MORGAN
STANLEY INSTITUTIONAL FUND TRUST
1585
Broadway
New
York, NY 10036
Statement
of Additional Information
January
28, 2024
Morgan
Stanley Institutional Fund Trust (the “Trust”) is a mutual fund consisting of
nine portfolios offering a variety of investment alternatives,
all of which are included in this Statement of Additional Information (“SAI”)
(each, a “Fund” and collectively the “Funds”).
Some or all of the Funds offer the following shares: Class I, Class A, Class L,
Class C, Class IR, Class R6, and Institutional Class.
Following is a list of the nine Funds included in this SAI:
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Share
Class and Ticker Symbol |
|
I |
A |
L1
|
C |
IR |
R6 |
Institutional |
U.S.
EQUITY FUND: |
Discovery
Portfolio |
MPEGX |
MACGX |
MSKLX |
MSMFX |
— |
MMCGX |
— |
Dynamic
Value Portfolio |
MAAQX |
MAAUX |
— |
MAAOX |
— |
MAADX |
— |
FIXED
INCOME FUNDS: |
Core
Plus Fixed Income Portfolio |
MPFIX |
MFXAX |
MSIOX |
MSCKX |
— |
MPLRX |
— |
Corporate
Bond Portfolio |
MPFDX |
MIGAX |
MGILX |
MSBOX |
— |
— |
— |
High
Yield Portfolio |
MSYIX |
MSYPX |
MSYLX |
MSHDX |
MRHYX |
MSHYX |
— |
Short
Duration Income Portfolio |
MPLDX |
MLDAX |
MSJLX |
MSLDX |
— |
— |
— |
Short
Duration Municipal Income Portfolio |
— |
MUAMX |
— |
— |
MULMX |
— |
— |
Ultra-Short
Income Portfolio |
— |
MUAIX |
— |
— |
MULSX |
— |
MUIIX |
ASSET
ALLOCATION FUND: |
Global
Strategist Portfolio |
MPBAX |
MBAAX |
MSDLX |
MSSOX |
— |
MGPOX |
— |
1 |
The
Trust has suspended offering Class L shares of each Fund to all investors.
Existing Class L shareholders may invest through reinvestment of dividends
and distributions.
Class L shares of the Dynamic Value Portfolio, Ultra-Short Income
Portfolio and Short Duration Municipal Income Portfolio are not being
offered at
this time. You do not currently have the option of purchasing Class L
shares. |
This
SAI is not a prospectus but should be read in conjunction with the Funds’
prospectuses (“Prospectuses”), each dated January 28, 2024,
as may be supplemented from time to time. To obtain any of these Prospectuses
without charge, please call Morgan Stanley Shareholder
Services at the number indicated below.
Each
Fund is “diversified” and, as such, each Fund’s investments are required to meet
certain diversification requirements under federal
securities laws.
MORGAN
STANLEY SHAREHOLDER SERVICES: 1-800-869-6397
OR,
WITH RESPECT TO INSTITUTIONAL LIQUIDITY CLIENTS, 1-888-378-1630
PRICES
AND INVESTMENT RESULTS: WWW.MORGANSTANLEY.COM/IM
FUND
INVESTMENTS AND STRATEGIES
This
SAI provides additional information about the investment policies and operations
of the Trust and the Funds. “Fund”
as used herein
and under “Investments and Risks” refers to each Fund listed on the cover page
of this SAI (unless otherwise noted).
The
following
tables summarize the permissible strategies and investments for each Fund. These
tables should be read in conjunction with the
investment summaries for each Fund contained in the applicable Prospectus in
order to provide a more complete description of such
Fund’s investment policies. The tables exclude investments that Funds may make
solely for temporary defensive purposes. More details
about each investment and related risks are provided in the discussion following
the tables.
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U.S.
EQUITY AND ASSET ALLOCATION FUNDS |
|
Discovery
Portfolio |
Dynamic
Value Portfolio |
Global
Strategist Portfolio |
Investments: |
Agencies |
x |
x |
x |
Asset-Backed
Securities |
|
|
x |
Bitcoin
Exposure |
x |
|
x |
Bitcoin Cash Settled Futures |
x |
|
x |
Bitcoin ETFs |
x |
|
|
Borrowing |
|
x |
|
Brady
Bonds |
|
|
x |
Cash
Equivalents |
x |
x |
x |
Chinese
Fixed-Income Investments |
|
|
x |
Combined
Transactions |
|
x |
|
Commercial
Paper |
x |
|
x |
Commodity-Linked
Investments |
|
|
x |
Common
Stock |
x |
x |
x |
Contracts
for Difference |
x |
x |
|
Convertible
Securities |
x |
|
x |
Corporates |
x |
|
x |
Currency
Forwards |
x |
x |
x |
Custodial
Receipts |
|
|
|
Depositary
Receipts |
x |
x |
x |
Derivatives |
x |
|
x |
Emerging
Market Securities |
x |
|
x |
Equity
Securities |
x |
|
x |
Eurodollar
and Yankee Dollar Obligations |
x |
|
x |
Exchange-Listed
Equities via Stock Connect Program |
|
|
x |
Exchange-Traded
Funds |
|
x |
|
Fixed-Income
Securities |
x |
|
x |
Floaters |
|
|
x |
Foreign
Currency Transactions |
x |
x |
x |
Foreign
Securities |
x |
x |
x |
Funding
Agreements |
|
|
|
Futures
Contracts |
x |
x |
x |
High
Yield Securities |
|
|
x |
Illiquid
Investments |
x |
x |
|
Inverse
Floaters |
|
|
x |
Investment
Company Securities |
x |
x |
x |
Investment
Funds |
|
x |
x |
Investment
Grade Securities |
x |
x |
x |
IPOs |
x |
x |
|
Limited
Partnership and Limited Liability Company Interests |
x |
x |
x |
Loan-Related
Investments |
|
|
x |
Loans
of Portfolio Securities |
x |
x |
x |
Money
Market Instruments |
|
x |
|
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| |
U.S.
EQUITY AND ASSET ALLOCATION FUNDS |
|
Discovery
Portfolio |
Dynamic
Value Portfolio |
Global
Strategist Portfolio |
Mortgage-Related
Securities |
|
x |
x |
Municipals |
|
|
x |
Non-Publicly
Traded Securities, Private Placements and Restricted
Securities |
x |
|
x |
Options |
x |
x |
x |
Preferred
Stocks |
x |
x |
x |
Private
Investments in Public Equity |
x |
|
x |
Promissory
Notes |
|
|
|
Real
Estate Investing |
x |
x |
x |
-REITs |
|
x |
|
-Foreign
Real Estate Companies |
|
x |
|
-Specialized
Ownership Vehicles |
|
x |
|
Repurchase
Agreements |
x |
x |
x |
Residual
Interest Bonds |
|
|
|
Reverse
Repurchase Agreements |
x |
|
x |
Rights |
x |
x |
x |
Short
Sales |
x |
|
x |
Special
Purpose Acquisition Company |
x |
|
|
Structured
Investments |
x |
x |
x |
Swaps |
x |
x |
x |
Temporary
Defensive Investments |
|
x |
|
U.S.
Government Securities |
x |
x |
x |
Warrants |
x |
x |
x |
When-Issued
and Delayed Delivery Securities |
x |
|
x |
When-Issued
and Delayed Delivery Securities and Forward Commitments |
|
x |
|
When,
As and If Issued Securities |
x |
x |
x |
Zero
Coupons, Pay-In-Kind Securities or Deferred Payment
Securities |
x |
x |
x |
Additional
Risks: |
x |
x |
x |
Special
Risks Related to Cyber Security |
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Regulatory
and Legal Risk |
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Market
and Geopolitical Risk |
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ESG
Investment Risk |
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FIXED
INCOME FUNDS |
|
Core
Plus Fixed
Income Portfolio |
Corporate
Bond Portfolio |
High
Yield Portfolio |
Short
Duration Income
Portfolio |
Ultra-Short Income
Portfolio |
Short
Duration Municipal
Income
Portfolio |
Investments: |
Agencies |
x |
x |
x |
x |
x |
x |
Asset-Backed
Securities |
x |
x |
x |
x |
x |
x |
Bitcoin
Futures |
|
|
|
|
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|
Borrowing |
x |
x |
x |
x |
x |
x |
Brady
Bonds |
x |
x |
x |
x |
|
|
Cash
Equivalents |
x |
x |
x |
x |
x |
x |
Chinese
Fixed-Income Investments |
|
|
|
|
|
|
Commercial
Paper |
x |
x |
x |
x |
x |
x |
Commodity-Linked
Investments |
|
|
|
|
|
|
Common
Stock |
|
|
x |
|
|
|
Contracts
for Difference |
|
|
|
|
|
|
Convertible
Securities |
x |
x |
x |
x |
|
|
Corporates |
x |
x |
x |
x |
x |
x |
Currency
Forwards |
x |
|
x |
x |
|
|
Custodial
Receipts |
|
|
|
|
x |
|
Depositary
Receipts |
x |
x |
x |
x |
|
|
Derivatives |
x |
x |
x |
x |
|
x |
Emerging
Market Securities |
x |
x |
x |
x |
|
|
Exchange-Listed
Equities via Stock Connect Program |
|
|
|
|
|
|
Equity
Securities |
|
|
x |
|
|
|
Eurodollar
and Yankee Dollar Obligations |
x |
x |
x |
x |
x |
|
Fixed-Income
Securities |
x |
x |
x |
x |
x |
x |
Floaters |
x |
x |
x |
x |
x |
x |
Floating
and Variable Rate Obligations |
|
|
|
|
|
x |
Foreign
Currency Transactions |
x |
x |
x |
|
|
|
Foreign
Securities |
x |
x |
x |
x |
x |
|
Funding
Agreements |
|
|
|
|
x |
x |
Futures
Contracts |
x |
x |
x |
x |
|
x |
High
Yield Securities |
x |
x |
x |
|
|
x |
Illiquid
Investments |
x |
x |
x |
x |
x |
x |
Inverse
Floaters |
x |
x |
x |
|
|
|
Investment
Company Securities |
x |
x |
x |
x |
x |
x |
Investment
Funds |
|
|
x |
|
|
|
Investment
Grade Securities |
x |
x |
x |
x |
x |
x |
Limited
Partnership and Limited Liability Company
Interests |
|
|
|
|
|
|
Loan-Related
Investments |
x |
|
x |
|
|
|
Loans
of Portfolio Securities |
x |
x |
x |
x |
x |
|
Mortgage-Related
Securities |
x |
x |
x |
x |
|
|
Municipals |
x |
x |
x |
x |
x |
x |
Non-Publicly
Traded Securities, Private Placements
and Restricted Securities |
x |
x |
x |
x |
x |
x |
Options |
x |
x |
x |
x |
|
|
Preferred
Stocks |
x |
x |
x |
x |
|
|
Private
Investments in Public Equity |
|
|
|
|
|
|
Promissory
Notes |
|
|
|
|
x |
|
Real
Estate Investing |
|
|
x |
|
|
|
|
|
|
|
|
| |
FIXED
INCOME FUNDS |
|
Core
Plus Fixed
Income Portfolio |
Corporate
Bond Portfolio |
High
Yield Portfolio |
Short
Duration Income
Portfolio |
Ultra-Short Income
Portfolio |
Short
Duration Municipal
Income
Portfolio |
Repurchase
Agreements |
x |
x |
x |
x |
x |
x |
Residual
Interest Bonds |
|
|
|
|
|
x |
Reverse
Repurchase Agreements |
x |
x |
x |
x |
x |
x |
Rights |
x |
|
x |
|
|
|
Short
Sales |
x |
x |
x |
x |
|
|
Special
Purpose Acquisition Company |
|
|
x |
|
|
|
Structured
Investments |
x |
x |
x |
x |
|
|
Swaps |
x |
x |
x |
x |
|
x |
Tender
Option Bonds |
|
|
|
|
|
x |
Temporary
Defensive Investments |
|
|
|
|
|
x |
U.S.
Government Securities |
x |
x |
x |
x |
x |
x |
Variable
Rate Master Demand Notes |
|
|
|
|
|
x |
Warrants |
|
|
x |
|
|
|
When-Issued
and Delayed Delivery Securities
and Forward Commitments |
x |
x |
x |
x |
x |
x |
When,
As and If Issued Securities |
x |
x |
x |
x |
x |
x |
Zero
Coupons, Pay-In-Kind Securities or Deferred
Payment Securities |
x |
x |
x |
x |
x |
x |
Additional
Risks: |
x |
x |
x |
x |
x |
x |
Special
Risks Related to Cyber Security |
|
|
|
|
|
|
Regulatory
and Legal Risk |
|
|
|
|
|
|
Market
and Geopolitical Risk |
|
|
|
|
|
|
ESG
Investment Risk |
|
|
|
|
|
|
INVESTMENTS
AND RISKS
Morgan
Stanley Investment Management Inc. is the adviser (the “Adviser”) to each Fund.
Morgan Stanley Investment Management Limited is
the investment sub-adviser (the “Sub-Adviser”) to the Global Strategist
Portfolio. References to the Adviser, when used in connection with
its
activities as investment adviser, include the Sub-Adviser acting under its
supervision.
Agencies.
Agencies refer to fixed-income securities issued or guaranteed by federal
agencies and U.S. government sponsored instrumentalities.
They may or may not be backed by the full faith and credit of the United States.
If they are not backed by the full faith
and credit of the United States, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the obligation
for ultimate repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality
does not meet its commitment. Agencies that are backed by the full faith and
credit of the United States include the Export-Import
Bank, Farmers Home Administration, Federal Financing Bank and others. Certain
debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is backed
by U.S. Treasury zero coupon issues, while the U.S. Treasury is explicitly
required to advance funds sufficient to pay interest on
it, if needed. Certain agencies and instrumentalities, such as the
Government National Mortgage Association (“Ginnie Mae”), are, in
effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make “indefinite and
unlimited” drawings on the Treasury if needed to service their debt. Debt from
certain other agencies and instrumentalities, including
the Federal Home Loan Banks, the
Federal National Mortgage Association (“Fannie
Mae”) and the
Federal Home Loan Mortgage
Corporation (“Freddie Mac”), are not guaranteed by the United States, but those
institutions are protected by the discretionary
authority of the U.S. Treasury to purchase certain amounts of their securities
to assist them in meeting their debt obligations.
Finally, other agencies and instrumentalities, such as the Farm Credit System,
are federally chartered institutions under U.S.
Government supervision, but their debt securities are backed only by the
creditworthiness of those institutions, not the U.S. Government.
Some of the U.S. government agencies that issue or guarantee securities include
the Export-Import Bank of the United States,
Farmers Home Administration, Federal Housing Administration, Maritime
Administration, Small Business Administration and
the Tennessee
Valley Authority (“TVA”).
An
instrumentality of the U.S. Government is a government agency organized under
federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Bank, Central
Bank for Cooperatives, Federal Intermediate Credit Banks and Fannie
Mae.
Asset-Backed
Securities. Certain
Funds may invest in asset-backed securities. Asset-backed securities utilize the
securitization techniques
used to develop MBS.
These techniques are also applied to a broad range of other assets. Various
types of assets, primarily automobile
and credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through
structures. These types of securities are known as asset-backed
securities. A
Fund may invest in any type of asset-backed security.
Asset-backed securities have risk characteristics similar to MBS. Like MBS, they
generally decrease in value as a result of interest
rate increases, but may benefit less than other fixed-income securities from
declining interest rates, principally because of prepayments.
Also, as in the case of MBS, prepayments generally increase during a period of
declining interest rates although other factors,
such as changes in credit use and payment patterns, may also influence
prepayment rates. Asset-backed securities also involve the
risk that various federal and state consumer laws and other legal, regulatory
and economic factors may result in the collateral backing
the securities being insufficient to support payment on the
securities.
Borrowing.
Each Fund
is permitted to borrow money from banks in accordance with
the Investment
Company Act of 1940, as amended
(the “1940 Act”), or the rules and regulations promulgated by
the SEC
thereunder. Currently, the 1940 Act permits a fund to
borrow money from banks in an amount up to 33⅓% of its total assets (including
the amount borrowed) less its liabilities (not including
any borrowings but including the fair market value at the time of computation of
any other senior securities then outstanding).
A Fund may
also borrow an additional 5% of its total assets without regard to the foregoing
limitation for temporary purposes
such as clearance of portfolio transactions. The Funds
will only borrow when the Adviser believes that such borrowings will
benefit
the Fund after taking into account considerations such as interest income and
possible gains or losses upon liquidation. The Funds
will maintain asset coverage in accordance with the 1940 Act.
Borrowing
by the Funds
creates an opportunity for increased net income but, at the same time, creates
special risks. For example, leveraging
may exaggerate changes in and increase the volatility of the net
asset value per share (“NAV”) of a
Fund. This is because leverage
tends to exaggerate the effect of any increase or decrease in the value
of a
Fund’s portfolio securities. The use of leverage also may
cause a
Fund to liquidate portfolio positions when it may not be advantageous to do so
in order to satisfy its obligations or to maintain
asset coverage.
In
general, a
Fund may not issue any class of senior security, except that
the Funds
may (i) borrow from banks, provided that immediately
following any such borrowing there is an asset coverage of at least 300% for all
Fund borrowings and in the event such asset
coverage falls below 300% the Fund will within three days or such longer period
as the SEC may prescribe by rules and regulations,
reduce the amount of its borrowings to an extent that the asset coverage of such
borrowings shall be at least 300%, and (ii)
engage in trading practices that involve the issuance of a senior security,
including but not limited to options, futures, forward
contracts
and reverse repurchase agreements, in applicable SEC requirements. The
borrowings subject to these limits include borrowings
through reverse repurchase agreements and similar financing transactions unless
a Fund has elected to treat all such transactions
as derivatives transactions under applicable SEC requirements.
Brady
Bonds.
Brady Bonds are fixed-income securities that are created through the exchange of
existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by Nicholas F. Brady when he was the
U.S. Secretary of the Treasury. They may be collateralized or uncollateralized
and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
(“OTC”) secondary market. A
Fund will invest in Brady
Bonds only if they are consistent with the Fund’s quality specifications.
Dollar-denominated, collateralized Brady Bonds may be
fixed-rate par bonds or floating rate discount bonds. Interest payments on Brady
Bonds generally are collateralized by cash or securities
in an amount that, in the case of fixed-rate bonds, is equal to at least one
year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year’s rolling interest payments
based on the applicable interest rate at that time and
is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
“value recovery payments” in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized.
Brady
Bonds are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the “residual
risk”). In the event of a default with respect to collateralized
Brady Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations
held as collateral for the payment of principal will not be distributed to
investors, nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which
will continue to be outstanding, at which time the face amount of the collateral
will equal the principal payments due on the Brady
Bonds in the normal course. However, Brady Bonds should be viewed as speculative
in light of the history of defaults with respect
to commercial bank loans by public and private entities of countries issuing
Brady Bonds.
Cash
Equivalents.
Cash equivalents are short-term fixed-income securities comprising:
■ |
Time
deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers’ acceptances issued by
a commercial bank or savings and loan association. Time deposits are
non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Certificates of
deposit are negotiable short-term obligations issued
by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates
of deposit are certificates of deposit on which the interest rate is
periodically adjusted prior to their stated maturity based
upon a specified market rate. A bankers’ acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection
with an international commercial transaction (to finance the import,
export, transfer or storage of goods); |
■ |
Obligations
of U.S. banks, foreign branches of U.S. banks (Eurodollars) and U.S.
branches of foreign banks (Yankee dollars). Eurodollar
and Yankee dollar investments will involve some of the same risks of
investing in international securities that are discussed
in various foreign investing sections of this
SAI; |
■ |
Any
security issued by a commercial bank if (i) the bank has total assets of
at least $1 billion, or the equivalent in other currencies
or, in the case of domestic banks which do not have total assets of at
least $1 billion, the aggregate investment made in
any one such bank is limited to $250,000 principal amount per certificate
and the principal amount of such investment is insured
in full by the Federal Deposit Insurance Corporation (“FDIC”), (ii) in the
case of U.S. banks, it is a member of the FDIC
and (iii) in the case of foreign branches of U.S. banks, the security is
deemed by the Adviser to be of an investment quality
comparable with other debt securities which the Fund may
purchase; |
■ |
Commercial
paper rated at time of purchase by one or more nationally recognized
statistical rating organizations (“NRSROs”) in
one of their two highest categories (e.g., A-l or A-2 by S&P
Global Ratings Group, a division of S&P Global Inc. (“S&P”),
Prime
1 or Prime 2 by Moody’s
Investors Service, Inc. (“Moody’s”) or F1 or F2 by Fitch
Ratings, Inc. (“Fitch”)) or, if unrated, determined
to be of comparable quality by the
Adviser; |
■ |
Short-term
corporate obligations rated high-grade at the time of purchase by an NRSRO
(e.g., A or better by Moody’s, S&P or Fitch); |
■ |
U.S.
government obligations, including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in interest rates,
maturities and dates of issue; |
■ |
Government
agency securities issued or guaranteed by U.S. government sponsored
instrumentalities and Federal agencies. These include
securities issued by the Federal Home Loan Banks, Federal Land Bank,
Farmers Home Administration, Farm Credit Banks,
Federal Intermediate Credit Bank, Fannie
Mae, Federal Financing Bank, the
TVA and others; and |
■ |
Repurchase
agreements collateralized by the securities listed
above. |
Chinese
Fixed-Income Investments. A Fund
may invest in Chinese fixed-income securities traded in the China Interbank Bond
Market
(“CIBM”) through the Bond Connect program (“Bond Connect”), which allows
non-Chinese-domiciled investors (such as a
Fund)
to purchase certain fixed-income investments available in China’s interbank bond
market. Bond Connect utilizes the trading infrastructure
of both Hong Kong and China. Bond Connect therefore is not available when there
are trading holidays in Hong Kong.
As a result, prices of securities purchased through Bond Connect may fluctuate
at times when a
Fund is unable to add to or
exit
its position. Securities offered via Bond Connect may lose their eligibility for
trading through the program at any time, in which case
they may be sold but could no longer be purchased through Bond Connect. Because
Bond Connect is relatively new, its effects on
the Chinese interbank bond are uncertain. In addition, the trading, settlement
and information technology systems required for non-Chinese
investors in Bond Connect are relatively new and continuing to evolve. In the
event that the relevant systems do not function
properly, trading via Bond Connect could be disrupted, adversely affecting the
ability of a
Fund to acquire or dispose of securities
through Bond Connect in a timely manner, which in turn could adversely impact
the Fund’s performance.
Bond
Connect is subject to regulation by both Hong Kong and China. There can be no
assurance that further regulations will not affect
the availability of securities in the program, the frequency of redemptions or
other limitations. In China, Bond Connect securities
are held on behalf of ultimate investors (such as a
Fund) by the Hong Kong Monetary Authority Central Money Markets Unit
via accounts maintained with China’s two clearinghouses for fixed-income
securities. While Chinese regulators have affirmed that
the ultimate investors hold a beneficial interest in Bond Connect securities,
the law surrounding such rights continues to develop,
and the mechanisms that beneficial owners may use to enforce their rights are
untested and therefore pose uncertain risks, with
legal and regulatory risks potentially having retroactive effect. Further,
courts in China have limited experience in applying the concept
of beneficial ownership, and the law surrounding beneficial ownership will
continue to evolve as they do so. There is accordingly
a risk that, as the law is tested and developed, a
Fund’s ability to enforce its ownership rights may be negatively impacted,
which
could expose the Fund to the risk of loss on such investments. A
Fund may not be able to participate in corporate actions affecting
Bond Connect securities due to time constraints or for other operational
reasons, and payments of distributions could be delayed.
Market volatility and potential lack of liquidity due to low trading volume of
certain bonds may result in prices of those bonds
fluctuating significantly; in addition, the bid-ask spreads of the prices of
such securities may be large, and a
Fund may therefore
incur significant costs and suffer losses when selling such investments. More
generally, bonds traded in CIBM may be difficult
or impossible to sell, which could further impact a
Fund’s ability to acquire or dispose of such securities at their expected
prices.
Bond Connect trades are settled in Renminbi (“RMB”), the Chinese currency, and
investors must have timely access to a reliable
supply of RMB in Hong Kong, which cannot be guaranteed. Moreover, securities
purchased through Bond Connect generally
may not be sold, purchased or otherwise transferred other than through Bond
Connect in accordance with applicable rules. Finally,
uncertainties in the Chinese tax rules governing taxation of income and gains
from investments via Bond Connect could result
in unexpected tax liabilities for a
Fund. The withholding tax treatment of dividends and capital gains payable to
overseas investors
currently is unsettled.
Under
the prevailing applicable Bond Connect regulations, a
Fund participates in Bond Connect through an offshore custody agent,
registration
agent or other third parties (as the case may be), who would be responsible for
making the relevant filings and account opening
with the relevant authorities. A
Fund is therefore subject to the risk of default or errors on the part of such
agents.
Commercial
Paper.
Commercial paper refers to short-term fixed-income securities with maturities
ranging from 1 to 397 days. They are
primarily issued by corporations needing to finance large amounts of
receivables, but may be issued by banks and other borrowers.
Commercial paper is issued either directly or through broker-dealers, and may be
discounted or interest bearing. Commercial
paper is unsecured. Virtually all commercial paper is rated by Moody’s, Fitch or
S&P.
Commercial
paper rated A-1 by S&P has the following characteristics: (1) liquidity
ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated “A” or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; (5) typically, the issuer’s industry is well
established and the issuer has a strong position within the industry; and (6)
the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer’s commercial paper is A-1, A-2 or A-3.
The
rating Prime-1 is the highest commercial paper rating assigned by Moody’s. Among
the factors considered by Moody’s in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer’s industry or industries
and the appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer’s products in relation
to competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period
of ten years; (7) financial strength of a parent company and the relationships
that exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such
obligations.
With
respect to Fitch, a short-term issuer or obligation rating is based in all cases
on the short-term vulnerability to default of the rated
entity and relates to the capacity to meet financial obligations in accordance
with the documentation governing the relevant obligation.
Short-term deposit ratings may be adjusted for loss severity. Short-term ratings
are assigned to obligations whose initial maturity
is viewed as “short term” based on market convention. Typically, this means up
to 13 months for corporate, sovereign, and structured
obligations and up to 36 months for obligations in U.S. public finance markets.
An F1 rating indicates the strongest intrinsic
capacity for timely payment of financial commitments whereas an F2 rating
indicates good intrinsic capacity for timely payment
of financial commitments.
The
Short Duration Municipal Income Portfolio may invest in tax-exempt commercial
paper. Tax-exempt commercial paper is a short-term
obligation with a stated maturity of 270 days or less. It is issued by state and
local governments or their agencies to finance seasonal
working capital needs or as short-term financing in anticipation of longer term
financing. While tax-exempt commercial paper
is intended to be repaid from general revenues or refinanced, it frequently is
backed by a letter of credit, lending arrangement, note
repurchase agreement or other credit facility agreement offered by a bank or
financial institution.
Commodity-Linked
Investments.
The Global Strategist Portfolio may seek to provide exposure to the investment
returns of real assets
that trade in the commodity markets through investments in commodity-linked
derivative securities, such as structured notes, and
other similar investments (including commodity exchange-traded funds (“ETFs”) )
which are designed to provide this exposure without
direct investment in physical commodities or commodities futures contracts. The
Global Strategist Portfolio may also seek to provide
exposure to the investment returns of real assets that trade in the commodity
markets through investments in the Fund’s wholly-owned
subsidiary (the “Global Strategist Subsidiary”). Real assets are assets such as
oil, gas, industrial and precious metals, livestock,
and agricultural or meat products, or certain other tangible items, as compared
to stocks or bonds, which are intangible financial
instruments. In choosing investments, the Adviser seeks to provide exposure to
various commodities and commodity sectors.
The value of commodity-linked derivative securities held by a Global Strategist
Portfolio and/or the Global Strategist Subsidiary
may be affected by a variety of factors, including, but not limited to, overall
market movements and other factors affecting the
value of particular industries or commodities, such as weather, disease,
embargoes, acts of war or terrorism, or political and regulatory
developments.
The
prices of commodity-linked derivative securities may move in different
directions than investments in traditional equity and debt securities
when the value of those traditional securities is declining due to adverse
economic conditions. As an example, during periods
of rising inflation, debt securities have historically tended to decline in
value due to the general increase in prevailing interest rates.
Conversely, during those same periods of rising inflation, the prices of certain
commodities, such as oil and metals, have historically
tended to increase. Of course, there cannot be any guarantee that these
investments will perform in that manner in the future,
and at certain times the price movements of commodity-linked instruments have
been parallel to those of debt or equity securities.
Commodities have historically tended to increase and decrease in value during
different parts of the business cycle than financial
assets. Nevertheless, at various times, commodities prices may move in tandem
with the prices of financial assets and thus may
not provide overall portfolio diversification benefits. Under favorable economic
conditions, the Global Strategist Portfolio’s investments
may underperform an investment in traditional securities. Over the long term,
the returns on the Global Strategist Portfolio’s
investments are expected to exhibit low or negative correlation with stocks and
bonds.
Common
Stocks.
Common stocks are equity securities representing an ownership interest in a
corporation, entitling the stockholder to
voting rights and receipt of dividends paid based on proportionate
ownership.
Contracts
for Difference. Certain
Funds may purchase contracts for difference (“CFDs”). A CFD is a privately
negotiated contract between
two parties, buyer and seller, stipulating that the seller will pay to or
receive from the buyer the difference between the nominal
value of the underlying instrument at the opening of the contract and that
instrument’s value at the end of the contract. The underlying
instrument may be a single security, stock basket or index. A CFD can be set up
to take either a short or long position on the
underlying instrument. The buyer and seller are typically both required to post
margin, which is adjusted daily. The buyer will also
pay to the seller a financing rate on the notional amount of the capital
employed by the seller less the margin deposit. A CFD is usually
terminated at the buyer’s initiative. The seller of the CFD will simply match
the exposure of the underlying instrument in the open
market and the parties will exchange whatever payment is due.
As
is the case with owning any financial instrument, there is the risk of loss
associated with buying a CFD. For example, if a
Fund buys
a long CFD and the underlying security is worth less at the end of the contract,
the Fund would be required to make a payment to
the seller and would suffer a loss. Also, there may be liquidity risk if the
underlying instrument is illiquid because the liquidity of a CFD
is based on the liquidity of the underlying instrument. A further risk is that
adverse movements in the underlying security will require
the buyer to post additional margin. CFDs also carry counterparty risk, i.e.,
the risk that the counterparty to the CFD transaction
may be unable or unwilling to make payments or to otherwise honor its financial
obligations under the terms of the contract.
If the counterparty were to do so, the value of the contract, and
of a
Fund’s shares, may be reduced. A
Fund will not enter into
a CFD transaction that is inconsistent with its investment objective, policies
and strategies.
Convertible
Securities.
A convertible security is a bond, debenture, note, preferred stock, right,
warrant or other security that may be
converted into or exchanged for a prescribed amount of common stock or other
security of the same or a different issuer or into cash
within a particular period of time at a specified price or formula. A
convertible security generally entitles the holder to receive interest
paid or accrued on debt securities or the dividend paid on preferred stock until
the convertible security matures or is redeemed,
converted or exchanged. Before conversion, convertible securities generally have
characteristics similar to both debt and equity
securities. The value of convertible securities tends to decline as interest
rates rise and, because of the conversion feature, tends to
vary with fluctuations in the market value of the underlying securities.
Convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities generally rank senior to common
stock in a corporation’s capital structure but are usually subordinated to
comparable nonconvertible fixed-income securities
in
such capital structure. Convertible securities generally do not participate
directly in any dividend increases or decreases of the underlying
securities although the market prices of convertible securities may be affected
by any dividend changes or other changes in the
underlying securities. Certain of the convertible securities in which
a
Fund may invest are rated below investment grade or are unrated.
The prices of such securities are likely to be more sensitive to adverse
economic changes than higher-rated securities, resulting
in increased volatility of market prices of these securities during periods of
economic uncertainty, or adverse individual corporate
developments. In addition, during an economic downturn or substantial period of
rising interest rates, lower rated issuers may
experience financial stress.
Corporates.
Corporates are fixed-income securities issued by private businesses. Holders, as
creditors, have a prior legal claim over holders
of equity securities of the issuer as to both income and assets for the
principal and interest due to the holder.
Currency
Forwards. A
foreign currency forward exchange contract is a negotiated agreement between two
parties to exchange specified
amounts of two or more currencies at a specified future time at a specified
rate. The rate specified by the foreign currency forward
exchange contract can be higher or lower than the spot rate between the
currencies that are the subject of the contract. A
Fund
may also invest in non-deliverable foreign currency forward exchange contracts
(“NDFs”). NDFs are similar to other foreign currency
forward exchange contracts, but do not require or permit physical delivery of
currency upon settlement. Instead, settlement is
made in cash based on the difference between the contracted exchange rate and
the spot foreign exchange rate at settlement. Currency
futures are similar to foreign currency forward exchange contracts, except that
they are traded on an exchange and standardized
as to contract size and delivery date. Most currency futures call for payment or
delivery in U.S. dollars. Unanticipated changes
in currency prices may result in losses to a
Fund and poorer overall performance for a
Fund than if it had not entered into foreign
currency forward exchange contracts. The typical use of a foreign currency
forward exchange contract is to “lock in” the price of
a security in U.S. dollars or some other foreign currency,
which a
Fund is holding in its portfolio. By entering into a foreign currency
forward exchange contract for the purchase or sale, for a fixed amount of
dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, a
Fund may be able to protect itself against a possible loss resulting from an
adverse
change in the relationship between the U.S. dollar or other currency which is
being used for the security purchase and the foreign
currency in which the security is denominated during the period between the date
on which the security is purchased or sold and
the date on which payment is made or received. The Adviser also may from time to
time utilize foreign currency forward exchange
contracts for other purposes. For example, they may be used to hedge a foreign
security held in the portfolio against a decline
in value of the applicable foreign currency. They also may be used to lock in
the current exchange rate of the currency in which
those securities anticipated to be purchased are denominated. At times,
a
Fund may enter into “cross-currency” hedging transactions
involving currencies other than those in which securities are held or proposed
to be purchased are denominated.
A Fund
will not enter into foreign currency forward exchange contracts or maintain a
net exposure to these contracts where the consummation
of the contracts would obligate a
Fund to deliver an amount of foreign currency in excess of the value
of a
Fund’s portfolio
securities.
A Fund
may be limited in its ability to enter into hedging transactions involving
foreign currency forward exchange contracts by Internal
Revenue Code of 1986, as amended (the “Code”), requirements relating to
qualification as a regulated
investment company
(“RIC”).
Foreign
currency forward exchange contracts may limit gains on portfolio securities that
could otherwise be realized had they not been
utilized and could result in losses. The contracts also may
increase a
Fund’s volatility and may involve a significant amount of risk
relative to the investment of cash.
Custodial
Receipts. Certain
Funds may invest in custodial receipts representing interests in U.S. government
securities, municipal obligations
or other debt instruments held by a custodian or trustee. Custodial receipts
evidence ownership of future interest payments,
principal payments or both on notes or bonds issued or guaranteed as to
principal or interest by the U.S. Government, its agencies,
instrumentalities, political subdivisions or authorities, by a state or local
governmental body or authority, or by other types of
issuers. For certain securities law purposes, custodial receipts are not
considered obligations of the underlying issuers. In addition, if
for tax purposes a
Fund is not considered to be the owner of the underlying securities held in the
custodial account, the Fund may suffer
adverse tax consequences. As a holder of custodial receipts, a Fund
will bear its proportionate share of the fees and expenses charged
to the custodial account.
Depositary
Receipts.
Depositary receipts represent an ownership interest in securities of foreign
companies (an “underlying issuer”) that
are deposited with a depositary. Depositary receipts are not necessarily
denominated in the same currency as the underlying securities.
Depositary receipts include American depositary receipts (“ADRs”), global
depositary receipts (“GDRs”) and other types of depositary
receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as “Depositary Receipts”). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution and evidence an ownership interest in a security
or pool of securities issued by a foreign issuer. ADRs are listed and traded in
the United States. ADRs also include American depositary
shares. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by
either
a foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market
and Depositary Receipts in bearer form are designed for use in securities
markets outside the United States.
Depositary
Receipts may be “sponsored” or “unsponsored.” Sponsored Depositary Receipts are
established jointly by a depositary and the
underlying issuer, whereas unsponsored Depositary Receipts may be established by
a depositary without participation by the underlying
issuer. Holders of unsponsored Depositary Receipts generally bear all the costs
associated with establishing unsponsored Depositary
Receipts. In addition, the issuers of the securities underlying unsponsored
Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there
may not be a correlation between such information and the market value of the
Depositary Receipts. For purposes of a
Fund’s investment
policies, a
Fund’s investments in Depositary Receipts will be deemed to be an investment in
the underlying securities, except
that ADRs may be deemed to be issued by a U.S. issuer.
Derivatives.
Certain
Funds may, but are not
required to, use various derivatives and other similar instruments as described
below. Derivatives
may be used for a variety of purposes including hedging, risk management,
portfolio management or to earn income. Any or
all of the investment techniques described herein may be used at any time and
there is no particular strategy that dictates the use of one
technique rather than another, as the use of any derivative by a Fund
is a function of numerous variables, including market conditions.
A Fund
complies with applicable regulatory requirements when using derivatives.
Although the Adviser seeks to use derivatives
to further a Fund’s
investment objective, no assurance can be given that the use of derivatives will
achieve this result.
Derivative
instruments used by a
Fund will be counted toward a
Fund’s 80% policy, if applicable, discussed in the Prospectuses to the
extent they have economic characteristics similar to the securities included
within that policy.
General
Risks of Derivatives.
Derivatives utilized by a
Fund may involve the purchase and sale of derivative instruments. A derivative
is a
financial instrument the value of which depends upon (or derives from) the value
of another asset, security, interest rate, index or financial
instrument. Derivatives may relate to a wide variety of underlying instruments,
including equity and debt securities, indices, interest
rates, currencies and other assets. Certain derivative instruments that
a
Fund may use and the risks of those instruments are described
in further detail below. A
Fund may in the future also utilize derivatives techniques, instruments and
strategies that may be newly
developed or permitted as a result of regulatory changes, consistent
with a
Fund’s investment objective and policies. Such newly
developed techniques, instruments and strategies may involve risks different
than or in addition to those described herein. No assurance
can be given that any derivatives strategy employed by a
Fund will be successful.
The
risks associated with the use of derivatives are different from, and possibly
greater than, the risks associated with investing directly
in the instruments underlying such derivatives. Derivatives are highly
specialized instruments that require investment techniques
and risk analyses different from other portfolio investments. The use of
derivative instruments requires an understanding not
only of the underlying instrument but also of the derivative itself. Certain
risk factors generally applicable to derivative transactions
are described below.
■ |
Derivatives
are subject to the risk that the market value of the derivative itself or
the market value of underlying instruments will change
in a way adverse to a
Fund’s interests. A
Fund bears the risk that the Adviser may incorrectly forecast future
market trends
and other financial or economic factors or the value of the underlying
security, index, interest rate or currency when establishing
a derivatives position for a
Fund. |
■ |
Derivatives
may be subject to pricing risk, which exists when a derivative becomes
extraordinarily expensive (or inexpensive) relative
to historical prices or corresponding instruments. Under such market
conditions, it may not be economically feasible to initiate
a transaction or liquidate a position at an advantageous time or
price. |
■ |
Many
derivatives are complex and often valued subjectively. Improper valuations
can result in increased payment requirements to
counterparties or a loss of value to a
Fund. Many derivatives may also involve operational and legal
risks. |
■ |
Using
derivatives as a hedge against a portfolio investment
subjects a
Fund to the risk that the derivative will have imperfect correlation
with the portfolio investment, which could result in a
Fund incurring substantial losses. This correlation risk may be
greater
in the case of derivatives based on an index or other basket of
securities, as the portfolio securities being hedged may not duplicate
the components of the underlying index or the basket may not be of exactly
the same type of obligation as those underlying
the derivative. The use of derivatives for “cross hedging” purposes (using
a derivative based on one instrument as a hedge
on a different instrument) may also involve greater correlation
risks. |
■ |
While
using derivatives for hedging purposes can reduce a
Fund’s risk of loss, it may also limit a
Fund’s opportunity for gains or result
in losses by offsetting or limiting a
Fund’s ability to participate in favorable price movements in portfolio
investments. |
■ |
Derivatives
transactions for non-hedging purposes involve greater risks and may result
in losses which would not be offset by increases
in the value of portfolio securities or declines in the cost of securities
to be acquired. In the event that a
Fund enters into
a derivatives transaction as an alternative to purchasing or selling the
underlying instrument or in order to obtain desired exposure
to an index or market, a
Fund will be exposed to the same risks as are incurred in purchasing or
selling the underlying instruments
directly as well as the additional risks associated with derivatives
transactions. |
■ |
The
use of certain derivatives transactions, including OTC
derivatives, involves the risk of loss resulting from the insolvency or
bankruptcy
of the counterparty to the contract or the failure by the counterparty to
make required payments or otherwise |
|
comply
with the terms of the contract. In the event of default by a counterparty,
a
Fund may have contractual remedies pursuant
to the agreements related to the
transaction. |
■ |
Liquidity
risk exists when a particular derivative is difficult to purchase or sell.
If a derivative transaction is particularly large or if the
relevant market is illiquid, a
Fund may be unable to initiate a transaction or liquidate a position at an
advantageous time or price. |
■ |
While
some derivatives are cleared through a regulated, central clearinghouse,
many derivatives transactions are not entered into or
traded on exchanges or in markets regulated by the U.S. Commodity Futures
Trading Commission (“CFTC”) or the SEC. Instead,
in some cases, certain types of bilateral OTC derivatives are entered into
directly by a
Fund and a counterparty and may be
traded only through financial institutions acting as market makers. OTC
derivatives transactions can only be entered into with
a willing counterparty that is approved by the Adviser in accordance with
guidelines established by the Board. Where no such
counterparty is available, a
Fund will be unable to enter into a desired OTC transaction. There also
may be greater risk that
no liquid secondary market in the trading of OTC derivatives will exist,
in which case a
Fund may be required to hold such instruments
until exercise, expiration or maturity. Many of the protections afforded
to participants in the cleared derivatives markets
are not available to participants in bilateral OTC derivatives
transactions. Bilateral OTC derivatives transactions are not subject
to the guarantee of a clearinghouse and, as a result, a
Fund would bear greater risk of default by the counterparties to
such
transactions. |
■ |
A Fund
may be required to make physical delivery of portfolio securities
underlying a derivative in order to close out or to meet margin
and payment requirements and a derivatives position or to sell portfolio
securities at a time or price at which it may be disadvantageous
to do so in order to obtain cash to close out or to maintain a derivatives
position. |
■ |
As
a result of the structure of certain derivatives, adverse changes in,
among other things, interest rates, volatility or the value of
the
underlying instrument can result in losses substantially greater than the
amount invested in the derivative itself. Certain derivatives
have the potential for unlimited loss, regardless of the size of the
initial investment. |
■ |
Certain
derivatives may be classified as illiquid and therefore subject to
a
Fund’s limitation on investments in illiquid investments. |
■ |
Derivatives
transactions conducted outside the United States may not be conducted in
the same manner as those entered into on
U.S. exchanges, and may be subject to different margin, exercise,
settlement or expiration procedures. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign
exchanges. Many of the risks of OTC derivatives
transactions are also applicable to derivatives transactions conducted
outside the United States. Derivatives transactions
conducted outside the United States are subject to the risk of
governmental action affecting the trading in, or the prices
of, foreign securities, currencies and other instruments. The value of
such positions could be adversely affected by foreign political
and economic factors; lesser availability of data on which to make trading
decisions; delays on a
Fund’s ability to act upon
economic events occurring in foreign markets; and less liquidity than U.S.
markets. |
■ |
Currency
derivatives are subject to additional risks. Currency derivatives
transactions may be negatively affected by government exchange
controls, blockages and manipulation. Currency exchange rates may be
influenced by factors extrinsic to a country’s economy.
There is no systematic reporting of last sale information with respect to
underlying foreign currencies. As a result, the available
information on which trading in currency derivatives will be based may not
be as complete as comparable data for other
transactions. Events could occur in the foreign currency market which will
not be reflected in currency derivatives until the
following day, making it more difficult for a
Fund to respond to such events in a timely
manner. |
Regulatory
Matters.
Regulatory developments affecting the exchange-traded and OTC derivatives
markets may impair a
Fund’s ability to
manage or hedge its investment portfolio through the use of derivatives. In
particular, in October 2020, the SEC adopted a final rule
related to the use of derivatives, short sales, reverse repurchase agreements
and certain other transactions by registered investment companies
that rescinded and withdrew the guidance of the SEC and its staff regarding
asset segregation and cover transactions previously
applicable to the Funds’ derivatives and other transactions. These requirements
may limit the ability of a
Fund to use derivatives
and reverse repurchase agreements and similar financing transactions as part of
its investment strategies. The final rule requires
the Funds to trade derivatives and other transactions that create future payment
or delivery obligations subject to a value-at-risk
(“VaR”) leverage limit, certain derivatives risk management program and
reporting requirements. Generally, these requirements apply
unless a
Fund qualifies as a “limited derivatives user.” Under the final rule, when
a
Fund trades reverse repurchase agreements or
similar financing transactions, including certain tender option bonds, it needs
to aggregate the amount of indebtedness associated with
the reverse repurchase agreements or similar financing transactions with the
aggregate amount of any other senior securities representing
indebtedness when calculating a Fund’s asset coverage ratio or treat all such
transactions as derivatives transactions. Reverse
repurchase agreements or similar financing transactions aggregated with other
indebtedness do not need to be included in the calculation
of whether a
Fund is a limited derivatives user, but for funds subject to the VaR testing,
reverse repurchase agreements and
similar financing transactions must be included for purposes of such testing
whether treated as derivatives transactions or not. The
SEC also provided guidance in connection with the rule regarding use of
securities lending collateral that may limit the Funds’ securities
lending activities. In addition, under the rule, a Fund is permitted to invest
in a security on a when-issued or forward-settling
basis, or with a non-standard settlement cycle, and the transaction will be
deemed not to involve a senior security under the 1940
Act, provided that (i) a Fund intends to physically settle the transaction and
(ii) the transaction will settle within 35 days of its trade
date (the “Delayed-Settlement Securities Provision”). A Fund may otherwise
engage in such transactions that do not meet the conditions
of the Delayed-Settlement Securities Provision so long as a Fund treats any such
transaction as a “derivatives transaction”
for
purposes of compliance with the rule. Furthermore, under the rule, a Fund will
be permitted to enter into an unfunded commitment
agreement, and such unfunded commitment agreement will not be subject to the
asset coverage requirements under the 1940
Act, if a Fund reasonably believes, at the time it enters into such agreement,
that it will have sufficient cash and cash equivalents to
meet its obligations with respect to all such agreements as they come
due.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
and the rules promulgated thereunder may
limit the ability of a
Fund to enter into one or more exchange-traded or OTC derivatives
transactions.
A Fund’s
use of derivatives may also be limited by the requirements of the Code for
qualification as a regulated investment company (“RIC”) for
U.S. federal income tax purposes.
The
Adviser is subject to registration and regulation as a “commodity pool operator”
(“CPO”) under the CEA, with respect to its service
as investment adviser to the Global Strategist Portfolio. As a result, the
Trust, on behalf of the Global Strategist Portfolio, will be
required to operate in compliance with applicable CFTC requirements, including
registration, disclosure, reporting and other operational
requirements under the CEA and related CFTC regulations. Compliance with these
additional requirements may increase
Trust expenses. The Adviser and the Global Strategist Portfolio are exempt from
certain CFTC recordkeeping, reporting and disclosure
requirements under CFTC Rule 4.7 with respect to the Global Strategist
Subsidiary.
The
Adviser, with respect to each Fund except for the Global Strategist Portfolio,
has filed a notice of eligibility with the National Futures
Association (“NFA”) claiming an exclusion from the definition of the term CPO
pursuant to CFTC Regulation 4.5, as promulgated
under the CEA, with respect to each Fund’s operations. In addition, the Adviser
will operate the Bitcoin Subsidiary (as defined
below) in reliance on an exemption from registration as a CPO under CFTC
Regulation 4.13(a)(3). Therefore, neither these Funds
nor the Adviser (with respect to these Funds and the Bitcoin Subsidiary), is
subject to registration or regulation as a commodity
pool or CPO under the CEA. If any of these Funds (or the Adviser with respect to
such Fund) becomes subject to these requirements,
as well as related NFA rules, the Fund may incur additional compliance and other
expenses.
With
respect to investments in swap transactions, commodity futures, commodity
options or certain other commodity interests used for
purposes other than bona fide hedging purposes, an investment company must meet
one of the following tests under the CFTC amended
regulations in order for its investment adviser to claim an exemption from being
considered a CPO. First, the aggregate initial
margin and premiums required to establish an investment company’s positions in
such investments may not exceed five percent
(5%) of the liquidation value of the investment company’s portfolio (after
accounting for unrealized profits and unrealized losses
on any such investments). Alternatively, the aggregate net notional value of
such instruments, determined at the time of the most
recent position established, may not exceed one hundred percent (100%) of the
liquidation value of the investment company’s portfolio
(after accounting for unrealized profits and unrealized losses on any such
positions). In addition to meeting one of the foregoing
trading limitations, the investment company may not market itself as a commodity
pool or otherwise as a vehicle for trading
in the commodity futures, commodity options or swaps and derivatives
markets.
Regulations
recently adopted by federal banking regulators under the Dodd-Frank Act require
that certain qualified financial contracts
(“QFCs”) with counterparties that are part of U.S. or foreign global
systemically important banking organizations be amended
to include contractual restrictions on close-out and cross-default rights. QFCs
include, but are not limited to, securities contracts,
commodities contracts, forward contracts, repurchase agreements, securities
lending agreements and swaps agreements, as well
as related master agreements, security agreements, credit enhancements, and
reimbursement obligations. If a covered counterparty
of a
Fund or certain of the covered counterparty’s affiliates were to become subject
to certain insolvency proceedings, a
Fund
may be temporarily unable to exercise certain default rights, and the QFC may be
transferred to another entity. These requirements
may impact a
Fund’s credit and counterparty risks.
Combined
Transactions.
Combined transactions involve entering into multiple derivatives transactions
(such as multiple options transactions,
including purchasing and writing options in combination with each other;
multiple futures transactions; and combinations
of options, futures, forward and swap transactions) instead of a single
derivatives transaction in order to customize the risk
and return characteristics of the overall position. Combined transactions
typically contain elements of risk that are present in each
of the component transactions. A
Fund may enter into a combined transaction instead of a single derivatives
transaction when, in
the opinion of the Adviser, it is in the best interest of the Fund to do so.
Because combined transactions involve multiple transactions,
they may result in higher transaction costs and may be more difficult to close
out.
Emerging
Market Securities. Certain
Funds may invest in emerging market securities. An emerging market security is a
security issued
by an emerging market foreign government or private issuer. An emerging market
foreign government or private issuer has one or
more of the following characteristics: (i) its principal securities
trading market is in an emerging market or developing country; (ii) alone
or on a consolidated basis it derives 50% or more of its annual revenue or
profits from goods produced, sales made or services
performed in an emerging market or developing country or has at least 50% of its
assets, core business operations and/or employees
in an emerging market or developing country; or (iii) it is organized
under the laws of, or has a principal office in, an emerging
market or developing country. Based on these criteria it is possible for a
security to be considered issued by an issuer in more
than one country. Therefore, it is possible for the securities of any issuer
that has one or more of these characteristics in
connection
with any emerging market or developing country to be considered an emerging
market security when held in one Fund, but
not considered an emerging market security when held in another Fund if it has
one or more of these characteristics in connection
with a developed country.
Emerging
market describes any country that is generally considered to be an emerging or
developing country by major organizations in
the international financial community or by a
Fund’s benchmark index.
The
economies of individual emerging market or developing countries may differ
favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation or deflation,
currency depreciation, capital reinvestment, resource self-sufficiency
and balance of payments position. Further, the economies of developing countries
generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures. These
economies also have been, and may continue
to be, adversely affected by economic conditions in the countries with which
they trade.
Prior
governmental approval for foreign investments may be required under certain
circumstances in some emerging market or developing
countries, and the extent of foreign investment in certain fixed-income
securities and domestic companies may be subject to
limitation in other emerging market or developing countries. Foreign ownership
limitations also may be imposed by the charters of
individual companies in emerging market or developing countries to prevent,
among other concerns, violation of foreign investment
limitations. Repatriation of investment income, capital and the proceeds of
sales by foreign investors may require governmental
registration and/or approval in some emerging countries. A
Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental registration or approval for such repatriation.
Any investment subject to such repatriation controls
will be considered illiquid if it appears reasonably likely that this process
will take more than seven days.
Certain
emerging market countries may be subject to less stringent requirements
regarding accounting, auditing, financial reporting and
record keeping and therefore, material information related to an investment may
not be available or reliable. In addition, a
Fund is
limited in its ability to exercise its legal rights or enforce a counterparty’s
legal obligations in certain jurisdictions outside of the United
States, in particular, in emerging markets countries.
Investment
in emerging market or developing countries may entail purchasing securities
issued by or on behalf of entities that are insolvent,
bankrupt, in default or otherwise engaged in an attempt to reorganize or
reschedule their obligations and in entities that have
little or no proven credit rating or credit history. In any such case, the
issuer’s poor or deteriorating financial condition may increase
the likelihood that a
Fund will experience losses or diminution in available gains due to
bankruptcy, insolvency or fraud. Emerging
market or developing countries also pose the risk of nationalization,
expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies
of such countries or the value of a
Fund’s investments in those countries. In addition, it may be difficult to
obtain and enforce
a judgment in a court outside the United States.
A Fund
may also be exposed to an extra degree of custodial and/or market risk,
especially where the securities purchased are not traded
on an official exchange or where ownership records regarding the securities are
maintained by an unregulated entity (or even the
issuer itself).
Equity
Securities.
Equity securities generally represent an ownership interest in an issuer, or may
be convertible into or represent a right
to acquire an ownership interest in an issuer. While there are many types of
equity securities, prices of all equity securities will fluctuate.
Economic, political and other events may affect the prices of broad equity
markets. For example, changes in inflation or consumer
demand may affect the prices of equity securities generally in the United
States. Similar events also may affect the prices of particular
equity securities. For example, news about the success or failure of a new
product may affect the price of a particular issuer’s
equity securities.
Eurodollar
and Yankee Dollar Obligations. Certain
Funds may invest in Eurodollar and Yankee dollar obligations. Eurodollar and
Yankee
dollar obligations are fixed-income securities that include time deposits, which
are non-negotiable deposits maintained in a bank
for a specified period of time at a stated interest rate. The Eurodollar
obligations may include bonds issued and denominated in euros.
Eurodollar obligations may be issued by government and corporate issuers in
Europe. Yankee dollar obligations, which include time
deposits and certificates of deposit, are U.S. dollar-denominated obligations
issued in the U.S. capital markets by foreign banks. Eurodollar
bank obligations, which include time deposits and certificates of deposit, are
U.S. dollar-denominated obligations issued outside
the U.S. capital markets by foreign branches of U.S. banks and by foreign
banks. The Funds
may consider Yankee dollar obligations
to be domestic securities for purposes of their investment
policies.
Eurodollar
and Yankee dollar obligations are subject to the same risks as domestic issues,
notably credit risk, market risk and liquidity risk.
However, Eurodollar (and to a limited extent, Yankee dollar) obligations are
also subject to certain sovereign risks. One such risk is
the possibility that a sovereign country might prevent capital from flowing
across its borders. Other risks include adverse political and
economic developments; the extent and quality of government regulations of
financial markets and institutions; the imposition of
foreign withholding taxes; and the expropriation or nationalization of foreign
issuers.
Exchange-Listed
Equities via Stock Connect Program. The
Shanghai-Hong Kong Stock Connect program and the Shenzhen-Hong
Kong Stock Connect programs (“Stock Connect”) allow non-Chinese investors (such
as a
Fund) to purchase certain listed equities
via brokers in Hong Kong. Although Stock Connect allows non-Chinese investors to
trade Chinese equities without a license,
purchases of securities through Stock Connect are subject to daily market-wide
quota limitations, which may prevent a
Fund from
purchasing Stock Connect securities when it is otherwise advantageous to do so.
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 Stock Connect and to enter
into
or exit trades where it is advantageous to do so on the same trading day.
Because Stock Connect trades are routed through Hong Kong
brokers and the Hong Kong Stock Exchange, Stock Connect is affected by trading
holidays in either China or Hong Kong, and
there are trading days in China when Stock Connect investors will not be able to
trade. As a result, prices of securities purchased through
Stock Connect may fluctuate at times when a
Fund is unable to add to or exit its position. Only certain China A-shares are
eligible
to be accessed through Stock Connect. Such securities may lose their eligibility
at any time, in which case they could be sold but
could no longer be purchased through Stock Connect. Because Stock Connect is
relatively new, its effects on the market for trading
China A-shares are uncertain. In addition, the trading, settlement and IT
systems required to operate Stock Connect are relatively
new and continuing to evolve. In the event that the relevant systems do not
function properly, trading through Stock Connect
could be disrupted.
Stock
Connect is subject to regulation by both Hong Kong and China. There can be no
assurance that further regulations will not affect
the availability of securities in the program, the frequency of redemptions or
other limitations. For defaults by Hong Kong brokers
occurring on or after January 1, 2020, the Hong Kong Investor Compensation Fund
will cover losses incurred by investors with
a cap of HK$500,000 per investor for securities traded on a stock market
operated by the Shanghai Stock Exchange and/or Shenzhen
Stock Exchange and in respect of which an order for sale or purchase is
permitted to be routed through the northbound link
of the Stock Connect. In China, Stock Connect securities are held on behalf of
ultimate investors (such as a
Fund) by the Hong Kong
Securities Clearing Company Limited (“HKSCC”) as nominee. The Fund may therefore
depend on HKSCC’s ability or willingness
as record-holder of Stock Connect securities to enforce the Fund’s shareholder
rights. While Chinese regulators have affirmed
that the ultimate investors hold a beneficial interest in Stock Connect
securities, the law surrounding such rights is in its early
stages and the mechanisms that beneficial owners may use to enforce their rights
are untested and therefore pose uncertain risks. Further,
courts in China have limited experience in applying the concept of beneficial
ownership and the law surrounding beneficial ownership
will continue to evolve as they do so. Accordingly, there is a risk that as the
law is tested and developed, a
Fund’s ability to enforce
its ownership rights may be negatively impacted. A
Fund may not be able to participate in corporate actions affecting Stock
Connect
securities due to time constraints or for other operational reasons.
A
Fund will not be able to attend shareholders’ meetings. Stock
Connect trades are settled in RMB, the Chinese currency, and investors must have
timely access to a reliable supply of RMB in Hong
Kong, which cannot be guaranteed.
Stock
Connect trades are either subject to certain pre-trade requirements or must be
placed in special segregated accounts that allow brokers
to comply with these pre-trade requirements by confirming that the
selling shareholder has sufficient Stock Connect securities
to complete the sale. If a
Fund does not utilize a special segregated account, the Fund will not be
able to sell the shares on any
trading day where it fails to comply with the pre-trade checks. In
addition, these pre-trade requirements may, as a practical matter,
limit the number of brokers that a
Fund may use to execute trades. While a
Fund may use special segregated accounts in lieu of
the pre-trade check, some market participants have yet to fully implement
IT systems necessary to complete trades involving securities
in such accounts in a timely manner. Market practice with respect to special
segregated accounts is continuing to evolve. Investments
via Stock Connect are subject to regulation by Chinese authorities. Chinese
law may require aggregation of a
Fund’s holdings
of Stock Connect securities with securities of other clients of
the Adviser for purposes of disclosing positions held in the market,
acquiescing to trading halts that may be imposed until regulatory filings
are completed or complying with China’s short-term trading
rules.
Since
the inception of Stock Connect, foreign investors investing in China A-shares
through Stock Connect have been temporarily exempt
from Chinese corporate income tax and value-added tax on the gains on disposal
of such China A-shares. Dividends are subject
to Chinese corporate income tax on a withholding basis at 10% unless reduced
under a double tax treaty with China upon application
to and obtaining approval from the competent tax authority. Additionally,
uncertainties in permanent Chinese tax rules governing
taxation of income and gains from investments in Stock Connect China A-shares
could result in unexpected tax liabilities for
the Fund.
The
risks related to investments in China A shares through Stock Connect are
heightened to the extent that the Fund invests in China
A shares listed on the Science and Technology Innovation Board on the Shanghai
stock exchange (“STAR market”) and/or the ChiNext
market of the Shenzhen stock exchange (“ChiNext market”). Listed companies on
the STAR market and ChiNext market
are usually of an emerging nature with smaller operating scale. They are subject
to higher fluctuation in stock prices and liquidity.
China A shares listed on ChiNext market and STAR market may be overvalued and
such exceptionally high valuation may not
be sustainable. Further, stock prices may be more susceptible to manipulation
due to fewer circulating shares. It may be more common
and faster for companies listed on the STAR market and ChiNext market to delist.
In particular, ChiNext market and
STAR
market have stricter criteria for delisting compared to other boards.
Investments through the ChiNext market and/or STAR market
may result in significant losses for the Fund.
Fixed-Income
Securities.
Fixed-income securities generally represent an issuer’s obligation to repay to
the investor (or lender) the amount
borrowed plus interest over a specified time period. A typical fixed-income
security specifies a fixed date when the amount borrowed
(principal) is due in full, known as the maturity date, and specifies dates when
periodic interest (coupon) payments will be made
over the life of the security.
Fixed-income
securities come in many varieties and may differ in the way that interest is
calculated, the amount and frequency of payments,
the type of collateral, if any, and the presence of special features (e.g.,
conversion rights). Prices of fixed-income securities fluctuate
and, in particular, are subject to several key risks including, but not limited
to, interest rate risk, credit risk, prepayment risk and
spread risk.
Interest
rate risk arises due to general changes in the level of market rates after the
purchase of a fixed-income security. Generally, the values
of fixed-income securities vary inversely with changes in interest rates. During
periods of falling interest rates, the values of most
outstanding fixed-income securities generally rise and during periods of rising
interest rates, the values of most fixed-income securities
generally decline. The Funds
may face a heightened level of interest rate risk in times of monetary
policy change and/or uncertainty,
such as when the Federal Reserve Board adjusts a quantitative easing program
and/or changes rates. A changing interest rate
environment increases certain risks, including the potential for periods of
volatility, increased redemptions, shortened durations (i.e.,
prepayment risk) and extended durations (i.e., extension risk). Certain
Funds are
not limited as to the maturities (when a debt security
provides its final payment) or duration (measure of interest rate sensitivity)
of the securities in which it may invest. While fixed-income
securities with longer final maturities often have higher yields than those with
shorter maturities, they usually possess greater
price sensitivity to changes in interest rates and other factors. Traditionally,
the remaining term to maturity has been used as a barometer
of a fixed-income security’s sensitivity to interest rate changes. This measure,
however, considers only the time until the final
principal payment and takes no account of the pattern or amount of principal or
interest payments prior to maturity. Duration combines
consideration of yield, coupon, interest and principal payments, final maturity
and call (prepayment) features. Duration measures
the likely percentage change in a fixed-income security’s price for a small
parallel shift in the general level of interest rates; it is
also an estimate of the weighted average life of the remaining cash flows of a
fixed-income security. In almost all cases, the duration of
a fixed-income security is shorter than its term to maturity.
Credit
risk represents the possibility that an issuer may be unable to meet scheduled
interest and principal payment obligations. It is most
often associated with corporate bonds, although it can be present in other
fixed-income securities as well. Credit ratings and quantitative
models attempt to measure the degree of credit risk in fixed-income securities,
and provide insight as to whether prevailing
yield spreads afford sufficient compensation for such risk. Other things being
equal, fixed-income securities with high degrees
of credit risk should trade in the market at lower prices (and higher yields)
than fixed-income securities with low degrees of credit
risk.
Prepayment
risk, also known as call risk, arises due to the issuer’s ability to prepay all
or most of the fixed-income security prior to the stated
final maturity date. Prepayments generally rise in response to a decline in
interest rates as debtors take advantage of the opportunity
to refinance their obligations. This risk is often associated with mortgage
securities where the underlying mortgage loans can
be refinanced, although it can also be present in corporate or other types of
bonds with call provisions. When a prepayment occurs, a
Fund may be forced to reinvest in lower yielding fixed-income securities.
Quantitative models are designed to help assess the degree
of prepayment risk, and provide insight as to whether prevailing yield spreads
afford sufficient compensation for such risk.
Spread
risk is the potential for the value of a
Fund’s assets to fall due to the widening of spreads. Fixed-income securities
generally compensate
for greater credit risk by paying interest at a higher rate. The difference (or
“spread”) between the yield of a security and the
yield of a benchmark, such as a U.S. Treasury security with a comparable
maturity, measures the additional interest paid for credit
risk. As the spread on a security widens (or increases), the price (or value) of
the security falls. Spread widening may occur, among
other reasons, as a result of market concerns over the stability of the market,
excess supply, general credit concerns in other markets,
security- or market-specific credit concerns or general reductions in risk
tolerance.
While
assets in fixed-income markets have grown rapidly in recent years, the capacity
for traditional dealer counterparties to engage in
fixed-income trading has not kept pace and in some cases has decreased. For
example, primary dealer inventories of corporate bonds,
which provide a core indication of the ability of financial intermediaries to
“make markets,” are at or near historic lows in relation
to market size. This reduction in market-making capacity may be a persistent
change, to the extent it is resulting from broader
structural changes, such as fewer proprietary trading desks at broker-dealers
and increased regulatory capital requirements. Because
market makers provide stability to a market through their intermediary services,
the significant reduction in dealer inventories
could potentially lead to decreased liquidity and increased volatility in the
fixed-income markets. Such issues may be exacerbated
during periods of economic uncertainty.
Economic,
political and other events also may affect the prices of broad fixed-income
markets, although the risks associated with such events
are transmitted to the market via changes in the prevailing levels of interest
rates, credit risk, prepayment risk or spread risk.
From
time to time, uncertainty regarding the status of negotiations in the U.S.
government to increase the statutory debt ceiling could
impact the creditworthiness of the United States and could impact the liquidity
of the U.S. Government securities markets and ultimately
the Funds.
Certain
of the Funds’
investments are subject to inflation risk, which is the risk that the value of
assets or income from investments will
be less in the future as inflation decreases the value of money (i.e., as
inflation increases, the values of the Fund’s assets can decline).
Inflation rates may change frequently and significantly as a result of various
factors, including unexpected shifts in the domestic
or global economy and changes in economic policies, and a
Fund’s investments may not keep pace with inflation, which may
result in losses to Fund shareholders. This risk is greater for fixed-income
instruments with longer maturities.
Floaters.
Floaters are fixed-income securities with a rate of interest that varies with
changes in specified market rates or indices, such as
the prime rate, or at specified intervals. Certain floating or variable rate
obligations may carry a demand feature that permits the holder
to tender them back to the issuer of the underlying instrument, or to a third
party, at par value prior to maturity. When the demand
feature of certain floating or variable rate obligations represents an
obligation of a foreign entity, the demand feature will be subject
to certain risks discussed under “Foreign Securities.”
Floating
and Variable Rate Obligations. Certain
Funds may purchase floating and variable rate obligations, including floating
and variable
rate municipal obligations and preferred shares of closed-end funds. The value
of these obligations is generally more stable than
that of a fixed rate obligation in response to changes in interest rate levels.
Subject to the conditions for using amortized cost valuation
under the 1940 Act, a Fund
may consider the maturity of a variable or floating rate obligation to be
shorter than its ultimate
stated maturity if the obligation is issued or guaranteed by U.S. government
agencies, authorities, instrumentalities or sponsored
enterprises or by the U.S. Treasury, if the obligation has a remaining maturity
of 397 calendar days or less, or if the obligation
has a demand feature that permits the Fund to receive payment at any time or at
specified intervals not exceeding 397 calendar
days. The issuers
or financial intermediaries providing demand features may support their ability
to purchase the obligations by
obtaining credit with liquidity supports. These may include lines of credit,
which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency
or subsidiary in the United States. A Fund may purchase variable or floating
rate obligations from the issuers or may purchase certificates
of participation, a type of floating or variable rate obligation, which are
interests in a pool of debt obligations held by a bank
or other financial institution.
Foreign
Currency Transactions.
The U.S. dollar value of the assets of the Funds,
to the extent it invest in securities denominated in foreign
currencies, may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations,
and the Funds
may incur costs in connection with conversions between various currencies.
Currency exchange rates may fluctuate
significantly over short periods of time for a number of reasons, including
changes in interest rates and the overall economic health
of the issuer. Devaluation of a currency by a country’s government or banking
authority also will have a significant impact on the
value of any investments denominated in that currency. The Funds may
conduct their
foreign currency exchange transactions on a
spot (i.e., cash) basis at the then-prevailing spot rate in the foreign currency
exchange market. The Funds
also may manage their
foreign
currency transactions by entering into foreign currency forward exchange
contracts to purchase or sell foreign currencies or by using
other instruments and techniques described under “Derivatives.”
Under
normal circumstances, consideration of the prospect for changes in the values of
currency will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Adviser believes that it is important to have
the flexibility to use such derivative products when it determines that it is in
the best interests of a
Fund. It may not be practicable
to hedge foreign currency risk in all markets, particularly emerging
markets.
Foreign
Currency Warrants. Certain Funds may
invest in foreign currency warrants, which entitle the holder to receive from
the issuer an
amount of cash (generally, for warrants issued in the United States, in U.S.
dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. dollar as of the exercise date of
the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time.
Foreign
currency warrants have been issued in connection with U.S. dollar-denominated
debt offerings by major corporate issuers in an
attempt to reduce the foreign currency exchange risk which, from the point of
view of prospective purchasers of the securities, is inherent
in the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed
by purchasers of a security by, for example, providing for a supplemental
payment in the event that the U.S. dollar depreciates
against the value of a major foreign currency such as the Japanese Yen. The
formula used to determine the amount payable
upon exercise of a foreign currency warrant may make the warrant worthless
unless the applicable foreign currency exchange rate
moves in a particular direction (e.g., unless the U.S. dollar appreciates or
depreciates against the particular foreign currency to which
the warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered,
and may be listed on exchanges.
Foreign
currency warrants may be exercisable only in certain minimum amounts, and an
investor wishing to exercise warrants who possesses
less than the minimum number required for exercise may be required either to
sell the warrants or to purchase additional
warrants,
thereby incurring additional transaction costs. In the case of any exercise of
warrants, there may be a delay between the time a
holder of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the
exchange rate could change significantly, thereby affecting both the market and
cash settlement values of the warrants being exercised.
The expiration date of the warrants may be accelerated if the warrants should be
delisted from an exchange or if their trading
should be suspended permanently, which would result in the loss of any remaining
“time value” of the warrants (i.e., the difference
between the current market value and the exercise value of the warrants), and,
in the case where the warrants were “out-of-the-money,”
in a total loss of the purchase price of the warrants.
Foreign
currency warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued
by the Options Clearing Corporation (“OCC”). Unlike foreign currency options
issued by the OCC, the terms of foreign exchange
warrants generally will not be amended in the event of governmental or
regulatory actions affecting exchange rates or in the event
of the imposition of other regulatory controls affecting the international
currency markets. The initial public offering price of foreign
currency warrants is generally considerably in excess of the price that a
commercial user of foreign currencies might pay in the interbank
market for a comparable option involving significantly larger amounts of foreign
currencies. Foreign currency warrants are subject
to complex political or economic factors.
Principal
Exchange Rate Linked Securities.
Principal exchange rate linked securities are debt obligations the principal of
which is payable
at maturity in an amount that may vary based on the exchange rate between the
U.S. dollar and a particular foreign currency at
or about that time. The return on “standard” principal exchange rate linked
securities is enhanced if the foreign currency to which the
security is linked appreciates against the U.S. dollar, and is adversely
affected by increases in the foreign exchange value of the U.S.
dollar; “reverse” principal exchange rate linked securities are like the
“standard” securities, except that their return is enhanced by
increases in the value of the U.S. dollar and adversely impacted by increases in
the value of foreign currency. Interest payments on the
securities are generally made in U.S. dollars at rates that reflect the degree
of foreign currency risk assumed or given up by the purchaser
of the notes (i.e., at relatively higher interest rates if the purchaser has
assumed some foreign currency risk).
Performance
indexed paper.
Performance-indexed paper is U.S. dollar-denominated commercial paper the yield
of which is linked to certain
foreign exchange rate movements. The yield to the investor will be within a
range stipulated at the time of purchase of the obligation,
generally with a guaranteed minimum rate of return that is below, and a
potential maximum rate of return that is above, market
yields on U.S. dollar-denominated commercial paper, with both the minimum and
maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
Foreign
Securities.
Investing in foreign securities involves certain special considerations which
are not typically associated with investments
in the securities of U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting
standards and may have policies that are not comparable to those of domestic
issuers. As a result, there may be less information
available about foreign issuers than about domestic issuers. Securities of some
foreign issuers may be less liquid and more volatile
than securities of comparable domestic issuers. There is generally less
stringent investor protections and disclosure standards, and
less government supervision and regulation of stock exchanges, brokers and
listed issuers than in the United States. In addition, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or
diplomatic developments which could affect U.S. investments in those countries.
The costs of investing in foreign countries frequently
are higher than the costs of investing in the United States. Although the
Adviser endeavors to achieve the most favorable execution
costs in portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, investments in certain foreign markets that have
historically been considered stable may become
more volatile and subject to increased risk due to ongoing developments and
changing conditions in such markets. Moreover,
the growing interconnectivity of global economies and financial markets has
increased the probability that adverse developments
and conditions in one country or region will affect the stability of economies
and financial markets in other countries or
regions. For instance, if one or more countries leave the European Union (“EU”)
or the EU dissolves, the world’s securities markets
likely will be significantly disrupted.
Investments
in foreign markets may also be adversely affected by governmental actions such
as the imposition of capital controls, nationalization
of companies or industries, expropriation of assets or the imposition of
punitive taxes. The governments of certain countries
may prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain sectors or industries.
In addition, a foreign government may limit or cause delay in the convertibility
or repatriation of its currency which would
adversely affect the U.S. dollar value and/or liquidity of investments
denominated in that currency. Certain foreign investments
may become less liquid in response to market developments or adverse investor
perceptions, or become illiquid after purchase
by a
Fund, particularly during periods of market turmoil. When a
Fund holds illiquid investments, its portfolio may be harder
to value.
Investments
in securities of foreign issuers may be denominated in foreign currencies.
Accordingly, the value of a
Fund’s assets, as measured
in U.S. dollars, may be affected favorably or unfavorably by changes in currency
exchange rates and in exchange control regulations. A
Fund may incur costs in connection with conversions between various
currencies.
Certain
foreign markets may rely heavily on particular industries or foreign capital and
are more vulnerable to diplomatic developments,
wars, the imposition of economic sanctions against a particular country or
countries, organizations, companies, entities and/or
individuals, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. International
trade barriers or economic sanctions against foreign countries, organizations,
companies, entities and/or individuals, may
adversely affect a
Fund’s foreign holdings or exposures. Investments in foreign markets may also be
adversely affected by governmental
actions such as the imposition of capital controls, nationalization of companies
or industries, expropriation of assets, or the
imposition of punitive taxes. Governmental actions can have a significant effect
on the economic conditions in foreign countries, which
also may adversely affect the value and liquidity of a
Fund’s investments. For example, the governments of certain countries
may
prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain sectors or industries. In addition,
a foreign government may limit or cause delay in the convertibility or
repatriation of its currency which would adversely affect
the U.S. dollar value and/or liquidity of investments denominated in that
currency. Any of these actions could severely affect security
prices, impair a
Fund’s ability to purchase or sell foreign securities or
transfer a
Fund’s assets back into the U.S., or otherwise adversely
affect a
Fund’s operations. Certain foreign investments may become less liquid in
response to market developments or adverse
investor perceptions, or become illiquid after purchase by a
Fund, particularly during periods of market turmoil. Certain foreign
investments may become illiquid when, for instance, there are few, if any,
interested buyers and sellers or when dealers are unwilling
to make a market for certain securities. When a
Fund holds illiquid investments, its portfolio may be harder to
value.
The
U.S. and governments of other countries may renegotiate some or all of its
global trade relationships and may impose or threaten to
impose significant import tariffs. The imposition of tariffs, trade
restrictions, currency restrictions or similar actions (or retaliatory
measures
taken in response to such actions) could lead to price volatility and overall
declines in U.S. and global investment markets. In
addition, the Holding Foreign Companies Accountable Act (the “HFCAA”) could
cause securities of a foreign (non-U.S.) company,
including ADRs, to be delisted from U.S. stock exchanges if the company does not
allow the U.S. government to oversee the
auditing of its financial information. Although the requirements of the HFCAA
apply to securities of all foreign (non-U.S.) issuers,
the SEC has thus far limited its enforcement efforts to securities of Chinese
companies. If securities are delisted, the Fund’s ability
to transact in such securities will be impaired, and the liquidity and market
price of the securities may decline. The Fund may also
need to seek other markets in which to transact in such securities, which could
increase the Fund’s costs.
Certain
foreign governments may levy withholding or other taxes on dividend and interest
income. Although in some countries a portion
of these taxes may be recoverable, the non-recovered portion of foreign
withholding taxes will reduce the income received from
investments in such countries. See “Taxes -- Special Tax Considerations Relating
to Foreign Investments”, below.
Unless
otherwise noted in a
Fund’s Prospectus, the Adviser may consider an issuer to be from a
particular country (including the United
States) or geographic region if: (i) its principal securities trading market is
in that country or geographic region; (ii) alone or on
a consolidated basis it derives 50% or more of its annual revenue or profits
from goods produced, sales made or services performed in
that country or geographic region or has at least 50% of its assets, core
business operations and/or employees in that country or geographic
region; or (iii) it is organized under the laws of, or has a principal office
in, that country or geographic region. By applying these
tests, it is possible that a particular issuer could be deemed to be from more
than one country or geographic region.
Foreign
securities may include, without limitation, foreign equity securities, which are
equity securities of a non-U.S. issuer, foreign government
fixed-income securities, which are fixed-income securities issued by a
government other than the U.S. Government or government-related
issuer in a country other than the United States, and foreign corporate
fixed-income securities, which are fixed-income
securities issued by a private issuer in a country other than the United
States.
On
February 1, 2022, the European Union adopted a settlement discipline regime
pursuant to Central Securities Depositories Regulation
(“CSDR”) that introduced new measures for the authorization and supervision of
European Union Central Security Depositories.
CSDR aims to reduce the number of settlement fails that occur in European
Economic Area (“EEA”) central securities depositories
(“CSDs”) and address settlement fails where they occur. Under the regime, among
other things, EEA CSDs are required to
impose cash penalties on participants that cause settlement fails and distribute
these to receiving participants. The CSDR requirements
apply to transactions in transferable securities (e.g., stocks and bonds), money
market instruments, shares of funds and emission
allowances that will be settled through an EEA CSD and are admitted to trading
or traded on an EEA trading venue or cleared
by an EEA central counterparty. The Fund may bear the net effect of any
penalties and credits incurred under the CSDR in respect
of its trading, which could increase the Fund’s expenses and adversely affect
Fund performance. The Adviser may seek reimbursement
from the relevant broker, agent, or subadviser (as applicable), as determined by
the Adviser from time to time, although
there can be no assurance that the Adviser will seek such reimbursement or that
the Fund will recover or be reimbursed for any
amounts at issue.
Investments
in foreign companies and countries are subject to economic sanction and trade
laws in the United States and other jurisdictions.
These laws and related governmental actions may, from time to time, prohibit
a
Fund from investing in certain countries
and in certain companies. Investments in certain countries and companies may be,
and have in the past been, restricted as a result
of the imposition of economic sanctions. In addition, economic sanction laws in
the United States and other jurisdictions may
prohibit
a
Fund from transacting with a particular country or countries, organizations,
companies, entities and/or individuals. These types
of sanctions may significantly restrict or completely prohibit investment
activities in certain jurisdictions.
Economic
sanctions and other similar governmental actions could, among other things,
effectively restrict or eliminate a
Fund’s ability
to purchase or sell securities or groups of securities, and thus may make the
Fund’s investments in such securities less liquid or more
difficult to value. In addition, as a result of economic sanctions, the Fund may
be forced to sell or otherwise dispose of investments
at inopportune times or prices, which could result in losses to the Fund and
increased transaction costs. These conditions may
be in place for a substantial period of time and enacted with limited advance
notice to the Fund.
In
addition, such economic sanctions or other government restrictions may
negatively impact the value or liquidity of a
Fund’s investments,
and could impair the Fund’s ability to meet its investment objective or invest
in accordance with its investment strategy because
the Fund may, for example, be prohibited from investing in securities issued by
companies subject to such restrictions and the
Fund could be required to freeze or divest its existing investments that the
Adviser would otherwise consider to be attractive.
The
risks posed by economic sanctions against a particular foreign country, its
nationals or industries or businesses within the country may
be heightened to the extent a
Fund invests significantly in the affected country or region or in issuers from
the affected country that
depend on global markets.
Referendum
on the UK’s EU Membership.
In an advisory referendum held in June 2016, the United Kingdom (“UK”)
electorate voted to
leave the EU, an event widely referred to as “Brexit.” On January 31, 2020, the
UK officially withdrew from the EU and on December
30, 2020, the EU and UK signed the EU-UK Trade and Cooperation Agreement
(“TCA”), an agreement on the terms governing
certain aspects of the EU’s and the UK’s relationship. Notwithstanding the TCA,
there is likely to be considerable uncertainty
as to the UK’s post-transition framework.
The
full impact on the UK and the EU and the broader global economy is still unknown
but could be significant and could result in increased
volatility and illiquidity and potentially lower economic growth. Brexit may
have a negative impact on the economy and currency
of the UK and the EU as a result of anticipated, perceived or actual changes to
the UK’s economic and political relations with
the EU. The impact of Brexit, and its ultimate implementation, on the economic,
political and regulatory environment of the UK
and the EU could have global ramifications.
The Funds
may make investments in the UK, other EU members and in non-EU countries that
are directly or indirectly affected by the
exit of the UK from the EU. Adverse legal, regulatory or economic conditions
affecting the economies of the countries in which the
Funds
conduct their
business (including making investments) and any corresponding deterioration in
global macro-economic conditions
could have a material adverse effect on a
Fund’s investment returns. Potential consequences to which the Funds may
be exposed,
directly or indirectly, as a result of the UK referendum vote include, but are
not limited to, market dislocations, economic and
financial instability in the UK and in other EU members, increased volatility
and reduced liquidity in financial markets, reduced availability
of capital, an adverse effect on investor and market sentiment, Sterling and
Euro destabilization, reduced deal flow in a
Fund’s
target markets, increased counterparty risk and regulatory, legal and compliance
uncertainties. Any of the foregoing or similar risks
could have a material adverse effect on the operations, financial condition or
investment returns of a Fund
and/or the Adviser in general.
The effects on the UK, European and global economies of the exit of the UK
(and/or other EU members during the term of a Fund)
from the EU, or the exit of other EU members from the European monetary area
and/or the redenomination of financial instruments
from the Euro to a different currency, are difficult to predict and to protect
fully against. Many of the foregoing risks are outside
of the control of a Fund
and the Adviser. These risks may affect a
Fund, the Adviser and other service providers given economic,
political and regulatory uncertainty created by Brexit.
Funding
Agreements. A
funding agreement is a contract between an issuer and a purchaser that obligates
the issuer to pay a guaranteed
rate of interest on a principal sum deposited by the purchaser. Funding
agreements will also guarantee the return of principal
and may guarantee a stream of payments over time. A funding agreement has a
fixed maturity and may have either a fixed, variable
or floating interest rate that is based on an index and guaranteed for a fixed
time period. The secondary market, if any, for these
funding agreements is limited; thus, such investments purchased by the
Funds may
be treated as illiquid.
Futures
Contracts.
A futures contract is a standardized agreement to buy or sell a specific
quantity of an underlying asset, reference rate
or index at a specific price at a specific future time (the “settlement date”).
Futures contracts may be based on, among other things,
a specified equity security (securities futures), a specified debt security or
reference rate (interest rate futures), the value of a specified
securities index (index futures) or the value of a foreign currency (currency
futures). While the value of a futures contract tends
to increase and decrease in tandem with the value of the underlying instrument,
differences between the futures market and the market
for the underlying asset may result in an imperfect correlation. The buyer of a
futures contract agrees to purchase the underlying
instrument on the settlement date and is said to be “long” the contract. The
seller of a futures contract agrees to sell the underlying
instrument on the settlement date and is said to be “short” the contract.
Futures contracts call for settlement only on the expiration
date and cannot be “exercised” at any other time during their
term.
Depending
on the terms of the particular contract, futures contracts are settled through
either physical delivery of the underlying instrument
on the settlement date (such as in the case of futures based on a specified debt
security) or by payment of a cash settlement
amount on the settlement date (such as in the case of futures contracts relating
to broad-based securities indices). In the case
of cash-settled futures contracts, the settlement amount is equal to the
difference between the reference instrument’s price on the last
trading day of the contract and the reference instrument’s price at the time the
contract was entered into. Most futures contracts, particularly
futures contracts requiring physical delivery, are not held until the settlement
date, but instead are offset before the settlement
date through the establishment of an opposite and equal futures position (buying
a contract that had been sold, or selling a contract
that had been purchased). All futures transactions are effected through a
clearinghouse associated with the exchange on which
the futures are traded.
The
buyer and seller of a futures contract are not required to deliver or pay for
the underlying commodity unless the contract is held until
the settlement date. However, both the buyer and seller are required to deposit
“initial margin” with a futures commission merchant
(“FCM”) when the futures contract is entered into. Initial margin deposits are
typically calculated as a percentage of the contract’s
market value. If the value of either party’s position declines, the party will
be required to make additional “variation margin”
payments to settle the change in value on a daily basis. The process is known as
“marking-to-market.” Upon the closing of a futures
position through the establishment of an offsetting position, a final
determination of variation margin will be made and additional
cash will be paid by or released to a
Fund.
Additional
Risks of Futures Transactions.
The risks associated with futures contract transactions are different from, and
possibly greater than,
the risks associated with investing directly in the underlying instruments.
Futures are highly specialized instruments that require investment
techniques and risk analyses different from those associated with other
portfolio investments. The use of futures requires an
understanding not only of the underlying instrument but also of the futures
contract itself. Futures may be subject to the risk factors
generally applicable to derivatives transactions described herein, and may also
be subject to certain additional risk factors, including:
■ |
The
risk of loss in buying and selling futures contracts can be substantial.
Small price movements in the commodity, security, index,
currency or instrument underlying a futures position may result in
immediate and substantial loss (or gain) to a
Fund. |
■ |
Buying
and selling futures contracts may result in losses in excess of the amount
invested in the position in the form of initial margin.
In the event of adverse price movements in the underlying commodity,
security, index, currency or instrument, a
Fund would
be required to make daily cash payments to maintain its required
margin. A
Fund may be required to sell portfolio securities,
or make or take delivery of the underlying securities in order to meet
daily margin requirements at a time when it may be
disadvantageous to do so. A
Fund could lose margin payments deposited with an FCM if the FCM breaches
its agreement with
a
Fund, becomes insolvent or declares
bankruptcy. |
■ |
Most
exchanges limit the amount of fluctuation permitted in futures contract
prices during any single trading day. Once the daily
limit has been reached in a particular futures contract, no trades may be
made on that day at prices beyond that limit. If futures
contract prices were to move to the daily limit for several trading days
with little or no trading, a
Fund could be prevented
from prompt liquidation of a futures position and subject to substantial
losses. The daily limit governs only price movements
during a single trading day and therefore does not
limit a
Fund’s potential losses. |
■ |
Index
futures based upon a narrower index of securities may present greater
risks than futures based on broad market indices, as narrower
indices are more susceptible to rapid and extreme fluctuations as a result
of changes in value of a small number of securities. |
High
Yield Securities.
High yield securities are generally considered to include fixed-income
securities rated below the four highest rating
categories at the time of purchase (e.g., Ba through C by Moody’s, or BB through
D by S&P or Fitch)
and unrated fixed-income
securities considered by the Adviser to be of equivalent quality. High yield
securities are not considered investment grade and are
commonly referred to as “junk bonds” or high yield, high risk securities.
Investment grade securities that a
Fund holds may be downgraded
to below investment grade by the rating agencies. If a
Fund holds a security that is downgraded, the Fund may choose to retain
the security.
While
high yield securities offer higher yields, they also normally carry a high
degree of credit risk and are considered speculative by the
major credit rating agencies. High yield securities may be issued as a
consequence of corporate restructuring or similar events. High
yield securities are often issued by smaller, less creditworthy issuers, or by
highly leveraged (indebted) issuers, that are generally less
able than more established or less leveraged issuers to make scheduled payments
of interest and principal. In comparison to investment
grade securities, the price movement of these securities is influenced less by
changes in interest rates and more by the financial
and business position of the issuer. The values of high yield securities are
more volatile and may react with greater sensitivity to
market changes.
High
yield securities are frequently ranked junior to claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations
are generally paid off before the junior obligations, which will potentially
limit a
Fund’s ability to fully recover principal or
to receive interest payments when senior securities are in default. Thus,
investors in high yield securities have a lower degree of protection
with respect to principal and interest payments than do investors in higher
rated securities. In addition, lower-rated securities
frequently have call or redemption features that would permit an issuer to
repurchase the security from a
Fund. If a call
were
exercised by the issuer during a period of declining interest
rates, a
Fund likely would have to replace such called security with a lower
yielding security, thus decreasing the net investment income to the Fund and any
dividends to investors.
The
secondary market for high yield securities is concentrated in relatively few
market makers and is dominated by institutional investors,
including mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities
is not as liquid as, and is more volatile than, the secondary market for
higher-rated securities. Because high yield securities are
less liquid, judgment may play a greater role in valuing certain
of a Fund’s securities
than is the case with securities trading in a more
liquid market. Also, future legislation may have a possible negative impact on
the market for high yield, high risk securities.
The
credit rating of a high yield security does not necessarily address its market
value risk. Ratings and market value may change from
time to time, positively or negatively, to reflect new developments regarding
the issuer.
The
high yield securities markets may react strongly to adverse news about an issuer
or the economy, or to the perception or expectation
of adverse news, whether or not it is based on fundamental analysis.
Additionally, prices for high yield securities may be affected
by legislative and regulatory developments. These developments could adversely
affect a
Fund’s NAV and investment practices,
the secondary market for high yield securities, the financial condition of
issuers of these securities and the value and liquidity
of outstanding high yield securities, especially in a thinly traded
market.
Inverse
Floaters.
Inverse floating rate obligations are obligations which pay interest at rates
that vary inversely with changes in market
rates of interest. Because the interest rate paid to holders of such obligations
is generally determined by subtracting a variable or
floating rate from a predetermined amount, the interest rate paid to holders of
such obligations will decrease as such variable or floating
rate increases and increase as such variable or floating rate
decreases.
Like
most other fixed-income securities, the value of inverse floaters will decrease
as interest rates increase. They are more volatile, however,
than most other fixed-income securities because the coupon rate on an inverse
floater typically changes at a multiple of the change
in the relevant index rate. Thus, any rise in the index rate (as a consequence
of an increase in interest rates) causes a correspondingly
greater drop in the coupon rate of an inverse floater while a drop in the index
rate causes a correspondingly greater increase
in the coupon of an inverse floater. Some inverse floaters may also increase or
decrease in value substantially because of changes
in the rate of prepayments.
Inverse
floating rate investments tend to underperform the market for fixed-rate bonds
in a rising interest rate environment, but tend to
outperform the market for fixed-rate bonds when interest rates decline or remain
relatively stable. Inverse floating rate investments have
varying degrees of liquidity.
Investment
Company Securities. Investment
company securities are equity securities and include securities of other
open-end, closed-end
and unregistered investment companies, including foreign investment companies,
hedge funds and exchange-traded funds (“ETFs”).
A
Fund may
invest in investment company securities as may be permitted by (i) the
1940
Act; (ii) the rules and regulations promulgated
by the SEC
under the 1940 Act; or (iii) an exemption or other relief applicable to the Fund
from provisions of the 1940 Act.
The 1940 Act generally prohibits an investment company from acquiring more than
3% of the outstanding voting shares of an investment
company and limits such investments to no more than 5% of a
Fund’s total assets in any one investment company and no more
than 10% in any combination of investment companies. The 1940 Act also
prohibits a
Fund from acquiring in the aggregate more
than 10% of the outstanding voting shares of any registered closed-end
investment company. A
Fund may invest in investment company
securities of investment companies managed by the Adviser or its affiliates to
the extent permitted under the 1940 Act or as otherwise
authorized by the SEC. To the extent a
Fund invests a portion of its assets in investment company securities, those
assets will
be subject to the risks of the purchased investment company’s portfolio
securities, and a shareholder in the Fund will bear not only
their proportionate share of the expenses of the Fund, but also, indirectly the
expenses of the purchased investment company.
Money
Market Funds. To
the extent permitted by applicable law, each
Fund may invest all or some of its short term cash investments in
any money market fund advised or managed by the Adviser or its affiliates. In
connection with any such investments, a
Fund, to the
extent permitted by the 1940 Act, will pay its share of all expenses (other than
advisory and administrative fees) of a money market
fund in which it invests, which may result in the Fund bearing some additional
expenses. The rules governing money market funds:
(1) permit certain money market funds to impose a “liquidity fee” (up to 2%), or
a “redemption gate” that temporarily restricts
redemptions from a money market fund, if weekly liquidity levels fall below the
required regulatory threshold, and (2) require
“institutional money market funds” to operate with a floating NAV
per share per share rounded to a minimum of the fourth decimal
place in the case of a
fund with a $1.0000 share price or an equivalent or more precise level of
accuracy for money market funds
with a different share price (e.g., $10.000 per share, or $100.00 per share).
These may affect the investment strategies, performance
and operating expenses of money market funds. “Government money market funds,”
as defined under Rule 2a-7 of the 1940
Act, are exempt from the requirements to operate with a floating NAV per share
and liquidity fees, though such funds may choose
to opt-in to the implementation of discretionary liquidity fees and redemption
gates. The amendments to the rules governing money
market funds may affect the investment strategies, performance and operating
expenses of money market funds.
Exchange-Traded
Funds.
The Funds
may invest in ETFs. Investments in ETFs are subject to a variety of risks,
including risks of a direct
investment in the underlying securities that the ETF holds. For example, the
general level of stock prices may decline, thereby adversely
affecting the value of the underlying investments of the ETF and, consequently,
the value of the ETF. In addition, the market
value of the ETF shares may differ from their NAV because the supply and demand
in the market for ETF shares at any point is
not always identical to the supply and demand in the market for the underlying
securities. Also, ETFs that track particular indices typically
will be unable to match the performance of the index exactly due to, among other
things, the ETF’s operating expenses and transaction
costs. ETFs typically incur fees that are separate from those fees incurred
directly by the Funds.
Therefore, as a shareholder
in an ETF (as with other investment companies), a
Fund would bear its ratable share of that entity’s expenses. At the same
time, the Fund would continue to pay its own investment management fees and
other expenses. As a result, a
Fund and its shareholders,
in effect, will be absorbing fees at two levels with respect to investments in
ETFs. Further,
certain of the ETFs in which a
Fund may invest are leveraged. Leveraged ETFs seek to deliver multiples of the
performance of the index or other benchmark they track
and use derivatives in an effort to amplify the returns of the underlying index
or benchmark. While leveraged ETFs may offer the
potential for greater return, the potential for loss and the speed at which
losses can be realized also are greater. Most leveraged ETFs
“reset” daily, meaning they are designed to achieve their stated objectives on a
daily basis. Leveraged ETFs can deviate substantially
from the performance of their underlying benchmark over longer periods of time,
particularly in volatile periods. The more
a
Fund invests in such leveraged ETFs, the more this leverage will magnify any
losses on those investments.
Furthermore, disruptions
in the markets for the securities underlying ETFs purchased or sold by the Fund
could result in losses on the Fund’s investment
in ETFs. Please
see “Bitcoin Exposure – Bitcoin ETFs” for additional risks associated with
investments in Bitcoin ETFs applicable
to the Discovery Portfolio.
Illiquid
Investments.
In accordance with Rule 22e-4 (the “Liquidity Rule”) under the 1940 Act,
each
Fund may invest up to 15% of
its net assets in “illiquid investments” that are assets. For these
purposes, “illiquid investments” are investments that a Fund
reasonably
expects cannot be sold or disposed of in current market conditions in seven
calendar days or less without the sale or disposition
significantly changing the market value of the investment. For each
Fund, each portfolio investment must be classified at least
monthly into one of four liquidity categories (illiquid, as discussed above, as
well as highly liquid, moderately liquid and less liquid),
which are defined pursuant to the Liquidity Rule and classified in accordance
with the Funds’ written
liquidity risk management
program by the program administrator designated by the Trust’s
Board of Trustees.
Such classification is to be made using
information obtained after reasonable inquiry and taking into account relevant
market, trading and investment-specific considerations.
In making such classifications, a
Fund determines whether trading varying portions of a position in a particular
portfolio
investment or asset class, in sizes that the Fund would reasonably anticipate
trading, is reasonably expected to significantly affect
its liquidity. If so, this determination is taken into account when classifying
the liquidity of that investment. The Funds
may be assisted
in classification determinations by one or more third-party service providers.
Assets classified according to this process as “illiquid
investments” are those subject to the 15% limit on illiquid
investments.
In
the event that changes in the portfolio or other external events cause
a
Fund to exceed this limit, the Fund must take steps to bring its
illiquid investments that are assets to or below the applicable limit of its net
assets within a reasonable period of time. This requirement
would not force a
Fund to liquidate any portfolio investment.
The
SEC has recently proposed amendments to the Liquidity Rule that, if adopted,
would result in changes to a Fund’s liquidity classification
framework and could potentially increase the percentage of a Fund’s investments
classified as illiquid. In addition, a Fund’s
operations and investment strategies may be adversely impacted if the proposed
amendments are adopted.
Investment
Funds. Some
emerging market countries have laws and regulations that currently preclude
direct investment or make it undesirable
to invest directly in the securities of their companies. However, indirect
investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain
emerging market countries through investment funds that
have been specifically authorized. A
Fund may invest in these investment funds subject to the provisions of the 1940
Act, as applicable,
and other applicable laws. The Funds
will invest in such investment funds only where appropriate given that the
Fund’s shareholders
will bear indirectly the layer of expenses of the underlying investment funds in
addition to their proportionate share of the
expenses of the Fund.
Investment
Grade Securities.
Investment grade securities are fixed-income securities rated by one or more of
the rating agencies in one
of the four highest rating categories at the time of purchase (e.g., AAA, AA, A
or BBB by S&P
Global Ratings Group, a division of
S&P Global Inc. (“S&P”), or Fitch
Ratings (“Fitch”) or Aaa, Aa, A or Baa by Moody’s
Investors Service, Inc. (“Moody’s”) or the equivalent
by another nationally recognized statistical rating organization) or determined
to be of equivalent quality by the Adviser. Securities
rated BBB or Baa represent the lowest of four levels of investment grade
securities and are regarded as borderline between sound
obligations and those in which speculative elements predominate. A
Fund is permitted to hold investment grade securities or “high
grade” securities, and may hold unrated securities if the Adviser considers the
risks involved in owning that security to be equivalent
to the risks involved in holding an investment grade security. Ratings assigned
to fixed-income securities represent only the opinion
of the rating agency assigning the rating and are not dispositive of the credit
risk associated with the purchase of a particular
fixed-income
security. Moreover, market risk also will affect the prices of even the highest
rated fixed-income securities so that their prices
may rise or fall even if the issuer’s capacity to repay its obligations remains
unchanged.
IPOs. Certain
Funds may purchase equity securities issued as part of, or a short period
after, a company’s initial public offering (“IPO”),
and may at times dispose of those securities shortly after their
acquisition. A Fund’s
purchase of securities issued in IPOs exposes
it to the risks associated with companies that have little operating history as
public companies, as well as to the risks inherent in
those sectors of the market where these issuers operate. The market for IPO
issuers has been volatile, and share prices of newly-public
companies have fluctuated significantly over short periods of time.
LIBOR
Discontinuance or Unavailability Risk.
The Fund’s investments, payment obligations and financing terms may be based
on
floating rates, such as the London Interbank Offered Rates (collectively,
“LIBOR”), Euro Interbank Offered Rate, Secured Overnight
Financing Rate (“SOFR”) and other similar types of reference rates (each, a
“Reference Rate”). These Reference Rates are generally
intended to represent the rate at which contributing banks may obtain short-term
borrowings from each other within certain
financial markets. London Interbank Offered Rate (“LIBOR”) was the basic rate of
interest used in lending transactions between
banks on the London interbank market and has been widely used as a reference for
setting the interest rate on loans globally. As
a result of benchmark reforms, publication of most LIBOR settings has ceased.
However, the publication of certain other LIBORs will
continue to be published on a temporary, synthetic and non-representative basis
(e.g., the 1-month, 3-month, and 6-month USD
LIBOR settings which are expected to be continued to be published until the end
of September 2024). As these synthetic LIBOR
settings are expected to be published for a limited period of time and are
considered non-representative of the underlying market,
regulators have advised that these settings should be used only in limited
circumstances.
Various
financial industry groups have been planning for the transition from LIBOR
and certain regulators and industry groups have taken
actions to establish alternative reference rates (e.g., the SOFR, which measures
the cost of overnight borrowings through repurchase
agreement transactions collateralized with U.S. Treasury securities and is
intended to replace U.S. dollar LIBORs with certain
adjustments). It is expected that a substantial portion of future floating rate
investments will be linked to SOFR or benchmark rates
derived from SOFR (or other Alternative Reference Rates based on SOFR). There is
no assurance that the composition or characteristics
of any such alternative reference rate will be similar to or produce the same
value or economic equivalence as LIBOR or
that it will have the same volume or liquidity as did LIBOR. These relatively
new and developing rates may also behave differently than
LIBOR would have or may not match the reference rate applicable to the
underlying assets related to these investments. Investments
in structured finance investments, loans, debt instruments or other investments
tied to reference rates are also subject to operational
risk associated with the alternative reference rate, such as errors in the input
data or in the calculation of reference rates.
Additionally,
the transition away from LIBOR and certain other Reference Rates could,
among other negative consequences (i) adversely
impact the pricing, liquidity, value of, return on and trading for a broad array
of financial products, including any Reference
Rate-linked securities, loans and derivatives in which the Fund may invest; (ii)
require extensive negotiations of and/or amendments
to agreements and other documentation governing Reference Rate-linked
investments products; (iii) lead to disputes, litigation
or other actions with counterparties or portfolio companies regarding the
interpretation and enforceability of “fallback” provisions
that provide for an alternative reference rate in the event of Reference Rate
unavailability; and/or (iv) cause the Fund to incur
additional costs in relation to any of the above factors.
The
risks associated with the above factors, including decreased liquidity, may be
heightened with respect to investments in so-called “tough
legacy” Reference Rate-based products that do not include effective fallback
provisions to address how interest rates will be determined
if LIBOR and certain other Reference Rates stop being published. In
addition, when a Reference Rate is discontinued, the
alternative Reference Rate may be lower than market expectations, which could
have an adverse impact on the value of preferred and
debt securities with floating or fixed-to-floating rate coupons.
These
developments could negatively impact financial markets in general and present
heightened risks, including with respect to the Fund’s
investments. As a result of the uncertainty and developments relating to the
transition process, performance, price volatility, liquidity
and value of the Fund and its assets may be adversely affected.
Limited
Partnership and Limited Liability Company Interests.
A limited partnership interest entitles a
Fund to participate in the investment
return of the partnership’s assets as defined by the agreement among the
partners. As a limited partner, a
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. A
Fund may invest in limited liability
company interests to the same extent it invests in limited partnership
interests. Limited liability company interests have similar
characteristics as limited partnership interests.
Loan-Related
Investments. Loan-related
investments may include, without limitation, bank loans, direct lending and loan
participations
and assignments. In addition to risks generally associated with debt
investments, loan-related investments are subject to other
risks. Loans in which a
Fund may invest may not be rated by a rating agency, will not be registered with
the SEC or
any state securities
commission and will not be listed on any national securities exchange. Investors
in loans, such as a
Fund, may not be entitled
to rely on the anti-fraud protections of the federal securities laws, although
they may be entitled to certain contractual
remedies.
The amount of public information available with respect to loans will generally
be less extensive than that available for registered
or exchange-listed securities. In evaluating the creditworthiness of borrowers,
the Adviser will consider, and may rely in part
on, analyses performed by others.
The
market for loan obligations may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods.
Because transactions in many loans are subject to extended trade settlement
periods, a
Fund may not receive the proceeds from
the sale of a loan for a period after the sale. As a result, sale proceeds
related to the sale of loans may not be available to make additional
investments or to meet a
Fund’s redemption obligations for a period after the sale of the loans, and, as
a result, the Fund may
have to hold additional cash or sell other investments or engage in borrowing
transactions, such as borrowing from its credit facility,
if necessary to raise cash to meet its obligations. In addition, a
Fund may not be able to readily dispose of its loans at prices that
approximate those at which the Fund could sell such loans if they were more
widely-traded and, as a result of such illiquidity, a
Fund
may have to hold additional cash or sell other investments or engage in
borrowing transactions, such as borrowing from its credit
facility, if necessary to raise cash to meet its obligations, including
redemption obligations. To the extent a readily available market
ceases to exist for a particular investment, such investment would be treated as
illiquid for purposes of a
Fund’s limitations on illiquid
investments.
Loans
are subject to the risk of non-payment of scheduled interest or principal. Such
non-payment would result in a reduction of income
to a
Fund, a reduction in the value of the investment and a potential decrease in the
Fund’s NAV. There can be no assurance that
the liquidation of any collateral securing a loan would satisfy a borrower’s
obligation in the event of non-payment of scheduled interest
or principal payments, or that such collateral could be readily liquidated. In
the event of bankruptcy of a borrower, a Fund
could
experience delays or limitations with respect to its ability to realize the
benefits of the collateral securing a loan. The collateral securing
a loan may lose all or substantially all of its value in the event of the
bankruptcy of a borrower. Some loans are subject to the risk
that a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such loans to presently existing or future indebtedness
of the borrower or take other action detrimental to the holders of loans
including, in certain circumstances, invalidating such
loans or causing interest previously paid to be refunded to the borrower. If
interest were required to be refunded, it could negatively
affect a
Fund’s performance.
Direct
Lending.
When a
Fund acts as a direct lender, it may participate in structuring the loan. Under
these circumstances, it will have
a direct contractual relationship with the borrower, may enforce compliance by
the borrower with the terms of the loan agreement
and may have rights with respect to any funds acquired by other lenders through
set-off. Lenders also have full voting and consent
rights under the applicable loan agreement. Action subject to lender vote or
consent generally requires the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
loan. Certain decisions, such as reducing the amount
of interest on or principal of a loan, releasing collateral, changing the
maturity of a loan or a change in control of the borrower,
frequently require the unanimous vote or consent of all lenders
affected.
Loan
Participations and Assignments.
Loan participations are interests in loans or other direct debt instruments
relating to amounts owed
by a corporate, governmental or other borrower to another party. These loans may
represent amounts owed to lenders or lending
syndicates, to suppliers of goods or services (trade claims or other
receivables), or to other parties (“Lenders”) and may be fixed-rate
or floating rate. These loans also may be arranged through private negotiations
between an issuer of sovereign debt obligations
and Lenders.
A Fund’s
investments in loans may be in the form of a participation in loans
(“Participations”) and assignments of all or a portion of loans
(“Assignments”) from third parties. In the case of a
Participation, 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 the event of an insolvency of the Lender selling a
Participation, a
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. Certain Participations may be structured
in a manner designed to avoid purchasers of Participations being subject to the
credit risk of the Lender with respect to the Participation.
Even under such a structure, in the event of a Lender’s insolvency, the Lender’s
servicing of the Participation may be delayed
and the assignability of the Participation may be impaired. A
Fund will acquire Participations only if the Lender interpositioned
between a
Fund and the borrower is determined by the Adviser to be
creditworthy.
When a
Fund purchases Assignments from Lenders it will acquire 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.
Because there is no liquid market for Participations and Assignments, it is
likely that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities
and a
Fund’s ability to dispose of particular Assignments or Participations when
necessary to meet a
Fund’s liquidity needs or
in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary
market for Participations and Assignments also may make it more difficult
for a
Fund to assign a value to these securities for
purposes of valuing a
Fund’s securities and calculating its NAV.
Participations
and Assignments involve a risk of loss in case of default or insolvency of the
borrower. In addition, they may offer less legal
protection to a
Fund in the event of fraud or misrepresentation and may involve a risk of
insolvency of the Lender. Certain Participations
and Assignments may also include standby financing commitments that obligate the
investing Fund to supply additional
cash to the borrower on demand. Participations involving emerging market country
issuers may relate to loans as to which there
has been or currently exists an event of default or other failure to make
payment when due, and may represent amounts owed to Lenders
that are themselves subject to political and economic risks, including the risk
of currency devaluation, expropriation, or failure.
Such Participations and Assignments present additional risk of default or
loss.
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. Investments in bank loans
entail those risks described
above, such as liquidity risk and risk of default.
Some
of the loans in which a
Fund may invest or obtain exposure to may be “covenant lite” loans. Certain
financial institutions may define
“covenant lite” loans differently. Covenant lite loans or securities, which have
varied terms and conditions, may contain fewer or
no restrictive covenants compared to other loans that might enable an investor
to proactively enforce financial covenants or prevent
undesired actions by the borrower. As a result, a
Fund may experience relatively greater difficulty or delays in enforcing its
rights
on its holdings of certain covenant lite loans and debt securities than its
holdings of loans or securities with more traditional financial
covenants, which may result in losses to the Fund.
Loans
of Portfolio Securities. Each Fund
may lend its portfolio securities to brokers, dealers, banks and other
institutional investors. By
lending its portfolio securities, a
Fund attempts to increase its net investment income through the receipt of
interest on the cash collateral
with respect to the loan or fees received from the borrower in connection with
the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Fund. Each
Fund employs an agent
to implement the securities lending program and the agent receives a fee from
the Funds
for its services. A
Fund will not lend more
than 33⅓% of the value of its total assets.
Each Fund
may lend its portfolio securities so long as the terms, structure and the
aggregate amount of such loans are not inconsistent
with the 1940 Act or the rules and regulations or interpretations of the
SEC thereunder,
which currently require that (i) the
borrower pledge and maintain with the Fund collateral consisting of liquid,
unencumbered assets having a value not less than 100%
of the value of the securities loaned; (ii) the borrower adds to such collateral
whenever the price of the securities loaned rises (i.e.,
the borrower “marks-to-market” on a daily basis); (iii) the loan be made subject
to termination by the Fund at any time; and (iv) the
Fund receives a reasonable return on the loan (which may include the Fund
investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value. In addition, voting rights may pass
with the loaned securities, but a
Fund will retain the right to call any security in anticipation of a vote that
the Adviser deems material
to the security on loan.
Loans
of securities involve a risk that the borrower may fail to return the securities
or may fail to maintain the proper amount of collateral,
which may result in a loss of money by a
Fund. There may be risks of delay and costs involved in recovery of securities
or even
loss of rights in the collateral should the borrower of the securities fail
financially. These delays and costs could be greater for foreign
securities. However, loans will be made only to borrowers deemed by the Adviser
to be creditworthy and when, in the judgment
of the Adviser, the income that can be earned from such securities loans
justifies the attendant risk. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer, bank or institution, will
be considered in making decisions with respect
to the lending of securities, subject to review by the Trust’s
Board of Trustees. Each Fund
also bears the risk that the reinvestment
of collateral will result in a principal loss. Finally, there is the risk that
the price of the securities will increase while they are
on loan and the collateral will not be adequate to cover their
value.
Mortgage-Related
Securities.
Mortgage-related securities are securities that, directly or indirectly,
represent a participation in, or are secured
by and payable from, mortgage loans on real property. Mortgage-related
securities include collateralized mortgage obligations and
MBS issued or guaranteed by agencies or instrumentalities of the U.S. Government
or by private sector entities.
Mortgage-Backed
Securities.
With mortgage-backed securities (“MBS”), many mortgagees’ obligations to make
monthly payments to their
lending institution are pooled together and the risk of the mortgagees’ payment
obligations is passed through to investors. The pools
are assembled by various governmental, government-related and private
organizations. A
Fund may invest in securities issued or guaranteed
by Ginnie Mae, Freddie Mac or Fannie Mae, private issuers and other government
agencies. MBS issued by non-agency issuers,
whether or not such securities are subject to guarantees, may entail greater
risk, since private issuers may not be able to meet their
obligations under the policies. If there is no guarantee provided by the issuer,
a
Fund will purchase only MBS that, at the time of
purchase, are rated investment grade by one or more NRSROs or, if unrated, are
deemed by the Adviser to be of comparable quality.
MBS
are issued or guaranteed by private sector originators of or investors in
mortgage loans and structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental
agency or instrumentality, however, they are generally structured with one or
more of the types of credit enhancement described
below. Fannie Mae and Freddie Mac obligations are not backed by the full faith
and credit of the U.S. Government as Ginnie
Mae certificates are. Freddie Mac securities are supported by Freddie Mac’s
right to borrow from the U.S. Treasury. Each of Ginnie
Mae, Fannie Mae and Freddie Mac guarantees timely distributions of interest to
certificate holders. Each of Ginnie Mae and Fannie
Mae also guarantees timely distributions of scheduled principal. Although
Freddie Mac has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan, Freddie Mac now issues
MBS (Freddie Mac Gold PCS) that also guarantee
timely payment of monthly principal reductions. Resolution Funding Corporation
obligations are backed, as to principal payments,
by zero coupon U.S. Treasury bonds and, as to interest payments, ultimately by
the U.S. Treasury.
There
are two methods of trading MBS. A specified pool transaction is a trade in which
the pool number of the security to be delivered
on the settlement date is known at the time the trade is made. This is in
contrast with the typical MBS transaction, called a to-be-announced
(“TBA”) transaction, in which the type of MBS to be delivered is specified at
the time of trade but the actual pool numbers
of the securities that will be delivered are not known at the time of the trade.
The pool numbers of the pools to be delivered at
settlement are announced shortly before settlement takes place. The terms of the
TBA trade may be made more specific if desired. Generally,
agency pass-through MBS are traded on a TBA basis. Investments in TBAs may give
rise to a form of leverage and may cause
a
Fund’s portfolio turnover rate to appear higher. Leverage may cause a
Fund to be more volatile than if the Fund had not been leveraged.
Like
fixed-income securities in general, MBS will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage
refinancing of home mortgages, with the result that the average life of MBS held
by a
Fund may be lengthened. As average life
extends, price volatility generally increases. This extension of average life
causes the market price of the MBS to decrease further when
interest rates rise than if their average lives were fixed. However, when
interest rates fall, mortgages may not enjoy as large a gain
in market value due to prepayment risk because additional mortgage prepayments
must be reinvested at lower interest rates. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range
of the average life movement could be and to calculate the effect that it will
have on the price of the MBS. In selecting MBS, the
Adviser looks for those that offer a higher yield to compensate for any
variation in average maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a
Fund may fail to fully recoup its initial investment in these securities,
even if the security is in one of the highest rating categories. A
Fund may invest, without limit, in MBS issued by private issuers
when the Adviser deems that the quality of the investment, the quality of the
issuer, and market conditions warrant such investments.
A
Fund will purchase securities issued by private issuers that are rated
investment grade at the time of purchase by Moody’s,
Fitch or S&P or are deemed by the Adviser to be of comparable investment
quality.
Fannie
Mae Certificates.
Fannie Mae is a federally chartered and privately owned corporation organized
and existing under the Federal National
Mortgage Association Charter Act of 1938. Each Fannie Mae certificate represents
a pro rata interest in one or more pools of
mortgage loans insured by the Federal Housing Administration under the National
Housing Act of 1934, as amended (the “Housing
Act”), or Title V of the Housing Act of 1949 (“FHA Loans”), or guaranteed by the
Department of Veteran Affairs under the
Servicemen’s Readjustment Act of 1944, as amended (“VA Loans”), or conventional
mortgage loans (i.e., mortgage loans that are not
insured or guaranteed by any governmental agency) of the following types: (i)
fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v)
other adjustable rate mortgage loans; and (vi) fixed rate and adjustable
mortgage loans secured by multi-family projects.
Freddie
Mac Certificates.
Freddie Mac is a corporate instrumentality of the United States created pursuant
to the Emergency Home Finance
Act of 1970, as amended (the “FHLMC Act”). Freddie Mac certificates represent a
pro rata interest in a group of mortgage loans
(a “Freddie Mac Certificate group”) purchased by Freddie Mac. The mortgage loans
underlying the Freddie Mac Certificates consist
of fixed rate or adjustable rate mortgage loans with original terms to maturity
of between ten and thirty years, substantially all of
which are secured by first liens on one-to-four-family residential properties or
multi-family projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. A Freddie Mac Certificate
group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
Ginnie
Mae Certificates.
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing
and Urban Development. The Housing Act authorizes Ginnie Mae to guarantee the
timely payment of the principal and interest
on certificates that are based on and backed by a pool of FHA Loans, VA Loans or
by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States is
pledged to the payment of all amounts that may be required
to be paid under any guaranty. In order to meet its obligations under such
guaranty, Ginnie Mae is authorized to borrow from
the U.S. Treasury with no limitations as to amount.
Each
Ginnie Mae certificate represents a pro rata interest in one or more of the
following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate
mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on
multi-family residential properties under
construction;
(vi) mortgage loans on completed multi-family projects; (vii) fixed rate
mortgage loans as to which escrowed funds are used
to reduce the borrower’s monthly payments during the early years of the mortgage
loans (“buydown” mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four-family housing units.
Collateralized
Mortgage Obligations. Certain
Funds may invest in collateralized mortgage obligations (“CMOs”), which
are MBS
that
are collateralized by mortgage loans or mortgage pass-through securities, and
multi-class pass-through securities, which are equity interests
in a trust composed of mortgage loans or other MBS. Unless the context indicates
otherwise, the discussion of CMOs below also
applies to multi-class pass-through securities.
CMOs
may be issued by governmental or government-related entities or by private
entities, such as banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market traders. CMOs are issued in multiple
classes, often referred to as “tranches,” with each tranche having a specific
fixed or floating coupon rate and stated maturity or
final distribution date. Under the traditional CMO structure, the cash flows
generated by the mortgages or mortgage pass-through securities
in the collateral pool are used to first pay interest and then pay principal to
the holders of the CMOs. Subject to the various provisions
of individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required
to pay the stated interest) is used to retire the bonds.
The
principal and interest on the underlying collateral may be allocated among the
several tranches of a CMO in innumerable ways, including
“interest only” and “inverse interest only” tranches. In a common CMO structure,
the tranches are retired sequentially in the
order of their respective stated maturities or final distribution dates (as
opposed to the pro-rata return of principal found in traditional
pass-through obligations). The fastest-pay tranches would initially receive all
principal payments. When those tranches are retired,
the next tranches in the sequence receive all of the principal payments until
they are retired. The sequential retirement of bond
groups continues until the last tranche is retired. Accordingly, the CMO
structure allows the issuer to use cash flows of long maturity,
monthly-pay collateral to formulate securities with short, intermediate, and
long final maturities and expected average lives and
risk characteristics.
The
primary risk of CMOs is the uncertainty of the timing of cash flows that results
from the rate of prepayments on the underlying mortgages
serving as collateral and from the structure of the particular CMO transaction
(that is, the priority of the individual tranches).
An increase or decrease in prepayment rates (resulting from a decrease or
increase in mortgage interest rates) may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates and will affect the yield and price of CMOs.
In addition, if the collateral securing CMOs or any third-party guarantees are
insufficient to make payments, a
Fund could sustain
a loss. The prices of certain CMOs, depending on their structure and the rate of
prepayments, can be volatile. Some CMOs may
also not be as liquid as other types of mortgage-backed securities. As a result,
it may be difficult or impossible to sell the securities
at an advantageous time or price.
Privately
issued CMOs are arrangements in which the underlying mortgages are held by the
issuer, which then issues debt collateralized
by the underlying mortgage assets. Such securities may be backed by mortgage
insurance, letters of credit, or other credit
enhancing features. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs
may be guaranteed by the U.S. Government or its agencies and instrumentalities,
these CMOs represent obligations solely of the
private issuer and are not insured or guaranteed by the U.S. Government, its
agencies and instrumentalities or any other person or
entity. Privately issued CMOs are subject to prepayment risk due to the
possibility that prepayments on the underlying assets will alter
the cash flow. Yields on privately issued CMOs have been historically higher
than the yields on CMOs backed by mortgages guaranteed
by U.S. government agencies and instrumentalities. The risk of loss due to
default on privately issued CMOs, however, is historically
higher since the U.S. Government has not guaranteed them.
New
types of CMO tranches have evolved. These include floating rate CMOs, planned
amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal and
interest received by each tranche from the underlying
collateral. For example, an inverse interest-only class CMO entitles holders to
receive no payments of principal and to receive
interest at a rate that will vary inversely with a specified index or a multiple
thereof. Under certain of these newer structures, given
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a
Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types
of MBS.
CMOs
may include real estate mortgage investment conduits (“REMICs”). REMICs, which
were authorized under the Tax Reform Act
of 1986, are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. A REMIC
is a CMO that qualifies for special tax treatment under the Code, and
invests in certain mortgages principally secured by interests
in real property.
A Fund
may invest in, among others, parallel pay CMOs and planned amortization class
CMOs (“PAC Bonds”). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one tranche. These simultaneous payments are
taken
into account in calculating the stated maturity date or final distribution date
of each tranche which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds are a form of parallel
pay CMO, with the required principal payment on such securities having the
highest priority after interest has been paid to all
classes. PAC Bonds generally require payments of a specified amount of principal
on each payment date.
Stripped
Mortgage-Backed Securities.
Certain Funds may invest in stripped mortgage-backed securities (“SMBS”). An
SMBS is a derivative
multi-class mortgage-backed security. SMBS usually are structured with two
classes that receive different proportions of the interest
and principal distribution on a pool of mortgage assets. In the most extreme
case, one class will receive all of the interest (the interest-only
or “IO” class), while the other class will receive all of the principal (the
principal-only or “PO” class). The yield to maturity
on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such security’s yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
a
Fund may fail to fully recoup its initial investment
in these securities. Conversely, if the underlying mortgage assets experience
less than anticipated prepayments of principal, the
yield of POs could be materially adversely affected. The market values of IOs
and POs are subject to greater risk of fluctuation in response
to changes in market rates of interest than many other types of mortgage-backed
securities. To the extent a
Fund invests in IOs
and POs, it may increase the risk of fluctuations in the NAV of a
Fund.
Credit
Enhancement.
Mortgage-related securities are often backed by a pool of assets representing
the obligations of a number of parties.
To lessen the effect of failure by obligors on underlying assets to make
payments, these securities may have various types of credit
support. Credit support falls into two primary categories: (i) liquidity
protection, and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
generally refers to the provision of advances, typically
by the entity administering the pool of assets, to ensure that the pass-through
of payments due on the underlying pool occurs
in a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool.
Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third-parties
(referred to herein as “third-party credit support”), through various means of
structuring the transaction or through a combination
of such approaches.
The
ratings of mortgage-related securities for which third-party credit enhancement
provides liquidity protection or protection against
losses from default are generally dependent upon the continued creditworthiness
of the provider of the credit enhancement.
The
ratings of such securities could decline in the event of deterioration in the
creditworthiness of the credit enhancement provider even
in cases where the delinquency and loss experience on the underlying pool of
assets is better than expected.
Examples
of credit support arising out of the structure of the transaction include
“senior-subordinated securities” (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal and interest thereon, with defaults on the
underlying assets being borne first by the holders of the most subordinated
class), creation of “reserve funds” (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and “over-collateralization”
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each security is generally
based on historical information with respect to the level of credit risk
associated with the underlying assets. Delinquency or loss
in excess of that which is anticipated could adversely affect the return on an
investment in such a security.
Commercial
Mortgage-Backed Securities. Commercial
mortgage-backed securities (“CMBS”) are generally multi-class or
pass-through
securities issued by special purpose entities that represent an undivided
interest in a portfolio of mortgage loans backed by commercial
properties, including, but not limited to, industrial and warehouse properties,
office buildings, retail space and shopping malls,
hotels, healthcare facilities, multifamily properties and cooperative
apartments. Private lenders, such as banks or insurance companies,
originate these loans and then sell the loans directly into a CMBS trust or
other entity. The commercial mortgage loans that
underlie CMBS are generally not amortizing or not fully amortizing. That is, at
their maturity date, repayment of the remaining principal
balance or “balloon” is due and is repaid through the attainment of an
additional loan or sale of this property. An extension of
the final payment on commercial mortgages will increase the average life of the
CMBS, generally resulting in a lower yield for discount
bonds and a higher yield for premium bonds.
CMBS
are subject to credit risk and prepayment risk. Although prepayment risk is
present, it is of a lesser degree in the CMBS than in
the residential mortgage market; commercial real estate property loans often
contain provisions which substantially reduce the likelihood
that such securities will be prepaid (e.g., significant prepayment penalties on
loans and, in some cases, prohibition on principal
payments for several years following origination).
CMBS
may be less liquid and exhibit greater price volatility than other types of
mortgage- or asset-backed securities. CMBS issued by private
issuers may offer higher yields than CMBS issued by government issuers, but also
may be subject to greater volatility and credit
or default risk than CMBS issued by government issuers. In addition, at times
the commercial real estate market has
experienced
substantially lower valuations combined with higher interest rates, leading to
difficulty in refinancing debt and, as a result,
the CMBS market has experienced (and could in the future experience) greatly
reduced liquidity and valuations. CMBS held by
the Fund may be subordinated to one or more other classes of securities of the
same series for purposes of, among other things, establishing
payment priorities and offsetting losses and other shortfalls with respect to
the related underlying mortgage loans. There can
be no assurance that the subordination will be sufficient on any date to offset
all losses or expenses incurred by the underlying trust.
The
values of, and income generated by, CMBS may be adversely affected by
changing interest rates, tightening lending standards, and
other developments impacting the commercial real estate market, such as
population shifts and other demographic changes, increasing
vacancies (potentially for extended periods) and reduced demand for commercial
and office space as well as maintenance or
tenant improvement costs and costs to convert properties for other uses. These
developments could result from, among other things,
changing tastes and preferences (such as remote work arrangements) as well as
cultural, technological, global or local economic
and market developments. In addition, changing interest rate environments and
associated changes in lending standards and
higher refinancing rates may adversely affect the commercial real estate and
CMBS markets. The occurrence of any of the foregoing
developments would likely increase default risk for the properties and loans
underlying these investments as well as impact the
value of, and income generated by, these investments. These developments could
also result in reduced liquidity for CMBS.
Municipals.
Municipal securities include debt obligations of states, territories or
possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the income on
which is generally exempt from federal income
tax at the time of issuance, in the opinion of bond counsel or other counsel to
the issuers of such securities. Municipals include
both municipal bonds (those securities with maturities of five years or more)
and municipal notes (those with maturities of less
than five years). Municipal bonds are issued for a wide variety of reasons: to
construct public facilities, such as airports, highways, bridges,
schools, hospitals, mass transportation, streets, water and sewer works; to
obtain funds for operating expenses; to refund outstanding
municipal obligations; and to loan funds to various public institutions and
facilities. Certain industrial development bonds
are also considered municipal bonds if their interest is exempt from federal
income tax. Industrial development bonds are issued
by, or on behalf of, public authorities to obtain funds for various
privately-operated manufacturing facilities, housing, sports arenas,
convention centers, airports, mass transportation systems and water, gas or
sewage works. Industrial development bonds are ordinarily
dependent on the credit quality of a private user, not the public issuer.
Private activity bonds are another type of municipal security.
The
two principal classifications of municipal bonds are “general obligation” and
“revenue” or “special tax” bonds. General obligation
bonds are secured by the issuer’s pledge of its full faith, credit and taxing
power for the payment of principal and interest. Thus,
these bonds may be vulnerable to limits on a government’s power or ability to
raise revenue or increase taxes and its ability to maintain
a fiscally sound budget. The timely payments may also be influenced by any
unfunded pension liabilities or other post-employee
benefit plan liabilities. These bonds may also depend on legislative
appropriation and/or funding or other support from other
governmental bodies in order to make payments. Revenue or special tax bonds are
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 or other tax, but not from general tax revenues.
As a result, these bonds historically have been subject to a greater risk of
default than general obligation bonds because investors
can look only to the revenue generated by the project or other revenue source
backing the project, rather than to the general taxing
authority of the state or local government issuer of the
obligations.
Industrial
revenue bonds in most cases are revenue bonds and generally do not have the
pledge of the credit of the issuer. The payment
of the principal and interest on such industrial revenue bonds is dependent
solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such
payment. Short-term municipal obligations issued by states, cities,
municipalities or municipal agencies, include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, construction loan notes and
short-term discount notes.
Private
activity bonds may be used by municipalities to finance the development of
industrial facilities for use by private enterprise. Principal
and interest payments are to be made by the private enterprise benefitting from
the development, which means that the holder
of the bond is exposed to the risk that the private issuer may default on the
bond. The credit and quality of private activity bonds
and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and
repayment of principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
Municipal
notes are issued to meet the short-term funding requirements of local, regional
and state governments. Municipal notes include
bond anticipation notes, revenue anticipation notes and tax and revenue
anticipation notes. These are short-term debt obligations
issued by state and local governments to aid cash flows while waiting for taxes
or revenue to be collected, at which time the
debt is retired. Other types of municipal notes in which a
Fund may invest are construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes and similar instruments.
Municipal
bonds generally include debt obligations issued by states and their political
subdivisions, and duly constituted authorities and
corporations, to obtain funds to construct, repair or improve various public
facilities such as airports, bridges, highways,
hospitals,
housing, schools, streets and water and sewer works. Municipal bonds may also be
issued to refinance outstanding obligations
as well as to obtain funds for general operating expenses and for loans to other
public institutions and facilities. In addition,
municipal bonds may include obligations of municipal housing authorities and
single-family mortgage revenue bonds. Weaknesses
in federal housing subsidy programs and their administration may result in a
decrease of subsidies available for payment of
principal and interest on housing authority bonds. Economic developments,
including fluctuations in interest rates and increasing construction
and operating costs, may also adversely impact revenues of housing authorities.
In the case of some housing authorities, inability
to obtain additional financing could also reduce revenues available to pay
existing obligations. Single-family mortgage revenue
bonds are subject to extraordinary mandatory redemption at par in whole or in
part from the proceeds derived from prepayments
of underlying mortgage loans and also from the unused proceeds of the issue
within a stated period which may be within
a year from the date of issue.
Note
obligations with demand or put options may have a stated maturity in excess of
one year, but permit any holder to demand payment
of principal plus accrued interest upon a specified number of days’ notice.
Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by banks. The issuer of
such notes normally has a corresponding right, after a given
period, to repay at its discretion the outstanding principal of the note plus
accrued interest upon a specific number of days’ notice
to the bondholders. The interest rate on a demand note may be based upon a known
lending rate, such as the prime lending rate,
and be adjusted when such rate changes, or the interest rate on a demand note
may be a market rate that is adjusted at specified intervals.
Each note purchased by the
Funds
will meet the quality criteria set out in the Prospectus for each Fund.
The
yields of municipal bonds depend on, among other things, general money market
conditions, conditions in the municipal bond market,
the size of a particular offering, the maturity of the obligation, and the
rating of the issue. The ratings of Moody’s
and S&P
represent
their opinions of the quality of the municipal bonds rated by them. It should be
emphasized that such ratings are general and
are not absolute standards of quality. Consequently, municipal bonds with the
same maturity, coupon and rating may have different
yields, while municipal bonds of the same maturity and coupon, but with
different ratings, may have the same yield. It will be
the responsibility of the Adviser
and/or Sub-Adviser to appraise independently the fundamental quality of the
bonds held by the Funds.
Municipal
bonds are sometimes purchased on a “when-issued” or “delayed-delivery” basis,
which means the Fund has committed to purchase
certain specified securities at an agreed-upon price when they are issued. The
period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From
time to time proposals have been introduced before Congress to restrict or
eliminate the federal income tax exemption for interest
on municipal bonds. Similar proposals may be introduced in the
future.
Similarly,
from time to time proposals have been introduced before state and local
legislatures to restrict or eliminate the state and local
income tax exemption for interest on municipal bonds. Similar proposals may be
introduced in the future.
The Funds
may also purchase bonds the income on which is subject to the alternative
minimum tax (“AMT bonds”). AMT bonds are
tax-exempt private activity bonds issued after August 7, 1986, the proceeds of
which are directed, at least in part, to private, for-profit
organizations. While the income from AMT bonds is exempt from regular federal
income tax, it is a tax preference item in the calculation
of the alternative minimum tax. The alternative minimum tax is a special
separate tax that applies to some taxpayers who have
certain adjustments to income or tax preference items.
An
issuer of municipal securities may file for bankruptcy or otherwise seek to
reorganize its debts by extending debt maturities, reducing
the amount of principal or interest, refinancing the debt or taking other
measures, in each case which may significantly affect
the rights of creditors and the value of the municipal securities and the value
of a
Fund’s investments in such municipal securities.
In addition, changes to bankruptcy laws may adversely impact a
Fund’s investments in municipal securities, including creditor
rights, if the issuer seeks bankruptcy protection.
Build
America Bonds are taxable municipal securities on which the issuer receives
federal support of the interest paid. Assuming certain
specified conditions are satisfied, issuers of Build America Bonds may either
(i) receive reimbursement from the U.S. Treasury with
respect to a portion of its interest payments on the bonds (“direct pay” Build
America Bonds) or (ii) provide tax credits to investors
in the bonds (“tax credit” Build America Bonds). Unlike most other municipal
securities, interest received on Build America Bonds
is subject to federal and state income tax. Issuance of Build America Bonds
ceased on December 31, 2010. The number of Build
America Bonds available in the market is limited, which may negatively affect
the value of the Build America Bonds.
The
Trust may hold municipal private placements. These securities are sold through
private negotiations, usually to institutions or mutual
funds, and generally have resale restrictions. Their yields are usually higher
than comparable public securities to compensate the
investor for their limited marketability.
Lease
Obligations.
Included within the revenue bonds category in which a
Fund may invest are participations in lease obligations or installment
purchase contracts (hereinafter collectively called “lease obligations”) of
municipalities. State and local governments, agencies
or authorities issue lease obligations to acquire equipment and facilities.
Lease obligations may have risks not normally
associated
with general obligation or other revenue bonds. Leases, and installment purchase
or conditional sale contracts (which may provide
for title to the leased asset to pass eventually to the issuer), have developed
as a means for governmental issuers to acquire property
and equipment without the necessity of complying with the constitutional and
statutory requirements generally applicable for
the issuance of debt. Certain lease obligations contain “non-appropriation”
clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative
body on an annual or other periodic basis. Consequently, continued lease
payments on those lease obligations containing “non-appropriation”
clauses are dependent on future legislative actions. If such legislative actions
do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
In
addition, lease obligations do not have the depth of marketability associated
with more conventional municipal obligations, and, as
a result, certain of such lease obligations may be considered illiquid
securities. The Adviser, pursuant to procedures adopted by the
Trustees,
will make a determination as to the liquidity of each lease obligation purchased
by the Funds.
If a lease obligation is determined
to be “liquid,” the security will not be included within the category “illiquid
securities.”
Non-Publicly
Traded Securities, Private Placements and Restricted Securities.
The Funds
may invest in securities that are neither listed
on a stock exchange nor traded OTC,
including privately placed and restricted securities. Such unlisted securities
may involve a higher
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by a
Fund or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. The illiquidity
of the market, as well as the lack of publicly available information regarding
these securities, may also adversely affect the ability
of the Funds
to arrive at a fair value for certain securities at certain times and could make
it difficult for the Funds
to sell certain
securities. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being sold, a
Fund may be required to bear the expenses of registration.
The Funds
may purchase equity securities, in a private placement, that are issued by
issuers who have outstanding, publicly-traded equity
securities of the same class (“private investments in public equity” or
“PIPEs”). 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 Funds
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.
Options.
An option is a contract that gives the holder of the option the right, but not
the obligation, to buy from (in the case of a call
option) or sell to (in the case of a put option) the buyer or seller, as
applicable, of the option (the “option writer”) the underlying instrument
at a specified fixed price (the “exercise price”) on or prior to a specified
date for American options or only at expiration for European
options (the “expiration date”). The buyer of the option pays to the option
writer the option premium, which is the purchase
price of the option.
Exchange-traded
options are issued by a regulated intermediary such as the OCC, which guarantees
the performance of the obligations
of the parties to such options. OTC options are purchased from or sold to
counterparties through direct bilateral agreements
between a Fund and its counterparties. Certain options, such as options on
individual securities, are settled through physical
delivery of the underlying security, whereas other options, such as index
options, may be settled in cash in an amount based on
the difference between the value of the underlying instrument and the strike
price, which is then multiplied by a specified multiplier.
Writing
Options.
The Funds
may write call and put options. As the writer of a call option, a Fund receives
the premium from the purchaser
of the option and has the obligation, upon exercise of the option, to deliver
the underlying security upon payment of the exercise
price. If the option expires without being exercised a Fund is not required to
deliver the underlying security and retains the premium
received.
The
Funds
may write call options that are “covered.” A call option on a security is
covered if (a) a Fund owns the security underlying the
call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration
is required, such amount is maintained by a Fund in earmarked or segregated cash
or liquid assets) upon conversion or exchange
of other securities held by a Fund; or (b) a Fund has purchased a call on the
underlying security, the exercise price of which is
(i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written, provided the difference
is maintained by a Fund in earmarked or segregated cash or liquid
assets.
Selling
call options involves the risk that a Fund may be required to sell the
underlying security at a disadvantageous price, below the market
price of such security, at the time the option is exercised. As the writer of a
covered call option, a Fund forgoes, during the
option’s
life, the opportunity to profit from increases in the market value of the
underlying security covering the option above the sum
of the premium and the exercise price but retains the risk of loss should the
price of the underlying security decline.
The
Funds
may write put options. As the writer of a put option, a Fund receives the
premium from the purchaser of the option and has
the obligation, upon exercise of the option, to pay the exercise price and
receive delivery of the underlying security. If the option expires
without being exercised, a Fund is not required to receive the underlying
security in exchange for the exercise price and retains the
option premium.
The
Funds
may write put options that are “covered.” A put option on a security is covered
if (a) a Fund earmarks or segregates cash or
liquid assets equal to the exercise price; or (b) a Fund has purchased a put on
the same security as the put written, the exercise price of
which is (i) equal to or greater than the exercise price of the put written, or
(ii) less than the exercise price of the put written, provided
the difference is maintained by a Fund in earmarked or segregated cash or liquid
assets.
Selling
put options involves the risk that a Fund may be required to buy the underlying
security at a disadvantageous price, above the market
price of such security, at the time the option is exercised. While a Fund’s
potential gain in writing a covered put option is limited
to the premium received plus the interest earned on the liquid assets covering
the put option, a Fund’s risk of loss is equal to the
entire value of the underlying security, offset only by the amount of the
premium received.
A
Fund may close out an options position that it has written through a closing
purchase transaction. A Fund could execute a closing purchase
transaction with respect to a written call option by purchasing a call option on
the same underlying security that has the same
exercise price and expiration date as the call option written by a Fund. A Fund
could execute a closing purchase transaction with
respect to a put option written by purchasing a put option on the same
underlying security and having the same exercise price and
expiration date as the put option written by a Fund. A closing purchase
transaction may or may not result in a profit to a Fund. A
Fund can close out its position as an option writer only if a liquid market
exists for options on the same underlying security that have
the same exercise price and expiration date as the option written by a Fund.
There is no assurance that such a market will exist with
respect to any particular option.
The
writer of an American option generally has no control over the time when the
option is exercised and the option writer is required
to deliver or acquire the underlying security. Once an option writer has
received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option. Thus, the use
of options may require a Fund to buy or sell portfolio
securities at inopportune times or for prices other than the current market
values of such securities, which may limit the amount
of appreciation a Fund can realize on an investment, or may cause a Fund to hold
a security that it might otherwise sell.
Purchasing
Options.
The Funds
may purchase call and put options. As the buyer of a call option, a Fund pays
the premium to the option
writer and has the right to purchase the underlying security from the option
writer at the exercise price. If the market price of the
underlying security rises above the exercise price, a Fund could exercise the
option and acquire the underlying security at a below-market
price, which could result in a gain to a Fund, minus the premium paid. As the
buyer of a put option, a Fund pays the premium
to the option writer and has the right to sell the underlying security to the
option writer at the exercise price. If the market price
of the underlying security declines below the exercise price, a Fund could
exercise the option and sell the underlying security at an
above-market price, which could result in a gain to a Fund, minus the premium
paid. A Fund may buy call and put options whether
or not it holds the underlying securities.
As
a buyer of a call or put option, a Fund may sell put or call options that it has
purchased at any time prior to such option’s expiration
date through a closing sale transaction. The principal factors affecting the
market value of a put or a call option include supply
and demand, interest rates, the current market price of the underlying security
in relation to the exercise price of the option, the
volatility of the underlying security, the underlying security’s dividend
policy, and the time remaining until the expiration date. A closing
sale transaction may or may not result in a profit to a Fund. A Fund’s ability
to initiate a closing sale transaction is dependent upon
the liquidity of the options market and there is no assurance that such a market
will exist with respect to any particular option. If
a Fund does not exercise or sell an option prior to its expiration date, the
option expires and becomes worthless.
OTC
Options.
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract
size and strike price, the terms of OTC options generally are established
through negotiation between the parties to the options
contract. This type of arrangement allows the purchaser and writer greater
flexibility to tailor the option to their needs. OTC options
are available for a greater variety of securities or baskets of securities, and
in a wider range of expiration dates and exercise prices,
than exchange-traded options. However, unlike exchange-traded options, which are
issued and guaranteed by a regulated intermediary,
such as the OCC, OTC options are entered into directly with the counterparty.
Unless the counterparties provide for it,
there is no central clearing or guaranty function for an OTC option. Therefore,
OTC options are subject to the risk of default or non-performance
by the counterparty. Accordingly, the Adviser must assess the creditworthiness
of the counterparty to determine the likelihood
that the terms of the option will be satisfied. There can be no assurance that a
continuous liquid secondary market will exist
for any particular OTC option at any specific time. As a result, a Fund may be
unable to enter into closing sale transactions with respect
to OTC options.
Index
Options.
Call and put options on indices operate similarly to options on securities.
Rather than the right to buy or sell a single security
at a specified price, options on an index give the holder the right to receive,
upon exercise of the option, an amount of cash determined
by reference to the difference between the value of the underlying index and the
strike price. The underlying index may be
a broad-based index or a narrower market index. Unlike many options on
securities, all settlements are in cash. The settlement amount,
which the writer of an index option must pay to the holder of the option upon
exercise, is generally equal to the difference between
the strike price of the option and the value of the underlying index, multiplied
by a specified multiplier. The multiplier determines
the size of the investment position the option represents. Gain or loss to a
Fund on index options transactions will depend,
in part, on price movements of the underlying index generally or in a particular
segment of the index rather than price movements
of individual components of the index. As with other options, a Fund may close
out its position in index options through closing
purchase transactions and closing sale transactions provided that a liquid
secondary market exists for such options.
Index
options written by a Fund may be covered in a manner similar to the covering of
other types of options, by holding an offsetting
financial position and/or earmarking or segregating cash or liquid assets. A
Fund may cover call options written on an index by
owning securities or other assets whose price changes, in the opinion of the
Adviser, are expected to correlate to those of the underlying
index.
Foreign
Currency Options.
Options on foreign currencies operate similarly to options on securities. Rather
than the right to buy or sell a
single security at a specified price, options on foreign currencies give the
holder the right to buy or sell foreign currency for a fixed amount
in U.S. dollars or other base currencies. Options on foreign currencies are
traded primarily in the OTC market, but may also be
traded on U.S. and foreign exchanges. The value of a foreign currency option is
dependent upon the value of the underlying foreign
currency relative to the U.S. dollar or other base currency. The price of the
option may vary with changes, among other things,
in the value of either or both currencies and has no relationship to the
investment merits of a foreign security. Options on foreign
currencies are affected by all of those factors that influence foreign exchange
rates and foreign investment generally. As with other
options, a Fund may close out its position in foreign currency options through
closing purchase transactions and closing sale transactions
provided that a liquid market exists for such options.
Foreign
currency options written by a Fund may be covered in a manner similar to the
covering of other types of options, by holding an
offsetting financial position and/or earmarking or segregating cash or liquid
assets.
Options
on Futures Contracts.
Options on futures contracts are similar to options on securities except that
options on futures contracts give
the purchasers the right, in return for the premium paid, to assume a position
in a futures contract (a long position in the case of a
call option and a short position in the case of a put option) at a specified
exercise price at any time prior to the expiration of the option.
Upon exercise of the option, the parties will be subject to all of the risks
associated with futures transactions and subject to margin
requirements. As the writer of options on futures contracts, a Fund would also
be subject to initial and variation margin requirements
on the option position.
Options
on futures contracts written by a Fund may be covered in a manner similar to the
covering of other types of options, by holding
an offsetting financial position and/or earmarking or segregating cash or liquid
assets. A Fund may cover an option on a futures
contract by purchasing or selling the underlying futures contract. In such
instances the exercise of the option will serve to close
out a Fund’s futures position.
Additional
Risks of Options Transactions.
The risks associated with options transactions are different from, and possibly
greater than, the
risks associated with investing directly in the underlying instruments. Options
are highly specialized instruments that require investment
techniques and risk analyses different from those associated with other
portfolio investments. The use of options requires an
understanding not only of the underlying instrument but also of the option
itself. Options may be subject to the risk factors generally
applicable to derivatives transactions described herein, and may also be subject
to certain additional risk factors, including:
■ |
The
exercise of options written or purchased by a Fund could cause a Fund to
sell portfolio securities, thus increasing a Fund’s portfolio
turnover. |
■ |
A
Fund pays brokerage commissions each time it writes or purchases an option
or buys or sells an underlying security in connection
with the exercise of an option. Such brokerage commissions could be higher
relative to the commissions for direct purchases
of sales of the underlying securities. |
■ |
A
Fund’s options transactions may be subject to limitations on options
positions established by the SEC, the CFTC or the exchanges
on which such options are traded. |
■ |
The
hours of trading for exchange-listed options may not coincide with the
hours during which the underlying securities are traded.
To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements
can take place in the underlying securities that cannot be reflected in
the options markets. |
■ |
Index
options based upon a narrow index of securities or other assets may
present greater risks than options based on broad market
indices, as narrower indices are more susceptible to rapid and extreme
fluctuations as a result of changes in the values of a
smaller number of securities or other
assets. |
■ |
A
Fund is subject to the risk of market movements between the time that an
option is exercised and the time of performance thereunder,
which could increase the extent of any losses suffered by a Fund in
connection with options transactions. |
Preferred
Stocks.
Preferred stocks are securities that evidence ownership in a corporation and pay
a fixed or variable stream of dividends.
Preferred stocks have a preference over common stocks in the event of the
liquidation of an issuer and usually do not carry voting
rights. Preferred stocks have many of the characteristics of both equity
securities and fixed-income securities.
Promissory
Notes. Promissory
notes are generally debt obligations of the issuing entity and are subject to
the risks of investing in corporate
debt.
Real
Estate Investing.
Investments in securities of issuers engaged in the real estate industry entail
special risks and considerations. In particular,
securities of such issuers may be subject to risks associated with the direct
ownership of real estate. These risks include the cyclical
nature of real estate values, risks related to general and local economic
conditions, overbuilding and increased competition, increases
in property taxes and operating expenses, demographic trends and variations in
rental income, changes in zoning laws, casualty
or condemnation losses, environmental risks, regulatory limitations on rents,
changes in neighborhood values, changes in the appeal
of properties to tenants, increases in interest rates and other real estate
capital market influences. Generally, increases in interest
rates will increase the costs of obtaining financing, which could directly and
indirectly decrease the value of a
Fund’s investments.
Real
Estate Investment Trusts and Foreign Real Estate Companies.
Certain
Funds may invest in real estate investment trusts (“REITs”)
and/or foreign real estate companies, which are similar to entities organized
and operated as REITs in the United States. REITs
and foreign real estate companies pool investors’ funds for investment primarily
in real estate properties or real estate-related loans.
REITs and foreign real estate companies generally derive their income from rents
on the underlying properties or interest on the
underlying loans, and their value is impacted by changes in the value of the
underlying property or changes in interest rates affecting
the underlying loans owned by the REITs and/or foreign real estate companies.
REITs and foreign real estate companies are more
susceptible to risks associated with the ownership of real estate and the real
estate industry in general. These risks can include fluctuations
in the value of underlying properties; defaults by borrowers or tenants; market
saturation; changes in general and local economic
conditions; decreases in market rates for rents; increases in competition,
property taxes, capital expenditures or operating expenses;
and other economic, political or regulatory occurrences affecting the real
estate industry. In addition, REITs and foreign real
estate companies depend upon specialized management skills, may not be
diversified (which may increase the volatility of a REIT’s
and/or foreign real estate company’s value), may have less trading volume and
may be subject to more abrupt or erratic price movements
than the overall securities market, and the possibility of failing to maintain
their exemptions from the 1940 Act. Foreign real
estate companies may be subject to laws, rules and regulations governing those
entities and their failure to comply with those laws,
rules and regulations could negatively impact the performance of those entities.
Operating REITs and foreign real estate companies
requires specialized management skills and a
Fund indirectly bears REIT and foreign real estate company management
expenses
along with the direct expenses of the Fund. REITs are generally not taxed on
income distributed to shareholders provided they
comply with several requirements of the Code.
REITs are subject to the risk of failing to qualify for tax-free pass-through
income
under the Code.
Specialized
Ownership Vehicles.
Specialized ownership vehicles pool investors’ funds for investment primarily in
income-producing real
estate or real estate-related loans or interests. Such specialized ownership
vehicles in which the Funds may
invest include property unit
trusts, foreign real estate companies, REITs and other similar specialized
investment vehicles. Investments in such specialized ownership
vehicles may have favorable or unfavorable legal, regulatory or tax implications
for a
Fund and, to the extent such vehicles are
structured similarly to investment funds, a shareholder in the Fund will bear
not only their proportionate share of the expenses of the
Fund, but also, indirectly the expenses of the specialized ownership
vehicle.
Repurchase
Agreements.
Repurchase agreements are transactions in which a
Fund purchases a security or basket of securities and simultaneously
commits to resell that security or basket to the seller (a bank, broker or
dealer) at a mutually agreed-upon date and price.
The resale price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or date
of maturity of the purchased security. The term of these agreements usually
ranges from overnight to one week, and never exceeds
one year. Repurchase agreements with a term of over seven days are considered
illiquid.
In
these transactions, a
Fund receives securities that have a market value at least equal to the purchase
price (including accrued interest)
of the repurchase agreement, and this value is maintained during the term of the
agreement. These securities are held by State
Street Bank and Trust Company (the “Custodian”) or an approved third-party for
the benefit of a
Fund until repurchased. Repurchase
agreements permit a
Fund to remain fully invested while retaining overnight flexibility to pursue
investments of a longer-term
nature. If the seller defaults and the value of the repurchased securities
declines, a
Fund might incur a loss. If bankruptcy proceedings
are commenced with respect to the seller, a
Fund’s realization upon the collateral may be delayed.
While
repurchase agreements involve certain risks not associated with direct
investments in debt securities, each
Fund follows procedures
approved by the Trustees
that are designed to minimize such risks. These procedures include effecting
repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored
by the Adviser. In addition, as described above, the value of the collateral
underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or
bankruptcy
by a selling financial institution, the Funds
will seek to liquidate such collateral. However, the exercising of a
Fund’s right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation
to repurchase were less than the repurchase price, the Fund could suffer a loss.
Certain
Funds may invest in repurchase agreements
backed by municipal securities and non-governmental collateral such as corporate
debt obligations, convertible securities and
common and preferred stock. Certain of these securities may be rated below
investment grade.
Repurchase agreements involving obligations
other than U.S. government securities may be subject to special risks.
Repurchase agreements secured by obligations that are
not eligible for direct investment under a
Fund’s investment objectives and restrictions may require the Fund to promptly
dispose of
such collateral if the seller or guarantor becomes insolvent.
A Fund
may enter into repurchase agreements on a forward commitment basis. To the
extent a
Fund does so and the counterparty to the
trade fails to effectuate the trade at the scheduled time, a
Fund may be forced to deploy its capital in a repurchase agreement with
a
less favorable rate of return than it otherwise may have achieved or may be
unable to enter into a repurchase agreement at all at the desired
time.
Residual
Interest Bonds.
The Short Duration Municipal Income ETF may invest in residual interest bonds in
a trust that holds municipal
securities (a “Tender Option Bond trust” or “TOB trust”). The interest rate
payable on a residual interest bond (which may
be reset periodically by a Dutch auction, a remarketing agent, or by reference
to a short-term tax-exempt interest rate index) bears
an inverse relationship to the interest rate on another security issued by the
TOB trust. Because changes in the interest rate on the
other security inversely affect the interest paid on the residual interest bond,
the value and income of a residual interest bond is generally
more volatile than that of a fixed rate bond. Residual interest bonds have
interest rate adjustment formulas that generally reduce
or, in the extreme, eliminate the interest paid to the Fund when short-term
interest rates rise, and increase the interest paid to the
Fund when shortterm interest rates fall. Residual interest bonds have varying
degrees of liquidity, and the market for these securities
is relatively volatile. These securities tend to underperform the market for
fixed rate bonds in a rising long-term interest rate environment,
but tend to outperform the market for fixed rate bonds when long-term interest
rates decline. Although volatile, residual
interest bonds typically offer the potential for yields exceeding the yields
available on fixed rate bonds with comparable credit quality
and maturity. These securities usually permit the investor to convert the
floating rate to a fixed rate (normally adjusted downward),
and this optional conversion feature may provide a partial hedge against rising
rates if exercised at an opportune time. While
residual interest bonds expose the Fund to leverage risk because they provide
two or more dollars of bond market exposure for every
dollar invested, they are not subject to the Fund’s restrictions on
borrowings.
Under
certain circumstances, the Fund may enter into a so-called shortfall and
forbearance agreement relating to a residual interest bond
held by the Fund. Such agreements commit the Fund to reimburse the difference
between the liquidation value of the underlying
security (which is the basis of the residual interest bond) and the principal
amount due to the holders of the floating rate security
issued in conjunction with the residual interest bond upon the termination of
the TOB trust issuing the residual interest bond.
Absent a shortfall and forbearance agreement, the Fund would not be required to
make such a reimbursement. If the Fund chooses
not to enter into such an agreement, the residual interest bond could be
terminated and the Fund could incur a loss. The Fund’s
investments in residual interest bonds and similar securities described in the
Prospectus and this SAI will not be considered borrowing
for purposes of the Fund’s restrictions on borrowing described herein and in the
Prospectus.
On
December 10, 2013, five U.S. federal agencies published final rules implementing
section 619 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “Volcker Rule”). The Volcker Rule prohibits
banking entities from engaging in proprietary
trading of certain instruments and limits such entities’ investments in, and
relationships with, covered funds, as defined in the
rules. The Volcker Rule precludes banking entities and their affiliates from (i)
sponsoring residual interest bond programs as such programs
were commonly structured prior to the effective date of the Volcker Rule and
(ii) continuing relationships with or services for
existing residual interest bond programs. In response to the Volcker Rule,
industry participants developed alternative structures for
residual interest bond programs in which service providers may be engaged to
assist with establishing, structuring and sponsoring the
programs. The service providers, such as administrators, liquidity providers,
trustees and remarketing agents act at the direction of,
and as agent of, the Fund holding the residual interests. In addition, the Fund,
rather than a bank entity, may act as the sponsor of
the TOB trust and undertake certain responsibilities that previously belonged to
the sponsor bank. Although the Fund may use third-party
service providers to complete some of these additional responsibilities,
sponsoring a TOB trust may give rise to certain additional
risks, including compliance, securities law and operational risks.
Reverse
Repurchase Agreements. Under
a reverse repurchase agreement, a
Fund sells a security and promises to repurchase that security
at an agreed-upon future date and price. The price paid to repurchase the
security reflects interest accrued during the term of the
agreement. Reverse repurchase agreements may be entered into for, among other
things, obtaining leverage, facilitating short-term
liquidity or when the Adviser expects that the interest income to be earned from
the investment of the transaction proceeds will be
greater than the related interest expense. Please see “Derivatives Agreements --
Regulatory Matters”. Reverse repurchase agreements
may be viewed as a speculative form of borrowing called leveraging. Furthermore,
reverse repurchase agreements involve the
risks that (i) the interest income earned in the investment of the proceeds will
be less than the interest expense, (ii) the market value
of the securities retained in lieu of sale by a
Fund may decline below the price of the securities the Fund has sold but is
obligated
to repurchase, (iii) the market value of the securities sold will decline below
the price at which the Fund is required to repurchase
them and (iv) the securities will not be returned to the Fund.
In
addition, the use of leverage may cause a
Fund to liquidate portfolio positions when it may not be advantageous to do so
to satisfy its
obligations. Leverage, including borrowing, may cause a
Fund to be more volatile than if the Fund had not been leveraged. This is
because
leverage tends to exaggerate the effect of any increase or decrease in the value
of a
Fund’s portfolio securities. All forms of borrowing
(including reverse repurchase agreements) are limited in the aggregate and may
not exceed 33⅓% of the Fund’s total assets,
except as permitted by law or SEC requirements.
Rights.
Rights represent the right, but not the obligation, for a fixed period of time
to purchase additional shares of an issuer’s common
stock at the time of a new issuance, usually at a price below the initial
offering price of the common stock and before the common
stock is offered to the general public. Rights are usually freely transferable.
The risk of investing in a right is that the right may
expire prior to the market value of the common stock exceeding the price fixed
by the right.
Sector
Risk. Each
Fund may, from time to time, invest more heavily in companies in a particular
economic sector or sectors. Economic
or regulatory changes adversely affecting such sectors may have more of an
impact on a
Fund’s performance than if the Fund
held a broader range of investments.
Short
Sales.
A short sale is a transaction in which a
Fund sells securities that it owns or has the right to acquire at no added cost
(i.e., “against
the box”) or does not own (but has borrowed) in anticipation of a decline in the
market price of the securities. To deliver the securities
to the buyer, a
Fund arranges through a broker to borrow the securities and, in so doing, the
Fund becomes obligated to replace
the securities borrowed at their market price at the time of replacement. When
selling short, a
Fund intends to replace the securities
at a lower price and therefore, profit from the difference between the cost to
replace the securities and the proceeds received from
the sale of the securities. When a
Fund makes a short sale, the proceeds it receives from the sale will be held on
behalf of a broker
until the Fund replaces the borrowed securities. A
Fund may have to pay a premium to borrow the securities and must pay
any
dividends or interest payable on the securities until they are
replaced.
A Fund’s
obligation to replace the securities borrowed in connection with a short sale
will be secured by collateral deposited with the broker
that consists of cash or other liquid securities. Short sales by
a
Fund involve certain risks and special considerations. If the Adviser
incorrectly predicts that the price of the borrowed security will
decline, a
Fund will have to replace the securities with securities
with a greater value than the amount received from the sale. As a result, losses
from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only
the total amount invested. Please see “Derivatives Agreements -- Regulatory
Matters”.
Special
Purpose Acquisition Companies. A Fund
may invest in stock, warrants, rights and other securities of special purpose
acquisition
companies (“SPAC”), which typically are publicly traded companies that raise
investment capital for the purpose of acquiring
or merging with an existing company that is identified subsequent to the SPAC’s
initial public offering (“IPO”), or similar special
purpose entities. Typically, the acquisition target is an existing privately
held company that wants to trade publicly, which it accomplishes
through a combination with a SPAC rather than by conducting a traditional IPO.
SPACs and similar entities are blank check
companies and do not have any operating history or ongoing business other than
seeking acquisitions. The long term value of a SPAC’s
securities is particularly dependent on the ability of the SPAC’s management to
identify a merger target and complete an attractive
acquisition. Some SPACs pursue acquisitions only within certain sectors,
industries or regions, which may increase the time horizon
for an acquisition as well as other risks associated with these investments,
including price volatility. Conversely, other SPACs may
invest without such limitations, in which case the SPAC’s management may have
limited experience or knowledge of the market sector,
industry or region in which the transaction is contemplated. In addition,
certain securities issued by a SPAC, particularly in private
placements conducted by the SPAC after its IPO, may be classified as illiquid
and/or be subject to restrictions on resale, which
restrictions may be imposed for at least a year or possibly a more extended
time, and may potentially be traded only in the over-the-counter
market.
Until
an acquisition or merger is completed, a SPAC generally invests its assets, less
a portion retained to cover expenses, in U.S. government
securities, money market securities and cash and does not typically pay
dividends in respect of its common stock. To the extent
a SPAC is invested in these securities or cash, the SPAC may not perform similar
to other equity securities and this may impact
the Fund’s ability to meet its investment objective. SPAC shareholders may not
approve any proposed acquisition or merger, or
an acquisition or merger, once effected, may prove unsuccessful. If an
acquisition or merger that meets the requirements of the SPAC
is not completed within a pre-established period of time (typically, two years),
the funds invested in the SPAC plus any interest paid
on such funds while held in trust (less any permitted expenses and any losses
experienced by the SPAC) are returned to its shareholders
unless the shareholders approve alternative options. As a result, a
Fund may be subject to opportunity costs to the extent that
alternative investments would have produced higher returns. Any warrants or
other rights with respect to a SPAC held by a
Fund may
expire worthless or may be repurchased or retired by the SPAC at an unfavorable
price.
In
connection with a proposed acquisition, a SPAC may raise additional funds in
order to fund the acquisition, post-acquisition working
capital, redemptions or some combination of those purposes. This additional
fundraising may be in the form of a private
placement
of a class of equity securities or debt. The debt could be secured by the assets
of the SPAC or the operating company existing
after the acquisition or it could be unsecured. The debt may also be investment
grade debt or below investment grade debt.
A Fund
may invest in stock, warrants, rights and other securities of SPACs or similar
special purpose entities in a private placement transaction
or as part of a public offering. If the Fund purchases securities in the SPAC’s
IPO, typically it will receive publicly-traded securities
called “units” that include one share of common stock and one right or warrant
(or partial right or warrant) conveying the right
to purchase additional shares of common stock. At a specified time, the rights
and warrants may be separated from the common stock
at the election of the holder, after which each security typically is freely
tradeable. An investment in the IPO securities of a SPAC
may be diluted by additional, later offerings of securities by the SPAC or by
other investors exercising existing rights to purchase
securities of the SPAC. If the Fund invests in equity securities issued in a
private placement after the IPO, those shares will not
be publicly tradable unless and until there is a registration statement filed by
the SPAC and approved by the SEC or if an exemption
from registration is available, which exemptions typically become available at
least a year after the date of the business combination.
Equity investments in the SPAC made in connection with a proposed business
combination will be diluted by the acquisition
itself and further fundraising by the ongoing operating business.
If
there is no market for the shares of the SPAC or only a thinly traded market for
shares or interests in the SPAC develops, a
Fund may
not be able to sell its interest in a SPAC or it may only sell its interest at a
price below what the Fund believes is the SPAC interest’s
value. If not subject to a restriction on resale, a
Fund may sell its investments in a SPAC at any time, including before, at or
after
the time of an acquisition or merger. Generally, SPACs provide the opportunity
for common shareholders who hold publicly traded
shares to have some or all of their shares redeemed by the SPAC at or around the
time of a proposed acquisition or merger. However,
there is often a limit to the number of shares that can be redeemed in
connection with a business combination. If a
Fund holds
shares of publicly traded SPAC stock, this means that a
Fund may not be able to redeem those shares prior to an acquisition and
may have to hold those shares until after the completion of the acquisition. If
a
Fund purchases shares in a private placement, those
shares will not be redeemable in connection with a transaction. In addition,
a
Fund may elect not to participate in a proposed SPAC
transaction or may be required to divest its interests in the SPAC due to
regulatory or other considerations.
An
investment in a SPAC is subject to the risks that any proposed acquisition or
merger may not obtain the requisite approval of SPAC
shareholders, may require governmental or other approvals that it fails to
obtain or that an acquisition or merger, once effected,
may prove unsuccessful and lose value. In addition, among other conflicts of
interest, the economic interests of the management,
directors, officers and related parties of a SPAC can differ from the economic
interests of public shareholders, which may
lead to conflicts as they evaluate, negotiate and recommend business combination
transactions to shareholders. This risk may become
more acute as the deadline for the completion of a business combination nears or
in the event that attractive acquisition or merger
targets become scarce.
An
investment in a SPAC is subject to the risks that any proposed acquisition or
merger may not obtain the requisite approval of SPAC
shareholders, may require governmental or other approvals that it fails to
obtain or that an acquisition or merger, once effected,
may prove unsuccessful and lose value. In addition, among other conflicts of
interest, the economic interests of the management,
directors, officers and related parties of a SPAC can differ from the economic
interests of public shareholders, which may
lead to conflicts as they evaluate, negotiate and recommend business combination
transactions to shareholders. For example, because
the sponsor, directors and officers of a SPAC may directly or indirectly own
interests in a SPAC, the sponsor, directors and officers
may have a conflict of interest in determining whether a particular target
business is an appropriate business with which to effectuate
a business combination. SPAC sponsors generally purchase equity in the SPAC at
more favorable terms than investors in the
IPO or subsequent investors on the open market. As a result, although most of
the SPAC’s capital has been provided by IPO investors,
the sponsors and potentially other initial investors will benefit more than
investors from the SPAC’s completion of an initial
business combination and may have an incentive to complete a transaction on
terms that may be less favorable to other investors.
This risk may become more acute as the deadline for the completion of a business
combination nears or in the event that attractive
acquisition or merger targets become scarce. In addition, the requirement that a
SPAC complete a business combination within
a prescribed time frame may give potential target businesses leverage over the
SPAC in negotiating a business combination and may
limit the time the SPAC has in which to conduct due diligence on potential
business combination targets, which could undermine
the SPAC’s ability to complete a business combination on terms that would
produce value for its shareholders. An investment
in a SPAC is also subject to the risk that a significant portion of the funds
raised by the SPAC may be expended during the
search for a target acquisition or merger. The value of investments in SPACs may
be highly volatile and may depreciate over time.
In
addition, investments in SPACs may be subject to the same risks as investing in
any initial public offering, including the risks associated
with companies that have little operating history as public companies, including
unseasoned trading, small number of shares
available for trading and limited information about the issuer. In addition, the
market for IPO issuers may be volatile, and share
prices of newly-public companies have fluctuated significantly over short
periods of time. Although some IPOs may produce high
returns, such returns are not typical and may not be sustainable. Certain
investments in SPACs are privately placed securities and
are also subject to the risks of such securities.
Debt
associated with a SPAC, whether issued by the SPAC, by a subsidiary or acquired
issuer, is subject to the same types of risks as exist
in other types of fixed income investing, including credit risk, default risk
and the potential for a restructuring, work-out or bankruptcy.
Structured
Investments. Certain
Funds may invest in structured investments. A structured investment is a
derivative security designed
to offer a return linked to a particular underlying security, currency,
commodity or market, for which the amount of principal
repayment and/or interest payments is based on the change in value of such
underlying security, currency, commodity or market,
including, among others, currency exchange rates, interest rates, referenced
bonds and stock indices or other financial references.
Structured investments may come in various forms, including notes, warrants and
options to purchase securities, and may be
listed and traded on an exchange or otherwise traded in the OTC
market.
The Funds
will typically use structured investments to gain exposure to a permitted
underlying security, currency, commodity or market
when direct access to such security, currency, commodity or market is limited or
inefficient from a tax, cost or regulatory standpoint.
Investments in structured investments involve risks including issuer risk,
counterparty risk and market risk. Holders of structured
investments bear risks of the underlying investment and are subject to issuer or
counterparty risk because the holders are relying
on the creditworthiness of such issuer or counterparty and have no rights with
respect to the underlying investment. Certain structured
investments may be thinly traded or have a limited trading market and may have
the effect of increasing a
Fund’s illiquidity
to the extent that the Fund, at a particular point in time, may be unable to
find qualified buyers for these investments.
A
structured investment may be linked either positively or negatively to an
underlying security, currency, commodity, index or market
and a change in interest rates, principal amount, volatility, currency values or
other factors, depending on the structured investment’s
design, may result in a gain or loss that is a multiple of the movement of such
interest rates, principal amount, volatility, currency
values or other factors. Application of a multiplier is comparable to the use of
financial leverage, a speculative technique. Leverage
magnifies the potential for gain and the risk of loss. As a result, a relatively
small decline in the value of the referenced factor could
result in a relatively large loss in the value of a structured
investment.
Other
types of structured investments include interests in entities organized and
operated for the purpose of restructuring the investment
characteristics of underlying investment interests or securities. This type of
securitization or restructuring usually involves the
deposit or purchase of an underlying security by a U.S. or foreign entity, such
as a corporation or trust of specified instruments, and
the issuance by that entity of one or more classes of securities backed by, or
representing an interest in, the underlying instruments.
The cash flow or rate of return on the underlying investments may be apportioned
among the newly issued securities to create
different investment characteristics, such as varying maturities, credit
quality, payment priorities and interest rate provisions. Structured
investments that are subordinated, for example, in payment priority often offer
higher returns, but may result in increased risks
compared to other investments.
Swaps.
An OTC swap contract is an agreement between two parties pursuant to which the
parties exchange payments at specified dates
on the basis of a specified notional amount, with the payments calculated by
reference to specified securities, indices, reference rates,
currencies or other instruments. Most swap agreements provide that when the
period payment dates for both parties are the same,
the payments are made on a net basis (i.e., the two payment streams are netted
out, with only the net amount paid by one party
to the other). A Fund’s obligations or rights under a swap contract entered into
on a net basis will generally be equal only to the net
amount to be paid or received under the agreement, based on the relative values
of the positions held by each counterparty. Many swap
agreements are not entered into or traded on exchanges and often there is no
central clearing or guaranty function for swaps. These
OTC swaps are often subject to the risk of default or non-performance by the
counterparty. Accordingly, the Adviser must assess
the creditworthiness of the counterparty to determine the likelihood that the
terms of the swap will be satisfied.
Swap
agreements allow for a wide variety of transactions. For example, fixed-rate
payments may be exchanged for floating rate payments,
U.S. dollar-denominated payments may be exchanged for payments denominated in
foreign currencies, and payments tied to
the price of one security, index, reference rate, currency or other instrument
may be exchanged for payments tied to the price of a different
security, index, reference rate, currency or other instrument. Swap contracts
are typically individually negotiated and structured
to provide exposure to a variety of particular types of investments or market
factors. Swap contracts can take many different
forms and are known by a variety of names. To the extent consistent with a
Fund’s investment objective and policies, a Fund
is not limited to any particular form or variety of swap contract. A Fund may
utilize swaps to increase or decrease its exposure to
the underlying instrument, reference rate, foreign currency, market index or
other asset. Certain Funds may also enter into related derivative
instruments including caps, floors and collars.
The
Dodd-Frank Act and related regulatory developments require the eventual clearing
and exchange-trading of many standardized OTC
derivative instruments that the CFTC and SEC defined as “swaps” and “security
based swaps,” respectively. Mandatory exchange-trading
and clearing is occurring on a phased-in basis based on the type of market
participant and CFTC approval of contracts
for central clearing and exchange-trading. In a cleared swap, a Fund’s ultimate
counterparty is a central clearinghouse rather than
a brokerage firm, bank or other financial institution. A Fund initially will
enter into cleared swaps through an executing broker. Such
transactions will then be submitted for clearing and, if cleared, will be held
at regulated FCMs that are members of the
clearinghouse
that serves as the central counterparty. When a Fund enters into a cleared swap,
it must deliver to the central counterparty
(via an FCM) an amount referred to as “initial margin.” Initial margin
requirements are determined by the central counterparty,
but an FCM may require additional initial margin above the amount required by
the central counterparty. During the term
of the swap agreement, a “variation margin” amount may also be required to be
paid by a Fund or may be received by a Fund in accordance
with margin controls set for such accounts, depending upon changes in the price
of the underlying reference asset subject to
the swap agreement. At the conclusion of the term of the swap agreement, if a
Fund has a loss equal to or greater than the margin amount,
the margin amount is paid to the FCM along with any loss that is greater than
such margin amount. If a Fund has a loss of less
than the margin amount, the excess margin is returned to the Fund. If a Fund has
a gain, the full margin amount and the amount of
the gain is paid to the Fund.
Central
clearing is designed to reduce counterparty credit risk 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 of the FCM with which the Fund has an open
position in a swap contract. The assets of a Fund may not be fully protected in
the event of the bankruptcy of the FCM or central
counterparty 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 or central counterparty’s customers or clearing members.
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 central counterparty.
As
a result of recent regulatory developments, certain standardized swaps are
currently subject to mandatory central clearing and some of
these cleared swaps must be traded on an exchange or swap execution facility
(“SEF”). An SEF is an electronic trading platform in which
multiple market participants can execute swap transactions by accepting bids and
offers made by multiple other participants on the
platform. Transactions executed on an SEF may increase market transparency and
liquidity but may cause a Fund to incur increased
expenses to execute swaps. Central clearing should decrease counterparty risk
and increase liquidity compared to bilateral swaps
because central clearing interposes the central clearinghouse as the
counterparty to each participant’s swap. However, central clearing
does not eliminate counterparty risk or liquidity risk entirely. In addition,
depending on the size of a Fund and other factors, the
margin required under the rules of a clearinghouse and by a clearing member may
be in excess of the collateral required to be posted
by a Fund to support its obligations under a similar bilateral swap. However,
the CFTC and other applicable regulators have adopted
rules imposing certain margin requirements, including minimums, on uncleared
swaps which may result in a Fund and its counterparties
posting higher margin amounts for uncleared swaps. Requiring margin on uncleared
swaps may reduce, but not eliminate,
counterparty credit risk.
In
addition, with respect to cleared swaps, a Fund may not be able to obtain as
favorable terms as it would be able to negotiate for an uncleared
swap. In addition, an FCM may unilaterally impose position limits or additional
margin requirements for certain types of swaps
in which a Fund may invest. Central counterparties and FCMs generally can
require termination of existing cleared swap transactions
at any time, and can also require increases in margin above the margin that is
required at the initiation of the swap agreement.
Margin requirements for cleared swaps vary on a number of factors, and the
margin required under the rules of the clearinghouse
and FCM may be in excess of the collateral required to be posted by a Fund to
support its obligations under a similar uncleared
swap. However, as noted above, regulators have adopted rules imposing certain
margin requirements, including minimums,
on uncleared swaps, which may result in a Fund and its counterparties posting
higher margin amounts for uncleared swaps.
Requiring margin on uncleared swaps may reduce, but not eliminate, counterparty
credit risk.
A
Fund is also subject to the risk that, after entering into a cleared swap with
an executing broker, no FCM or central counterparty is willing
or able to clear the transaction. In such an event, the central counterparty
would void the trade. Before a Fund can enter into a
new trade, market conditions may become less favorable to the Fund.
The
Adviser will continue to monitor developments regarding trading and execution of
cleared swaps on exchanges, particularly to the
extent regulatory changes affect a Fund’s ability to enter into swap agreements
and the costs and risks associated with such investments.
Interest
Rate Swaps, Caps, Floors and Collars.
Interest rate swaps consist of an agreement between two parties to exchange
their respective
commitments to pay or receive interest (e.g., an exchange of floating rate
payments for fixed-rate payments). Interest rate swaps
are generally entered into on a net basis. Interest rate swaps do not involve
the delivery of securities, other underlying assets, or principal.
Accordingly, the risk of market loss with respect to interest rate and total
rate of return swaps is typically limited to the net amount
of interest payments that a Fund is contractually obligated to
make.
Certain
Funds may also buy or sell interest rate caps, floors and collars. The purchase
of an interest rate cap entitles the purchaser, to the
extent that a specified interest rate index exceeds a predetermined level, to
receive payments of interest on a specified notional amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified
interest rate falls below a predetermined level, to receive payments of interest
on a specified notional amount from the party
selling
the interest rate floor. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range
of interest rates. Caps, floors and collars may be less liquid than other types
of derivatives.
Total
Return Swaps.
Total return swaps are contracts in which one party agrees to make periodic
payments to another party based on the
change in market value of the assets underlying the contract, which may include,
but not be limited to, a specified security, basket of
securities or securities indices during the specified period, in return for
periodic payments based on a fixed or variable interest rate or
the total return from other underlying assets. Total return swaps may be used to
obtain long or short exposure to a security or market
without owning or taking physical custody of such security or investing directly
in such market. Each Fund may incur a theoretically
unlimited loss on short exposures. In comparison, the Fund may incur losses on
long exposures, but such losses are limited
by the fact that the underlying security’s price cannot fall below zero. Total
return swaps may effectively add leverage to a Fund’s
portfolio because, in addition to its total net assets, a Fund would be subject
to investment exposure on the notional amount of
the swap.
Total
return swaps are subject to the risk that a counterparty will default on its
payment obligations to a Fund thereunder, and conversely,
that a Fund will not be able to meet its obligation to the counterparty.
Generally, a Fund will enter into total return swaps
on a net basis (i.e., the two payment streams are netted against one another
with a Fund receiving or paying, as the case may be,
only the net amount of the two payments).
Index
Swaps.
An index swap consists of an agreement between two parties in which a party
typically exchanges a cash flow based on a notional
amount of a reference index for a cash flow based on a different index or on
another specified instrument or reference rate. Index
swaps are generally entered into on a net basis.
Inflation
Swaps.
Inflation swap agreements are contracts in which one party typically 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 NAV 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.
Currency
Swaps.
A currency swap consists of an agreement between two parties to exchange cash
flows on a notional amount of two or
more currencies based on the relative value differential among them, such as
exchanging a right to receive a payment in foreign currency
for the right to receive U.S. dollars. Currency swap agreements may be entered
into on a net basis or may involve the delivery
of the entire principal value of one designated currency in exchange for the
entire principal value of another designated currency.
In such cases, the entire principal value of a currency swap is subject to the
risk that the counterparty will default on its contractual
delivery obligations.
Credit
Default Swaps.
A credit default swap consists of an agreement between two parties in which the
“buyer” typically agrees to pay to
the “seller” a periodic stream of payments over the term of the contract and the
seller agrees to pay the buyer the par (or other agreed-upon)
value of a referenced debt obligation upon the occurrence of a credit event with
respect to the issuer of that referenced debt
obligation. Generally, a credit event means bankruptcy, failure to pay,
obligation acceleration or modified restructuring. A Fund may
be either the buyer or seller in a credit default swap. Where a Fund is the
buyer of a credit default swap contract, it would typically
be entitled to receive the par (or other agreed-upon) value of a referenced debt
obligation from the counterparty to the contract
only in the event of a default or similar event by the issuer of the debt
obligation. If no default occurs, a Fund would have paid
to the counterparty a periodic stream of payments over the term of the contract
and received no benefit from the contract. The use
of credit default swaps could result in losses to a Fund if the Adviser fails to
correctly evaluate the creditworthiness of the issuer of the
referenced debt obligation.
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 a premium. A receiver
swaption gives the owner the right to receive the
return of a specified asset, reference rate, or index. A payer swaption gives
the owner the right to pay the 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.
General
Risks of Swaps.
The risks associated with swap transactions are different from, and possibly
greater than, the risks associated with
investing directly in the underlying instruments. Swaps are highly specialized
instruments that require investment techniques and
risk analyses different from those associated with other portfolio investments.
The use of swaps requires an understanding not only
of the underlying instrument but also of the swap contract itself. Swap
transactions may be subject to the risk factors generally applicable
to derivatives transactions described above, and may also be subject to certain
additional risk factors, including:
■ |
OTC
swap agreements are not traded on exchanges and may be subject to
liquidity risk, which exists when a particular swap is difficult
to purchase or sell. |
■ |
In
addition to the risk of default by the counterparty, if the
creditworthiness of a counterparty to a swap agreement declines, the
value
of the swap agreement would be likely to decline, potentially resulting in
losses. |
■ |
The
swaps market is subject to extensive regulation under the Dodd-Frank Act
and certain CFTC and SEC rules promulgated thereunder.
It is possible that further developments in the swaps market, including
new and additional governmental regulation, could
result in higher Fund costs and expenses and could adversely affect a
Fund’s ability to utilize swaps, terminate existing swap
agreements or realize amounts to be received under such
agreements. |
Municipal
Interest Rate Swap Transactions.
In order to hedge the value of a Fund against interest rate fluctuations or to
enhance a Fund’s
income, a Fund may enter into interest rate swap transactions such as Municipal
Market Data AAA Cash Curve swaps (“MMD
Swaps”) or Securities Industry and Financial Markets Association Municipal Swap
Index swaps (“SIFMA Swaps”). To the extent
that a Fund enters into these transactions, the Fund expects to do so primarily
to preserve a return or spread on a particular investment
or portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later
date. A Fund intends to use these transactions primarily as a hedge rather than
as a speculative investment. However, a Fund also
may invest in MMD Swaps and SIFMA Swaps to enhance income or gain or to increase
the Fund’s yield, for example, during periods
of steep interest rate yield curves (i.e., wide differences between short term
and long term interest rates). A Fund may purchase
and sell SIFMA Swaps in the SIFMA swap market. In a SIFMA Swap, a Fund exchanges
with another party their respective commitments
to pay or receive interest (e.g., an exchange of fixed rate payments for
floating rate payments linked to the SIFMA Municipal
Swap Index). Because the underlying index is a tax-exempt index, SIFMA Swaps may
reduce cross-market risks incurred by
a Fund and increase a Fund’s ability to hedge effectively. SIFMA Swaps are
typically quoted for the entire yield curve, beginning with
a seven day floating rate index out to 30 years. The duration of a SIFMA Swap is
approximately equal to the duration of a fixed-rate
Municipal Bond with the same attributes as the swap (e.g., coupon, maturity,
call feature).
A
Fund may also purchase and sell MMD Swaps, also known as MMD rate locks. An MMD
Swap permits a Fund to lock in a specified
municipal interest rate for a portion of its portfolio to preserve a return on a
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.
By using an MMD Swap, a Fund can create a synthetic long or short position,
allowing the Fund to select the most attractive part
of the yield curve. An MMD Swap is a contract between a Fund and an MMD Swap
provider pursuant to which the parties agree
to make payments to each other on a notional amount, contingent upon whether the
Municipal Market Data AAA General Obligation
Scale is above or below a specified level on the expiration date of the
contract. For example, if a Fund buys an MMD Swap
and the Municipal Market Data AAA General Obligation Scale is below the
specified level on the expiration date, the counterparty
to the contract will make a payment to the Fund equal to the specified level
minus the actual level, multiplied by the notional
amount of the contract. If the Municipal Market Data AAA General Obligation
Scale is above the specified level on the expiration
date, a Fund will make a payment to the counterparty equal to the actual level
minus the specified level, multiplied by the notional
amount of the contract.
In
connection with investments in SIFMA and MMD Swaps, there is a risk that
municipal yields will move in the opposite direction than
anticipated by a Fund, which would cause the Fund to make payments to its
counterparty in the transaction that could adversely
affect the Fund’s performance. A Fund has no obligation to enter into SIFMA or
MMD Swaps and may not do so. The net amount
of the excess, if any, of a Fund’s obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily
basis and a number of liquid assets that have an aggregate NAV at least equal to
the accrued excess will be maintained in a segregated
account by the Fund.
Tender
Option Bonds.
A tender option bond is a municipal obligation (generally held pursuant to a
custodial arrangement) created by
dividing the income stream provided by an underlying municipal bond having a
relatively long maturity and bearing interest at a fixed
rate substantially higher than prevailing short-term tax-exempt rates to create
two securities issued by a special-purpose trust – floating
rate certificates and residual interest securities. Tender option bonds are
typically issued in conjunction with the agreement of a
third party, such as a bank, broker-dealer or other financial institution,
pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution.
A
Fund holds the class of interest, or floating rate certificate,
which receives tax-exempt interest based on short-term rates and has the ability
to tender the certificate at par. As consideration
for providing the tender option, the financial institution receives periodic
fees equal to the difference between the bond’s
fixed coupon rate and the rate, as determined by a remarketing or similar agent,
that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds
a demand obligation that bears interest at the prevailing short-term, tax-exempt
rate. The tender option will be taken into account
in determining the maturity of the tender option bonds and a
Fund’s average portfolio maturity. There is a risk that a
Fund may
not be considered the owner of a tender option bond for federal income tax
purposes, and thus will not be entitled to treat such interest
as exempt from federal income tax. Certain tender option bonds may be illiquid
or may become illiquid as a result of a credit rating
downgrade, a payment default or a disqualification from tax-exempt
status.
Temporary
Defensive Investments.
When the Adviser believes that changes in market, economic, political or other
conditions make it
advisable, a
Fund may invest up to 100% of its assets in cash, cash equivalents and other
fixed-income securities for temporary defensive
purposes that may be inconsistent with the Fund’s investment strategies.
For
example, with respect to the Short Duration Municipal
Income Portfolio, when the Adviser believes that conditions warrant, including
when suitable municipal obligations are unavailable,
the Fund may invest without limit in securities subject to federal income tax or
in securities that pay interest income
subject
to the federal “alternative minimum tax.” Under such circumstances, a higher
portion of the Fund’s distributions will likely be
subject to federal income tax and/or the federal alternative minimum
tax.
These temporary investments may consist of obligations of
the U.S. or foreign governments, their agencies and instrumentalities; money
market instruments; and instruments issued by international
development agencies.
U.S.
Government Securities.
U.S. government securities refer to a variety of fixed-income securities issued
or guaranteed by the U.S. Government
and its various instrumentalities and agencies. The U.S. government securities
that certain
Funds may purchase include U.S.
Treasury bills, notes and bonds, all of which are direct obligations of the U.S.
Government. In addition, certain
Funds may purchase
securities issued by agencies and instrumentalities of the U.S. Government that
are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing these obligations are
the Government National Mortgage Association
(“Ginnie Mae”) and the Federal Housing Administration. Certain
Funds may also purchase securities issued by agencies and
instrumentalities that are not backed by the full faith and credit of the United
States, but whose issuing agency or instrumentality has
the right to borrow, to meet its obligations, from the U.S. Treasury. Among
these agencies and instrumentalities are the Federal National
Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation
(“Freddie Mac”) and the Federal Home
Loan Banks. Further, certain
Funds may purchase securities issued by agencies and instrumentalities that are
backed solely by the
credit of the issuing agency or instrumentality. Among these agencies and
instrumentalities is the Federal Farm Credit System.
Variable
Rate Master Demand Notes.
These are obligations that permit a
Fund to invest fluctuating amounts, at varying rates of interest,
pursuant to direct arrangements between the Fund, as lender, and the borrower.
These obligations permit daily changes in the
amounts borrowed. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations,
although they are redeemable at face value, plus accrued interest. Accordingly,
where these obligations are not secured by letters
of credit or other credit support arrangements, a
Fund’s right to redeem is dependent on the ability of the borrower to pay
principal
and interest on demand.
Warrants.
Warrants give holders the right, but not the obligation, to buy common stock of
an issuer at a given price, usually higher than
the market price at the time of issuance, during a specified period. Warrants
are usually freely transferable. The risk of investing in
a warrant is that the warrant may expire prior to the market value of the common
stock exceeding the price fixed by the warrant.
When-Issued
and Delayed Delivery Securities, TBAs and Forward Commitments.
A
Fund may purchase or sell securities on a when-issued
or delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When these transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of
commitment. The Funds
may sell the securities before the settlement date if it is deemed advisable.
The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date. In addition, a
Fund
may invest in to-be-announced pass-through mortgage securities, which settle on
a delayed delivery basis (“TBAs”). In a TBA transaction,
the buyer and seller agree upon general trade parameters such as agency,
settlement date, par amount, and price at the time
the contract is entered into but the MBS are delivered in the future, generally
30 days later. Accordingly, a
Fund’s investments in
TBAs are subject to risks such as failure of the counterparty to perform its
obligation to deliver the security, the characteristics of a security
delivered to a
Fund may be less favorable than expected and the security a
Fund buys will lose value prior to its delivery.
At
the time a
Fund makes the commitment to purchase or sell securities on a when-issued,
delayed delivery or forward commitment basis,
it will record the transaction and thereafter reflect the value, each day, of
such security purchased, or if a sale, the proceeds to be received,
in determining its NAV. At the time of delivery of the securities, their value
may be more or less than the purchase or sale price.
An increase in the percentage of a
Fund’s assets committed to the purchase of securities on a when-issued, delayed
delivery or forward
commitment basis may increase the volatility of its NAV.
When,
As and If Issued Securities. A
Fund may purchase securities on a “when, as and if issued” basis, under which
the issuance of the
security depends upon the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization or debt restructuring.
The commitment for the purchase of any such security will not be recognized in
the portfolio of a
Fund until the Adviser
determines that issuance of the security is probable. At that
time, a
Fund will record the transaction and, in determining its NAV,
will reflect the value of the security daily.
An
increase in the percentage of a
Fund’s assets committed to the purchase of securities on a “when, as and if
issued” basis may increase
the volatility of its NAV. A
Fund may also sell securities on a “when, as and if issued” basis provided that
the issuance of the security
will result automatically from the exchange or conversion of a security owned by
the Fund at the time of sale.
Zero
Coupons, Pay-In-Kind Securities or Deferred Payment Securities.
Zero coupon, pay-in-kind and deferred payment securities
are all types of fixed-income securities on which the holder does not receive
periodic cash payments of interest or principal. Generally,
these securities are subject to greater price volatility and lesser liquidity in
the event of adverse market conditions than comparably
rated securities paying cash interest at regular intervals.
Although a
Fund will not receive cash periodic coupon payments on
these securities, the Fund may be deemed to have received interest income, or
“phantom income” during the life of the obligation.
The
Fund may have to distribute such phantom income to avoid taxes at the Fund
level, although it has not received any cash payment.
Zero
Coupons.
Zero coupons are fixed-income securities that do not make regular interest
payments. Instead, zero coupons are sold at a
discount from their face value. The difference between a zero coupon’s issue or
purchase price and its face value represents the imputed
interest an investor will earn if the obligation is held until maturity. For tax
purposes, a portion of this imputed interest is deemed
as income received by zero coupon bondholders each year. Each Fund
intends to pass along such interest as a component of the
Fund’s distributions of net investment income.
Zero
coupons may offer investors the opportunity to earn a higher yield than that
available on ordinary interest-paying obligations of similar
credit quality and maturity. However, zero coupon prices may also exhibit
greater price volatility than ordinary fixed-income securities
because of the manner in which their principal and interest are returned to the
investor.
Pay-In-Kind
Securities.
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.
Deferred
Payment Securities.
Deferred payment securities are securities that remain zero coupons until a
predetermined date, at which time
the stated coupon rate becomes effective and interest becomes payable at regular
intervals.
Bitcoin
Exposure.
The Discovery Portfolio may have exposure to bitcoin indirectly through cash
settled futures or indirectly through
investments in pooled investment vehicles and exchange-traded products that
invest in bitcoin (“Bitcoin ETFs”). In addition,
the Global Strategist Portfolio may have exposure to bitcoin indirectly through
cash settled futures. To the extent either Fund
invests in bitcoin futures or the Discovery Portfolio invests in Bitcoin ETFs,
it will do so through a wholly-owned subsidiary, which
is organized as an exempted company under the laws of the Cayman Islands (the
“Bitcoin Subsidiary” and together with either the
Discovery Portfolio Subsidiary or Global Strategist Subsidiary, referred to as a
“Subsidiary”). Each Fund may at times have no exposure
to bitcoin. Although neither Fund directly invests in bitcoin, each Fund’s
indirect investments in bitcoin are exposed to risks
associated with the price of bitcoin, which is subject to numerous factors and
risks.
Bitcoin
is a digital asset whose ownership and behavior are determined by participants
in an online, peer-to-peer network that connects
computers that run publicly accessible, or “open source,” software that follows
the rules and procedures governing the bitcoin
network (commonly referred to as the bitcoin protocol). The value of bitcoin,
like the value of other cryptocurrencies, is not backed
by any government, corporation, or other identified body. The value of bitcoin
is determined in part by the supply of (which is
limited), and demand for, bitcoin in the markets for exchange that have been
organized to facilitate the trading of bitcoin. The further
development of the bitcoin network, which is part of a new and rapidly changing
industry, is subject to a variety of factors that
are difficult to evaluate.
Risks
Related to Bitcoin. Cryptocurrencies (also referred to as “virtual currencies”
and “digital currencies”) are digital assets designed to
act as a medium of exchange. Although there are thousands of cryptocurrencies,
the most well-known of which is bitcoin. Cryptocurrency
is an emerging asset class with a limited history. Investments in or exposure to
bitcoin are subject to substantial risks, including
significant price volatility and fraud and manipulation, which are generally
more pronounced in the crypto asset market. In addition,
performance and value of indirect investments in bitcoin may differ
significantly from the performance or value of bitcoin.
Cryptocurrency
facilitates decentralized, peer-to-peer financial exchange and value storage
that is used like money, without the oversight
of a central authority or banks. The value of cryptocurrency is not backed by
any government, corporation, or other identified
body. Similar to fiat currencies (i.e., a currency that is backed by a central
bank or a national, supra-national or quasi-national
organization), cryptocurrencies are susceptible to theft, loss and destruction.
For example, the bitcoin held by Bitcoin ETFs (and
the Discovery Portfolio’s indirect exposure to such bitcoin) is also susceptible
to these risks.
The
value of a Fund’s indirect investments in bitcoin is subject to significant
fluctuations in the value of the cryptocurrency, which have
been and may in the future be highly volatile and subject to sharp declines. The
value of cryptocurrencies is determined by the supply
and demand for cryptocurrency in the global market for the trading of
cryptocurrency, which consists primarily of transactions
on electronic exchanges. The price of bitcoin could drop precipitously
(including to zero) for a variety of reasons, including,
but not limited to, regulatory changes, a crisis of confidence, flaw or
operational issue in the bitcoin network or a change in
user preference to competing cryptocurrencies. A Fund’s exposure to bitcoin
could result in substantial losses to the Fund.
Cryptocurrencies
trade on exchanges, which are largely unregulated and, therefore, are more
exposed to fraud, market manipulation and
failure than established, regulated exchanges for securities and other
traditional assets, derivatives, and other currencies. Cryptocurrency
exchanges have in the past, and may in the future, fail or otherwise cease
operating temporarily or even permanently, resulting
in the potential loss of users’ cryptocurrency or other market
disruptions.
Cryptocurrency
exchanges that are regulated typically must comply with minimum net capital,
cybersecurity, and anti-money laundering
requirements, but are not typically required to protect customers or their
markets to the same extent that regulated securities
exchanges or futures exchanges are required to do so. Furthermore, many
cryptocurrency exchanges lack certain safeguards established
by traditional exchanges to enhance the stability of trading on the exchange,
such as measures designed to prevent sudden
drops
in value of items traded on the exchange (i.e., “flash crashes”). As a result,
the prices of cryptocurrencies on exchanges may be subject
to larger and more frequent sudden declines than assets traded on traditional
exchanges. In addition, cryptocurrency exchanges
are also subject to the risk of cybersecurity threats and have been breached,
resulting in the theft and/or loss of bitcoin and other
cryptocurrencies. A cyber or other security breach or a business failure of a
cryptocurrency exchange or custodian may affect the price
of a particular cryptocurrency or cryptocurrencies generally. A risk also exists
with respect to malicious actors or previously unknown
vulnerabilities, which may adversely affect the value of bitcoin.
Disruptions
at bitcoin exchanges and potential consequences of a bitcoin exchange’s failure
could adversely affect a Fund’s indirect investments
in bitcoin. In 2022 and early 2023, several large participants in the
cryptocurrency industry, including exchanges, lenders and
investment firms, declared bankruptcy, which has resulted in a loss of
confidence in participants of the digital asset ecosystem and
negative publicity surrounding digital assets more broadly. These events have
also contributed to financial distress among crypto asset
market participants and widespread disruption in those markets. The collateral
impacts of these types of failures, or of fraud or other
adverse developments in the crypto asset markets, is difficult to predict.
Extreme volatility in the future, including further declines
in the trading prices of the bitcoin, could have a material adverse effect on
the value of the Funds’ indirect investments in bitcoin.
Furthermore, negative perception and/or a lack of stability and standardized
regulation in the digital asset economy may reduce
confidence in the digital asset economy and may result in greater volatility in
the prices of bitcoin and other digital assets, including
a depreciation in value. Further, regulation of crypto asset markets is still
developing and federal, state or foreign governmental
authorities may restrict the development, use or exchange or cryptocurrencies.
In addition, events that impact one cryptocurrency
may lead to a volatility or a decline in the value or another cryptocurrency,
such as bitcoin.
The
market for bitcoin (and bitcoin futures) depends on, among other things: the
supply and demand for bitcoin (and bitcoin futures);
the adoption of bitcoin for commercial uses; the anticipated increase of
investments in bitcoin-related investment products by
retail and institutional investors; speculative interest in bitcoin, bitcoin
futures, and bitcoin-related investment products; regulatory
or other restrictions on investors’ ability to invest in bitcoin futures; and
the potential ability to hedge against the price of bitcoin
with bitcoin futures (and vice versa). At times, there has been, and may in the
future be, significant disruption to the crypto asset
market, which could adversely impact a Fund’s indirect investments in
bitcoin.
Factors
affecting the further development of cryptocurrency include, but are not limited
to: continued worldwide growth or possible cessation
or reversal in the adoption and use of cryptocurrency and other digital assets;
government and quasi-government regulation or
restrictions on or regulation of access to and operation of digital asset
networks; changes in consumer demographics and public preferences;
maintenance and development of open-source software protocol; availability and
popularity of other forms or methods of buying
and selling goods and services; the use of the networks supporting digital
assets, such as those for developing smart contracts and
distributed applications; general economic conditions and the regulatory
environment relating to digital assets; negative consumer
or public perception; and general risks tied to the use of information
technologies, including cyber risks. A breach or failure of
one cryptocurrency may lead to a loss in confidence in, and thus decreased usage
and or value of, other cryptocurrencies.
Bitcoin
mining operations consume significant amounts of electricity, which may have a
negative environmental impact and give rise to
public opinion against allowing, or government regulations restricting, the use
of electricity for mining operations. Additionally, miners
may be forced to cease operations during an electricity shortage or power
outage. Given the energy-intensiveness and electricity
costs of mining, miners are restricted in where they can locate mining
operations. Any shortage of electricity supply or increase
in related costs (or if miners otherwise cease expanding processing power) will
negatively impact the viability and expected economic
return from bitcoin mining, which will affect the availability of bitcoin in the
marketplace. Today, many bitcoin mining operations
rely on fossil fuels to power their operations. Public perception of the impact
of bitcoin mining on climate change may reduce
the demand for bitcoin and increase the likelihood of government regulation.
Such events could have a negative impact on the price
of bitcoin, bitcoin futures, and a Fund’s performance. In addition, sales of
newly mined bitcoin (and sales of bitcoin by large holders)
may impact the price of bitcoin.
Currently,
there is relatively limited use of cryptocurrency in the retail and commercial
marketplace, which contributes to price volatility.
A lack of expansion by cryptocurrencies into retail and commercial markets, or a
contraction of such use, may result in increased
volatility or a reduction in the value of cryptocurrencies, either of which
could adversely impact a Fund’s indirect investment
in bitcoin. In addition, to the extent market participants develop a preference
for one cryptocurrency over another, the value
of the less preferred cryptocurrency would likely be adversely
affected.
Cryptocurrency
is a new technological innovation with a limited history; it is a highly
speculative asset and future U.S. or foreign government
or regulatory actions or policies may limit, perhaps to a materially adverse
extent, the value of a Fund’s indirect investment
in bitcoin and the ability to exchange a cryptocurrency or utilize it for
payments.
Many
significant aspects of the tax treatment of investments in cryptocurrency are
uncertain, and a direct or indirect investment in cryptocurrency
may produce income that if directly earned by a RIC, like each Fund, would be
treated as non-qualifying income for purposes
of the income test applicable to RICs. Accordingly, to the extent the Global
Strategist Portfolio invests in bitcoin futures or the
Discovery Portfolio invests in bitcoin futures or Bitcoin ETFs, it will do so
through its Subsidiary.
In
2014, the IRS released a notice (the “Notice”) discussing certain aspects of
“convertible virtual currency” (that is, digital assets that have
an equivalent value in fiat currency or that act as a substitute for fiat
currency) for U.S. federal income tax purposes and, in particular,
stating that such a digital asset (i) is “property,” (ii) is not “currency” for
purposes of the rules relating to foreign currency gain
or loss and (iii) may be held as a capital asset. In 2019, the IRS released a
revenue ruling and a set of “Frequently Asked Questions”
(the “Ruling & FAQs”) that provide some additional guidance. However, the
Notice and the Ruling & FAQs do not address
other significant aspects of the U.S. federal income tax treatment of digital
assets. Moreover, although the Ruling & FAQs address
the treatment of hard forks, there continues to be uncertainty with respect to
the income and withholding taxation of incidental
rights received through a fork in the blockchain, airdrops offered to bitcoin
holders and other similar events, including situations
where such rights are disclaimed, as is expected with respect to a Bitcoin
ETF’s intended treatment of such events.
The
taxing authorities of certain states (i) have announced that they will follow
the Notice with respect to the treatment of digital assets
for state income tax purposes and/or (ii) have issued guidance exempting the
purchase and/or sale of digital assets for fiat currency
from state sales tax. It is unclear what further guidance on the treatment of
digital assets for state tax purposes may be issued in
the future.
It
is unclear what additional guidance on the treatment of digital assets for U.S.
federal, state and local income tax purposes may be issued
in the future. Because of the evolving nature of digital assets, it is not
possible to predict potential future developments that may
arise with respect to digital assets. Any future guidance on the treatment of
digital assets for federal, state or local tax purposes could
result in adverse tax consequences for investors in each Fund and could have an
adverse effect on the value of bitcoin.
Bitcoin
Cash Settled Futures.
The Discovery Portfolio may engage in futures contracts based on bitcoin to
obtain long exposure to bitcoin.
The Global Strategist Portfolio may engage in futures contracts based on bitcoin
to obtain long or short exposure to bitcoin. A
long exposure reflects an investment contemplating an increase in the value of
the underlying asset whereas a short exposure contemplates
a decrease in value of the underlying asset.
The
only bitcoin futures in which each Fund may invest are cash settled bitcoin
futures traded on futures exchanges registered with the
CFTC. The value of bitcoin futures is determined by reference to the CME CF
Bitcoin Reference Rate, which provides an indication
of the price of bitcoin across certain cash bitcoin exchanges.
Bitcoin
futures expose a Fund to all of the risks related to bitcoin discussed above and
also expose a Fund to risks related to futures, and
specifically risks related to bitcoin futures. The price of bitcoin futures is
based on a variety of factors. For example, regulatory changes
or actions may alter the nature of an investment in bitcoin futures or restrict
the use of bitcoin or the operations of the bitcoin
network or exchanges on which bitcoin trades in a manner that adversely affects
the price of bitcoin futures, which could adversely
impact a Fund and necessitate the payment of large daily variation margin
payments to settle a Fund’s losses.
The
market for bitcoin futures is still developing and a Fund’s investment in
bitcoin futures may involve illiquidity risk, as bitcoin futures
are not as heavily traded as other futures given that the bitcoin futures market
is relatively new, which means a Fund may be unable
to purchase or sell a futures contract at a desired price or time. In addition,
bitcoin futures markets may be more volatile than traditional
futures markets and exchanges on which bitcoin futures are traded and their
related clearinghouses and a Fund’s FCMs generally
require the Fund to maintain relatively high levels of initial margin at the
clearinghouse and FCM in connection with bitcoin
futures. Initial margin requirements will increase if a Fund’s bitcoin futures
investments increase in value. Bitcoin futures are subject
to collateral requirements and daily limits that may limit the Fund’s ability to
achieve the desired exposure.
Exchanges
on which bitcoin is traded (which are the source of the price(s) used to
determine the cash settlement amount for a Fund’s bitcoin
futures) have experienced, and may in the future experience, technical and
operational issues, making bitcoin prices unavailable
at times. In addition, the cash market in bitcoin has been the target of fraud
and manipulation, which could affect the pricing
of bitcoin futures contracts.
The
contractual obligations of a buyer or seller holding a futures contract to
expiration may be satisfied by settling in cash as provided by
the terms of such contract. However, neither Fund intends to hold bitcoin
futures through expiration. Instead, each Fund intends to
“roll” futures positions. “Rolling” refers to a process whereby futures
contracts nearing expiration are closed out and replaced with new
futures contracts with a later expiration date. Accordingly, the Fund is subject
to risks related to rolling. In addition, the costs associated
with rolling bitcoin futures typically are substantially higher than the costs
associated with other futures contracts and may have
a significant adverse impact on the performance of a Fund’s investments in
bitcoin futures.
When
the market for certain futures contracts is such that the prices are higher in
the more distant delivery months than in the nearer delivery
months, the sale during the “rolling process” of the bitcoin futures with closer
delivery dates would take place at a price that is
lower than the price of the bitcoin futures with more distant delivery dates.
This pattern of higher futures prices for longer expiration
bitcoin futures is often referred to as “contango.” Alternatively, when the
market for certain bitcoin futures is such that the prices
are higher in the nearer months than in the more distant months, the sale during
the rolling process of the more nearby bitcoin futures
would take place at a price that is higher than the price of the more distant
bitcoin futures. This pattern of higher future prices
for shorter expiration bitcoin futures is referred to as “backwardation.” There
have been extended periods in which contango or
backwardation
has existed in certain futures markets in general. Such periods could occur in
the future for bitcoin futures and may cause
significant and sustained losses. Additionally, because of the frequency with
which a Fund may roll futures contracts, the impact
of contango or backwardation on Fund performance may be greater than it would
have been if the Fund rolled futures contracts
less frequently.
In
addition, bitcoin and bitcoin futures have generally exhibited significant price
volatility relative to traditional asset classes. Bitcoin futures
may also experience significant price volatility as a result of the market fraud
and manipulation noted above.
Futures
contracts providing short exposure to bitcoin are also subject to additional
risks, including potentially unlimited losses. The Global
Strategist Portfolio’s short exposure would reflect the portfolio management
team’s view that the value of the underlying asset will
decrease. If the Adviser fails to accurately predict the movement in the value
of the underlying asset, the Global Strategist Portfolio
may incur a theoretically unlimited loss on short exposures (whereas losses from
long exposures can equal only the full value of
the underlying asset).
Futures
contracts based on bitcoin are also subject to the risks otherwise applicable to
derivatives, in particular those described in “Futures
Contracts.”
Bitcoin
ETFs.
The Discovery Portfolio may obtain investment exposure to bitcoin indirectly
through investing in Bitcoin ETFs. The amount
of the Discovery Portfolio’s investment in Bitcoin ETFs will be subject to
certain limits at the time of investment. The risks of
investing in Bitcoin ETFs are similar to the risks of investing in
cryptocurrencies generally. Investments in a Bitcoin ETF expose the
Discovery Portfolio to all of the risks related to bitcoin discussed above and
also expose the Discovery Portfolio to risks specific to such
Bitcoin ETF.
Shares
of Bitcoin ETFs (including for purposes of this and the following
paragraph, as applicable, pooled investment vehicles other than
ETFs providing Bitcoin exposure) have historically traded, and may continue to
trade, at a significant discount or premium to NAV.
To the extent a Bitcoin ETF trades at a discount to NAV, the value of the
Discovery Portfolio’s investment in the Bitcoin ETF would
typically decrease, even if the value of the Bitcoin ETF’s underlying holdings
in bitcoin does not decrease. In addition, there is no
guarantee that an active trading market for a Bitcoin ETF will exist at any
time. The Discovery Portfolio’s investment in a Bitcoin ETF
will be subject to the operating expenses associated with such Bitcoin ETF. In
addition, Bitcoin ETFs are susceptible to theft of their
bitcoin holdings, which would negatively affect an investment by the Discovery
Portfolio in such products.
The
Discovery Portfolio’s investments in Bitcoin ETFs are also subject to the
risks associated with private funds and ETFs generally, including
liquidity risk, authorized participant concentration risk, cash transactions
risk and trading risk. The securities of such private
funds are generally not registered under the 1940 Act, and therefore the
Discovery Portfolio’s investments in Bitcoin ETFs will
not benefit from the protections and restrictions of such laws and the
regulations thereunder.
Investment
by the Bitcoin Subsidiary in Bitcoin ETFs will generally be treated for
tax purposes as a direct investment by the Bitcoin Subsidiary
in bitcoin and will be subject to the tax risks related to investment in
bitcoin.
Special
Risks Related to the Cayman Islands Subsidiary.
The Discovery Portfolio and Global Strategist Portfolio may, consistent
with
its principal investment strategies, invest up to 25% of its total assets in a
wholly-owned subsidiary of the Fund organized as a company
under the laws of the Cayman Islands. The Bitcoin Subsidiary may invest in
Bitcoin ETFs, cash-settled bitcoin futures and other
investments. Investments in the Bitcoin Subsidiary are expected to provide the
Discovery Portfolio with exposure to bitcoin within
the limitations of Subchapter M of the Code and Internal Revenue Service (“IRS”)
revenue rulings, as discussed below under “Taxes.”
The Global Strategist Subsidiary may invest, directly or indirectly through the
use of derivatives, in securities, commodities, commodity-related
instruments and other investments, primarily futures, swaps and notes. The
Global Strategist Subsidiary may also invest
in cash-settled bitcoin futures. Investments in the Global Strategist Subsidiary
are expected to provide the Global Strategist Portfolio
with exposure to bitcoin and the commodity markets within the limitations of
Subchapter M of the Code and IRS revenue rulings,
as discussed below under “Taxes.”
Each
Subsidiary is a company organized under the laws of the Cayman Islands and is
overseen by its own board of directors. Each Fund
is the sole shareholder of its respective Subsidiary, and it is not currently
expected that shares of any Subsidiary will be sold or offered
to other investors. To the extent that a Fund invests in a Subsidiary, the Fund
may be subject to the risks associated with such commodity-related
instruments, bitcoin and other bitcoin related investments.
While
each Subsidiary may be considered similar to an investment company, it is not
registered under the 1940 Act and, unless otherwise
noted in the Prospectus and this SAI, is not subject to all of the investor
protections of the 1940 Act and other U.S. regulations.
Changes in the laws of the United States and/or the Cayman Islands could result
in the inability of a Fund and/or the Subsidiary
to operate as described in the applicable Prospectus and this SAI and could
eliminate or severely limit the Fund’s ability to invest
in the Subsidiary which may adversely affect the Fund and its
shareholders.
Additional
Risks.
In
addition to the investment strategies and risks described in the prospectus and
above, the Fund is subject to the following risks:
Special
Risks Related to Cyber Security.
The Trust and its service providers are susceptible to cyber security risks that
include, among other
things, theft, unauthorized monitoring, release, misuse, loss, destruction or
corruption of confidential and highly restricted data;
denial of service attacks; unauthorized access to relevant systems; compromises
to networks or devices that the Trust and its service
providers use to service the Trust’s operations; or operational disruption or
failures in the physical infrastructure or operating systems
that support the Trust and its service providers. Cyber attacks against or
security breakdowns of the Trust or its service providers
may adversely impact the Trust and its shareholders, potentially resulting in,
among other things, financial losses; the inability
of Fund shareholders to transact business and a
Fund to process transactions; inability to calculate a
Fund’s NAV; violations of
applicable privacy and other laws; regulatory fines, penalties, reputational
damage, reimbursement or other compensation costs; and/or
additional compliance costs. The Trust may incur additional costs for cyber
security risk management and remediation purposes.
In addition, cyber security risks may also impact issuers of securities in which
a
Fund invests, which may cause a
Fund’s investment
in such issuers to lose value. There can be no assurance that the Trust or its
service providers will not suffer losses relating to
cyber attacks or other information security breaches in the future.
Regulatory
and Legal Risk.
U.S. and non-U.S. governmental agencies and other regulators regularly implement
additional regulations and
legislators pass new laws that affect the investments held by a
Fund, the strategies used by a
Fund or the level of regulation or taxation
applying to a
Fund (such as regulations related to investments in derivatives and other
transactions). These regulations and laws
impact the investment strategies, performance, costs and operations of
a
Fund or taxation of shareholders. For example, the SEC recently
adopted amendments to rules related to fund names and related strategies, which
could result in costs to some Funds in amending
their names and/or strategies accordingly. In addition, a rapidly expanding or
otherwise more aggressive regulatory environment
may impose greater costs on all sectors and on financial services companies in
particular.
Market
and Geopolitical Risk.
The value of your investment in a
Fund is based on the values of a
Fund’s investments. These values change
daily due to economic and other events that affect markets generally, as well as
those that affect particular regions, countries, industries,
companies or governments. Price movements, sometimes called volatility, may be
greater or less depending on the types of securities
the Fund owns and the markets in which the securities trade. The increasing
interconnectivity between global economies and
markets increases the likelihood that events or conditions in one region,
sector, industry, market or with respect to the Fund may adversely
impact issuers in a different country, region, sector, industry, or market. For
example, adverse developments in the banking or
financial services sector could impact companies operating in various sectors or
industries (and in turn adversely impact a
Fund’s investments)
and otherwise adversely affect a
Fund and its operations. Securities in a
Fund’s portfolio may underperform due to inflation
(or expectations for inflation), interest rates, global demand for particular
products or resources, natural disasters, pandemics,
epidemics, terrorism, regulatory events and governmental or quasi-governmental
actions. The occurrence of global events similar
to those in recent years, such as terrorist attacks around the world, natural
disasters, social and political discord or debt crises and
downgrades, among others, may result in market volatility and may have long term
effects on both the U.S. and global financial markets.
The occurrence of such events may be sudden and unexpected, and it is difficult
to predict when similar events affecting the U.S.
or global financial markets may occur, the effects that such events may have and
the duration of those effects. Any such event(s) could
have a significant adverse impact on the value, liquidity and risk profile of
a
Fund’s portfolio, as well as its ability to sell securities
to meet redemptions. There is a risk that you may lose money by investing in
a
Fund.
Social,
political, economic and other conditions and events, such as war, natural
disasters, health emergencies (e.g., epidemics and pandemics),
terrorism, conflicts, social unrest, recessions, inflation, rapid interest rate
changes and supply chain disruptions may occur
and could significantly impact issuers, industries, governments and other
systems, including the financial markets. As global systems,
economies and financial markets are increasingly interconnected, events that
once had only local impact are now more likely to
have regional or even global effects. Events that occur in one country, region
or financial market will, more frequently, adversely impact
issuers in other countries, regions or markets. These impacts can be exacerbated
by failures of governments and societies to adequately
respond to an emerging event or threat. These types of events quickly and
significantly impact markets in the U.S. and across
the globe leading to extreme market volatility and disruption. The extent and
nature of the impact on supply chains or economies
and markets from these events is unknown, particularly if a health emergency or
other similar event, persists for an extended
period of time. Social, political, economic and other conditions and events,
such as natural disasters, health emergencies (e.g.,
epidemics and pandemics), terrorism, conflicts and social unrest, could reduce
consumer demand or economic output, result in market
closures, travel restrictions or quarantines, and generally have a significant
impact on the economies and financial markets and the
Adviser’s investment advisory activities and services of other service
providers, which in turn could adversely affect a
Fund’s investments
and other operations. The value of a
Fund’s investment may decrease as a result of such events, particularly if these
events
adversely impact the operations and effectiveness of the Adviser or key service
providers or if these events disrupt systems and processes
necessary or beneficial to the investment advisory or other activities on behalf
of the Fund.
Additionally,
health crises and geopolitical developments have in the past, and may in the
future, adversely impact a number of industries,
including but not limited to retail, transportation, hospitality and
entertainment. In addition to these or other developments
having adverse consequences for certain companies and other issuers in
which a
Fund invests and the value of a
Fund’s investments
therein, the operations of the Adviser (including those relating to a
Fund) could be impacted adversely, including through
quarantine measures and travel restrictions imposed on the Adviser’s or service
providers’ personnel located in affected
countries,
regions or local areas, or any related health issues of such personnel. Any of
the foregoing events could materially and adversely
affect the Adviser’s ability to source, manage and divest investments on behalf
of a
Fund and pursue a
Fund’s investment objectives
and strategies. Similar consequences could arise with respect to other
infectious diseases. Given the significant economic and
financial market disruptions and general uncertainty associated with the
Coronavirus pandemic, the valuation and performance of
a
Fund’s investments may be impacted adversely.
In
light of current market conditions, until recently interest rates and bond
yields in the United States and many other countries were at
or near historic lows, and in some cases, such rates and yields were
negative.
During
periods of very low or negative interest rates, a
Fund’s susceptibility to interest rate risk (i.e., the risks associated with
changes in
interest rates) may be magnified, its yield and income may be diminished and its
performance may be adversely affected (e.g., during
periods of very low or negative interest rates, the Fund may be unable to
maintain positive returns). These levels of interest rates
(or negative interest rates) may magnify the risks associated with rising
interest rates. Changing interest rates, including rates that
fall below zero, may have unpredictable effects on markets, including market
volatility and reduced liquidity, and may adversely affect
a
Fund’s yield, income and performance. In addition, government actions (such as
changes to interest rates) could have unintended
economic and market consequences that adversely affect a
Fund’s investments. Government and other public debt can be adversely
affected by large and sudden changes in local and global economic conditions
that result in increased debt levels. Although high
levels of government and other public debt do not necessarily indicate or cause
economic problems, high levels of debt may create
certain systemic risks if sound debt management practices are not implemented. A
high debt level may increase market pressures
to meet an issuer’s funding needs, which may increase borrowing costs and cause
a government or public or municipal entity
to issue additional debt, thereby increasing the risk of refinancing. A high
debt level also raises concerns that the issuer may be unable
or unwilling to repay the principal or interest on its debt, which may adversely
impact instruments held by the Fund that rely on
such payments. Governmental and quasi-governmental responses to certain economic
or other conditions may lead to increasing government
and other public debt, which heighten these risks. Unsustainable debt levels can
lead to declines in the value of currency, and
can prevent a government from implementing effective counter-cyclical fiscal
policy during economic downturns, can generate or
contribute to an economic downturn or cause other adverse economic or market
developments, such as increases in inflation or volatility.
Increasing government and other public debt may adversely affect issuers,
obligors, guarantors or instruments across a variety
of asset classes.
ESG
Investment Risk.
To the extent that the Adviser considers environmental, social and/or governance
(“ESG”) issues, the Fund’s performance
may be impacted. Additionally, the Adviser’s consideration of ESG issues may
require subjective analysis based on qualitative
assessments and the ability of the Adviser to consider ESG issues may be
impacted by data availability for a particular company
or issuer (or obligor), including if the data is inaccurate, incomplete,
unavailable or based on estimates. The Adviser’s consideration
of ESG issues may contribute to the Adviser’s decision to forgo opportunities to
buy certain securities. ESG issues with respect
to an issuer (or obligor) or the Adviser’s assessment of such may change over
time. The consideration of ESG issues within the Adviser’s
investment decision-making process for a Fund may vary across asset classes,
industries and sectors. For certain Funds, ESG issues
are not necessarily considered with respect to each issuer (or obligor) in which
the Funds invest and are not the sole determinant
of whether or not an investment can be made or a holding can remain in the
Funds’ portfolios. As a result, the Funds may,
in some cases, invest in companies or issuers that do not have favorable
sustainability or ESG characteristics.
INVESTMENT
LIMITATIONS
Fundamental
Limitations.
Each Fund is subject to the following restrictions which are fundamental
policies and may not be changed without
the approval of the lesser of: (1) at least 67% of the voting securities of the
Fund present at a meeting if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy, or (2) more than 50% of the outstanding
voting securities of the Fund.
As
a matter of fundamental policy, each Fund will not change its objective (unless
stated otherwise in a Fund’s Prospectus) and will not:
1 |
purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments; provided that this
restriction shall not prohibit the Fund from purchasing or selling
options, futures contracts and related options thereon, forward
contracts, swaps, caps, floors, collars and any other financial
instruments or from investing in securities or other instruments
backed by physical commodities or as otherwise permitted by (i) the 1940
Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other
relief applicable to the Fund from the provisions of the 1940 Act, as
amended from time to time; |
2 |
purchase
or sell real estate, although it may purchase and sell securities of
companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities
which are secured by interests in real estate; |
3 |
make
loans of money or property to any person, except (a) to the extent that
securities or interests in which the Fund may invest are
considered to be loans, (b) through the loan of portfolio securities, (c)
by engaging in repurchase agreements or (d) as may otherwise
be permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the |
| SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief applicable to the Fund from the provisions
of the 1940 Act, as amended from time to time; |
4 |
invest
in a manner inconsistent with its classification as a “diversified
company” as provided by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under
the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief applicable to the Fund from the provisions of
the 1940 Act, as amended from time to time; |
5 |
borrow
money, except the Fund may borrow money to the extent permitted by (i) the
1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or
other relief applicable to the Trust from the provisions of the 1940 Act,
as amended from time to time; |
6 |
underwrite
the securities of other issuers (except to the extent that the Fund may be
deemed to be an underwriter within the meaning
of the 1933 Act in connection with the disposition of restricted
securities); |
7 |
acquire
any securities of companies within one industry, if, as a result of such
acquisition, more than 25% of the value of the Fund’s
total assets would be invested in securities of companies within such
industry; provided, however that (i) there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (and also,
with respect to the Short Duration Municipal Income Portfolio, municipal
obligations); (ii) utility companies will be divided
according to their services, for example, gas, gas transmission, electric
and telephone will each be considered a separate industry;
(iii) financial service companies will be classified according to the end
users of their services, for example, automobile finance,
bank finance and diversified finance will each be considered a separate
industry; and (iv) asset-backed securities will be classified
according to the underlying assets securing such securities, except that
the Ultra-Short Income Portfolio will invest, under
normal circumstances, at least 25% of its assets in securities issued by
companies in the financial services industry. Companies
in the financial services industry include companies involved in
activities such as banking, mortgage, consumer or specialized
finance, investment banking, securities brokerage, asset management and
custody, insurance, financial investment, real
estate and mortgage finance and financial conglomerates. The Ultra-Short
Income Portfolio’s investments in repurchase agreements
will be considered to be investments in the industry of their respective
counterparties for purposes of this policy. Although
the Ultra-Short Income Portfolio concentrates its investments in the
financial services industry, it may invest less than 25%
of its assets in this industry as a temporary defensive measure;
and |
8 |
issue
senior securities, except the Fund may issue senior securities to the
extent permitted by (i) the 1940 Act, as amended from time
to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an
exemption or other relief applicable to the Fund from the provisions of
the 1940 Act, as amended from time to time. |
In
addition, as a matter of fundamental policy, under normal circumstances, the
Short Duration Municipal Income Portfolio will invest
at least 80% of its assets in municipal securities, the income from which is
exempt from federal income tax.
Non-Fundamental
Limitations.
Each Fund is also subject to the following restrictions which may be changed by
the Board without shareholder
approval.
As
a matter of non-fundamental policy, no Fund will:
1 |
purchase
on margin, except that (i) each Fund may make margin deposits in
connection with short sales of securities, derivatives and
other similar transactions; and (ii) each Fund may use short-term credit
as may be necessary for the clearance of purchases and
sales of securities; |
2 |
pledge,
mortgage or hypothecate assets in an amount greater than 50% of its total
assets, provided that each Fund may make margin
deposits in connection with short sales of securities, derivatives and
other similar transactions; |
3 |
invest
for the purpose of exercising control over management of any company;
and |
4 |
invest
its assets in securities of any investment company, except as permitted by
the 1940 Act or the rules, regulations, interpretations
or orders of the SEC and its staff thereunder. |
The
percentage limitations contained in these fundamental and non-fundamental
limitations apply at the time of purchase of securities.
A later change in percentage resulting from changes in the value of a Fund’s
assets or in total or net assets of the Fund will not
be considered a violation of the restriction and the sale of securities will not
be required. The foregoing does not apply to borrowings.
Future series of the Trust may adopt different limitations.
Pursuant
to an order from the SEC, the Funds may enter into interfund lending
arrangements. Interfund loans and borrowings permit
each Fund to lend money directly to and borrow from other series of the Trust
for temporary purposes. Such loans and borrowings
normally extend overnight but may have a maximum duration of seven days. A Fund
will borrow through the interfund lending
facility only when the costs are lower than the costs of bank loans, and will
lend through the facility only when the returns are
higher than those available from an investment in repurchase agreements. In
addition, a Fund will borrow and lend money through
interfund lending arrangements only if, and to the extent that, such practice is
consistent with the Fund’s investment objective
and other investments. Any delay in repayment to a lending Fund could result in
a lost investment opportunity or additional
borrowing costs.
The
investment policies, limitations or practices of the Funds may not apply during
periods of unusual or adverse market, economic, political
or other conditions. Such market, economic, political or other conditions may
include periods of abnormal or heightened market
volatility, strained credit and/or liquidity conditions or increased
governmental intervention in the markets or industries. During
such periods, a Fund may not invest according to its principal investment
strategies or in the manner in which its name may suggest,
and may be subject to different and/or heightened risks. It is possible that
such unusual or adverse conditions may continue for
extended periods of time.
For
purposes of policies adopted in accordance with Rule 35d-1 under the 1940 Act,
the term “assets,” as defined in Rule 35d-1 under
the 1940 Act, means net assets plus the amount of any borrowings for investment
purposes.
With
respect to the Short Duration Municipal Income Portfolio policy not to invest
25% or more of its total assets in any one industry,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and municipal obligations backed
by the credit of a governmental entity are not considered to represent
industries. However, municipal obligations backed only by
the assets and revenues of non-governmental users may for this purpose be deemed
to be issued by such nongovernmental users and
the Short Duration Municipal Income Portfolio 25% limitation would apply to such
issuers. In addition, the Short Duration Municipal
Income Portfolio may invest more than 25% of its total assets in certain types
of municipal obligations, such as revenue bonds,
and certain economic sectors, such as housing, hospitals and other health care
facilities or utilities.
DISCLOSURE
OF PORTFOLIO HOLDINGS
The
Trust’s Board of Trustees and the Adviser have adopted policies and procedures
regarding disclosure of portfolio holdings (the “Policy”).
Pursuant to the Policy, the Adviser may disclose information concerning Trust
portfolio holdings only if such disclosure is consistent
with the antifraud provisions of the federal securities laws and the Trust’s and
the Adviser’s fiduciary duties to Fund shareholders.
In no instance may the Adviser, Sub-Adviser or the Trust receive compensation or
any other consideration in connection
with the disclosure of information about the portfolio securities of a Fund.
Consideration includes any agreement to maintain
assets in the Funds or in other investment companies or accounts managed by the
Adviser or by any affiliated person of the Adviser.
Non-public information concerning portfolio holdings may be divulged to
third-parties only when the Trust has a legitimate business
purpose for doing so and the recipients of the information are subject to a duty
of confidentiality. Under no circumstances shall
current or prospective Fund shareholders receive non-public portfolio holdings
information, except as described below.
The
Trust makes available on its public website the following portfolio holdings
information:
■ |
complete
portfolio holdings information monthly, at least 15 calendar days after
the end of each month (except with respect to the
Discovery and Ultra-Short Income
Portfolios); |
■ |
complete
portfolio holdings information monthly, at least 3 business days after the
end of each month (with respect to the Ultra-Short
Income Portfolio); |
■ |
complete
portfolio holdings information quarterly, at least 45 calendar days after
the end of each quarter (with respect to the Discovery
Portfolio); |
■ |
complete
portfolio holdings information weekly, at least 2 business days following
the end of the prior week (with respect to the Ultra-Short
Income Portfolio); and |
■ |
top
10 holdings monthly, at least 15 calendar days after the end of each month
(except with respect to the Ultra-Short Income Portfolio). |
The
Trust provides a complete schedule of portfolio holdings for the second and
fourth fiscal quarters in its Semi-Annual and Annual Reports,
and for the first and third fiscal quarters in its filings with the SEC as an
exhibit to Form N-PORT. These portfolio holdings
will be available on or about the date of this Statement of Additional
Information on the Trust’s public website, www.morganstanley.com/im/shareholderreports.
All
other portfolio holdings information that has not been disseminated in a manner
making it available generally as described above is
non-public information for purposes of the Policy.
The
Trust may make selective disclosure of non-public portfolio holdings information
pursuant to certain exemptions set forth in the Policy.
Third-parties eligible for exemptions under the Policy and therefore eligible to
receive such disclosures currently include clients/shareholders
(such as redeeming shareholders in-kind), fund rating agencies, information
exchange subscribers, proxy voting or
advisory services, pricing services, consultants and analysts, portfolio
analytics providers, transition managers and service providers, provided
that the third party expressly agrees to maintain the disclosed information in
confidence and not to trade portfolio securities or
related derivative securities based on the non-public information. Non-public
portfolio holdings information may not be disclosed to
a third-party pursuant to an exemption unless and until the third-party
recipient has entered into a nondisclosure agreement with the
Trust and the arrangement has been reviewed and approved as set forth in the
Policy and discussed below. In addition, persons who
owe a duty of trust or confidence to the Trust or the Adviser may receive
non-public portfolio holdings information without entering
into a non-disclosure agreement. Currently, these persons include (i) the Funds’
independent registered public accounting firm
(as of the Trust’s fiscal year end and on an as-needed basis), (ii) counsel to
the Funds (on an as-needed basis), (iii) counsel to the
Independent
Trustees (on an as-needed basis) and (iv) members of the Board of Trustees (on
an as-needed basis). Subject to the terms
and conditions of any agreement between the Adviser or the Trust and the
third-party recipient, if these conditions for disclosure
are satisfied, there shall be no restriction on the frequency with which Fund
non-public portfolio holdings information is released,
and no lag period shall apply (unless otherwise indicated below).
The
Adviser and/or Sub-Adviser may provide interest lists to broker-dealers who
execute securities transactions for the Funds without entering
into a non-disclosure agreement with the broker-dealers, provided that the
interest list satisfies all of the following criteria: (1)
the interest list must contain only the CUSIP numbers and/or ticker symbols of
securities held in all registered management investment
companies advised by the Adviser and/or Sub-Adviser or any affiliate of the
Adviser or Sub-Adviser (the “Morgan Stanley Funds”)
on an aggregate, rather than a fund-by-fund basis; (2) the interest list will
not disclose portfolio holdings on a fund-by-fund basis;
(3) the interest list must not contain information about the number or value of
shares owned by a specified Morgan Stanley Fund;
(4) the interest list may identify the investment strategy, but not the
particular Morgan Stanley Funds, to which the list relates; and
(5) the interest list may not identify the portfolio manager or team members
responsible for managing the Morgan Stanley Funds.
The
Trust may discuss or otherwise disclose performance attribution analyses (i.e.,
mention the effects of having a particular security in
the portfolio(s)) where such discussion is not contemporaneously made public,
provided that the particular holding has been disclosed
publicly or the information that includes such holding(s) has been made
available to shareholders requesting such information.
Additionally, any discussion of the analyses may not be more current than the
date the holding was disclosed publicly or the
information that includes such holding(s) has been made available to
shareholders requesting such information.
Portfolio
holdings information may be provided to broker-dealers, prime brokers, futures
commission merchants, or similar providers in
connection with each Fund’s portfolio trading or operational processing
activities; such entities generally need access to such information
in the performance of their duties and responsibilities to fund service
providers and are subject to a duty of confidentiality,
including a duty not to trade on material non-public information, imposed by law
or contract. Portfolio holdings information
may also be provided to affiliates of Morgan Stanley Investment Management
(“MSIM”) pursuant to regulatory requirements
or for legitimate business purposes, which may include risk management, or may
be reported by each Fund’s counterparties
to certain global trade repositories pursuant to regulatory
requirements.
The
Adviser, the Sub-Adviser, the Trust and/or certain Funds currently have entered
into ongoing arrangements regarding the selective
disclosure of complete portfolio holdings information with the following
parties:
|
| |
Name |
Frequency1
|
Lag
Time |
Service
Providers |
|
|
State
Street Bank and Trust Company |
Daily
basis |
Daily |
BlackRock
Financial Management Inc.2
|
Daily
basis |
3
|
KellyCo
Marketing |
Monthly
basis and Quarterly basis |
Varying
lag times after the date of the information |
Commcise
Software Limited4
|
Monthly
basis |
Approximately
three business days |
Virtu
Financial, Inc.4
|
Monthly
basis |
Approximately
three business days |
R.R.
Donnelley & Sons Company |
Monthly
basis and Quarterly basis |
Varying
lag times after the date of the information |
Toppan
Merrill5
|
Semi-Annual
basis |
Approximately
15 business days after month end |
Fund
Rating Agencies |
|
|
Refinitiv Lipper |
Monthly
basis |
Approximately
six business days after month end |
Portfolio
Analytics Providers |
|
|
Bloomberg
Finance, L.P. |
Daily
basis |
Daily |
FactSet
Research Systems, Inc. |
Daily
basis |
Daily |
BestX
Ltd. |
Daily
basis |
Daily |
Abel
Noser Solutions, LLC |
Daily
basis |
Daily |
MSCI
Inc.4
|
Daily
basis |
Daily |
Clients |
|
|
Teacher
Retirement System of Texas6
|
Daily
basis |
Daily |
1 |
Dissemination
of portfolio holdings information to entities listed above may occur less
frequently than indicated (or not at all). |
2 |
With
respect to the Core Plus Fixed Income, Corporate Bond, Dynamic Value,
Global Strategist, High Yield, Short Duration Income, Ultra-Short Income
and Short
Duration Municipal Income Portfolios, only. |
3 |
Information
will typically be provided on a real time basis or as soon thereafter as
possible. |
4 |
With
respect to the Discovery, Dynamic Value and Global Strategist Portfolios,
only. |
5 |
With
respect to the Discovery Portfolio, only. |
6 |
With
respect to the Dynamic Value Portfolio,
only. |
Further,
with respect to the Ultra-Short Income and Short Duration Municipal Income
Portfolios, certain entities such as municipalities,
which may not be authorized to enter into a non-disclosure agreement, may enter
into an undertaking to keep any non-public
holdings information confidential.
All
disclosures of non-public portfolio holdings information made to third-parties
pursuant to the exemptions set forth in the Policy must
be reviewed and approved by the Adviser, which will also determine from
time-to-time whether such third-parties should continue
to receive portfolio holdings information.
The
Adviser and/or Sub-Adviser shall report quarterly to the Board of Trustees (or a
designated committee thereof) at the next regularly
scheduled meeting: (i) any material information concerning all parties receiving
non-public portfolio holdings information pursuant
to an exemption; and (ii) any new non-disclosure agreements entered into during
the reporting period. Procedures to monitor
the use of such non-public portfolio holdings information may include requiring
annual certifications that the recipients have
utilized such information only pursuant to the terms of the agreement between
the recipient and the Adviser and, for those recipients
receiving information electronically, acceptance of the information will
constitute reaffirmation that the third-party expressly
agrees to maintain the disclosed information in confidence and not to trade
portfolio securities based on the non-public information.
PURCHASE
AND REDEMPTION OF SHARES
The
Trust has suspended offering Class L shares of the Funds to all investors. The
Class L shareholders of the Funds do not have the option of purchasing
additional Class L shares. However, the existing Class L shareholders of the
Funds may invest in additional Class L shares through
reinvestment of dividends and distributions.
Information
concerning how Fund shares are offered to the public (and how they are redeemed
and exchanged) is provided in the Fund’s
Prospectus. Each Fund reserves the right in its sole discretion (i) to suspend
the offering of its shares; (ii) to reject purchase orders
when in the judgment of management such rejection is in the best interest of the
Fund; and (iii) to reduce or waive the minimum
for initial investments for certain categories of investments.
The
NAV of each Fund is calculated on days that the New York Stock Exchange (“NYSE”)
is open for business (except, with respect to
the Ultra-Short Income Portfolio, when the following federal holidays are
observed: Columbus Day and Veterans Day). NAV is determined
as of the close of trading of the NYSE (normally 4:00 p.m. Eastern Time) (for
each Fund, the “Pricing Time”). Shares will
generally not be priced on days that the NYSE is closed, although Fund shares
may be priced on such days if the Securities Industry
and Financial Markets Association (“SIFMA”) recommends that the bond markets
remain open for all or part of the day. On
any business day when SIFMA recommends that the bond markets close early, the
Fund reserves the right to close at or prior to the
SIFMA recommended closing time. If the Fund does so, it will cease granting same
day credit for purchase and redemption orders
received after the Fund’s closing time and credit will be given on the next
business day. If the NYSE is closed due to inclement weather,
technology problems or any other reason on a day it would normally be open for
business, or the NYSE has an unscheduled early
closing on a day it has opened for business, each Fund reserves the right to
treat such day as a business day and accept purchase and
redemption orders until, and calculate its NAV as of, the normally scheduled
close of regular trading on the NYSE for that day, so
long as the Adviser believes there generally remains an adequate market to
obtain reliable and accurate market quotations. A Fund may
elect to remain open and price its shares on days when the NYSE is closed but
the primary securities markets on which the Fund’s
securities trade remain open.
Additional
Purchase Information.
You may purchase Class I, Class A, Class C, Class IR, Class R6 and/or
Institutional Class shares directly
from the Funds by Federal Funds wire or by check; however, on days that the NYSE
is open but the custodian bank is closed, you
may only purchase shares by check (except, with respect to the Ultra-Short
Income Portfolio, when the following federal holidays are
observed: Columbus Day and Veterans Day). Investors may also invest in a Fund by
purchasing Class I, Class A, Class C, Class IR,
Class R6 and/or Institutional Class shares through certain third-parties, such
as brokers, dealers or other financial intermediaries that
have entered into a selling agreement with Morgan Stanley Distribution, Inc.
(the “Distributor”) (each, a “Financial Intermediary”).
Some Financial Intermediaries may charge an additional service or transaction
fee (see also “Investment Through Financial
Intermediaries”). If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for
any loss the Funds or their agents incur. If you are already a shareholder, the
Funds may redeem shares from your account(s) to reimburse
the Funds or their agents for any loss. In addition, you may be prohibited or
restricted from making future investments in the
Funds.
Check.
An account may be opened and you may purchase Class I, Class A, Class C, Class
IR, Class R6 and/or Institutional Class shares
by completing and signing a New Account Application and mailing it, together
with a check payable to “Morgan Stanley Institutional
Fund Trust—[Fund name]” to:
Morgan
Stanley Institutional Fund Trust
c/o
SS&C Global Investor and Distribution Solutions, Inc.
P.O.
Box 219804
Kansas
City, MO 64121-9804
A
purchase of shares by check ordinarily will be credited to your account at the
NAV determined on the day of receipt.
Investment
Through Financial Intermediaries.
Certain Financial Intermediaries have made arrangements with the Trust so that
an investor
may purchase or redeem, as applicable, Class I, Class A, Class L, Class C, Class
IR, Class R6 and/or Institutional Class shares at
the NAV next determined after the Financial Intermediary receives the share
order. In other instances, the Trust has also authorized
such Financial Intermediaries to designate other intermediaries to receive
purchase and redemption orders on the Trust’s behalf
at the share price next determined after such designees receive the share order.
Under these arrangements, the Trust will be deemed
to have received a purchase or redemption order when the Financial Intermediary
or, if applicable, a Financial Intermediary’s authorized
designee, receives the share order from an investor.
Conversion
To a New Share Class.
If the value of an account containing shares of a Fund falls below the
investment minimum for the
class of shares held by the account because of shareholder redemption(s) or the
failure to meet one of the waiver criteria set forth in
the applicable Fund’s Prospectus and, if the account value remains below such
investment minimum, the shares in such account may,
at the Adviser’s discretion, convert to another class of shares offered by the
Fund, if an account meets the minimum investment amount
for such class, and will be subject to the shareholder services fee and other
features applicable to such shares. Conversion to another
class of shares will result in holding a share class with higher fees. The Trust
will not convert to another class of shares based solely
upon changes in the market that reduce the NAV of shares. Under current tax law,
conversion between share classes is not a taxable
event to the shareholder. Shareholders will be notified prior to any such
conversion.
Involuntary
Redemption of Shares.
If the value of an account falls below the investment minimum for that class
because of shareholder
redemption(s) or you no longer meet one of the waiver criteria set forth in the
applicable Fund’s Prospectus and, if the account
value remains below such investment minimum, the shares in such account may be
subject to redemption by the Fund. The Fund
will not redeem shares based solely upon changes in the market that reduce the
NAV of shares. If shares are redeemed, redemption
proceeds will be promptly paid to the shareholder. Shareholders will be notified
prior to any such redemption.
Suspension
of Redemptions.
The Trust may suspend the right of redemption or postpone the date of payment
(i) during any period that
the NYSE is closed, or trading on the NYSE is restricted as determined by the
SEC, (ii) during any period when an emergency exists
as determined by the SEC as a result of which it is not practicable for a Fund
to dispose of securities it owns, or fairly to determine
the value of its assets, and (iii) for such other periods as the SEC may
permit.
Further
Redemption Information.
To protect your account and the Trust from fraud, signature guarantees are
required for certain redemptions.
Signature guarantees enable the Trust to verify the identity of the person who
has authorized a redemption from your account.
Signature guarantees are required in connection with: (i) all redemptions,
regardless of the amount involved, when the proceeds
are to be paid to someone other than the registered owner(s) and/or registered
address; and (ii) share transfer requests. An “eligible
guarantor institution” may include a bank, a trust company, a credit union or
savings and loan association, a member firm of
a domestic stock exchange, or a foreign branch of any of the foregoing. Notaries
public are not acceptable guarantors. The signature
guarantees must appear either: (i) on the written request for redemption; (ii)
on a separate instrument for assignment (“stock
power”) which should specify the total number of shares to be redeemed; or (iii)
on all stock certificates tendered for redemption
and, if shares held by a Fund are also being redeemed, on the letter or stock
power.
Transactions
With Brokers/Dealers.
The Trust has authorized certain brokers to accept on its behalf purchase and
redemption orders.
Some of these brokers are authorized to designate other intermediaries to accept
purchase and redemption orders on a Fund’s behalf.
For purposes of determining the purchase price of shares, a Fund will be deemed
to have received a purchase or redemption order
when an authorized broker, or if applicable, a broker’s authorized designee,
accepts the order. In other words, orders will be priced
at the NAV next computed after such orders are accepted by an authorized broker
or the broker’s authorized designee.
ACCOUNT
POLICIES AND FEATURES
Transfer
of Shares
Shareholders
may transfer shares of the Funds to another person by written request to
Shareholder Services at Morgan Stanley Institutional
Fund Trust, c/o SS&C Global Investor and Distribution Solutions, Inc.
(“SS&C GIDS”), P.O. Box 219804, Kansas City,
MO 64121-9804. If shares are being transferred to a new account, requests for
transfer must be accompanied by a completed New
Account Application for the receiving party. If shares are being transferred to
an existing account, the request should clearly identify
the account and number of shares to be transferred and include the signature of
all registered owners and all share certificates, if
any, which are subject to the transfer. The signature on the letter of request,
the share certificate or any stock power must be guaranteed
in the same manner as described in the Prospectuses. As in the case of
redemptions, the written request must be received in
good order before any transfer can be made.
Valuation
of Shares
NAV
of a class is determined by dividing the total market value of each Fund’s
investments and other assets attributable to that class, less
the total market value of all liabilities attributable to that class, by the
total number of outstanding shares of the respective class of that
Fund. The NAV for each class of shares offered by a Fund may differ due to
class-specific expenses paid by each class, including the
shareholder servicing fees charged to Class A, Class L, Class C and
Institutional Class shares.
In
the calculation of a Fund’s NAV: (1) an equity portfolio security listed or
traded on an exchange is valued at its latest reported sale price
(or at the exchange official closing price if such exchange reports an official
closing price), and if there were no sales on a given day
and if there is no official exchange closing price for that day, the security is
valued at the mean between the last reported bid and asked
prices if such bid and asked prices are available on the relevant exchanges; and
(2) all other equity portfolio securities for which OTC
market quotations are readily available are valued at the latest reported sale
price (or at the market official closing price if such market
reports an official closing price), and if there was no trading in the security
on a given day and if there is no official closing price
from the relevant markets for that day, the security is valued at the mean
between the last reported bid and asked prices if such bid
and asked prices are available on the relevant markets. Listed equity securities
not traded on the valuation date with no reported bid
and asked prices available on the exchange are valued at the mean between the
current bid and asked prices obtained from one or more
reputable brokers or dealers. An unlisted equity security that does not trade on
the valuation date and for which bid and asked prices
from the relevant markets are unavailable is valued at the mean between the
current bid and asked prices obtained from one or more
reputable brokers or dealers. In cases where a security is traded on more than
one exchange, the security is valued on the exchange
designated as the primary market. When market quotations are not readily
available, including circumstances under which it
is determined by the Adviser and/or Sub-Adviser, as applicable, that the closing
price, the last sale price or the mean between the last
reported bid and asked prices are not reflective of a security’s market value,
portfolio securities are valued at their fair value as determined
in good faith under procedures established by and under the general supervision
of the Trust’s Board. For valuation purposes,
quotations of foreign portfolio securities, other assets and liabilities and
forward contracts stated in foreign currency are translated
into U.S. dollar equivalents at the prevailing market rates prior to the close
of the NYSE.
Certain
of a Fund’s securities may be valued using as an input evaluated prices provided
by an outside pricing service approved by the Board.
Prices obtained from these approved sources are monitored and reviewed by the
Adviser’s Valuation Committee and if not deemed
to represent fair value, may be overridden and valued using procedures adopted
by the Board. The pricing service may utilize a
matrix system or other model incorporating attributes such as security quality,
maturity and coupon as the evaluation model parameters,
and/or research evaluations by its staff, including review of broker-dealer
market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service. Pricing services generally value securities assuming
orderly transactions of an institutional round lot size, but a Fund may hold or
transact in such securities in smaller, odd lot sizes.
Odd lots often trade at lower prices than institutional round lots. In certain
cases where a valuation is not available from any of the
approved pricing services, then a quote from a broker or dealer may be
used.
Listed
options are valued at the last reported sales price on the exchange on which
they are listed (or at the exchange official closing price
if such exchange reports an official closing price). If an official closing
price or last reported sale price is unavailable, the listed option
should be fair valued at the mean between its latest bid and ask prices. If an
exchange closing price or bid and asked prices are not
available from the exchange, then the quotes from one or more brokers or dealers
may be used. Unlisted options and swaps are valued
by an approved outside pricing service or quotes from a broker or dealer.
Unlisted options and swaps cleared on a clearinghouse
or exchange may be valued using the closing price provided by the clearinghouse
or exchange. Futures are valued at the settlement
price on the exchange on which they trade or, if a settlement price is
unavailable, then at the last sale price on the exchange.
If
the Adviser determines that the valuation received from the outside pricing
service or broker or dealer is not reflective of the security’s
market value, such security is valued at its fair value as determined in good
faith using methods approved by the Board.
Generally,
trading in foreign securities, as well as corporate bonds, U.S. government
securities and money market instruments, is substantially
completed each day at various times prior to the close of the NYSE. The values
of such securities used in computing the NAV
of the Fund’s shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close
of the NYSE. Occasionally, events which may affect the values of such securities
and such exchange rates may occur between the times
at which they are determined and the close of the NYSE. If events that may
affect the value of such securities occur during such period,
then these securities may be valued at their fair value as determined in good
faith using methods approved by the Board.
In
general, fair value represents the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When there is no public market or
possibly no market at all for an asset, fair value
represents, in general, a good faith approximation of the current value of an
asset. A security that is fair valued may be valued at a
price higher or lower than actual market quotations or the value determined by
other funds using their own fair valuation procedures
or by other investors. The fair value of an asset may not be the price at which
that asset is ultimately sold.
The
proceeds received by each Fund from the issue or sale of its shares, and all net
investment income, realized and unrealized gain and
proceeds thereof, subject only to the rights of creditors, will be specifically
allocated to the Fund and constitute the underlying assets
of each Fund. The underlying assets of a Fund will be segregated on the books of
account, and will be charged with the liabilities
in respect of a Fund and with a share of the general liabilities of the Trust.
Expenses of the Trust with respect to the Fund and
the other series of the Trust are generally allocated in proportion to the NAVs
of the respective Fund except where allocations of expenses
can otherwise be fairly made.
Each
Fund relies on various sources to calculate its NAV. The ability of the Fund to
calculate the NAV per share of the Fund is subject
to operational risks associated with processing or human errors, systems or
technology failures, cyber attacks and errors caused by
third party service providers, data sources, or trading counterparties. Such
failures may result in delays in the calculation of the Fund’s
NAV and/or the inability to calculate NAV over extended time periods. The Fund
may be unable to recover any losses associated
with such failures. In addition, if the third-party service providers and/or
data sources upon which the Fund directly or indirectly
relies to calculate its NAV or price individual securities are unavailable or
otherwise unable to calculate the NAV correctly, it
may be necessary for alternative procedures to be utilized to price the
securities at the time of determining the Fund’s NAV.
Although
the legal rights of Class I, Class A, Class L, Class C, Class IR, Class R6, and
Institutional Class shares will be identical, the different
expenses borne by each class will result in different NAVs and dividends for the
class. Dividends will differ by approximately the
amount of the class specific expenses (distribution, transfer agency and sub
transfer agency fees). The NAV of Class A, Class L, Class
C and Institutional Class shares will generally be lower than the NAV of Class
I, Class IR, and Class R6 shares as a result of the shareholder
services fees charged to Class A and Institutional Class shares and the
distribution and shareholder services fees charged to Class
L and Class C shares and certain other class-specific expenses of Class A, Class
C and Class L shares.
MANAGEMENT
OF THE TRUST
Trustees
and Officers
The
Board of the Trust consists of ten
Trustees. These same individuals also serve as directors or trustees for certain
of the funds advised
by the Adviser and Morgan Stanley AIP GP LP. None of the Trustees have an
affiliation or business connection with the Adviser
or any of its affiliated persons or own any stock or other securities issued by
the Adviser’s parent company, Morgan Stanley. These
Trustees are the “non-interested” or “Independent” Trustees of the Trust as
defined under the 1940 Act.
Board
Structure and Oversight Function
The
Board’s leadership structure features an Independent Trustee serving as
Chairperson and the Board Committees described below.
The Chairperson participates in the preparation of the agenda for meetings of
the Board and the preparation of information to
be presented to the Board with respect to matters to be acted upon by the Board.
The Chairperson also presides at all meetings of the
Board and is involved in discussions regarding matters pertaining to the
oversight of the management of the Trust between meetings.
The
Board of Trustees operates using a system of committees to facilitate the timely
and efficient consideration of all matters of importance
to the Trustees, the Trust and Trust shareholders, and to facilitate compliance
with legal and regulatory requirements and oversight
of the Trust’s activities and associated risks. The Board of Trustees has
established six standing committees: (1) Audit Committee,
(2) Governance Committee, (3) Compliance and Insurance Committee, (4) Equity
Investment Committee, (5) Fixed Income,
Liquidity and Alternatives Investment Committee and (6) Risk Committee, which
are each comprised exclusively of Independent
Trustees. Each committee charter governs the scope of the committee’s
responsibilities with respect to the oversight of the
Trust. The responsibilities of each committee, including their oversight
responsibilities, are described further under the caption “Independent
Trustees and the Committees.”
A
Fund is subject to a number of risks, including investment, compliance,
operational and valuation risk, among others. The Board of
Trustees oversees these risks as part of its broader oversight of the Trust’s
affairs through various Board and committee activities. The
Board has adopted, and periodically reviews, policies and procedures designed to
address various risks to a Fund. In addition, appropriate
personnel, including but not limited to the Trust’s Chief Compliance Officer,
members of the Trust’s administration and
accounting teams, representatives from a Fund’s independent registered public
accounting firm, the Trust’s Treasurer, portfolio management
personnel, risk management personnel and independent valuation and brokerage
evaluation service providers, make regular
reports regarding the Trust’s activities and related risks to the Board of
Trustees and the committees, as appropriate. These reports
include, among others, quarterly performance reports, quarterly risk reports and
discussions with members of the risk teams relating
to each asset class. The Board’s committee structure allows separate committees
to focus on different aspects of risk and the potential
impact of these risks on some or all of the funds in the complex and then report
back to the full Board. In between regular meetings,
Trust officers also communicate with the Trustees regarding material exceptions
and items relevant to the Board’s risk oversight
function. The Board recognizes that it is not possible to identify all of the
risks that may affect a Fund, and that it is not possible
to develop processes and controls to eliminate all of the risks that may affect
a Fund. Moreover, the Board recognizes that it may
be necessary for a Fund to bear certain risks (such as investment risk) to
achieve their respective investment objectives.
As
needed between meetings of the Board, the Board or a specific committee receives
and reviews reports relating to the Trust and engages
in discussions with appropriate parties relating to the Trust’s operations and
related risks.
Trustees
The
Trust seeks as Trustees individuals of distinction and experience in business
and finance, government service or academia. In determining
that a particular Trustee was and continues to be qualified to serve as Trustee,
the Board has considered a variety of criteria,
none of which, in isolation, was controlling. Based on a review of the
experience, qualifications, attributes or skills of each Trustee,
including those enumerated in the table below, the Board has determined that
each of the Trustees is qualified to serve as a Trustee
of the Trust. In addition, the Board believes that, collectively, the Trustees
have balanced and diverse experience, qualifications,
attributes and skills that allow the Board to operate effectively in governing
the Trust and protecting the interests of shareholders.
Information about the Trust’s Governance Committee and Board of Trustees
nomination process is provided below under
the caption “Independent Trustees and the Committees.”
The
Trustees of the Trust, their birth years, addresses, positions held, length of
time served, their principal business occupations during
the past five years and other relevant professional experience, the number of
portfolios in the Fund Complex (described below)
overseen by each Independent Trustee and other directorships, if any, held by
the Trustees, are shown below (as of January
1, 2024).
The Fund Complex includes all open-end and closed-end funds (including all of
their portfolios) advised by the Adviser and any
registered funds that have an adviser that is an affiliate of the Adviser
(including, but not limited to, Morgan Stanley AIP GP LP) (the
“Morgan Stanley AIP Funds”).
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held by Independent
Trustee
During Past
5 Years** |
Frank
L. Bowman c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1944 |
Trustee |
Since
August 2006 |
President,
Strategic Decisions,
LLC (consulting)
(since February
2009); Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
Chairperson of the
Compliance and Insurance
Committee (since
October 2015); formerly,
Chairperson of
the Insurance Sub-Committee
of the Compliance
and Insurance
Committee (2007-2015);
served as President
and Chief Executive
Officer of the Nuclear
Energy Institute
(policy organization)
(February 2005-November
2008); retired
as Admiral, U.S. Navy
after serving over 38
years on active duty including
8 years as Director
of the Naval Nuclear
Propulsion Program
in the Department
of the Navy
and the U.S. Department
of Energy (1996-2004);
served as Chief
of Naval Personnel
(July 1994-September
1996) and on
the Joint Staff as Director
of Political Military
Affairs (June 1992-July
1994); knighted
as Honorary Knight
Commander of the
Most Excellent Order
of the British Empire;
awarded the Officier
de L’Ordre National
du Mérite
by the French Government;
elected to the
National Academy of
Engineering (2009). |
87 |
Director
of Naval and Nuclear Technologies
LLP; Director Emeritus
of the Armed Services
YMCA; Member of the
National Security Advisory Council
of the Center for U.S. Global
Engagement and a former
member of the CNA Military
Advisory Board; Chairman
of the Board of Trustees
of Fairhaven United Methodist
Church; Member of
the Board of Advisors of the Dolphin
Scholarship Foundation;
Director of other various
nonprofit organizations;
formerly, Director
of BP, plc (November
2010-May 2019). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held by Independent
Trustee During Past
5 Years** |
Frances
L. Cashman c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1961 |
Trustee |
Since
February
2022 |
Chief
Executive Officer,
Asset Management
Division, Delinian
Ltd. (financial information)
(May 2021-Present);
Executive
Vice President
and various other
roles, Legg Mason
& Co. (asset management)
(2010-2020);
Managing Director,
Stifel Nicolaus
(2005-2010). |
88 |
Trustee
and Investment Committee
Member, Georgia Tech
Foundation (Since June 2019);
Trustee and Chair of Marketing
Committee, and Member
of Investment Committee,
Loyola Blakefield (Since
September 2017); Trustee,
MMI Gateway Foundation
(since September 2017);
Director and Investment
Committee Member,
Catholic Community
Foundation Board
(2012–2018); Director and
Investment Committee Member,
St. Ignatius Loyola Academy
(2011-2017). |
Kathleen
A. Dennis c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1953 |
Trustee |
Since August 2006 |
Chairperson
of the Governance
Committee
(since January
2021), Chairperson
of the Liquidity
and Alternatives
Sub-Committee
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
President, Cedarwood
Associates (mutual
fund and investment
management
consulting)
(since July 2006);
formerly, Senior Managing
Director of Victory
Capital Management
(1993-2006). |
87 |
Board
Member, University of Albany
Foundation (2012-present);
Board Member, Mutual
Funds Directors Forum
(2014-present); Director
of various non-profit organizations. |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held by Independent
Trustee During Past
5 Years** |
Nancy
C. Everett c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1955 |
Trustee |
Since January 2015 |
Chairperson
of the Equity
Investment Committee
(since January
2021); Director
or Trustee of various
Morgan Stanley Funds
(since January 2015);
Chief Executive Officer,
Virginia Commonwealth
University
Investment Company
(since November
2015); Owner,
OBIR, LLC (institutional
investment
management
consulting)
(since June 2014);
formerly, Managing
Director, BlackRock,
Inc. (February
2011-December
2013) and Chief
Executive Officer,
General Motors
Asset Management
(a/k/a Promark
Global Advisors,
Inc.) (June 2005-May
2010). |
88 |
Formerly,
Member of Virginia Commonwealth
University School
of Business Foundation
(2005-2016); Member
of Virginia Commonwealth
University Board
of Visitors (2013-2015);
Member of Committee
on Directors for Emerging
Markets Growth Fund,
Inc. (2007-2010); Chairperson
of Performance Equity
Management, LLC (2006-2010);
and Chairperson,
GMAM Absolute
Return Strategies Fund,
LLC (2006-2010). |
Eddie
A. Grier c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1955 |
Trustee |
Since
February
2022 |
Dean,
Santa Clara University
Leavey School
of Business (since
July 2021); Dean,
Virginia Commonwealth
University
School of Business
(2010-2021); President
and various other
roles, Walt Disney
Company (entertainment
and media)
(1981-2010). |
88 |
Director,
Witt/Kieffer, Inc. (executive
search) (since 2016);
Director, NuStar GP, LLC
(energy) (since August 2021);
Director, Sonida Senior
Living, Inc. (residential community
operator) (2016-2021);
Director, NVR, Inc. (homebuilding)
(2013-2020); Director,
Middleburg Trust Company
(wealth management)
(2014-2019); Director,
Colonial Williamsburg
Company (2012-2021);
Regent, University
of Massachusetts Global
(since 2021); Director and
Chair, ChildFund International
(2012-2021); Trustee,
Brandman University (2010-2021);
Director, Richmond
Forum (2012-2019). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held by Independent
Trustee During Past
5 Years** |
Jakki
L. Haussler c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1957 |
Trustee |
Since January 2015 |
Chairperson
of the Audit
Committee (since
January 2023) and
Director or Trustee of
various Morgan Stanley
Funds (since January
2015); Chairman,
Opus Capital
Group (since 1996);
formerly, Chief Executive
Officer, Opus
Capital Group (1996-2019);
Director, Capvest
Venture Fund, LP
(May 2000-December
2011); Partner,
Adena Ventures,
LP (July 1999-December
2010); Director,
The Victory Funds
(February 2005-July
2008). |
88 |
Director,
Vertiv Holdings Co. (VRT)
(since August 2022); Director
of Cincinnati Bell Inc.
and Member, Audit Committee
and Chairman, Governance
and Nominating Committee
(2008-2021); Director
of Service Corporation
International and Member,
Audit Committee and
Investment Committee; Director,
Barnes Group Inc. (since
July 2021); Director of Northern
Kentucky University Foundation
and Member, Investment
Committee; Member
of Chase College of Law
Center for Law and Entrepreneurship
Board of Advisors;
Director of Best Transport
(2005-2019); Director
of Chase College of Law
Board of Visitors; formerly,
Member, University of
Cincinnati Foundation Investment
Committee. |
Dr.
Manuel H. Johnson c/o
Johnson Smick International,
Inc. 220
I Street, NE Suite
200 Washington,
D.C. 20002 Birth
Year: 1949 |
Trustee |
Since July
1991 |
Senior
Partner, Johnson Smick
International, Inc.
(consulting firm); Chairperson
of the Fixed
Income, Liquidity
and Alternatives
Investment Committee
(since January
2021), Chairperson
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since July 1991);
Co-Chairman and
a founder of the Group
of Seven Council
(G7C) (international
economic commission);
formerly, Chairperson
of the Audit
Committee (July 1991-September
2006); Vice
Chairman of the Board
of Governors of the
Federal Reserve System
and Assistant Secretary
of the U.S. Treasury. |
87 |
Director
of NVR, Inc. (home construction). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held by Independent
Trustee During Past
5 Years** |
Michael
F. Klein c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1958 |
Trustee |
Since August 2006 |
Chairperson
of the Risk Committee
(since January
2021); Managing
Director, Aetos
Alternatives Management,
LP (since March
2000); Co-President,
Aetos Alternatives
Management,
LP (since January
2004) and Co-Chief
Executive Officer of
Aetos Alternatives Management,
LP (since August
2013); Chairperson
of the Fixed
Income Sub-Committee
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
formerly, Managing
Director, Morgan
Stanley & Co. Inc.
and Morgan Stanley
Dean Witter Investment
Management
and President,
various Morgan
Stanley Funds (June
1998-March 2000);
Principal, Morgan
Stanley & Co. Inc.
and Morgan Stanley
Dean Witter Investment
Management
(August 1997-December
1999). |
87 |
Director
of certain investment funds
managed or sponsored by
Aetos Alternatives Management,
LP; Director of Sanitized
AG and Sanitized Marketing
AG (specialty chemicals). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held by Independent
Trustee During Past
5 Years** |
Patricia
A. Maleski c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1960 |
Trustee |
Since January 2017 |
Director
or Trustee of various
Morgan Stanley Funds
(since January 2017);
Managing Director,
JPMorgan Asset
Management (2004-2016);
Oversight and
Control Head of Fiduciary
and Conflicts of
Interest Program (2015-2016);
Chief Control
Officer—Global
Asset Management
(2013-2015);
President, JPMorgan
Funds (2010-2013);
Chief Administrative
Officer (2004-2013);
various other
positions including
Treasurer and
Board Liaison (since
2001). |
88 |
Trustee
(since January 2022) and
Treasurer (since January 2023),
Nutley Family Service Bureau,
Inc. |
W.
Allen Reed c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1947 |
Chair
of the Board and Trustee |
Chair
of the Board since
August 2020 and Trustee
since August 2006 |
Chair
of the Boards of various
Morgan Stanley Funds
(since August 2020);
Director or Trustee
of various Morgan
Stanley Funds (since
August 2006); formerly,
Vice Chair of the
Boards of various Morgan
Stanley Funds (January
2020-August 2020);
President and Chief
Executive Officer of
General Motors Asset
Management; Chairman
and Chief Executive
Officer of the GM
Trust Bank and Corporate
Vice President
of General Motors
Corporation (August
1994-December
2005). |
87 |
Formerly,
Director of Legg Mason,
Inc. (2006-2019); and Director
of the Auburn University
Foundation (2010-2015). |
* |
This
is the earliest date the Trustee began
serving the Morgan Stanley Funds. Each Trustee serves
an indefinite term, until his or her successor is
elected. |
** |
This
includes any directorships at public companies and registered investment
companies held by the Trustee
at any time during the past five years. |
The
executive officers of the Trust, their birth years, addresses, positions held,
length of time served and their principal business occupations
during the past five years are shown below (as of January
1, 2024).
|
|
| |
Name,
Address and Birth Year
of Executive Officer |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s) During Past 5 Years |
John
H. Gernon 1585
Broadway New
York, NY 10036 Birth
Year: 1963 |
President
and Principal
Executive Officer |
Since
September 2013 |
President
and Principal Executive Officer of the Equity and Fixed Income Funds
and
the Morgan Stanley AIP Funds (since September 2013) and the Liquidity
Funds
and various money market funds (since May 2014) in the Fund Complex;
Managing
Director of the Adviser. |
|
|
| |
Name,
Address and Birth Year
of Executive Officer |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s) During Past 5 Years |
Deidre
A. Downes 1633
Broadway New
York, NY 10019 Birth
Year: 1977 |
Chief
Compliance Officer |
Since
November 2021 |
Managing
Director of the Adviser (since January 2024) and Chief Compliance
officer
of various Morgan Stanley Funds (since November 2021). Formerly,
Executive
Director of the Adviser (January 2021-January 2024) and Vice President
and
Corporate Counsel at PGIM and Prudential Financial (October 2016 –
December
2020). |
Francis
J. Smith 750
7th Ave New
York, NY 10019 Birth
Year: 1965 |
Treasurer
and Principal
Financial Officer |
Treasurer
since July 2003
and Principal Financial
Officer since September
2002 |
Managing
Director of the Adviser and various entities affiliated with the Adviser;
Treasurer
(since July 2003) and Principal Financial Officer of various Morgan
Stanley
Funds (since September 2002). |
Mary
E. Mullin 1633
Broadway New
York, NY 10019 Birth
Year: 1967 |
Secretary |
Since
June 1999 |
Managing
Director of the Adviser; Secretary of various Morgan Stanley Funds
(since
June 1999). |
Michael
J. Key 1585
Broadway New
York, NY 10036 Birth
Year: 1979 |
Vice
President |
Since
June 2017 |
Vice
President of the Equity and Fixed Income Funds, Liquidity Funds, various
money
market funds and the Morgan Stanley AIP Funds in the Fund Complex
(since
June 2017); Managing Director of the Adviser; Head of Product Development
for Equity and Fixed Income Funds (since August
2013). |
* |
This
is the earliest date the Officer began serving the Morgan Stanley Funds.
Each Officer serves an indefinite term, until his or her successor is
elected. |
It
is a policy of the Trust’s Board that each Trustee shall invest in any
combination of the Morgan Stanley Funds that the Trustee determines
meets his or her own specific investment objectives, without requiring any
specific investment in any particular Fund.
For
each Trustee, the dollar range of equity securities beneficially owned by the
Trustee in the
Funds and in the Family of Investment
Companies (Family of Investment Companies includes all of the registered
investment companies advised by the Adviser and
Morgan Stanley AIP GP LP), which may include, for Independent Trustees,
shares (if any) deemed to be beneficially owned through
a deferred compensation plan, as of December 31, 2023 is set forth in the table
below.
|
| |
Name
of Trustee |
Dollar
Range of Equity Securities in the Funds (as
of December 31, 2023) |
Aggregate
Dollar Range of Equity Securities in All Registered
Investment Companies Overseen by Trustee
in Family of Investment Companies (as of December
31, 2023) |
Independent: |
|
|
Frank
L. Bowman |
1
|
Over
$100,000 |
Frances
L. Cashman |
1
|
Over
$100,000 |
Kathleen
A. Dennis |
None |
Over
$100,000 |
Nancy
C. Everett |
None |
Over
$100,000 |
Eddie
A. Grier |
None |
None |
Jakki
L. Haussler |
1
|
Over
$100,000 |
Manuel
H. Johnson |
1
|
Over
$100,000 |
Michael
F. Klein |
None |
Over
$100,000 |
Patricia
A. Maleski |
1
|
Over
$100,000 |
W.
Allen Reed |
1
|
Over
$100,000 |
1 |
Frank
L. Bowman—Discovery Portfolio ($50,001 - $100,000); Frances L.
Cashman—Ultra-Short Income Portfolio (over $100,000); Jakki L.
Haussler—Ultra-Short
Income Portfolio (over $100,000); Manuel H. Johnson—Short Duration Income
Portfolio (over $100,000); Michael F. Klein—High Yield Portfolio (over
$100,000);
Patricia A. Maleski—Ultra-Short Income Portfolio ($50,001 - $100,000); W.
Allen Reed—Discovery Portfolio ($50,001 - $100,000) and Global
Strategist
Portfolio (over $100,000). |
As
to each Independent Trustee and his or her immediate family members, no person
owned beneficially or of record securities of an investment
adviser or principal underwriter of the Trust, or a person (other than a
registered investment company) directly or indirectly
controlling, controlled by or under common control with an investment adviser or
principal underwriter of the Trust.
As
of January
1, 2024, the Trustees and officers of the Trust, as a group, owned less than 1%
of any class of the outstanding shares of beneficial
interest of each Fund.
Independent
Trustees and the Committees
Law
and regulation establish both general guidelines and specific duties for the
Independent Trustees. The Board has six committees: (1)
Audit Committee, (2) Governance Committee, (3) Compliance and Insurance
Committee, (4) Equity Investment Committee, (5)
Fixed Income, Liquidity and Alternatives Investment Committee and (6) Risk
Committee.
The
Independent Trustees are charged with recommending to the full Board approval of
management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing fund performance; checking on the
pricing
of portfolio securities, brokerage commissions, transfer agent costs and
performance and trading among funds in the same complex;
and approving fidelity bond and related insurance coverage and allocations, as
well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the board of
any fund that has a Rule 12b-1 plan of distribution.
The
Board of Trustees has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (the “1934 Act”). The Audit
Committee is charged with recommending to the full Board
the engagement or discharge of the Funds’
independent registered public accounting firm; directing investigations into
matters within
the scope of the independent registered public accounting firm’s duties,
including the power to retain outside specialists; reviewing
with the independent registered public accounting firm the audit plan and
results of the auditing engagement; approving professional
services provided by the independent registered public accounting firm and other
accounting firms prior to the performance
of the services; reviewing the independence of the independent registered public
accounting firm; considering the range of
audit and non-audit fees; reviewing the adequacy of the Trust’s system of
internal controls; and reviewing the valuation process. The
Trust has adopted a formal, written Audit Committee Charter.
The
members of the Audit Committee of the Trust are Nancy C. Everett, Eddie A.
Grier, and Jakki L. Haussler. None of the members
of the Trust’s Audit Committee is an “interested person,” as defined under the
1940 Act, of the Trust (with such disinterested
Trustees being “Independent Trustees” or individually, an “Independent
Trustee”). Each Independent Trustee is also “independent”
from the Trust under the listing standards of the NYSE. The Chairperson of the
Audit Committee of the Trust is Jakki
L. Haussler.
The
Board of Trustees of the Trust also has a Governance Committee. The Governance
Committee identifies individuals qualified to serve
as Independent Trustees on the Trust’s Board and on committees of such Board and
recommends such qualified individuals for nomination
by the Trust’s Independent Trustees as candidates for election as Independent
Trustees, advises the Trust’s Board with respect
to Board composition, procedures and committees, develops and recommends to the
Trust’s Board a set of corporate governance
principles applicable to the Trust, monitors and makes recommendations on
corporate governance matters and policies and
procedures of the Trust’s Board of Trustees and any Board committees and
oversees periodic evaluations of the Trust’s Board and
its committees. The members of the Governance Committee of the Trust are
Kathleen A. Dennis, Manuel H. Johnson, Michael F.
Klein, Patricia A. Maleski and W. Allen Reed, each of whom is an Independent
Trustee. In addition, W. Allen Reed (as Chair of the
Morgan Stanley Funds) periodically may attend other operating committee
meetings. The Chairperson of the Governance Committee
is Kathleen A. Dennis.
The
Trust does not have a separate nominating committee. While the Trust’s
Governance Committee recommends qualified candidates
for nominations as Independent Trustees, the Board of Trustees of the Trust
believes that the task of nominating prospective
Independent Trustees is important enough to require the participation of all
current Independent Trustees, rather than a separate
committee consisting of only certain Independent Trustees. Accordingly, all the
Independent Trustees participate in the selection
and nomination of candidates for election as Independent Trustees for the Trust.
Persons recommended by the Trust’s Governance
Committee as candidates for nomination as Independent Trustees shall possess
such experience, qualifications, attributes,
skills and diversity so as to enhance the Board’s ability to manage and direct
the affairs and business of the Trust, including,
when applicable, to enhance the ability of committees of the Board to fulfill
their duties and/or to satisfy any independence
requirements imposed by law, regulation or any listing requirements of the NYSE.
While the Independent Trustees of the
Trust expect to be able to continue to identify from their own resources an
ample number of qualified candidates for the Trust’s Board
as they deem appropriate, they will consider nominations from shareholders to
the Board. Nominations from shareholders should
be in writing and sent to the Independent Trustees as described below under the
caption “Shareholder Communications.”
The
Board formed the Compliance and Insurance Committee to address insurance
coverage and oversee the compliance function for the
Trust and the Board. The Compliance and Insurance Committee consists of Frank L.
Bowman, Kathleen A. Dennis and Patricia A.
Maleski, each of whom is an Independent Trustee. The Chairperson of the
Compliance and Insurance Committee is Frank L. Bowman.
The
Equity Investment Committee and the Fixed Income, Liquidity and Alternatives
Investment Committee oversee the Trust’s portfolio
investment process and review the performance of the Trust’s investments. The
Equity Investment Committee and the Fixed
Income, Liquidity and Alternatives Investment Committee also recommend to the
Board to approve or renew the Trust’s Investment
Advisory, Sub-Advisory and Administration Agreements. Each Investment Committee
focuses on the Trust’s primary areas
of investment, namely equities, fixed income, liquidity and alternatives.
Kathleen A. Dennis, Nancy C. Everett, Eddie A. Grier, Jakki
L. Haussler and Michael F. Klein are members of the Equity Investment Committee.
The Chairperson of the Equity Investment
Committee is Nancy C. Everett. Frank L. Bowman, Frances L. Cashman, Manuel H.
Johnson, and Patricia A. Maleski are
members of the Fixed Income, Liquidity and Alternatives Investment Committee.
The Chairperson of the Fixed Income, Liquidity
and Alternatives Investment Committee is Manuel H. Johnson.
The
Risk Committee assists the Board in connection with the oversight of the Trust’s
risks, including investment risks, operational risks
and risks posed by the Trust’s service providers as well as the effectiveness of
the guidelines, policies and processes for monitoring
and mitigating such risks. The members of the Risk Committee of the Trust are
Frances L. Cashman, Manuel H. Johnson,
Michael F. Klein and W. Allen Reed, each of whom is an Independent Trustee. The
Chairperson of the Risk Committee is Michael
F. Klein.
During
the Trust’s fiscal year ended October
31, 2023, the Board of Trustees held the following meetings:
| |
Board
of Trustees/Committee/Sub-Committee |
Number
of Meetings |
Board
of Trustees |
5 |
Audit
Committee |
5 |
Governance
Committee |
9 |
Compliance
and Insurance Committee |
4 |
Equity
Investment Committee |
5 |
Fixed
Income, Liquidity and Alternatives Investment Committee |
5 |
Risk
Committee |
4 |
Experience,
Qualifications and Attributes
The
Board has concluded, based on each Trustee’s experience, qualifications and
attributes that each Board member should serve as a Trustee.
Following is a brief summary of the information that led to and/or supports this
conclusion.
Mr.
Bowman has experience in a variety of business and financial matters through his
prior service as a Director or Trustee for various
funds in the Fund Complex, where he serves as Chairperson of the Compliance and
Insurance Committee (and formerly served
as Chairperson of the Insurance Sub-Committee of the Compliance and Insurance
Committee). Mr. Bowman also serves as a Director
of Naval and Nuclear Technologies LLP and Director Emeritus for the Armed
Services YMCA, and formerly served as a Director
of BP, plc. Mr. Bowman serves as Chairman of the Board of Trustees of the
Fairhaven United Methodist Church. Mr. Bowman
is also a member of the National Security Advisory Council of the Center for
U.S. Global Engagement, a former member of the
CNA Military Advisory Board and a member of the Dolphin Scholarship Foundation
Advisory Board. Mr. Bowman retired as an Admiral
in the U.S. Navy after serving over 38 years on active duty including eight
years as Director of the Naval Nuclear Propulsion Program
in the Department of the Navy and the U.S. Department of Energy (1996-2004).
Additionally, Mr. Bowman served as the U.S.
Navy’s Chief of Naval Personnel (1994-1996), where he was responsible for the
planning and programming of all manpower, personnel,
training and education resources for the U.S. Navy and on the Joint Staff as
Director of Political Military Affairs (1992-1994).
In addition, Mr. Bowman served as President and Chief Executive Officer of the
Nuclear Energy Institute. Mr. Bowman has received
such distinctions as a knighthood as Honorary Knight Commander of the Most
Excellent Order of the British Empire and the
Officier de l’Ordre National du Mérite from the French Government and was
elected to the National Academy of Engineering (2009).
He is President of the consulting firm Strategic Decisions, LLC.
With
more than 30 years of experience in the financial services industry, Ms. Cashman
possesses valuable insights and expertise regarding
governance, marketing, communications, and strategy. Ms. Cashman is Chief
Executive Officer of the Asset Management Division
of Delinian Limited. Prior to that, Ms. Cashman spent over 20 years at Legg
Mason & Co., ultimately serving as Executive Vice
President and Global Head of Marketing and Communications. She has gained
valuable experience as Director of two investment
management entities and as a distribution leader reporting to boards of other
mutual funds. In addition, Ms. Cashman also
serves as Trustee for the Georgia Tech Foundation and the MMI Gateway
Foundation.
Ms.
Dennis has over 25 years of business experience in the financial services
industry and related fields including serving as a Director or
Trustee of various other funds in the Fund Complex, where she serves as
Chairperson of the Governance Committee. Ms. Dennis possesses
a strong understanding of the regulatory framework under which investment
companies must operate based on her years of service
to this Board and her position as Senior Managing Director of Victory Capital
Management.
Ms.
Everett has over 35 years of experience in the financial services industry,
including roles with both registered investment companies
and registered investment advisers. Ms. Everett serves as the Chairperson of the
Equity Investment Committee. By serving on
the boards of other registered funds, such as GMAM Absolute Return Strategies
Fund, LLC and Emerging Markets Growth Fund,
Inc., Ms. Everett has acquired significant experience with financial,
accounting, investment and regulatory matters. Ms. Everett
is also a Chartered Financial Analyst.
During
the course of a career spanning more than 40 years in both academia and
industry, Mr. Grier has gained substantial experience
in management, operations, finance, marketing, and oversight. Mr. Grier is the
Dean of Santa Clara University’s Leavey School
of Business. Prior to that, Mr. Grier was the Dean of the Virginia Commonwealth
University School of Business. Before joining
academia, Mr. Grier spent 29 years at the Walt Disney Company where he served in
various leadership roles, including as President
of the Disneyland Resort. Mr. Grier also gained substantial oversight experience
serving on the boards of Sonia Senior
Living,
Inc. (formerly, Capital Senior Living Corporation), NVR, Inc., and Middleburg
Trust Company. In addition, Mr. Grier currently
serves as a Director of Witt/Kieffer, Inc., Director of NuStar GP, LLC, Director
of the Colonial Williamsburg Company, and
Regent of University of Massachusetts Global. Mr. Grier is also a Certified
Public Accountant.
With
more than 30 years of experience in the financial services industry, including
her years of entrepreneurial and managerial experience
in the development and growth of Opus Capital Group, Ms. Haussler brings a
valuable perspective to the Trust’s Board, where
she serves as the Chairperson of the Audit Committee. Through her role at Opus
Capital and her service as a director of several venture
capital funds and other boards, Ms. Haussler has gained valuable experience
dealing with accounting principles and evaluating
financial results of large corporations. She is a certified public accountant
(inactive) and a licensed attorney in the State of Ohio
(inactive). The Board has determined that Ms. Haussler is an “audit committee
financial expert” as defined by the SEC.
In
addition to his tenure as a Director or Trustee of various other funds in the
Fund Complex, where he currently serves as the Chairperson
of the Fixed Income, Liquidity and Alternatives Investment Committee and
formerly served as Chairperson of the Audit Committee,
Dr. Johnson has also served as an officer or a board member of numerous
companies for over 20 years. These positions included
Co-Chairman and a founder of the Group of Seven Council, Director of NVR, Inc.,
Director of Evergreen Energy and Director
of Greenwich Capital Holdings. He also has served as Vice Chairman of the Board
of Governors of the Federal Reserve System
and Assistant Secretary of the U.S. Treasury. In addition, Dr. Johnson also
served as Chairman of the Financial Accounting Foundation,
which oversees the Financial Accounting Standards Board, for seven
years.
Through
his prior positions as a Managing Director of Morgan Stanley & Co. Inc. and
Morgan Stanley Dean Witter Investment Management
and as President and a Trustee of the Morgan Stanley Institutional Funds, Mr.
Klein has experience in the management and
operation of registered investment companies, enabling him to provide management
input and investment guidance to the Board.
Mr. Klein is the Chairperson of the Risk Committee. Mr. Klein also has extensive
experience in the investment management industry
based on his current positions as Managing Director and Co-Chief Executive and
Co-President of Aetos Alternatives Management,
LP and as a Director of certain investment funds managed or sponsored by Aetos
Alternatives Management, LP. In addition,
he also has experience as a member of the board of other funds in the Fund
Complex.
Ms.
Maleski has over 30 years of experience in the financial services industry and
extensive experience with registered investment companies.
Ms. Maleski began her career as a certified public accountant at Price
Waterhouse LLP (“PW”) and was a member of PW’s
Investment Company Practice. After a brief stint at the Bank of New York, Ms.
Maleski began her affiliation with the JPMorgan
Funds, at the Pierpont Group and then with J.P. Morgan Investment Management
Inc. From 2001-2013, Ms. Maleski held
roles with increasing responsibilities, from Vice President and Board Liaison,
Treasurer and Principal Financial Officer, Chief Administrative
Officer and finally President and Principal Executive Officer for the JPMorgan
Fund complex. Between 2013 and 2016,
Ms. Maleski served as Global Head of Oversight and Control of JPMorgan Asset
Management and then as Head of JPMorgan Chase’s
Fiduciary and Conflicts of Interest Program. Ms. Maleski has extensive
experience in the management and operation of funds in
addition to regulatory and accounting and valuation matters.
Mr.
Reed has experience on investment company boards and is experienced with
financial, accounting, investment and regulatory matters
through his prior service as a Director of iShares, Inc. and his service as
Chair of the Board and as Trustee or Director of other
funds in the Fund Complex. Mr. Reed also gained substantial experience in the
financial services industry through his prior positions
as a Director of Legg Mason, Inc. and as President and CEO of General Motors
Asset Management.
The
Trustees’ principal occupations and other relevant professional experience
during the past five years or more are shown in the above
tables.
The
Board has adopted a policy that Board members are expected to retire no later
than the end of the year they reach the age of 78. The
Governance Committee has discretion to grant waivers from this retirement policy
under special circumstances, including for Board
members to continue serving in Chair or Chair-related roles beyond the
retirement age. Current Board members who have reached
the age of 75 as of January 1, 2021, are grandfathered as exceptions to the
retirement policy and may continue to serve on the
Board until the end of the year in which they turn 80 years of age.
Advantages
of Having the Same Individuals as Trustees for the Morgan Stanley
Funds
The
Independent Trustees and the Funds’ management believe that having the same
Independent Trustees for each of the Morgan Stanley
Funds avoids the duplication of effort that would arise from having different
groups of individuals serving as Independent Trustees
for each of the
Funds or even of sub-groups of funds. They believe that having the same
individuals serve as Independent Trustees
of all the Morgan Stanley Funds tends to increase their knowledge and expertise
regarding matters which affect the Fund Complex
generally and enhances their ability to negotiate on behalf of each fund with
the fund’s service providers. This arrangement also
precludes the possibility of separate groups of Independent Trustees arriving at
conflicting decisions regarding operations and management
of the
Funds and avoids the cost and confusion that would likely ensue. Finally, having
the same Independent Trustees serve
on all fund boards enhances the ability of each fund to obtain, at modest cost
to each separate fund, the services of Independent Trustees
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Morgan Stanley Funds.
Trustee
and Officer Indemnification
The
Trust’s Declaration of Trust provides that no Trustee, officer, employee or
agent of the Trust is liable to the Trust or to a shareholder,
nor is any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Trust, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her
or its duties. It also provides that all third persons shall look solely to
Trust property for satisfaction of claims arising in connection
with the affairs of the Trust. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee
or agent is entitled to be indemnified against all liability in connection with
the affairs of the Trust.
Shareholder
Communications
Shareholders
may send communications to the Trust’s Board of Trustees. Shareholders should
send communications intended for the Trust’s
Board by addressing the communications directly to the Board (or individual
Board members) and/or otherwise clearly indicating
in the salutation that the communication is for the Board (or individual Board
members) and by sending the communication
to either the Trust’s office or directly to such Board member(s) at the address
specified for each Trustee previously noted.
Other shareholder communications received by the Trust not directly addressed
and sent to the Board will be reviewed and generally
responded to by management, and will be forwarded to the Board only at
management’s discretion based on the matters contained
therein.
Compensation
Each
Trustee
(except for the Chair of the Boards) receives an annual retainer fee of $335,000
for serving as a Trustee
of the Morgan Stanley
Funds.
The
Audit Committee Chairperson receives an additional annual retainer fee of
$80,000, the Risk Committee Chairperson, the Equity
Investment Committee Chairperson, Fixed Income, Liquidity and Alternatives
Investment Committee Chairperson and Governance
Committee Chairperson each receive an additional annual retainer fee of $50,000
and the Compliance and Insurance Committee
Chairperson receives an additional annual retainer fee of $65,000. The aggregate
compensation paid to each Trustee
is paid
by the Morgan Stanley Funds, and is allocated on a pro rata basis among each of
the operational funds of the Morgan Stanley Funds
based on the relative net assets of each of the Funds. The Chair of the Boards
receives a total annual retainer fee of $630,000 for
his services and for administrative services provided to each
Board.
The
Trust
also reimburses such Trustees
for travel and other out-of-pocket expenses incurred by them in connection with
attending such
meetings. Trustees
of the Trust
who are employed by the Adviser receive no compensation or expense reimbursement
from the Trust
for their services as a Trustee.
Effective
April 1, 2004, the Trust
began a Deferred Compensation Plan (the “DC Plan”), which allows each
Trustee
to defer payment
of all, or a portion, of the fees he or she receives for serving on the Board of
Trustees
throughout the year. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan
Stanley Funds that are offered as investment options under the DC Plan. At the
Trustee’s
election, distributions are either in one
lump sum payment, or in the form of equal annual installments over a period of
five years. The rights of an eligible Trustee
and the
beneficiaries to the amounts held under the DC Plan are unsecured and such
amounts are subject to the claims of the creditors of the
Trust.
Prior
to April 1, 2004, the Trust
maintained a similar Deferred Compensation Plan (the “Prior DC Plan”), which
also allowed each Independent
Trustee
to defer payment of all, or a portion, of the fees he or she received for
serving on the Board of Trustees
throughout
the year. Generally, the DC Plan amends and supersedes the Prior DC Plan and all
amounts payable under the Prior DC Plan
are now subject to the terms of the DC Plan (except for amounts paid during the
calendar year 2004, which remain subject to the
terms of the Prior DC Plan).
The
following table shows aggregate compensation payable to each of the Trust’s
Trustees
from the Trust
for the fiscal year ended September
30, 2023 and the aggregate compensation payable to each of the Trust’s
Trustees
by the Fund Complex (which includes all
of the Morgan Stanley Funds) for the calendar year ended December
31, 2023.
|
| |
COMPENSATION1
|
Name
of Trustee |
Aggregate
Compensation From
the Trust2
|
Total
Compensation From
Trust and Fund Complex
Paid to the Trustees3
|
Frank
L. Bowman |
$20,121 |
$400,000 |
Frances
L. Cashman2,3
|
16,841 |
335,000 |
Kathleen
A. Dennis |
19,367 |
385,000 |
Nancy
C. Everett |
19,348 |
385,000 |
Eddie
A. Grier |
16,836 |
335,000 |
Jakki
L. Haussler |
20,856 |
415,000 |
|
| |
COMPENSATION1 |
Name
of Trustee |
Aggregate
Compensation From
the Trust2 |
Total
Compensation From
Trust and Fund Complex
Paid to the Trustees3 |
Manuel
H. Johnson |
19,367 |
385,000 |
Joseph
J. Kearns2,3,4
|
16,840 |
335,000 |
Michael
F. Klein2,3
|
19,366 |
385,000 |
Patricia
Maleski |
16,836 |
335,000 |
W.
Allen Reed3
|
31,690 |
630,000 |
1 |
Includes
all amounts paid for serving as director/trustee of the funds in the Fund
Complex, as well as serving as Chair of the Boards or a Chairperson of a
Committee. |
2 |
The
amounts shown in this column represent the aggregate compensation before
deferral with respect to the Trust’s fiscal year. The following Trustees
deferred compensation
from the Trust during the fiscal year ended September 30, 2023:
Ms. Cashman, $8,417, Mr. Kearns $8,041 and Mr. Klein
$19,366. |
3 |
The
amounts shown in this column represent the aggregate compensation paid by
all of the funds in the Fund Complex as of December 31, 2023 before
deferral by
the Trustees under the DC Plan. As of December 31, 2023, the value
(including interest) of the deferral accounts across the Fund Complex for
Ms. Cashman and
Messrs. Kearns, Klein and Reed pursuant to the deferred compensation plan
was $173,673, $1,236,375, $3,928,291 and $4,422,691 respectively. Because
the funds
in the Fund Complex have different fiscal year ends, the amounts shown in
this column are presented on a calendar year
basis. |
4 |
Mr.
Kearns retired from the Board of Trustees on December 31,
2023. |
Prior
to December 31, 2003, 49 of the Morgan Stanley Funds (the “Adopting Funds”) had
adopted a retirement program under which
an Independent Trustee who retired after serving for at least five years as an
Independent Trustee of any such fund (an “Eligible
Trustee”) would have been entitled to retirement payments based on factors such
as length of service, upon reaching the eligible
retirement age. On December 31, 2003, the amount of accrued retirement benefits
for each Eligible Trustee was frozen, and will
be payable, together with a return of 8% per annum, at or following each such
Eligible Trustee’s retirement as shown in the table below.
The
following table illustrates the retirement benefits accrued to the Trust’s
Independent Trustees by the Trust for the period ended September
30, 2023 and by the Adopting Funds for the calendar year ended December
31, 2023, and the estimated retirement benefits
for the Independent Trustees from the Adopting Funds for each calendar year
following retirement. Only the Trustees listed below
participated in the retirement program.
|
|
|
| |
|
Retirement
Benefits Accrued as Trust Expenses |
Estimated
Annual Benefits Upon Retirement1
|
Name
of Independent Trustee |
By
the Trust2,3
|
By
all Adopting Funds3
|
From
the Trust2
|
From
all Adopting Funds |
Manuel
H. Johnson |
$(1,623) |
$(19,083) |
$5,711 |
$55,816 |
1 |
Total
compensation accrued under the retirement plan, together with a return of
8% per annum, will be paid annually commencing upon retirement and
continuing
for the remainder of the Trustee’s life. |
2 |
Corporate
Bond Portfolio, Global Strategist Portfolio, Discovery Portfolio and Short
Duration Income Portfolio |
3 |
Mr.
Johnson’s retirement expenses are negative due to the fact that his
retirement date has been extended and therefore his expenses have been
over-accrued. |
Code
of Ethics
The
Trust, the Adviser and the Distributor have each adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 Act. The Codes
of Ethics are designed to detect and prevent improper personal trading. The
Codes of Ethics permit personnel subject to the Codes
of Ethics to invest in securities, including securities that may be purchased,
sold or held by a Fund, subject to a number of restrictions
and controls, including prohibitions against purchases of securities in an
initial public offering and a preclearance requirement
with respect to personal securities transactions.
INVESTMENT
ADVISORY AND OTHER SERVICES
Adviser
The
Adviser is a wholly-owned subsidiary of Morgan Stanley (NYSE: “MS”), a
preeminent global financial services firm engaged in securities
trading and brokerage activities, as well as providing investment banking,
research and analysis, financing and financial advisory
services. The principal offices of Morgan Stanley are located at 1585 Broadway,
New York, NY 10036, and the principal offices
of the Adviser are located at 1585 Broadway, New York, NY 10036. As of December
31, 2023, the Adviser, together with its affiliated
asset management companies, had approximately $1.5
trillion in assets under management or supervision.
The
Adviser provides investment advice and portfolio management services pursuant to
an Investment Advisory Agreement (the “Agreement”)
and, subject to the supervision of the Trust’s Board of Trustees, makes or
oversees each of the Fund’s day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Fund’s investments. Pursuant
to the Agreement, the Adviser is entitled to receive from each class of shares
of each Fund an annual management fee, payable
quarterly, equal to the percentage of average daily net assets set forth in the
below table reflecting the contractual advisory fee
and
the maximum expense ratios for each Fund. The Adviser has agreed to a reduction
in the fees payable to it and to reimburse the Funds,
if necessary, if such fees would cause the total annual operating expenses of
each such Fund to exceed the percentage of average
daily net assets set forth in the below table reflecting the contractual
advisory fee and the maximum expense ratios for each Fund.
In determining the actual amount of fee waivers and/or expense reimbursements
for a Fund, if any, the Adviser excludes from total
annual operating expenses acquired fund fees and expenses (as applicable),
certain investment related expenses, taxes, interest and
other extraordinary expenses (including litigation). The fee waivers and/or
expense reimbursements for a Fund will continue for at
least one year from the date of the applicable Prospectus or until such time as
the Trust’s Board of Trustees acts to discontinue all or
a portion of such waivers and/or reimbursements when it deems such action is
appropriate. The Adviser may make additional voluntary
fee waivers and/or expense reimbursements. The Adviser may discontinue these
voluntary fee waivers and/or expense reimbursements
at any time in the future. With respect to the Ultra-Short Income Portfolio, the
Distributor, Adviser and Administrator
may also waive distribution fees, advisory fees, administration fees and/or
reimburse expenses to enable the Fund to maintain
a minimum level of daily net investment income. The Adviser, Distributor and
Administrator, as applicable, may discontinue
the voluntary fee waivers and/or expense reimbursements at any time in the
future.
The
Global Strategist Portfolio may gain exposure to bitcoin and the
commodities markets by investing up to 25% of its total assets in
a wholly-owned subsidiary of the Global Strategist Portfolio organized as a
company under the laws of the Cayman Islands. The Discovery
Portfolio may gain exposure to bitcoin and other assets by investing up to 25%
of its total assets in a wholly-owned subsidiary
of the Discovery Portfolio organized as a company under the laws of the Cayman
Islands. Each Subsidiary has entered into a
separate contract with the Adviser whereby the Adviser provides investment
advisory and other services to that Subsidiary. In consideration
of these services, each Subsidiary will pay to the Manager at the end of each of
the Subsidiary’s fiscal quarters, an advisory
fee calculated by applying a quarterly rate, based on the annual percentage rate
of 0.05%, to the average daily net assets of the
Subsidiary for the quarter. The Adviser will waive or credit such amounts
against the fees payable to the Adviser by the Funds.
The
Discovery Portfolio and the Bitcoin Subsidiary have entered into contracts
for the provision of custody and audit services with service
providers. The Global Strategist Portfolio and the Global Strategist Subsidiary
have also entered into contracts for the provision
of custody and audit services with service providers.
The Bitcoin
Subsidiary is managed pursuant to compliance policies and procedures that are
the same, in all material respects, as the policies
and procedures adopted by Discovery Portfolio. As a result, the Adviser, in
managing the Bitcoin Subsidiary’s portfolio, is subject
to the same investment policies and restrictions that apply to the management of
the Discovery Portfolio (as discussed above, the
Bitcoin Subsidiary may invest in cash settled bitcoin futures or Bitcoin ETFs)
and, in particular, to the requirements relating to portfolio
leverage, liquidity, brokerage and the timing and method of valuation of the
Bitcoin Subsidiary’s portfolio investments and shares
of the Bitcoin Subsidiary. Certain of these policies and restrictions are
described in detail in this SAI. The Global Strategist Subsidiary
is managed pursuant to compliance policies and procedures that are the same, in
all material respects, as the policies and procedures
adopted by the Global Strategist Portfolio. As a result, the Adviser, in
managing the Global Strategist Subsidiary’s portfolio,
is subject to the same investment policies and restrictions that apply to the
management of the Global Strategist Portfolio (as
discussed above, the Global Strategist Subsidiary may invest in cash settled
bitcoin futures or commodity-related instruments) and,
in particular, to the requirements relating to portfolio leverage, liquidity,
brokerage and the timing and method of valuation of the
Global Strategist Subsidiary’s portfolio investments and shares of the Global
Strategist Subsidiary. Certain of these policies and restrictions
are described in detail in this SAI.
The
consolidated financial statements of each Subsidiary are included in the Annual
Report and Semi-Annual Report of the Funds provided
to shareholders.
The
following table reflects for each Fund (i) the advisory fee paid; and (ii) the
advisory fee waived and/or affiliated rebates for each of
the past three fiscal years ended September 30, 2021,
2022 and 2023.
|
|
|
|
|
|
|
|
| |
|
Advisory
Fees Paid (After
Fee Waivers and or
Affiliated Rebates) |
Advisory
Fees Waived |
Affiliated
Rebates |
Fund |
2021 (000) |
2022 (000) |
2023 (000) |
2021 (000) |
2022 (000) |
2023 (000) |
2021 (000) |
2022 (000) |
2023 (000) |
Core
Plus Fixed
Income |
$2,197 |
$1,748 |
$1,050 |
$1,466 |
$1,282 |
$1,019 |
$123 |
$66 |
$112 |
Corporate
Bond |
743 |
580 |
351 |
0 |
0 |
118 |
3 |
2 |
3 |
Discovery |
23,352 |
11,915 |
5,042 |
0 |
0 |
0 |
228 |
37 |
44 |
Dynamic
Value |
0 |
0 |
109 |
10 |
104 |
301 |
@ |
4 |
13 |
Global
Strategist |
1,983 |
2,176 |
2,022 |
0 |
5 |
0 |
40 |
79 |
108 |
High
Yield |
612 |
539 |
205 |
526 |
494 |
534 |
1 |
1 |
1 |
|
|
|
|
|
|
|
|
| |
|
Advisory
Fees Paid (After
Fee Waivers and or
Affiliated Rebates) |
Advisory
Fees Waived |
Affiliated
Rebates |
Fund |
2021 (000) |
2022 (000) |
2023 (000) |
2021 (000) |
2022 (000) |
2023 (000) |
2021 (000) |
2022 (000) |
2023 (000) |
Short
Duration
Income |
385 |
377 |
237 |
594 |
563 |
551 |
6 |
6 |
9 |
Short
Duration
Municipal
Income |
0 |
0 |
0 |
461 |
292 |
362 |
0 |
0 |
@ |
Ultra-Short
Income |
14,139 |
12,011 |
16,910 |
18,476 |
10,500 |
5,614 |
0 |
0 |
0 |
|
@
Amount is less than $500. |
The
following table reflects the contractual advisory fee and the maximum expense
ratios for each Fund.
|
|
|
|
|
|
|
| |
Fund |
Contractual
Rate of Advisory
Fees |
Expense
Cap Class
I |
Expense
Cap Class
A |
Expense
Cap Class
L |
Expense
Cap Class
C |
Expense
Cap
Class IR |
Expense
Cap Class
R6 |
Expense
Cap Institutional Class |
Core
Plus Fixed Income |
0.375%
of the portion of the
daily net assets not exceeding
$1 billion; and 0.300%
of the portion of the
daily net assets exceeding
$1 billion |
0.42% |
0.77% |
1.02% |
1.52% |
– |
0.37% |
– |
Corporate
Bond |
0.375% |
0.65% |
1.00% |
1.47% |
1.75% |
– |
– |
– |
Discovery |
0.50% |
0.80% |
1.15% |
1.65% |
1.90% |
– |
0.73% |
– |
Dynamic
Value |
0.35% |
0.55% |
0.90% |
– |
1.65% |
– |
0.50% |
– |
Global
Strategist |
0.45% |
0.74% |
1.09% |
1.59% |
1.84% |
– |
0.71% |
– |
High
Yield |
0.60% |
0.65% |
1.00% |
1.25% |
1.75% |
0.62% |
0.62% |
– |
Short
Duration Income |
0.20% |
0.30% |
0.55% |
0.80% |
1.30% |
– |
– |
– |
Short
Duration Municipal Income |
0.20% |
– |
0.35% |
– |
– |
0.25% |
– |
– |
Ultra-Short
Income |
0.20% |
– |
0.40% |
– |
– |
0.25% |
– |
0.30% |
The
Agreement continues for successive one year periods, only if each renewal is
specifically approved by an in-person vote of the Trust’s
Board, including the affirmative votes of a majority of the Trustees who are not
parties to the agreement or “interested persons”
(as defined in the 1940 Act) of any such party at a meeting called for the
purpose of considering such approval. In addition, the
question of continuance of the Agreement may be presented to the shareholders of
the Fund; in such event, continuance shall be effected
only if approved by the affirmative vote of a majority of the outstanding voting
securities of each Fund of the Trust. If the holders
of any Fund fail to approve the Agreement, the Adviser may continue to serve as
investment adviser to each Fund that approved
the Agreement, and to any Fund that did not approve the Agreement until new
arrangements have been made. The Agreement
is automatically terminated if assigned, and may be terminated by any Fund
without the payment of any penalty, at any time,
(1) by vote of a majority of the entire Board or (2) by vote of a majority of
the outstanding voting securities of the Trust on 60 days’
written notice to the Adviser or (3) by the Adviser without the payment of any
penalty, upon 90 days’ written notice to the Trust.
The
Trust bears all of its own costs and expenses, including but not limited to:
services of its independent accountants, its administrator
and dividend disbursing and transfer agent, legal counsel, taxes, insurance
premiums, costs incidental to meetings of its shareholders
and Trustees,
the cost of filing its registration statements under federal and state
securities laws, reports to shareholders, and
custodian fees. These Trust expenses are, in turn, allocated to each
Fund, based on their relative net assets. Each
Fund bears its own
advisory fees and brokerage commissions and transfer taxes in connection with
the acquisition and disposition of its investment securities.
Sub-Adviser
The
Adviser has entered into a Sub-Advisory Agreement with Morgan Stanley Investment
Management Limited, located at 25 Cabot Square,
Canary Wharf, London, E14 4QA, England (with respect to the Global Strategist
Portfolio). The Sub-Adviser is a wholly-owned
subsidiary of Morgan Stanley. The Sub-Adviser provides the Fund with investment
advisory services subject to the overall
supervision
of the Adviser and the Trust’s officers and Trustees. The Adviser pays the
Sub-Adviser on a monthly basis a portion of the
net advisory fees the Adviser receives from the Fund.
Principal
Underwriter
Morgan
Stanley Distribution, Inc., an indirect wholly-owned subsidiary of Morgan
Stanley, with its principal office at 1585
Broadway,
New York, NY 10036, distributes the shares of each Fund. Under the Distribution
Agreement, the Distributor, as agent of
the Trust, agrees to use its best efforts as sole distributor of each Fund’s
shares. The Distribution Agreement continues in effect so long
as such continuance is approved at least annually by the Trust’s Board,
including a majority of those Trustees who are not parties
to such Distribution Agreement nor interested persons of any such party. The
Distribution Agreement provides that each Fund
will bear the costs of the registration of its shares with the SEC and various
states and the printing of its prospectuses, statements
of additional information and reports to shareholders.
Fund
Administration
The
Adviser also provides administrative services to the Funds pursuant to an
Amended and Restated Administration Agreement dated
as of August 26, 2016 (the “Administration Agreement”). For its services under
the Administration Agreement, the Trust pays the
Adviser a monthly fee which on an annual basis equals 0.08% of the average daily
net assets of each Fund. The Adviser may compensate
other service providers for performing shareholder servicing and administrative
services.
For
the fiscal years ended September 30, 2021,
2022 and 2023, the Trust paid the following administrative fees
|
|
| |
|
Administrative
Fees Paid |
Fund |
2021 (000) |
2022 (000) |
2023 (000) |
Core
Plus Fixed Income |
$812 |
$660 |
$465 |
Corporate
Bond |
159 |
124 |
101 |
Discovery |
3,773 |
1,912 |
814 |
Dynamic
Value1
|
2 |
24 |
97 |
Global
Strategist |
360 |
402 |
379 |
High
Yield |
152 |
138 |
99 |
Short
Duration Income |
394 |
378 |
319 |
Short
Duration Municipal Income |
182* |
117** |
145 |
Ultra-Short
Income |
13,046 |
9,004 |
9,009 |
* |
The
administration fee paid reflects a waiver of approximately
$2,000. |
** |
The
administration fee paid reflects a waiver of less
than $500. |
1 |
The
Fund commenced operations on March 19, 2021. |
Sub-Administrator.
Under an agreement between the Administrator and State Street Bank and Trust
Company (“State Street”), State Street
provides certain administrative services to the Trust. For such services, the
Administrator pays State Street a portion of the administrative
fee the Administrator receives from the Trust. The Administrator supervises and
monitors the administrative and accounting
services provided by State Street. Their services are also subject to the
supervision of the officers and Board of Trustees of the
Trust.
Custodian
State
Street, located at One Lincoln Street, Boston, MA 02111-2101, serves as
custodian for the Funds. The Custodian holds cash, securities,
and other assets of the Funds as required by the 1940 Act.
Transfer
and Dividend Disbursing Agent
SS&C
GIDS, 2000 Crown Colony Drive, Quincy, MA 02169-0953, serves as the Funds’
transfer agent and dividend disbursing agent.
Co-Transfer
Agent
Eaton
Vance Management is the co-transfer agent with respect to Core Plus Fixed
Income, Corporate Bond, Discovery, Dynamic Value,
Global Strategist, High Yield and Short Duration Income Portfolios. Eaton Vance
Management is a registered transfer agent and
operates the Fund’s call center. In connection therewith, Eaton Vance Management
performs certain transfer agency services related
to processing and relaying purchase and redemption orders to SS&C GIDS, the
Funds’ transfer agent. The Funds will bear the
costs associated with Eaton Vance Management’s provision of these transfer
agency services. Morgan Stanley Services Company, Inc.
(“MSSCI”), 1585 Broadway, New York, NY 10036, is a registered transfer agent and
operates the Trust’s call center with respect to
the Ultra-Short Income and Short Duration Municipal Income Portfolios. In
connection therewith, MSSCI performs certain
transfer
agency services related to processing and relaying purchase and redemption
orders to SS&C GIDS, the Funds’ transfer agent. MSSCI
does not receive any direct compensation from the Funds for providing the call
center or the related transfer agency services.
Portfolio
Managers
Other
Accounts Managed by the Portfolio Managers
Because
the portfolio managers may manage assets for other investment companies, pooled
investment vehicles and/or other accounts (including
institutional clients, pension plans and certain high net worth individuals),
there may be an incentive to favor one client over
another resulting in conflicts of interest. For instance, the Adviser and/or
Sub-Adviser may receive fees from certain accounts that
are higher than the fee they receive from the Trust, or they may receive a
performance-based fee on certain accounts. In those instances,
the portfolio managers may have an incentive to favor the higher and/or
performance-based fee accounts over the Trust. In addition,
a conflict of interest could exist to the extent the Adviser and/or Sub-Adviser
have proprietary investments in certain accounts,
where portfolio managers have personal investments in certain accounts or when
certain accounts are investment options in the
Adviser’s and/or Sub-Adviser’s employee benefits and/or deferred compensation
plans. The portfolio manager may have an incentive
to favor these accounts over others. If the Adviser and/or Sub-Adviser manage
accounts that engage in short sales of securities
of the type in which the Trust invests, the Adviser and/or Sub-Adviser could be
seen as harming the performance of the Trust
for the benefit of the accounts engaging in short sales if the short sales cause
the market value of the securities to fall. The Adviser
and/or Sub-Adviser have adopted trade allocation and other policies and
procedures that they believe are reasonably designed to
address these and other conflicts of interest.
Portfolio
Manager Compensation Structure
Morgan
Stanley’s compensation structure is based on a total reward system of base
salary and incentive compensation, which is paid either
in the form of cash bonus, or for employees meeting the specified deferred
compensation eligibility threshold, partially as a cash
bonus and partially as mandatory deferred compensation. Deferred compensation
granted to Investment Management employees
are generally granted as a mix of deferred cash awards under the Investment
Management Alignment Plan (IMAP) and equity-based
awards in the form of stock units. The portion of incentive compensation granted
in the form of a deferred compensation
award and the terms of such awards are determined annually by the Compensation,
Management Development and Succession
Committee of the Morgan Stanley Board of Directors.
Base salary
compensation.
Generally, portfolio managers receive base salary compensation based on the
level of their position with the Adviser.
Incentive
compensation.
In addition to base compensation, portfolio managers may receive discretionary
year-end compensation.
Incentive
compensation may include:
■ |
A
mandatory program that defers a portion of incentive compensation into
restricted stock units or other awards based on Morgan
Stanley common stock or other plans that are subject to vesting and other
conditions. |
■ |
IMAP
is a cash-based deferred compensation plan designed to increase the
alignment of participants’ interests with the interests
of the Advisor’s clients. For eligible employees, a portion of their
deferred compensation is mandatorily deferred into
IMAP on an annual basis. Awards granted under IMAP are notionally invested
in referenced funds available pursuant to
the plan, which are funds advised by MSIM and its affiliates that are
investment advisers. Portfolio managers are required
to notionally invest a minimum of 40% of their account balance in the
designated funds that they manage and are included
in the IMAP notional investment fund
menu. |
■ |
Deferred
compensation awards are typically subject to vesting over a multi-year
period and are subject to cancellation through
the payment date for competition, cause (i.e., any act or omission that
constitutes a breach of obligation to the Company,
including failure to comply with internal compliance, ethics or risk
management standards, and failure or refusal
to perform duties satisfactorily, including supervisory and management
duties), disclosure of proprietary information,
and solicitation of employees or clients. Awards are also subject to
clawback through the payment date if an employee’s
act or omission (including with respect to direct supervisory
responsibilities) causes a restatement of the Firm’s consolidated
financial results, constitutes a violation of the Firm’s global risk
management principles, policies and standards,
or causes a loss of revenue associated with a position on which the
employee was paid and the employee operated
outside of internal control policies. |
MSIM
compensates employees based on principles of pay-for-performance, market
competitiveness and risk management. Eligibility for,
and the amount of any, discretionary compensation is subject to a
multi-dimensional process. Specifically, consideration is given to
one or more of the following factors, which can vary by portfolio management
team and circumstances:
■ |
Revenue
and profitability of the business and/or each fund/account managed by the
portfolio manager |
■ |
Revenue
and profitability of the Firm |
■ |
Return
on equity and risk factors of both the business units and Morgan
Stanley |
■ |
Assets
managed by the portfolio manager |
■ |
External
market conditions |
■ |
New
business development and business
sustainability |
■ |
Contribution
to client objectives |
■ |
Team,
product and/or MSIM and its affiliates that are investment advisers
(including Parametric) performance |
■ |
The
pre-tax investment performance of the funds/accounts managed by the
portfolio manager (which may, in certain cases, be measured
against the applicable benchmark(s) and/or peer group(s) over one, three
and five-year periods) |
■ |
Individual
contribution and performance |
Further,
the Firm’s Global Incentive Compensation Discretion Policy requires compensation
managers to consider only legitimate, business
related factors when exercising discretion in determining variable incentive
compensation, including adherence to Morgan Stanley’s
core values, conduct, disciplinary actions in the current performance year, risk
management and risk outcomes.
Other
Accounts Managed by Portfolio Managers at September 30, 2023 (unless otherwise
indicated)
|
|
|
|
|
| |
|
Registered
Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Fund
and Portfolio Managers |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Core
Plus Fixed Income |
|
|
|
|
|
|
Brian
S. Ellis |
15 |
$14.2
billion |
1 |
$18.5
million |
8 |
$624.4
million |
Vishal
Khanduja |
13 |
$13.6
billion |
1 |
$18.5
million |
7 |
$603.8
million |
Matthew
Dunning |
1 |
$370.0
million |
1 |
$166.0
million |
70 |
$22.1
billion1
|
Corporate
Bond |
|
|
|
|
|
|
Joseph
Mehlman |
1 |
$113
million |
32 |
$4.9
billion |
41 |
$10.0
billion2
|
Angie
Salam |
0 |
0 |
10 |
$1.4
billion |
5 |
$1.31
billion |
Stella
Ma |
1 |
$369.9
million |
32 |
$4.9
billion |
14 |
$5.7
billion3
|
Discovery |
|
|
|
|
|
|
Dennis
P. Lynch |
22 |
$13.0
billion |
32 |
$10.3
billion |
14 |
$4.2
billion4
|
Sam
G. Chainani |
21 |
$13.0
billion |
29 |
$10.2
billion |
13 |
$4.1
billion4
|
Jason
C. Yeung |
21 |
$12.2
billion |
29 |
$10.2
billion |
13 |
$4.1
billion4
|
Armistead
B. Nash |
21 |
$12.2
billion |
29 |
$10.2
billion |
13 |
$4.1
billion4
|
David
S. Cohen |
21 |
$13.0
billion |
29 |
$10.2
billion |
13 |
$4.1
billion4
|
Alexander
T. Norton |
21 |
$12.2
billion |
29 |
$10.2
billion |
13 |
$4.1
billion4
|
Dynamic
Value |
|
|
|
|
|
|
Mark
A. Bavoso |
5 |
$1.7
billion |
8 |
$1.1
billion |
8 |
$6.1
billion5
|
Cyril
Moullé-Berteaux |
5 |
$1.7
billion |
8 |
$1.1
billion |
9 |
$6.1
billion5
|
Douglas
Rentz |
0 |
0 |
1 |
$126.2
million |
0 |
0 |
Global
Strategist |
|
|
|
|
|
|
Mark
A. Bavoso |
5 |
$1.4
billion |
8 |
$1.1
billion |
8 |
$6.1
billion5
|
Cyril
Moullé-Berteaux |
5 |
$1.4
billion |
8 |
$1.1
billion |
9 |
$6.1
billion5
|
High
Yield |
|
|
|
|
|
|
Jack
Cimarosa |
0 |
0 |
9 |
$2.8
billion |
6 |
$1.1
billion6
|
Joseph
F. Hurley |
0 |
0 |
9 |
$2.8
billion |
6 |
$1.1
billion6
|
Short
Duration Income |
|
|
|
|
|
|
Stella
Ma |
1 |
$556.0
million |
32 |
$4.9
billion |
14 |
$5.7
billion3
|
Brian
S. Ellis |
15 |
$14.2
billion |
1 |
$18.5
million |
8 |
$624.4
million |
Eric
Jesionowski |
0 |
0 |
1 |
$166.0
million |
41 |
$17.7
billion |
Ultra-Short
Income |
|
|
|
|
|
|
Jonas
Kolk |
7 |
$260.9
billion |
4 |
$59.9
billion |
16 |
$18.9
billion |
Michael
Cha |
2 |
$19.2
billion |
4 |
$63.2
billion |
8 |
$6.1
billion |
David
Schoenfeld |
2 |
$19.2
billion |
2 |
$41.5
billion |
8 |
$6.1
billion |
Short
Duration Municipal Income |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Registered
Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Fund
and Portfolio Managers |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Julie
P. Callahan |
9 |
$2.5
billion |
0 |
$0 |
0 |
$0 |
Paul
Metheny |
3 |
$1.02
billion |
0 |
$0 |
3 |
$521.7
million |
Carl
Thompson |
6 |
$649.9
million |
0 |
$0 |
0 |
$0 |
1 |
Of
these other accounts, one account with a total of approximately $293.0
million in assets had performance-based fees. |
2 |
Of
these other accounts, three accounts with a total of approximately $1.5
billion in assets had performance-based fees. |
3 |
Of
these other accounts, two accounts with a total of approximately $1.2
billion in assets had performance-based fees. |
4 |
Of
these other accounts, two accounts with a total of approximately $199.4
million in assets had performance-based fees. |
5 |
Of
these other accounts, two accounts with a total of approximately $2.8
billion in assets had performance-based fees. |
6 |
Of
these other accounts, one account with a total of approximately $498.9
million in assets had performance-based fees. |
Securities
Ownership of Portfolio Managers
As
of September
30, 2023, the dollar range of securities beneficially owned (or held notionally
through IMAP) by each portfolio manager
in the Trust is shown below:
| |
Fund
and Portfolio Managers |
Fund
Holdings |
Core
Plus Fixed Income |
Brian
S. Ellis |
None |
Vishal
Khanduja |
None |
Matthew
Dunning |
None |
Corporate
Bond |
Joseph
Mehlman |
$50,001
- $100,000 |
Angie
Salam |
$10,001
- $50,000 |
Stella
Ma |
None |
Discovery |
Dennis
P. Lynch |
Over
$1 million |
Sam
G. Chainani |
$500,001
- $1,000,000 |
Jason
C. Yeung |
$100,001
- $500,000 |
Armistead
B. Nash |
$50,001
- $100,000 |
David
S. Cohen |
$100,001
- $500,000 |
Alexander
T. Norton |
$10,001
- $50,000 |
Dynamic
Value |
|
Mark
A. Bavoso |
$100,001
- $500,000 |
Cyril
Moullé-Berteaux |
Over
$1 million |
Douglas
Rentz |
None |
Global
Strategist |
Mark
Bavoso |
$50,001
- $100,000 |
Cyril
Moullé-Berteaux |
$100,000
- $500,000 |
High
Yield |
Jack
Cimarosa |
$100,001
- $500,000 |
Joseph
F. Hurley |
$10,001
- $50,000 |
Short
Duration Income |
Stella
Ma |
None |
Brian
S. Ellis |
None |
Eric
Jesionowski |
$10,001
- $50,000 |
Ultra-Short
Income |
Jonas
Kolk |
None |
Michael
Cha |
None |
David
Schoenfeld |
None |
Short
Duration Municipal Income |
|
Julie
P. Callahan |
None |
Paul
Metheny |
None |
| |
Fund
and Portfolio Managers |
Fund
Holdings |
Carl
Thompson |
None |
Independent
Registered Public Accounting Firm
Ernst
& Young LLP, located at 200 Clarendon Street, Boston, MA 02116-5021, serves
as the Funds’
independent registered public accounting
firm and provides audit and audit-related services, tax-related services and
assistance in connection with various SEC filings.
Fund
Counsel
Dechert
LLP, located at 1095 Avenue of the Americas, New York, NY 10036, acts as the
Funds’
legal counsel.
Proxy
Voting Policies and Procedures and Proxy Voting Record
The
Board of Trustees believes that the voting of proxies on securities held by the
Trust is an important element of the overall investment
process. As such, the Trustees have delegated the responsibility to vote such
proxies to MSIM.
A
copy of MSIM’s Proxy Voting Policy (“Proxy Policy”) is attached hereto as
Appendix A. In addition, a copy of the Proxy Policy, as well
as the Trust’s most recent proxy voting record for the 12-month period ended
June 30, as filed with the SEC, are available without
charge on our web site at www.morganstanley.com/im. The Trust’s proxy voting
record is also available without charge on the
SEC’s web site at http://www.sec.gov.
Securities
Lending
Pursuant
to an agreement between the Trust and State Street, the Funds
may lend their securities through State Street as securities lending
agent to certain qualified borrowers. As securities lending agent of the Trust,
State Street administers the Funds’
securities lending
program. These services include arranging the loans of securities with approved
borrowers and their return to the Fund upon loan
termination, negotiating the terms of such loans, selecting the securities to be
loaned and monitoring dividend activity relating to
loaned securities. State Street also marks-to-market daily the value of loaned
securities and collateral and may require additional collateral
as necessary from borrowers. State Street may also, in its capacity as
securities lending agent, invest cash received as collateral
in pre-approved investments in accordance with the Securities Lending
Authorization Agreement. State Street maintains records
of loans made and income derived therefrom and makes available such records that
the Trust deems necessary to monitor the securities
lending program.
For
the fiscal year ended September
30, 2023, the following Funds earned income and incurred the following costs and
expenses as a result
of their securities lending activities:
|
|
|
|
|
|
|
|
| |
Fund |
Gross Income1
|
Revenue Split2
|
Cash Collateral Management Fees3
|
Administrative Fees4
|
Indemnification Fees5
|
Rebates
to Borrowers |
Other Fees |
Total
Cost of
the Securities Lending Activities |
Net
Income from
the Securities Lending
Activities |
Core
Plus Fixed
Income |
$192,120 |
$15,531 |
$0 |
$0 |
$0 |
$88,576 |
$0 |
$104,107 |
$88,013 |
Corporate
Bond |
$93,303 |
$2,041 |
$0 |
$0 |
$0 |
$79,699 |
$0 |
$81,740 |
$11,563 |
Discovery |
$3,268,385 |
$445,505 |
$0 |
$0 |
$0 |
$298,325 |
$0 |
$743,830 |
$2,524,555 |
1 |
Gross
income includes income from the reinvestment of cash
collateral. |
2 |
Revenue
split represents the share of revenue generated by the securities lending
program and paid to State Street. |
3 |
Cash
collateral management fees include fees deducted from a pooled cash
collateral reinvestment vehicle that are not included in the revenue
split. |
4 |
These
administrative fees are not included in the revenue
split. |
5 |
These
indemnification fees are not included in the revenue
split. |
DISTRIBUTION
AND SHAREHOLDER SERVICES PLANS
Class
A, Class L, Class C and Institutional Class
The
Trust has adopted a Shareholder Services Plan for Class A shares and a
Distribution and Shareholder Services Plan for Class L and
Class C shares under Rule 12b-1 of the 1940 Act (together, the “Plans”). The
Plans provide that the Trust, on behalf of each Fund,
may pay the Distributor and other affiliated and unaffiliated broker-dealers,
financial institutions and/or intermediaries an annualized
service fee of up to 0.25% of the average daily net assets of each Fund (0.20%
with respect to the Short Duration Municipal
Income Portfolio) attributable to Class A, Class C and Class L shares, as
applicable. This service fee is for providing “personal
service and/or the maintenance of shareholder accounts” as provided for in
Section 2830(b)(9) of the Financial Industry
Regulatory
Authority (“FINRA”) Conduct Rules, including (i) expenditures for overhead and
other expenses of the Distributor and other
affiliated and unaffiliated broker-dealers, (ii) telephone and other
communications expenses relating to the provision of shareholder
services and (iii) compensation to and expenses of financial advisors and other
employees of the Distributor and other affiliated
and unaffiliated broker-dealers for the provision of shareholder services. In
addition, the Class L Plan provides that the Trust,
on behalf of each Fund, may pay the Distributor an annualized distribution fee
of up to 0.25% (0.50% with respect to the Discovery
and Global Strategist Portfolios) of the average daily net assets of each Fund
attributable to Class L shares. The Class C Plan
provides that the Trust, on behalf of each Fund, may pay the Distributor an
annualized distribution fee of up to 0.75% of the average
daily net assets of each Fund attributable to Class C shares. The Distributor
may direct that all or any part of these fees be paid
directly to its affiliates or other broker-dealers, financial institutions
and/or intermediaries that provide shareholder services. The Distributor
has agreed to waive the 12b-1 fee on Class A shares of the Ultra-Short Income
and Short Duration Municipal Income Portfolios
to the extent it exceeds 0.10% of the average daily net assets of such shares on
an annualized basis, and the 12b-1 fee on Class
A shares of the Corporate Bond Portfolio to the extent it exceeds 0.15% of the
average daily net assets of such shares on an annualized
basis. This waiver will continue for at least one year from of the date of the
applicable Prospectus or until such time as the Trust’s
Board of Trustees acts to discontinue all or a portion of such waiver when it
deems such action is appropriate. For the Trust’s fiscal
year ended September
30, 2023, all amounts paid by the Trust with respect to the distribution fee
were used to compensate broker-dealers,
banks and other intermediaries for sales of Class L and Class C shares of the
respective Funds.
The
Trust has adopted a Shareholder Services Plan for Institutional Class shares,
under which the Trust, on behalf of the Ultra-Short Income
Portfolio, may pay Service Organizations (defined below) who provide shareholder
services. Under the Shareholder Services Plan,
the Trust, on behalf of Institutional Class, is authorized to pay the
Distributor an annualized fee of 0.05% of the average daily net
assets of the Ultra-Short Income Portfolio attributable to Institutional Class
shares, owned beneficially by the customers of such Service
Organizations during such period, to compensate Service Organizations for
providing the following services: processing and issuing
confirmations concerning shareholder orders to purchase, redeem and exchange
shares of Institutional Class; receiving and transmitting
funds representing the purchase price or redemption proceeds of Institutional
Class shares; and forwarding shareholder communications
such as prospectus updates, proxies and shareholder reports.
Service
Organizations include institutions that (i) act directly or indirectly as
nominees and recordholders of shares of each class for their
respective customers who are or may become beneficial owners of such shares;
(ii) provide services to other Service Organizations
intended to facilitate or improve a Service Organization’s services to
shareholders of the Trust with respect to the applicable
Portfolio; and/or (iii) perform certain account services with respect to the
shareholders pursuant to agreements between the Trust,
on behalf of Institutional Class, and such Service Organizations.
With
respect to sales of Class C shares of a Fund, a commission or transaction fee
generally will be compensated by the Distributor at the
time of purchase directly out of the Distributor’s assets (and not out of the
Fund’s assets) to Financial Intermediaries who initiate and
are responsible for such purchases computed based on a percentage of the dollar
value of such shares sold of up to 1.00% on Class
C shares.
Proceeds
from any CDSC and any distribution fees on Class C shares are paid to the
Distributor and are used by the Distributor to defray
its distribution related expenses in connection with the sale of the Fund’s
shares, such as the payment to Financial Intermediaries
for selling such shares. With respect to Class C shares, the Financial
Intermediaries generally receive from the Distributor
ongoing distribution fees of up to 1.00% of the average daily net assets of the
Fund’s Class C shares annually commencing
in the second year after purchase.
The
following table describes the distribution and/or shareholder servicing fees
paid by each Fund with respect to its Class A, Class L, Class
C and Institutional Class shares, as applicable, pursuant to the Plans,
including the Shareholder Services Plan for Institutional
Class shares, and the distribution- and/or shareholder servicing-related
expenses for each Fund with respect to its Class A,
Class L, Class C and Institutional Class shares, as applicable, for the fiscal
year ended September
30, 2023. To the extent that expenditures
on distribution- and/or shareholder servicing-related activities exceed the fees
paid by a Fund, the excess amounts were paid
by the Adviser or the Distributor out of its own resources.
|
|
| |
Fund |
Total
Distribution and/or
Shareholder Servicing
Fees Paid by
Fund |
Distribution
and/or Shareholder
Servicing
Expenses1
|
Distribution
and/or Shareholder Servicing
Fees Retained by Morgan Stanley
Distribution, Inc. (Expenditures
in Excess of Distribution
and/or Shareholder Servicing
Fees) |
Class
A |
|
|
|
Core
Plus Fixed Income |
$147,702 |
$145,906 |
$1,796 |
Corporate
Bond |
20,3562
|
28,987 |
(8,631) |
Discovery |
1,170,532 |
1,120,496 |
50,036 |
Dynamic
Value |
7,032 |
7,002 |
30 |
|
|
| |
Fund |
Total
Distribution and/or
Shareholder Servicing
Fees Paid by
Fund |
Distribution
and/or Shareholder
Servicing
Expenses1 |
Distribution
and/or Shareholder Servicing
Fees Retained by Morgan Stanley
Distribution, Inc. (Expenditures
in Excess of Distribution
and/or Shareholder Servicing
Fees) |
Global
Strategist |
356,362 |
261,826 |
94,536 |
High
Yield |
29,222 |
28,765 |
457 |
Short
Duration Income |
543,911 |
540,821 |
3,090 |
Short
Duration Municipal Income |
84,0693
|
84,570 |
(501) |
Ultra-Short
Income |
4,714,6204
|
4,726,962 |
(12,342) |
Class
L |
|
|
|
Core
Plus Fixed Income |
$4,365 |
$4,076 |
$289 |
Corporate
Bond |
5,130 |
5,127 |
3 |
Discovery |
32,847 |
32,029 |
818 |
Global
Strategist |
76,873 |
75,069 |
1,804 |
High
Yield |
849 |
799 |
50 |
Short
Duration Income |
4,858 |
4,108 |
750 |
Class
C |
|
|
|
Core
Plus Fixed Income |
$129,211 |
$125,398 |
$3,813 |
Corporate
Bond |
13,904 |
13,562 |
342 |
Discovery |
143,564 |
133,409 |
10,155 |
Dynamic
Value |
12,129 |
9,415 |
2,714 |
Global
Strategist |
17,526 |
16,854 |
672 |
High
Yield |
37,988 |
27,974 |
10,014 |
Short
Duration Income |
34,819 |
33,897 |
922 |
Institutional
Class |
|
|
|
Ultra-Short
Income |
$807,473 |
$767,858 |
$39,615 |
Total
Class A, Class L, Class C and Institutional Class |
$8,395,342 |
$8,194,910 |
$200,432 |
1 |
Includes
payments for distribution and/or shareholder servicing to third-parties
and affiliated entities. |
2 |
The
shareholder servicing fee paid by the Corporate Bond Portfolio pursuant to
the Class A Plan reflects a waiver of $13,571. |
3 |
The
shareholder servicing fee paid by the Short Duration Municipal Income
Portfolio pursuant to the Class A Plan reflects a waiver of
$84,070. |
4 |
The
shareholder servicing fee paid by the Ultra-Short Income Portfolio
pursuant to the Class A Plan reflects a waiver of
$7,071,930. |
The
Plans, including the Shareholder Services Plan for Institutional Class shares,
were approved by the Trust’s Board of Trustees, including
the Independent Trustees, none of whom has a direct or indirect financial
interest in the operation of the Plan or in any agreements
related thereto.
Revenue
Sharing
This
section does not apply to Class R6 shares.
The
Adviser and/or the Distributor may pay compensation, out of their own funds and
not as an expense of the Funds, to certain third-parties,
such as banks, brokers, dealers, recordkeepers and administrators of various
deferred compensation plans, other financial
intermediaries or financial services firms or other persons (“Intermediaries”),
in connection with the sale, distribution, marketing
and retention of shares of the Funds
and/or shareholder servicing. For example, the Adviser or the Distributor may
pay additional
compensation to an Intermediary for, among other things, promoting the sale and
distribution of Fund shares, providing access
to various programs, mutual fund platforms or preferred or recommended mutual
fund lists that may be offered by an Intermediary,
granting the Distributor access to an Intermediary’s financial advisors and
consultants, providing assistance in the ongoing
education and training of an Intermediary’s financial personnel, conferences or
seminars, sales, client and investor events, due
diligence events, other firm-sponsored events or other programs, furnishing
marketing support, finders or referral fees for directing
investors to a Fund, maintaining share balances and/or for sub-accounting,
recordkeeping, administrative, shareholder or transaction
processing services. The Adviser and/or Distributor will also reimburse certain
investors, or make payments to certain third-party
vendors, to defray costs incurred by investors for the use of treasury
management systems or other business-related software
for investments in funds. Such payments are in addition to any distribution
fees, shareholder servicing fees and/or transfer agency
fees that may be payable by the Funds. The additional payments may be based on
various factors, including level of sales (based
on gross or net sales or some specified minimum sales or some other similar
criteria related to sales of the Funds and/or some or
all other Morgan Stanley Funds), amount of assets invested by the Intermediary’s
customers (which could include current or aged
assets
of the Funds
and/or some or all other Morgan Stanley Funds), a Fund’s
advisory fees, some other agreed upon amount or other measures
as determined from time to time by the Adviser and/or the Distributor. These
categories of additional compensation are not mutually
exclusive and the Adviser and/or the Distributor may pay further types of
additional compensation in the future. The amount
of these payments may be different for different Intermediaries.
With
respect to Morgan Stanley Smith Barney LLC, these payments may include the
following amounts, which are paid in accordance
with the applicable compensation structure:
1 |
an
ongoing annual fee in an amount of $582,650 in consideration of the
Adviser’s participation at various Morgan Stanley Smith
Barney LLC events, including seminars, conferences and meetings as
determined by Morgan Stanley Smith Barney
LLC; |
2 |
an
ongoing annual fee in an amount of $575,000 in consideration of Morgan
Stanley Smith Barney LLC providing Adviser with
access to distribution analytical data in relation to sales of the Funds
and certain other products managed and/or sponsored by
the Adviser or its affiliates; |
3 |
on
Class I, Class A, Class L and Class C shares of the Funds held in Morgan
Stanley Smith Barney LLC brokerage and advisory accounts,
an ongoing annual fee in an amount up to 0.10% of the total average daily
NAV of such shares for the applicable quarterly
period; |
4 |
on
Class I shares and Class IR shares converted from Class I shares of a Fund
held in Morgan Stanley Smith Barney LLC brokerage
and advisory accounts as of June 30, 2014, where each such account holds
$5 million or more in Class I shares of the Fund,
or had $4 million or more in assets (but less than $5 million) as of June
30, 2014 and reached $5 million by December 31,
2014, an ongoing annual fee in an amount equal to 35% of the advisory fee
the Adviser receives from such Fund based on the
average daily NAV of such shares for the applicable quarterly
period; |
5 |
on
Class IR shares of a Fund, an ongoing annual fee in an amount up to 25% of
the advisory fee the Adviser receives from the Fund
based on the average daily NAV of such shares for the applicable quarterly
period. |
6 |
on
purchases of $1 million or more of Class A shares (for which no initial
sales charge was paid), Morgan Stanley Smith Barney LLC
may, at the discretion of the Distributor, receive a gross sales credit of
up to 1.00% (with respect to the U.S. Equity and Asset
Allocation Funds) or 0.50% (with respect to the Fixed Income Funds) of the
amount sold, as applicable.* |
*
Commissions or transaction fees paid when Morgan Stanley Smith Barney LLC or
other Intermediaries initiate and are responsible for
purchases of $1 million or more are computed on a percentage of the dollar value
of such shares sold as follows: (i) with respect to the
U.S. Equity and Asset Allocation Funds: 1.00% on sales of $1 million to $4
million, then 0.50% on sales over $4 million to $15 million
and then 0.25% on the excess over $15 million; and (ii) with respect to the
Fixed Income Funds (except Short Duration Income
Portfolio): 0.75% on sales of $500,000 to $4 million, then 0.50% on sales over
$4 million to $15 million and then 0.25% on
the excess over $15 million. Purchases of Class A shares for which no initial
sales charge is paid are subject to a contingent deferred
sales charge (“CDSC”) of 1% with respect to the U.S. Equity and Asset Allocation
Funds and 0.75% with respect to the Fixed
Income Funds (except Short Duration Income Portfolio) if the redemption of such
shares occurs within 12 months after purchase.
The full amount of such CDSC will be retained by the Distributor. With respect
to the Short Duration Income Portfolio: 0.25%
on sales of $250,000 to $4 million, then 0.20% on sales over $4 million to $15
million and then 0.15% on the excess over $15
million.
With
respect to Morgan Stanley & Co. LLC, these payments may include the
following amounts, which are paid in accordance with the
applicable compensation structure:
1 |
on
shares of a Fund, a fee in an amount up to 20% of the advisory fee the
Adviser receives from such Fund attributable to such shares
for the applicable period, not to exceed one
year. |
With
respect to certain affiliated entities of the Adviser and Distributor, these
payments, which are paid in accordance with the applicable
compensation structure, may include an ongoing annual fee in an amount up to
0.10% of the total average NAV in respect
of the applicable period of shares of the Ultra-Short Income Portfolio or Short
Duration Municipal Income Portfolio held in the
applicable accounts.
The
prospect of receiving, or the receipt of, additional compensation, as described
above, by Intermediaries may provide such Intermediaries
and their financial advisors and other salespersons with an incentive to favor
sales of shares of the Funds over other investment
options with respect to which these Intermediaries do not receive additional
compensation (or receives lower levels of additional
compensation). These payment arrangements, however, will not change the price
that an investor pays for shares of the Funds
or the amount that the Funds receive to invest on behalf of an investor.
Investors may wish to take such payment arrangements
into account when considering and evaluating any recommendations relating to
Fund shares and should review carefully
any disclosure provided by Intermediaries as to their compensation.
Other
Payments to Intermediaries
The
Adviser and/or the Distributor may also make payments, out of their own assets
and not as an expense to a
Fund, to Intermediaries
to offset certain nominal expenses of Intermediaries related to setup,
connectivity or other technological maintenance
of
the Intermediary’s investment platform and/or the provision of services with
respect to a
Fund or share class on an Intermediary’s investment
platform. Investors may wish to take such payment arrangements into account when
considering an investment in Fund shares.
Dealer
Reallowances
Upon
notice to selected broker-dealers, the Distributor may reallow up to the full
applicable front-end sales charge during periods specified
in such notice. During periods when 90% or more of the sales charge is
reallowed, such selected broker-dealers may be deemed
to be underwriters as that term is defined in the 1933 Act.
BROKERAGE
PRACTICES
Fund
Transactions
The
Adviser and/or Sub-Adviser are responsible for decisions to buy and sell
securities for a Fund, for broker-dealer selection and for negotiation
of commission rates. The Adviser and/or Sub-Adviser are prohibited from
directing brokerage transactions on the basis of the
referral of clients or the sale of shares of advised investment companies.
Purchases and sales of securities on a stock exchange are effected
through brokers who charge a commission for their services. In the OTC market,
securities may be traded as agency transactions
through broker-dealers or traded on a “net” basis with dealers acting as
principal for their own accounts without a stated commission,
although the price of the security usually includes profit to the dealer. In
underwritten offerings, securities are purchased at
a fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter’s concession or discount.
When securities are purchased or sold directly from or to an issuer, no
commissions or discounts are paid.
A
Fund may purchase certain money market instruments directly from an issuer
without payment of a commission or concession. Money
market instruments are generally traded on a “net” basis with dealers acting as
principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer.
The
Trust anticipates that certain of its transactions involving foreign securities
will be effected on foreign securities exchanges. There is
also generally less government supervision and regulation of foreign securities
exchanges and brokers than in the United States.
The
Adviser and/or Sub-Adviser select broker-dealers for the execution of
transactions for the Funds in accordance with their duty to seek
“best execution” (i.e., the most favorable terms of execution). In seeking best
execution, the Adviser and/or Sub-Adviser are not obligated
to choose the broker-dealer offering the lowest available commission rate if, in
the Adviser’s and/or Sub-Adviser’s reasonable
judgment, (i) the total costs or proceeds from the transaction might be less
favorable than may be obtained elsewhere; (ii) a
higher commission is justified by the brokerage and research services provided
by the broker-dealer that fall within the safe harbor of
Section 28(e) of the 1934 Act or otherwise is permitted under applicable law; or
(iii) other considerations, such as the order size, the
time required for execution, the depth and breadth of the market for the
security or minimum credit quality requirements to transact
business with a particular broker-dealer. The research services received include
services which aid the Adviser and/or Sub-Adviser
in fulfilling their investment decision-making responsibilities, including (a)
furnishing advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; and (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance
of accounts.
When
effecting transactions on behalf of the Funds, the Adviser and/or Sub-Adviser
may trade with any broker-dealer on their list of approved
broker-dealers. Approved broker-dealers have met criteria as established by the
Adviser’s Trading and Research Governance team
(“TRG”). TRG reviews and approves broker-dealers periodically to determine
whether broker-dealers on the approved list continue
to meet such criteria. The approval lists are reported quarterly to the
Adviser’s Counterparty Governance Committee. When
selecting an approved broker-dealer (including an affiliate) to execute
securities transactions, the following factors may
be considered: (i) best available price; (ii) reliability, integrity and
reputation in the industry (which may include a review of financial
information and creditworthiness); (iii) execution capabilities, including block
positioning, speed of execution and quality and
responsiveness of its trading desk; (iv) knowledge of and access to the markets
for the securities being traded; (v) potential ability to
obtain price improvement; (vi) ability to maintain confidentiality; (vii)
ability to handle non-traditional trades; (viii) commission and
commission-equivalent rates; (ix) technology infrastructure; (x) clearance and
settlement capabilities; (xi) the size of the trade relative
to other trades in the same instrument; (xii) ability of a counterparty to
commit its capital to a Fund’s trade and its access to liquidity;
(xiii) counterparty restrictions associated with a portfolio, including
regulatory trading, documentation requirement or any specific
clearing broker-dealer requirements; (xiv) client-directed execution; (xv)
client-specific restrictions; and (xvi) such other factors
as may be appropriate.
Subject
to the duty to seek best execution, the Adviser uses a portion of the
commissions generated when executing client transactions to
acquire brokerage and research services that aid in fulfilling investment
decision-making responsibilities in accordance with Section 28(e)
and applicable law. Commissions paid to broker-dealers providing brokerage and
research services may be higher than those charged
by other broker-dealers. Subject to applicable law, the Adviser receives a
benefit when using client commissions to obtain
brokerage
and research services because the Adviser does not have to produce or pay for
the brokerage research services itself. Therefore,
the Adviser has an incentive to select or recommend a broker-dealer based on its
interest in receiving brokerage and research
services, rather than solely on its clients’ interest in obtaining the best
price.
The
Adviser has adopted policies and procedures designed to help track and evaluate
the benefits received from brokerage and research
services, as well as to track how much clients pay above the amount that
broker-dealers from which the Adviser receives brokerage
and research services may have charged solely for execution of such trades. The
Adviser utilizes a voting system to assist in making
a good faith determination of the value of brokerage and research services it
receives in accordance with Section 28(e) and applicable
law. In many cases, these involve subjective judgments or approximations. The
Adviser has established a process for budgeting
research costs and allocating such costs across client accounts.
The
Adviser and certain other affiliated advisers have entered into commission
sharing arrangements (“CSAs”) with executing brokers (“CSA
Partners”) and a third-party vendor (“CSA Aggregator”). Pursuant to these
arrangements, and under the Adviser’s supervision, the
CSA Partners and CSA Aggregator track execution and research commissions
separately and pool and distribute research credits in
accordance with the policies and procedures discussed above to approved research
providers (which may include executing brokerage
firms or independent research providers (“Approved Research Providers”)) that
provide brokerage and research services. The
CSA Aggregator also reconciles research credits from trades with CSA Partners,
and pays Approved Research Providers and provides
other related administrative functions. In addition, a CSA Partner may provide
the Adviser with proprietary research it has developed
and, upon instruction, may retain research commission credits as compensation
for the provision of such proprietary research
services. The Adviser believes that these arrangements allow it to monitor the
amount of trading costs that are attributable to execution
services on the one hand and other brokerage and research services on the
other.
Transactions
that generate research credits include equity transactions executed on an agency
basis or via a riskless principal transaction
where the executing broker-dealer receives a commission. The Adviser does not
use CSAs or otherwise have arrangements to
pay for brokerage and research services with client commissions in connection
with trading fixed-income securities. Consistent with
long-standing industry practice in the fixed-income markets, however, the
Adviser, subject to applicable law, may receive brokerage
and research services and other information, including access to fixed-income
trading platforms that dealers provide for no charge
to their customers in the ordinary course of business. Fixed-income instruments
typically trade at a bid/ask spread and without an
explicit brokerage charge. While there is not a formal trading expense or
commission, clients will bear the implicit trading costs reflected
in these spreads.
The
Adviser may receive “mixed use” products and services from an Approved Research
Provider, where a portion of the product or service
assists in its investment decision-making process in accordance with Section
28(e) and a portion may be used for other purposes.
Where a product or service has a mixed use, the Adviser will make a reasonable
allocation of its cost according to its use and will
use client commissions to pay only for the portion of the product or service
that assists in its investment decision-making process. The
Adviser may have an incentive to allocate the costs to uses that assist in its
investment decision-making process because the Adviser
may pay for such costs with client commissions rather than its own resources. To
the extent the Adviser receives “mixed use” products
and services, the Adviser will allocate the anticipated costs of a mixed use
product or service in good faith and maintain records
concerning allocations in order to mitigate such conflicts.
Client
accounts that pay a greater amount of commissions relative to other accounts may
bear a greater share of the cost of brokerage and
research services than such other accounts. The Adviser may use brokerage and
research services obtained with brokerage commissions
from some clients for the benefit of other clients whose brokerage commissions
do not pay for such brokerage and research
services. The Adviser may also share brokerage and research services with its
affiliated advisers, and the clients of its affiliated advisers
may receive the benefits of such brokerage and research services. These
arrangements remain subject to the Adviser’s overall obligation
to seek best execution for client trading.
The
EU’s Markets in Financial Instruments Directive II (“MiFID II”), which became
effective January 3, 2018, requires investment advisers
regulated under MiFID II to pay for research services separately from trade
execution services, either through their own resources
or a research payment account funded by a specific charge to a client. Although
the Adviser is not directly subject to the provisions
of MiFID II, certain of its affiliated advisers are, such as Morgan Stanley
Investment Management Limited; accordingly, as applicable,
the Adviser makes a reasonable valuation and allocation of the cost of research
services as between MiFID II client accounts
and other accounts that participate in CSAs and will pay for research services
received with respect to MiFID II client accounts
from its own resources. The Adviser and affiliated advisers subject to MiFID II
may separately pay for fixed-income research from
their own resources. Following its withdrawal from the EU on January 31, 2020,
the United Kingdom has entered a transition period,
during which EU law (including MiFID II) will continue to apply in the United
Kingdom. Following the transition period, investment
managers in the United Kingdom may still be required to comply with certain
MiFID II equivalent requirements in accordance
with the handbook of rules and guidance issued by the Financial Conduct
Authority.
When
permitted under applicable law, portfolio managers generally will aggregate
orders of their clients for the same securities in a single
order so that such orders are executed simultaneously in order to facilitate
best execution and to reduce brokerage costs. The
Adviser
and/or Sub-Adviser effect aggregated orders in a manner designed to ensure that
no participating client is favored over any other
client.
In
general, accounts that participate in an aggregated order will participate on a
pro rata or other objective basis. Pro rata allocation of securities
and other instruments will generally consist of allocation based on the order
size of a participating client account in proportion
to the size of the orders placed for other accounts participating in the
aggregated order. However, the Adviser and/or Sub-Adviser
may allocate such securities and other instruments using a method other than pro
rata if their supply is limited, based on differing
portfolio characteristics among accounts or to avoid odd lots or small
allocations, among other reasons. These allocations are made
in the good faith judgment of the Adviser and/or the Sub-Adviser with a goal of
seeking to ensure that fair and equitable allocation
occurs over time. There may be times that the Adviser and/or Sub-Adviser are not
able to aggregate orders because of applicable
law or other considerations when doing so might otherwise be
advantageous.
Affiliated
Brokers
Subject
to the overriding objective of obtaining the best execution of orders, the Trust
may use broker-dealer affiliates of the Adviser to
effect Fund brokerage transactions, including transactions in futures contracts
and options on futures contracts, under procedures adopted
by the Trust’s Board of Trustees. In order to use such affiliates, the
commission rates and other remuneration paid to the affiliates
must be fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities
being purchased or sold during a comparable time period. This standard would
allow the affiliated broker or dealer to receive
no more than the remuneration which would be expected to be received by an
unaffiliated broker.
Pursuant
to an order issued by the SEC, the Trust is permitted to engage in principal
transactions in money market instruments, subject
to certain conditions, with Morgan Stanley & Co. LLC, a broker-dealer
affiliated with the Trust’s Adviser.
During
the fiscal years ended September 30, 2021,
2022 and 2023, the Funds did not effect any principal transactions with Morgan
Stanley
& Co. LLC.
Brokerage
Commissions Paid
During
the fiscal years ended September 30, 2021,
2022 and 2023, the Trust paid brokerage commissions of approximately
$2,041,604,
$1,418,451 and $872,591 respectively. During the fiscal years ended September
30, 2021,
2022 and 2023, the Trust paid
in the aggregate $0, $0, and $0, respectively, as brokerage commissions to
Morgan Stanley & Co. LLC and/or its affiliated broker-dealers.
During the fiscal year ended September
30, 2023, the brokerage commissions paid to Morgan Stanley & Co. LLC
and/or
its affiliated broker-dealers represented approximately 0.00% of the total
brokerage commissions paid by the Trust during the period
and were paid on account of transactions having an aggregate dollar value equal
to approximately 0.00% of the aggregate dollar
value of all portfolio transactions of the Trust during the period for which
commissions were paid.
For
the fiscal year ended September
30, 2023, each Fund paid brokerage commissions, including brokerage commissions
paid to affiliated
broker-dealers, as follows:
|
|
|
| |
|
Brokerage
Commissions Paid During Fiscal Year Ended September
30, 2023 |
|
|
Commissions
Paid to Morgan Stanley & Co. LLC and/or its affiliated
broker-dealers |
Fund |
Total
Commissions Paid |
Total
Commissions |
Percent
of Total Commissions |
Percent
of Total Brokered
Transactions |
Core
Plus Fixed Income |
$35,923 |
$0 |
0.00% |
0% |
Corporate
Bond |
11,296 |
0 |
0.00% |
0% |
Discovery |
622,340 |
0 |
0.00% |
0% |
Dynamic
Value |
172,607 |
0 |
0.00% |
0% |
Global
Strategist |
13,904 |
0 |
0.00% |
0% |
High
Yield |
0 |
0 |
0.00% |
0% |
Short
Duration Income |
16,521 |
0 |
0.00% |
0% |
Short
Duration Municipal Income |
0 |
0 |
0.00% |
0% |
Ultra-Short
Income |
0 |
0 |
0.00% |
0% |
During
the fiscal years ended September 30, 2021 and 2022, each
Fund paid brokerage commissions, including brokerage commissions
paid to affiliated broker-dealers, as follows:
|
|
|
| |
|
Brokerage
Commissions Paid
During Fiscal Year Ended
September 30, 2021 and 2022 |
|
Fiscal
Year Ended September 30, 2022 |
Fiscal
Year Ended September 30, 2021 |
Fund |
Total |
Morgan
Stanley & Co. LLC and/or
its affiliated broker-dealers |
Total |
Morgan
Stanley & Co. LLC and/or
its affiliated broker-dealers |
Core
Plus Fixed Income |
$41,095 |
$0 |
$39,830 |
$0 |
Corporate
Bond |
10,995 |
0 |
13,031 |
0 |
Discovery |
1,200,410 |
0 |
1,849,042 |
0 |
Dynamic
Value1
|
62,599 |
0 |
3,318 |
- |
Global
Strategist |
76,963 |
0 |
101,223 |
1,969 |
High
Yield |
218 |
0 |
0 |
0 |
Short
Duration Income |
26,171 |
0 |
34,761 |
0 |
Short
Duration Municipal Income |
0 |
0 |
0 |
0 |
Ultra-Short
Income |
0 |
0 |
0 |
0 |
1 |
The
Fund commenced operations on March 19,
2021. |
Regular
Broker-Dealers
During
the fiscal year ended September
30, 2023, the following Funds purchased securities issued by the following
issuers, which issuers
were among the ten brokers or ten dealers that executed transactions for or with
the Trust or the Funds in the largest dollar amounts
during the period:
| |
Fund |
Issuer |
Core
Plus Fixed Income |
Bank
of America Securities LLC Barclays
Bank PLC BNP
Paribas SA Citigroup
Global Markets, Inc. JP
Morgan Chase & Co. |
Corporate
Bond |
Bank
of America Securities LLC BNP
Paribas SA Citigroup
Global Markets, Inc. Deutsche
Bank AG Goldman
Sachs & Co. JP
Morgan Chase & Co. Wells
Fargo & Co. |
Dynamic
Value |
Jefferies
LLC State
Street Bank & Trust Co. Virtu
Americas LLC |
Global
Strategist |
Bank
of America Securities LLC Barclays
Bank PLC BNP
Paribas SA Citigroup
Global Markets, Inc. Goldman
Sachs & Co. HSBC
Holdings PLC JP
Morgan Chase & Co. State
Street Bank & Tust Co. UBS
AG |
High
Yield |
Jane
Street Execution Services LLC |
Short
Duration Income |
Bank
of America Securities LLC JP
Morgan Chase & Co. |
Ultra-Short
Income |
Bank
of America Securities LLC Bank
of New York Mellon Barclays
Bank PLC Citigroup
Global Markets, Inc. Credit Agricole
Securities ING
Financial Markets LLC JP
Morgan Chase & Co. Prudential
Global Funding, LLC Wells
Fargo & Co. |
At
September
30, 2023, the Funds held securities issued by such brokers or dealers with the
following market values:
|
| |
Fund |
Issuer |
Approximate
Market Value at
09/30/23 |
Core
Plus Fixed Income |
Bank
of America Securities, LLC |
$5,755,000 |
|
JP
Morgan Chase & Co. |
$3,108,000 |
|
BNP
Paribas SA |
$1,419,000 |
|
Citigroup
Global Markets, Inc. |
$1,064,000 |
Corporate
Bond |
Bank
of America Securities, LLC |
$2,925,000 |
|
JP
Morgan Chase & Co |
$2,182,000 |
|
Citigroup
Global Markets, Inc. |
$1,325,000 |
|
Deutsche
Bank AG |
$453,000 |
|
Wells
Fargo & Co. |
$399,000 |
Dynamic
Value |
State
Street Bank & Trust Co. |
$699,000 |
|
Virtu
Americas, LLC |
$693,000 |
Global
Strategist |
BNP
Paribas SA |
$2,180,000 |
|
JP
Morgan Chase & Co. |
$2,125,000 |
|
HSBC
Holdings PLC |
$2,116,000 |
|
Bank
of America Securities, LLC |
$1,991,000 |
|
Citigroup
Global Markets, Inc. |
$1,281,000 |
|
Goldman
Sachs & Co. |
$910,000 |
|
UBS
AG |
$372,000 |
|
Barclays
Bank PLC |
$143,000 |
|
State
Street Bank & Tust Co. |
$63,000 |
High
Yield |
Jane
Street Execution Services, LLC |
$667,000 |
Short
Duration Income |
JP
Morgan Chase & Co. |
$8,215,000 |
|
Bank
of America Securities, LLC |
$4,166,000 |
Ultra-Short
Income |
Barclays
Bank PLC |
$461,164,000 |
|
Citigroup
Global Markets, Inc. |
$186,119,000 |
|
Bank
of America Securities, LLC |
$174,890,000 |
|
JP
Morgan Chase & Co. |
$166,601,000 |
|
Wells
Fargo & Co. |
$114,620,000 |
|
Credit
Agricole Securities |
$32,000,000 |
|
Prudential
Global Funding, LLC |
$26,824,000 |
Portfolio
Turnover
The
Funds generally do not invest for short-term trading purposes; however, when
circumstances warrant, a Fund may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher
or lower portfolio turnover rate than expected and the Funds will not consider
portfolio turnover rate a limiting factor in making
investment decisions consistent with their investment objectives and policies.
Higher portfolio turnover (e.g., over 100%) necessarily
will cause the Funds to pay correspondingly increased brokerage and trading
costs. In addition to transaction costs, higher portfolio
turnover may result in the realization of capital gains. As discussed under
“Taxes,” to the extent net short-term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes.
GENERAL
INFORMATION
Fund
History
Morgan
Stanley Institutional Fund Trust is an open-end, management investment company
established under Pennsylvania law as a Pennsylvania
business trust under an Amended and Restated Agreement and Declaration of Trust
dated November 18, 1993 as further
Amended and Restated on August 24, 2006 (the “Declaration of Trust”). The Trust
was originally established as The MAS Pooled
Trust Fund, a Pennsylvania business trust, in February 1984.
Each
Fund is diversified. No Fund of the Trust is subject to the liabilities of any
other Fund of the Trust.
Description
of Shares and Voting Rights
The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of beneficial interest, without par value, from an
unlimited number of series of shares. Currently, the Trust consists of nine
Funds.
The
shares of each
Fund of the Trust are fully paid and non-assessable, except as set forth below,
and have no preference as to conversion,
exchange, dividends, retirement or other features. The shares of each
Fund of the Trust have no preemptive rights. The shares
of the Trust have non-cumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election
of Trustees can elect 100% of the Trustees if they choose to do so. A
shareholder of a class is entitled to one vote for each full class
share held (and a fractional vote for each fractional class share held) in the
shareholder’s name on the books of the Trust. Shareholders
of a class have exclusive voting rights regarding any matter submitted to
shareholders that relates solely to that class of shares
(such as a service agreement relating to that class), and separate voting rights
on any other matter submitted to shareholders in which
the interests of the shareholders of that class differ from the interests of
holders of any other class.
Meetings
of shareholders will not be held except as required by the 1940 Act and other
applicable law. A meeting will be held to vote on
the removal of a Trustee or Trustees if requested in writing by the holders of
not less than 10% of the outstanding shares of the Trust.
The Trust will assist in shareholder communication in such matters to the extent
required by law.
Dividends
and Capital Gains Distributions
Each
Fund’s policy is to distribute substantially all of its net investment income,
if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the federal excise tax
on undistributed income and capital gains. The amounts of any income dividends
or capital gains distributions cannot be predicted.
Any
dividend or distribution paid shortly after the purchase of shares of
a
Fund by an investor may have the effect of reducing the per share
NAV of that Fund by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although
in effect a return of capital, may be subject to income taxes.
As
set forth in each of the Funds’ Prospectuses,
unless the shareholder elects otherwise in writing, all dividends and capital
gains distributions
for a class of shares are automatically reinvested in additional shares of the
same class of the Fund at NAV (as of the business
day following the record date). This automatic reinvestment of dividends and
distributions will remain in effect until the shareholder
notifies the Fund by telephone or in writing that either the Income Option
(income dividends in cash and capital gain distributions
reinvested in shares at NAV) or the Cash Option (both income dividends and
capital gains distributions in cash) has been
elected. It may take up to three business days to effect this change. An account
statement is sent to shareholders whenever a dividend
or distribution is paid.
Each
Fund within the Trust is treated as a separate entity (and hence, as a separate
“regulated investment company”) for federal tax purposes.
Any net capital gains recognized by a
Fund are distributed to its investors without need to offset (for federal income
tax purposes)
such gains against any net capital losses of another Fund.
Undistributed
net investment income is included in a
Fund’s net assets for the purpose of calculating NAV. Therefore, on the
ex-dividend
date, the NAV excludes the dividend (i.e., is reduced by the per share amount of
the dividend). Dividends paid shortly after the
purchase of shares by an investor, although in effect a return of capital, are
taxable as ordinary income.
Certain
mortgage securities may provide for periodic or unscheduled payments of
principal and interest as the mortgages underlying the
securities are paid or prepaid. However, such principal payments (not otherwise
characterized as original issue discount or bond premium
expense) will not normally be considered as income to a
Fund and therefore will not be distributed as dividends. Rather, these
payments on MBS will be reinvested on your behalf by a
Fund.
Shareholder
and Trustee Liability
Under
Pennsylvania law, shareholders of a trust such as the Trust may, under certain
circumstances, be held personally liable as partners
for the obligations of the trust. The Trust’s Declaration of Trust contains an
express disclaimer of shareholder liability for acts
or obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered
into or executed by the Trust or the Trustees, but this disclaimer may not be
effective in some jurisdictions or as to certain types
of claims. The Declaration of Trust further provides for indemnification out of
the Trust’s property of any shareholder held personally
liable for the obligations of the Trust. The Declaration of Trust also provides
that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Trust and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
Pursuant
to the Declaration of Trust, the Trustees may also authorize the creation of
additional series of shares (the proceeds of which
would be invested in separate, independently managed portfolios with distinct
investment objectives and policies and share purchase,
redemption and net asset valuation procedures) with such preferences,
privileges, limitations and voting and dividend rights
as
the Trustees may determine. All consideration received by the Trust for shares
of any additional series or class, and all assets in which
such consideration is invested, would belong to that series or class (subject
only to the rights of creditors of the Trust) and would
be subject to the liabilities related thereto. Pursuant to the 1940 Act
shareholders of any additional series or class of shares would
normally have to approve the adoption of any advisory contract relating to such
series or class and of any changes in the investment
policies relating thereto.
The
Declaration of Trust further provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing
in the Declaration of Trust protects a Trustee against any liability to which he
or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of the office.
TAXES
The
following is only a summary of certain federal income tax considerations
generally affecting the Trust, the
Funds and their shareholders.
No attempt is made to present a detailed explanation of the federal, state or
local tax treatment of the Trust, the
Funds or
shareholders, and the discussion here and in the Prospectuses is not intended to
be a substitute for careful tax planning.
The
following general discussion of certain federal income tax consequences is based
on the Code and the regulations issued thereunder
as in effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change
the conclusions expressed herein, and may have a retroactive effect with respect
to the transactions contemplated herein.
Each
Fund of the Trust is generally treated as a separate corporation for federal
income tax purposes. Thus, the provisions of the Code
generally will be applied to each Fund separately, rather than to the Trust as a
whole.
Investment
Company Taxation.
Each Fund intends to continue to qualify as a regulated investment company under
Subchapter M of
the Code. To continue to so qualify, a Fund will be required to, among other
things, satisfy an asset diversification test, a qualifying
income test and a distribution test. Assuming a Fund satisfies the foregoing
requirements, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, to the extent
that it timely distributes such income and capital
gains to its shareholders. If a Fund fails to qualify for any taxable year as a
regulated investment company, all of its taxable income
will be subject to tax at regular corporate income tax rates without any
deduction for distributions to shareholders, and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
a Fund’s current and accumulated earnings
and profits.
Each
Fund generally intends to distribute sufficient income and gains so that the
Fund will not pay corporate income tax on its earnings.
A Fund also generally intends to distribute to its shareholders in each calendar
year a sufficient amount of ordinary income and
capital gains to avoid the imposition of a 4% excise tax. However, a Fund may
instead determine to retain all or part of any income
or net long-term capital gains in any year for reinvestment. In such event, a
Fund will pay federal income tax (and possibly excise
tax) on such retained income or gains.
Gains
or losses on sales of securities by a Fund will generally be long-term capital
gains or losses if the securities have a tax holding period
of more than one year at the time of such sale. Gains or losses on the sale of
securities with a tax holding period of one year or less
will be short-term capital gains or losses.
Regulated
Investment Company Qualification
Each
Fund intends to qualify and has either elected or will elect to be treated for
each taxable year as a RIC as defined pursuant to Subchapter
M of the Code. In order to so qualify, a Fund must, among other things, (i)
derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, gains
from the sale or other disposition of stock, securities
or foreign currencies, and other income derived with respect to its business of
investing in such stock, securities or currencies,
including, generally, certain gains from options, futures and forward contracts;
and (ii) diversify its holdings so that, at the end
of each fiscal quarter of the Fund’s taxable year, (a) at least 50% of the
market value of the Fund’s total assets is represented by cash
and cash items, U.S. government securities, securities of other RICs, and other
securities, with such other securities limited, in respect
to any one issuer, to an amount not greater than 5% of the value of the Fund’s
total assets or 10% of the outstanding voting securities
of such issuer, and (b) not more than 25% of the value of its total assets are
invested in the securities (other than U.S. government
securities or securities of other RICs) of any one issuer or two or more issuers
which the Fund controls and which are engaged
in the same, similar, or related trades or businesses. If for any taxable year
the Fund does not qualify as a RIC, all of its taxable
income for that year (including its net capital gain) would be subject to tax at
regular corporate rates without any deduction for
distributions to shareholders, and such distributions would be taxable as
ordinary dividends to the extent of the Fund’s current and
accumulated earnings and profits.
For
purposes of the 90% gross income requirement described above, foreign currency
gains will generally be treated as qualifying income
under current federal income tax law. However, the Code expressly provides the
U.S. Treasury with authority to issue regulations
that would exclude foreign currency gains from qualifying income if such gains
are not directly related to a RIC’s business of
investing in stock or securities (or options or futures with respect to stocks
or securities). While to date the U.S. Treasury has not
exercised
this regulatory authority, there can be no assurance that it will not issue
regulations in the future (possibly with retroactive application)
that would treat some or all of a Fund’s foreign currency gains as
non-qualifying income.
For
purposes of the 90% gross income test described above, dividends received by a
Fund will be treated as qualifying income to the extent
they are attributable to the issuer’s current and accumulated earnings and
profits. Distributions in excess of the distributing issuer’s
current and accumulated earnings and profits will first reduce a Fund’s basis in
the stock as a return of capital and will not qualify
as gross income. Distributions in excess of a Fund’s basis in the stock will
qualify for the 90% gross income test discussed above
as the distribution will be treated as gain from the sale of stock. This gain
will be long-term capital gain if a Fund held the stock
for more than a year.
For
purposes of the diversification requirement described above, a Fund will not be
treated as in violation of such requirement as a result
of a discrepancy between the value of its various investments and the
diversification percentages described above, unless such discrepancy
exists immediately following the acquisition of any security or other property
and is wholly or partly the result of such acquisition.
Moreover, even in the event of noncompliance with the diversification
requirement as of the end of any given quarter, a Fund
is generally permitted to cure the violation by eliminating the discrepancy
causing such noncompliance within a period of 30 days
from the close of the relevant quarter.
Net
income derived from an interest in a “qualified publicly traded partnership,” as
defined in the Code, will be treated as qualifying income
for purposes of the income requirement in clause (i) above. In addition, for the
purposes of the diversification requirements in
clause (ii) above, the outstanding voting securities of any issuer includes the
equity securities of a qualified publicly traded partnership,
and no more than 25% of the value of a RIC’s total assets may be invested in the
securities of one or more qualified publicly
traded partnerships. The separate treatment for publicly traded partnerships
under the passive loss rules of the Code applies to
a RIC holding an interest in a qualified publicly traded partnership, with
respect to items attributable to such interest.
A
Fund may make certain investments indirectly through one or more entities
treated as corporations for U.S. federal income tax purposes.
Such entities will generally be required to pay U.S. corporate income tax, and
possibly other taxes, on their earnings, which ultimately
will reduce the Fund’s return on income derived from such
investments.
The
Discovery Portfolio may seek to gain exposure to bitcoin through investments in
the Bitcoin Subsidiary. The Global Strategist Portfolio
may seek to gain exposure to bitcoin and the commodity markets through
investments in the Global Strategist Subsidiary. Historically,
the IRS has issued private letter rulings in which the IRS specifically
concluded that income and gains from investments in
a wholly-owned foreign subsidiary that invests in commodity-linked instruments
are qualifying income for purposes of the qualifying
income test described above. The Funds have not received such a private letter
ruling, and are not able to rely on private letter
rulings issued to other taxpayers. Applicable Treasury regulations would
generally treat a Fund’s income inclusion with respect to
a Subsidiary as qualifying income either if (i) there is a current-year
distribution out of the earnings and profits of the Subsidiary that
are attributable to such income inclusion or (ii) such inclusion is derived with
respect to the Fund’s business of investing in stock,
securities or currencies. The tax treatment of a Fund’s investments in a
Subsidiary may be adversely affected by future legislation,
court decisions, Treasury Regulations and/or guidance issued by the IRS that
could affect whether income derived from such
investments is “qualifying income” under Subchapter M of the Code, or otherwise
affect the character, timing and/or amount of the
Fund’s taxable income or any gains and distributions made by the Fund. No
assurances can be provided that the IRS would not be
able to successfully assert that a Fund’s income from such investments was not
“qualifying income,” in which case the Fund would fail
to qualify as a RIC under Subchapter M of the Code if over 10% of its gross
income was derived from these investments. If the Fund
failed to qualify as a RIC, it would be subject to federal and state income tax
on all of its taxable income at regular corporate tax rates
with no deduction for any distributions paid to shareholders, which would
significantly adversely affect the returns to, and could cause
substantial losses for, Fund shareholders.
A
foreign corporation, such as a Subsidiary, will generally not be subject to U.S.
federal income taxation unless it is deemed to be engaged
in a U.S. trade or business. The rules regarding whether a Subsidiary will be
treated as engaged in a U.S. trade or business as a
result of its bitcoin related investments are not certain. It is expected that a
Subsidiary will conduct its activities in a manner so as to meet
the requirements of a safe harbor under Section 864(b)(2) of the Code under
which the Subsidiary may engage in trading in stocks
or securities or certain commodities without being deemed to be engaged in a
U.S. trade or business. However, if certain of a Subsidiary’s
activities were determined not to be of the type described in the safe harbor,
then the activities of the Subsidiary may constitute
a U.S. trade or business, or be taxed as such. In general, a foreign
corporation, such as a Subsidiary, that does not conduct a
U.S. trade or business is nonetheless subject to tax at a flat rate of 30
percent (or lower tax treaty rate), generally payable through withholding,
on the gross amount of certain U.S.-source income that is not effectively
connected with a U.S. trade or business. There is
presently no tax treaty in force between the U.S. and the Cayman Islands that
would reduce this rate of withholding tax. It is not expected
that a Subsidiary will derive income subject to such withholding
tax.
Each
Subsidiary will be treated as a controlled foreign corporation and each Fund
will be treated as a “U.S. shareholder” of the Subsidiary.
As a result, each Fund will be required to include in gross income for U.S.
federal income tax purposes all of a Subsidiary’s
“Subpart F income” and “global intangible low-taxed income” whether or not such
income is distributed by the
Subsidiary.
Each Fund’s recognition of a Subsidiary’s income will increase the Fund’s tax
basis in its respective Subsidiary. Distributions
by a Subsidiary to a Fund will be tax-free, to the extent of their previously
undistributed “Subpart F income” and “global
intangible low-taxed income” and will correspondingly reduce the Fund’s tax
basis in the Subsidiary. “Subpart F income” and “global
intangible low-taxed income” is generally treated as ordinary income, regardless
of the character of a Subsidiary’s underlying income.
If a net loss is realized by a Subsidiary, such loss is not generally available
to offset the income earned by a Fund, and such loss
cannot be carried forward to offset taxable income of the Fund or the Subsidiary
in future periods.
In
addition to the requirements described above, in order to qualify as a RIC, a
Fund must distribute at least 90% of its investment company
taxable income (which generally includes dividends, taxable interest, and the
excess of net short-term capital gains over net long-term
capital losses less operating expenses) and at least 90% of its net tax-exempt
interest income, for each tax year, if any, to its shareholders.
If a Fund meets all of the RIC requirements, it will not be subject to federal
income tax on any of its investment company
taxable income or capital gains that it distributes to
shareholders.
If
a Fund fails to qualify as a RIC for any taxable year, all of its net income
will be subject to tax at regular corporate rates (whether or not
distributed to shareholders), and its distributions (including capital gains
distributions) will be taxable as income dividends to its shareholders
to the extent of a Fund’s current and accumulated earnings and profits, and will
be eligible for the dividends-received deduction
for corporate shareholders and for treatment as qualified dividend income, in
the case of individual shareholders. If a Fund fails
to satisfy either the income test or asset diversification test described above,
in certain cases, however, the Fund may be able to avoid
losing its status as a RIC by timely providing notice of such failure to the
IRS, curing such failure and possibly paying an additional
tax or penalty.
Tax
Treatment of the Funds
and Shareholders
Each
Fund intends to distribute substantially all of its net investment income
(including, for this purpose, net short-term capital gains)
to shareholders. Dividends from a Fund’s net investment income (other than
“exempt-interest dividends” discussed below) generally
are taxable to shareholders as ordinary income, whether received in cash or in
additional shares. Certain income distributions
paid by a Fund to individual shareholders are taxed at rates equal to those
applicable to net long-term capital gains (currently
either 15% or 20%, depending on whether the individual’s income exceeds certain
threshold amounts). This tax treatment applies
only if certain holding period requirements are satisfied by the shareholder and
the dividends are attributable to qualified dividends
received by a Fund itself. For this purpose, “qualified dividends” means
dividends received by a Fund from certain U.S. corporations
and qualifying foreign corporations, provided that the Fund satisfies certain
holding period and other requirements in respect
of the stock of such corporations. The Funds do not anticipate that they will
make distributions of qualified dividends. Distributions
received from REITs are generally comprised of ordinary income dividends and
capital gains dividends, which are generally
passed along to shareholders retaining the same character and are subject to tax
accordingly, as described above. In the case of
securities lending transactions, payments in lieu of dividends are not qualified
dividends. Dividends received by a Fund from REITs
are qualified dividends eligible for this lower tax rate only in limited
circumstances. Since the Fixed Income Funds’ income is expected
to be derived entirely from interest rather than dividends, it is not
anticipated that any portion of the distributions by the Fixed
Income Funds would qualify for a lower tax rate as qualified dividend income.
Further, such Funds’ distributions are not anticipated
to be eligible for a dividends received deduction for corporate
shareholders.
Individuals
and certain other noncorporate entities are generally eligible for a 20%
deduction with respect to ordinary dividends received
from REITs (“qualified REIT dividends”) and certain taxable income from certain
master limited partnerships (“MLPs”) through
2025. Applicable treasury regulations permit a RIC to pass through to its
shareholders qualified REIT dividends eligible for the
20% deduction. However, the regulations do not provide a mechanism for a RIC to
pass through to its shareholders income from MLPs
that would be eligible for such deduction if received directly by the
shareholders.
Certain
distributions reported by a Fund as Section 163(j) interest dividends may be
treated as interest income by shareholders for purposes
of the tax rules applicable to interest expense limitations under Section 163(j)
of the Code. Such treatment by the shareholder
is generally subject to holding period requirements and other potential
limitations, although the holding period requirements
are generally not applicable to dividends declared by money market funds and
certain other funds that declare dividends
daily and pay such dividends on a monthly or more frequent basis. The amount
that a Fund is eligible to report as a Section
163(j) dividend for a tax year is generally limited to the excess of the Fund’s
business interest income over the sum of the Fund’s
(i) business interest expense and (ii) other deductions properly allocable to
the Fund’s business interest income.
You
should also be aware that the benefits of the reduced tax rate applicable to
long-term capital gains and qualified dividend income may
be impacted by the application of the alternative minimum tax to individual
shareholders.
A
dividend paid by a Fund to a shareholder will not be treated as qualified
dividend income of the shareholder if (1) the dividend is received
with respect to any share held for fewer than 61 days during the 121-day period
beginning on the date which is 60 days before
the date on which such share becomes ex-dividend with respect to such dividend,
(or 91 days during the 181-day period beginning
90 days before the ex-dividend date in the case of certain preferred stock
dividends paid by a Fund), (2) to the extent that the
recipient is under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions
in
substantially similar or related property or (3) if the recipient elects to have
the dividend treated as investment income for purposes of
the limitation on deductibility of investment interest.
Dividends
paid to you out of a Fund’s investment company taxable income that are not
attributable to qualified dividends generally will
be taxable to you as ordinary income (currently at a maximum federal income tax
rate of 37% in the case of an individual shareholder for
taxable years beginning after 2017 and before 2026 and, in the case of a
corporate shareholder, 21%) to the extent of the
Fund’s earnings and profits. Distributions in excess of a Fund’s current and
accumulated earnings and profits will, as to each shareholder,
be treated as a tax-free return of capital to the extent of a shareholder’s
basis in their Fund shares, and as a capital gain thereafter
(if the shareholder holds their Fund shares as capital assets).
Distributions
of net long-term capital gains, if any, are taxable to shareholders as long-term
capital gains regardless of how long a shareholder
has held a Fund’s shares and regardless of whether the distribution is received
in additional shares or in cash. The maximum
individual rate applicable to long-term capital gains is generally either 15% or
20%, depending on whether the individual’s
income exceeds certain threshold amounts.
Distributions
from capital gains generally are made after applying any available capital loss
carryforwards. Capital loss carryforwards are
reduced to the extent they offset current-year net realized capital gains,
whether a Fund retains or distributes such gains. If a Fund incurs
or has incurred capital losses in excess of capital gains (“net capital
losses”), those losses will be carried forward to one or more subsequent
taxable years; any such carryforward losses will retain their character as
short-term or long-term. In the event that a Fund were
to experience an ownership change as defined under the Code, the capital loss
carryforwards and other favorable tax attributes of the
Fund, if any, may be subject to limitation.
In
determining its net capital gain, including in connection with determining the
amount available to support a capital gain dividend,
its taxable income and its earnings and profits, a Fund generally may also elect
to treat part or all of any post-October capital
loss (defined as any net capital loss attributable to the portion, if any, of
the taxable year after October 31 or, if there is no such
loss, the net long-term capital loss or net short-term capital loss attributable
to any such portion of the taxable year) or late-year ordinary
loss (generally, the sum of its (i) net ordinary loss, if any, from the sale,
exchange or other taxable disposition of property, attributable
to the portion, if any, of the taxable year after October 31, and its (ii) other
net ordinary loss, if any, attributable to the portion,
if any, of the taxable year after December 31) as if incurred in the succeeding
taxable year.
Each
Fund will decide whether to distribute or to retain all or part of any net
capital gains (the excess of net long-term capital gains over
net short-term capital losses) in any year for reinvestment. If any
capital gains are retained, a Fund will pay federal income tax thereon,
and, if the Fund makes an election, the shareholders will include such
undistributed gains in their income, and will increase their
tax basis in Fund shares by the difference between the amount of the includable
gains and the tax deemed paid by the shareholder
in respect of such shares. The shareholder will be able to claim their share of
the tax paid by a Fund as a refundable credit.
A
Fund will send reports annually to shareholders regarding the federal income tax
status of all distributions made for the preceding year.
To the extent such amounts include distributions received from a REIT,
they may be based on estimates and be subject to change
as REITs do not always have the information available by the time these reports
are due and can recharacterize certain amounts
after the end of the tax year. As a result, the final character and amount of
distributions may differ from that initially reported.
Shareholders
generally are taxed on any ordinary dividend or capital gain distributions from
a Fund in the year they are actually distributed.
However, if any such dividends or distributions are declared in October,
November or December, to shareholders of record
of such month and paid in January, then such amounts will be treated for tax
purposes as received by the shareholders on December
31.
Although
income received on direct U.S. Government obligations is taxable at the federal
level, such income may be exempt from state
tax, depending on the state, when received by a shareholder. Each Fund will
inform shareholders annually of the percentage of income
and distributions derived from direct U.S. Government obligations. Shareholders
should consult their tax advisors to determine
whether any portion of dividends received from a Fund is considered tax exempt
in their particular states.
A
Fund may invest a portion of its net assets in below investment grade
instruments. Investments in these types of instruments may present
special tax issues for a Fund. U.S. federal income tax rules are not entirely
clear about issues such as when a Fund may cease to
accrue interest, original issue discount or market discount, when and to what
extent deductions may be taken for bad debts or worthless
instruments, how payments received on obligations in default should be allocated
between principal and income and whether
exchanges of debt obligations in a bankruptcy or workout context are taxable.
These and other issues will be addressed by a Fund
to the extent necessary in order to ensure that it distributes sufficient income
such that it does not become subject to U.S. federal
income or excise tax.
After
the end of each calendar year, shareholders will be sent information on their
dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains, and the amount of any dividends
eligible for the federal dividends received deduction for
corporations.
Gains
or losses on the sale of securities by a Fund held as a capital asset will
generally be long-term capital gains or losses if the securities
have a tax holding period of more than one year at the time of such sale. Gains
or losses on the sale of securities with a tax holding
period of one year or less will be short-term capital gains or losses. Special
tax rules described below may change the normal treatment
of gains and losses recognized by a Fund when it makes certain types of
investments. Those special tax rules can, among other
things, affect the treatment of capital gain or loss as long-term or short-term
and may result in ordinary income or loss rather than
character of distributions made by a Fund.
A
gain or loss realized by a shareholder on the sale, exchange or redemption of
shares of a Fund held as a capital asset will be capital gain
or loss, and such gain or loss will be long-term if the holding period for the
shares exceeds one year and otherwise will be short-term.
Any loss realized on a sale, exchange or redemption of shares of a Fund will be
disallowed to the extent the shares disposed of are
replaced with substantially identical shares within the 61-day period beginning
30 days before and ending 30 days after the shares are
disposed of. Any loss realized by a shareholder on the disposition of shares
held six months or less is treated as a long-term capital loss
to the extent of any distributions of net long-term capital gains received by
the shareholder with respect to such shares or any inclusion
of undistributed capital gain with respect to such shares. The ability to deduct
capital losses may otherwise be limited under the
Code.
An
additional 3.8% Medicare tax is imposed on certain net investment income
(including ordinary dividends and capital gain distributions
received from a Fund and net gains from redemptions or other taxable
dispositions of Fund shares) of U.S. individuals, estates
and trusts to the extent that such person’s “modified adjusted gross income” (in
the case of an individual) or “adjusted gross income”
(in the case of an estate or trust) exceeds certain threshold
amounts.
Each
Fund (or its administrative agent) is required to report to the IRS and furnish
to Fund shareholders the cost basis information for
sale transactions of shares purchased on or after January 1, 2012. Shareholders
may elect to have one of several cost basis methods applied
to their account when calculating the cost basis of shares sold, including
average cost, FIFO (“first-in, first out”) or some other
specific identification method. Unless you instruct otherwise, each Fund will
use average cost as its default cost basis method, and
will treat sales as first coming from shares purchased prior to January 1, 2012.
If average cost is used for the first sale of Fund shares
covered by these rules, the shareholder may only use an alternative cost basis
method for shares purchased prospectively. Fund shareholders
should consult with their tax advisors to determine the best cost basis method
for their tax situation.
Each
Fund will generally be subject to a nondeductible 4% federal excise tax to the
extent it fails to distribute by the end of any calendar
year an amount at least equal to the sum of 98% of its ordinary income for that
year (taking into account certain deferrals and
elections) and 98.2% of its capital gain net income (the excess of short- and
long-term capital gains over short- and long-term capital
losses, including any available capital loss carryforwards) for the one-year
period ending on October 31 of that year, plus certain
other amounts. Each Fund intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain
net income, prior to the end of each calendar year to avoid liability for
federal excise tax, but can give no assurances that all such liability
will be eliminated.
The
Funds may be required to withhold and remit to the U.S. Treasury at the
applicable rate a percentage of any dividends, capital gains
distributions and redemption proceeds paid to any individual or certain other
noncorporate shareholder (i) who has failed to provide
a correct taxpayer identification number (generally an individual’s social
security number or non-individual’s employer identification
number) on the New Account Application; (ii) who is subject to backup
withholding as notified by the IRS; or (iii) who
has not certified to the Funds that such shareholder is not subject to backup
withholding. This backup withholding is not an additional
tax, and any amounts withheld would be sent to the IRS as an advance payment of
taxes due on a shareholder’s income for such
year.
The
Funds may make investments in which it recognizes income or gain prior to
receiving cash with respect to such investment. For example,
under certain tax rules, the Funds may be required to accrue a portion of any
discount at which certain securities are purchased
as income each year even though the Funds receives no payments in cash on the
security during the year. To the extent that
the Funds makes such investments, it generally would be required to pay out such
income or gain as a distribution in each year to
avoid taxation at the Funds level. Such distributions will be made from the
available cash of the Funds or by liquidation of portfolio
securities if necessary. If a distribution of cash necessitates the liquidation
of portfolio securities, the Adviser will select which
securities to sell. The Funds may realize a gain or loss from such sales. In the
event the Funds realizes net capital gains from such
transactions, the Funds and consequently its shareholders may receive a larger
capital gain distribution, if any, than they would in
the absence of such transactions.
Additional
Tax Considerations with respect to Short Duration Municipal Income
Portfolio
In
computing net investment income, the Fund will amortize any premiums and
original issue discounts on securities owned, if applicable.
Capital gains or losses realized upon sale or maturity of such securities will
be based on their amortized cost.
All
or a portion of any of the Fund’s gain from tax-exempt obligations purchased at
a market discount (where bonds are purchased below
their principal or face value) may be treated as ordinary income rather than
capital gain. This may increase the amount of taxable
distributions paid by the Fund to its shareholders.
From
time to time, proposals have been introduced before Congress for the purpose of
restricting or eliminating the federal income tax
exemption for interest on municipal securities. Similar proposals may be
introduced in the future. If such a proposal were enacted,
the availability of municipal securities for investment by the Fund could be
affected. In that event, the Fund would reevaluate
its investment objective and policies.
Taxation
of Dividends and Distributions.
The Fund intends to qualify to pay “exempt-interest dividends” to its
shareholders by maintaining,
as of the close of each of its taxable years, at least 50% of the value of its
assets in tax-exempt securities. An obligation will
be considered a tax-exempt security only if, in the opinion of bond counsel, the
interest payable is exempt from federal income tax.
An exempt-interest dividend is that part of the dividend distributions made by
the Fund which consists of interest received by the
Fund on tax-exempt securities upon which the shareholder generally incurs no
federal income taxes. Exempt-interest dividends are
included, however, in determining what portion, if any, of a person’s Social
Security benefits are subject to federal income tax.
The
Fund may invest a portion of its assets in certain “private activity bonds.” As
a result, a portion of the exempt-interest dividends paid
by the Fund will be an item of tax preference to shareholders subject to the
alternative minimum tax. However, the alternative minimum
tax consequences discussed in this paragraph do not apply with respect to
interest paid on bonds issued after December 31, 2008
and before January 1, 2011 (including refunding bonds issued during that period
to refund bonds originally issued after December
31, 2003 and before January 1, 2009).
Shareholders
will be subject to federal income tax on dividends paid from interest income
derived from taxable securities and on distributions
of net short-term capital gains. Such dividends and distributions are taxable to
the shareholder as ordinary dividend income
regardless of whether the shareholder receives such distributions in additional
shares or in cash. Such dividends and distributions
would not be eligible for either the corporate dividend received deduction or
for reduced rates applicable to equivalent dividends.
Shareholders
are generally taxed on any income dividend or capital gain distributions from
the Fund in the year they are actually distributed.
However, if any such dividends or distributions are declared in October,
November or December and paid to shareholders
of record of such month in January then such amounts will be treated for tax
purposes as received by the shareholders on
December 31.
Individuals
are often exempt from state and local personal income taxes on distributions of
tax-exempt dividends derived from assets located
in the state in which they reside, but are usually subject to state and local
taxes on distributions of tax-exempt dividends derived
from assets located in other states. Shareholders should consult their tax
advisers as to any other state and local taxes that apply
to the dividends and distributions received from the Fund.
Special
Rules for Certain Foreign Currency and Derivatives Transactions
In
general, gains from foreign currencies and from foreign currency options,
foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies are currently
considered to be qualifying income for purposes
of determining whether a Fund qualifies as a RIC.
Under
Section 988 of the Code, special rules are provided for certain transactions in
a foreign currency other than the taxpayer’s functional
currency (i.e., unless certain special rules apply, currencies other than the
U.S. dollar). In general, foreign currency gains or losses
from forward contracts, from futures contracts that are not “regulated futures
contracts,” and from unlisted options will be treated
as ordinary income or loss under Section 988 of the Code. Also, certain foreign
exchange gains or losses derived with respect to
foreign fixed-income securities are also subject to Section 988 treatment. In
general, therefore, Section 988 gains or losses will increase
or decrease the amount of a Fund’s investment company taxable income available
to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund’s net
capital gain.
A
Fund’s investment in options, swaps and related transactions, futures contracts
and forward contracts, options on futures contracts and
stock indices and certain other securities, including transactions involving
actual or deemed short sales or foreign exchange gains or
losses are subject to many complex and special tax rules. For example, OTC
options on debt securities and equity options, including
options on stock and on narrow-based stock indices, will be subject to tax under
Section 1234 of the Code, generally producing
a long-term or short-term capital gain or loss upon exercise, lapse or closing
out of the option or sale of the underlying stock
or security. By contrast, a Fund’s treatment of certain other options, futures
and forward contracts entered into by the Fund is generally
governed by Section 1256 of the Code. These “Section 1256” positions generally
include listed options on debt securities, options
on broad-based stock indices, options on securities indices, options on futures
contracts, regulated futures contracts and certain
foreign currency contracts and options thereon.
When
a Fund holds options or futures contracts which substantially diminish their
risk of loss with respect to other positions (as might
occur in some hedging transactions), this combination of positions could be
treated as a “straddle” for tax purposes, resulting
in
possible deferral of losses, adjustments in the holding periods of Fund
securities and conversion of short-term capital losses into long-term
capital losses. Certain tax elections exist for mixed straddles (i.e., straddles
comprised of at least one Section 1256 position and
at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
A
Section 1256 position held by a Fund will generally be marked-to-market (i.e.,
treated as if it were sold for fair market value) on the
last business day of the Fund’s fiscal year, and all gain or loss associated
with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income
or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses
into long-term capital losses within a Fund. The acceleration of income on
Section 1256 positions may require a Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the
Code, a Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows
from other sources. Any or all of these rules may, therefore, affect the amount,
character and timing of income earned and, in turn,
distributed to shareholders by a Fund.
Special
Tax Considerations Relating to Foreign Investments
Gains
or losses attributable to foreign currency contracts, or to fluctuations in
exchange rates that occur between the time a Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities are treated as ordinary
income or ordinary loss to the Fund. Similarly, gains or losses
on disposition of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss to a Fund. These
gains or losses increase or decrease the amount of a Fund’s net investment
income available to be distributed to its shareholders as
ordinary income.
A
Fund may be subject to foreign withholding taxes with respect to its dividend
and interest income from foreign countries, and the Fund
may be subject to foreign income taxes with respect to other income. If more
than 50% in value of a Fund’s total assets at the close
of the taxable year consists of stock or securities of foreign corporations, the
Fund may elect to treat certain foreign income taxes imposed
on it for federal income tax purposes as paid directly by its shareholders. If a
Fund is eligible to make this election, the Fund will
make such an election only if it deems it to be in the best interest of its
shareholders and will notify shareholders in writing each year
if it makes an election and of the amount of foreign income taxes, if any, to be
treated as paid by the shareholders. If a Fund makes
the election, shareholders will be required to include in income their
proportionate share of the amount of foreign income taxes
treated as imposed on the Fund and will be entitled to claim either a credit
(subject to the limitations discussed below) or, if they
itemize deductions, a deduction, for their shares of the foreign income taxes in
computing their federal income tax liability.
Shareholders
who choose to utilize a credit (rather than a deduction) for foreign taxes will
be subject to a number of complex limitations
regarding the availability and utilization of the credit. Because of these
limitations, shareholders may be unable to claim a credit
for the full amount of their proportionate shares of the foreign income taxes
paid by the Fund. Shareholders are urged to consult
their tax advisors regarding the application of these rules to their particular
circumstances.
A
Fund may invest in stocks of foreign companies that may be classified under the
Code as passive foreign investment companies (“PFICs”).
In general, a foreign company is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75%
or more of its gross income is investment-type income. When investing in PFIC
securities, each Fund generally intends to mark-to-market
these securities under certain provisions of the Code and recognize any
unrealized gains as ordinary income at the end
of the Fund’s fiscal and excise tax years. Deductions for losses are allowable
only to the extent of any current or previously recognized
gains. These gains (reduced by allowable losses) are treated as ordinary income
that a Fund is required to distribute, even though
it has not sold or received dividends from these securities. In addition, if a
Fund is unable to identify an investment as a PFIC and
thus does not make a mark-to-market election, a Fund may be subject to U.S.
federal income tax and interest on a portion of any “excess
distribution” or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by a Fund to its
shareholders.
Taxes
and Foreign Shareholders
Taxation
of a shareholder who, as to the United States, is a nonresident alien
individual, a foreign trust or estate, a foreign corporation
or a foreign partnership (“Foreign Shareholder”) depends on whether the income
from a
Fund is “effectively connected” with
a U.S. trade or business carried on by such shareholder.
If
the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a Foreign Shareholder, distributions
of investment company taxable income will generally be subject to U.S.
withholding tax at the rate of 30% (or such lower
treaty rate as may be applicable) upon the gross amount of the dividend (other
than “exempt-interest dividends” discussed above).
Furthermore, Foreign Shareholders will generally be exempt from U.S. federal
income tax on gains realized on the sale of shares
of a Fund, distributions of net long-term capital gains and amounts retained by
the Fund that are reported as undistributed capital
gains.
Dividends
paid by a Fund to shareholders who are nonresident aliens or foreign entities
that are derived from short-term capital gains and
qualifying U.S. source net interest income (including income from original issue
discount), and that are reported by the Fund as “interest-related
dividends” or “short-term capital gain dividends,” will generally not be subject
to U.S. withholding tax, provided that
the income would not be subject to U.S. federal income tax if earned directly by
the foreign shareholder. However, depending on
the circumstances, the Funds may report all, some or none of the Fund’s
potentially eligible dividends as exempt.
Foreign
Shareholders that own, either directly or indirectly, more than 5% of a class of
Fund shares, are urged to consult their own tax
advisors concerning special tax rules that may apply to their investment in Fund
shares.
If
the income from a Fund is effectively connected with a U.S. trade or business
carried on by a Foreign Shareholder, then distributions
from a Fund and any gains realized upon the sale of shares of a Fund will be
subject to U.S. federal income tax at the rates
applicable to U.S. citizens and residents or domestic corporations. In addition,
Foreign Shareholders that are corporations may be
subject to a branch profit tax.
The
Funds may be required to withhold federal income tax on distributions that are
otherwise exempt from withholding tax (or taxable
at a reduced treaty rate) unless the Foreign Shareholder complies with IRS
certification requirements.
Withholding
of U.S. tax (at a 30% rate) is required on payments of taxable dividends made to
certain non-U.S. entities that fail to comply
(or be deemed compliant) with extensive reporting and withholding requirements
designed to inform the U.S. Department of
the Treasury of U.S.-owned foreign investment accounts. Shareholders may be
requested to provide additional information to a
Fund
to enable the
Fund to determine whether withholding is required.
The
tax consequences to a Foreign Shareholder entitled to claim the benefits of an
applicable tax treaty may differ from those described
here. Furthermore, Foreign Shareholders are strongly urged to consult their own
tax advisors with respect to the particular tax
consequences to them of an investment in a
Fund, including the possible applicability of the U.S. estate tax.
State
and Local Tax Considerations
Rules
of state and local taxation of dividend and capital gains from RICs often differ
from the rules for federal income taxation described
above. Shareholders are urged to consult their tax advisors as to the
consequences of these and other state and local tax rules regarding
an investment in a
Fund.
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As
of January 1, 2024,
the following persons or entities own, of record or beneficially, more than 5%
of the shares of any Class of the following
Funds’
outstanding shares.
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
Core
Plus Fixed Income |
I |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
31.93% |
|
|
National
Fincl Services Corp FBO Their
Customers P.O.
Box 3908 Church
Street Station New
York, NY 10008-3908 |
25.09% |
|
|
Charles
Schwab & Co Inc Special
Custody Account For The Exclusive
Benefit Of Customers Attn
Mutual Funds 101
Montgomery St San
Francisco, CA 94104-4151 |
11.65% |
|
|
Pershing
LLC ATTN
Joe Mattiello One
Pershing Plaza 14th Fl Jersey
City NJ 07399-0001 |
5.70% |
|
|
LPL
Financial Omnibus
Customer Account Attn
Mutual Fund Trading 4707
Executive Dr San
Diego, CA 92121-3091 |
5.62% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
Corporate
Bond |
I |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
45.23% |
|
|
Charles
Schwab & Co Inc Special
Custody Account For The Exclusive
Benefit Of Customers Attn
Mutual Funds 101
Montgomery St San
Francisco, CA 94104-4151 |
10.69% |
|
|
Raymond
James House
Acct Firm 92500015 Omnibus
For Mutual Funds Attn
Courtney Waller 880
Carillon Pkwy St
Petersburg, FL 33716-1102 |
9.97% |
Discovery |
I |
National
Fincl Services Corp FBO* Their
Customers P
O Box 3908 Church
Street Station New
York NY 10008-3908 |
31.96% |
|
|
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
15.36% |
|
|
Charles
Schwab & Co Inc Special
Custody Account For The Exclusive
Benefit of Customers ATTN
Mutual Funds 101
Montgomery ST San
Francisco CA 94104-4151 |
8.69% |
|
|
Wells
Fargo Clearing Services LLC A/C
1699-0135 Special
Custody Acct For The Exclusive
Benefit of Customer 2801
Market ST Saint
Louis MO 63103-2523 |
6.32% |
|
|
Mac
& Co A/C 969821 ATTN:
Mutual Fund Operations 500
Grant Street Room
151-1010 Pittsburgh
PA 15219-2502 |
6.04% |
Dynamic
Value |
I |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
99.00% |
Global
Strategist |
I |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
37.63% |
|
|
National
Fincl Svcs Corp Clients For
The Exclusive Benefit Of National
Fincl Svcs Corp Clients P.O.
Box 3908 Church
Street Station New
York, NY 10008-3908 |
9.77% |
|
|
UBS
WM USA 0O0
11011 6100 OMNI Account
M/F Spec
Cdy A/C EBOC UBSFSI 1000
Harbor Blvd Weehawken,
NJ 07086-6761 |
8.15% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
High
Yield |
I |
National
Financial Services LLC* For
Exclusive Benefit Of Our Customers 499
Washington Blvd Attn
Mutual Funds Dept - 4th Floor Jersey
City, NJ 07310-1995 |
61.40% |
|
|
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
21.56% |
|
|
C/O
First HawaIIan Bank Sei
Private Trust Company 1
Freedom Valley Drive Oaks
PA 19456-9989 |
5.94% |
|
|
LPL
Financial Omnibus
Customer Account Attn
Mutual Fund Trading 4707
Executive Dr San
Diego, CA 92121-3091 |
5.08% |
Short
Duration Income |
I |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
54.13% |
|
|
LPL
Financial Omnibus
Customer Account Attn
Mutual Fund Trading 4707
Executive Dr San
Diego, CA 92121-3091 |
19.59% |
|
|
Copinco C/O
US Bank NA PO
BOX 1787 Milwaukee,
WI 53201-1787 |
7.19% |
Ultra
Short Income |
I |
Morgan
Stanley Smith Barney LLC* Special
Custody Acct For The Exclusive
Benefit of Customers of
MSSB 1300
Thames Street Wharf 6Th Fl Baltimore
MD 21231-3496 |
95.99% |
Core
Plus Fixed Income |
A |
National
Financial Services LLC For
Exclusive Benefit Of Our Cust Attn
Mutual Funds Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
51.79% |
|
|
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
33.20% |
Corporate
Bond |
A |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
36.99% |
|
|
National
Financial Services LLC For
Exclusive Benefit of Our Cust ATTN
Mutual Funds Dept 4th Floor 499
Washington BLVD Jersey
City NJ 07310-1995 |
14.50% |
Discovery |
A |
National
Financial Services LLC For
Exclusive Benefit Of Our Cust Attn
Mutual Funds Dept 4th Floor 499
Washington Blvd Jersey
City, NJ 07310-1995 |
54.75% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
|
|
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
19.22% |
|
|
Charles
Schwab & Co Inc Attn
Mutual Funds Special
Custody FBO Customers 101
Montgomery St San
Francisco, CA 94104-4151 |
10.80% |
Dynamic
Value |
A |
National
Financial Services LLC For
Exclusive Benefit of Our Cust ATTN
Mutual Funds Dept 4th Floor 499
Washington BLVD Jersey
City NJ 07310-1995 |
47.60% |
|
A |
Morgan
Stanley Smith Barney LLC 1
New York Plz Fl 12 New
York NY 10004-1935 |
28.28% |
|
A |
Pershing
LLC Po
Box 2052 Jersey
City NJ 07303-2052 |
18.55% |
Global
Strategist |
A |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
72.64% |
High
Yield |
A |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
41.19% |
|
|
National
Financial Services LLC* For
Exclusive Benefit of Our Cust ATTN
Mutual Funds Dept 4th Floor 499
Washington BLVD Jersey
City NJ 07310-1995 |
28.21% |
|
|
Charles
Schwab & Co Inc ATTN
Mutual Funds 101
Montgomery Street San
Francisco CA 94104-4151 |
11.62% |
|
|
Pershing
LLC 1
Pershing Plaza Jersey
City NJ 07399-0002 |
6.62% |
Short
Duration Income |
A |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
93.40% |
Short
Duration Municipal Income |
A |
Morgan
Stanley Smith Barney LLC* Special
Custody Acct For The Exclusive
Benefit of Customers of
Mssb 1300
Thames Street Wharf 6Th Fl Baltimore
MD 21231-3496 |
99.48% |
Ultra
Short Income Portfolio |
A |
Morgan
Stanley Smith Barney LLC* Special
Custody Acct For The Exclusive
Benefit of Customers of
MSSB 1300
Thames Street Wharf 6Th Floor Baltimore
MD 21231-3496 |
97.57% |
Core
Plus Fixed Income |
L |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
63.57% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
|
|
Vanguard
Brokerage Service Brokerage
Dealer # 0062 A/C
11111111 PO
BOX 1170 Valley
Forge, PA 19482-1170 |
34.83% |
Corporate
Bond |
L |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
84.85% |
|
|
UBS
WM USA 0O0
11011 6100 Omni
Account M/F Spec
Cdy A/C EBOC UBSFSI 1000
Harbor BLVD Weehawken
NJ 07086-6761 |
14.76% |
Discovery |
L |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
67.26% |
|
|
Wells
Fargo Clearing Services LLC A/C
1699-0135 Special
Custody Acct For The Exclusive
Benefit Of Customer 2801
Market St Saint
Louis, MO 63103-2523 |
14.37% |
|
|
UBS
WM USA 0O0
11011 6100 OMNI Account
M/F Spec
Cdy A/C EBOC UBSFSI 1000
Harbor Blvd Weehawken,
NJ 07086-6761 |
7.71% |
Global
Strategist |
L |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
84.77% |
|
|
UBS
WM USA 0O0
11011 6100 OMNI Account
M/F Spec
Cdy A/C EBOC UBSFSI 1000
Harbor Blvd Weehawken,
NJ 07086-6761 |
5.60% |
High
Yield |
L |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
84.62% |
|
|
Pershing
LLC 1
Pershing Plaza Jersey
City, NJ 07399-0002 |
7.76% |
|
|
Morgan
Stanley Investment Management 1633
Broadway Fl 26 New
York Ny 10019-6708 |
6.06% |
Short
Duration Income |
L |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City, NJ 07311 |
73.71% |
|
|
Brown
Brothers Harriman & Co Cust
For Banque Pictet & Cie Sa: W9
Omnibus 6659510 Reinvest 140
Broadway New
York, NY 10005-1101 |
14.62% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
|
|
Edward
D. Jones & Co For
The Benefit Of Customers 12555
Manchester Rd Saint
Louis, MO 63131-3710 |
9.97% |
Core
Plus Fixed Income |
C |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
41.84% |
|
|
Wells
Fargo Clearing Services LLC A/C
1699-0135 Special
Custody Acct For The Exclusive
Benefit of Customer 2801
Market ST Saint
Louis MO 63103-2523 |
23.67% |
|
|
LPL
Financial Fbo
Customer Accounts ATTN
Mutual Fund Operations Po
Box 509046 San
Diego CA 92150-9046 |
14.16% |
Corporate
Bond |
C |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
56.71% |
|
|
American
Enterprise Investment Svc FBO
# 41999970 707
2Nd Ave South Minneapolis
MN 55402-2405 |
11.68% |
|
|
Raymond
James Omnibus
For Mutual Funds House
Acct Firm 92500015 ATTN
Courtney Waller 880
Carillon PKWY St
Petersburg FL 33716-1102 |
11.73% |
|
|
LPL
Financial Fbo
Customer Accounts ATTN
Mutual Fund Operations Po
Box 509046 San
Diego CA 92150-9046 |
7.54% |
|
|
Pershing
LLC 1
Pershing Plaza Jersey
City NJ 07399-0002 |
6.16% |
Discovery |
C |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
42.06% |
|
|
Raymond
James House
Acct Firm 92500015 Omnibus
For Mutual Funds ATTN
Courtney Waller 880
Carillon PKWY St
Petersburg FL 33716-1102 |
9.98% |
|
|
Pershing
LLC 1
Pershing Plaza Jersey
City NJ 07399-0002 |
8.34% |
|
|
Merrill
Lynch Pierce Fenner & Smith Inc
For The Sole Benefit of Its Customers 4800
Deer Lake Dr E Boston
FL 32246-6484 |
6.49% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
|
|
LPL
Financial Omnibus
Customer Account ATTN
Mutual Fund Trading 4707
Executive Dr San
Diego CA 92121-3091 |
5.25% |
Dynamic
Value |
C |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
50.48% |
|
|
Pershing
LLC Po
Box 2052 Jersey
City NJ 07303-2052 |
25.02% |
|
|
National
Financial Services LLC For
Exclusive Benefit of Our Cust ATTN
Mutual Funds Dept 4th Floor 499
Washington BLVD Jersey
City NJ 07310-1995 |
19.82% |
Global
Strategist |
C |
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
78.08% |
|
|
Wells
Fargo Clearing Services LLC A/C
1699-0135 Special
Custody Acct For The Exclusive
Benefit of Customer 2801
Market ST Saint
Louis MO 63103-2523 |
17.10% |
High
Yield |
C |
Raymond
James Omnibus
For Mutual Funds House
Acct Firm 92500015 ATTN
Courtney Waller 880
Carillon PKWY St
Petersburg FL 33716-1102 |
39.13% |
|
|
Morgan
Stanley & Co Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
32.16% |
|
|
UBS
Wm USA 0O0
11011 6100 Omni
Account M/F Spec
Cdy A/C EBOC UBSFSI 1000
Harbor BLVD Weehawken
NJ 07086-6761 |
20.00% |
Short
Duration Income |
C |
Morgan
Stanley & Co* Harborside
Financial Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
63.19% |
|
|
Raymond
James Omnibus
For Mutual Funds House
Acct Firm 92500015 ATTN
Courtney Waller 880
Carillon PKWY St
Petersburg FL 33716-1102 |
18.13% |
|
|
Charles
Schwab & Co Inc Special
Custody Acct Fbo Customers ATTN:
Mutual Funds 211
Main St San
Francisco CA 94105-1901 |
7.40% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
|
|
Wells
Fargo Clearing Services LLC A/C
1699-0135 Special
Custody Acct For The Exclusive
Benefit of Customer 2801
Market ST Saint
Louis MO 63103-2523 |
6.90% |
Core
Plus Fixed Income |
R6 |
Northern
Tr Co Cust FBO Mather Foundation
Fx Income Tr A/C2678267 Po
Box 92956 Chicago
IL 60675-2956 |
61.30% |
|
|
Grayhawk
Fixed Income Pool Ua
Dtd 04/14/2020 350
7Th Avenue SW Ste 1900 Calgary
Ab T2P 3N9 |
32.57% |
|
|
C/O
Fiduciary Trust Company Int’L Currie
& Co Po
Box 3199 Church
Street Station New
York NY 10008-3199 |
6.10% |
Discovery |
R6 |
National
Financial Services LLC For
Exclusive Benefit Of Our Customers 499
Washington Blvd Attn
Mutual Funds Dept - 4th Floor Jersey
City, NJ 07310-1995 |
50.46% |
|
|
Edward
D. Jones & Co For
The Benefit Of Customers Attn
Terrance Spencer 12555
Manchester Rd Saint
Louis, MO 63131-3710 |
38.44% |
|
|
Tiaa
Trust, N.A. As Cust/Ttee of
Retirement Plans RecoRdkept
By Tiaa ATTN:
Fund Operations 8500
andrew Carnegie BLVD Charlotte
NC 28262-8500 |
5.45% |
Dynamic
Value |
R6 |
Teacher
Retirement System of Texas* ATTN
Jean Benoit Daumerie 1000
Red River St Austin
Tx 78701-2698 |
99.98% |
Global
Strategist Portfolio |
R6 |
Factory
Mutual Insurance Company* 404
Wyman St Ste 390 Waltham
Ma 02451-1275 |
40.93% |
|
|
Inter-American
Development Bank* For
Its Staff Retiremement The
Northern Trust Co ATTN
Elizabeth ShepaRd Farrar 1300
New York Ave Nw Washington
Dc 20577-0001 |
39.33% |
|
|
Inter-American
Development Bank For Its
Postretirement Benefits Plan ATTN
Elizabeth ShepaRd Farrar 1300
New York Ave Nw Washington
Dc 20577-0001 |
18.83% |
High
Yield |
IR |
Morgan
Stanley Investment Management 1633
Broadway FL 26 New
York NY 10019-6708 |
100% |
Short
Duration Municipal Income |
IR |
Morgan
Stanley Smith Barney LLC* Special
Custody Acct For The Exclusive
Benefit of Customers of
MSSB 1300
Thames Street Wharf 6Th Floor Baltimore
MD 21231-3496 |
99.46% |
|
|
| |
Fund |
Share
Class |
Name
and Address |
%
of Class |
Ultra
Short Income |
IR |
Charles
Schwab & Co Inc Special
Custody A/C FBO Customers ATTN
Mutual Funds 211
Main Street San
Francisco CA 94105-1901 |
32.70% |
|
|
Morgan
Stanley Smith Barney LLC Special
Custody Acct For The Exclusive
Benefit of Customers of
MSSB 1300
Thames Street Wharf 6Th Floor Baltimore
MD 21231-3496 |
23.47% |
|
|
Band
& Co C/O
US Bank NA Po
Box 1787 Milwaukee
WI 53201-1787 |
7.82% |
|
|
County
of Fairfax VA ATTN
Treasurer Fund Accountant 12000
Government Center PKWY Finance
Dept Fairfax
VA 22035-0002 |
5.61% |
As
of January 1, 2024, no person was known by the Trust to own beneficially or of
record 5% or more of any outstanding class of shares
of a Fund not listed above.
* |
The
persons listed above as owning 25% or more of the outstanding shares of a
Fund may be presumed to “control” (as that term is defined in the 1940
Act) such Fund.
As a result, those persons would have the ability to vote a majority of
the shares of the respective Fund on any matter requiring the approval of
shareholders of
the Fund. |
PERFORMANCE
INFORMATION
The
average annual compounded rates of return for the Class I shares of the Funds
for the 1-,5- and 10-year periods ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
2.03% |
0.61% |
2.83% |
6.23% |
11/14/1984 |
Corporate
Bond |
4.51% |
0.86% |
3.08% |
5.40% |
8/31/1990 |
Discovery |
2.74% |
1.21% |
6.28% |
11.08% |
3/30/1990 |
Dynamic
Value |
14.30% |
N/A |
N/A |
4.08% |
3/19/2021 |
Global
Strategist |
13.72% |
2.93% |
3.81% |
6.54% |
12/31/1992 |
High
Yield |
10.34% |
2.01% |
3.99% |
5.48% |
2/7/2012 |
Short
Duration Income |
4.19% |
1.38% |
2.04% |
2.81% |
3/31/1992 |
The
average annual compounded rates of return for the Class A shares of the Funds
for the 1-,5- and 10-year periods ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
1.59% |
0.26% |
2.47% |
3.83% |
11/7/1996 |
Corporate
Bond |
4.18% |
0.57% |
2.76% |
3.37% |
5/20/2002 |
Discovery |
2.44% |
0.95% |
5.99% |
8.78% |
1/31/1997 |
Dynamic
Value |
13.96% |
N/A |
N/A |
3.68% |
3/19/2021 |
Global
Strategist |
13.35% |
2.60% |
3.48% |
5.51% |
11/1/1996 |
High
Yield |
9.98% |
1.64% |
3.62% |
5.12% |
2/7/2012 |
Short
Duration Income |
3.92% |
1.13% |
1.77% |
0.46% |
9/28/2007 |
Ultra-Short
Income |
4.92% |
1.74% |
N/A |
1.53% |
4/28/2016 |
Short
Duration Municipal Income |
2.41% |
N/A |
N/A |
0.98% |
12/19/2018 |
The
average annual compounded rates of return, inclusive of a maximum sales charge
of 3.25% (5.25% with respect to the Global Strategist
and Discovery Portfolios and 2.25% with respect to Short Duration Income
Portfolio), for Class A shares of the Funds for the
1-,5- and 10-year periods ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
-1.73% |
-0.39% |
2.13% |
3.70% |
11/7/1996 |
Corporate
Bond |
0.84% |
-0.10% |
2.42% |
3.21% |
5/20/2002 |
Discovery |
-2.89% |
-0.14% |
5.42% |
8.56% |
1/31/1997 |
Dynamic
Value |
7.98% |
N/A |
N/A |
1.52% |
3/19/2021 |
Global
Strategist |
7.43% |
1.50% |
2.92% |
5.29% |
11/1/1996 |
High
Yield |
6.45% |
0.98% |
3.28% |
4.82% |
2/7/2012 |
Short
Duration Income |
1.57% |
0.67% |
1.53% |
0.31% |
9/28/2007 |
Ultra-Short
Income* |
4.92% |
1.74% |
N/A |
1.53% |
4/28/2016 |
Short
Duration Municipal Income* |
2.41% |
N/A |
N/A |
0.98% |
12/19/2018 |
* |
Class
A shares of the Ultra-Short Income and Short Duration Municipal Income
Portfolios do not have a sales charge. |
The
average annual compounded rates of return for the Class L shares of the Funds
for the 1-, 5- and 10-year periods ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
1.30% |
-0.02% |
2.21% |
2.24% |
4/27/2012 |
Corporate
Bond |
3.68% |
0.13% |
2.39% |
3.02% |
6/16/2008 |
Discovery |
1.77% |
0.43% |
5.42% |
7.48% |
6/14/2012 |
Global
Strategist |
12.69% |
2.07% |
2.95% |
3.98% |
4/27/2012 |
High
Yield |
9.76% |
1.40% |
3.36% |
4.86% |
2/7/2012 |
Short
Duration Income |
3.68% |
0.88% |
1.47% |
1.43% |
4/27/2012 |
The
average annual compounded rates of return for the Class C shares of the Funds
for the 1-, 5- and 10-year periods ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
0.84% |
-0.44% |
N/A |
1.07%** |
4/30/2015 |
Corporate
Bond |
3.28% |
-0.25% |
N/A |
1.20%** |
4/30/2015 |
Discovery |
1.73% |
0.18% |
N/A |
6.76% |
5/31/2017 |
Dynamic
Value |
13.31% |
N/A |
N/A |
3.02% |
3/19/2021 |
Global
Strategist |
12.45% |
1.78% |
N/A |
2.21%** |
4/30/2015 |
High
Yield |
9.16% |
0.90% |
N/A |
2.39%** |
4/30/2015 |
Short
Duration Income |
3.02% |
0.36% |
N/A |
1.10%** |
4/30/2015 |
The
average annual compounded rates of return, inclusive of maximum contingent
deferred sales charge of 1.00% for the Class C*** shares
of the Funds for the 1-,5- and 10-year periods ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
-0.12% |
-0.44% |
N/A |
1.07%** |
4/30/2015 |
Corporate
Bond |
2.28% |
-0.25% |
N/A |
1.20%** |
4/30/2015 |
Discovery |
0.73% |
0.18% |
N/A |
6.76% |
5/31/2017 |
Dynamic
Value |
12.31% |
N/A |
N/A |
3.02% |
3/19/2021 |
Global
Strategist |
11.45% |
1.78% |
N/A |
2.21%** |
4/30/2015 |
High
Yield |
8.16% |
0.90% |
N/A |
2.39%** |
4/30/2015 |
Short
Duration Income |
2.02% |
0.36% |
N/A |
1.10%** |
4/30/2015 |
|
**
Class C shares will generally convert to Class A shares approximately
eight years after the end of the calendar month in which the shares were
purchased. Performance
for periods greater than eight years reflects this
conversion. |
|
***
Class C shares have a 1.00% sales charge for shares redeemed within one
year of purchase. |
The
average annual compounded rates of return for the Class R6 shares of the Funds
for the 1-, 5- and 10-year periods ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
1.97% |
0.64% |
N/A |
0.71% |
6/15/2018 |
Discovery |
2.84% |
1.33% |
6.39% |
6.48% |
9/13/2013 |
Dynamic
Value |
14.43% |
N/A |
N/A |
4.09% |
3/19/2021 |
Global
Strategist |
13.64% |
2.95% |
N/A |
3.51% |
5/29/2015 |
High
Yield |
10.35% |
2.03% |
N/A |
3.32% |
3/28/2014 |
Short
Duration Income†
|
4.24% |
1.43% |
N/A |
2.43% |
1/11/2016 |
† |
Short
Duration Income Portfolio’s Class R6 shares liquidated on
12/11/2023. |
The
average annual compounded rates of return for the Institutional Class and Class
IR shares of the Fund for the 1-,5- and 10-year periods
ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
High
Yield - Class IR |
10.36% |
2.04% |
N/A |
2.29% |
06/15/2018 |
Short
Duration Municipal Income - Institutional Class* |
2.41% |
N/A |
N/A |
1.02% |
12/19/2018 |
Short
Duration Municipal Income - Class IR |
2.51% |
N/A |
N/A |
1.10% |
12/19/2018 |
Ultra-Short
Income - Institutional Class |
4.97% |
1.86% |
N/A |
1.68% |
04/28/2016 |
Ultra-Short
Income - Class IR |
5.03% |
1.91% |
N/A |
1.73% |
04/28/2016 |
* |
Short
Duration Municipal Income’s Institutional Class liquidated on
12/20/2023. |
The
average annual compounded rates of return (after taxes on distributions) for the
Class I shares of the Funds (except with respect to
Ultra Short Income Portfolio and Short Duration Municipal Income Portfolio) for
the 1-,5- and 10-year periods ended September
30,
2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
-0.12% |
-0.98% |
1.32% |
3.79% |
11/14/1984 |
Corporate
Bond |
2.73% |
-0.70% |
1.63% |
3.38% |
8/31/1990 |
Discovery |
2.74% |
-2.27% |
1.85% |
8.42% |
3/30/1990 |
Dynamic
Value |
13.16% |
N/A |
N/A |
2.99% |
3/19/2021 |
Global
Strategist |
13.55% |
1.45% |
2.40% |
4.86% |
12/31/1992 |
High
Yield |
7.37% |
-0.52% |
1.00% |
2.42% |
2/7/2012 |
Short
Duration Income |
3.02% |
0.53% |
1.23% |
1.43% |
3/31/1992 |
Ultra-Short
Income1
|
2.96% |
1.07% |
N/A |
0.97% |
4/28/2016 |
Short
Duration Municipal Income1
|
1.35% |
N/A |
N/A |
0.63% |
12/19/2018 |
1 |
The
returns for the Ultra-Short Income Portfolio and Short Duration Municipal
Income Portfolio reflect Institutional Class shares and the Class IR
shares, respectively. |
The
average annual compounded rates of return (after taxes on distributions and
redemptions) for the Class I shares of the Funds (except
with respect to Ultra-Short Income Portfolio and Short Duration Municipal Income
Portfolio) for the 1-,5- and 10-year periods
ended September
30, 2023 and for the period from inception through September
30, 2023 are as follows:
|
|
|
|
| |
Fund |
1
Year Return 09/30/23 |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
1.22% |
-0.13% |
1.55% |
3.90% |
11/14/1984 |
Corporate
Bond |
2.69% |
0.17% |
1.83% |
3.44% |
8/31/1990 |
Discovery |
1.62% |
1.83% |
4.60% |
8.97% |
3/30/1990 |
Dynamic
Value |
8.69% |
N/A |
N/A |
2.74% |
3/19/2021 |
Global
Strategist |
8.23% |
1.90% |
2.60% |
4.72% |
12/31/1992 |
High
Yield |
6.07% |
0.47% |
1.70% |
2.88% |
2/7/2012 |
Short
Duration Income |
2.49% |
0.70% |
1.21% |
1.61% |
3/31/1992 |
Ultra-Short
Income1
|
2.92% |
1.09% |
N/A |
0.98% |
4/28/2016 |
Short
Duration Municipal Income1
|
1.48% |
N/A |
N/A |
0.64% |
12/19/2018 |
1 |
The
returns for the Ultra-Short Income Portfolio and Short Duration Municipal
Income Portfolio reflect Institutional Class shares and the Class IR
shares, respectively. |
The
aggregate compounded rates of return for the Class I shares of the Funds (except
with respect to Ultra-Short Income Portfolio and
Short Duration Municipal Income Portfolio) for the 5- and 10-year periods ended
September
30, 2023 and for the period from inception
through September
30, 2023 are set forth below. One year aggregate total return figures are
reflected under the average annual
total return figures provided above.
|
|
|
| |
Fund |
5
Years ended 09/30/23 |
10
Years ended 09/30/23 |
Inception to 09/30/23 |
Date of
Inception of
Class |
Core
Plus Fixed Income |
3.08% |
32.18% |
948.85% |
11/14/1984 |
Corporate
Bond |
4.36% |
35.42% |
470.27% |
8/31/1990 |
Discovery |
6.22% |
83.90% |
3,281.06% |
3/30/1990 |
Dynamic
Value |
N/A |
N/A |
10.67% |
3/19/2021 |
Global
Strategist |
15.51% |
45.29% |
600.46% |
12/31/1992 |
High
Yield |
10.44% |
47.85% |
86.18% |
2/7/2012 |
Short
Duration Income |
7.12% |
22.35% |
139.26% |
3/31/1992 |
Ultra-Short
Income1
|
9.64% |
N/A |
13.15% |
4/28/2016 |
Short
Duration Municipal Income1
|
N/A |
N/A |
4.96% |
12/19/2018 |
1 |
The
returns for the Ultra-Short Income and Short Duration Municipal Income
Portfolio reflect Institutional Class
shares. |
The
30-day yield figures for each of the Trust’s Fixed Income and Asset Allocation
Funds is set forth below:
| |
Class
I Fund |
Period
Ending 09/30/23 |
Core
Plus Fixed Income |
6.21% |
Corporate
Bond |
5.75% |
Dynamic
Value |
2.37% |
Global
Strategist |
2.37% |
High
Yield |
8.64% |
Short
Duration Income |
5.16% |
| |
Class
A Fund |
Period
Ending 09/30/23 |
Core
Plus Fixed Income |
5.66% |
Corporate
Bond |
5.22% |
Dynamic
Value |
1.92% |
Global
Strategist |
1.97% |
High
Yield |
8.01% |
Short
Duration Income |
4.80% |
Short
Duration Municipal Income |
3.82% |
Ultra-Short
Income |
5.46% |
| |
Class
L Fund |
Period
Ending 09/30/23 |
Core
Plus Fixed Income |
5.60% |
Corporate
Bond |
4.91% |
Global
Strategist |
1.49% |
High
Yield |
8.04% |
Short
Duration Income |
4.67% |
| |
Class
C Fund |
Period
Ending 09/30/23 |
Core
Plus Fixed Income |
5.12% |
Corporate
Bond |
4.63% |
Dynamic
Value |
1.20% |
Global
Strategist |
1.26% |
High
Yield |
7.51% |
Short
Duration Income |
4.16% |
| |
Class
IR Fund |
Period
Ending 09/30/23 |
High
Yield |
8.68% |
Ultra-Short
Income |
5.56% |
Short
Duration Municipal Income |
3.82% |
| |
Class
R6 Fund |
Period
Ending 09/30/23 |
Core
Plus Fixed Income |
6.26% |
Dynamic
Value |
2.44% |
Global
Strategist |
2.45% |
High
Yield |
8.68% |
| |
Institutional
Class Fund |
Period
Ending 09/30/23 |
Ultra-Short
Income |
5.51% |
Based
upon a federal personal income tax bracket of 40.8%, the tax-equivalent yield of
each of Class A, Class IR and Institutional Class
of the Short Duration Municipal Income Portfolio for the 30-day period ended
September 30, 2023 was 6.45%, 6.45% and 6.44%
respectively.
POTENTIAL
CONFLICTS OF INTEREST
As
a diversified global financial services firm, Morgan Stanley, the parent company
of the Adviser, engages in a broad spectrum of activities,
including financial advisory services, investment management activities,
lending, commercial banking, sponsoring and managing
private investment funds, engaging in broker-dealer transactions and principal
securities, commodities and foreign exchange
transactions, research publication and other activities. In the ordinary course
of its business, Morgan Stanley is a full-service investment
banking and financial services firm and therefore engages in activities where
Morgan Stanley’s interests or the interests of its
clients may conflict with the interests of a
Fund. Morgan Stanley advises clients and sponsors, manages or advises other
investment funds
and investment programs, accounts and businesses (collectively, together with
the Morgan Stanley Funds, any new or successor funds,
programs, accounts or businesses (other than funds, programs, accounts or
businesses sponsored, managed, or advised by former
direct or indirect subsidiaries of Eaton Vance Corp. (“Eaton Vance Investment
Accounts”)), the ‘‘MS Investment Accounts”, and,
together with the Eaton Vance Investment Accounts, the “Affiliated Investment
Accounts’’) with a wide variety of investment objectives
that in some instances may overlap or conflict with a
Fund’s investment objectives and present conflicts of interest. In addition,
Morgan Stanley or the Adviser may also from time to time create new or successor
Affiliated Investment Accounts that may compete
with a
Fund and present similar conflicts of interest. The discussion below enumerates
certain actual, apparent and potential conflicts
of interest. There is no assurance that conflicts of interest will be resolved
in favor of Fund shareholders and, in fact, they may
not be. Conflicts of interest not described below may also exist.
The
discussions below with respect to actual, apparent and potential conflicts of
interest also may be applicable to or arise from the Eaton
Vance Investment Accounts whether or not specifically identified.
Material
Non-public and Other Information.
It is expected that confidential or material non-public information regarding an
investment
or potential investment opportunity may become available to the Adviser. If such
information becomes available, the Adviser
may be precluded (including by applicable law or internal policies or
procedures) from pursuing an investment or disposition opportunity
with respect to such investment or investment opportunity. The Adviser may also
from time to time be subject to contractual
‘‘stand-still’’ obligations and/or confidentiality obligations that may restrict
its ability to trade in certain investments on a
Fund’s
behalf. In addition, the Adviser may be precluded from disclosing such
information to an investment team, even in circumstances
in which the information would be beneficial if disclosed. Therefore, the
investment team may not be provided access to
material non-public information in the possession of Morgan Stanley that might
be relevant to an investment decision to be made on
behalf of a
Fund, and the investment team may initiate a transaction or sell an investment
that, if such information had been known
to it, may not have been undertaken. In addition, certain members of the
investment team may be recused from certain investment-related
discussions so that such members do not receive information that would limit
their ability to perform functions of their
employment with the Adviser or its affiliates unrelated to that of a
Fund. Furthermore, access to certain parts of Morgan Stanley may
be subject to third party confidentiality obligations and to information
barriers established by Morgan Stanley in order to manage
potential conflicts of interest and regulatory restrictions, including without
limitation joint transaction restrictions pursuant to
the 1940 Act. Accordingly, the Adviser’s ability to source investments from
other business units within Morgan Stanley may be limited
and there can be no assurance that the Adviser will be able to source any
investments from any one or more parts of the Morgan
Stanley network.
The
Adviser may restrict its investment decisions and activities on behalf of the
Funds
in various circumstances, including because of applicable
regulatory requirements or information held by the Adviser or Morgan Stanley.
The Adviser might not engage in transactions
or other activities for, or enforce certain rights in favor of, a
Fund due to Morgan Stanley’s activities outside the Funds.
In
instances where trading of an investment is restricted, the Adviser may not be
able to purchase or sell such investment on behalf of a
Fund, resulting in the
Fund’s inability to participate in certain desirable transactions. This
inability to buy or sell an investment could
have an adverse effect on a
Fund’s portfolio due to, among other things, changes in an investment’s value
during the period its trading
is restricted. Also, in situations where the Adviser is required to aggregate
its positions with those of other Morgan Stanley business
units for position limit calculations, the Adviser may have to refrain from
making investments due to the positions held by other
Morgan Stanley business units or their clients. There may be other situations
where the Adviser refrains from making an investment
due to additional disclosure obligations, regulatory requirements, policies, and
reputational risk, or the Adviser may limit purchases
or sales of securities in respect of which Morgan Stanley is engaged in an
underwriting or other distribution capacity.
Morgan
Stanley has established certain information barriers and other policies to
address the sharing of information between different businesses
within Morgan Stanley. As a result of information barriers, the Adviser
generally will not have access, or will have limited access,
to certain information and personnel in other areas of Morgan Stanley and
generally will not manage the Funds
with the benefit
of the information held by such other areas. Morgan Stanley, due to its access
to and knowledge of funds, markets and securities
based on its prime brokerage and other businesses, may make decisions based on
information or take (or refrain from
taking)
actions with respect to interests in investments of the kind held (directly or
indirectly) by the Funds
in a manner that may be adverse
to a
Fund, and will not have any obligation or other duty to share information with
the Adviser.
In
limited circumstances, however, including for purposes of managing business and
reputational risk, and subject to policies and procedures
and any applicable regulations, Morgan Stanley personnel, including personnel of
the Adviser, on one side of an information
barrier may have access to information and personnel on the other side of the
information barrier through “wall crossings.”
The Adviser faces conflicts of interest in determining whether to engage in such
wall crossings. Information obtained in connection
with such wall crossings may limit or restrict the ability of the Adviser to
engage in or otherwise effect transactions on behalf
of the Funds
(including purchasing or selling securities that the Adviser may otherwise have
purchased or sold for a
Fund in the
absence of a wall crossing). In managing conflicts of interest that arise
because of the foregoing, the Adviser generally will be subject
to fiduciary requirements. The Adviser may also implement internal information
barriers or ethical walls, and the conflicts described
herein with respect to information barriers and otherwise with respect to Morgan
Stanley and the Adviser will also apply internally
within the Adviser. As a result, a
Fund may not be permitted to transact in (e.g., dispose of a security in whole
or in part) during
periods when it otherwise would have been able to do so, which could adversely
affect a
Fund. Other investors in the security that
are not subject to such restrictions may be able to transact in the security
during such periods. There may also be circumstances in
which, as a result of information held by certain portfolio management teams in
the Adviser, the Adviser limits an activity or transaction
for a
Fund, including if the
Fund is managed by a portfolio management team other than the team holding such
information.
Investments
by Morgan Stanley and its Affiliated Investment Accounts.
In serving in multiple capacities to Affiliated Investment Accounts,
Morgan Stanley, including the Adviser and its investment teams, may have
obligations to other clients or investors in Affiliated
Investment Accounts, the fulfillment of which may not be in the best interests
of a
Fund or its shareholders. A
Fund’s investment
objectives may overlap with the investment objectives of certain Affiliated
Investment Accounts. As a result, the members of
an investment team may face conflicts in the allocation of investment
opportunities among a
Fund and other investment funds, programs,
accounts and businesses advised by or affiliated with the Adviser. Certain
Affiliated Investment Accounts may provide for higher
management or incentive fees or greater expense reimbursements or overhead
allocations, all of which may contribute to this conflict
of interest and create an incentive for the Adviser to favor such other
accounts.
Morgan
Stanley currently invests and plans to continue to invest on its own behalf and
on behalf of its Affiliated Investment Accounts
in a wide variety of investment opportunities globally. Morgan Stanley and its
Affiliated Investment Accounts, to the extent consistent
with applicable law and policies and procedures, will be permitted to invest in
investment opportunities without making such
opportunities available to a
Fund beforehand. Subject to the foregoing, Morgan Stanley may offer investments
that fall into the investment
objectives of an Affiliated Investment Account to such account or make such
investment on its own behalf, even though such
investment also falls within a
Fund’s investment objectives. A
Fund may invest in opportunities that Morgan Stanley and/or one or
more Affiliated Investment Accounts has declined, and vice versa. All of the
foregoing may reduce the number of investment opportunities
available to a
Fund and may create conflicts of interest in allocating investment
opportunities. Investors should note that
the conflicts inherent in making such allocation decisions may not always be
resolved to a
Fund’s advantage. There can be no assurance
that a
Fund will have an opportunity to participate in certain opportunities that fall
within their investment objectives.
To
seek to reduce potential conflicts of interest and to attempt to allocate such
investment opportunities in a fair and equitable manner,
the Adviser has implemented allocation policies and procedures. These policies
and procedures are intended to give all clients
of the Adviser, including the Funds,
fair access to investment opportunities consistent with the requirements of
organizational documents,
investment strategies, applicable laws and regulations, and the fiduciary duties
of the Adviser. Each client of the Adviser that
is subject to the allocation policies and procedures, including each
Fund, is assigned an investment team and portfolio manager(s)
by the Adviser. The investment team and portfolio managers review investment
opportunities and will decide with respect to
the allocation of each opportunity considering various factors and in accordance
with the allocation policies and procedures. The allocation
policies and procedures are subject to change. Investors should note that the
conflicts inherent in making such allocation decisions
may not always be resolved to the advantage of a
Fund.
It
is possible that Morgan Stanley or an Affiliated Investment Account, including
another Morgan Stanley Fund, will invest in or advise
(in the case of Morgan Stanley) a company that is or becomes a competitor of a
company of which a
Fund holds an investment.
Such investment could create a conflict between the Funds,
on the one hand, and Morgan Stanley or the Affiliated Investment
Account, on the other hand. In such a situation, Morgan Stanley may also have a
conflict in the allocation of its own resources
to the portfolio investment. Furthermore, certain Affiliated Investment Accounts
will be focused primarily on investing in other
funds which may have strategies that overlap and/or directly conflict and
compete with a
Fund.
In
addition, certain investment professionals who are involved in a
Fund’s activities remain responsible for the investment activities of
other
Affiliated Investment Accounts managed by the Adviser and its affiliates, and
they will devote time to the management of such investments
and other newly created Affiliated Investment Accounts (whether in the form of
funds, separate accounts or other vehicles),
as well as their own investments. In addition, in connection with the management
of investments for other Affiliated Investment
Accounts, members of Morgan Stanley and its affiliates may serve on the boards
of directors of or advise companies
which
may compete with a
Fund’s portfolio investments. Moreover, these Affiliated Investment Accounts
managed by Morgan Stanley
and its affiliates may pursue investment opportunities that may also be suitable
for a
Fund.
It
should be noted that Morgan Stanley may, directly or indirectly, make large
investments in certain of its Affiliated Investment Accounts,
and accordingly Morgan Stanley’s investment in a
Fund may not be a determining factor in the outcome of any of the foregoing
conflicts. Nothing herein restricts or in any way limits the activities of
Morgan Stanley, including its ability to buy or sell interests
in, or provide financing to, equity and/or debt instruments, funds or portfolio
companies, for its own accounts or for the accounts
of Affiliated Investment Accounts or other investment funds or clients in
accordance with applicable law.
Different
clients of the Adviser, including a
Fund, may invest in different classes of securities of the same issuer,
depending on the respective
clients’ investment objectives and policies. As a result, the Adviser and its
affiliates, at times, will seek to satisfy fiduciary obligations
to certain clients owning one class of securities of a particular issuer by
pursuing or enforcing rights on behalf of those clients
with respect to such class of securities, and those activities may have an
adverse effect on another client which owns a different class
of securities of such issuer. For example, if one client holds debt securities
of an issuer and another client holds equity securities of
the same issuer, if the issuer experiences financial or operational challenges,
the Adviser and its affiliates may seek a liquidation of the
issuer on behalf of the client that holds the debt securities, whereas the
client holding the equity securities may benefit from a reorganization
of the issuer. Thus, in such situations, the actions taken by the Adviser or its
affiliates on behalf of one client can negatively
impact securities held by another client. These conflicts also exist as between
the Adviser’s clients, including the Fund, and the
Affiliated Investment Accounts managed by Eaton Vance.
The
Adviser and its affiliates may give advice and recommend securities to other
clients which may differ from advice given to, or securities
recommended or bought for, a
Fund even though such other clients’ investment objectives may be similar to
those of the Fund.
The
Adviser and its affiliates manage long and short portfolios. The simultaneous
management of long and short portfolios creates conflicts
of interest in portfolio management and trading in that opposite directional
positions may be taken in client accounts, including
client accounts managed by the same investment team, and creates risks such as:
(i) the risk that short sale activity could adversely
affect the market value of long positions in one or more portfolios (and vice
versa) and (ii) the risks associated with the trading
desk receiving opposing orders in the same security simultaneously. The Adviser
and its affiliates have adopted policies and procedures
that are reasonably designed to mitigate these conflicts. In certain
circumstances, the Adviser invests on behalf of itself in securities
and other instruments that would be appropriate for, held by, or may fall within
the investment guidelines of its clients, including
a
Fund. At times, the Adviser may give advice or take action for its own accounts
that differs from, conflicts with, or is adverse
to advice given or action taken for any client.
From
time to time, conflicts also arise due to the fact that certain securities or
instruments may be held in some client accounts, including
a
Fund, but not in others, or that client accounts may have different levels of
holdings in certain securities or instruments. In
addition, due to differences in the investment strategies or restrictions among
client accounts, the Adviser may take action with respect
to one account that differs from the action taken with respect to another
account. In some cases, a client account may compensate
the Adviser based on the performance of the securities held by that account. The
existence of such a performance based fee
may create additional conflicts of interest for the Adviser in the allocation of
management time, resources and investment opportunities.
The Adviser has adopted several policies and procedures designed to address
these potential conflicts including a code of
ethics and policies that govern the Adviser’s trading practices, including,
among other things, the aggregation and allocation of trades
among clients, brokerage allocations, cross trades and best
execution.
In
addition, at times an investment team will give advice or take action with
respect to the investments of one or more clients that is not
given or taken with respect to other clients with similar investment programs,
objectives, and strategies. Accordingly, clients with similar
strategies will not always hold the same securities or instruments or achieve
the same performance. The Adviser’s investment teams
also advise clients with conflicting programs, objectives or strategies. These
conflicts also exist as between the Adviser’s clients, including
the Fund, and the Affiliated Investment Accounts managed by Eaton
Vance.
Morgan
Stanley and its affiliates maintain separate trading desks that operate
independently of each other and do not share information
with the Adviser. The Morgan Stanley and affiliate trading desks may compete
against the Adviser trading desks when implementing
buy and sell transactions, possibly causing certain Affiliated Investment
Accounts to pay more or receive less for a security
than other Affiliated Investment Accounts.
Investments
by Separate Investment Departments.
The entities and individuals that provide investment-related services for the
Fund
and certain other MS Investment Accounts (the “MS Investment Department”) may be
different from the entities and individuals
that provide investment-related services to Eaton Vance Investment Accounts (the
“Eaton Vance Investment Department”
and, together with the MS Investment Department, the “Investment Departments”).
Although Morgan Stanley has implemented
information barriers between the Investment Departments in accordance with
internal policies and procedures, each Investment
Department may engage in discussions and share information and resources with
the other Investment Department on certain
investment-related matters. The sharing of information and resources between the
Investment Departments is designed to
further
increase the knowledge and effectiveness of each Investment Department. Because
each Investment Department generally makes
investment decisions and executes trades independently of the other, the quality
and price of execution, and the performance of
investments and accounts, can be expected to vary. In addition, each Investment
Department may use different trading systems and
technology and may employ differing investment and trading strategies. As a
result, an Eaton Vance Investment Account could trade
in advance of the Fund (and vice versa), might complete trades more quickly and
efficiently than the Fund, and/or achieve different
execution than the Fund on the same or similar investments made
contemporaneously, even when the Investment Departments
shared research and viewpoints that led to that investment decision. Any sharing
of information or resources between the
Investment Department servicing the Fund and the Eaton Vance Investment
Department may result, from time to time, in the Fund
simultaneously or contemporaneously seeking to engage in the same or similar
transactions as an account serviced by the other Investment
Department and for which there are limited buyers or sellers on specific
securities, which could result in less favorable execution
for the Fund than such Affiliated Investment Account. The MS Investment
Department will not knowingly or intentionally
cause the Fund to engage in a cross trade with an account serviced by the Eaton
Vance Investment Department, however,
subject to applicable law and internal policies and procedures, the Fund may
conduct cross trades with other accounts serviced
by the MS Investment Department. Although the MS Investment Department may
aggregate the Fund’s trades with trades of
other accounts serviced by the MS Investment Department, subject to applicable
law and internal policies and procedures, there will
be no aggregation or coordination of trades with accounts serviced by the Eaton
Vance Investment Department, even when both Investment
Departments are seeking to acquire or dispose of the same investments
contemporaneously.
Payments
to Broker-Dealers and Other Financial Intermediaries.
The Adviser and/or the Distributor may pay compensation, out of
their own funds and not as an expense of the Fund, to certain Financial
Intermediaries (which may include affiliates of the Adviser and
the Distributor), including recordkeepers and administrators of various deferred
compensation plans, in connection with the sale, distribution,
marketing and retention of shares of the Fund and/or shareholder servicing. For
example, the Adviser or the Distributor may
pay additional compensation to a Financial Intermediary for, among other things,
promoting the sale and distribution of Fund shares,
providing access to various programs, mutual fund platforms or preferred or
recommended mutual fund lists that may be offered
by a Financial Intermediary, granting the Distributor access to a Financial
Intermediary’s financial advisors and consultants, providing
assistance in the ongoing education and training of a Financial Intermediary’s
financial personnel, furnishing marketing support,
maintaining share balances and/or for sub-accounting, recordkeeping,
administrative, shareholder or transaction processing services.
Such payments are in addition to any distribution fees, shareholder servicing
fees and/or transfer agency fees that may be payable
by the Fund. The additional payments may be based on various factors, including
level of sales (based on gross or net sales or some
specified minimum sales or some other similar criteria related to sales of the
Fund and/or some or all other Morgan Stanley Funds),
amount of assets invested by the Financial Intermediary’s customers (which could
include current or aged assets of the Fund and/or
some or all other Morgan Stanley Funds), a
Fund’s advisory fee, some other agreed upon amount or other measures as
determined
from time to time by the Adviser and/or the Distributor. The amount of these
payments may be different for different Financial
Intermediaries.
The
prospect of receiving, or the receipt of, additional compensation, as described
above, by Financial Intermediaries may provide such
Financial Intermediaries and their financial advisors and other salespersons
with an incentive to favor sales of shares of the Fund over
other investment options with respect to which these Financial Intermediaries do
not receive additional compensation (or receives
lower levels of additional compensation). These payment arrangements, however,
will not change the price that an investor pays
for shares of the Fund or the amount that the Fund receives to invest on behalf
of an investor. Investors may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to Fund shares and should review
carefully any disclosures provided by Financial Intermediaries as to their
compensation.
In
addition, in certain circumstances, the Adviser restricts, limits or reduces the
amount of the Fund’s investment, or restricts the type of
governance or voting rights it acquires or exercises, where the Fund
(potentially together with Morgan Stanley) exceeds a certain ownership
interest, or possesses certain degrees of voting or control or has other
interests.
Morgan
Stanley Trading and Principal Investing Activities.
Notwithstanding anything to the contrary herein, Morgan Stanley will
generally conduct its sales and trading businesses, publish research and
analysis, and render investment advice without regard for a
Fund’s holdings, although these activities could have an adverse impact on the
value of one or more of the Fund’s investments, or could
cause Morgan Stanley to have an interest in one or more portfolio investments
that is different from, and potentially adverse to that
of a
Fund. Furthermore, from time to time, the Adviser or its affiliates may invest
“seed” capital in a
Fund, typically to enable the
Fund to commence investment operations and/or achieve sufficient scale. The
Adviser and its affiliates may hedge such seed capital
exposure by investing in derivatives or other instruments expected to produce
offsetting exposure. Such hedging transactions, if
any, would occur outside of a
Fund.
Morgan
Stanley’s sales and trading, financing and principal investing businesses
(whether or not specifically identified as such, and including
Morgan Stanley’s trading and principal investing businesses) will not be
required to offer any investment opportunities to a
Fund.
These businesses may encompass, among other things, principal trading activities
as well as principal investing.
Morgan
Stanley’s sales and trading, financing and principal investing businesses have
acquired or invested in, and in the future may acquire
or invest in, minority and/or majority control positions in equity or debt
instruments of diverse public and/or private companies.
Such activities may put Morgan Stanley in a position to exercise contractual,
voting or creditor rights, or management or other
control with respect to securities or loans of portfolio investments or other
issuers, and in these instances Morgan Stanley may, in
its discretion and subject to applicable law, act to protect its own interests
or interests of clients, and not a
Fund’s interests.
Subject
to the limitations of applicable law, a
Fund may purchase from or sell assets to, or make investments in, companies in
which Morgan
Stanley has or may acquire an interest, including as an owner, creditor or
counterparty.
Morgan
Stanley’s Investment Banking and Other Commercial Activities.
Morgan Stanley advises clients on a variety of mergers, acquisitions,
restructuring, bankruptcy and financing transactions. Morgan Stanley may act as
an advisor to clients, including other investment
funds that may compete with a
Fund and with respect to investments that the
Fund may hold. Morgan Stanley may give advice
and take action with respect to any of its clients or proprietary accounts that
may differ from the advice given, or may involve an
action of a different timing or nature than the action taken, by a
Fund. Morgan Stanley may give advice and provide recommendations
to persons competing with a
Fund and/or any of a
Fund’s investments that are contrary to the Fund’s best interests and/or
the best interests of any of its investments.
Morgan
Stanley could be engaged in financial advising, whether on the buy-side or
sell-side, or in financing or lending assignments that
could result in Morgan Stanley’s determining in its discretion or being required
to act exclusively on behalf of one or more third parties,
which could limit a
Fund’s ability to transact with respect to one or more existing or potential
investments. Morgan Stanley may
have relationships with third-party funds, companies or investors who may have
invested in or may look to invest in portfolio companies,
and there could be conflicts between a
Fund’s best interests, on the one hand, and the interests of a Morgan Stanley
client or
counterparty, on the other hand.
To
the extent that Morgan Stanley advises creditor or debtor companies in the
financial restructuring of companies either prior to or after
filing for protection under Chapter 11 of the U.S. Bankruptcy Code or similar
laws in other jurisdictions, the Adviser’s flexibility
in making investments in such restructurings on a
Fund’s behalf may be limited.
Morgan
Stanley could provide investment banking services to competitors of portfolio
companies, as well as to private equity and/or private
credit funds; such activities may present Morgan Stanley with a conflict of
interest vis-a-vis a
Fund’s investment and may also result
in a conflict in respect of the allocation of investment banking resources to
portfolio companies.
To
the extent permitted by applicable law, Morgan Stanley may provide a broad range
of financial services to companies in which a
Fund
invests, including strategic and financial advisory services, interim
acquisition financing and other lending and underwriting or placement
of securities, and Morgan Stanley generally will be paid fees (that may include
warrants or other securities) for such services.
Morgan Stanley will not share any of the foregoing interest, fees and other
compensation received by it (including, for the avoidance
of doubt, amounts received by the Adviser) with a
Fund, and any advisory fees payable will not be reduced thereby.
Morgan
Stanley may be engaged to act as a financial advisor to a company in connection
with the sale of such company, or subsidiaries
or divisions thereof, may represent potential buyers of businesses through its
mergers and acquisition activities and may provide
lending and other related financing services in connection with such
transactions. Morgan Stanley’s compensation for such activities
is usually based upon realized consideration and is usually contingent, in
substantial part, upon the closing of the transaction.
Under these circumstances, a
Fund may be precluded from participating in a transaction with or relating to
the company being
sold or participating in any financing activity related to merger or
acquisition.
The
involvement or presence of Morgan Stanley in the investment banking and other
commercial activities described above (or the financial
markets more broadly) may restrict or otherwise limit investment opportunities
that may otherwise be available to the Fund. For
example, issuers may hire and compensate Morgan Stanley to provide underwriting,
financial advisory, placement agency, brokerage
services or other services and, because of limitations imposed by applicable law
and regulation, a
Fund may be prohibited from
buying or selling securities issued by those issuers or participating in related
transactions or otherwise limited in its ability to engage
in such investments.
Morgan
Stanley’s Marketing Activities.
Morgan Stanley is engaged in the business of underwriting, syndicating,
brokering, administering,
servicing, arranging and advising on the distribution of a wide variety of
securities and other investments in which a
Fund
may invest. Subject to the restrictions of the 1940 Act, including Sections
10(f) and 17(e) thereof, a
Fund may invest in transactions
in which Morgan Stanley acts as underwriter, placement agent, syndicator,
broker, administrative agent, servicer, advisor, arranger
or structuring agent and receives fees or other compensation from the sponsors
of such products or securities. Any fees earned
by Morgan Stanley in such capacity will not be shared with the Adviser or the
Fund. Certain conflicts of interest, in addition to
the receipt of fees or other compensation, would be inherent in these
transactions. Moreover, the interests of one of Morgan Stanley’s
clients with respect to an issuer of securities in which a
Fund has an investment may be adverse to the Adviser’s or a
Fund’s best
interests. In conducting the foregoing activities, Morgan Stanley will be acting
for its other clients and will have no obligation to act
in the Adviser’s or a
Fund’s best interests.
Client
Relationships.
Morgan Stanley has existing and potential relationships with a significant
number of corporations, institutions and
individuals. In providing services to its clients, Morgan Stanley may face
conflicts of interest with respect to activities recommended
to or performed for such clients, on the one hand, and a
Fund, its shareholders or the entities in which the Fund invests,
on the other hand. In addition, these client relationships may present conflicts
of interest in determining whether to offer certain
investment opportunities to a
Fund.
In
acting as principal or in providing advisory and other services to its other
clients, Morgan Stanley may engage in or recommend activities
with respect to a particular matter that conflict with or are different from
activities engaged in or recommended by the Adviser
on a
Fund’s behalf.
Principal
Investments.
To the extent permitted by applicable law, there may be situations in which
a
Fund’s interests may conflict with
the interests of one or more general accounts of Morgan Stanley and its
affiliates or accounts managed by Morgan Stanley or its affiliates.
This may occur because these accounts hold public and private debt and equity
securities of many issuers which may be or become
portfolio companies, or from whom portfolio companies may be
acquired.
Transactions
with Portfolio Companies of Affiliated Investment Accounts.
The companies in which a
Fund may invest may be counterparties
to or participants in agreements, transactions or other arrangements with
portfolio companies or other entities of portfolio
investments of Affiliated Investment Accounts (for example, a company in which
a
Fund invests may retain a company in which
an Affiliated Investment Account invests to provide services or may acquire an
asset from such company or vice versa). Certain of
these agreements, transactions and arrangements involve fees, servicing
payments, rebates and/or other benefits to Morgan Stanley or
its affiliates. For example, portfolio entities may, including at the
encouragement of Morgan Stanley, enter into agreements regarding
group procurement and/or vendor discounts. Morgan Stanley and its affiliates may
also participate in these agreements and may
realize better pricing or discounts as a result of the participation of
portfolio entities. To the extent permitted by applicable law, certain
of these agreements may provide for commissions or similar payments and/or
discounts or rebates to be paid to a portfolio entity
of an Affiliated Investment Account, and such payments or discounts or rebates
may also be made directly to Morgan Stanley or
its affiliates. Under these arrangements, a particular portfolio company or
other entity may benefit to a greater degree than the other
participants, and the Morgan Stanley Funds, investment vehicles and accounts
(which may or may not include a
Fund) that own
an interest in such entity will receive a greater relative benefit from the
arrangements than the Morgan Stanley Funds, investment
vehicles or accounts that do not own an interest therein. Fees and compensation
received by portfolio companies of Affiliated
Investment Accounts in relation to the foregoing will not be shared with
a
Fund or offset advisory fees payable.
Investments
in Portfolio Investments of Other Funds.
To the extent permitted by applicable law, when a
Fund invests in certain companies
or other entities, other funds affiliated with the Adviser may have made or may
be making an investment in such companies
or other entities. Other funds that have been or may be managed by the Adviser
may invest in the companies or other entities
in which a
Fund has made an investment. Under such circumstances, a
Fund and such other funds may have conflicts of interest
(e.g., over the terms, exit strategies and related matters, including the
exercise of remedies of their respective investments). If the
interests held by a
Fund are different from (or take priority over) those held by such other funds,
the Adviser may be required to make
a selection at the time of conflicts between the interests held by such other
funds and the interests held by a
Fund.
Allocation
of Expenses.
Expenses may be incurred that are attributable to a
Fund and one or more other Affiliated Investment Accounts
(including in connection with issuers in which a
Fund and such other Affiliated Investment Accounts have overlapping investments).
The allocation of such expenses among such entities raises potential conflicts
of interest. The Adviser and its affiliates intend
to allocate such common expenses among a
Fund and any such other Affiliated Investment Accounts on a pro rata basis or in
such
other manner as the Adviser deems to be fair and equitable or in such other
manner as may be required by applicable law.
Temporary
Investments.
To more efficiently invest short-term cash balances held by a
Fund, the Adviser may invest such balances on
an overnight “sweep” basis in shares of one or more money market funds or other
short-term vehicles. It is anticipated that the investment
adviser to these money market funds or other short-term vehicles may be the
Adviser (or an affiliate) to the extent permitted
by applicable law, including Rule 12d1-1 under the 1940 Act. In such a case, the
affiliated investment adviser may receive asset-based
fees in respect of a
Fund’s investment (which will reduce the net return realized by a
Fund).
Transactions
with Affiliates.
The Adviser and any investment sub-adviser might purchase securities from
underwriters or placement agents
in which a Morgan Stanley affiliate is a member of a syndicate or selling group,
as a result of which an affiliate might benefit from
the purchase through receipt of a fee or otherwise. Neither the Adviser nor any
investment sub-adviser will purchase securities on
behalf of a
Fund from an affiliate that is acting as a manager of a syndicate or selling
group. Purchases by the Adviser on behalf of a
Fund from an affiliate acting as a placement agent must meet the requirements of
applicable law. Furthermore, Morgan Stanley may
face conflicts of interest when a
Fund uses service providers affiliated with Morgan Stanley because Morgan
Stanley receives greater
overall fees when they are used.
General
Process for Potential Conflicts.
All of the transactions described above involve the potential for conflicts of
interest between
the Adviser, related persons of the Adviser and/or their clients. The Advisers
Act, the 1940 Act and ERISA impose certain requirements
designed to decrease the possibility of conflicts of interest between an
investment adviser and its clients. In some cases,
transactions
may be permitted subject to fulfillment of certain conditions. Certain other
transactions may be prohibited. In addition, the
Adviser has instituted policies and procedures designed to prevent conflicts of
interest from arising and, when they do arise, to ensure
that it effects transactions for clients in a manner that is consistent with its
fiduciary duty to its clients and in accordance with applicable
law. The Adviser seeks to ensure that potential or actual conflicts of interest
are appropriately resolved taking into consideration
the overriding best interests of the client.
FINANCIAL
STATEMENTS
APPENDIX
A — MORGAN STANLEY INVESTMENT MANAGEMENT PROXY VOTING POLICY AND
PROCEDURES
I.
POLICY STATEMENT
Morgan
Stanley Investment Management’s policy and procedures for voting proxies, the
Equity Proxy Voting Policy and Procedures (the
“Policy”), with respect to securities held in the accounts of clients applies to
those Morgan Stanley Investment Management (“MSIM”)
entities that provide discretionary investment management services and for which
an MSIM entity has authority to vote proxies1.
For purposes of this Policy, clients shall include: Morgan Stanley U.S.
registered investment companies, other Morgan Stanley
pooled investment vehicles, and MSIM separately managed accounts (including
accounts for Employee Retirement Income Security
(“ERISA”) clients and ERISA-equivalent clients). This Policy is reviewed and
updated as necessary to address new and evolving
proxy voting issues and standards.
The
MSIM entities covered by this Policy currently include the following: Morgan
Stanley AIP GP LP, Morgan Stanley Investment Management
Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment
Management Company, Morgan Stanley
Saudi Arabia, MSIM Fund Management (Ireland) Limited, Morgan Stanley Asia
Limited, Morgan Stanley Investment Management
(Japan) Co. Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Eaton Vance CLO Manager
LLC, and, Morgan Stanley Eaton Vance CLO CM LLC (each an “MSIM Affiliate” and
collectively referred to as the “MSIM
Affiliates” or as “we” below).
Each
MSIM Affiliate will use its best efforts to vote proxies as part of its
authority to manage, acquire and dispose of account assets.
■ |
With
respect to the U.S. registered investment companies sponsored, managed or
advised by any MSIM Affiliate (the “MS Funds”),
each MSIM Affiliate will vote proxies under this Policy pursuant to
authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by the Board
of Directors/Trustees of the MS Funds. |
■ |
For
other pooled investment vehicles (e.g., UCITS), each MSIM Affiliate will
vote proxies under this Policy pursuant to authority
granted under its applicable investment advisory agreement or, in the
absence of such authority, as authorized by the relevant
governing board. |
■ |
For
separately managed accounts (including ERISA and ERISA-equivalent
clients), each MSIM Affiliate will vote proxies under this
Policy pursuant to authority granted under the applicable investment
advisory agreement or investment management agreement.
Where an MSIM Affiliate has the authority to vote proxies on behalf of
ERISA and ERISA-equivalent clients, the MSIM
Affiliate must do so in accordance with its fiduciary duties under ERISA
(and the Internal Revenue Code). |
■ |
In
certain situations, a client or its fiduciary may reserve the authority to
vote proxies for itself or an outside party or may provide
an MSIM Affiliate with a statement of proxy voting policy. The MSIM
Affiliate will comply with the client’s
policy. |
An
MSIM Affiliate will not vote proxies unless the investment management agreement,
investment advisory agreement or other authority
explicitly authorizes the MSIM Affiliate to vote proxies.
MSIM
Affiliates will vote proxies in a prudent and diligent manner and in the best
interests of clients, including beneficiaries of and participants
in a client’s benefit plan(s) for which the MSIM Affiliates manage assets,
consistent with the objective of maximizing long-term
investment returns (“Client Proxy Standard”) and this Policy. In addition to
voting proxies of portfolio companies, MSIM routinely
engages with, or, in some cases, may engage a third party to engage with, the
management or board of companies in which we
invest on a range of environmental, social and governance issues. Governance is
a window into or proxy for management and board
quality. MSIM engages with companies where we have larger positions, voting
issues are material or where we believe we can make
a positive impact on the governance structure. MSIM’s engagement process,
through private communication with companies, allows
us to understand the governance structures at investee companies and better
inform our voting decisions.
1 |
This
Policy does not apply to MSIM’s authority to exercise certain
decision-making rights associated with investments in loans and other
fixed income instruments (collectively,
for purposes hereof, “Fixed Income
Instruments”). |
Retention
and Oversight of Outsourced Proxy Voting
- Certain MSIM exchange-traded funds (“ETFs”) will follow Calvert Research
and Management’s (“Calvert”) Proxy Voting Policies and Procedures and the Global
Proxy Voting Guidelines set forth in Appendix
A of the Calvert Proxy Voting Policies and Procedures. MSIM’s oversight of
Calvert’s proxy voting engagement is ongoing pursuant
to the 40 Act Fund Service Provider and Vendor Oversight Policy.
Retention
and Oversight of Proxy Advisory Firms
- Institutional Shareholder Services (“ISS”) and Glass Lewis (together
with other proxy
research providers as we may retain from time to time, the “Research Providers”)
are independent advisers that specialize in providing
a variety of fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants,
and other institutional investors. The services provided include in-depth
research, global issuer analysis, record retention, ballot
processing and voting recommendations.
To
facilitate proxy voting, MSIM has retained Research Providers to provide company
level reports that summarize key data elements contained
within an issuer’s proxy statement. Although we are aware of the voting
recommendations included in the Research Providers’
company level reports, these recommendations are not an input into our vote nor
is any potential vote prepopulated based on
a Research Provider’s research. MSIM votes all proxies based on its own proxy
voting policies, consultation with the investment
teams,
and in the best interests of each client. In addition to research, MSIM retains
ISS to provide vote execution, reporting, and recordkeeping
services.
As
part of MSIM’s ongoing oversight of the Research Providers, MSIM performs
periodic due diligence on the Research Providers. Topics
of the reviews include, but are not limited to, conflicts of interest,
methodologies for developing their policies and vote recommendations,
and resources.
Voting
Proxies for Certain Non-U.S. Companies
- Voting proxies of companies located in some jurisdictions may involve several
problems
that can restrict or prevent the ability to vote such proxies or entail
significant costs. These problems include, but are not limited
to: (i) proxy statements and ballots being written in a language other than
English; (ii) untimely and/or inadequate notice of shareholder
meetings; (iii) restrictions on the ability of holders outside the issuer’s
jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person; (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to
the shareholder meeting; and (vi) requirements to provide local agents with
power of attorney to facilitate our voting instructions. As
a result, we vote clients’ non-U.S. proxies on a best efforts basis only, after
weighing the costs and benefits of voting such proxies, consistent
with the Client Proxy Standard. ISS has been retained to provide assistance in
connection with voting non-U.S. proxies.
Securities
Lending
- MS Funds or any other investment vehicle sponsored, managed or advised by an
MSIM affiliate may participate
in a securities lending program through a third party provider. The voting
rights for shares that are out on loan are transferred
to the borrower and therefore, the lender (i.e., an MS Fund or another
investment vehicle sponsored, managed or advised by
an MSIM affiliate) is not entitled to vote the lent shares at the company
meeting. In general, MSIM believes the revenue received from
the lending program outweighs the ability to vote and we will not recall shares
for the purpose of voting. However, in cases in which
MSIM believes the right to vote outweighs the revenue received, we reserve the
right to recall the shares on loan on a best efforts
basis.
II.
GENERAL PROXY VOTING GUIDELINES
To
promote consistency in voting proxies on behalf of our clients, we follow this
Policy (subject to any exception set forth herein). As
noted
above, certain ETFs will follow Calvert’s Global Proxy Voting Guidelines set
forth in Appendix A of Calvert’s Proxy Voting Policies
and Procedures and the proxy voting guidelines discussed in this section do not
apply to such ETFs. See Appendix A of Calvert’s
Proxy Voting Policies and Procedures for a general discussion of the proxy
voting guidelines to which these ETFs will be subject.
The
Policy addresses a broad range of issues, and provides general voting parameters
on proposals that arise most frequently. However,
details of specific proposals vary, and those details affect particular voting
decisions, as do factors specific to a given company.
Pursuant to the procedures set forth herein, we may vote in a manner that is not
in accordance with the following general guidelines,
provided the vote is approved by the Proxy Review Committee (see Section 3) and
is consistent with the Client Proxy Standard.
Morgan Stanley AIP GP LP (“Morgan Stanley AIP”) will follow the procedures as
described in Appendix A.
The
Policy addresses a broad range of issues, and provides general voting parameters
on proposals that arise most frequently. However,
details of specific proposals vary, and those details affect particular voting
decisions, as do factors specific to a given company.
Pursuant to the procedures set forth herein, we may vote in a manner that is not
in accordance with the following general guidelines,
provided the vote is approved by the Proxy Review Committee (see Section 3) and
is consistent with the Client Proxy Standard.
Morgan Stanley AIP GP LP (“Morgan Stanley AIP”) will follow the procedures as
described in Appendix A.
We
endeavor to integrate governance and proxy voting policy with investment goals,
using the vote to encourage portfolio companies to
enhance long-term shareholder value and to provide a high standard of
transparency such that equity markets can value corporate assets
appropriately.
We
seek to follow the Client Proxy Standard for each client. At times, this may
result in split votes, for example when different clients
have varying economic interests and/or priorities reflected in their mandates
with respect to the outcome of a particular voting matter
(such as a case in which varied ownership interests in two companies involved in
a merger result in different stakes in the outcome).
We also may split votes at times based on differing views of portfolio
managers.
We
may abstain from or vote against matters for which disclosure is
inadequate.
A.
Routine Matters.
We
generally support routine management proposals. The following are examples of
routine management proposals:
■ |
Approval
of financial statements and auditor reports if delivered with an
unqualified auditor’s opinion. |
■ |
General
updating/corrective amendments to the charter, articles of association or
bylaws, unless we believe that such amendments
would diminish shareholder rights. |
■ |
Most
proposals related to the conduct of the annual meeting, with the following
exceptions. We generally oppose proposals that relate
to “the transaction of such other business which may come before the
meeting,” and open-ended requests for adjournment.
However, where management specifically states the reason for requesting an
adjournment and the requested |
|
adjournment
would facilitate passage of a proposal that would otherwise be supported
under this Policy (i.e., an uncontested corporate
transaction), the adjournment request will be supported. We do not support
proposals that allow companies to call a special
meeting with a short (generally two weeks or less) time frame for
review. |
We
generally support shareholder proposals advocating confidential voting
procedures and independent tabulation of voting results.
MSIM
is supportive of the use of technology to conduct virtual shareholder meetings
in parallel with physical meetings, for increased investor
participation. However, adoption of a ‘virtual-only’ approach would restrict
meaningful exchange between the company and shareholders.
Therefore, MSIM is generally not supportive of proposals seeking authority to
conduct virtual-only shareholder meetings.
B.
Board of Directors.
1 |
Election
of Directors: Votes on board nominees can involve balancing a variety of
considerations. In vote decisions, we may take into
consideration whether the company has a majority voting policy in place
that we believe makes the director vote more meaningful.
In the absence of a proxy contest, we generally support the board’s
nominees for director except as follows: |
a |
We
consider withholding support from or voting against a nominee if we
believe a direct conflict exists between the interests
of the nominee and the public shareholders, including failure to meet
fiduciary standards of care and/or loyalty. We
may oppose directors where we conclude that actions of directors are
unlawful, unethical or negligent. We consider opposing
individual board members or an entire slate if we believe the board is
entrenched and/or dealing inadequately with
performance problems; if we believe the board is acting with insufficient
independence between the board and management;
or if we believe the board has not been sufficiently forthcoming with
information on key governance or other material
matters. |
b |
We
consider withholding support from or voting against interested directors
if the company’s board does not meet market standards
for director independence, or if otherwise we believe board independence
is insufficient. We refer to prevalent market
standards as promulgated by a stock exchange or other authority within a
given market (e.g., New York Stock Exchange
or Nasdaq rules for most U.S. companies, and The Combined Code on
Corporate Governance in the United Kingdom).
Thus, for an NYSE company with no controlling shareholder, we would expect
that at a minimum a majority of
directors should be independent as defined by NYSE. Where we view market
standards as inadequate, we may withhold votes
based on stronger independence standards. Market standards
notwithstanding, we generally do not view long board tenure
alone as a basis to classify a director as
non-independent. |
i |
At
a company with a shareholder or group that controls the company by virtue
of a majority economic interest in the company,
we have a reduced expectation for board independence, although we believe
the presence of independent directors
can be helpful, particularly in staffing the audit committee, and at times
we may withhold support from or vote
against a nominee on the view the board or its committees are not
sufficiently independent. In markets where board
independence is not the norm (e.g. Japan), however, we consider factors
including whether a board of a controlled
company includes independent members who can be expected to look out for
interests of minority holders. |
ii |
We
consider withholding support from or voting against a nominee if he or she
is affiliated with a major shareholder that
has representation on a board disproportionate to its economic
interest. |
c |
Depending
on market standards, we consider withholding support from or voting
against a nominee who is interested and who
is standing for election as a member of the company’s
compensation/remuneration, nominating/governance or audit committee. |
d |
We
consider withholding support from or voting against nominees if the term
for which they are nominated is excessive. We
consider this issue on a market-specific basis. |
e |
We
consider withholding support from or voting against nominees if in our
view there has been insufficient board renewal (turnover),
particularly in the context of extended poor company performance. Also, if
the board has failed to consider diversity,
including but not limited to, gender and ethnicity, in its board
composition. |
f |
We
consider withholding support from or voting against a nominee standing for
election if the board has not taken action to
implement generally accepted governance practices for which there is a
“bright line” test. For example, in the context of the
U.S. market, failure to eliminate a dead hand or slow hand poison pill
would be seen as a basis for opposing one or more
incumbent nominees. |
g |
In
markets that encourage designated audit committee financial experts, we
consider voting against members of an audit committee
if no members are designated as such. We also consider voting against the
audit committee members if the company
has faced financial reporting issues and/or does not put the auditor up
for ratification by shareholders. |
h |
We
believe investors should have the ability to vote on individual nominees,
and may abstain or vote against a slate of nominees
where we are not given the opportunity to vote on individual
nominees. |
i |
We
consider withholding support from or voting against a nominee who has
failed to attend at least 75% of the nominee’s |
| board
and board committee meetings within a given year without a reasonable
excuse. We also consider opposing nominees
if the company does not meet market standards for disclosure on
attendance. |
j |
We
consider withholding support from or voting against a nominee who appears
overcommitted, particularly through service
on an excessive number of boards. Market expectations are incorporated
into this analysis; for U.S. boards, we generally
oppose election of a nominee who serves on more than five public company
boards (excluding investment companies),
or public company CEOs that serve on more than two outside boards given
the level of time commitment required
in their primary job. |
k |
We
consider withholding support from or voting against a nominee where we
believe executive remuneration practices are poor,
particularly if the company does not offer shareholders a separate
“say-on-pay” advisory vote on pay. |
2 |
Discharge
of Directors’ Duties: In markets where an annual discharge of directors’
responsibility is a routine agenda item, we generally
support such discharge. However, we may vote against discharge or abstain
from voting where there are serious findings
of fraud or other unethical behavior for which the individual bears
responsibility. The annual discharge of responsibility represents
shareholder approval of disclosed actions taken by the board during the
year and may make future shareholder action against
the board difficult to pursue. |
3 |
Board
Independence: We generally support U.S. shareholder proposals requiring
that a certain percentage (up to 66⅔%) of the company’s
board members be independent directors, and promoting all-independent
audit, compensation and nominating/governance
committees. |
4 |
Board
Diversity: We generally support shareholder proposals urging diversity of
board membership with respect to gender, race or
other factors where we believe the board has failed to take these factors
into account. We will also consider not supporting the re-election
of the nomination committee and/or chair (or other resolutions when the
nomination chair is not up for re- election) where
we perceive limited progress in gender diversity, with the expectation
where feasible and with consideration of any idiosyncrasies
of individual markets, that female directors represent not less than a
third of the board, unless there is evidence that
the company has made significant progress in this area. In markets where
information on director ethnicity is available, and it
is legal to obtain it, and where it is relevant, we will generally also
consider not supporting the re-election of the nomination committee
chair (or other resolutions when the nomination chair is not up for
re-election) if the board lacks ethnic diversity and has
not outlined a credible diversity strategy. |
5 |
Majority
Voting: We generally support proposals requesting or requiring majority
voting policies in election of directors, so long as
there is a carve-out for plurality voting in the case of contested
elections. |
6 |
Proxy
Access: We consider proposals on procedures for inclusion of shareholder
nominees and to have those nominees included in
the company’s proxy statement and on the company’s proxy ballot on a
case-by-case basis. Considerations include ownership thresholds,
holding periods, the number of directors that shareholders may nominate
and any restrictions on forming a group. |
7 |
Reimbursement
for Dissident Nominees: We generally support well-crafted U.S. shareholder
proposals that would provide for reimbursement
of dissident nominees elected to a board, as the cost to shareholders in
electing such nominees can be factored into
the voting decision on those nominees. |
8 |
Proposals
to Elect Directors More Frequently: In the U.S. public company context, we
usually support shareholder and management
proposals to elect all directors annually (to “declassify” the board),
although we make an exception to this policy where
we believe that long-term shareholder value may be harmed by this change
given particular circumstances at the company at
the time of the vote on such proposal. As indicated above, outside the
United States, we generally support greater accountability
to shareholders that comes through more frequent director elections, but
recognize that many markets embrace longer
term lengths, sometimes for valid reasons given other aspects of the legal
context in electing boards. |
9 |
Cumulative
Voting: We generally support proposals to eliminate cumulative voting in
the U.S. market context. (Cumulative voting
provides that shareholders may concentrate their votes for one or a
handful of candidates, a system that can enable a minority
bloc to place representation on a board.) U.S. proposals to establish
cumulative voting in the election of directors generally
will not be supported. |
10 |
Separation
of Chairman and CEO Positions: We vote on shareholder proposals to
separate the Chairman and CEO positions and/or
to appoint an independent Chairman based in part on prevailing practice in
particular markets, since the context for such
a practice varies. In many non-U.S. markets, we view separation of the
roles as a market standard practice, and support division
of the roles in that context. In the United States, we consider such
proposals on a case-by-case basis, considering, among
other things, the existing board leadership structure, company
performance, and any evidence of entrenchment or perceived
risk that power is overly concentrated in a single
individual. |
11 |
Director
Retirement Age and Term Limits: Proposals setting or recommending director
retirement ages or director term limits are
voted on a case-by-case basis that includes consideration of company
performance, the rate of board renewal, evidence of effective
individual director evaluation processes, and any indications of
entrenchment. |
12 |
Proposals
to Limit Directors’ Liability and/or Broaden Indemnification of Officers
and Directors: Generally, we will support |
| such
proposals provided that an individual is eligible only if he or she has
not acted in bad faith, with gross negligence or with reckless
disregard of their duties. |
C.
Statutory Auditor Boards.
The
statutory auditor board, which is separate from the main board of directors,
plays a role in corporate governance in several markets.
These boards are elected by shareholders to provide assurance on compliance with
legal and accounting standards and the company’s
articles of association. We generally vote for statutory auditor nominees if
they meet independence standards. In markets that
require disclosure on attendance by internal statutory auditors, however, we
consider voting against nominees for these positions who
failed to attend at least 75% of meetings in the previous year. We also consider
opposing nominees if the company does not meet
market standards for disclosure on attendance.
D.
Corporate Transactions and Proxy Fights.
We
examine proposals relating to mergers, acquisitions and other special corporate
transactions (i.e., takeovers, spin-offs, sales of assets,
reorganizations, restructurings and recapitalizations) on a case-by-case basis
in the interests of each fund or other account. Proposals
for mergers or other significant transactions that are friendly and approved by
the Research Providers usually are supported if
there is no portfolio manager objection. We also analyze proxy contests on a
case-by-case basis.
E.
Changes in Capital Structure.
1 |
We
generally support the following: |
■ |
Management
and shareholder proposals aimed at eliminating unequal voting rights,
assuming fair economic treatment of classes
of shares we hold. |
■ |
U.S.
management proposals to increase the authorization of existing classes of
common stock (or securities convertible into common
stock) if: (i) a clear business purpose is stated that we can support and
the number of shares requested is reasonable
in relation to the purpose for which authorization is requested; and/or
(ii) the authorization does not exceed 100%
of shares currently authorized and at least 30% of the total new
authorization will be outstanding. (We consider proposals
that do not meet these criteria on a case-by-case
basis.) |
■ |
U.S.
management proposals to create a new class of preferred stock or for
issuances of preferred stock up to 50% of issued capital,
unless we have concerns about use of the authority for anti-takeover
purposes. |
■ |
Proposals
in non-U.S. markets that in our view appropriately limit potential
dilution of existing shareholders. A major consideration
is whether existing shareholders would have preemptive rights for any
issuance under a proposal for standing share
issuance authority. We generally consider market-specific guidance in
making these decisions; for example, in the U.K.
market we usually follow Association of British Insurers’ (“ABI”)
guidance, although company-specific factors may be considered
and for example, may sometimes lead us to voting against share
authorization proposals even if they meet ABI guidance. |
■ |
Management
proposals to authorize share repurchase plans, except in some cases in
which we believe there are insufficient protections
against use of an authorization for anti-takeover
purposes. |
■ |
Management
proposals to reduce the number of authorized shares of common or preferred
stock, or to eliminate classes of preferred
stock. |
■ |
Management
proposals to effect stock splits. |
■ |
Management
proposals to effect reverse stock splits if management proportionately
reduces the authorized share amount set
forth in the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount generally
will be approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for
common stock increases. |
■ |
Management
dividend payout proposals, except where we perceive company payouts to
shareholders as inadequate. |
2 |
We
generally oppose the following (notwithstanding management
support): |
■ |
Proposals
to add classes of stock that would substantially dilute the voting
interests of existing shareholders. |
■ |
Proposals
to increase the authorized or issued number of shares of existing classes
of stock that are unreasonably dilutive, particularly
if there are no preemptive rights for existing shareholders. However,
depending on market practices, we consider
voting for proposals giving general authorization for issuance of shares
not subject to preemptive rights if the authority
is limited. |
■ |
Proposals
that authorize share issuance at a discount to market rates, except where
authority for such issuance is de minimis,
or if there is a special situation that we believe justifies such
authorization (as may be the case, for example, at a company
under severe stress and risk of
bankruptcy). |
■ |
Proposals
relating to changes in capitalization by 100% or
more. |
We
consider on a case-by-case basis shareholder proposals to increase dividend
payout ratios, in light of market practice and perceived market
weaknesses, as well as individual company payout history and current
circumstances. For example, currently we perceive low payouts
to shareholders as a concern at some Japanese companies, but may deem a low
payout ratio as appropriate for a growth company
making good use of its cash, notwithstanding the broader market
concern.
F.
Takeover Defenses and Shareholder Rights.
1 |
Shareholder
Rights Plans: We generally support proposals to require shareholder
approval or ratification of shareholder rights plans
(poison pills). In voting on rights plans or similar takeover defenses, we
consider on a case-by-case basis whether the company
has demonstrated a need for the defense in the context of promoting
long-term share value; whether provisions of the defense
are in line with generally accepted governance principles in the market
(and specifically the presence of an adequate qualified
offer provision that would exempt offers meeting certain conditions from
the pill); and the specific context if the proposal
is made in the midst of a takeover bid or contest for
control. |
2 |
Supermajority Voting
Requirements: We generally oppose requirements for supermajority votes to
amend the charter or bylaws, unless
the provisions protect minority shareholders where there is a large
shareholder. In line with this view, in the absence of a large
shareholder we support reasonable shareholder proposals to limit such
supermajority voting requirements. Also, we oppose provisions
that do not allow shareholders any right to amend the charter or
bylaws. |
3 |
Shareholders
Right to Call a Special Meeting: We consider proposals to enhance a
shareholder’s rights to call meetings on a case-by-case
basis. At large-cap U.S. companies, we generally support efforts to
establish the right of holders of 10% or more of shares
to call special meetings, unless the board or state law has set a policy
or law establishing such rights at a threshold that we believe
to be acceptable. |
4 |
Written
Consent Rights: In the U.S. context, we examine proposals for shareholder
written consent rights on a case-by-case basis. |
5 |
Reincorporation:
We consider management and shareholder proposals to reincorporate to a
different jurisdiction on a case-by-case
basis. We oppose such proposals if we believe the main purpose is to take
advantage of laws or judicial precedents that reduce
shareholder rights. |
6 |
Anti-greenmail
Provisions: Proposals relating to the adoption of anti-greenmail
provisions will be supported, provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders (holders of at least 1% of the outstanding shares
and in certain cases, a greater amount) not made to all shareholders or
not approved by disinterested shareholders; and (iii)
contains no anti-takeover measures or other provisions restricting the
rights of shareholders. |
7 |
Bundled
Proposals: We may consider opposing or abstaining on proposals if
disparate issues are “bundled” and presented for a single
vote. |
G.
Auditors.
We
generally support management proposals for selection or ratification of
independent auditors. However, we may consider opposing
such proposals with reference to incumbent audit firms if the company has
suffered from serious accounting irregularities and
we believe rotation of the audit firm is appropriate, or if fees paid to the
auditor for non-audit-related services are excessive. Generally,
to determine if non-audit fees are excessive, a 50% test will be applied (i.e.,
non-audit-related fees should be less than 50% of
the total fees paid to the auditor). We generally vote against proposals to
indemnify auditors.
H.
Executive and Director Remuneration.
1 |
We
generally support the following: |
■ |
Proposals
for employee equity compensation plans and other employee ownership plans,
provided that our research does not
indicate that approval of the plan would be against shareholder interest.
Such approval may be against shareholder interest
if it authorizes excessive dilution and shareholder cost, particularly in
the context of high usage (“run rate”) of equity
compensation in the recent past; or if there are objectionable plan design
and provisions. |
■ |
Proposals
relating to fees to outside directors, provided the amounts are not
excessive relative to other companies in the country
or industry, and provided that the structure is appropriate within the
market context. While stock-based compensation
to outside directors is positive if moderate and appropriately structured,
we are wary of significant stock option
awards or other performance-based awards for outside directors, as well as
provisions that could result in significant forfeiture
of value on a director’s decision to resign from a board (such forfeiture
can undercut director independence). |
■ |
Proposals
for employee stock purchase plans that permit discounts, but only for
grants that are part of a broad-based employee
plan, including all non-executive employees, and only if the discounts are
limited to a reasonable market standard
or less. |
■ |
Proposals
for the establishment of employee retirement and severance plans, provided
that our research does not indicate that
approval of the plan would be against shareholder
interest. |
2 |
We
generally oppose retirement plans and bonuses for non-executive directors
and independent statutory auditors. |
3 |
In
the U.S. context, we generally vote against shareholder proposals
requiring shareholder approval of all severance agreements, but
we generally support proposals that require shareholder approval for
agreements in excess of three times the annual compensation
(salary and bonus) or proposals that require companies to adopt a
provision requiring an executive to receive accelerated
vesting of equity awards if there is a change of control and the executive
is terminated. We generally oppose shareholder
proposals that would establish arbitrary caps on pay. We consider on a
case-by-case basis shareholder proposals that seek
to limit Supplemental Executive Retirement Plans (SERPs), but support such
shareholder proposals where we consider SERPs
excessive. |
4 |
Shareholder
proposals advocating stronger and/or particular pay-for-performance models
will be evaluated on a case-by-case basis,
with consideration of the merits of the individual proposal within the
context of the particular company and its labor markets,
and the company’s current and past practices. While we generally support
emphasis on long-term components of senior
executive pay and strong linkage of pay to performance, we consider
factors including whether a proposal may be overly prescriptive,
and the impact of the proposal, if implemented as written, on recruitment
and retention. |
5 |
We
generally support proposals advocating reasonable senior executive and
director stock ownership guidelines and holding requirements
for shares gained in executive equity compensation
programs. |
6 |
We
generally support shareholder proposals for reasonable “claw-back”
provisions that provide for company recovery of senior executive
bonuses to the extent they were based on achieving financial benchmarks
that were not actually met in light of subsequent
restatements. |
7 |
Management
proposals effectively to re-price stock options are considered on a
case-by-case basis. Considerations include the company’s
reasons and justifications for a re-pricing, the company’s competitive
position, whether senior executives and outside directors
are excluded, potential cost to shareholders, whether the re-pricing or
share exchange is on a value-for-value basis, and whether
vesting requirements are extended. |
8 |
Say-on-Pay:
We consider proposals relating to an advisory vote on remuneration on a
case-by-case basis. Considerations include a
review of the relationship between executive remuneration and performance
based on operating trends and total shareholder return
over multiple performance periods. In addition, we review remuneration
structures and potential poor pay practices, including
relative magnitude of pay, discretionary bonus awards, tax gross ups,
change-in-control features, internal pay equity and
peer group construction. As long-term investors, we support remuneration
policies that align with long-term shareholder returns. |
I.
Social and Environmental Issues.
Shareholders in the United States and certain other markets submit proposals
encouraging changes
in company disclosure and practices related to particular social and
environmental matters. MSIM believes that relevant social
and environmental issues, including principal adverse sustainability impacts,
can influence risk and return. Consequently, we consider
how to vote on proposals related to social and environmental issues on a
case-by-case basis by determining the relevance of
social and environmental issues identified in the proposal and their likely
impacts on shareholder value. In reviewing proposals on social
and environmental issues, we consider a company’s current disclosures and our
understanding of the company’s management of
material social and environmental issues in comparison to peers. We seek to
balance concerns on reputational and other risks that lie
behind a proposal against costs of implementation, while considering appropriate
shareholder and management prerogatives. We may
abstain from voting on proposals that do not have a readily determinable
financial impact on shareholder value and we may oppose
proposals that intrude excessively on management prerogatives and/or board
discretion. We generally vote against proposals requesting
reports or actions that we believe are duplicative, related to matters not
material to the business, or that would impose unnecessary
or excessive costs. We consider proposals on these sustainability risks,
opportunities and impacts on a case-by-case basis but
generally support proposals that seek to enhance useful disclosure. We focus on
understanding the company’s business and commercial
context and recognise that there is no one size fits all that can apply to all
companies. In assessing and prioritising proposals,
we carefully reflect on the materiality of the issues as well as the sector and
geography in which the company operates. We also
consider the explanation companies provide where they may depart from best
practice to assess the adequacy and appropriateness of
measures that are in place.
Environmental Issues
We
generally support proposals that, if implemented, would enhance useful
disclosure on climate, biodiversity, and other environmental
risks, such as disclosures aligned with SASB (Sustainability Accounting
Standards Board) and the TCFD (Task Force on
Climate-related Financial Disclosures). We also generally support proposals that
aim to meaningfully reduce or mitigate a company’s
impact on the global climate and encourage companies to use independently
verified Science Based Targets to ensure emissions
are in line with the Paris Agreement on Climate Change, which should ultimately
help companies manage long-term climate-related
risks. We generally will support reasonable proposals to reduce negative
environmental impacts and ameliorate a company’s
overall environmental footprint, including any threats to biodiversity in
ecologically sensitive areas. We generally will also support
proposals asking companies to report on their environmental practices, policies
and impacts, including environmental damage
and health risks resulting from operations, and the impact of environmental
liabilities on shareholder value.
Social Issues
We
generally support proposals that, if implemented, would enhance useful
disclosure on employee and board diversity, including gender,
race, and other factors. We consider proposals on other social issues on a
case-by-case basis but generally support proposals that:
■ |
Seek
to enhance useful disclosure or improvements on material issues such as
human rights risks, supply chain management. workplace
safety, human capital management and pay
equity. |
■ |
Encourage
policies to eliminate gender-based violence and other forms of harassment
from the workplace. |
■ |
Seek
disclosure of relevant diversity policies and meaningful workforce
diversity data, including EEO-1 data. |
We
may consider withholding support where we have material concerns in relation to
a company’s involvement/remediation of a breach
of global conventions such as UN Global Compact Principles on Human Rights,
Labour Standards, Environment and Business
Malpractice.
J.
Funds of Funds.
Certain MS Funds advised by an MSIM Affiliate invest only in other MS Funds. If
an underlying fund has a shareholder
meeting, in order to avoid any potential conflict of interest, such proposals
will be voted in the same proportion as the votes
of the other shareholders of the underlying fund, unless otherwise determined by
the Proxy Review Committee. In markets where
proportional voting is not available we will not vote at the meeting, unless
otherwise determined by the Proxy Review Committee.
Other MS Funds invest in unaffiliated funds. If an unaffiliated underlying fund
has a shareholder meeting and the MS Fund
owns more than 25% of the voting shares of the underlying fund, the MS Fund will
vote its shares in the unaffiliated underlying
fund in the same proportion as the votes of the other shareholders of the
underlying fund to the extent possible.
Voting Conditions Triggered Under Rule
12d1-4
Rule
12d1-4 sets forth the conditions under which a registered fund (“acquiring
fund”) may invest in excess of the statutory limits of Section
12(d)(1) of the 1940 Act (for example by owning more than 3% of the total
outstanding voting stock) in another registered fund
(“acquired fund”). In the event that a Morgan Stanley “acquiring fund” invests
in an “acquired fund” in reliance on Rule 12d1-4
under the 1940 Act, and the MS Fund and its “advisory group” (as defined in Rule
12d1-4) hold more than (i) 25% of the total outstanding
voting stock of a particular open-end fund (including ETFs) or (ii) 10% of the
total outstanding voting stock of a particular
closed-end fund, the Morgan Stanley “acquiring fund” and its “advisory group”
will be required to vote all shares of the open-
or closed-end fund held by the fund and its “advisory group” in the same
proportion as the votes of the other shareholders of the
open- or closed-end fund.
Because
MSIM and Eaton Vance are generally considered part of the same “advisory group,”
an Eaton Vance “acquiring fund” that is required
to comply with the voting conditions set forth in Rule 12d1-4 could potentially
implicate voting conditions for a MS Fund invested
in the same open- or closed-end fund as the Eaton Vance “acquiring fund.” The
Committee will be notified by Compliance if
the conditions are triggered for a particular open- or closed-end fund holding
in an MS Fund. In the event that the voting conditions
in Rule 12d1-4 are triggered, please refer to the Morgan Stanley Funds Fund of
Funds Investment Policy for specific information
on Rule 12d1-4 voting requirements and exceptions.
III.
ADMINISTRATION OF THE POLICY
The
MSIM Proxy Review Committee (the “Committee”) has overall responsibility for the
Policy. The Committee consists of investment
professionals who represent the different investment disciplines and geographic
locations of MSIM, and is chaired by the director
of the Global Stewardship Team (“GST”). Because proxy voting is an investment
responsibility and may affect shareholder value,
and because of their knowledge of companies and markets as well as their
understanding of their clients’ objectives, portfolio managers
and other members of investment staff play a key role in proxy voting,
individual investment teams are responsible for determining
decisions on proxy votes with consultation from the GST. The GST administers and
implements the Policy, as well as monitoring
services provided by the proxy advisory firms, third-party proxy engagements and
other research providers used in the proxy
voting process. As
noted above, certain ETFs will follow Calvert’s Proxy Voting Policy and
Procedures, which is administered by
Calvert’s Proxy Voting and Engagement Department and overseen by Calvert’s Proxy
Voting and Engagement Committee. The GST
periodically monitors Calvert’s proxy voting with respect to securities held by
the ETFs.
The
GST Director is responsible for identifying issues that require Committee
deliberation or ratification. The GST, working with advice
of investment teams and the Committee, is responsible for voting on routine
items and on matters that can be addressed in line
with these Policy guidelines. The GST has responsibility for voting case-by-case
where guidelines and precedent provide adequate guidance.
The
Committee may periodically review and has the authority to amend, as necessary,
the Policy and establish and direct voting positions
consistent with the Client Proxy Standard.
GST
and members of the Committee may take into account Research Providers’
recommendations and research as well as any other relevant
information they may request or receive, including portfolio manager and/or
analyst comments and research, as applicable.
Generally,
proxies related to securities held in client accounts that are managed pursuant
to quantitative, index or index-like strategies (“Index
Strategies”) will be voted in the same manner as those held in actively managed
accounts, unless economic interests or investment
guidelines of the accounts differ. Because accounts managed using Index
Strategies are passively managed accounts, research
from portfolio managers and/or analysts related to securities held in these
accounts may not be available. If the affected securities
are held only in accounts that are managed pursuant to Index Strategies, and the
proxy relates to a matter that is not described
in this Policy, the GST will consider all available information from the
Research Providers, and to the extent that the holdings
are significant, from the portfolio managers and/or analysts.
A.
Committee Procedures
The
Committee meets at least quarterly, and reviews and considers changes to the
Policy at least annually. The Committee will review
developing issues and approve upcoming votes, as appropriate, for matters
as requested by GST.
The
Committee reserves the right to review voting decisions at any time and to make
voting decisions as necessary to ensure the independence
and integrity of the votes.
B.
Material Conflicts of Interest
In
addition to the procedures discussed above, if the GST Director determines that
an issue raises a material conflict of interest, the GST
Director may request a special committee (“Special Committee”) to review, and
recommend a course of action with respect to, the
conflict(s) in question.
A
potential material conflict of interest could exist in the following situations,
among others:
1 |
The
issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and
the vote is on a matter that materially affects the issuer. |
2 |
The
proxy relates to Morgan Stanley common stock or any other security issued
by Morgan Stanley or its affiliates except if echo voting
is used, as with MS Funds, as described herein. |
3 |
Morgan
Stanley has a material pecuniary interest in the matter submitted for a
vote (e.g., acting as a financial advisor to a party to
a merger or acquisition for which Morgan Stanley will be paid a success
fee if completed). |
4 |
One
of Morgan Stanley’s independent directors or one of MS Funds’ directors
also serves on the board of directors or is a nominee
for election to the board of directors of a company held by an MS Fund or
affiliate. |
If
the GST Director determines that an issue raises a potential material conflict
of interest, depending on the facts and circumstances, the
issue will be addressed as follows:
1 |
If
the matter relates to a topic that is discussed in this Policy, the
proposal will be voted as per the Policy. |
2 |
If
the matter is not discussed in this Policy or the Policy indicates that
the issue is to be decided case-by-case, the proposal will be
voted in a manner consistent with the Research Providers, provided that
all the Research Providers consulted have the same recommendation,
no portfolio manager objects to that vote, and the vote is consistent with
MSIM’s Client Proxy Standard. |
3 |
If
the Research Providers’ recommendations differ, the GST Director will
refer the matter to a Special Committee to vote on the
proposal, as appropriate. |
Any
Special Committee shall be comprised of the GST Director, and at least two
portfolio managers (preferably members of the Committee),
as approved by the Committee. The GST Director may request non-voting
participation by MSIM’s General Counsel or
his/her designee and the Chief Compliance Officer or his/her designee. In
addition to the research provided by Research Providers, the
Special Committee may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems appropriate.
C.
Proxy Voting Reporting
The
CGT will document in writing all Committee and Special Committee decisions and
actions, which documentation will be maintained
by the GST for a period of at least six years. To the extent these decisions
relate to a security held by an MS Fund, the GST
will report the decisions to each applicable Board of Trustees/Directors of
those MS Funds (the “Board”) at each Board’s next regularly
scheduled Board meeting. The report will contain information concerning
decisions made during the most recently ended calendar
quarter immediately preceding the Board meeting.
In
addition, to the extent that Committee and Special Committee decisions and
actions relate to a security held by other pooled investment
vehicles, the GST will report the decisions to the relevant governing board of
the pooled investment vehicle.
MSIM
will promptly provide a copy of this Policy to any client requesting it. MSIM
will also, upon client request, promptly provide a
report indicating how each proxy was voted with respect to securities held in
that client’s account.
MSIM’s
Legal Department, in conjunction with GST and GST IT for MS Fund reporting and
with the AIP investment team for AIP
Closed-End 40 Act Fund reporting, is responsible for filing an annual Form N-PX
on behalf of each MS Fund and AIP Closed-End
40 Act Fund for which such filing is required, indicating how all proxies were
voted with respect to each such fund’s holdings.
Also,
MSIM maintains voting records of individual agenda items at company meetings in
a searchable database on its website on a rolling
12-month basis.
In
addition, ISS provides vote execution, reporting and recordkeeping services to
MSIM.
IV.
RECORDKEEPING
Records
are retained in accordance with Morgan Stanley’s Global Information Management
Policy, which establishes general Firm-wide
standards and procedures regarding the retention, handling, and destruction of
official books and records and other information of
legal or operational significance. The Global Information Management Policy
incorporates Morgan Stanley’s Master Retention Schedule,
which lists various record classes and associated retention periods on a global
basis.
Approved
by the Board September 2015, September 27–28, 2016, September 27–28, 2017,
October 3–4, 2018, September 24–25,2019,
September 30 – October 1, 2020, March 1-2, 2022, December 7-8, 2022, and March
1-2, 2023.
APPENDIX
A
Appendix
A applies to the following accounts managed by Morgan Stanley AIP GP LP (i)
closed-end funds registered under the Investment
Company Act of 1940, as amended; (ii) discretionary separate accounts; (iii)
unregistered funds; and (iv) non-discretionary
accounts offered in connection with AIP’s Custom Advisory Portfolio Solutions
service.
Generally,
AIP will follow the guidelines set forth in Section II of MSIM’s Proxy Voting
Policy and Procedures. To the extent that such
guidelines do not provide specific direction, or AIP determines that consistent
with the Client Proxy Standard, the guidelines should
not be followed, the Proxy Review Committee has delegated the voting authority
to vote securities held by accounts managed by
AIP to the Fund of Hedge Funds investment team, the Private Markets investment
team or the Portfolio Solutions team of AIP. A summary
of decisions made by the applicable investment teams will be made available to
the Proxy Review Committee for its information
at the next scheduled meeting of the Proxy Review Committee.
In
certain cases, AIP may determine to abstain from determining (or recommending)
how a proxy should be voted (and therefore abstain
from voting such proxy or recommending how such proxy should be voted), such as
where the expected cost of giving due consideration
to the proxy does not justify the potential benefits to the affected account(s)
that might result from adopting or rejecting
(as the case may be) the measure in question.
Waiver
of Voting Rights
For
regulatory reasons, AIP may either 1) invest in a class of securities of an
underlying fund (the “Fund”) that does not provide for voting
rights; or 2) waive 100% of its voting rights with respect to the
following:
1 |
Any
rights with respect to the removal or replacement of a director, general
partner, managing member or other person acting in a
similar capacity for or on behalf of the Fund (each individually a
“Designated Person,” and collectively, the “Designated Persons”),
which may include, but are not limited to, voting on the election or
removal of a Designated Person in the event of such
Designated Person’s death, disability, insolvency, bankruptcy, incapacity,
or other event requiring a vote of interest holders of
the Fund to remove or replace a Designated Person;
and |
2 |
Any
rights in connection with a determination to renew, dissolve, liquidate,
or otherwise terminate or continue the Fund, which may
include, but are not limited to, voting on the renewal, dissolution,
liquidation, termination or continuance of the Fund upon
the occurrence of an event described in the Fund’s organizational
documents; provided,
however,
that, if the Fund’s organizational
documents require the consent of the Fund’s general partner or manager, as
the case may be, for any such termination
or continuation of the Fund to be effective, then AIP may exercise its
voting rights with respect to such matter. |
APPENDIX
B — DESCRIPTION OF RATINGS
Standard
& Poor’s Ratings Services
An
S&P Global Ratings issue credit rating is a forward-looking opinion about
the creditworthiness of an obligor with respect to a specific
financial obligation, a specific class of financial obligations, or a specific
financial program (including ratings on medium-term
note programs and commercial paper programs). It takes into consideration the
creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings’ view of the obligor’s capacity and
willingness to meet its financial commitments as they come
due, and this opinion may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the
event of default.
Issue
credit ratings can be either long-term or short-term. Short-term ratings are
generally assigned to those obligations considered short-term
in the relevant market. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features
on long-term obligations. Medium-term notes are assigned long-term
ratings.
I.
S&P’s Long-Term Issue Credit Ratings
AAA:
An obligation rated ‘AAA’ has the highest rating assigned by S&P Global
Ratings. The obligor’s capacity to meet its financial commitments
on the obligation is extremely strong.
AA:
An obligation rated ‘AA’ differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial
commitments on the obligation is very strong.
A:
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor’s capacity to meet
its financial commitments on the obligation is still
strong.
BBB:
An obligation rated ‘BBB’ exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances
are more likely to weaken the obligor’s capacity to meet its financial
commitments on the obligation.
BB;
B; CCC; CC; and C:
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having
significant speculative characteristics.
‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposure to adverse conditions.
BB:
An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions that could
lead to the obligor’s inadequate capacity to meet
its financial commitments on the obligation.
B:
An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated
‘BB’, but the obligor currently has the capacity to meet
its financial commitments on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s capacity
or willingness to meet its financial commitments on the obligation.
CCC:
An obligation rated ‘CCC’ is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the obligation.
In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitments on the obligation.
CC:
An obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The ‘CC’
rating is used when a default has not yet occurred
but S&P Global Ratings expects default to be a virtual certainty, regardless
of the anticipated time to default.
C: An
obligation rated ‘C’ is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority
or lower ultimate recovery compared with obligations that are rated
higher.
D: An
obligation rated ‘D’ is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category
is used when payments on an obligation are not made on the date due, unless
S&P Global Ratings believes that such payments
will be made within five business days in the absence of a stated grace period
or within the earlier of the stated grace period or
30 calendar days. The ‘D’ rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered
to ‘D’ if it is subject to a distressed exchange offer.
NR: Indicates
that a rating has not been assigned or is no longer assigned.
Note:
Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the
rating categories.
II.
S&P’s Short-Term Issue Credit Ratings
A-1:
A short-term obligation rated ‘A-1’ is rated in the highest category by S&P
Global Ratings. The obligor’s capacity to meet its financial
commitments on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates
that the obligor’s capacity to meet its financial commitments on these
obligations is extremely strong.
A-2:
A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse
effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the obligor’s
capacity to meet its financial commitments on
the obligation is satisfactory.
A-3:
A short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to weaken an obligor’s capacity to meet its financial
commitments on the obligation.
B:
A short-term obligation rated ‘B’ is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the
capacity to meet its financial commitments; however, it faces major ongoing
uncertainties that could lead to the obligor’s inadequate
capacity to meet its financial commitments.
C:
A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the
obligation.
D:
A short-term obligation rated ‘D’ is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the ‘D’ rating
category is used when payments on an obligation are not made on the date due,
unless S&P Global Ratings believes that such payments
will be made within any stated grace period. However, any stated grace period
longer than five business days will be treated as
five business days. The ‘D’ rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered
to ‘D’ if it is subject to a distressed exchange offer.
NR:
Indicates that a rating has not been assigned or is no longer
assigned.
III.
Municipal Short-Term Note Ratings
SP-1:
Strong capacity to pay principal and interest. An issue determined to possess a
very strong capacity to pay debt service is given a plus
(+) designation.
SP-2:
Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term
of the notes.
SP-3:
Speculative capacity to pay principal and interest.
D:
‘D’ is assigned upon failure to pay the note when due, completion of a
distressed exchange offer, or the filing of a bankruptcy petition
or the taking of similar action anywhere default on an obligation is a virtual
certainty, for example, due to automatic stay provisions.
Moody’s
Investors, Inc.
Ratings
assigned on Moody’s global long-term and short-term rating scales are
forward-looking opinions of the relative credit risks of financial
obligations issued by non-financial corporates, financial institutions,
structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations
with an original maturity of one year or more and reflect
both on the likelihood of a default on contractually promised payments and the
expected financial loss suffered in the event of default.
Short-term ratings are assigned to obligations with an original maturity of
thirteen months or less and reflect both on the likelihood
of a default on contractually promised payments and the expected financial loss
suffered in the event of default.
I.
Moody’s Global Long-Term Rating Scale
Aaa:
Obligations rated Aaa are judged to be of the highest quality, subject to the
lowest level of credit risk.
Aa:
Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk.
A:
Obligations rated A are judged to be upper-medium grade and are subject to low
credit risk.
Baa:
Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative
characteristics.
Ba:
Obligations rated Ba are judged to be speculative and are subject to substantial
credit risk.
B:
Obligations rated B are considered speculative and are subject to high credit
risk.
Caa:
Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
Ca:
Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and
interest.
C:
Obligations rated C are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic rating category.
Additionally, a “(hyb)” indicator is appended to all ratings
of hybrid securities issued by banks, insurers, finance companies, and
securities firms.
II.
Moody’s Global Short-Term Rating Scale
P-1:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
P-2:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to
repay short-term obligations.
NP:
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Fitch
Ratings Inc.
Fitch
Ratings’ credit ratings relating to issuers are an opinion on the relative
ability of an entity to meet financial commitments, such as
interest, preferred dividends, repayment of principal, insurance claims or
counterparty obligations. Credit ratings relating to securities
and obligations of an issuer can include a recovery expectation. Credit ratings
are used by investors as indications of the likelihood
of receiving the money owed to them in accordance with the terms on which they
invested. The agency’s credit ratings cover
the global spectrum of corporate, sovereign financial, bank, insurance, and
public finance entities (including supranational and sub-national
entities) and the securities or other obligations they issue, as well as
structured finance securities backed by receivables or other
financial assets.
I.
Fitch’s Long-Term Issuer Credit Rating Scale
AAA:
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of default
risk. They are assigned only in cases of exceptionally
strong capacity for payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable
events.
AA:
Very high credit quality. ‘AA’ ratings denote expectations of very low default
risk. They indicate very strong capacity for payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A:
High credit quality. ‘A’ ratings denote expectations of low default risk. The
capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to adverse business
or economic conditions than is the case for higher
ratings.
BBB:
Good credit quality. ‘BBB’ ratings indicate that expectations of default risk
are currently low. The capacity for payment of financial
commitments is considered adequate, but adverse business or economic conditions
are more likely to impair this capacity.
BB:
Speculative. ‘BB’ ratings indicate an elevated vulnerability to default risk,
particularly in the event of adverse changes in business or
economic conditions over time; however, business or financial flexibility exists
that supports the servicing of financial commitments.
B:
Highly speculative. ‘B’ ratings indicate that material default risk is present,
but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is vulnerable
to deterioration in the business and economic
environment.
CCC:
Substantial credit risk. Default is a real possibility.
CC:
Very high levels of credit risk. Default of some kind appears
probable.
C: Near
default. A default or default-like process has begun, or the issuer is in
standstill, or for a closed funding vehicle, payment capacity
is irrevocably impaired. Conditions that are indicative of a ‘C’ category rating
for an issuer include: a. the issuer has entered into
a grace or cure period following non-payment of a material financial obligation;
b. the issuer has entered into a temporary negotiated
waiver or standstill agreement following a payment default on a material
financial obligation; c. the formal announcement by
the issuer or their agent of a distressed debt exchange; d. a closed financing
vehicle where payment capacity is irrevocably impaired such
that it is not expected to pay interest and/or principal in full during the life
of the transaction, but where no payment default is imminent.
RD:
Restricted default. ‘RD’ ratings indicate an issuer that in Fitch’s
opinion has experienced: a. an uncured payment default or distressed
debt exchange on a bond, loan or other material financial obligation, but b. has
not entered into bankruptcy filings, administration,
receivership, liquidation, or other formal winding-up procedure, and c. has not
otherwise ceased operating. This would
include: i. the selective payment default on a specific class or currency of
debt; ii. the uncured expiry of any applicable grace period,
cure period or default forbearance period following a payment default on a bank
loan, capital markets security or other
material
financial obligation; iii. the extension of multiple waivers or forbearance
periods upon a payment default on one or more material
financial obligations, either in series or in parallel; ordinary execution of a
distressed debt exchange on one or more material financial
obligations.
D:
Default. ‘D’ ratings indicate an issuer that in Fitch’s opinion has
entered into bankruptcy filings, administration, receivership, liquidation
or other formal winding-up procedure or that has otherwise ceased
business.
Default
ratings are not assigned prospectively to entities or their obligations; within
this context, non-payment on an instrument that contains
a deferral feature or grace period will generally not be considered a default
until after the expiration of the deferral or grace period,
unless a default is otherwise driven by bankruptcy or other similar
circumstance, or by a distressed debt exchange.
Imminent
default, categorized under ‘C’, typically refers to the occasion where a payment
default has been intimated by the issuer and
is all but inevitable. This may, for example, be where an issuer has missed a
scheduled payment but (as is typical) has a grace period
during which it may cure the payment default. Another alternative would be where
an issuer has formally announced a distressed
debt exchange, but the date of the exchange still lies several days or weeks in
the immediate future.
In
all cases, the assignment of a default rating reflects the agency’s opinion as
to the most appropriate rating category consistent with the
rest of its universe of ratings and may differ from the definition of default
under the terms of an issuer’s financial obligations or local
commercial practice.
Note:
The modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not
added to ‘AAA’ ratings and ratings below the ‘CCC’ category.
II.
Fitch’s Short-Term Ratings Assigned to Issuers or Obligations in Corporate,
Public and Structure Finance
F1:
Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity
for timely payment of financial commitments; may have
an added “+” to denote any exceptionally strong credit feature.
F2:
Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of
financial commitments.
F3:
Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of
financial commitments is adequate.
B:
Speculative Short-Term Credit Quality. Minimal capacity for timely payment of
financial commitments, plus heightened vulnerability
to near term adverse changes in financial and economic conditions.
C:
High Short-Term Default Risk. Default is a real possibility.
RD:
Restricted Default. Indicates an entity that has defaulted on one or more of its
financial commitments, although it continues to meet
other financial obligations. Typically applicable to entity ratings
only.
D:
Default. Indicates a broad-based default event for an entity, or the default of
a short-term obligation.
Note: The
modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. For the short-term
rating category of ‘F1’, a ‘+’ may be appended.
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