFTC and SEC, non-deliverable forwards are considered
swaps, and therefore are
included in the definition of “commodity interests.” Although non-deliverable
forwards have historically been traded in the OTC market, as swaps they may in
the future be required to be centrally cleared and traded on public execution
facilities. For more information on central clearing and trading of cleared
swaps, see “Swaps” and “Special Regulatory Risks of Derivatives.” Forward
foreign currency contracts that qualify as deliverable forwards are not
regulated as swaps for most purposes, and are not included in the definition of
“commodity interests.” However these forwards are subject to some requirements
applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap
dealers. CFTC regulation of forward foreign currency contracts, especially
non-deliverable forwards, may restrict a Fund’s ability to use these instruments
in the manner described above or subject Invesco to CFTC registration and
regulation as a CPO.
The
cost to a Fund of engaging in forward foreign currency contracts varies with
factors such as the currencies
involved, the length of the contract period, differences in prevailing interest
rates in the jurisdictions associated with the two currencies and the prevailing
market conditions. Because forward foreign currency contracts are usually
entered into on a principal basis, no fees or commissions are typically
involved. The use of forward foreign currency contracts for hedging does not
eliminate fluctuations in the prices of the underlying securities a Fund owns or
intends to acquire, but it does establish a rate of exchange in advance. While
forward foreign currency contract sales limit the risk of loss due to a decline
in the value of the hedged currencies, they also limit any potential gain that
might result should the value of the currencies increase.
LIBOR
Transition Risk
A
Fund may have investments in financial instruments that are exposed to the
London Interbank Offered Rate (LIBOR) as the reference or benchmark rate for
variable interest rate calculations (including variable or floating rate debt
securities or loans and derivatives such as interest rate futures or swaps).
LIBOR was
intended to measure
the rate generally at which banks can lend and borrow from one another in the
relevant currency on an unsecured basis. LIBOR was a common benchmark interest
rate index used to make adjustments to variable-rate debt instruments, to
determine interest rates for a variety of financial instruments and borrowing
arrangements and as a reference rate in derivative contracts.
In
the years following the 2008 financial crisis, the integrity of LIBOR was
increasingly questioned because several
banks contributing to its calculation were accused of rate manipulation and
because of a general contraction in the unsecured interbank lending market. As a
result, regulators and financial industry working groups in several
jurisdictions have worked over the past several years to identify alternative
reference rates (ARRs) to replace LIBOR and to assist with the transition to the
new ARRs. The industry working group in the United States, the Alternative
Reference Rate Committee, has recommended adoption of the Secured Overnight
Financing Rate (SOFR) as a replacement for USD LIBOR. SOFR is a broad measure of
the cost of overnight borrowing of cash through repurchase agreements
collateralized by U.S. Treasury securities.
In
connection with the LIBOR transition, on March 5, 2021 the UK Financial Conduct
Authority (FCA), the regulator that
oversees LIBOR, announced that the majority of LIBOR rates would cease to be
published or would no longer be representative on January 1, 2022. Specifically,
the publication of all settings of British Pound Sterling, Swiss Franc, Euro and
Japanese Yen LIBOR, as well as the 1-week and 2-month settings of U.S. Dollar
(USD) LIBOR were phased out at the end of 2021. The remaining settings of USD
LIBOR, which
64
are
the most widely used in financial markets, ceased to be
published after June 30,
2023.
Key
regulators had
previously instructed banking institutions to cease entering into new contracts
that reference these remaining USD LIBOR settings after December 31, 2021,
subject to certain limited exceptions. The FCA will permit the use of synthetic
U.S. dollar LIBOR rates for non-U.S. contracts for a limited period of time
after June 30, 2023, but any such rates would be considered non-representative
of the underlying market.
While
the transition process away from LIBOR has become increasingly well-defined,
there remains uncertainty
and risks relating to converting certain longer-term securities and transactions
to a new ARR. For example, there can be no assurance that the composition or
characteristics of any ARRs or financial instruments in which a Fund invests
that utilize ARRs will be similar to or produce the same value or economic
equivalence as LIBOR or that these instruments will have the same volume or
liquidity. Additionally, although regulators have generally prohibited banking
institutions from entering into new contracts that reference those USD LIBOR
settings that continue to exist, there remains uncertainty and risks relating to
certain “legacy” USD LIBOR instruments that were issued or entered into before
December 31, 2021 and the process by which a replacement interest rate will be
identified and implemented into these instruments when USD LIBOR is ultimately
discontinued. While some “legacy” USD LIBOR instruments may contemplate a
scenario where LIBOR is no longer available by providing for an alternative or
“fallback” rate-setting methodology, there may be significant uncertainty
regarding the effectiveness of such alternative or “fallback” methodologies to
replicate USD LIBOR; other “legacy” USD LIBOR instruments may not include such
“fallback” rate-setting provisions at all. While it is expected that the market
participants will amend legacy financial instruments referencing LIBOR to
include such fallback provisions to ARRs, there remains uncertainty regarding
the willingness and ability of parties to add or amend such fallback provisions
in legacy
instruments.
On
December
16,
2022,
the
Federal Reserve Board adopted regulations implementing the Adjustable Interest
Rate Act. The regulations provide a statutory fallback mechanism to replace
LIBOR, by identifying benchmark rates based on SOFR that will replace LIBOR in
certain financial contracts after June 30, 2023. These regulations apply only to
contracts governed by U.S.
law,
among other limitations. The regulations include provisions that (i) provide a
safe harbor for selection or use of a
replacement
benchmark rate selected by the Federal Reserve Board;
(ii)
clarify who
may
choose
the replacement
benchmark rate
selected by the Federal Reserve Board;
and
(iii)
ensure
that contracts
adopting a
replacement benchmark rate selected by
the
Federal Reserve Board will not be
interrupted or
terminated following the replacement of LIBOR;
however
there
remains significant
uncertainty regarding the effectiveness of such legislation.
The
Funds
may have instruments linked to other interbank offered rates that may also cease
to be published in the future. All of the foregoing may adversely affect a
Fund’s performance or NAV.
Environmental,
Social and Governance (ESG) Considerations
The
ESG considerations described herein may not be used by a Fund and will vary
depending on a Fund's particular
investment strategy and in accordance with what a Fund’s investment team deems
relevant when making investment decisions. The ESG considerations described
herein may not be applied or evaluated with respect to each issuer or Fund
investment. Further, a Fund’s prospectus may describe additional ESG strategies
and risks.
ESG
considerations, either quantitative or qualitative, may be utilized as a
component of a Fund's investment
process to implement its investment strategy in pursuit of its investment
objective. ESG factors may be incorporated to evaluate an issuer, as part of
risk analysis, credit analysis or in other manners. ESG factors may vary across
types of investments and issuers, and not every ESG factor may be identified or
evaluated. The incorporation of ESG factors may affect a Fund’s exposure to
certain issuers or industries and may not work as intended. A Fund may
underperform other funds that do not assess an issuer’s ESG factors as part of
the investment process or that use a different methodology to identify and/or
incorporate ESG factors. Because ESG considerations may be used as one part of
an overall investment process, a Fund may still invest in securities of issuers
that are not considered ESG-focused or that may be viewed as having a high ESG
risk profile. As investors can differ in their views regarding ESG factors, a
Fund may invest in issuers that do not reflect the views with respect to ESG of
any particular investor. Information used by a Fund to evaluate such factors,
including information from reliance on third-party research and/or proprietary
65
research,
may not be readily available, complete or accurate, and may vary across
providers and issuers as ESG is not a
uniformly defined characteristic, which could negatively impact a Fund’s ability
to accurately assess an issuer, which could negatively impact a Fund’s
performance. There is no guarantee that the evaluation of ESG considerations
will be additive to a Fund’s performance.
Receipt
of Issuer’s Nonpublic Information
The
Adviser or Sub-Advisers (through their portfolio managers, analysts, or other
representatives) may receive material
nonpublic information about an issuer that may restrict the ability of the
Adviser or Sub-Advisers to cause the Funds to buy or sell securities of the
issuer on behalf of the Funds for substantial periods of time. This may impact
the Funds' ability to realize profit or avoid loss with respect to the issuer
and may adversely affect the Funds' flexibility with respect to buying or
selling securities, potentially impacting Fund performance. For example,
activist investors of certain issuers in which the Adviser or Sub-Advisers hold
large positions may contact representatives of the Adviser or Sub-Advisers and
may disclose material nonpublic information in such communication. The Adviser
or Sub-Advisers would be restricted from trading on the basis of such material
nonpublic information, limiting their flexibility in managing the Funds and
possibly impacting Fund performance.
Business
Continuity and Operational Risk
The
Adviser, the Funds and the Funds’ service providers may experience disruptions
or operating errors, such as processing
errors or human errors, inadequate or failed internal or external processes,
systems or technology failures, or other disruptive events, that could
negatively impact and cause disruptions in normal business operations of the
Adviser, the Funds or the Funds’ service providers. The Adviser has developed a
Business Continuity Program (the “Program”) designed to minimize the disruption
of normal business operations in the event of an adverse incident affecting the
Funds, the Adviser and/or its affiliates. The Program is also designed to enable
the Adviser to reestablish normal business operations in a timely manner during
such an adverse incident; however, there are inherent limitations in such
programs (including the possibility that contingencies have not been anticipated
and procedures do not work as intended) and, under some circumstances (e.g.
natural disasters, terrorism, public health crises, power or utility shortages
and failures, system failures or malfunctions), the Adviser, its affiliates, and
any service providers or vendors used by the Adviser, its affiliates, or the
Fund could be prevented or hindered from providing services to the Funds for
extended periods of time. These circumstances could cause disruptions and
negatively impact the Funds’ service providers and the Funds’ business
operations, potentially including an inability to process Fund shareholder
transactions, an inability to calculate a Fund’s net asset value and price the
Fund’s investments, and impediments to trading portfolio
securities.
Cybersecurity
Risk
With
the increased use of technologies such as the Internet to conduct business, the
Funds, like all companies, may be
susceptible to operational, information security and related risks.
Cybersecurity incidents involving the Funds and its service providers
(including, without limitation, a Fund’s investment adviser, sub-adviser, fund
accountant, custodian, transfer agent and financial intermediaries) have the
ability to cause disruptions and impact business operations, potentially
resulting in financial losses, impediments to trading, the inability of Fund
shareholders to transact business, violations of applicable privacy and other
laws, regulatory fines, penalties, reputational damage, reimbursement or other
compensation costs, and/or additional compliance costs.
Cybersecurity
incidents can result from deliberate cyberattacks or unintentional events and
may arise from external or
internal sources. Cyberattacks may include infection by malicious software or
gaining unauthorized access to digital systems, networks or devices that are
used to service the Funds' operations (e.g., by “hacking” or “phishing”).
Cyberattacks may also be carried out in a manner that does not require gaining
unauthorized access, such as causing denial-of-service attacks on websites
(i.e., efforts to make network services unavailable to intended users). These
cyberattacks could cause the misappropriation of assets or personal information,
corruption of data or operational disruptions. Geopolitical tensions may, from
time to time, increase the scale and sophistication of deliberate
cyberattacks.
66
Similar
adverse consequences could result from cybersecurity incidents affecting issuers
of securities in which the Funds
invest, counterparties with which the Funds engage, governmental and other
regulatory authorities, exchange and other financial market operators, banks,
brokers, dealers, insurance companies, other financial institutions and other
parties. In addition, substantial costs may be incurred in order to prevent any
cybersecurity incidents in the future. Although the Funds’ service providers may
have established business continuity plans and risk management systems to
mitigate cybersecurity risks, there can be no guarantee or assurance that such
plans or systems will be effective, or that all risks that exist, or may develop
in the future, have been completely anticipated and identified or can be
protected against. The Funds and its
shareholders could
be negatively impacted as a result.
Natural
Disaster/Epidemic Risk
Natural
or environmental disasters such as
earthquakes, wildfires, floods, hurricanes, tsunamis,
other
severe weather-related phenomena, and widespread disease including pandemics and
epidemics, can be highly disruptive to economies and markets, sometimes severely
so, and can adversely impact individual companies, sectors, industries, markets,
currencies, interest and inflation rates, credit ratings, investor sentiment,
and other factors affecting the value of the Funds’ investments. Given the
increasing interdependence among global economies and markets, conditions in one
country, market, or region are increasingly likely to adversely affect markets,
issuers, and/or foreign exchange rates in other countries, including the U.S.
These disruptions could prevent the Funds from executing advantageous investment
decisions in a timely manner and negatively impact the Funds’ ability to achieve
their investment objectives. Any such event(s) could have a significant adverse
impact on the value and risk profile of the Funds.
The
recent spread of the human coronavirus disease 2019 (COVID-19)
is an
example.
In the
first quarter of 2020, the World Health Organization (WHO) recognized COVID-19
as a global pandemic and both the WHO and the U.S. declared the outbreak a
public health emergency. The subsequent spread of COVID-19 resulted in, among
other significant adverse economic impacts, instances of market closures and
dislocations, extreme volatility, liquidity constraints and increased trading
costs. Efforts to contain the spread of COVID-19 resulted in travel
restrictions, closed international borders, disruptions of healthcare systems,
business operations (including business closures) and supply chains, employee
layoffs and general lack of employee availability, lower consumer demand, and
defaults and credit downgrades, all of which contributed to disruption of global
economic activity across many industries and exacerbated other pre-existing
political, social and economic risks
domestically and
globally.
Although the WHO
and the U.S.
ended
their declarations
of
COVID-19 as a global health emergency in
May
2023, the full economic impact at the macro-level and on individual
businesses,
as
well as the potential for a future reoccurrence of COVID or the occurrence of a
similar epidemic or pandemic, are unpredictable and could result in significant
and prolonged adverse impact on economies and financial markets in specific
countries and worldwide and thereby negatively affect a Fund’s
performance.
Custody
and Banking Risks
The
Fund’s assets may be maintained with one or more banks or other depository
institutions (“banking institutions”),
including both US and non-US banking institutions. In addition, the Fund’s
assets may be maintained at regional (or mid-size) banking institutions or large
banking institutions. Regional banking institutions are generally subject to
fewer regulatory safeguards than large banking institutions, causing regional
banking institutions to be perceived as having greater credit risk than large
banking institutions. The Fund may enter into credit facilities or have other
financial relationships with banking institutions. The distress, impairment or
failure of one or more banking institutions, whether or not holding the Fund’s
assets, may inhibit the ability of the Fund to access depository accounts or
lines of credit at all or in a timely manner. Such events can be caused by
various factors including negative market sentiment, significant withdrawals,
fraud, or poor management. In such cases, the Fund may need to delay or forgo
making new investments, or the Fund may need to sell another investment to raise
cash when it is not desirable to do so, which could result in lower performance.
In the event of such a failure of a banking institution, access to such accounts
could be restricted and U.S. Federal Deposit Insurance Corporation (FDIC)
protection may not be available for balances in excess of the amounts insured by
the FDIC (and similar considerations may apply to banking
67
institutions
in other jurisdictions not subject to FDIC protection). In such instances, the
Fund may not recover such excess
uninsured amounts and instead would only have an unsecured claim against the
banking institution and may be able to recover only the residual value of the
banking institution’s assets, if any value is recovered at all. The loss of any
assets maintained with a banking institution or the inability to access such
assets for a period of time, even if ultimately recovered, could be materially
adverse to the Fund. In addition, the Fund’s Adviser may not be able to identify
all potential solvency or stress concerns with respect to a banking institution
or transfer assets from one bank to another in a timely manner in the event a
banking institution comes under stress or fails. It is also possible that a Fund
will incur additional expenses or delays in putting in place alternative
arrangements or that such alternative arrangements will be less favorable than
those formerly in place (with respect to access to capital, economic terms, or
otherwise).
Fund
Policies
Fundamental
Restrictions. Except as
otherwise noted below, each Fund is subject to the following investment
restrictions, which may be changed only by a vote of such Fund's outstanding
shares. Fundamental restrictions may be changed only by a vote of the lesser of
(i) 67% or more of the Fund's shares present at a meeting if the holders of more
than 50% of the outstanding shares are present in person or represented by
proxy, or (ii) more than 50% of the Fund's outstanding shares.
(1) The Fund
(except for Invesco Comstock Select Fund, Invesco Energy Fund, Invesco Gold
& Special Minerals Fund and Invesco Technology Fund) is a “diversified
company” as defined in the 1940 Act. The Fund will not purchase the securities
of any issuer if, as a result, the Fund would fail to be a diversified company
within the meaning of the 1940 Act, and the rules and regulations promulgated
thereunder, as such statute, rules and regulations are amended from time to time
or are interpreted from time to time by the SEC staff (collectively, the "1940
Act Laws and Interpretations") or except to the extent that the Fund may be
permitted to do so by exemptive order or similar relief (collectively, with the
1940 Act Laws and Interpretations, the "1940 Act Laws, Interpretations and
Exemptions"). In complying with this restriction, however, the Fund may purchase
securities of other investment companies to the extent permitted by the 1940 Act
Laws, Interpretations and Exemptions.
(2) The Fund may
not borrow money or issue senior securities, except as permitted by the 1940 Act
Laws, Interpretations and Exemptions.
(3) The Fund may
not underwrite the securities of other issuers. This restriction does not
prevent the Fund from engaging in transactions involving the acquisition,
disposition or resale of its portfolio securities, regardless of whether the
Fund may be considered to be an underwriter under the 1933 Act.
(4) Invesco
Comstock Fund, Invesco Comstock Select Fund, Invesco Dividend Income Fund,
Invesco Small Cap Value Fund and Invesco Value Opportunities will not make
investments that will result in the concentration (as that term may be defined
or interpreted by the 1940 Act Laws, Interpretations and Exemptions) of its
investments in the securities of issuers primarily engaged in the same industry.
This restriction does not limit the Fund's investments in (i) obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities, or (ii)
tax-exempt obligations issued by governments or political subdivisions of
governments. In complying with this restriction, the Fund will not consider a
bank-issued guaranty or financial guaranty insurance as a separate
security.
Invesco Energy Fund
will concentrate (as that term may be defined or interpreted by the 1940 Act
Laws, Interpretations and Exemptions) its investments in the securities of
issuers engaged primarily in energy-related industries.
Invesco Gold &
Special Minerals Fund will concentrate (as that term may be defined or
interpreted by the 1940 Act Laws, Interpretations and Exemptions) its
investments without limit in the metals, mining and minerals
industries.
Invesco Technology
Fund will concentrate (as that term may be defined or interpreted by the 1940
Act Laws, Interpretations and Exemptions) its investments in the securities of
issuers engaged primarily in technology-related industries.
68
(5) The Fund may
not purchase real estate or sell real estate unless acquired as a result of
ownership of securities or other instruments. This restriction does not prevent
the Fund from investing in issuers that invest, deal, or otherwise engage in
transactions in real estate or interests therein, or investing in securities
that are secured by real estate or interests therein.
(6) The Fund
(except Invesco Gold & Special Minerals Fund and Invesco Comstock Select
Fund) may not purchase physical commodities or sell physical commodities unless
acquired as a result of ownership of securities or other instruments. This
restriction does not prevent the Fund from engaging in transactions involving
futures contracts and options thereon or investing in securities that are
secured by physical commodities.
(7) Invesco Gold
& Special Minerals Fund and Invesco Comstock Select Fund may not purchase or
sell physical commodities except to the extent permitted by the 1940 Act and
other governing statute, and by the rules thereunder, and by the SEC or other
regulatory agency with any authority over the Fund.
(8) The Fund may
not make personal loans or loans of its assets to persons who control or are
under common control with the Fund, except to the extent permitted by 1940 Act
Laws, Interpretations and Exemptions. This restriction does not prevent the Fund
from, among other things, purchasing debt obligations, entering into repurchase
agreements, loaning its assets to broker-dealers or institutional investors, or
investing in loans, including assignments and participation
interests.
(9) The Fund may,
notwithstanding any other fundamental investment policy or limitation, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Fund.
Invesco
Gold & Special Minerals Fund’s investment objective is to seek capital
appreciation. The Fund’s investment
objective is fundamental and may not be changed without shareholder
approval.
The
investment restrictions set forth above provide each of the Funds with the
ability to operate under new interpretations
of the 1940 Act or pursuant to exemptive relief from the SEC without receiving
prior shareholder approval of the change. Even though each of the Funds has this
flexibility, the Board has adopted non-fundamental restrictions for each of the
Funds relating to certain of these restrictions which Invesco and, when
applicable, the Sub-Advisers must follow in managing the Funds. Any changes to
these non-fundamental restrictions, which are set forth below, require the
approval of the Board.
Explanatory
Note
For
purposes of the Fund’s fundamental restriction related to industry concentration
above, investments in tax-exempt
municipal securities where the payment of principal and interest for such
securities is derived solely from a specific project associated with an issuer
that is not a governmental entity or a political subdivision of a government are
subject to a Fund’s industry concentration policy.
For
purposes of the fundamental restriction (7) related to physical commodities
above, Invesco Comstock Select Fund and
Invesco Gold & Special Minerals Fund are currently permitted to invest in
futures, swaps and other instruments on physical commodities and the 1940 Act
does not prohibit a fund from owning commodities or contracts related to
commodities. The extent to which the Fund can invest in futures, swaps and other
instruments on physical commodities, and/or commodities or contracts related to
commodities is set out in the investment strategies described in the Fund’s
prospectus and this SAI.
For
purposes of the Fund’s fundamental restriction related to real estate above, the
1940 Act does not prohibit a fund
from owning real estate. The extent to which the Fund can invest in real estate
is set out in the investment strategies described in the Fund’s
prospectus,
this
SAI, and as permitted by the Fund’s fundamental restriction.
For
purposes of the Fund’s fundamental restriction related to senior securities
above, the 1940 Act prohibits a fund
from issuing a “senior security,” which is generally defined as any bond,
debenture, note, or similar obligation or instrument constituting a security and
evidencing indebtedness, or any stock of a class
69
having
priority over any other class of the fund’s shares with respect to the payment
of dividends or the distribution of
fund assets, except that the fund may borrow money as described
above.
For
purposes of the Fund’s fundamental restriction related to loans above, made by
the Fund, current SEC staff
interpretations under the 1940 Act prohibit a fund from lending more than
one-third of its total assets, except through the purchase of debt obligations
or the use of repurchase agreements.
Non-Fundamental
Restrictions. Non-fundamental
restrictions may be changed for any Fund without shareholder approval. The
non-fundamental investment restrictions listed below apply to each of the Funds
unless otherwise indicated.
(1) In complying
with the fundamental restriction regarding issuer diversification, the Fund
(except Invesco Comstock Select Fund, Invesco Energy Fund, Invesco Gold &
Special Minerals Fund and Invesco Technology Fund) will not, with respect to 75%
of its total assets, purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities and securities issued by other investment companies), if, as a
result, (i) more than 5% of the Fund’s total assets would be invested in the
securities of that issuer, or (ii) the Fund would hold more than 10% of the
outstanding voting securities of that issuer. The Fund may purchase securities
of other investment companies as permitted by the 1940 Act Laws, Interpretations
and Exemptions.
In complying with
the fundamental restriction regarding issuer diversification, any Fund that
invests in municipal securities will regard each state (including the District
of Columbia and Puerto Rico), territory and possession of the United States,
each political subdivision, agency, instrumentality and authority thereof, and
each multi-state agency of which a state is a member as a separate "issuer."
When the assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from the government creating the subdivision
and the security is backed only by assets and revenues of the subdivision, such
subdivision would be deemed to be the sole issuer. Similarly, in the case of an
Industrial Development Bond or Private Activity Bond, if that bond is backed
only by the assets and revenues of the non-governmental user, then that
non-governmental user would be deemed to be the sole issuer. However, if the
creating government or another entity guarantees a security, then to the extent
that the value of all securities issued or guaranteed by that government or
entity and owned by a Fund exceeds 10% of the Fund's total assets, the guarantee
would be considered a separate security and would be treated as issued by that
government or entity. Securities issued or guaranteed by a bank or subject to
financial guaranty insurance are not subject to the limitations set forth in the
preceding sentence.
(2) In complying
with the fundamental restriction regarding borrowing money and issuing senior
securities, the Fund may borrow money in an amount not exceeding 33 1/3% of its
total assets (including the amount borrowed) less liabilities (other than
borrowings).
(3) In complying
with the fundamental restriction regarding industry concentration, Invesco
Comstock Fund, Invesco Comstock Select Fund, Invesco Dividend Income Fund,
Invesco Small Cap Value Fund and Invesco Value Opportunities Fund may invest up
to 25% of its total assets in the securities of issuers whose principal business
activities are in the same industry.
For purposes of
Invesco Energy Fund's fundamental investment restriction regarding industry
concentration an issuer will be considered to be engaged in an energy-related
industry if (1) at least 50% of its gross income or its net sales come from
activities in energy-related industries; (2) at least 50% of its total assets
are devoted to producing revenues in energy-related industries; or (3) based on
other available information,
the
Fund's portfolio manager(s)
determines that its
primary business is within energy-related industries. Such other available
information may include industry classifications from any one or more
third-party providers, such as those using the Global Industry Classification
Standard (GICS®), the North American Industry Classification System (NAICS), or
the Bloomberg Industry Classification Standard (BICS).
For purposes of
Invesco Technology Fund's fundamental investment restriction regarding industry
concentration an issuer will be considered to be engaged in a technology-related
industry if (1) at least
70
50% of its gross
income or its net sales come from activities in technology-related industries;
(2) at least 50% of its total assets are devoted to producing revenues in
technology-related industries; or (3) based on other available information, the
Fund's portfolio manager(s) determines that its primary business is within
technology-related industries. Such other available information may include
industry classifications from any one or more third-party providers, such as
those using GICS®, NAICS, or BICS.
(4) Notwithstanding
the fundamental restriction with regard to engaging in transactions involving
futures contracts and options thereon or investing in securities that are
secured by physical commodities, the Fund (except Invesco Gold & Special
Minerals Fund and Invesco Comstock Select Fund) currently may not invest in any
security (including futures contracts or options thereon) that is secured by
physical commodities.
The Funds do not
consider currencies or other financial commodities or contracts and financial
instruments to be physical commodities (which include, for example, oil,
precious metals and grains). Accordingly, the Funds will interpret the proposed
fundamental restriction and the related non-fundamental restriction to permit
the Funds, subject to each Fund's investment objectives and general investment
policies (as stated in the Funds' prospectuses and herein), to invest directly
in foreign currencies and other financial commodities and to purchase, sell or
enter into commodity futures contracts and options thereon, forward foreign
currency contracts, foreign currency options, currency-, commodity- and
financial instrument-related swap agreements, hybrid instruments, interest rate
or securities-related or foreign currency-related hedging instruments or other
currency-, commodity- or financial instrument-related derivatives, subject to
compliance with any applicable provisions of the federal securities or
commodities laws. The Funds will interpret fundamental restriction regarding the
purchase and sale of physical commodities and the related non-fundamental
restriction to permit the Funds to invest in ETFs, investment companies and
other pooled investment vehicles that invest in physical and/or financial
commodities, subject to the limits described in the Funds' prospectuses and
herein.
(5) In complying
with the fundamental restriction with regard to making loans, the Fund may lend
up to 33 1/3% of its total assets and may lend money to an Invesco Fund, on such
terms and conditions as the SEC may require in an exemptive order.
(6) Notwithstanding
the fundamental restriction with regard to investing all assets in an open-end
fund, the Fund may not invest all of its assets in the securities of a single
open-end management investment company with the same fundamental investment
objectives, policies and restrictions as the Fund.
(7) The Fund may
not acquire any securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
(8) The following
apply:
(a) Invesco Comstock
Fund and Invesco Comstock Select Fund invest, under normal circumstances, at
least 80% of its assets in common stocks.
(b) Invesco Dividend
Income Fund invests, under normal circumstances, at least 80% of its assets in
dividend-paying equity securities.
(c) Invesco Energy
Fund invests, under normal circumstances, at least 80% of its assets in
securities of issuers engaged in energy-related industries.
(d) Invesco Gold
& Special Minerals Fund invests, under normal market conditions, at least
80% of the Fund’s assets in common stocks of companies that are involved in
mining, processing or dealing in gold or other metals or minerals, gold bullion,
other physical metals, and precious metals-related ETFs.
(e) Invesco Small
Cap Value Fund invests, under normal circumstances, at least 80% of its assets
in securities of small capitalization companies.
(f) Invesco
Technology Fund invests, under normal circumstances, at least 80% of its assets
in securities of issuers engaged in technology-related industries.
71
For
purposes of the foregoing, "assets" means net assets, plus the amount of any
borrowings for investment
purposes. Derivatives and other instruments that have economic characteristics
similar to the securities in a Fund’s 80% policy described above for a Fund may
also be counted toward that Fund's 80% policy. The Fund will provide written
notice to its shareholders prior to any change to this policy, as required by
the 1940 Act Laws, Interpretations and Exemptions.
It
is the intention of each Fund, unless otherwise indicated, that with respect to
the Fund's policies that are a result of
application of law, the Fund will take advantage of the flexibility provided by
rules or interpretations of the SEC currently in existence or promulgated in the
future, or changes to such laws.
Portfolio
Turnover
Each
Fund calculates its portfolio turnover rate by dividing the value of the lesser
of purchases or sales of portfolio
securities for the fiscal period by the monthly average of the value of
portfolio securities owned by the Fund during the fiscal period. A 100%
portfolio turnover rate would occur, for example, if all of the portfolio
securities (other than short-term securities) were replaced once during the
fiscal period. Portfolio turnover rates will vary from year to year, depending
on market conditions. The following Funds experienced significant variation in
portfolio turnover during the two most recently completed fiscal years ended
April 30,
2022
and April 30, 2023.
|
Fund |
2023 |
2022 |
|
Invesco
Dividend Income Fund1 |
17% |
38% |
|
Invesco
Energy Fund2 |
52% |
18% |
|
Invesco
Technology Fund3 |
142% |
95% |
|
|
|
|
1
|
The
significant variation in portfolio turnover can be attributed to market
conditions. |
|
2
|
The
significant variation in portfolio turnover can be attributed to the
Fund’s status change from diversified to non-diversified, which triggered
a
number
of changes in the portfolio. |
|
3 |
The
variation in portfolio turnover rate was due to a change in the portfolio
management team. |
Policies
and Procedures for Disclosure of Fund Holdings
The
Board has adopted policies and procedures with respect to the disclosure of the
Funds' portfolio holdings (the
Holdings Disclosure Policy). Invesco and the Board may amend the Holdings
Disclosure Policy at any time without prior notice. Details of the Holdings
Disclosure Policy and a description of the basis on which employees of Invesco
and its affiliates may release information about portfolio securities in certain
contexts are provided below. As used in the Holdings Disclosure Policy and
throughout the SAI, the term “portfolio holdings information” includes
information with respect to the portfolio holdings of a Fund, including holdings
that are derivatives and holdings held as short positions. Information generally
excluded from “portfolio holdings information” includes, without limitation, (i)
descriptions of allocations among asset classes, regions, countries, industries
or sectors; (ii) aggregated data such as average or median ratios, market
capitalization, credit quality or duration; (iii) performance attributions by
asset class, country, industry or sector; (iv) aggregated risk statistics,
analysis and simulations, such as stress testing; (v) the characteristics of the
stock and bond components of a Fund’s portfolio holdings and other investment
positions; (vi) the volatility characteristics of a Fund; (vii) information on
how various weightings and factors contributed to Fund performance; (viii)
various financial characteristics of a Fund or its underlying portfolio
investments; and (ix) other information where, in the reasonable belief of the
Funds' Chief Compliance Officer (or a designee), the release of such information
would not present risks of dilution, arbitrage, market timing, insider trading
or other inappropriate trading for the applicable Fund.
Public
release of portfolio holdings. The Funds, except
certain Funds for which the Adviser has determined that disclosure of portfolio
holdings information on a monthly basis without a sufficient lag would be
detrimental to the Funds and their shareholders (“Exception Funds”)1, disclose the
following portfolio holdings information at www.invesco.com/us.2
72
|
Information |
Approximate
Date of Website Posting |
Information
Remains Posted
on
Website |
|
Select
portfolio holdings information,
such
as top ten holdings as of the
month-end |
15
calendar days after month-end |
Until
replaced with the
following
month’s top ten
holdings |
|
|
||
|
Select
portfolio holdings information
(e.g.,
buys/sells,
contributors/detractors
and/or
relevant
to market environment) |
15
calendar days after month-end |
Until
replaced with the
following
month’s select
portfolio
holdings
information |
|
|
||
|
Complete
portfolio holdings
information
as of calendar month-
end |
30
calendar days after month-end |
For twelve
months from
the date of
posting |
|
|
||
|
Complete
portfolio holdings
information
as of fiscal quarter-end |
60-70
calendar days after fiscal quarter-end |
For twelve
months from
the date of
posting |
|
|
The
Exception Funds disclose the following portfolio holdings information at
www.invesco.com/us.2
|
Information |
Approximate
Date of Website Posting |
Information
Remains Posted
on
Website |
|
Select
portfolio holdings information,
such
as top ten holdings as of the
month-end |
15
calendar days after month-end |
Until
replaced with the
following
month’s top ten
holdings |
|
|
||
|
Select
portfolio holdings information
(e.g.,
buys/sells,
contributors/detractors
and/or
relevant
to market environment) |
15
calendar days after month-end |
Until
replaced with the
following
quarter’s select
portfolio
holdings
information |
|
|
||
|
Complete
portfolio holdings
information
as of calendar quarter-
end |
30
calendar days after calendar quarter-end |
For twelve
months from
the date of
posting |
|
|
||
|
Complete
portfolio holdings
information
as of fiscal quarter-end |
60-70
calendar days after fiscal quarter-end |
For twelve
months from
the date of
posting |
|
|
1
As of the
date of this SAI, the Exception Funds are: Invesco Gold & Special Minerals
Fund
2
To locate
each Fund’s portfolio holdings information, go to www.invesco.com/us, select
“Financial Professional” or “Individual Investor,” if applicable. Hover over the
“Products” tab and then click on “Mutual Funds.” On the “Mutual Funds” page
click on “Fund Materials.” Links to each Fund’s portfolio holdings are located
under the “Holdings” column.
You
may also obtain the publicly available portfolio holdings information described
above by contacting us at
1-800-959-4246.
Selective
disclosure of portfolio holdings information pursuant to Non-Disclosure
Agreement.
Employees of
Invesco and its affiliates may disclose non-public full portfolio holdings
information on a selective basis only if Invesco approves the parties to whom
disclosure of non-public full portfolio holdings information will be made.
Invesco must determine that the proposed selective disclosure will be made for
business purposes of the applicable Fund and is in the best interest of the
applicable Fund’s shareholders. In making such determination, Invesco will
address any perceived conflicts of interest between shareholders of such Fund
and Invesco or its affiliates as part of granting its approval.
The
Board exercises continuing oversight of the disclosure of Fund portfolio
holdings information by (1) overseeing the
implementation and enforcement of the Holdings Disclosure Policy and the Invesco
Funds’ Code of Ethics by the Chief Compliance Officer (or his designee) of
Invesco and the Invesco Funds and (2)
73
considering
reports and recommendations by the Chief Compliance Officer concerning any
material compliance matters
(as defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the
Investment Advisers Act of 1940, as amended (the Advisers Act)) that may arise
in connection with the Holdings Disclosure Policy. Pursuant to the Holdings
Disclosure Policy, the Board receives reports on the specific types of
situations in which Invesco proposes to provide such selective disclosure and
the situations where providing selective disclosure raises perceived conflicts
of interest between shareholders of the applicable Fund and Invesco or its
affiliates. In any specific situation where Invesco addresses a perceived
conflict, Invesco will report to the Board on the persons to whom such
disclosures are to be made and the treatment of any such conflicts before
agreeing to provide selective disclosure.
Invesco
discloses non-public full portfolio holdings information to the following
persons in connection with the day-to-day
operations and management of the funds advised by Invesco (the Invesco
Funds):
•
Attorneys and
accountants;
•
Securities lending
agents;
•
Lenders to the
Invesco Funds;
•
Rating and rankings
agencies;
•
Persons assisting
in the voting of proxies;
•
Invesco Funds’
custodians;
•
The Invesco Funds’
transfer agent(s) (in the event of a redemption in kind);
•
Pricing services,
market makers, or other fund accounting software providers (to determine the
price of investments held by an Invesco Fund);
•
Brokers identified
by the Invesco Funds’ portfolio management team who provide execution and
research services to the team;
•
Analysts hired to
perform research and analysis for the Invesco Funds’ portfolio management team;
and
•
Insurance companies
which receive portfolio holdings information before Invesco posts portfolio
holdings information to Invesco's website (to allow such insurance companies to
post portfolio holdings information to their websites at approximately the same
time that Invesco posts portfolio holdings information to Invesco's
website).
In
many cases, Invesco will disclose current portfolio holdings information on a
daily basis to these persons. In these
situations, Invesco has entered into non-disclosure agreements which provide
that the recipient of the portfolio holdings information will maintain the
confidentiality of such portfolio holdings information and will not trade on
such information (Non-disclosure Agreements). Please refer to Appendix B for a
list of examples of persons to whom Invesco provides non-public portfolio
holdings information on an ongoing basis.
Invesco
will also disclose non-public portfolio holdings information if such disclosure
is required by applicable laws,
rules or regulations, or by regulatory authorities having jurisdiction over
Invesco and its affiliates or the Invesco Funds, and where there is no other way
to transact the Funds' business without disclosure of such portfolio holdings
information.
The
Holdings Disclosure Policy provides that the Funds, Invesco or any other party
in connection with the disclosure of
portfolio holdings information will not request, receive or accept any
compensation (including compensation in the form of the maintenance of assets in
any Fund or other mutual fund or account managed by Invesco or one of its
affiliates) for the selective disclosure of portfolio holdings
information.
Disclosure
of certain portfolio holdings information without Non-Disclosure
Agreement. Invesco and its
affiliates that provide services to the Funds, the Sub-Advisers and each of
their employees may receive or have access to portfolio holdings information as
part of the day to day operations of the Funds.
74
Employees
of Invesco and its affiliates may express their views orally or in writing on
one or more of the Funds' portfolio
investments or may state that a Fund has recently purchased or sold, or
continues to own, one or more investments. The investments subject to these
views and statements may be ones that were purchased or sold since the date on
which portfolio holdings was made available on the Fund’s website and therefore
may not be reflected on the portfolio holdings information disclosed on the
website. Such views and statements may be made to various persons, including
members of the press, shareholders in the applicable Fund, persons considering
investing in the applicable Fund or representatives of such shareholders or
potential shareholders, such as fiduciaries of a 401(k) plan and their advisers.
The nature and content of the views and statements provided to each of these
persons may differ.
Disclosure
of portfolio holdings information to traders. Additionally,
employees of Invesco and its affiliates may disclose one or more of the
investments held by a Fund when purchasing and selling investments through
broker-dealers, futures commissions merchants, clearing agencies and other
counterparties requesting bids on investments, obtaining price quotations on
investments, or in connection with litigation involving the Funds' portfolio
investments. Invesco does not enter into formal Non-Disclosure Agreements in
connection with these situations; however, the Funds would not continue to
conduct business with a person who Invesco believed was misusing the disclosed
information.
Disclosure
of portfolio holdings of other Invesco-managed products. Invesco and its
affiliates manage products sponsored by companies other than Invesco, including
investment companies, offshore funds, and separate accounts. In many cases,
these other products are managed in a similar fashion to certain Invesco Funds
(as defined herein) and thus have similar portfolio holdings. The sponsors of
these other products managed by Invesco and its affiliates may disclose the
portfolio holdings of their products at different times than Invesco discloses
portfolio holdings for the Invesco Funds.
MANAGEMENT
OF THE TRUST
Board
of Trustees
The
Trustees and officers of the Trust, their principal occupations during at least
the last five years and certain other
information concerning them are set forth in Appendix C.
Qualifications
and Experience. In addition to the
information set forth in Appendix C, the following sets forth additional
information about the qualifications and experience of each of the
Trustees.
Interested
Trustee
Martin
L. Flanagan, Trustee and Vice Chair
Martin
L. Flanagan has been a member of the Board of Trustees and Vice Chair of the
Invesco Funds since 2007. Mr.
Flanagan is Chairman Emeritus of Invesco Ltd.
Previously,
Mr. Flanagan served as president, chief executive officer (2007-2023) and a
member of the Board of Directors
(2005-2023) of Invesco Ltd.
Mr.
Flanagan joined Invesco, Ltd. from Franklin Resources, Inc., where he was
president and co-chief executive officer
from January 2004 to July 2005. Previously he had been Franklin’s co-president
from May 2003 to January 2004, chief operating officer and chief financial
officer from November 1999 to May 2003, and senior vice president and chief
financial officer from 1993 until November 1999.
Mr.
Flanagan served as director, executive vice president and chief operating
officer of Templeton, Galbraith &
Hansberger, Ltd. before its acquisition by Franklin in 1992. Before joining
Templeton in 1983, he worked with Arthur Andersen & Co.
Mr.
Flanagan is a chartered financial analyst and a certified public accountant. He
previously served
as vice chairman of the Investment Company Institute.
He
serves as a member of the executive board at the SMU Cox School of
Business.
75
The
Board believes that Mr. Flanagan’s long experience as an executive in the
investment management area benefits the
Funds.
Independent
Trustees
Beth
Ann Brown, Trustee and Chair
Beth
Ann Brown has been a member of the Board of Trustees of the Invesco Funds since
2019
and Chair since August 2022. From 2016 to 2019, Ms. Brown served on the boards
of certain investment companies in the Oppenheimer Funds complex.
Ms.
Brown has served as Director of Caron Engineering, Inc. since 2018 and as an
Independent Consultant since
September 2012.
Previously,
Ms. Brown served in various capacities at Columbia Management Investment
Advisers LLC, including Head of
Intermediary Distribution, Managing Director, Strategic Relations and Managing
Director, Head of National Accounts. She also served as Senior Vice President,
National Account Manager from 2002-2004 and Senior Vice President, Key Account
Manager from 1999 to 2002 of Liberty Funds Distributor, Inc. From 2013 through
2022, she served as Director, Vice President (through 2019) and President
(2019-2022) of Grahamtastic Connection, a non-profit organization.
From
2014 to 2017, Ms. Brown served on the Board of Advisors of Caron Engineering
Inc. and also served as President
and Director of Acton Shapleigh Youth Conservation Corps, a non–profit
organization, from 2012 to 2015.
The
Board believes that Ms. Brown’s experience in financial services and investment
management and as a director of other
investment companies benefits the Funds.
Cynthia
Hostetler, Trustee
Cynthia
Hostetler has been a member of the Board of Trustees of the Invesco Funds since
2017.
Ms.
Hostetler is currently a member of the board of directors of the Vulcan
Materials Company, a public company engaged in
the production and distribution of construction materials, Trilinc Global Impact
Fund LLC, a publicly registered non-traded limited liability company that
invests in a diversified portfolio of private debt instruments, Resideo
Technologies, Inc., a public company that manufactures and distributes smart
home security products and solutions worldwide, and Textainer Group Holdings, a
public company that is the world’s second largest shipping container leasing
company. Ms. Hostetler also serves on the board of governors of the Investment
Company Institute and is a member of the governing council of the Independent
Directors Council, both of which are professional organizations in the
investment management industry.
Previously,
Ms. Hostetler served as a member of the board of directors/trustees of Aberdeen
Investment Funds, a mutual
fund complex, Edgen Group Inc., a public company that provides products and
services to energy and construction companies, from 2012 to 2013, prior to its
sale to Sumitomo, and Genesee & Wyoming, Inc., a public company that owns
and operates railroads worldwide, from 2018 to 2019, prior to its sale to
Brookfield Asset Management. Ms. Hostetler was also a member of the board of
directors of the Eisenhower Foundation, a non-profit organization.
From
2001 to 2009, Ms. Hostetler served as Head of Investment Funds and Private
Equity at Overseas Private Investment
Corporation (“OPIC”), a government agency that supports US investment in the
emerging markets. Ms. Hostetler oversaw a multi-billion dollar investment
portfolio in private equity funds. Prior to joining OPIC, Ms. Hostetler served
as President and member of the board of directors of First Manhattan
Bancorporation, a bank holding company, from 1991 to 2007, and its largest
subsidiary, First Savings Bank, from 1991 to 2006 (Board Member) and from 1996
to 2001 (President).
The
Board believes that Ms. Hostetler’s knowledge of financial services and
investment management, her experience as a
director of other companies, including a mutual fund complex, her legal
background, and other professional experience gained through her prior
employment benefit the Funds.
76
Dr.
Eli Jones, Trustee
Dr.
Eli Jones has been a member of the Board of Trustees of the Invesco Funds since
2016.
Dr.
Jones has served as Board Member of
the regional board,
First
Financial Bank Texas since 2021 and Board Member, First Financial Bankshares,
Inc.
Texas
(FFIN)
since
2022. Since 2020, Dr. Jones has served as a director on the board of directors
of Insperity, Inc. (“Insperity”). From 2004 to 2016, Dr. Jones was chair of the
Compensation Committee, a member of the Nominating and Corporate Governance
Committee and a director on the board of directors of Insperity.
Dr.
Jones is a Professor of Marketing, Lowry and Peggy Mays Eminent Scholar, and
Dean Emeritus of Mays Business
School at Texas A&M University. From 2015 to 2021, Dr. Jones served as Dean
of Mays Business School at Texas A&M University. From 2012 to 2015, Dr.
Jones was the dean of the Sam M. Walton College of Business at the University of
Arkansas and holder of the Sam M. Walton Leadership Chair in Business. Prior to
joining the faculty at the University of Arkansas, he was dean of the E. J.
Ourso College of Business and Ourso Distinguished Professor of Business at
Louisiana State University from 2008 to 2012; professor of marketing and
associate dean at the C.T. Bauer College of Business at the University of
Houston from 2007 to 2008; an associate professor of marketing from 2002 to
2007; and an assistant professor from 1997 until 2002. He taught at Texas
A&M University for several years before joining the faculty of the
University of Houston.
Dr.
Jones served as the executive director of the Program for Excellence in Selling
and the Sales Excellence
Institute at the University of Houston from 1997 to 2007. Before becoming a
professor, he worked in sales and sales management for three Fortune 100
companies: Quaker Oats, Nabisco, and Frito-Lay. Dr. Jones is a past director of
Arvest Bank. He received his Bachelor of Science degree in journalism in 1982,
his MBA in 1986 and his Ph.D. in 1997, all from Texas A&M
University.
The
Board believes that Dr. Jones’ experience in academia and his experience in
marketing benefits the Funds.
Elizabeth
Krentzman, Trustee
Elizabeth
Krentzman has been a member of the Board of Trustees of the Invesco Funds since
2019. From 2014 to 2019,
Ms. Krentzman served on the boards of certain investment companies in the
Oppenheimer Funds complex.
Ms.
Krentzman served from 2017 to
2022,
as a
member of the Cartica Funds Board of Directors (private investment funds). Ms.
Krentzman previously served as a member of the Board of Trustees of the
University of Florida National Board Foundation from 2016 to 2021. She also
served as a member of the Board of Trustees of the University of Florida Law
Center Association, Inc. from 2016 to 2021, as a member of its Audit Committee
from 2016 to 2020, and as a member of its Membership Committee from 2020 to
2021.
Ms.
Krentzman served from 1997 to 2004 and from 2007 and 2014 in various capacities
at Deloitte & Touche LLP,
including Principal and Chief Regulatory Advisor for Asset Management Services,
U.S. Mutual Fund Leader and National Director of the Investment Management
Regulatory Consulting Practice. She served as General Counsel of the Investment
Company Institute from 2004 to 2007.
From
1996 to 1997, Ms. Krentzman served as an Assistant Director of the Division of
Investment Management - Office
of Disclosure and Investment Adviser Regulation of the U.S. Securities and
Exchange Commission. She also served from 1991 to 1996 in various positions with
the Division of Investment Management – Office of Regulatory Policy of the U.S.
Securities and Exchange Commission and from 1987 to 1991 as an Associate at
Ropes & Gray LLP.
The
Board believes that Ms. Krentzman’s legal background, experience in financial
services and accounting and as a
director of other investment companies benefits the Funds.
Anthony
J. LaCava, Jr., Trustee
Anthony
J. LaCava, Jr. has been a member of the Board of Trustees of the Invesco Funds
since 2019.
77
Previously,
Mr. LaCava served as a member of the board of directors and as a member of the
audit committee of Blue
Hills Bank, a publicly traded financial institution.
Mr.
LaCava retired after a 37-year career with KPMG LLP (“KPMG”) where he served as
senior partner for a wide range of
firm clients across the retail, financial services, consumer markets, real
estate, manufacturing, health care and technology industries. From 2005 to 2013,
Mr. LaCava served as a member of the board of directors of KPMG and chair of the
board’s audit and finance committee and nominating committee. He also previously
served as Regional Managing Partner from 2009 through 2012 and Managing Partner
of KPMG’s New England practice.
Mr.
LaCava currently serves as Member and Chairman
of the Business School Advisory Council of Bentley University and as a member of
American College of Corporate Directors and Board Leaders, Inc.
The
Board believes that Mr. LaCava’s experience in audit and financial services
benefits the Funds.
Dr.
Prema Mathai-Davis, Trustee
Dr.
Prema Mathai-Davis has been a member of the Board of Trustees of the Invesco
Funds since 1998.
Since
2021, Dr. Mathai-Davis has served as a member of the Board of Positive Planet
US, a non-profit organization and
Healthcare Chaplaincy Network, a non-profit organization.
Previously,
Dr. Mathai-Davis served as co-founder and partner of Quantalytics Research, LLC,
(a FinTech Investment Research
Platform) from 2017 to October 2019, when the firm was acquired by Forbes Media
Holdings, LLC.
Dr.
Mathai-Davis previously served as Chief Executive Officer of the YWCA of the USA
from 1994 until her retirement in
2000. Prior to joining the YWCA, Dr. Mathai-Davis served as the Commissioner of
the New York City Department for the Aging. She was a Commissioner and Board
Member of the Metropolitan Transportation Authority of New York, the largest
regional transportation network in the U.S. Dr. Mathai-Davis also served as a
Trustee of the YWCA Retirement Fund, the first and oldest pension fund for
women, and on the advisory board of the Johns Hopkins Bioethics Institute. She
was a member of the Board of Visitors of the University of Maryland School of
Public Policy, and on the visiting Committee of The Harvard University Graduate
School of Education.
Dr.
Mathai-Davis was the president and chief executive officer of the Community
Agency for Senior Citizens, a
non-profit social service agency that she established in 1981. She also directed
the Mt. Sinai School of Medicine-Hunter College Long-Term Care Gerontology
Center, one of the first of its kind.
The
Board believes that Dr. Mathai-Davis’ extensive experience in running public and
charitable institutions
benefits the Funds.
Joel
W. Motley, Trustee
Joel
W. Motley has been a member of the Board of Trustees of the Invesco Funds since
2019. From 2002 to 2019, Mr. Motley
served on the boards of certain investment companies in the Oppenheimer Funds
complex.
In
May
2022, Mr. Motley rejoined the Vestry and the Investment Committee of Trinity
Church Wall Street.
Since
2021, Mr. Motley has served as a Board member of the Trust for Mutual
Understanding, which makes grants to arts and environmental organizations in
Eastern Europe. Since 2021, Mr. Motley has served as a member of the board of
Blue Ocean Acquisition Corp. Since 2016, Mr. Motley has served as an independent
director of the Office of Finance of the Federal Home Loan Bank System. He has
served as Managing Director of Carmona Motley, Inc., a privately-held financial
advisory firm, since January 2002.
Mr.
Motley also serves as a member of the Council on Foreign Relations and its
Finance and Budget Committee. He is a
member of the Investment Committee and is Chairman Emeritus of the Board of
Human Rights Watch and a member of the Investment Committee and the Board of
Historic Hudson Valley, a non-profit cultural organization.
78
Since
2011, he has served as a Board Member and Investment Committee Member of the
Pulitzer Center for Crisis
Reporting, a non-profit journalism organization. Mr. Motley also serves as
Director and member of the Board and Investment Committee of The Greenwall
Foundation, a bioethics research foundation, and as a Director of Friends of the
LRC, a South Africa legal services foundation.
Previously,
Mr. Motley served as Managing Director of Public Capital Advisors, LLC, a
privately held financial advisory
firm, from 2006 to 2017. He also served as Managing Director of Carmona Motley
Hoffman Inc. a privately-held financial advisor, and served as a Director of
Columbia Equity Financial Corp., a privately-held financial advisor, from 2002
to 2007.
The
Board believes that Mr. Motley’s experience in financial services and as a
director of other investment companies benefits
the Funds.
Teresa
M. Ressel, Trustee
Teresa
Ressel has been a member of the Board of Trustees of the Invesco Funds since
2017.
Ms.
Ressel has previously served within the private sector and the U.S. government
as well as consulting. Formerly, Ms.
Ressel served at UBS AG in various capacities, including as Chief Executive
Officer of UBS Securities LLC, a broker-dealer division of UBS Investment Bank,
and as Group Chief Operating Officer of the Americas.
Between
2001 and 2004, Ms. Ressel served at the U.S. Treasury, initially as Deputy
Assistant Secretary for Management
& Budget and then as Assistant Secretary for Management and Chief Financial
Officer. Ms. Ressel was confirmed by the U.S. Senate and anchored financial
duties at the Department, including finance, accounting, risk, audit and
performance measurement.
Ms.
Ressel also volunteers
within her community across a number of functions and serves on the board of
GAVI, the Global Vaccine Alliance (non-profit) supporting children’s
health.
The
Board believes that Ms. Ressel’s risk management and financial experience in
both the private and public sectors
benefits the Funds.
Robert
C. Troccoli, Trustee
Robert
C. Troccoli has been a member of the Board of Trustees of the Invesco Funds
since 2016.
Mr.
Troccoli retired after a 39-year career with KPMG LLP (“KPMG”), where he served
as a senior Partner. From 2013
to 2017, he was an adjunct professor at the University of Denver’s Daniels
College of Business.
Mr.
Troccoli’s leadership roles during his career with KPMG included managing
partner and partner in charge of the
Denver office’s Financial Services Practice. He served regulated investment
companies, investment advisors, private partnerships, private equity funds,
sovereign wealth funds, and financial services companies. Toward the end of his
career, Mr. Troccoli was a founding member of KPMG’s Private Equity Group in New
York City, where he served private equity firms and sovereign wealth funds. Mr.
Troccoli also served mutual fund clients along with several large private equity
firms as Global Lead Partner of KPMG’s Private Equity Group.
The
Board believes that Mr. Troccoli’s experience as a partner in a large accounting
firm and his knowledge of
investment companies, investment advisors, and private equity firms benefits the
Funds.
Daniel
S. Vandivort, Trustee
Daniel
S. Vandivort has been a member of the Board of Trustees of the Invesco Funds
since 2019. From 2014 to 2019, Mr.
Vandivort served on the boards of certain investment companies in the
Oppenheimer Funds complex, as a Trustee and as the Governance Committee
Chair.
Mr.
Vandivort also served as Chairman, Lead Independent Director, and Chairman of
the Audit Committee of the Board of
Directors of the Value Line Funds from 2008 through 2014.
79
Previously, Mr. Vandivort also
served as a Trustee and Chairman of the Weiss Peck and Greer Mutual Funds Board
from 2004 to 2005.
Previously,
Mr. Vandivort served at Weiss Peck and Greer/Robeco Investment Management from
1994 to 2007, as President
and Chief Investment Officer and prior to that as Managing Director and Head of
Fixed Income. Mr. Vandivort also served in various capacities at CS First Boston
from 1984 to 1994, including as Head of Fixed Income at CS First Boston
Investment Management.
Mr.
Vandivort was also a Trustee on the Board of Huntington Disease Foundation of
America from 2007 to 2013 and from 2015
to 2019. He also served as Treasurer and Chairman of the Audit and Finance
Committee of Huntington Disease Foundation of America from 2016 to
2019.
Mr.
Vandivort currently serves as President of Flyway Advisory Services LLC, a
consulting and property management
company.
The
Board believes that Mr. Vandivort’s experience in financial services and
investment management and as a director of
other investment companies benefits the Funds.
Management
Information
The
Trustees have the authority to take all actions that they consider necessary or
appropriate in connection with
oversight of the Trust, including, among other things, approving the investment
objectives, investment policies and fundamental investment restrictions for the
Funds. The Trust has entered into agreements with various service providers,
including the Funds’ investment advisers, administrator, transfer agent,
distributor and custodians, to conduct the day-to-day operations of the Funds.
The Trustees are responsible for selecting these service providers, approving
the terms of their contracts with the Funds, and exercising general oversight of
these arrangements on an ongoing basis.
Certain
Trustees and officers of the Trust are affiliated with Invesco and Invesco Ltd.,
the parent corporation of
Invesco. All of the Trust’s executive officers hold similar offices with some or
all of the other Trusts.
Leadership
Structure and the Board of Trustees. The Board is
currently composed of eleven Trustees, including ten Trustees who are not
“interested persons” of the Funds, as that term is defined in the 1940 Act
(collectively, the Independent Trustees and each, an Independent Trustee). In
addition to eight regularly scheduled meetings per year, the Board holds special
meetings or informal conference calls to discuss specific matters that may
require action prior to the next regular meeting. As discussed below, the Board
has established four standing committees – the Audit Committee, the Compliance
Committee, the Governance Committee and the Investments Committee (the
Committees), to assist the Board in performing its oversight
responsibilities.
The
Board has appointed an Independent Trustee to serve in the role of Chair. The
Chair’s primary role is to preside at
meetings of the Board and act as a liaison with the Adviser and other service
providers, officers, attorneys, and other Trustees between meetings. The Chair
also participates in the preparation of the agenda for the meetings of the
Board, is active with mutual fund industry organizations, and may perform such
other functions as may be requested by the Board from time to time. Except for
any duties specified pursuant to the Trust’s Declaration of Trust or By-laws,
the designation of Chair does not impose on such Independent Trustee any duties,
obligations or liability that is greater than the duties, obligations or
liability imposed on such person as a member of the Board generally.
The
Board believes that its leadership structure, including having an Independent
Trustee as Chair, allows for effective
communication between the Trustees and management, among the Trustees and among
the Independent Trustees. The existing Board structure, including its Committee
structure, provides the Independent Trustees with effective control over Board
governance while also allowing them to receive and benefit from insight from the
interested Trustee who is an active officer of the Funds’ investment adviser.
The
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Board’s
leadership structure promotes dialogue and debate, which the Board believes
allows for the proper consideration of
matters deemed important to the Funds and their shareholders and results in
effective decision-making.
Risk
Oversight. The Board
considers risk management issues as part of its general oversight
responsibilities throughout the year at its regular meetings and at regular
meetings of its Committees. Invesco prepares regular reports that address
certain investment, valuation and compliance matters, and the Board as a whole
or the Committees also receive special written reports or presentations on a
variety of risk issues at the request of the Board, a Committee or the Senior
Officer.
The
Board also considers liquidity risk management issues as part of its general
oversight responsibilities and oversees the
Trust's liquidity risk through, among other things, receiving periodic reporting
and presentations by Invesco personnel that address liquidity matters. As
required by Rule 22e-4 under the 1940 Act, the Board, including a majority of
the Independent Trustees, has approved the Trust’s Liquidity Risk Management
("LRM") Program, which is reasonably designed to assess and manage the Trust’s
liquidity risk, and has appointed the LRM Program Administrator that is
responsible for administering the LRM Program. The Board also reviews, no less
frequently than annually, a written report prepared by the LRM Program
Administrator that addresses, among other items, the operation of the program
and assesses its adequacy and effectiveness of implementation.
The
Audit Committee assists the
Board
with
its
oversight of the Funds'
accounting and
auditing process. The Audit Committee is responsible for selecting the
Funds'
independent
registered public accounting firm
(auditors),
including
evaluating their independence and meeting with such auditors to consider and
review matters relating to the Funds' financial reports and internal controls.
In addition, the Audit Committee meets regularly with representatives of Invesco
Ltd.’s internal audit group to review reports on their examinations of functions
and processes within Invesco that affect the Funds. The Audit Committee also
oversees the Adviser’s process for valuing the Funds’ portfolio investments and
receives reports from management regarding its process and the valuation of the
Funds’ portfolio investments as consistent with the valuation policy approved by
the Board and related procedures.
The
Compliance Committee receives regular compliance reports prepared by Invesco’s
compliance group and meets regularly
with the Fund’s Chief Compliance Officer (CCO) to discuss compliance issues,
including compliance risks. The Compliance Committee has recommended and the
Board has adopted compliance policies and procedures for the Funds and for the
Funds’ service providers. The compliance policies and procedures are designed to
detect, prevent and correct violations of the federal securities
laws.
The
Governance Committee monitors the composition of the Board and each of its
Committees and monitors the
qualifications of the Trustees to ensure adherence to certain governance
undertakings applicable to the Funds. In addition, the Governance Committee
oversees an annual self-assessment of the Board and its committees and addresses
governance risks, including insurance and fidelity bond matters, for the
Trust.
The
Investments Committee and its sub-committees receive regular written reports
describing and analyzing the
investment performance of the Invesco Funds. In addition, Invesco’s Chief
Investment Officers and the portfolio managers of the Funds meet regularly with
the Investments Committee or its sub-committees to discuss portfolio
performance, including investment risk, such as the impact on the Funds of
investments in particular types of securities or instruments, such as
derivatives. To the extent that a Fund changes a particular investment strategy
that could have a material impact on the Fund’s risk profile, the Board
generally is consulted in advance with respect to such change.
Committee
Structure
The
members of the Audit Committee are Messrs. LaCava (Chair)
and
Troccoli, Dr. Jones, and Mss. Hostetler and Ressel. The Audit Committee performs
a number of functions with respect to the oversight of the Funds’ accounting and
financial reporting, including: (i) assisting the Board with its oversight of
the qualifications, independence and performance of the independent registered
public accountants; (ii) selecting independent registered public accountants for
the Funds; (iii) to the extent required, pre-approving certain
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audit
and permissible non-audit services; (iv) overseeing the financial reporting
process for the Funds; (v) assisting the Board
with its oversight of the integrity of the Funds’ financial statements and
compliance with legal and regulatory requirements that relate to the Funds’
accounting and financial reporting, internal control over financial reporting
and independent audits; (vi) pre-approving engagements for non-audit services to
be provided by the Funds’ independent auditors to the Funds’ investment adviser
or to any of its affiliates; and (vii) overseeing the performance of the fair
valuation determinations by the Adviser. During the fiscal year ended April 30,
2023, the Audit Committee held five meetings.
The
members of the Compliance Committee are Messrs. Motley and Vandivort, and Mss.
Brown
and
Krentzman (Chair) and Dr. Mathai-Davis. The Compliance Committe