STATEMENT
OF ADDITIONAL INFORMATION
Dated
March 28,
2024
AIM
Investment Funds (Invesco Investment Funds)
This Statement of
Additional Information (the SAI) relates to the portfolio (each a Fund,
collectively the Funds) of AIM Investment Funds (Invesco Investment Funds) (the
Trust) listed below. Each Fund offers separate classes of shares as
follows:
|
Fund: |
Class
A |
Class
C |
Class
R |
Class
Y |
Class
R5 |
Class
R6 |
Prospectus
Date |
|
Invesco
SteelPath MLP Alpha Fund |
MLPAX |
MLPGX |
SPMGX |
MLPOX |
SPMHX |
OSPAX |
March
28, 2024 |
|
Invesco
SteelPath MLP Alpha Plus Fund |
MLPLX |
MLPMX |
SPMJX |
MLPNX |
SPMPX |
OSPPX |
March
28, 2024 |
|
Invesco
SteelPath MLP Income Fund |
MLPDX |
MLPRX |
SPNNX |
MLPZX |
SPMQX |
OSPMX |
March
28, 2024 |
|
Invesco
SteelPath MLP Select 40 Fund |
MLPFX |
MLPEX |
SPMWX |
MLPTX |
SPMVX |
OSPSX |
March
28, 2024 |
This SAI is not a
Prospectus, and it should be read in conjunction with the Prospectuses for the
Funds listed above. The Funds were organized on May 24, 2019 for the purpose of
acquiring the assets and liabilities of the corresponding predecessor funds
(as defined below). Portions of each Fund's financial statements are
incorporated into this SAI by reference to each Fund’s most recent shareholder
report for its fiscal year ended November
30, 2023.
You may obtain,
without charge, a copy of any Prospectus and/or shareholder report for any Fund
listed above from an authorized dealer or by writing to:
Invesco
Investment Services, Inc.
P.O. Box 219078
Kansas City, MO 64121-9078
P.O. Box 219078
Kansas City, MO 64121-9078
or by calling (800)
959-4246
or on the Internet:
http://www.invesco.com/us
The Trust has
established other funds, which are offered by one or more separate prospectuses
and SAIs. Any reference to the term “Fund” or “Funds” throughout this SAI refers
to each Fund named above unless otherwise indicated.
O-AIF-SOAI-1130
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O-1 |
GENERAL
INFORMATION ABOUT THE TRUST
Fund
History
AIM
Investment Funds (Invesco Investment Funds) (the Trust) is a Delaware statutory
trust registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as an open-end series
management investment company. The Trust was originally organized as a Maryland
corporation on October 29, 1987 and re-organized as a Delaware statutory trust
on May 7, 1998. Under the Trust's Agreement and Declaration of Trust, as amended
(the Trust Agreement), the Board of Trustees of the Trust (the Board) is
authorized to create new series of shares without the necessity of a vote of
shareholders of the Trust. Prior to April 30, 2010, the Trust was known as AIM
Investment Funds.
On
May 24, 2019, each Fund assumed the assets and liabilities of its corresponding
predecessor fund as shown
below.
|
Fund |
Predecessor
Fund |
|
Invesco
SteelPath MLP Alpha Fund (Prior to
September
30, 2020, Invesco SteelPath MLP Alpha Fund
was
known as Invesco Oppenheimer SteelPath MLP
Alpha
Fund) |
Oppenheimer
SteelPath MLP Alpha Fund |
|
Invesco
SteelPath MLP Alpha Plus Fund (Prior to
September
30, 2020, Invesco SteelPath MLP Alpha Plus
Fund
was known as Invesco Oppenheimer SteelPath MLP
Alpha
Plus Fund) |
Oppenheimer
SteelPath MLP Alpha Plus Fund |
|
Invesco
SteelPath MLP Income Fund (Prior to
September
30, 2020, Invesco SteelPath MLP Income
Fund
was known as Invesco Oppenheimer SteelPath MLP
Income
Fund) |
Oppenheimer
SteelPath MLP Income Fund |
|
Invesco
SteelPath MLP Select 40 Fund (Prior to
September
30, 2020, Invesco SteelPath MLP Select 40
Fund
was known as Invesco Oppenheimer SteelPath MLP
Select
40 Fund) |
Oppenheimer
SteelPath MLP Select 40
Fund |
Shares
of Beneficial Interest
Shares
of beneficial interest of the Trust are redeemable at their net asset value at
the option of the shareholder or at
the option of the Trust, in accordance with any applicable provisions of the
Trust Agreement and applicable law, subject in certain circumstances to a
contingent deferred sales charge, if applicable.
The
Trust allocates cash and property it receives from the issue or sale of shares,
together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds thereof, to the appropriate Fund, as applicable, subject only to
the rights of creditors of that Fund. These assets constitute the assets
belonging to the Fund, are segregated on the Trust’s books, and are charged with
the liabilities and expenses of such Fund and its respective classes. The Trust
allocates any general liabilities and expenses of the Trust not readily
identifiable as belonging to a particular Fund primarily on the basis of
relative net assets or other relevant factors, subject to oversight by the
Board.
Each
share of the Fund represents an equal pro rata interest in that Fund with each
other share and is entitled to
dividends and other distributions with respect to the Fund, which may be from
income, capital gains, capital or distributions in kind, as declared by the
Board.
Each
class of shares of a Fund represents a proportionate undivided interest in the
net assets belonging to that Fund.
Differing sales charges and expenses will result in differing net asset values
and dividends and distributions. Upon any liquidation of the Trust,
shareholders of each class are entitled to share pro rata in the net assets
belonging to the applicable Fund allocable to such class available for
distribution after satisfaction of, or reasonable provision for, the outstanding
liabilities of the Fund allocable to such class.
1
The
Trust Agreement provides that each shareholder, by virtue of having become a
shareholder of the Trust, is bound by
terms of the Trust Agreement and the Trust’s Bylaws. Ownership of shares does
not make shareholders third party beneficiaries of any contract entered into by
the Trust.
The
Trust is not required to hold annual or regular meetings of shareholders.
Meetings of shareholders of a Fund or class
will be held for any purpose determined by the Board, including from time to
time to consider matters requiring a vote of such shareholders in accordance
with the requirements of the 1940 Act, state law or the provisions of the Trust
Agreement. It is not expected that shareholder meetings will be held
annually.
The
Trust Agreement provides that the Board may authorize (i) a merger,
consolidation or sale of assets (including, but not
limited to, mergers, consolidations or sales of assets between two Funds, or
between a Fund and a series of any other registered investment company), and
(ii) the combination of two or more classes of shares of a Fund into a single
class, each without shareholder approval but subject to applicable requirements
under the 1940 Act and state law.
Each
share of a Fund generally has the same voting, dividend, liquidation and other
rights; however, each class of shares of
a Fund is subject to different sales loads, conversion features, exchange
privileges and class-specific expenses, as applicable.
Except
as specifically noted above, shareholders of the Fund are entitled to one vote
per share (with proportionate
voting for fractional shares), irrespective of the relative net asset value of
the shares of the Fund. However, on matters affecting an individual Fund or
class of shares, a separate vote of shareholders of that Fund or class is
required. Shareholders of a Fund or class are not entitled to vote on any matter
which does not affect that Fund or class but that requires a separate vote of
another Fund or class. An example of a matter that would be voted on separately
by shareholders of the Fund is the approval of the advisory agreement with
Invesco Advisers, Inc. (the Adviser or Invesco).
When
issued, shares of the Fund are fully paid and nonassessable, have no preemptive
or subscription rights, and are
freely transferable. Shares do not have cumulative voting rights in connection
with the election of Trustees or on any other matter.
Under
Delaware law, shareholders of a Delaware statutory trust shall be entitled to
the same limitation of personal liability
extended to shareholders of private for-profit corporations organized under
Delaware law. There is a remote possibility, however, that shareholders could,
under certain circumstances, be held liable for the obligations of the Trust to
the extent the courts of another state, which does not recognize such limited
liability, were to apply the laws of such state to a controversy involving such
obligations. The Trust Agreement disclaims shareholder personal liability for
the debts, liabilities, obligations and expenses of the Trust and requires that
every undertaking of the Trust or the Board relating to the Trust or any Fund
include a recitation limiting such obligation to the Trust and its assets or to
one or more of the Funds and the assets belonging thereto. The Trust Agreement
provides for indemnification out of the property of a Fund (or class, as
applicable) for all losses and expenses of any shareholder of such Fund held
personally liable solely on account of being or having been a
shareholder.
The
trustees and officers of the Trust will not be liable for any act, omission or
obligation of the Trust or any trustee or
officer; however, a trustee or officer is not protected against any liability to
the Trust or to the shareholders to which a trustee or officer would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office
with the Trust or applicable Fund (Disabling Conduct). The Trust’s Bylaws
generally provide for indemnification by the Trust of the trustees, officers and
employees or agents of the Trust, provided that such persons have not engaged in
Disabling Conduct. Indemnification does not extend to judgments or amounts paid
in settlement in any actions by or in the right of the Trust. The Trust
Agreement also authorizes the purchase of liability insurance on behalf of
trustees and officers with Fund assets. The Trust’s Bylaws provide for the
advancement of payments of expenses to current and former trustees, officers and
employees or agents of the Trust, or anyone serving at their request, in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding, for which such person would be entitled to
indemnification; provided
2
that
any advancement of expenses would be reimbursed unless it is ultimately
determined that such person is entitled to
indemnification for such expenses.
The
Trust Agreement provides that any Trustee who serves as chair of the Board, a
member or chair of a committee of the
Board, lead independent Trustee, or an expert on any topic or in any area
(including an audit committee financial expert), or in any other special
appointment will not be subject to any greater standard of care or liability
because of such position.
The
Trust Agreement provides a detailed process for the bringing of derivative
actions by shareholders. A shareholder may
only bring a derivative action on behalf of the Trust if certain conditions are
met. Among other things, such conditions: (i) require shareholder(s) to make a
pre-suit demand on the Trustees (unless such effort is not likely to succeed
because a majority of the Board or the committee established to consider the
merits of such action are not independent Trustees under Delaware law); (ii)
require 10% of the beneficial owners to join in the pre-suit demand, or if a
pre-suit demand is not required, require 10% of beneficial owners to join in the
demand for the Board to commence such action; and (iii) afford the Trustees a
reasonable amount of time to consider the request and investigate the basis of
the claims (including designating a committee to consider the demand and hiring
counsel or other advisers). These conditions generally are intended to provide
the Trustees with the ability to pursue a claim if they believe doing so would
be in the best interests of the Trust and its shareholders and to preclude the
pursuit of claims that the Trustees determine to be without merit or otherwise
not in the Trust’s best interest to pursue. Insofar as the federal securities
laws supersede state law, these provisions do not apply to shareholder
derivative claims that arise under the federal securities laws.
The
Trust Agreement also generally requires that actions by shareholders in
connection with or against the Trust or a Fund
be brought only in certain Delaware courts, provided that actions arising under
the U.S. federal securities laws are required to be brought in the United States
District Court for the Southern District of New York and that the right to jury
trial be waived to the fullest extent permitted by law. These provisions may
result in increased shareholder costs in pursuing a shareholder derivative claim
and/or may limit a shareholder's ability to bring a claim in a different
forum.
Share
Certificates
Shareholders
of the Funds do not have the right to demand or require the Trust to issue share
certificates and share
certificates are not issued. Any certificate previously issued with respect to
any shares is deemed to be cancelled without any requirement for surrender to
the Trust.
DESCRIPTION
OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
Classification
The
Trust is an open-end management investment company. Invesco SteelPath MLP Select
40 Fund is classified as
“diversified” for purposes of the 1940 Act. Invesco SteelPath MLP Alpha Fund,
Invesco SteelPath MLP Income Fund and Invesco SteelPath MLP Alpha Plus Fund are
classified as “non-diversified” for purposes of the 1940 Act, which means these
Funds can invest a greater percentage of their assets in a small number of
issuers or any one issuer than a diversified fund can.
Investment
Strategies and Risks
Set
forth below are detailed descriptions of the various types of securities and
investment techniques that Invesco and/or the
Sub-Advisers (as defined herein) may use in managing the Funds, as well as the
risks associated with those types of securities and investment techniques. The
descriptions of the types of securities and investment techniques below
supplement the discussion of principal investment strategies and risks contained
in each Fund's Prospectus. Where a particular type of security or investment
technique is not discussed in a Fund’s Prospectus, that security or investment
technique is not a principal investment strategy.
The
Funds may invest in all of the following types of investments (unless otherwise
indicated). The Funds might not invest in
all of these types of securities or use all of these techniques at any one time.
Invesco
3
and/or
the Sub-Advisers may invest in other types of securities and may use other
investment techniques in managing the
Funds,
including those
described below for Funds not specifically mentioned as investing in the
security or using the investment technique, as well as securities and techniques
not described. A Fund’s transactions in a particular type of security or use of
a particular technique is subject to limitations imposed by a Fund’s investment
objective, policies and restrictions described in that Fund’s Prospectus and/or
this SAI, as well as the federal securities laws.
Unless
a Fund’s prospectus or this SAI states that a percentage limitation or
fundamental or non-fundamental restriction
applies on an ongoing basis, it applies only at the time a Fund makes an
investment. That means a Fund is not required to sell securities to meet the
percentage limits or investment restrictions if the value of the investment
increases in proportion to the size of a Fund. Percentage limits on borrowing
and illiquid investments apply on an ongoing basis.
The
Funds' investment objectives, policies, strategies and practices described below
are non-fundamental and may be changed
without approval of the holders of the Funds’ voting securities, unless
otherwise indicated.
Equity
Investments
Common
Stock.
Common stock is issued by a company principally to raise cash for business
purposes and represents an equity or ownership interest in the issuing company.
Common stockholders are typically entitled to vote on important matters of the
issuing company, including the selection of directors, and may receive dividends
on their holdings. A Fund participates in the success or failure of any company
in which it holds common stock. In the event a company is liquidated or declares
bankruptcy, the claims of bondholders, other debt holders, owners of preferred
stock and general creditors take precedence over the claims of those who own
common stock.
The
prices of common stocks change in response to many factors including the
historical and prospective earnings of the
issuing company, the value of its assets, general economic conditions, interest
rates, investor perceptions and market liquidity.
Preferred
Stock. Preferred stock,
unlike common stock, often offers a specified dividend rate payable from a
company’s earnings. Preferred stock also generally has a preference over common
stock on the distribution of a company’s assets in the event the company is
liquidated or declares bankruptcy; however, the rights of preferred stockholders
on the distribution of a company’s assets in the event of a liquidation or
bankruptcy are generally subordinate to the rights of the company’s debt holders
and general creditors. If interest rates rise, the fixed dividend on preferred
stocks may be less attractive, causing the price of preferred stocks to
decline.
Some
fixed rate preferred stock may have mandatory sinking fund provisions which
provide for the stock to be retired or
redeemed on a predetermined schedule, as well as call/redemption provisions
prior to maturity, which can limit the benefit of any decline in interest rates
that might positively affect the price of preferred stocks. Preferred stock
dividends may be “cumulative,” requiring all or a portion of prior unpaid
dividends to be paid before dividends are paid on the issuer’s common stock.
Preferred stock may be “participating,” which means that it may be entitled to a
dividend exceeding the stated dividend in certain cases. In some cases an issuer
may offer auction rate preferred stock, which means that the interest to be paid
is set by auction and will often be reset at stated
intervals.
Small-
and Mid-Capitalization Companies.
Small-capitalization (small-cap) companies may be either established or newer
companies, including “unseasoned” companies that have typically been in
operation for less than three years. Mid-capitalization (mid-cap) companies are
generally companies that have completed their initial start-up cycle, and in
many cases have established markets and developed seasoned market teams.
While smaller companies might offer greater opportunities for gain than larger
companies, they also involve greater risk of loss. They may be more sensitive to
changes in a company’s earnings expectations and may experience more abrupt and
erratic price movements. Small- and mid-cap companies’ securities often trade in
lower volumes and in many instances, are traded over-the-counter or on a
regional securities
4
exchange,
where the frequency and volume of trading is substantially less than is typical
for securities of larger companies
traded on national securities exchanges. Therefore, the securities of smaller
companies may be subject to wider price fluctuations and it might be harder for
the Fund to dispose of its holdings at an acceptable price when it wants to sell
them. Small- and mid-cap companies may not have established markets for their
products or services and may have fewer customers and product lines. They may
have more limited access to financial resources and may not have the financial
strength to sustain them through business downturns or adverse market
conditions. Since small- and mid-cap companies typically reinvest a high
proportion of their earnings in their business, they may not pay dividends for
some time, particularly if they are newer companies. Small- and mid-cap
companies may have unseasoned management or less depth in management skill than
larger, more established companies. They may be more reliant on the efforts of
particular members of their management team and management changes may pose a
greater risk to the success of the business. Securities of small, unseasoned
companies may be particularly volatile, especially in the short-term, and may
have very limited liquidity in a declining market. It may take a substantial
period of time to realize a gain on an investment in a small- or mid-cap
company, if any gain is realized at all.
When
the Fund invests in smaller company securities that might trade infrequently,
investors might seek to trade Fund
shares based on their knowledge or understanding of the value of those
securities (this is sometimes referred to as “price arbitrage”). If such price
arbitrage were successful, it might interfere with the efficient management of
the Fund’s portfolio and the Fund may be required to sell securities at
disadvantageous times or prices to satisfy the liquidity requirements created by
that activity. Successful price arbitrage might also dilute the value of fund
shares held by other shareholders.
Equity-Linked
Securities. Equity-linked
securities are instruments whose value is based upon the value of one or more
underlying equity securities, a reference rate or an index. Equity-linked
securities come in many forms and may include features, among others, such as
the following: (i) may be issued by the issuer of the underlying equity security
or by a company other than the one to which the instrument is linked (usually an
investment bank), (ii) may convert into equity securities, such as common stock,
within a stated period from the issue date or may be redeemed for cash or some
combination of cash and the linked security at a value based upon the value of
the underlying equity security within a stated period from the issue date, (iii)
may have various conversion features prior to maturity at the option of the
holder or the issuer or both, (iv) may limit the appreciation value with caps or
collars of the value of the underlying equity security and (v) may have fixed,
variable or no interest payments during the life of the security which reflect
the actual or a structured return relative to the underlying dividends of the
linked equity security. Investments in equity-linked securities may subject a
Fund to additional risks not ordinarily associated with investments in other
equity securities. Because equity-linked securities are sometimes issued by a
third party other than the issuer of the linked security, a Fund is subject to
risks if the underlying equity security, reference rate or index underperforms
or if the issuer defaults on the payment of the dividend or the common stock at
maturity. In addition, the trading market for particular equity-linked
securities may be less liquid, making it difficult for a Fund to dispose of a
particular security when necessary and reduced liquidity in the secondary market
for any such securities may make it more difficult to obtain market quotations
for valuing the Fund’s portfolio.
Convertible
Securities. Convertible
securities are generally bonds, debentures, notes, preferred stocks or other
securities or investments that may be converted or exchanged (by the holder or
by the issuer) into shares of the underlying common stock (or cash or securities
of equivalent value) at a stated exchange ratio or predetermined price (the
conversion price). A convertible security is designed to provide current income
and also the potential for capital appreciation through the conversion feature,
which enables the holder to benefit from increases in the market price of the
underlying common stock. A convertible security may be called for redemption or
conversion by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible security
held by a Fund is called for redemption or conversion, the Fund could be
required to tender it for redemption, convert it into the underlying common
stock, or sell it to a third party, which may have an adverse effect on the
Fund’s ability to achieve its investment objectives. Convertible securities have
general characteristics similar to both debt and equity securities.
5
A
convertible security generally entitles the holder to receive interest paid or
accrued until the convertible security matures or
is redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to non-convertible debt obligations and are
designed to provide for a stable stream of income with generally higher yields
than common stocks. However, there can be no assurance of current income because
the issuers of the convertible securities may default on their obligations.
Convertible securities rank senior to common stock in a corporation’s capital
structure and, therefore, generally entail less risk than the corporation’s
common stock. Convertible securities are subordinate in rank to any senior debt
obligations of the issuer, and, therefore, an issuer’s convertible securities
entail more risk than its debt obligations. Moreover, convertible securities are
often rated below investment grade or not rated because they fall below debt
obligations and just above common stock in order of preference or priority on an
issuer’s balance sheet. To the extent that a Fund invests in convertible
securities with credit ratings below investment grade, such securities may have
a higher likelihood of default, although this may be somewhat offset by the
convertibility feature.
Convertible
securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar credit
quality because of the potential for capital appreciation. The common stock
underlying convertible securities may be issued by a different entity than the
issuer of the convertible securities.
The
value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its “investment value.” The
investment value of the convertible security typically will fluctuate based on
the credit quality of the issuer and will fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its “conversion value,” which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock, and will therefore be subject to risks relating to the activities
of the issuer and general market and economic conditions. Depending upon the
relationship of the conversion price to the market value of the underlying
security, a convertible security may trade more like an equity security than a
debt instrument.
If,
because of a low price of the common stock, the conversion value is
substantially below the investment value of the
convertible security, the price of the convertible security is governed
principally by its investment value. Generally, if the conversion value of a
convertible security increases to a point that approximates or exceeds its
investment value, the value of the security will be principally influenced by
its conversion value. A convertible security will sell at a premium over its
conversion value to the extent investors place value on the right to acquire the
underlying common stock while holding an income-producing security.
While
a Fund uses the same criteria to rate a convertible debt security that it uses
to rate a more conventional debt
security, a convertible preferred stock is treated like a preferred stock for
the Fund’s financial reporting, credit rating and investment limitation
purposes.
Contingent
Convertible Securities (CoCos). CoCos (also
referred to as contingent capital securities) are a form of hybrid fixed income
security typically issued by non-U.S. banks that may either convert into common
stock of the issuer or undergo a principal write-down by a predetermined
percentage upon the occurrence of a “trigger” event, such as if (a) the issuer’s
capital ratio falls below a specified level or (b) certain regulatory events,
such as a change in regulatory capital requirements, affect the issuer’s
continued viability. Unlike traditional convertible securities, the conversion
is not voluntary and the equity conversion or principal write-down features are
tailored to the issuing banking institution and its regulatory requirements. In
certain circumstances, CoCos may be automatically written down to zero, thereby
cancelling the securities, and investors (including a Fund) could lose the
entire value of their investment even as the issuer remains in business. If such
an event occurs, an investor may not have any rights to repayment of the
principal amount of the securities that has not become due. Additionally, an
investor may not be able to collect interest payments or dividends on such
securities.
CoCos
are subject to credit, interest rate and market risks associated with fixed
income and equity securities
generally, along with risks typically applicable to convertible securities.
CoCos are also subject to
6
loss
absorption risk because coupon payments can potentially be cancelled or deferred
at the issuer’s discretion or at
the request of the relevant regulatory authority in order to help the bank
absorb losses. Additionally, certain call provisions permit an issuer to
repurchase CoCos if the regulatory environment or tax treatment of the security
(e.g., tax deductibility of interest payments) changes. This may result in a
potential loss to the Fund if the price at which the issuer calls or repurchases
the CoCos is lower than the initial purchase price by the Fund.
CoCos
are subordinate in rank to traditional convertible securities and other debt
obligations of an issuer in the issuer’s
capital structure, and therefore, CoCos entail more risk than an issuer’s other
debt obligations.
CoCos
are generally speculative and their market value may fluctuate based on a number
of unpredictable
factors, including, but not limited to, the creditworthiness of the issuer
and/or fluctuations in the issuer’s capital ratios, supply and demand for CoCos,
general market conditions and available liquidity, and economic, financial and
political events affecting the particular issuer or markets in
general.
Enhanced
Convertible Securities. “Enhanced”
convertible securities are equity-linked hybrid securities that automatically
convert to equity securities on a specified date. Enhanced convertibles have
been designed with a variety of payoff structures, and are known by a variety of
different names. Three features common to enhanced convertible securities are
(i) conversion to equity securities at the maturity of the convertible (as
opposed to conversion at the option of the security holder in the case of
ordinary convertibles); (ii) capped or limited appreciation potential relative
to the underlying common stock; and (iii) dividend yields that are typically
higher than that on the underlying common stock. Thus, enhanced convertible
securities offer holders the opportunity to obtain higher current income than
would be available from a traditional equity security issued by the same company
in return for reduced participation in the appreciation potential of the
underlying common stock. Other forms of enhanced convertible securities may
involve arrangements with no interest or dividend payments made until maturity
of the security or an enhanced principal amount received at maturity based on
the yield and value of the underlying equity security during the security’s term
or at maturity.
Synthetic
Convertible Securities. A synthetic
convertible security is a derivative position composed of two or more distinct
securities whose investment characteristics, taken together, resemble those of
traditional convertible securities, i.e., fixed income and the right to acquire
the underlying equity security. For example, a Fund may purchase a
non-convertible debt security and a warrant or option, which enables a Fund to
have a convertible-like position with respect to a security or
index.
Synthetic
convertibles are typically offered by financial institutions in private
placement transactions and are typically sold
back to the offering institution. Upon conversion, the holder generally receives
from the offering institution an amount in cash equal to the difference between
the conversion price and the then-current value of the underlying security.
Synthetic convertible securities differ from true convertible securities in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Purchasing a synthetic convertible security
may provide greater flexibility than purchasing a traditional convertible
security, including the ability to combine components representing distinct
issuers, or to combine a fixed income security with a call option on a stock
index, when the Adviser determines that such a combination would better further
a Fund’s investment goals. In addition, the component parts of a synthetic
convertible security may be purchased simultaneously or separately.
The
holder of a synthetic convertible faces the risk that the price of the stock or
the level of the market index underlying
the convertibility component will decline. In addition, in purchasing a
synthetic convertible security, a Fund may have counterparty risk with respect
to the financial institution or investment bank that offers the
instrument.
Alternative
Entity Securities. Alternative entity
securities are the securities of entities that are formed as limited
partnerships, limited liability companies, business trusts or other
non-corporate entities that are similar to common or preferred stock of
corporations.
7
Special
Purpose Acquisition Companies. Special purpose
acquisition companies (“SPACs”) are investment entities, acquired through
stocks, warrants and other securities, that pool funds to seek potential
acquisition or merger opportunities. A SPAC is a publicly traded company that
raises funds through an initial public offering (“IPO”) for the purpose of
acquiring or merging with another company to be identified subsequent to the
SPAC’s IPO. The securities of a SPAC are often issued in “units” that include
one share of common stock and one right or warrant (or partial right or warrant)
conveying the right to purchase additional common shares or partial shares of
the SPAC. In some cases, the rights and warrants may be separated from the
common stock at the election of the holder, after which they may become freely
tradeable. If a Fund purchases shares of a SPAC in an IPO it will generally bear
a sales commission, which may be significant.
Unless
and until a business combination transaction is completed, a SPAC generally
invests its assets (which are
constituted solely by the proceeds of the IPO), less a portion retained to cover
expenses, in U.S. government securities, money market funds and similar
investments whose returns or yields may be significantly lower than those of a
Fund’s other investments. If an acquisition or merger that meets the
requirements for the SPAC is not completed within a pre-established period of
time, the invested funds are returned to the SPAC’s shareholders, less certain
permitted expenses, and any rights or warrants issued by the SPAC will expire
worthless. Under any circumstances in which a Fund receives a refund of all or a
portion of its original investment in a SPAC, the returns on that investment may
be negligible, and a Fund may be subject to opportunity costs to the extent that
alternative investments would have produced higher returns. Further, a Fund may
be delayed in receiving any redemption or liquidation proceeds from a SPAC to
which it is entitled.
Because
SPACs are in essence “blank check” companies without operating histories or
ongoing business operations (other
than identifying and pursuing acquisition or merger opportunities), the
potential for the long term capital appreciation of their securities is
dependent on the ability of the SPAC’s sponsor to identify and complete a
profitable business combination. There is no guarantee that the SPACs in which a
Fund invests will complete a business combination or that any transaction
completed by the SPACs in which a Fund invests will be profitable. Even if a
SPAC in which a Fund has invested identifies a desirable acquisition or merger
target and reaches agreement with that company as to the terms of the business
combination, there can be no guarantee that the transaction will ultimately be
consummated because, among other conditions that must be satisfied, a requisite
number of shareholders of the SPAC or of the target company do not vote in favor
of the transaction. The values of investments in SPACs may be highly volatile
and may depreciate significantly over time. Some SPACs may pursue acquisitions
or mergers only within certain industries or regions, which may ultimately lead
to an increase in the volatility of their prices following completion of a
business combination. In addition, some of these securities may be considered
illiquid and/or subject to restrictions on resale, leaving a Fund unable to sell
its interest in a SPAC or able to sell its interest only at a price below what
that Fund believes is the SPAC interest’s intrinsic value. Additionally, an
investment in a SPAC may be diluted by additional later offerings of interests
in the SPAC or by other investors exercising their warrants to purchase shares
of the SPAC.
Due
to the risk of the loss of sponsors’ and other initial investors’ capital if an
acquisition or merger is not consummated,
sponsors of SPACs may be incentivized to consummate business combinations at
less attractive valuations at the expense of SPAC shareholders. In addition, as
the number of SPACs grows, there is greater competition among SPACs and
traditional purchasers of companies, which further increases the likelihood that
SPAC sponsors may be incentivized to consummate acquisitions or mergers at less
attractive valuations, as well as the risk that SPACs cannot successfully
complete business combinations. In addition, recent regulations promulgated by
the SEC impose additional disclosure obligations and other requirements on SPACs
and may impact the ability of a SPAC to conduct its
operations.
Equity-Linked
Notes (ELNs). ELNs are hybrid
derivative-type instruments, in a single note form, that are specially designed
to combine the characteristics of one or more reference securities (such as a
single stock, exchange-traded fund, exchange-traded note, or an index or basket
of securities (underlying securities)) and a related equity derivative, such as
a put or call option. Generally, when purchasing an ELN, a Fund pays the
counterparty the current value of the underlying securities plus a commission.
Upon the maturity of the note, the Fund generally receives the par value of the
note plus a return based on the appreciation of the
8
underlying
securities. A Fund may or may not hold an ELN until its maturity. If the
underlying securities have depreciated in
value or if their price fluctuates outside of a preset range, depending on the
type of ELN, the Fund may receive only the principal amount of the note, or may
lose the entire principal invested in the ELN. ELNs are available with an
assortment of features, including periodic coupon payments; limitations on
participation in the appreciation of the underlying securities; and different
protection levels on the Fund’s principal investment. A Fund will only invest in
ELNs for which the underlying security is a permissible investment for the Fund
in accordance with its investment policies and restrictions. ELNs are generally
in two types: (1) those that provide for protection of a Fund’s principal in
exchange for limited participation in the appreciation of the underlying
securities, and (2) those that do not provide for such protection and subject a
Fund to the risk of loss of its principal investment.
Investments
in ELNs possess the risks associated with the underlying securities, such as
management risk, market risk
and, as applicable, foreign securities and currency risks. In addition, as a
note, ELNs are also subject to certain debt securities risks, such as interest
rate and credit risk. An investment in an ELN also bears the risk that the ELN
issuer will default or become bankrupt. In such an event, the Fund may have
difficulty being repaid, or fail to be repaid, the principal amount of, or
income from, its investment. ELNs may be structured to be subordinated or
unsubordinated to other classes of debt holders' right of payment. A downgrade
or impairment to the credit rating of the issuer may also negatively impact the
price of the ELN. The Fund may also experience liquidity issues when investing
in ELNs, as ELN transactions generally take place in the over-the-counter
institutional investment market as well as in privately negotiated transactions
with ELN issuers. The secondary market for ELNs may be limited, and the lack of
liquidity may make ELNs difficult to sell at a desirable time and price and
value. ELNs may be subject to resale restrictions such as those contained in
Rule 144A promulgated under the Securities Act of 1933, as amended (the 1933
Act). The price of an ELN may not correlate with the price of the underlying
securities or a fixed-income investment. As the holder of an ELN, the Fund
generally has no rights to the underlying securities, including no voting rights
or rights to receive dividends. The Adviser’s ability to accurately forecast
movements in the underlying securities will determine the success of the Fund’s
ELNs investments. Should the prices of the underlying securities move in an
unexpected manner, the Fund may not achieve the anticipated benefits of its ELN
investments, and it may realize losses, which could be significant and could
include the Fund’s entire principal investment.
Foreign
Investments
Foreign
Securities. Foreign securities
are equity or debt securities issued by issuers outside the United States, and
include securities in the form of American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
securities representing underlying securities of foreign issuers (foreign
securities). ADRs are receipts, issued by U.S. banks, for the shares of foreign
corporations, held by the bank issuing the receipt. ADRs are typically issued in
registered form, denominated in U.S. dollars and designed for use in the U.S.
securities markets. GDRs are bank certificates issued in more than one country
for shares in a foreign company. The shares are held by a foreign branch of an
international bank. GDRs trade as domestic shares but are offered for sale
globally through the various bank branches. GDRs are typically used by private
markets to raise capital and are denominated in either U.S. dollars or foreign
currencies. EDRs are similar to ADRs and GDRs, except they are typically issued
by European banks or trust companies, denominated in foreign currencies and
designed for use outside the U.S. securities markets. ADRs, EDRs and GDRs
entitle the holder to all dividends and capital gains on the underlying foreign
securities, less any fees paid to the bank. Purchasing ADRs, EDRs or GDRs gives
a Fund the ability to purchase the functional equivalent of foreign securities
without going to the foreign securities markets to do so. ADRs, EDRs or GDRs
that are “sponsored” are those where the foreign corporation whose shares are
represented by the ADR, EDR or GDR is actively involved in the issuance of the
ADR, EDR or GDR and generally provides material information about the
corporation to the U.S. market. An “unsponsored” ADR, EDR or GDR program is one
where the foreign corporation whose shares are held by the bank is not obligated
to disclose material information in the United States, and, therefore, the
market value of the ADR, EDR or GDR may not reflect important facts known only
to the foreign company.
9
Foreign
debt securities include corporate debt securities of foreign issuers, certain
foreign bank obligations (see
“Bank Instruments”) and U.S. dollar or foreign currency denominated obligations
of foreign governments or their subdivisions, agencies and instrumentalities
(see “Foreign Government Obligations”), international agencies and supranational
entities.
The
Funds consider various factors when determining whether a company is in a
particular country or in a particular
region/continent, including whether (1) it is organized under the laws of a
country or in a country in a particular region/continent; (2) it has a principal
office in a country or in a country in a particular region/continent; (3) it
derives 50% or more of its total revenues from businesses in a country or in a
country in a particular region/continent; (4) its securities are traded
principally on a security exchange, or in an over-the-counter (OTC) market, in a
particular country or in a country in a particular region/continent; and/or (5)
its “country of risk" as determined by a third party service provider such as
Bloomberg. The issuer's “country of risk” is determined based on a number of
criteria, including its country of domicile, the primary stock exchange on which
it trades, the location from which the majority of its revenue comes, and its
reporting currency.
Investments
by a Fund in foreign securities, including ADRs, EDRs and GDRs, whether
denominated in U.S. dollars or
foreign currencies, may entail all of the risks set forth below in addition to
those accompanying an investment in issuers in the United
States.
Currency
Risk.
The value in U.S. dollars of a Fund’s non-dollar-denominated foreign investments
will be affected by changes in currency exchange rates. The U.S. dollar value of
a foreign security decreases when the value of the U.S. dollar rises against the
foreign currency in which the security is denominated and increases when the
value of the U.S. dollar falls against such currency.
Political
and Economic Risk. The economies of
many countries may not be as developed as that of the United States’ economy and
may be subject to significantly different forces. Political, economic or social
instability and development, expropriation or confiscatory taxation, and
limitations on the removal of funds or other assets could also adversely affect
the value of portfolio investments. Certain foreign companies may be subject to
sanctions, embargoes, or other governmental actions that may impair or otherwise
limit the ability to invest in, receive, hold or sell the securities of such
companies. These factors may affect the value of investments in those companies.
Certain companies may operate in, or have dealings with, countries that the U.S.
government has identified as state sponsors of terrorism. As a result, such
companies may be subject to specific constraints or regulations under U.S. law
and, additionally, may be subject to negative investor perception, either of
which could adversely affect such companies' performance. Further, war and
military conflict between countries or in a region, for example the current
conflicts in the Ukraine and Middle East, may have an impact on the value of
portfolio investments.
Regulatory
Risk.
Foreign companies may not be registered with the SEC and are generally not
subject to the regulatory controls and disclosure requirements imposed on U.S.
issuers and, as a consequence, there is generally less publicly available
information about foreign securities than is available about domestic
securities. Foreign companies may not be subject to uniform accounting, auditing
and financial reporting standards, corporate governance practices and
requirements comparable to those applicable to domestic companies. Therefore,
financial information about foreign companies may be incomplete, or may not be
comparable to the information available on U.S. companies. Income from foreign
securities owned by the Funds may be reduced by a withholding tax at the source,
which tax would reduce dividend income payable to Fund shareholders.
There
is generally less government supervision and regulation of securities exchanges,
brokers, dealers, and listed
companies in foreign countries than in the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Foreign markets may also have different clearance and
settlement procedures. If a Fund experiences settlement problems, it may result
in temporary periods when a portion of that Fund’s assets are uninvested and
could cause it to miss attractive investment opportunities or create a potential
liability to that Fund arising out of its inability to fulfill a contract to
sell such securities.
10
Market
Risk.
Investing in foreign markets generally involves certain risks not typically
associated with investing in the United States. The securities markets in many
foreign countries will have substantially lower trading volume than the U.S.
markets. As a result, the securities of some foreign companies may be less
liquid and experience more price volatility than comparable domestic securities.
Obtaining and/or enforcing judgments in foreign countries may be more difficult,
and there is generally less government regulation and supervision of foreign
stock exchanges, brokers and issuers, each of which may make it more difficult
to enforce contractual obligations. Increased custodian costs as well as
administrative costs (such as the need to use foreign custodians) may also be
associated with the maintenance of assets in foreign jurisdictions. In addition,
transaction costs in foreign securities markets are likely to be higher, since
brokerage commission rates in foreign countries are likely to be higher than in
the United States.
Risks
of Developing/Emerging Market Countries. The Funds may
invest in securities of companies located in developing and emerging markets
countries, subject to any limits included in the Fund's prospectus. Unless a
Fund’s prospectus includes a different definition, the Fund considers developing
and emerging market countries to be those countries that are (i) generally
recognized to be an emerging market country by the international financial
community, including the World Bank, (ii) determined by the Adviser to be an
emerging market country or (iii) its “country of risk” is an emerging market
country as determined by a third party service provider such as Bloomberg. As of
the date of this SAI, the Adviser considers “emerging market countries” to
generally include every country in the world except those countries included in
the MSCI World Index. The Adviser has broad discretion to identify countries
that it considers to be emerging market countries and may consider various
factors in determining whether to classify a country as an emerging market
country, including a country’s relative interest rates, inflation rates,
exchange rates, monetary and fiscal policies, trade and current account
balances, legal and political developments and any other specific factors the
Adviser believes to be relevant. Because emerging market equity and emerging
market debt are distinct asset classes, a country may be deemed an emerging
market country with respect to its equity only, its debt only, both its equity
and debt, or neither.
Investments
in developing and emerging market countries present risks in addition to, or
greater than, those presented by
investments in foreign issuers generally, and may include the following
risks:
i. Restriction, to
varying degrees, on foreign investment in stocks;
ii. Repatriation of
investment income, capital, and the proceeds of sales in foreign countries may
require foreign governmental registration and/or approval;
iii. Greater risk
of fluctuation in the value of foreign investments due to changes in currency
exchange rates, currency control regulations or currency devaluation. In
addition, there may be higher rates of inflation and more rapid and extreme
fluctuations in inflation rates and greater sensitivity to interest rate
changes;
iv. Inflation and
rapid fluctuations in inflation rates may have negative effects on the economies
and securities markets of certain developing and emerging market
countries;
v. Many of the
developing and emerging market countries’ securities markets are relatively
small or less diverse, have low trading volumes, suffer periods of relative
illiquidity, and are characterized by significant price volatility;
vi. There is a risk
in developing and emerging market countries that a future economic or political
crisis could lead to price controls, forced mergers of companies, expropriation
or confiscatory taxation, seizure, nationalization, or creation of government
monopolies;
vii. Investments in
such securities markets may be subject to unexpected market
closures;
viii. The taxation
systems at the federal, regional and local levels in developing or emerging
market countries may be less transparent and inconsistently enforced, and
subject to sudden change. Developing or emerging market countries may also have
a higher degree of corruption and fraud than developed market countries, as well
as counterparties and financial institutions with less financial sophistication,
creditworthiness and/or resources;
11
ix. Less developed
legal systems allowing for enforcement of private property rights and/or redress
for injuries to private property, such as bankruptcy. The ability to bring and
enforce actions in developing or emerging market countries, or to obtain
information needed to pursue or enforce such actions, may be limited and
shareholder claims may be difficult or impossible to pursue; and
x. Less stringent
regulatory, disclosure, financial reporting, accounting, auditing and
recordkeeping standards than companies in more developed countries and, as a
result, the nature and quality of such information may vary. Information about
such companies may be less available and reliable and, therefore, the ability to
conduct adequate due diligence in developing or emerging markets may be limited
which can impede the Fund's ability to evaluate such companies. In addition,
certain developing or emerging market countries may impose material limitations
on Public Company Accounting Oversight Board (“PCAOB”) inspection, investigation
and enforcement capabilities which can hinder the PCAOB’s ability to engage in
independent oversight or inspection of accounting firms located in or operating
in certain developing or emerging markets. There is no guarantee that the
quality of financial reporting or the audits conducted by audit firms of
developing or emerging market issuers meet PCAOB standards.
Risks
Related to Armed Conflict. As a result of
increasingly interconnected global economies and financial markets, armed
conflict between countries or in a geographic region, for example the current
conflicts between Russia and Ukraine in Europe and Hamas and Israel in the
Middle East, has the potential to adversely impact Fund investments. Such
conflicts, and other corresponding events, have had, and could continue to have,
severe negative effects on regional and global economic and financial markets,
including increased volatility, reduced liquidity, and overall uncertainty. The
negative impacts may be particularly acute in certain sectors The timing and
duration of such conflicts, resulting sanctions, related events and other
implications cannot be predicted. The foregoing may result in a negative impact
on Fund performance and the value of an investment in the Fund, even beyond any
direct investment exposure the Fund may have to issuers located in or with
significant exposure to an impacted country or geographic region.
Risks
Related to Russian Invasion of Ukraine. In late February
2022, Russian military forces invaded Ukraine, significantly amplifying already
existing geopolitical tensions among Russia, Ukraine, Europe, the North Atlantic
Treaty Organization (NATO), and the West. Russia’s invasion, the responses of
countries and political bodies to Russia’s actions, and the potential for wider
conflict may increase financial market volatility and could have severe adverse
effects on regional and global economic markets, including the markets for
certain securities and commodities such as oil and natural gas.
Following
Russia’s actions, various countries, including the U.S., Canada, the United
Kingdom, Germany, and
France, among others, as well as the European Union, issued broad-ranging
economic sanctions against Russia. The sanctions freeze certain Russian assets
and prohibit trading by individuals and entities in certain Russian securities,
engaging in certain private transactions, and doing business with certain
Russian corporate entities, large financial institutions, officials and
oligarchs. The sanctions include a commitment by certain countries and the
European Union to remove selected Russian banks from the Society for Worldwide
Interbank Financial Telecommunications, commonly called “SWIFT,” the electronic
network that connects banks globally, and imposed restrictive measures to
prevent the Russian Central Bank from undermining the impact of the sanctions. A
number of large corporations have since withdrawn from Russia or suspended or
curtailed their Russia-based operations.
The
imposition of these current sanctions (and the potential for further sanctions
in response to Russia’s continued
military activity) and other actions undertaken by countries and businesses may
adversely impact various sectors of the Russian economy, including, but not
limited to, the financials, energy, metals and mining, engineering, and defense
and defense-related materials sectors. Such actions also may result in the
decline of the value and liquidity of Russian securities, a weakening of the
ruble, and could impair the ability of a Fund to buy, sell, receive, or deliver
those securities. Moreover, the measures could adversely affect global financial
and energy markets and thereby negatively affect the value of a Fund’s
investments beyond any direct exposure to Russian issuers or those of adjoining
geographic regions.
12
In
response to sanctions, the Russian Central Bank raised its interest rates and
banned sales of local securities by
foreigners. Russia also prevented the export of certain goods and payments to
foreign shareholders of Russian securities. Russia may take additional
countermeasures or retaliatory actions, which may further impair the value and
liquidity of Russian securities and Fund investments. Such actions could, for
example, include restricting gas exports to other countries, the seizure of U.S.
and European residents’ assets, or undertaking or provoking other military
conflict elsewhere in Europe, any of which could exacerbate negative
consequences on global financial markets and the economy. The actions discussed
above could have a negative effect on the performance of Funds that have
exposure to Russia. While diplomatic efforts have been ongoing, the conflict
between Russia and Ukraine is unpredictable and has the potential to result in
broader military actions. The duration of the ongoing conflict and corresponding
sanctions and related events cannot be predicted and may result in a negative
impact on Fund performance and the value of Fund investments, particularly as it
relates to Russian exposure.
Frontier
Markets. The risks
associated with investments in frontier market countries include all the risks
associated with investments in developing and emerging markets. These risks are
magnified for frontier market countries because frontier markets countries
generally have smaller economies, even less developed capital markets, and are
traditionally less accessible than traditional emerging and developing markets.
As a result, investments in companies in frontier markets countries are
generally subject to a higher risk of loss than investments in companies in
traditional emerging and developing market countries due to less developed
securities markets, different settlement procedures, greater price volatility,
less developed governments and economies, more government restrictions, and the
limited ability of foreign entities to participate in certain privatization
programs. Investments in companies operating in frontier market countries are
highly speculative in nature.
Foreign
Government Obligations. Debt securities
issued by foreign governments are often, but not always, supported by the full
faith and credit of the foreign governments, or their subdivisions, agencies or
instrumentalities, that issue them. These securities involve the risks discussed
above under “Foreign Securities”. Additionally, the issuer of the debt or the
governmental authorities that control repayment of the debt may be unwilling or
unable to pay interest or repay principal when due. Political or economic
changes or the balance of trade may affect a country’s willingness or ability to
service its debt obligations. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt obligations, especially debt
obligations issued by the governments of developing countries. Foreign
government obligations of developing countries, and some structures of emerging
market debt securities, both of which are generally below investment grade, are
sometimes referred to as “Brady Bonds.” The failure of a sovereign debtor to
implement economic reforms, achieve specified levels of economic performance, or
repay principal or interest when due may result in the cancellation of
third-party commitments to lend funds to the sovereign debtor, which may impair
the debtor’s ability or willingness to service its debts.
Foreign
Exchange Transactions. Each Fund may
invest in foreign currency-denominated securities and has the authority to
purchase and sell put and call options on foreign currencies (foreign currency
options), foreign currency futures contracts and related options, and
currency-related swaps, and may engage in foreign currency transactions either
on a spot (i.e., for prompt delivery and settlement) basis at the rate
prevailing in the currency exchange market at the time or through forward
foreign currency contracts (see “Forward Foreign Currency Contracts”). The use
of these instruments may result in a loss to a Fund if the counterparty to the
transaction (particularly with respect to OTC derivatives, as discussed further
below) does not perform as promised, including because of such counterparty’s
bankruptcy or insolvency.
The
Funds will incur costs in converting assets from one currency to another.
Foreign exchange dealers may charge a fee
for conversion. In addition, dealers may realize a profit based on the
difference between the prices at which they buy and sell various currencies in
the spot and forward markets.
A
Fund will generally engage in these foreign exchange transactions in order to
complete a purchase or sale of foreign
currency denominated securities. The Funds may also use foreign currency
options, forward foreign currency contracts, foreign currency futures contracts
and currency-related swap contracts to increase
13
or
reduce exposure to a foreign currency, to shift exposure from one foreign
currency to another in a cross currency
hedge or to enhance returns. These transactions are intended to minimize
the risk of loss due to a decline in the value of the hedged currencies;
however, at the same time, they tend to limit any potential gain which might
result should the value of such currencies increase.
A
Fund may purchase and sell foreign currency futures contracts and purchase and
write foreign currency options to increase
or decrease its exposure to different foreign currencies. A Fund may also
purchase and write foreign currency options in connection with foreign currency
futures contracts or forward foreign currency contracts. Foreign currency
futures contracts are traded on exchanges and have standard contract sizes and
delivery dates. Most foreign currency futures contracts call for payment or
delivery in U.S. dollars. The uses and risks of foreign currency futures
contracts are similar to those of futures contracts relating to securities or
indices (see “Futures Contracts”). Foreign currency futures contracts’ values
can be expected to correlate with exchange rates but may not reflect other
factors that affect the value of the Fund’s investments.
Whether
or not any hedging strategy will be successful is highly uncertain, and use of
hedging strategies may leave a Fund in
a less advantageous position than if a hedge had not been established. Moreover,
it is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward foreign currency contract.
Accordingly, a Fund may be required to buy or sell additional currency on the
spot market (and bear the expense of such transaction) if Invesco’s or the
Sub-Advisers’ predictions regarding the movement of foreign currency or
securities markets prove inaccurate.
A
Fund may hold a portion of its assets in bank deposits denominated in foreign
currencies, so as to facilitate
investment in foreign securities as well as protect against currency
fluctuations and the need to convert such assets into U.S. dollars (thereby also
reducing transaction costs). To the extent these monies are converted back into
U.S. dollars, the value of the assets so maintained will be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations. Foreign exchange transactions may involve some of the risks
of investments in foreign securities. For a discussion of tax considerations
relating to foreign currency transactions, see “Dividends, Distributions and Tax
Matters — Tax Matters — Tax Treatment of Portfolio Transactions — Foreign
currency transactions.”
Under
definitions adopted by the Commodity Futures Trading Commission (CFTC) and the
U.S. Securities and
Exchange Commission (SEC), non-deliverable foreign exchange forwards and OTC
foreign exchange options are considered “swaps.” These instruments are therefore
included in the definition of “commodity interests” for purposes of determining
whether fund service providers qualify for certain exemptions and exclusions
from regulation by the CFTC. Although non-deliverable forward foreign currency
contracts have historically been traded in the OTC market, as swaps they may in
the future be regulated to be centrally cleared and traded on public execution
facilities. For more information, see “Forward Foreign Currency Contracts” and
“Swaps.”
Floating
Rate Corporate Loans and Corporate Debt Securities of Non-U.S.
Borrowers. Floating rate
loans and debt securities made to and issued by non-U.S. borrowers in which the
Funds invest will be U.S. dollar-denominated or otherwise provide for payment in
U.S. dollars, and the borrower will meet the credit quality standards
established by Invesco and the Sub-Advisers for U.S. borrowers. The Funds
similarly may invest in floating rate loans and floating rate debt securities
made to and issued by U.S. borrowers with significant non-U.S.
dollar-denominated revenues; provided that the loans are U.S. dollar-denominated
or otherwise provide for payment to the Funds in U.S. dollars. In
all cases where the floating rate loans or floating rate debt securities
are not denominated in U.S. dollars, provisions will be made for payments to the
lenders, including the Funds, in U.S. dollars pursuant to foreign currency
swaps.
Foreign
Bank Obligations. Foreign bank
obligations include certificates of deposit, banker’s acceptances and fixed time
deposits and other obligations (a) denominated in U.S. dollars and issued by a
foreign branch of a domestic bank (Eurodollar Obligations), (b) denominated in
U.S. dollars and issued by a domestic branch of a foreign bank (Yankee Dollar
Obligations), or (c) issued by foreign branches of foreign banks. Foreign banks
are not generally subject to examination by any U.S. government agency or
instrumentality.
14
Exchange-Traded
Funds
Exchange-Traded
Funds (ETFs). Most ETFs are
registered under the 1940 Act as investment companies, although others may not
be registered as investment companies and are registered as commodity pools.
Therefore, a Fund’s purchase of shares of an ETF may be subject to the
restrictions on investments in other investment companies discussed under “Other
Investment Companies.” ETFs have management fees, which increase their cost. The
Fund may invest in ETFs advised by unaffiliated advisers as well as ETFs advised
by Invesco Capital Management LLC (Invesco Capital). Invesco, the Sub-Advisers
and Invesco Capital are affiliates of each other as they are all indirect
wholly-owned subsidiaries of Invesco Ltd.
Generally,
ETFs hold portfolios of securities, commodities and/or currencies that are
designed to replicate, as
closely as possible before expenses, the performance of a specified market
index. The performance results of ETFs will not replicate exactly the
performance of the pertinent index due to transaction and other expenses,
including fees to service providers, borne by ETFs. Furthermore, there can be no
assurance that the portfolio of securities, commodities and/or currencies
purchased by an ETF will replicate a particular index. Some ETFs are actively
managed and instead of replicating a particular index they seek to outperform
it, or outperform a basket of securities or price of a commodity or
currency.
Only
Authorized Participants (APs) may engage in creation or redemption transactions
directly with ETFs. ETF shares are sold
to and redeemed by APs at net asset value only in large blocks called creation
units and redemption units, respectively. Such market makers have no obligation
to submit creation or redemption orders; consequently, there is no assurance
that market makers will establish or maintain an active trading market for ETF
shares. In addition, to the extent that APs exit the business or are unable to
proceed with creation and/or redemption orders with respect to an ETF and no
other AP is able to step forward to create or redeem units of an ETF, an ETF’s
shares may be more likely to trade at a premium or discount to net asset value
and possibly face trading halts and/or delisting. ETF shares may be purchased
and sold by all other investors in secondary market trading on national
securities exchanges, which allows investors to purchase and sell ETF shares at
their market price throughout the day.
Investments
in ETFs generally present the same primary risks as an investment in a
conventional mutual fund that has the
same investment objective, strategy and policies. Investments in ETFs further
involve the same risks associated with a direct investment in the types of
securities, commodities and/or currencies included in the indices the ETFs are
designed to replicate. In addition, shares of an ETF may trade at a market price
that is higher or lower than their net asset value and an active trading market
in such shares may not develop or continue. Moreover, trading of an ETF’s shares
may be halted if the listing exchange’s officials deem such action to be
appropriate, the shares are de-listed from the exchange, or the activation of
market-wide “circuit breakers” (which are tied to large decreases in stock
prices) halts stock trading generally.
Exchange-Traded
Notes
Exchange-Traded
Notes (ETNs). ETNs are senior,
unsecured, unsubordinated debt securities whose returns are linked to the
performance of a particular market benchmark or strategy, minus applicable fees.
ETNs are traded on an exchange (e.g., the New York Stock Exchange) during normal
trading hours; however, investors can also hold the ETN until maturity. At
maturity, the issuer pays to the investor a cash amount equal to the principal
amount, subject to the day’s market benchmark or strategy factor. ETNs do not
make periodic coupon payments or provide principal protection. ETNs are subject
to credit risk, including the credit risk of the issuer, and the value of the
ETN may drop due to a downgrade in the issuer’s credit rating, despite the
underlying market benchmark or strategy remaining unchanged. The value of an ETN
may also be influenced by time to maturity, level of supply and demand for the
ETN, volatility and lack of liquidity in underlying assets, changes in the
applicable interest rates, changes in the issuer’s credit rating, and economic,
legal, political, or geographic events that affect the referenced underlying
asset. When a Fund invests in ETNs it will bear its proportionate share of any
fees and expenses borne by the ETN. A decision to sell ETN holdings may be
limited by the availability of a secondary market. In addition, although an ETN
may be listed on an exchange, the issuer may not be required to maintain the
listing, and there can be no assurance that a secondary market will exist for an
ETN.
15
ETNs
are also subject to tax risk. No assurance can be given that the Internal
Revenue Service (IRS) will accept, or a court
will uphold, how ETNs are characterized or treated for tax purposes. Further,
the IRS and Congress are considering proposals that would change the timing and
character of income and gains from ETNs.
An
ETN that is tied to a specific market benchmark or strategy may not be able to
replicate and maintain exactly the
composition and relative weighting of securities, commodities or other
components in the applicable market benchmark or strategy. Some ETNs that use
leverage can, at times, be relatively illiquid, and thus they may be difficult
to purchase or sell at a fair price. Leveraged ETNs are subject to the same risk
as other instruments that use leverage in any form.
The
market value of ETNs may differ from their market benchmark or strategy. This
difference in price may be due to the
fact that the supply and demand in the market for ETNs at any point in time is
not always identical to the supply and demand in the market for the securities,
commodities or other components underlying the market benchmark or strategy that
the ETN seeks to track. As a result, there may be times when an ETN trades at a
premium or discount to its market benchmark or strategy.
Debt
Investments
U.S.
Government Obligations. U.S. government
obligations are obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities, including bills, notes and bonds issued by the
U.S. Treasury, as well as "stripped" or "zero coupon" U.S. Treasury
obligations.
U.S.
government obligations may be, (i) supported by the full faith and credit of the
U.S. Treasury, (ii) supported by the
right of the issuer to borrow from the U.S. Treasury, (iii) supported by the
discretionary authority of the U.S. government to purchase the agency’s
obligations, or (iv) supported only by the credit of the instrumentality. There
is a risk that the U.S. government may choose not to provide financial support
to U.S. government-sponsored agencies or instrumentalities if it is not legally
obligated to do so. In that case, if the issuer were to default, a Fund holding
securities of such issuer might not be able to recover its investment from the
U.S. government. For example, while the U.S. government has provided financial
support to Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC), no assurance can be given that the U.S. government
will always do so, since the U.S. government is not so obligated by law. There
also is no guarantee that the government would support Federal Home Loan Banks.
Accordingly, securities of FNMA, FHLMC and Federal Home Loan Banks, and other
agencies, may involve a risk of non-payment of principal and interest. Any
downgrade of the credit rating of the securities issued by the U.S. government
may result in a downgrade of securities issued by its agencies or
instrumentalities, including government-sponsored entities. Additionally, from
time to time uncertainty regarding the status of negotiations in the U.S.
government to increase the statutory debt limit, commonly called the “debt
ceiling,” could increase the risk that the U.S. government may default on
payments on certain U.S. government securities, cause the credit rating of the
U.S. government to be downgraded, increase volatility in the stock and bond
markets, result in higher interest rates, reduce prices of U.S. Treasury
securities, and/or increase the costs of various kinds of debt. If a U.S.
government-sponsored entity is negatively impacted by legislative or regulatory
action, is unable to meet its obligations, or its creditworthiness declines, the
performance of a Fund that holds securities of that entity will be adversely
impacted.
Inflation-Indexed
Bonds.
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Two structures are
common. The U.S. Treasury and some other issuers use a structure that accrues
inflation into the principal value of the bond. Most other issuers pay out the
Consumer Price Index (CPI) accruals as part of a semiannual coupon.
Inflation-indexed
securities issued by the U.S. Treasury have maturities of five, ten or thirty
years, although it is
possible that securities with other maturities will be issued in the future. The
U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed
percentage of the inflation-adjusted principal amount. For example, if a fund
purchased an inflation-indexed bond with a par value of $1,000 and a 3% real
rate of return coupon (payable 1.5% semi-annually), and inflation over the first
six months was 1%, the mid-year par value of the bond would be $1,010 and the
first semi-annual interest payment would be $15.15
16
($1,010
times 1.5%). If inflation during the second half of the year resulted in the
whole years’ inflation equaling 3%, the
end-of-year par value of the bond would be $1,030 and the second semiannual
interest payment would be $15.45 ($1,030 times 1.5%).
If
the periodic adjustment rate measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted
downward, and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment of the
original bond principal upon maturity (as adjusted for inflation) is guaranteed
in the case of U.S. Treasury inflation-indexed bonds, even during a period of
deflation. However, the current market value of the bonds is not guaranteed, and
will fluctuate. The Fund may also invest in other inflation related bonds which
may or may not provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal.
The
value of inflation-indexed bonds is expected to change in response to changes in
real interest rates. Real interest rates
in turn are tied to the relationship between nominal interest rates and the rate
of inflation. Therefore, if inflation were to rise at a faster rate than nominal
interest rates, real interest rates might decline, leading to an increase in
value of inflation-indexed bonds. In contrast, if nominal interest rates
increased at a faster rate than inflation, real interest rates might rise,
leading to a decrease in value of inflation-indexed bonds.
While
these securities are expected to be protected from long-term inflationary
trends, short-term increases in
inflation may lead to a decline in value. If interest rates rise due to reasons
other than inflation (for example, due to changes in currency exchange rates),
investors in these securities may not be protected to the extent that the
increase is not reflected in the bond’s inflation measure.
The
periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer
Price Index for Urban Consumers (CPI-U),
which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is
a measurement of changes in the cost of living, made up of components such as
housing, food, transportation and energy. Inflation-indexed bonds issued by a
foreign government are generally adjusted to reflect a comparable inflation
index, calculated by that government. There can be no assurance that the CPI-U
or any foreign inflation index will accurately measure the real rate of
inflation in the prices of goods and services. Moreover, there can be no
assurance that the rate of inflation in a foreign country will be correlated to
the rate of inflation in the United States.
Any
increase in the principal amount of an inflation-indexed bond will be considered
taxable ordinary income, even though
investors do not receive their principal until maturity.
Temporary
Investments. Each Fund may
invest a portion of its assets in affiliated money market funds or in other
types of money market instruments in which those funds would invest or other
short-term U.S. government securities for cash management purposes. Each Fund
may invest up to 100% of its assets in investments that may be inconsistent with
the Fund’s principal investment strategies for temporary defensive purposes in
anticipation of or in response to adverse market, economic, political or other
conditions, or atypical circumstances such as unusually large cash inflows or
redemptions. As a result, the Fund may not achieve its investment
objective.
Changing
Interest Rates. In a low or
negative interest rate environment, debt securities may trade at, or be issued
with, negative yields, which means the purchaser of the security may receive at
maturity less than the total amount invested. In addition, in a negative
interest rate environment, if a bank charges negative interest, instead of
receiving interest on deposits, a depositor must pay the bank fees to keep money
with the bank. To the extent a Fund holds a negatively-yielding debt security or
has a bank deposit with a negative interest rate, the Fund would generate a
negative return on that investment. Cash positions may also subject a Fund to
increased counterparty risk to the Fund's bank. Debt market conditions are
highly unpredictable and some parts of the market are subject to dislocations.
In the past, the U.S. government and certain foreign central banks have taken
steps to stabilize markets by, among other things, reducing interest rates. To
the extent such actions are pursued, they present heightened risks to debt
securities, and such risks could be even further heightened if these actions are
unexpectedly or suddenly reversed or are ineffective in achieving
17
their
desired outcomes. In recent years, the U.S. government began implementing
increases to the federal funds interest rate
and there may be further rate increases. As interest rates rise, there is risk
that rates across the financial system also may rise. To the extent rates
increase substantially and/or rapidly, the Funds may be subject to significant
losses.
In
a low or negative interest rate environment, some investors may seek to
reallocate assets to other income-producing
assets. This may cause the price of such higher yielding instruments to rise,
could further reduce the value of instruments with a negative yield, and may
limit a Fund's ability to locate fixed income instruments containing the desired
risk/return profile. Changing interest rates, including, rates that fall below
zero, could have unpredictable effects on the markets and may expose fixed
income markets to heightened volatility, increased redemptions, and potential
illiquidity.
With
respect to a money market fund, which seeks to maintain a stable $1.00 price per
share, a low or negative interest
rate environment could impact the money market fund’s ability to maintain a
stable $1.00 share price. During a negative interest rate environment causing a
money market fund to have a negative gross yield, the money market fund may
reduce the number of shares outstanding on a pro rata basis through reverse
distribution mechanisms
or
other mechanisms to seek to maintain a stable $1.00 price per share, subject to
approval of the Board and to the extent permissible by applicable law and its
organizational documents. A money market fund that implements share cancellation
would continue to maintain a stable $1.00 share price by use of the amortized
cost method of valuation and/or penny rounding method but the value of an
investor’s investment would decline if the fund reduces the number of shares
held by the investor.
Alternatively, the
money market fund may discontinue using the amortized cost method of valuation
to maintain a stable $1.00 price per share and establish a fluctuating NAV per
share rounded to four decimal places by using available market quotations or
equivalents. A money market fund that floats its NAV would no longer maintain a
stable $1.00 share price and instead have a share price that fluctuates. An
investor in a money market fund that floats its NAV would lose money if the
investor sells their shares when they are worth less than what the investor
originally paid for them.
Mortgage-Backed
and Asset-Backed Securities. Mortgage-backed
and asset-backed securities include commercial mortgage-backed securities (CMBS)
and residential mortgage-backed securities (RMBS). Mortgage-backed securities
are mortgage-related securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, or issued by non-government entities, such as
commercial banks and other private lenders. Mortgage-related securities
represent ownership in pools of mortgage loans assembled for sale to investors
by various government agencies such as the Government National Mortgage
Association (GNMA) and government-related organizations such as the FNMA and the
FHLMC, as well as by non-government issuers such as commercial banks, savings
and loan institutions, mortgage bankers and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. These securities differ from
conventional bonds in that the principal is paid back to the investor as
payments are made on the underlying mortgages in the pool. Accordingly, a Fund
receives monthly scheduled payments of principal and interest along with any
unscheduled principal prepayments on the underlying mortgages. Because these
scheduled and unscheduled principal payments must be reinvested at prevailing
interest rates, mortgage-backed securities do not provide an effective means of
locking in long-term interest rates for the investor.
In
addition, there are a number of important differences among the agencies and
instrumentalities of the U.S. government
that issue mortgage-related securities and among the securities they issue.
Mortgage-related securities issued by GNMA include GNMA Mortgage Pass-Through
Certificates (also known as Ginnie Maes) which are guaranteed as to the timely
payment of principal and interest. That guarantee is backed by the full faith
and credit of the U.S. Treasury. GNMA is a corporation wholly-owned by the U.S.
government within the Department of Housing and Urban Development.
Mortgage-related securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as Fannie Maes) and are guaranteed as to
payment of principal and interest by FNMA itself and backed by a line of credit
with the U.S. Treasury. FNMA is a government-sponsored entity (GSE) wholly-owned
by public stockholders. Mortgage-related securities issued by FHLMC include
FHLMC Mortgage Participation Certificates (also known as
18
Freddie
Macs) and are guaranteed as to payment of principal and interest by FHLMC itself
and backed by a line of credit with
the U.S. Treasury. FHLMC is a GSE wholly-owned by public
stockholders.
Another
type of mortgage-related security issued by GSEs, such as FNMA and FHLMC, is
credit risk transfer
securities. GSE credit risk transfer securities are unguaranteed and unsecured
fixed or floating rate general obligations issued by GSEs, which are typically
issued at par and have stated final maturities. In addition, GSE credit risk
transfer securities are structured so that: (i) interest is paid directly by the
issuing GSE; and (ii) principal is paid by the issuing GSE in accordance with
the principal payments and default performance of a pool of residential mortgage
loans acquired by the GSE. The issuing GSE selects the pool of mortgage loans
based on that GSE’s eligibility criteria, and the performance of the credit risk
transfer securities will be directly affected by the selection of such
underlying mortgage loans.
GSE
credit risk transfer securities are not directly linked to or backed by the
underlying mortgage loans. Thus, although the
payment of principal and interest on such securities is tied to the performance
of the pool of underlying mortgage loans, in no circumstances will the actual
cash flow from the underlying mortgage loans be paid or otherwise made available
to the holders of the securities and the holders of the securities will have no
interest in the underlying mortgage loans. As a result, in the event that a GSE
fails to pay principal or interest on its credit risk transfer securities or
goes through a bankruptcy, insolvency or similar proceeding, holders of such
credit risk transfer securities will have no direct recourse to the underlying
mortgage loans. Such holders will receive recovery on par with other unsecured
note holders (agency debentures) in such a scenario.
GSE
credit risk transfer securities are issued in multiple tranches, which are
allocated certain principal repayments and
credit losses corresponding to the seniority of the particular tranche. Each
tranche will have credit exposure to the underlying mortgage loans and the yield
to maturity will be directly related to the amount and timing of certain defined
credit events on the underlying mortgage loans, any prepayments by borrowers and
any removals of a mortgage loan from the pool. Because credit risk exposure is
allocated in accordance with the seniority of the particular tranche, principal
losses will be first allocated to the most junior or subordinate tranches, thus
making the most subordinate tranches subject to increased sensitivity to
dramatic housing downturns. In addition, many credit risk transfer securities
have collateral performance triggers (such as those based on credit enhancement,
delinquencies or defaults) that could shut off principal payments to subordinate
tranches.
The
risks associated with an investment in GSE credit risk transfer securities will
be different than the risks associated
with an investment in mortgage-backed securities issued by GSEs, because some or
all of the mortgage default or credit risk associated with the underlying
mortgage loans in credit risk transfer securities is transferred to investors,
such as the Fund. As a result, investors in GSE credit risk transfer securities
could lose some or all of their investment in these securities if the underlying
mortgage loans default.
The
Funds may also invest in credit risk transfer securities issued by private
entities, such as banks or other financial
institutions. Credit risk transfer securities issued by private entities are
structured similarly to those issued by GSEs, and are generally subject to the
same types of risks, including credit, prepayment, extension, interest rate and
market risks.
On
September 7, 2008, FNMA and FHLMC were placed under the conservatorship of the
Federal Housing Finance
Agency (FHFA) to provide stability in the financial markets, mortgage
availability and taxpayer protection by preserving FNMA and FHLMC’s assets and
property and putting FNMA and FHLMC in a sound and solvent position. Under the
conservatorship, the management of FNMA and FHLMC was replaced.
Since
2009, both FNMA and FHLMC have received significant capital support through U.S.
Treasury preferred stock
purchases and Federal Reserve purchases of the entities’ mortgage-backed
securities.
In
February 2011, the Obama Administration produced a report to Congress outlining
proposals to wind down FNMA and FHLMC
and reduce the government’s role in the mortgage market. In December 2011,
Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 which,
among other provisions,
19
requires
that FNMA and FHLMC increase their single-family guaranty fees by at least 10
basis points and remit this increase
to Treasury with respect to all loans acquired by FNMA or FHLMC on or after
April 1, 2012 and before January 1, 2022. Discussions among policymakers
continue, however, as to whether FNMA and FHLMC should be nationalized,
privatized, restructured, or eliminated altogether. FNMA reported in the third
quarter of 2016 that it expected "continued significant uncertainty" regarding
its future and the housing finance system, including how long FNMA will continue
to exist in its current form, the extent of its role in the market, how long it
will be in conservatorship, what form it will have and what ownership interest,
if any, current common and preferred stockholders will hold after the
conservatorship is terminated, and whether FNMA will continue to exist following
conservatorship. FHLMC faces similar uncertainty about its future role. If FNMA
and FHLMC are taken out of conservatorship, it is unclear how the capital
structure of FNMA and FHLMC would be constructed and what effects, if any, there
may be on FNMA’s and FHLMC’s creditworthiness and guarantees of certain
mortgage-backed securities. It is also unclear whether the U.S. Treasury would
continue to enforce its rights or perform its obligations related to senior
preferred stock. Should FNMA’s and FHLMC’s conservatorship end, there could be
an adverse impact on the value of their securities, which could cause Fund
losses. FNMA and FHLMC also are the subject of several continuing legal actions
and investigations over certain accounting, disclosure or corporate governance
matters, which (along with any resulting financial restatements) may continue to
have an adverse effect on the guaranteeing entities. Importantly, the future of
the entities is in question as the U.S. government considers multiple options
regarding the future of FNMA and FHLMC.
Under
the direction of the FHFA, FNMA and FHLMC have entered into a joint initiative
to develop a common
securitization platform for the issuance of a uniform mortgage-backed security
(the “Single Security Initiative”) that aligns the characteristics of FNMA and
FHLMC certificates. The Single Security Initiative seeks to support the overall
liquidity of the TBA market. FNMA and FHLMC began issuing uniform
mortgage-backed security in June 2019, and while the initial effects of the
issuance of uniform mortgage-backed securities on the market for
mortgage-related securities have been relatively minimal, the long-term effects
are still uncertain.
Asset-backed
securities are structured like mortgage-backed securities, but instead of
mortgage loans or interests in
mortgage loans, the underlying assets may include such items as motor vehicle
installment sales contracts or installment loan contracts, leases of various
types of real and personal property, and receivables from credit card agreements
and from sales of personal property. Regular payments received on
asset-backed securities include both interest and principal. Asset-backed
securities typically have no U.S. government backing. Additionally, the
ability of an issuer of asset-backed securities to enforce its security interest
in the underlying assets may be limited.
If
a Fund purchases a mortgage-backed or other asset-backed security at a premium,
the premium may be lost if there is
a decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying collateral. As with other
interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. Although the value of a mortgage-backed
or other asset-backed security may decline when interest rates rise, the
converse is not necessarily true, since in periods of declining interest rates
the mortgages and loans underlying the securities are prone to prepayment,
thereby shortening the average life of the security and shortening the period of
time over which income at the higher rate is received. When interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the period
of time over which income at the lower rate is received. For these and other
reasons, a mortgage-backed or other asset-backed security’s average maturity may
be shortened or lengthened as a result of interest rate fluctuations and,
therefore, it is not possible to predict accurately the security’s return. In
addition, while the trading market for short-term mortgages and asset-backed
securities is ordinarily quite liquid, in times of financial stress the trading
market for these securities may become restricted.
CMBS
and RMBS generally offer a higher rate of interest than government and
government-related mortgage-backed
securities because there are no direct or indirect government or government
agency guarantees of payment. The risk of loss due to default on CMBS and RMBS
is historically higher because neither the U.S. government nor an agency or
instrumentality have guaranteed them. CMBS and RMBS whose underlying assets are
neither U.S. government securities nor U.S. government insured mortgages, to
20
the
extent that real properties securing such assets may be located in the same
geographical region, may also be subject to
a greater risk of default than other comparable securities in the event of
adverse economic, political or business developments that may affect such region
and, ultimately, the ability of property owners to make payments of principal
and interest on the underlying mortgages. Non-government mortgage-backed
securities are generally subject to greater price volatility than those issued,
guaranteed or sponsored by government entities because of the greater risk of
default in adverse market conditions. Where a guarantee is provided by a private
guarantor, the Fund is subject to the credit risk of such guarantor, especially
when the guarantor doubles as the originator.
Collateralized
Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. A CMO is a
type of mortgage-backed security that creates separate classes with varying
maturities and interest rates, called tranches. Similar to a bond, interest and
prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs
are structured into multiple classes, each bearing a different fixed or floating
interest rate and stated maturity.
Actual maturity and average life will depend upon the prepayment experience of
the collateral. CMOs provide for a modified form of call protection through a de
facto breakdown of the underlying pool of mortgages according to how quickly the
loans are repaid. Monthly payment of principal received from the pool of
underlying mortgages, including prepayments, is first returned to investors
holding the shortest maturity class. Investors holding the longer maturity
classes receive principal only after the first class has been retired. An
investor is partially guarded against a sooner than desired return of principal
because of the sequential payments.
In
a typical CMO transaction, a corporation (issuer) issues multiple series (i.e.,
Series A, B, C and Z) of CMO bonds (Bonds).
Proceeds of the Bond offering are used to purchase mortgages or mortgage
pass-through certificates (Collateral). The Collateral is pledged to a third
party trustee as security for the Bonds. Principal and interest payments from
the Collateral are used to pay principal on the Bonds in the following order:
Series A, B, C and Z. The Series A, B, and C Bonds all bear current interest.
Interest on a Series Z Bond is accrued and added to principal and a like amount
is paid as principal on the Series A, B, or C Bond is currently being paid off.
Only after the Series A, B, and C Bonds are paid in full does the Series Z Bond
begin to receive payment. With some CMOs, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations) to
borrow against their loan portfolios.
CMOs
that are issued or guaranteed by the U.S. government or by any of its agencies
or instrumentalities will be considered
U.S. government securities by the Funds, while other CMOs, even if
collateralized by U.S. government securities, will have the same status as other
privately issued securities for purposes of applying the Funds' diversification
tests.
FHLMC
CMOs are debt obligations of FHLMC issued in multiple classes having different
maturity dates which are secured
by the pledge of a pool of conventional mortgage loans purchased by FHLMC.
Payments of principal and interest on the FHLMC CMOs are made semiannually. The
amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC’s mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the FHLMC CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC’s minimum sinking fund obligation for any payment
date are paid to the holders of the FHLMC CMOs as additional sinking fund
payments. Because of the “pass-through” nature of all principal payments
received on the collateral pool in excess of FHLMC’s minimum sinking fund
requirement, the rate at which principal of the FHLMC CMOs is actually repaid is
likely to be such that each class of bonds will be retired in advance of its
scheduled maturity date. If collection of principal (including prepayments) on
the mortgage loans during any semiannual payment period is not sufficient to
meet the FHLMC CMO’s minimum sinking fund obligation on the next sinking fund
payment date, FHLMC agrees to make up the deficiency from its general
funds.
21
Classes
of CMOs may also include interest only securities (IOs) and principal only
securities (POs). IOs and POs are
stripped mortgage-backed securities representing interests in a pool of
mortgages the cash flow from which has been separated into interest and
principal components. IOs receive the interest portion of the cash flow while
POs receive the principal portion. IOs and POs can be extremely volatile in
response to changes in interest rates. As interest rates rise and fall, the
value of IOs tends to move in the same direction as interest rates. POs perform
best when prepayments on the underlying mortgages rise since this increases the
rate at which the investment is returned and the yield to maturity on the PO.
When payments on mortgages underlying a PO are slow, the life of the PO is
lengthened and the yield to maturity is reduced.
CMOs
are generally subject to the same risks as mortgage-backed securities. In
addition, CMOs may be subject to credit
risk because the issuer or credit enhancer has defaulted on its obligations and
a Fund may not receive all or part of its principal. Obligations issued by U.S.
government-related entities are guaranteed as to the payment of principal and
interest, but are not backed by the full faith and credit of the U.S.
government. The performance of private label mortgage-backed securities, issued
by private institutions, is based on the financial health of those institutions.
Although GNMA guarantees timely payment of GNMA certificates even if homeowners
delay or default, tracking the “pass-through” payments may, at times, be
difficult.
Collateralized
Debt Obligations (CDOs). A CDO is a
security backed by a pool of bonds, loans and other debt obligations. CDOs are
not limited to investing in one type of debt and accordingly, a CDO may own
corporate bonds, commercial loans, asset-backed securities, residential
mortgage-backed securities, commercial mortgage-backed securities, and emerging
market debt. The CDO’s securities are typically divided into several classes, or
bond tranches, that have differing levels of investment grade or credit
tolerances. Most CDO issues are structured in a way that enables the senior bond
classes and mezzanine classes to receive investment-grade credit ratings. Credit
risk is shifted to the most junior class of securities. If any defaults occur in
the assets backing a CDO, the senior bond classes are first in line to receive
principal and interest payments, followed by the mezzanine classes and finally
by the lowest rated (or non-rated) class, which is known as the equity tranche.
Similar in structure to a collateralized mortgage obligation (described above)
CDOs are unique in that they represent different types of debt and credit
risk.
Collateralized
Loan Obligations (CLOs). CLOs are debt
instruments backed solely by a pool of other debt securities. The risks of an
investment in a CLO depend largely on the type of the collateral securities and
the class of the CLO in which a Fund invests. Some CLOs have credit ratings, but
are typically issued in various classes with various priorities. Normally, CLOs
are privately offered and sold (that is, they are not registered under the
securities laws) and may be characterized by a Fund as illiquid investments;
however, an active dealer market may exist for CLOs that qualify for Rule 144A
transactions. In addition to the normal interest rate, default and other risks
of fixed income securities, CLOs carry additional risks, including the
possibility that distributions from collateral securities will not be adequate
to make interest or other payments, the quality of the collateral may decline in
value or default a Fund may invest in CLOs that are subordinate to other
classes, values may be volatile, and disputes with the issuer may produce
unexpected investment results.
Credit
Linked Notes (CLNs). A CLN is a
security structured and issued by an issuer, which may be a bank, broker or
special purpose vehicle. If a CLN is issued by a special purpose vehicle, the
special purpose vehicle will typically be collateralized by AAA-rated
securities, but some CLNs are not collateralized. The performance and payment of
principal and interest is tied to that of a reference obligation which may be a
particular security, basket of securities, credit default swap, basket of credit
default swaps, or index. The reference obligation may be denominated in foreign
currencies. Risks of CLNs include those risks associated with the underlying
reference obligation including, but not limited to, market risk, interest rate
risk, credit risk, default risk and foreign currency risk. In the case of a CLN
created with credit default swaps, the structure will be “funded” such that the
par amount of the security will represent the maximum loss that could be
incurred on the investment and no leverage is introduced. An investor in a CLN
also bears counterparty risk or the risk that the issuer of the CLN will default
or become bankrupt and not make timely payments of principal and interest on the
structured security. Should the issuer default or declare bankruptcy, the CLN
holder may not
22
receive
any compensation. In return for these risks, the CLN holder receives a higher
yield. As with most derivative
instruments, valuation of a CLN may be difficult due to the complexity of the
security.
Bank
Instruments. Bank instruments
are unsecured interest bearing bank deposits. Bank instruments include, but are
not limited to, certificates of deposit, time deposits, and banker’s acceptances
from U.S. or foreign banks, as well as Eurodollar certificates of deposit
(Eurodollar CDs) and Eurodollar time deposits of foreign branches of domestic
banks. Some certificates of deposit are negotiable interest-bearing instruments
with a specific maturity issued by banks and savings and loan institutions in
exchange for the deposit of funds, and can typically be traded in the secondary
market prior to maturity. Other certificates of deposit, like time deposits, are
non-negotiable receipts issued by a bank in exchange for the deposit of funds
which earns a specified rate of interest over a definite period of time;
however, it cannot be traded in the secondary market. A banker’s acceptance is a
bill of exchange or time draft drawn on and accepted by a commercial
bank.
An
investment in Eurodollar CDs or Eurodollar time deposits may involve some of the
same risks that are described for
Foreign Securities.
Commercial
Instruments. Commercial
instruments include commercial paper, master notes and other short-term
corporate instruments, that are denominated in U.S. dollars or foreign
currencies.
Commercial
instruments are a type of instrument issued by large banks and corporations to
raise money to meet their
short-term debt obligations, and are only backed by the issuing bank or
corporation’s promise to pay the face amount on the maturity date specified on
the note. Commercial paper consists of short-term promissory notes issued by
corporations. Commercial paper may be traded in the secondary market after its
issuance. Master notes are demand notes that permit the investment of
fluctuating amounts of money at varying rates of interest pursuant to
arrangements with issuers who meet certain credit quality criteria. The interest
rate on a master note may fluctuate based on changes in specified interest rates
or may be reset periodically according to a prescribed formula or may be a set
rate. Although there is no secondary market in master notes, if such notes have
a demand feature, the payee may demand payment of the principal amount of the
note upon relatively short notice. Master notes are generally illiquid and
therefore typically subject to the Funds' percentage limitations for investments
in illiquid investments. Commercial instruments may not be registered with the
SEC.
Synthetic
Municipal Instruments. Synthetic
municipal instruments are instruments, the value of and return on which are
derived from underlying securities. Synthetic municipal instruments in
which the Funds may invest include tender option bonds, and fixed or variable
rate trust certificates. These types of instruments involve the deposit into a
trust or custodial account of one or more long-term tax-exempt bonds or notes
(Underlying Bonds), and the sale of certificates evidencing interests in the
trust or custodial account to investors such as the Funds. The trustee or
custodian receives the long-term fixed rate interest payments on the Underlying
Bonds, and pays certificate holders fixed rates or short-term floating or
variable interest rates which are reset periodically. A “tender option bond”
provides a certificate holder with the conditional right to sell its certificate
to the sponsor or some designated third party at specified intervals and receive
the par value of the certificate plus accrued interest (a demand feature). A
"fixed rate trust certificate" evidences an interest in a trust entitling a
certificate holder to fixed future interest and/or principal payments on the
Underlying Bonds. A “variable rate trust certificate” evidences an interest in a
trust entitling the certificate holder to receive variable rate interest based
on prevailing short-term interest rates and also typically provides the
certificate holder with the conditional demand feature (the right to tender its
certificate at par value plus accrued interest under certain
conditions).
All
synthetic municipal instruments must meet the minimum quality standards for the
Funds' investments and must present
minimal credit risks. In selecting synthetic municipal instruments for the
Funds, Invesco considers the creditworthiness of the issuer of the Underlying
Bond, the sponsor and the party providing certificate holders with a conditional
right to sell their certificates at stated times and prices (a demand
feature).
23
Typically,
a certificate holder cannot exercise the demand feature until the occurrence of
certain conditions, such as
where the issuer of the Underlying Bond defaults on interest payments. Moreover,
because synthetic municipal instruments involve a trust or custodial account and
a third party conditional demand feature, they involve complexities and
potential risks that may not be present where a municipal security is owned
directly.
The
tax-exempt character of the interest paid to certificate holders is based on the
assumption that the holders have an
ownership interest in the Underlying Bonds; however, the IRS has not issued a
ruling addressing this issue. In the event the IRS issues an adverse ruling or
successfully litigates this issue, it is possible that the interest paid to the
Funds on certain synthetic municipal instruments would be deemed to be taxable.
The Funds rely on opinions of special tax counsel on this ownership question and
opinions of bond counsel regarding the tax-exempt character of interest paid on
the Underlying Bonds.
Municipal
Securities. Municipal
Securities are typically debt obligations of states, territories or possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest on which, in the
opinion of bond counsel or other counsel to the issuers of such securities, is,
at the time of issuance, exempt from federal income tax. The issuers of
municipal securities obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, highways,
bridges, schools, hospitals, housing, mass transportation, streets and water and
sewer works. Other public purposes for which municipal securities may be issued
include refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to other public institutions and
facilities.
Certain
types of municipal securities are issued to obtain funding for privately
operated facilities. The credit and quality
of private activity debt securities are dependent on the private facility or
user, who is responsible for the interest payment and principal
repayment.
The
two major classifications of Municipal Securities are bonds and notes. Municipal
bonds are municipal debt obligations in
which the issuer is obligated to repay the original (or “principal”) payment
amount on a certain maturity date along with interest. A municipal bond’s
maturity date (the date when the issuer of the bond repays the principal) may be
years in the future. Short-term bonds mature in one to three years, while
long-term bonds usually do not mature for more than a decade. Notes are
short-term instruments which usually mature in less than two years. Most notes
are general obligations of the issuing municipalities or agencies and are sold
in anticipation of a bond sale, collection of taxes or receipt of other
revenues. Municipal notes also include tax, revenue notes and revenue and bond
anticipation notes (discussed more fully below) of short maturity, generally
less than three years, which are issued to obtain temporary funds for various
public purposes.
Municipal
debt securities may also be classified as general obligation or revenue
obligations (or "special delegation
securities"). General obligation securities are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and
interest.
Revenue
debt obligations, such as revenue bonds and revenue notes, are usually payable
only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source but not from
the general taxing power. The principal and interest payments for industrial
development bonds or pollution control bonds are often the sole responsibility
of the industrial user and therefore may not be backed by the taxing power of
the issuing municipality. The interest paid on such bonds may be exempt from
federal income tax, although current federal tax laws place substantial
limitations on the purposes and size of such issues. Such obligations are
considered to be Municipal Securities provided that the interest paid thereon,
in the opinion of bond counsel, qualifies as exempt from federal income tax.
However, interest on municipal securities may give rise to a federal alternative
minimum tax (AMT) liability and may have other collateral federal income tax
consequences. There is a risk that some or all of the interest received by the
Fund from tax-exempt municipal securities might become taxable as a result of
tax law changes or determinations of the IRS.
24
Another
type of revenue obligations is pre-refunded bonds, which are typically issued to
refinance debt. In other words,
pre-refunded bonds result from the advance refunding of bonds that are not
currently redeemable. The proceeds from the issue of the lower yield and/or
longer maturing pre-refunding bond will usually be used to purchase U.S.
government obligations, such as U.S. Treasury securities, which are held in an
escrow account and used to pay interest and principal payments until the
scheduled call date of the original bond issue occurs. Like other fixed income
securities, pre-refunded bonds are subject to interest rate, market, credit, and
reinvestment risks. However, because pre-refunded bonds are generally
collateralized with U.S. government obligations, such pre-refunded bonds have
essentially the same risks of default as an AAA-rated security. The Fund will
treat such pre-refunded securities as investment-grade securities,
notwithstanding the fact that the issuer of such securities may have a lower
rating (such as a below-investment-grade rating) from one or more rating
agencies.
Within
these principal classifications of municipal securities, there are a variety of
types of municipal securities,
including but not limited to, fixed and variable rate securities, variable rate
demand notes, municipal leases, custodial receipts, participation certificates,
inverse floating rate securities, and derivative municipal
securities.
After
purchase by a Fund, an issue of Municipal Securities may cease to be rated by
Moody's Investors Service, Inc.
(Moody's) or S&P Global Ratings (S&P), or another nationally recognized
statistical rating organization (NRSRO), or the rating of such a security may be
reduced below the minimum credit quality rating required for purchase by the
Fund. Neither event would require a Fund to dispose of the security. To the
extent that the ratings applied by Moody’s, S&P or another NRSRO to
Municipal Securities may change as a result of changes in these rating systems,
a Fund will attempt to use comparable credit quality ratings as standards for
its investments in Municipal Securities.
The
yields on Municipal Securities are dependent on a variety of factors, including
general economic and monetary
conditions, money market factors, conditions of the Municipal Securities market,
size of a particular offering, and maturity and rating of the obligation.
Because many Municipal Securities are issued to finance similar projects,
especially those related to education, health care, transportation and various
utilities, conditions in those sectors and the financial condition of an
individual municipal issuer can affect the overall municipal market. The market
values of the Municipal Securities held by a Fund will be affected by changes in
the yields available on similar securities. If yields increase following the
purchase of a Municipal Security, the market value of such Municipal Security
will generally decrease. Conversely, if yields decrease, the market value of a
Municipal Security will generally increase. The ratings of S&P and Moody’s
represent their opinions of the quality of the municipal securities they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal securities
with the same maturity, coupon and rating may have different yields while
municipal securities of the same maturity and coupon with different ratings may
have the same yield.
Certain
of the municipal securities in which the Funds may invest represent relatively
recent innovations in the municipal
securities markets and the markets for such securities may be less developed
than the market for conventional fixed rate municipal securities.
Under
normal market conditions, longer-term municipal securities generally provide a
higher yield than shorter-term
municipal securities. The Funds have no limitation as to the maturity of
municipal securities in which they may invest. The Adviser may adjust the
average maturity of a Fund’s portfolio from time to time depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates.
The
net asset value of a Fund will change with changes in the value of its portfolio
securities. With fixed income municipal
securities, the net asset value of a Fund can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. The prices of longer
term municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.
25
Municipal
Securities, like other debt obligations, are subject to the credit risk of
nonpayment. The ability of issuers of
municipal securities to make timely payments of interest and principal may be
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such nonpayment would result in a reduction of income to a
Fund, and could result in a reduction in the value of the municipal securities
experiencing nonpayment and a potential decrease in the net asset value of the
Fund. In addition, a Fund may incur expenses to work out or restructure a
distressed or defaulted security.
The
Funds may invest in Municipal Securities with credit enhancements such as
letters of credit and municipal bond
insurance. The Funds may invest in Municipal Securities that are insured by
financial insurance companies. Since a limited number of entities provide such
insurance, a Fund may invest more than 25% of its assets in securities insured
by the same insurance company. If a Fund invests in Municipal Securities backed
by insurance companies and other financial institutions, changes in the
financial condition of these institutions could cause losses to the Fund and
affect share price. Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying Municipal Bond should default. These credit
enhancements do not guarantee payments or repayments on the Municipal Securities
and a downgrade in the credit enhancer could affect the value of the Municipal
Security.
If
the IRS determines that an issuer of a Municipal Security has not complied with
applicable tax requirements,
interest from the security could be treated as taxable, which could result in a
decline in the security’s value. In addition, there could be changes in
applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on Municipal Securities or otherwise adversely
affect the current federal or state tax status of Municipal Securities. For
example, 2017 legislation commonly known as the Tax Cuts and Jobs Act repeals
the exclusion from gross income for interest on pre-refunded municipal
securities effective for such bonds issued after December 31, 2017.
Taxable
municipal securities are debt securities issued by or on behalf of states and
their political subdivisions, the
District of Columbia, and possessions of the United States, the interest on
which is not exempt from federal income tax. Taxable investments include, for
example, hedging instruments, repurchase agreements, and many of the types of
securities the Fund would buy for temporary defensive purposes.
At
times, in connection with the restructuring of a municipal bond issuer either
outside of bankruptcy court in a negotiated
workout or in the context of bankruptcy proceedings, the Fund may determine or
be required to accept equity or taxable debt securities, or the underlying
collateral (which may include real estate or loans) from the issuer in exchange
for all or a portion of the Fund’s holdings in the municipal security. Although
the Adviser will attempt to sell those assets as soon as reasonably practicable
in most cases, depending upon, among other things, the Adviser’s valuation of
the potential value of such assets in relation to the price that could be
obtained by the Fund at any given time upon sale thereof, the Fund may determine
to hold such securities or assets in its portfolio for limited period of time in
order to liquidate the assets in a manner that maximizes their value to the
Fund.
Municipal
Securities also include,
but
are not limited to, the following securities:
•
Bond Anticipation
Notes usually are general obligations of state and local governmental issuers
which are sold to obtain interim financing for projects that will eventually be
funded through the sale of long-term debt obligations or bonds.
•
Revenue
Anticipation Debt Securities, including bonds, notes, and certificates, are
issued by governments or governmental bodies with the expectation that future
revenues from a designated source will be used to repay the securities. In
general, they also constitute general obligations of the issuer.
•
Tax Anticipation
Notes are issued by state and local governments to finance the current
operations of such governments. Repayment is generally to be derived from
specific future tax revenues.
26
•
Tax-Exempt
Commercial Paper (Municipal Paper) is similar to taxable commercial paper,
except that tax-exempt commercial paper is issued by states, municipalities and
their agencies.
•
Tax-Exempt
Mandatory Paydown Securities (TEMPS) are fixed rate term bonds carrying a
short-term maturity, usually three to four years beyond the expected redemption.
TEMPS are structured as bullet repayments, with required optional redemptions as
entrance fees are collected.
•
Zero Coupon and
Pay-in-Kind Securities do not immediately produce cash income. These securities
are issued at an original issue discount, with the full value, including accrued
interest, paid at maturity. Interest income may be reportable annually, even
though no annual payments are made. Market prices of zero coupon bonds tend to
be more volatile than bonds that pay interest regularly. Pay-in-kind securities
are securities that have interest payable by delivery of additional securities.
Upon maturity, the holder is entitled to receive the aggregate par value of the
securities. Zero coupon and pay-in-kind securities may be subject to greater
fluctuation in value and less liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer’s financial condition, fluctuation in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative. Special tax
considerations are associated with investing in certain lower-grade securities,
such as zero coupon or pay-in-kind securities.
•
Capital
Appreciation Bonds are municipal securities in which the investment return on
the initial principal payment is reinvested at a compounded rate until the bond
matures. The principal and interest are due on maturity. Thus, like zero coupon
securities, investors must wait until maturity to receive interest and
principal, which increases the interest rate and credit risks.
•
Payments in lieu of
taxes (also known as PILOTs) are voluntary payments by, for instance the U.S.
government or nonprofits, to local governments that help offset losses in or
otherwise serve as a substitute for property taxes.
•
Converted Auction
Rate Securities (CARS) are a structure that combines the debt service deferral
feature of Capital Appreciation Bonds (CABS) with Auction Rate Securities. The
CARS pay no debt service until a specific date, then they incrementally convert
to conventional Auction Rate Securities. At each conversion date the issuer has
the ability to call and pay down any amount of the CARS.
Some
bonds may be “callable,” allowing the issuer to redeem them before their
maturity date. To protect
bondholders, callable bonds may be issued with provisions that prevent them from
being called for a period of time. Typically, that is 5 to 10 years from the
issuance date. When interest rates decline, if the call protection on a bond has
expired, it is more likely that the issuer may call the bond. If that occurs,
the Fund might have to reinvest the proceeds of the called bond in investments
that pay a lower rate of return, which could reduce the Fund’s
yield.
Inverse
Floating Rate Interests. Inverse floating
rate interests
(Inverse
Floaters)
are
issued in connection with municipal tender option bond (TOB) financing
transactions to generate leverage for the Fund. Such instruments are created by
a special purpose trust (a TOB Trust) that holds long-term fixed rate
bonds
sold
to it by the Fund (the underlying security), and issues two classes of
beneficial interests: short-term floating rate interests
(Floaters), which
are sold to other investors, and Inverse Floaters, which are purchased by the
Fund. The Floaters have first priority on the cash flow from the underlying
security held by the TOB Trust, have a tender option feature that allows holders
to tender the Floaters back to the TOB Trust for their par amount and accrued
interest at specified intervals and bear interest at prevailing short-term
interest rates. Tendered Floaters are remarketed for sale to other investors for
their par amount and accrued interest by a remarketing agent to the TOB Trust
and are ultimately supported by a liquidity facility provided by a bank, upon
which the TOB Trust can draw funds to pay such amount to holders of Tendered
Floaters that cannot be remarketed. The Fund,
as
holder of the Inverse
Floaters, is paid
the residual cash flow from the underlying security. Accordingly, the Inverse
Floaters provide the Fund with leveraged exposure to the underlying security.
When short-term interest rates rise or fall, the interest payable on
the
Floaters issued by a TOB Trust
27
will,
respectively, rise or fall,
leaving less or more, respectively,
residual interest
cash flow from the underlying security available for payment on the Inverse
Floaters. Thus, as short-term interest rates rise,
Inverse Floaters
produce less income for the Fund,
and as
short-term interest rates decline,
Inverse Floaters
produce more income for the Fund.
The
price of Inverse Floaters is expected to decline when interest rates rise and
increase when interest rates decline,
in
either case generally more so than the price of a bond with a similar maturity,
because of the effect of leverage. As a result, the price of Inverse Floaters is
typically more volatile than the price of bonds with similar maturities,
especially if the relevant TOB Trust is structured to provide the holder of the
Inverse Floaters relatively greater leveraged exposure to the underlying
security (e.g., if the par amount of the Floaters, as a percentage of the par
amount of the underlying security, is relatively greater). Upon the occurrence
of certain adverse events (including a credit ratings downgrade of the
underlying security or a substantial decrease in the market value of the
underlying security), a TOB Trust may be collapsed by the remarketing agent or
liquidity provider and the underlying security liquidated, and the Fund could
lose the entire amount of its investment in the Inverse Floater and may, in some
cases, be contractually required to pay the shortfall, if any, between the
liquidation value of the underlying security and the principal amount of the
Floaters. Consequently, in a rising interest rate environment, the Fund’s
investments in Inverse Floaters could negatively impact the Fund’s performance
and yield, especially when those Inverse Floaters provide the Fund with
relatively greater
leveraged exposure
to the underlying securities held by the relevant TOB Trusts.
Final
rules implementing section 619 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Volcker Rule)
prohibit banking entities and their affiliates from sponsoring and/or providing
certain services to TOB Trusts, which constitute “covered funds” under the
Volcker Rule. As a result of the Volcker Rule, the Fund, as holder of Inverse
Floaters, is required to perform certain duties in connection with TOB financing
transactions previously performed by banking entities. These duties may
alternatively be performed by a non-bank third-party service provider. A Fund’s
expanded role in TOB financing transactions as a result of the Volcker Rule may
increase its operational and regulatory risk.
Further,
the SEC and various banking agencies have adopted rules implementing credit risk
retention requirements for
asset-backed securities (the Risk Retention Rules), which apply to TOB financing
transactions and TOB Trusts. The Risk Retention Rules require the sponsor of a
TOB Trust, which is deemed to be the Fund (as holder of the related Inverse
Floaters), to retain at least 5% of the credit risk of the underlying security
held by the TOB Trust. As applicable, the Fund has adopted policies and
procedures intended to comply with the Risk Retention Rules. The Risk Retention
Rules may adversely affect the Fund’s
ability to engage
in TOB financing transactions or increase the costs of such transactions in
certain circumstances.
There
can be no assurances that TOB financing
transactions will continue to be a viable or cost-effective form of leverage.
The
unavailability of
TOB financing transactions or an increase in the cost of financing
provided by TOB
transactions may adversely affect the Fund’s net asset value, distribution rate
and ability to achieve its investment objective.
Municipal
Lease Obligations. Municipal lease
obligations are issued by state and local governments or authorities to finance
the acquisition of land, equipment and facilities, such as state and municipal
vehicles, telecommunications and computer equipment, and other capital
assets. Municipal lease obligations, a type of Municipal Security, may
take the form of a lease, an installment purchase contract or a conditional
sales contract. Interest payments on qualifying municipal lease obligations are
generally exempt from federal income taxes.
Municipal
lease obligations are generally subject to greater risks than general obligation
or revenue bonds. State laws
set forth requirements that states or municipalities must meet in order to issue
municipal obligations, and such obligations may contain a covenant by the issuer
to budget for, appropriate, and make payments due under the obligation. However,
certain municipal lease obligations may contain "non-appropriation" clauses
which provide that the issuer is not obligated to make payments on the
obligation in future years unless funds have been appropriated for this purpose
each year. If not enough money is appropriated to make the lease payments, the
leased property may be repossessed as security for holders of
28
the
municipal lease obligation. In such an event, there is no assurance that the
property's private sector or re-leasing value
will be enough to make all outstanding payments on the municipal lease
obligation or that the payments will continue to be tax-free. Additionally, it
may be difficult to dispose of the underlying capital asset in the event of
non-appropriation or other default. Direct investments by the Fund in municipal
lease obligations may be deemed illiquid and therefore subject to the Funds'
percentage limitations for illiquid investments and the risks of holding
illiquid investments.
Municipal
Forward Contracts. A municipal
forward contract is an agreement by a Fund to purchase a Municipal Security on a
when-issued basis with a longer-than-standard settlement period, in some cases
with the settlement date taking place up to five years from the date of
purchase. Municipal forward contracts typically carry a substantial yield
premium to compensate the buyer for the risks associated with a long when-issued
period, including shifts in market interest rates that could materially impact
the principal value of the bond, deterioration in the credit quality of the
issuer, loss of alternative investment options during the when-issued period and
failure of the issuer to complete various steps required to issue the
bonds.
Investment
Grade Debt Obligations. Debt obligations
include, among others, bonds, notes, debentures and variable rate demand notes.
They may be U.S. dollar-denominated debt obligations issued or guaranteed by
U.S. corporations or U.S. commercial banks, U.S. dollar-denominated obligations
of foreign issuers or debt obligations of foreign issuers denominated in foreign
currencies.
The
Adviser considers investment grade securities to include: (i) securities rated
BBB- or higher by S&P or Baa3 or higher
by Moody’s or an equivalent rating by another NRSRO, (ii) short-term securities
with comparable NRSRO ratings, or (iii) unrated securities determined by the
Adviser to be of comparable quality, each at the time of purchase. The Adviser
may rely to some extent on credit ratings by NRSROs in evaluating the credit
risk of securities selected for the Fund’s portfolio. Credit ratings evaluate
the expectation that scheduled interest and principal payments will be made in a
timely manner. They do not reflect any judgment of market risk. Ratings and
market value may change from time to time, positively or negatively, to reflect
new developments regarding the issuer. Rating organizations might not change
their credit rating of an issuer in a timely manner to reflect events that could
affect the issuer’s ability to make timely payments on its obligations. The
Fund’s Adviser internally assigns ratings to unrated securities, after assessing
their credit quality and other factors, in investment-grade or
below-investment-grade categories similar to those of NRSROs. There can be no
assurance, nor is it intended, that the Fund’s Adviser’s credit analysis process
is consistent or comparable with the credit analysis process used by a NRSRO.
The descriptions of debt securities ratings are found in Appendix A.
In
choosing corporate debt securities on behalf of a Fund, portfolio managers may
consider:
i.
general economic
and financial conditions;
ii.
the specific
issuer’s (a) business and management, (b) cash flow, (c) earnings coverage of
interest and dividends, (d) ability to operate under adverse economic
conditions, (e) fair market value of assets, and (f) in the case of foreign
issuers, unique political, economic or social conditions applicable to such
issuer’s country; and,
iii.
other
considerations deemed appropriate.
Debt
securities are subject to a variety of risks, such as interest rate risk, income
risk, prepayment risk, inflation risk,
credit risk, currency risk and default risk.
Non-Investment
Grade Debt Obligations (Junk Bonds). Bonds rated below
or determined to be below investment grade (as defined above in “Investment
Grade Debt Obligations”) are commonly referred to as “junk bonds.” Analysis of
the creditworthiness of junk bond issuers is more complex than that of
investment-grade issuers and the success of the Adviser in managing these
decisions is more dependent upon its own credit analysis than is the case with
investment-grade bonds. Descriptions of debt securities ratings are found in
Appendix A.
The
capacity of junk bonds to pay interest and repay principal is considered
speculative. While junk bonds may provide an
opportunity for greater income and gains, they are subject to greater risks than
higher-rated
29
debt
securities. The prices of and yields on junk bonds may fluctuate to a greater
extent than those of higher-rated debt securities.
Junk bonds are generally more sensitive to individual issuer developments,
economic conditions and regulatory changes than higher-rated bonds. Issuers of
junk bonds are often smaller, less-seasoned companies or companies that are
highly leveraged with more traditional methods of financing unavailable to them.
Junk bonds are generally at a higher risk of default because such issues are
often unsecured or otherwise subordinated to claims of the issuer’s other
creditors. If a junk bond issuer defaults, a Fund may incur additional expenses
to seek recovery. The secondary markets in which junk bonds are traded may be
thin and less liquid than the market for higher-rated debt securities and a Fund
may have difficulty selling certain junk bonds at the desired time and price.
Less liquidity in secondary trading markets could adversely affect the price at
which a Fund could sell a particular junk bond, and could cause large
fluctuations in the net asset value of that Fund’s shares. The lack of a liquid
secondary market may also make it more difficult for a Fund to obtain accurate
market quotations in valuing junk bond assets and elements of judgment may play
a greater role in the valuation.
Floating
Rate Corporate Loans and Corporate Debt Securities. Floating rate
loans consist generally of obligations of companies and other entities
(collectively, borrowers) incurred for the purpose of reorganizing the assets
and liabilities of a borrower; acquiring another company; taking over control of
a company (leveraged buyout); temporary refinancing; or financing internal
growth or other general business purposes. Floating rate loans are often
obligations of borrowers who have incurred a significant percentage of debt
compared to equity issued and thus are highly leveraged.
Floating
rate loans may include both term loans, which are generally fully funded at the
time of a Fund’s investment, and
revolving loans, which may require a Fund to make additional investments in the
loans as required under the terms of the loan agreement. A revolving credit loan
agreement may require a Fund to increase its investment in a loan at a time when
a Fund might not otherwise have done so, even if the borrower’s condition makes
it unlikely that the loan will be repaid.
A
floating rate loan is generally offered as part of a lending syndicate to banks
and other financial institutions and is
administered in accordance with the terms of the loan agreement by an agent bank
who is responsible for collection of principal and interest and fee payments
from the borrower and apportioning those payments to all lenders who are parties
to the agreement. Typically, the agent is given broad discretion to enforce the
loan agreement and is compensated by the borrower for its services.
Floating
rate loans may be acquired by direct investment as a lender at the inception of
the loan or by assignment of a
portion of a floating rate loan previously made to a different lender or by
purchase of a participation interest. If a Fund makes a direct investment in a
loan as one of the lenders, it generally acquires the loan at par. This means a
Fund receives a return at the full interest rate for the loan. If a Fund
acquires its interest in loans in the secondary market or acquires a
participation interest, the loans may be purchased or sold above, at, or below
par, which can result in a yield that is below, equal to, or above the stated
interest rate of the loan. At times, a Fund may be able to invest in floating
rate loans only through assignments or participations.
A
participation interest represents a fractional interest in a floating rate loan
held by the lender selling a Fund the
participation interest. In the case of participations, a Fund will not have any
direct contractual relationship with the borrower, a Fund’s rights to consent to
modifications of the loan are limited and it is dependent upon the participating
lender to enforce the Fund’s rights upon a default.
A
Fund may be subject to the credit of both the agent and the lender from whom the
Fund acquires a participation
interest. These credit risks may include delay in receiving payments of
principal and interest paid by the borrower to the agent or, in the case of a
participation, offsets by the lender's regulator against payments received from
the borrower. In the event of the borrower's bankruptcy, the borrower's
obligation to repay the floating rate loan may be subject to defenses that the
borrower can assert as a result of improper conduct by the
agent.
30
Historically,
floating rate loans have not been registered with the SEC or any state
securities commission or listed on any
securities exchange. As a result, the amount of public information available
about a specific floating rate loan has been historically less extensive than if
the floating rate loan were registered or exchange traded.
Floating
rate debt securities are typically in the form of notes or bonds issued in
public or private placements in the
securities markets. Floating rate debt securities will typically have
substantially similar terms to floating rate loans, but will not be in the form
of participations or assignments.
The
floating rate loans and debt securities in which a Fund invests will, in most
instances, be secured and senior to other
indebtedness of the borrower. Each floating rate loan and debt security will
generally be secured by collateral such as accounts receivable, inventory,
equipment, real estate, intangible assets such as trademarks, copyrights and
patents, and securities of subsidiaries or affiliates. The value of the
collateral generally will be determined by reference to financial statements of
the borrower, by an independent appraisal, by obtaining the market value of such
collateral, in the case of cash or securities if readily ascertainable, or by
other customary valuation techniques considered appropriate by Invesco and/or
the Sub-Advisers. The value of collateral may decline after a Fund’s investment,
and collateral may be difficult to sell in the event of default. Consequently,
the Fund may not receive all the payments to which it is entitled. A Fund’s
assets may be invested in unsecured floating rate loans and debt securities or
subordinated floating rate loans and debt securities, which may or may not be
secured. If the borrower defaults on an unsecured loan or security, there is no
specific collateral on which the lender can foreclose. If the borrower defaults
on a subordinated loan or security, the collateral may not be sufficient to
cover both the senior and subordinated loans and securities.
Most
borrowers pay their debts from cash flow generated by their businesses. If a
borrower’s cash flow is insufficient to pay
its debts, it may attempt to restructure its debts rather than sell collateral.
Borrowers may try to restructure their debts by filing for protection under the
federal bankruptcy laws or negotiating a work-out. If a borrower becomes
involved in a bankruptcy proceeding, access to collateral may be limited by
bankruptcy and other laws. If a court decides that access to collateral is
limited or voidable, a Fund may not recover the full amount of principal and
interest that is due.
A
borrower must comply with certain restrictive covenants contained in the loan
agreement or indenture (in the case of
floating rate debt securities). In addition to requiring the scheduled payment
of principal and interest, these covenants may include restrictions on the
payment of dividends and other distributions to the borrower’s shareholders,
provisions requiring compliance with specific financial ratios, and limits on
total indebtedness. The agreement may also require the prepayment of the
floating rate loans or debt securities from excess cash flow. A breach of a
covenant that is not waived by the agent (or lenders directly) is normally an
event of default, which provides the agent and lenders the right to call for
repayment of the outstanding floating rate loan or debt security.
Over
time, the customary terms of loans have evolved such that they are no longer
accompanied by the various restrictive
covenants that historically accompanied most loans and that were in favor of the
investor. Newly originated loans (including reissuances and restructured loans)
in which a Fund may invest have varied terms and conditions, but generally
contain few or no financial maintenance covenants. Financial maintenance
covenants are those that require a borrower to maintain certain financial
metrics during the life of the loan, such as maintaining certain levels of cash
flow or limiting leverage. In the event of financial deterioration on the part
of the borrower, these covenants are included to permit the lenders to
renegotiate the terms of the loan, such as increasing the borrowing costs to the
borrower, or to take other actions which would improve the position of the
lender. Accordingly, the Fund may experience difficulty or delays in enforcing
its rights on its holdings of loans, which may result in losses to the Fund,
especially during a downturn in the credit cycle. Although loans may contain few
or no financial maintenance covenants, information necessary to monitor a
borrower’s financial performance may be available without covenants to lenders
and the public alike and can be used to detect such early warning signs as
deterioration of a borrower’s financial condition or results. When such
information is available, the Adviser or Sub-Adviser will seek to take
appropriate action without the help of covenants in the loans.
31
Purchasers
of floating rate loans may receive and/or pay certain fees. These fees are in
addition to interest payments
and may include commitment fees, facility fees, and prepayment penalty fees.
When a Fund buys a floating rate loan, it may receive a facility fee, and when
it sells a floating rate loan, it may pay an assignment fee.
In
general,
floating rate loans
and debt securities typically have stated maturities of three to ten years.
However, because floating rate loans and debt securities are frequently prepaid,
it is generally expected that the average maturity will be less. The degree to
which borrowers prepay floating rate loans and debt securities, whether as a
contractual requirement or at the borrower’s election, may be affected by
general business conditions, the borrower’s financial condition and competitive
conditions among lenders. Prepayments cannot be predicted with accuracy.
Prepayments may result in a Fund’s investing in floating rate loans and debt
securities with lower yields.
Companies
involved in significant restructuring tend to be subject to increased litigation
risk, including for investors in these
companies, such as the Funds. Expenses of asserting, or defending against,
claims in connection with such restructurings are generally directly or
indirectly borne by the Funds. See also “Litigation Risk” herein.
Loans,
Loan Participations and Assignments. Loans and loan
participations are interests in amounts owed by a corporate, governmental or
other borrowers to another party. They may represent amounts owed to lenders or
lending syndicates, to suppliers of goods or services, or to other parties. A
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the lender selling the participation and only
upon receipt by the lender of the payments from the borrower. In connection with
purchasing participations, a Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan, nor any rights of set-off against the borrower, and a Fund may not
directly benefit from any collateral supporting the loan in which it has
purchased the participation. In addition, the Fund's rights to consent to
modifications of the loan are limited and it is dependent upon the participating
lender to enforce the Fund's rights upon a default. As a result, the Fund will
be subject to the credit risk of the borrower, the lender, and the agent who is
responsible for collection of principal and interest and fee payments from the
borrower and apportioning those payments to all lenders who are parties to the
loan agreement. In the event of the insolvency of the lender selling a
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower. Credit
risks relating to the agent may include delay in receiving payments of principal
and interest paid by the borrower to the agent. In the event of the borrower's
bankruptcy, the borrower's obligation to repay the loan may be subject to
defenses that the borrower can assert as a result of improper conduct by the
agent.
When
a Fund purchases assignments from lenders, it acquires direct rights against the
borrower on the loan. However,
because assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by a Fund
as the purchaser of an assignment may differ from, and be more limited than,
those held by the assigning lender. In addition, if the loan is foreclosed, a
Fund could be part owner of any collateral and could bear the costs and
liabilities of owning and disposing of the collateral.
Investments
in loans, loan participations and assignments present the possibility that a
Fund could be held liable as a
co-lender under emerging legal theories of lender liability. The Fund
anticipates that loans, loan participations and assignments could be sold only
to a limited number of institutional investors. If there is no active secondary
market for a loan, it may be more difficult to sell the interests in such a loan
at a price that is acceptable or to even obtain pricing information. In
addition, some loans, loan participations and assignments may not be rated by
major rating agencies. Loans held by a Fund might not be considered securities
for purposes of the 1933
Act,
or the Securities Exchange Act of 1934, as amended (the Exchange Act), and
therefore a risk exists that purchasers, such as the Fund, may not be entitled
to rely on the anti-fraud provisions of those Acts.
The
secondary market for certain floating rate loans may be subject to irregular
trading activity, wide bid/ask spreads and
extended trade settlement periods (in some cases, longer than seven
days).
32
Public
Bank Loans. Public bank loans
are privately negotiated loans for which information about the issuer has been
made publicly available. Public loans are made by banks or other financial
institutions, and may be rated investment grade (as defined above in “Investment
Grade Debt Obligations”) or below investment grade. However, public bank loans
are not registered under the 1933 Act and are not publicly traded. They usually
are second lien loans normally lower in priority of payment to senior loans, but
have seniority in a company’s capital structure to other claims, such as
subordinated corporate bonds or publicly-issued equity so that in the event of
bankruptcy or liquidation, the company is required to pay down these second lien
loans prior to such other lower-ranked claims on their assets. Bank loans
normally pay floating rates that reset frequently, and as a result, protect
investors from increases in interest rates.
Bank
loans generally are negotiated between a borrower and several financial
institutional lenders represented by one
or more lenders acting as agent of all the lenders. The agent is responsible for
negotiating the loan agreement that establishes the terms and conditions of the
loan and the rights of the borrower and the lenders, monitoring any collateral,
and collecting principal and interest on the loan. By investing in a loan, a
Fund becomes a member of a syndicate of lenders. Certain bank loans are
illiquid, meaning the Fund may not be able to sell them quickly at a fair price.
Illiquid investments are also difficult to value. To the extent a bank loan has
been deemed illiquid, it will be subject to a Fund’s restrictions on illiquid
investments. The secondary market for bank loans may be subject to irregular
trading activity, wide bid/ask spreads and extended trade settlement
periods.
Bank
loans are subject to the risk of default. Default in the payment of interest or
principal on a loan will result in a
reduction of income to a Fund, a reduction in the value of the loan, and a
potential decrease in the Fund’s net asset value. The risk of default will
increase in the event of an economic downturn or a substantial increase in
interest rates. Bank loans are subject to the risk that the cash flow of the
borrower and property securing the loan or debt, if any, may be insufficient to
meet scheduled payments. As discussed above, however, because bank loans reside
higher in the capital structure than high yield bonds, default losses have been
historically lower in the bank loan market. Bank loans that are rated below
investment grade share the same risks of other below investment grade
securities.
Structured
Notes and Indexed Securities. Structured notes
are derivative debt instruments, the interest rate or principal of which is
linked to currencies, interest rates, commodities, indices or other financial
indicators (reference instruments). Indexed securities may include structured
notes and other securities wherein the interest rate or principal is determined
by a reference instrument.
Most
structured notes and indexed securities are fixed income securities that have
maturities of three years or less. The
interest rate or the principal amount payable at maturity of an indexed security
may vary based on changes in one or more specified reference instruments, such
as a floating interest rate compared with a fixed interest rate. The reference
instrument need not be related to the terms of the indexed security. Structured
notes and indexed securities may be positively or negatively indexed (i.e.,
their principal value or interest rates may increase or decrease if the
underlying reference instrument appreciates), and may have return
characteristics similar to direct investments in the underlying reference
instrument or to one or more options on the underlying reference
instrument.
Structured
notes and indexed securities may entail a greater degree of market risk than
other types of debt securities
because the investor bears the risk of the reference instrument. Structured
notes or indexed securities also may be more volatile, less liquid, and more
difficult to accurately price than less complex securities and instruments or
more traditional debt securities. In addition to the credit risk of the
structured note or indexed security’s issuer and the normal risks of price
changes in response to changes in interest rates, the principal amount of
structured notes or indexed securities may decrease as a result of changes in
the value of the underlying reference instruments. Further, in the case of
certain structured notes or indexed securities in which the interest rate, or
exchange rate in the case of currency, is linked to a reference instrument, the
rate may be increased or decreased or the terms may provide that, under certain
circumstances, the principal amount payable on maturity may be reduced to zero
resulting in a loss to the Fund.
33
U.S.
Corporate Debt Obligations. Corporate debt
obligations are debt obligations issued or guaranteed by corporations that are
denominated in U.S. dollars. Such investments may include, among others,
commercial paper, bonds, notes, debentures, variable rate demand notes, master
notes, funding agreements and other short-term corporate instruments. Commercial
paper consists of short-term promissory notes issued by corporations. Commercial
paper may be traded in the secondary market after its issuance. Variable rate
demand notes are securities with a variable interest which is readjusted on
pre-established dates. Variable rate demand notes are subject to payment of
principal and accrued interest (usually within seven days) on a Fund’s demand.
Master notes are negotiated notes that permit the investment of fluctuating
amounts of money at varying rates of interest pursuant to arrangements with
issuers who meet the credit quality criteria of the Fund. The interest rate on a
master note may fluctuate based upon changes in specified interest rates or be
reset periodically according to a prescribed formula or may be a set rate.
Although there is no secondary market in master notes, if such notes have a
demand feature, the payee may demand payment of the principal amount of the note
upon relatively short notice. Funding agreements are agreements between an
insurance company and a Fund covering underlying demand notes. Although there is
no secondary market in funding agreements, if the underlying notes have a demand
feature, the payee may demand payment of the principal amount of the note upon
relatively short notice. Master notes and funding agreements are generally
illiquid and therefore subject to the Funds' percentage limitation for illiquid
investments.
Other
Investments
Real
Estate Investment Trusts (REITs). REITs are trusts
that sell equity or debt securities to investors and use the proceeds to invest
in real estate or interest therein. A REIT may focus on particular projects,
such as apartment complexes, or geographic regions, such as the southeastern
United States or both. Equity REITs invest the majority of their assets directly
in real property and derive income primarily from the collection of rents.
Equity REITs can also realize capital gains by selling property that has
appreciated in value. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive income from the collection of interest
payments.
Investments
in REITs may be subject to many of the same risks as direct investments in real
estate. These risks include
difficulties in valuing and trading real estate, declines in the value of real
estate, risks related to general and local economic conditions, adverse changes
in the climate for real estate, environmental liability risks, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to tenants, heavy cash flow dependency and increases in
interest rates. To the extent that a Fund invests in REITs, the Fund could
conceivably acquire real estate directly as a result of a default on the REIT
interests or obligations it owns.
In
addition to the risks of direct real estate investment described above, equity
REITs may be affected by any changes in the
value of the underlying property owned by the trusts, while mortgage REITs may
be affected by the quality of any credit extended. REITs are also subject to the
following risks: they are dependent upon management skill and on cash flows; are
not diversified; are subject to defaults by borrowers, self-liquidation, and the
possibility of failing to maintain an exemption from the 1940 Act; and are
subject to interest rate risk. A Fund that invests in REITs will bear a
proportionate share of the expenses of the REITs.
Furthermore,
for tax reasons, a REIT may impose limits on how much of its securities any one
investor may own. These
ownership limitations (also called “excess share provisions”) may be based on
ownership of securities by multiple funds and accounts managed by the same
investment adviser and typically result in adverse consequences (such as
automatic divesture of voting and dividend rights for shares that exceed the
excess share provision) to investors who exceed the limit. A REIT’s excess share
provision may result in a Fund being unable to purchase (or otherwise obtain
economic exposure to) the desired amounts of certain REITs. In some
circumstances, a Fund may seek and obtain a waiver from a REIT to exceed the
REIT’s ownership limitations without being subject to the adverse consequences
of exceeding such limit were a waiver not obtained, provided that the Fund
complies with the provisions of the waiver.
34
Other
Investment Companies. Unless otherwise
indicated in this SAI or in a Fund’s prospectus, a Fund may purchase shares of
other investment companies, including ETFs, non-exchange traded U.S. registered
open-end investment companies (mutual funds), closed-end investment companies,
or non-U.S. investment companies traded on foreign exchanges. When a Fund
purchases shares of another investment company, the Fund will indirectly bear
its proportionate share of the advisory fees and other operating expenses of
such investment company and will be subject to the risks associated with the
portfolio investments of the underlying investment company.
A
Fund’s investment in the securities of other investment companies is subject to
the applicable provisions of the
1940 Act and the rules thereunder. Specifically, Section 12(d)(1) of the 1940
Act contains various limitations on the ability of a registered investment
company (an “acquiring fund”) to acquire shares of another registered investment
company (an “acquired fund”). Under these limits, an acquiring fund generally
cannot (i) purchase more than 3% of the total outstanding voting stock of an
acquired fund; (ii) invest more than 5% of its total assets in securities issued
by an acquired company; and (iii) invest more than 10% of its total assets in
securities issued by other investment companies. Likewise, an acquired fund, as
well as its principal underwriter or any broker or dealer registered under the
Exchange Act, cannot knowingly sell more than 3% of the total outstanding voting
stock of the acquired fund to an acquiring fund, or more than 10% of the total
outstanding voting stock of the acquired fund to acquiring funds
generally.
Rule
12d1-4 under the 1940 Act
allows
a fund to acquire the securities of another investment company in excess of the
limitations imposed by Section 12 without obtaining an exemptive order from the
SEC, subject to certain limitations and conditions. Among those conditions is
the requirement that, prior to a fund relying on Rule 12d1-4 to acquire
securities of another fund in excess of the limits of Section 12(d)(1), the
acquiring fund must enter into a Fund of Funds Agreement with the acquired fund.
(This requirement does not apply when the acquiring fund’s investment adviser
acts as the acquired fund’s investment adviser and does not act as sub-adviser
to either fund.)
Rule
12d1-4 also is designed to limit the use of complex fund structures. Under Rule
12d1-4, an acquired fund is prohibited
from purchasing or otherwise acquiring the securities of another investment
company or private fund if, immediately after the purchase, the securities of
investment companies and private funds owned by the acquired fund have an
aggregate value in excess of 10% of the value of the acquired fund’s total
assets, subject to certain limited exceptions. Accordingly, to the extent a
Fund’s shares are sold to other investment companies in reliance on Rule 12d1-4,
the Fund will be limited in the amount it could invest in other investment
companies and private funds.
In
addition to Rule 12d1-4, the 1940 Act and related rules provide other exemptions
from these restrictions. For
example, these limitations do not apply to investments by a Fund in investment
companies that are money market funds, including money market funds that have
the Adviser or an affiliate of the Adviser as an investment
adviser.
Private
(Unregistered) Investment Companies. Securities of
private investment companies, including "hedge funds" and private equity funds,
are not registered with the SEC and may not be registered with any other
regulatory authority. Accordingly, they are not subject to certain oversight and
regulatory requirements to which registered issuers are subject, including
requirements of a certain degree of liquidity, limiting how much can be invested
in a single investment, requiring that fund shares be redeemable, protecting
against conflicts of interest, assuring fairness in pricing of fund shares, and
limiting the use of leverage. They are typically not required to provide
investors with information about their underlying holdings, fees and expenses
and there may be very little public information available about their
investments and performance. Additionally, because sales of shares of private
investment companies are generally restricted to certain qualified purchasers,
such shares may be illiquid and it could be difficult for the fund to sell its
shares at an advantageous price and time. Registered fund units may not be
redeemable at the investor’s option and there may not be a secondary market for
the sale of unregistered fund units. The Fund may not be able to get the money
invested in an unregistered fund back. Moreover, unlike registered mutual funds,
because shares of private investment companies are not publicly traded there
typically are no specific rules on fund pricing, and a fair value for the fund’s
investment typically will have to be determined under the valuation policy
approved by the Board and
35
related
procedures. As with investments in publicly-registered investment companies, if
the Fund invests in a private investment
company, the Fund will be subject to its proportionate share of the advisory
fees, including incentive compensation and other operating expenses. These fees
can be substantial and would be in addition to the advisory fees and other
operating expenses incurred by the Fund.
Investments
in the securities of private investment companies are subject to the Fund’s
limitations on investment in
illiquid securities, unless Invesco and/or the Sub-Advisers determines that such
securities are otherwise liquid under guidelines adopted by the
Board.
Limited
Partnerships. A limited
partnership interest entitles the Fund to participate in the investment return
of the partnership’s assets as defined by the agreement among the partners. As a
limited partner, the Fund generally is not permitted to participate in the
management of the partnership. However, unlike a general partner whose liability
is not limited, a limited partner’s liability generally is limited to the amount
of its commitment to the partnership.
Initial
Public Offerings. Initial public
offerings (IPOs) of securities issued by unseasoned companies with little or no
operating history are risky and their prices are highly volatile, but they can
result in very large gains in their initial trading. Attractive IPOs are often
oversubscribed and may not be available to a Fund, or only in very limited
quantities. Thus, when a Fund’s size is smaller, any gains from IPOs will have
an exaggerated impact on the Fund’s reported performance than when the Fund is
larger. A Fund may engage in short-term trading in connection with its IPO
investments, which could produce higher trading costs and adverse tax
consequences. There can be no assurance that a Fund will have favorable IPO
investment opportunities.
Master
Limited Partnerships (MLPs). MLPs generally are
limited partnerships (or limited liability companies), the common units of which
are listed and traded on a national securities exchange or over-the-counter.
MLPs generally have two classes of partners, the general partner and the limited
partners. The general partner normally controls the MLP through an equity
interest plus units that are subordinated to the common (publicly traded) units
for an initial period and then only converting to common if certain financial
tests are met. The general partner also generally receives a larger portion of
the net income as incentive. As cash flow grows, the general partner receives a
greater interest in the incremental income compared to the interest of limited
partners.
MLP
common units represent an equity ownership interest in a partnership, providing
limited voting rights and entitling the
holder to a share of the company’s success through distributions and/or capital
appreciation. Unlike shareholders of a corporation, common unit holders do not
elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets,
removal of the general partner or material amendments to the partnership
agreement. MLPs are required by their partnership agreements to distribute a
large percentage of their current operating earnings. Common unit holders
generally have first right to a minimum quarterly distribution (MQD) prior to
distributions to the convertible subordinated unit holders or the general
partner (including incentive distributions). Common unit holders typically have
arrearage rights if the MQD is not met. In the event of liquidation, MLP common
unit holders have first right to the partnership’s remaining assets after
bondholders, other debt holders, and preferred unit holders have been paid in
full.
The
general partner or managing member interest in an MLP is typically retained by
the original sponsors of an MLP, such as
its founders, corporate partners and entities that sell assets to the MLP. The
holder of the general partner or managing member interest can be liable in
certain circumstances for amounts greater than the amount of the holder’s
investment in the general partner or managing member. General partner or
managing member interests often confer direct board participation rights in, and
in many cases control over the operations of, the MLP. General partner or
managing member interests can be privately held or owned by publicly traded
entities. General partner or managing member interests receive cash
distributions, typically in an amount of up to 2% of available cash, which is
contractually defined in the partnership or limited liability company agreement.
In addition, holders of general partner or managing member interests typically
receive incentive distribution rights (IDRs), which provide them with an
increasing share of the entity’s aggregate cash distributions upon the payment
of per common unit distributions that exceed specified threshold levels above
the MQD. Incentive distributions to a general partner are designed to encourage
the general partner, who
36
controls
and operates the partnership, to maximize the partnership’s cash flow and
increase distributions to the limited
partners. Due to the IDRs, general partners of MLPs have higher distribution
growth prospects than their underlying MLPs, but quarterly incentive
distribution payments would also decline at a greater rate than the decline rate
in quarterly distributions to common and subordinated unit holders in the event
of a reduction in the MLP’s quarterly distribution. The ability of the limited
partners or members to remove the general partner or managing member without
cause is typically very limited. In addition, some MLPs permit the holder of
IDRs to reset, under specified circumstances, the incentive distribution levels
and receive compensation in exchange for the distribution rights given up in the
reset.
Some
companies in which a Fund may invest have been organized as limited liability
companies (MLP LLCs). Such MLP
LLCs generally are treated in the same manner as MLPs for federal income tax
purposes (i.e., generally taxed as partnerships). MLP LLC common units trade on
a national securities exchange or OTC. In contrast to MLPs, MLP LLCs have no
general partner and there are generally no incentives that entitle management or
other unitholders to increased percentages of cash distributions as
distributions reach higher target levels. In addition, MLP LLC common
unitholders typically have voting rights with respect to the MLP LLC, whereas
MLP common units have limited voting rights.
Investments
in securities of an MLP involve risks that differ from investments in common
stock, including risks related to
limited control and limited rights to vote on matters affecting the MLP, risks
related to potential conflicts of interest between the MLP and the MLP’s general
partner, cash flow risks, dilution risks and risks related to the general
partner’s right to require unit-holders to sell their common units at an
undesirable time or price. Certain MLP securities may trade in lower volumes due
to their smaller capitalizations, and may be subject to more abrupt or erratic
price movements and lower market liquidity. MLPs are generally considered
interest-rate sensitive investments. During periods of interest rate volatility,
these investments may not provide attractive returns.
There
are also certain tax risks undertaken by the Fund when it invests in MLPs. MLPs
are generally treated as
partnerships for U.S. federal income tax purposes subject to the application of
certain partnership audit rules. Partnerships do not pay U.S. federal income tax
at the partnership level, subject to the application of certain partnership
audit rules. Rather, each partner is allocated a share of the partnership’s
income, gains, losses, deductions and expenses. A change in current tax law or a
change in the underlying business mix of a given MLP could result in an MLP
being treated as a corporation for U.S. federal income tax purposes, which would
result in the MLP being required to pay U.S. federal income tax (as well as
state and local income taxes) on its taxable income. This would have the effect
of reducing the amount of cash available for distribution by the MLP and could
result in a reduction in the value of the Fund’s investment in the MLP and lower
income to the Fund. Also, to the extent a distribution received by a Fund from
an MLP is treated as a return of capital, the Fund’s adjusted tax basis in the
interests of the MLP will be reduced, which may increase the Fund’s tax
liability upon the sale of the interests in the MLP or upon subsequent
distributions in respect of such interests.
MLP
Debt Securities. Debt securities
issued by MLPs may include those rated below investment grade or that are
unrated but judged to be below investment grade by the investment adviser at the
time of purchase. A debt security of an MLP will be considered to be investment
grade if it is rated as such by one of the rating organizations or, if unrated,
are judged to be investment grade by the investment adviser at the time of
purchase. Investments in such securities may not offer the tax characteristics
of equity securities of MLPs.
MLP
Affiliates. The Fund may
invest in the equity and debt securities issued by affiliates of MLPs, including
the general partners or managing members of MLPs and companies that own MLP
general partner interests and are energy infrastructure companies. Such issuers
may be organized and/or taxed as corporations and therefore may not offer the
advantageous tax characteristics of MLP units. The Fund may purchase such other
MLP equity securities through market transactions, but may also do so through
direct placements.
I-Shares. I-Shares represent
an indirect ownership interest in an MLP and are issued by an MLP affiliate. The
MLP affiliate uses the proceeds from the sale of I-Shares to purchase limited
partnership interests in the MLP in the form of I-units. Thus, I-Shares
represent an indirect interest in an MLP limited partnership interest.
37
I-units
have similar features as MLP common units in terms of voting rights, liquidation
preference and distribution.
I-Shares themselves have limited voting rights and are similar that respect to
MLP common units. I-Shares differ from MLP common units primarily in that
instead of receiving cash distributions, holders of I-Shares will receive
distributions of additional I-Shares in an amount equal to the cash
distributions received by common unit holders. I-Shares are traded on the NYSE.
Issuers of MLP I-Shares are treated as corporations and not partnerships for tax
purposes. MLP affiliates also include publicly traded limited liability
companies that own, directly or indirectly, general partner interests of
MLPs.
Infrastructure-Related
Companies.
Infrastructure-related companies are subject to a variety of factors that may
adversely affect their business or operations, including costs associated with
environmental, governmental and other regulations, high interest costs in
connection with capital construction programs, high leverage, the effects of
economic slowdown, surplus capacity, increased competition from other providers
of services, uncertainties concerning the availability of fuel at reasonable
prices, the effects of energy conservation policies, unfavorable tax laws or
accounting policies, and other factors. Infrastructure-related companies are
also affected by difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, and general
changes in market sentiment towards infrastructure assets. Some
infrastructure-related companies’ assets are not movable, which creates the risk
that an event may occur in the region of the company’s asset that may impair the
performance of that assets and the performance of the issuer. Natural disasters,
such as earthquakes, flood, lightning, hurricanes and wind or other mand-made
disasters, environmental damage, terrorist attacks or political activities could
result in substantial damage to the facilities of companies located in the
affected areas, and volatility in the products or services of
infrastructure-related could adversely impact the prices of
infrastructure-related companies’ securities. Any destruction or loss of an
infrastructure asset may have a major impact on the infrastructure-related
company. Failure by the infrastructure-related company to carry adequate
insurance or to operate the asset appropriately could lead to significant losses
and damages. Additionally, to the extent that a Fund invests in
infrastructure-related companies, the Fund could conceivably own infrastructure
assets directly as a result of a default on the infrastructure-related company
interests or obligations it owns.
Income
Trusts. An income trust is
an investment trust which holds income producing assets, typically in the form
of an operating business that has been put into a trust, and passes the income
on to its security holders. Because income trusts pay out the bulk of their free
cash flow to unit holders, they have an ability to generate constant cash flows.
Despite the potential for attractive regular payments, income trusts are equity
investments, not fixed-income securities, and they share many of the risks
inherent in stock ownership. In addition, an income trust may lack
diversification and potential growth may be sacrificed because revenue is passed
on to the security holders rather than reinvested in the business. Income trusts
do not guarantee minimum distributions or even return of capital; therefore, if
the business loses money, the trust can reduce or even eliminate distributions.
The value of income trust units may decline significantly if they are unable to
meet distribution targets.
Investments
in income trusts can have varying degrees of risk depending on the sector and
the underlying assets.
Risks related to the underlying operating companies controlled by such trusts
include dependence upon specialized management skills and the risk that such
management may lack or have limited operating histories. Income trusts are also
subject generally to the risks associated with business cycles, commodity
prices, interest rates or other economic factors.
While
income trusts are regarded as equity investments, they also have fixed-income
attributes that subject them to
credit risk, interest rate risk and dividend risk. Income trusts may potentially
achieve higher yields than cash investments in periods of low interest rates and
lower yields in periods of increasing interest rates. They may also experience
losses during periods of both low and high interest rates. To the extent that
claims against an income trust are not satisfied by the trust, investors in the
income trust (including a fund) could be held responsible for such obligations.
Income trusts generally are structured to avoid taxes at the entity level. In a
traditional corporate tax structure, net income is taxed at the corporate level
and again when distributed as dividends to its shareholders. An income trust’s
flow-through structure means that the distributions to its investors are
generally higher than dividends from an equivalent corporate entity. Income
38
trusts
also are subject to the risks that regulatory changes or a challenge to their
tax structure under existing laws could reduce
or eliminate any tax benefits and adversely affect the value of such
securities.
Greenfield
Projects. Greenfield
projects are energy-related projects built by private joint ventures formed by
energy infrastructure companies. Greenfield projects may include the creation of
a new pipeline, processing plant or storage facility or other energy
infrastructure asset that is integrated with the company’s existing assets. The
primary risk involved with the greenfield projects is execution risk or
construction risk. Changing project requirements, elevated costs for labor and
materials, and unexpected construction hurdles all can increase construction
costs. Financing risk exists should changes in construction costs or financial
markets occur. Regulatory risk exists should changes in regulation occur during
construction or the necessary permits are not secured prior to beginning
construction.
Private
Investments in Public Equity. Private
investments in public equity (PIPEs) are equity securities in a private
placement that are issued by issuers who have outstanding, publicly-traded
equity securities of the same class. Shares in PIPEs generally are not
registered with the SEC until after a certain time period from the date the
private sale is completed. This restricted period can last many months. Until
the public registration process is completed, PIPEs are restricted as to resale
and the Fund cannot freely trade the securities. Generally, such restrictions
cause the PIPEs to be illiquid during this time. PIPEs may contain provisions
that the issuer will pay specified financial penalties to the holder if the
issuer does not publicly register the restricted equity securities within a
specified period of time, but there is no assurance that the restricted equity
securities will be publicly registered, or that the registration will remain in
effect.
Private
Equity and Debt Investments. Privately issued
securities, which include PIPEs, and private debt investments, involve an
extraordinarily high degree of business and financial risk and can result in
substantial or complete losses. Some portfolio companies in which the Fund may
invest may be operating at a loss or with substantial variations in operating
results from period to period and may need substantial additional capital to
support expansion or to achieve or maintain competitive positions. Such
companies may face intense competition, including competition from companies
with much greater financial resources, much more extensive development,
production, marketing and service capabilities and a much larger number of
qualified managerial and technical personnel. The Fund can offer no assurance
that the marketing efforts of any particular portfolio company will be
successful or that its business will succeed. Additionally, privately held
companies are not subject to SEC reporting requirements or the reporting
requirements of publicly traded companies in applicable jurisdictions, are not
required to maintain their accounting records in accordance with generally
accepted accounting principles, and are not required to maintain effective
internal controls over financial reporting. As a result, the Adviser may not
have timely or accurate information about the business, financial conditions and
results of operations of the privately held companies in which the Fund invests.
The more limited financial information and lack of publicly available prices
require a Fund to determine a fair value for such investments in accordance with
the valuation policy approved by the Board and related procedures. Difficulty in
valuing such investments may make it difficult to accurately determine a Fund's
exposure to privately issued securities. The Fund’s NAV could be adversely
affected if the Fund’s determinations regarding the fair value of the Fund’s
investments were materially higher than the values that the Fund ultimately
realizes upon the disposal of such investments. In addition, input from the
Adviser’s investment professionals as part of the Fund’s valuation process could
result in a conflict of interest as the Adviser’s management fee is based, in
part, on the value of the Fund’s assets.
Investments
in private companies may be considered to be illiquid and may be difficult to
sell at a desirable time or
at the prices at which the Fund has valued the investments. Additional risks
include that the Fund could be subject to contingent liabilities in the event a
private issuer is acquired by another company during the period it is held by
the Fund; and that the company may be using excessive leverage. Privately issued
debt securities can often be below investment grade quality and frequently are
unrated.
Defaulted
Securities. Defaulted
securities are debt securities on which the issuer is not currently making
interest payments. In order to enforce its rights in defaulted securities, a
Fund may be required to participate in legal proceedings or take possession of
and manage assets securing the issuer’s obligations on the defaulted securities.
This could increase operating expenses and adversely affect net asset value.
Risks of
39
defaulted
securities may be considerably higher as they are generally unsecured and
subordinated to other creditors of the
issuer. Investments in defaulted securities generally will also be considered
illiquid investments subject to the limitations described herein, except as
otherwise may be determined under the Trust’s applicable policies and
procedures.
Variable
or Floating Rate Instruments. Variable or
floating rate instruments are securities that provide for a periodic adjustment
in the interest rate paid on the obligation. The interest rates for securities
with variable interest rates are readjusted on set dates (such as the last day
of the month or calendar quarter) and the interest rates for securities with
floating rates are reset whenever a specified interest rate change occurs.
Variable or floating interest rates generally reduce changes in the market price
of securities from their original purchase price because, upon readjustment,
such rates approximate market rates. Accordingly, as market interest rates
decrease or increase, the potential for capital appreciation or depreciation is
less for variable or floating rate securities than for fixed rate obligations.
Many securities with variable or floating interest rates have a demand feature
allowing the Fund to demand payment of principal and accrued interest prior to
its maturity. The terms of such demand instruments require payment of principal
and accrued interest by the issuer, a guarantor, and/or a liquidity provider.
All variable or floating rate instruments will meet the applicable rating
standards of the Funds. A Fund’s Adviser, or Sub-Adviser, as applicable, may
determine that an unrated floating rate or variable rate demand obligation meets
the Fund’s rating standards by reason of being backed by a letter of credit or
guarantee issued by a bank that meets those rating standards.
The
secondary market for certain floating rate loans may be subject to irregular
trading activity, wide bid/ask spreads and
extended trade settlement periods (in some cases, longer than seven days).
Certain floating rate loans held by a Fund might not be considered securities
for purposes of the Exchange Act and therefore a risk exists that purchasers,
such as the Funds, may not be entitled to rely on the antifraud provisions of
those Acts.
Premium
Securities. Premium securities
are securities bearing coupon rates higher than the then prevailing market
rates.
Premium
securities are typically purchased at a “premium,” in other words, at a price
greater than the principal amount
payable on maturity. The Fund will not amortize the premium paid for such
securities in calculating its net investment income. As a result, in such cases
the purchase of premium securities provides the Fund a higher level of
investment income distributable to shareholders on a current basis than if the
Fund purchased securities bearing current market rates of interest. However, the
yield on these securities would remain at the current market rate. If securities
purchased by the Fund at a premium are called or sold prior to maturity, the
Fund will realize a loss to the extent the call or sale price is less than the
purchase price. Additionally, the Fund will realize a loss of principal if it
holds such securities to maturity.
Stripped
Income Securities. Stripped Income
Securities are obligations representing an interest in all or a portion of the
income or principal components of an underlying or related security, a pool of
securities, or other assets. Stripped income securities may be partially
stripped so that each class receives some interest and some principal. However,
they may be completely stripped, where one class will receive all of the
interest (the interest-only class or the IO class), while the other class will
receive all of the principal (the principal-only class or the PO
class).
The
market values of stripped income securities tend to be more volatile in response
to changes in interest rates than
are conventional income securities. In the case of mortgage-backed stripped
income securities, the yields to maturity of IOs and POs may be very sensitive
to principal repayments (including prepayments) on the underlying mortgages
resulting in a Fund being unable to recoup its initial investment or resulting
in a less than anticipated yield. The market for stripped income securities may
be limited, making it difficult for the Fund to dispose of its holdings at an
acceptable price.
Privatizations. The governments of
certain foreign countries have, to varying degrees, embarked on privatization
programs to sell part or all of their interests in government owned or
controlled companies or enterprises (privatizations). A Fund’s investments in
such privatizations may include: (i) privately negotiated investments in a
government owned or controlled company or enterprise; (ii) investments in the
initial offering
40
of
equity securities of a government owned or controlled company or enterprise; and
(iii) investments in the securities of a
government owned or controlled company or enterprise following its initial
equity offering.
In
certain foreign countries, the ability of foreign entities such as the Fund to
participate in privatizations may be limited by
local law, or the terms on which the Fund may be permitted to participate may be
less advantageous than those for local investors. There can be no assurance that
foreign governments will continue to sell companies and enterprises currently
owned or controlled by them, that privatization programs will be successful, or
that foreign governments will not re-nationalize companies or enterprises that
have been privatized. If large blocks of these enterprises are held by a small
group of stockholders the sale of all or some portion of these blocks could have
an adverse effect on the price.
Participation
Notes.
Participation notes, also known as participation certificates, are issued by
banks or broker-dealers and are designed to replicate the performance of foreign
companies or foreign securities markets and can be used by the Fund as an
alternative means to access the securities market of a country. Participation
notes are generally traded OTC. The performance results of participation notes
will not replicate exactly the performance of the foreign company or foreign
securities market that they seek to replicate due to transaction and other
expenses. Investments in participation notes involve the same risks associated
with a direct investment in the underlying foreign companies or foreign
securities market that they seek to replicate. In addition, participation notes
are subject to counterparty risk, currency risk and reinvestment risk.
Counterparty risk is the risk that the broker-dealer or bank that issues them
will not fulfill its contractual obligation to complete the transaction with the
Fund. Participation notes constitute general unsecured contractual obligations
of the banks or broker-dealers that issue them, and a Fund is relying on the
creditworthiness of such banks or broker-dealers and has no rights under a
participation note against the issuer of the underlying assets. Additionally,
there is a currency risk since the dollar value of the Fund’s foreign
investments will be affected by changes in the exchange rates between the dollar
and (a) the currencies in which the notes are denominated, such as euro
denominated participation notes, and (b) the currency of the country in which
the foreign company sits. Also, there is a reinvestment risk because the amounts
from the note may be reinvested in a less valuable investment when the note
matures.
Investment
Techniques
Forward
Commitments, When-Issued and Delayed Delivery Securities. Each Fund may
purchase and sell securities on a forward commitment, when-issued and delayed
delivery basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. Securities purchased or sold on a forward
commitment, when-issued or delayed delivery basis involve delivery and payment
that take place in the future after the trade date or the date of the commitment
to purchase or sell the securities at a pre-determined price and/or yield.
Settlement of such transactions normally occurs a month or more after the
purchase or sale commitment is made. Typically, no interest accrues to the
purchaser until the security is delivered. Forward commitments include “to be
announced” (TBA) transactions, which are contracts for the purchase and sale of
mortgage-backed securities issued or guaranteed by certain U.S. agencies or
government sponsored enterprises for delivery at a future settlement date agreed
upon by the two parties to the transaction, which is typically a month or more
after the trade date of the transaction. On the trade date of a TBA transaction,
the counterparties agree upon certain criteria for the securities that are to be
delivered, including the issuer, maturity, coupon, face value and price, but the
precise securities to be delivered are not specified. Instead, the actual
securities to be delivered, which must satisfy the specified criteria, are
communicated by the seller to the buyer shortly before the agreed upon
settlement date. Although a Fund generally intends to acquire or dispose of
securities on a forward commitment, when-issued or delayed delivery basis, a
Fund may instead sell these securities or its commitment before the settlement
date if deemed advisable. This will frequently be the case for TBA transactions
and other forward-settling mortgage-backed securities transactions. No specific
limitation exists as to the percentage of the Fund’s assets which may be used to
acquire securities on a when-issued and delayed delivery basis.
When
purchasing a security on a forward commitment, when-issued or delayed delivery
basis, a Fund assumes the risks
of ownership of the security, including the risk of price and yield
fluctuations, and takes such fluctuations into account when determining its net
asset value. Securities purchased on a forward
41
commitment,
when-issued or delayed delivery basis are subject to changes in value based upon
the public’s perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates. Accordingly, securities acquired on such a basis may expose a
Fund to risks because they may experience such fluctuations prior to actual
delivery. Purchasing securities on a forward commitment, when-issued or delayed
delivery basis may involve the additional risk that the yield available in the
market when the delivery takes place actually may be higher than that obtained
in the transaction itself.
Many
forward commitments, when-issued and delayed delivery transactions, including
TBAs, are also subject to the risk
that a counterparty may become bankrupt or otherwise fail to perform its
obligations due to financial difficulties, including making payments or
fulfilling delivery obligations to a Fund. A Fund may obtain no or only limited
recovery in a bankruptcy or other reorganizational proceedings, and any recovery
may be significantly delayed. With respect to TBA transactions and other
forward-settling mortgage-backed securities transactions, the counterparty risk
may be mitigated by the exchange of variation margin between the counterparties
on a regular basis as the market value of the deliverable security
fluctuates.
Investment
in these types of securities may increase the possibility that the Fund will
incur short-term gains subject to
federal taxation or short-term losses if the Fund must engage in portfolio
transactions in order to honor its commitment. In the case of a purchase
transaction, the delayed delivery securities, which will not begin to accrue
interest or dividends until the settlement date, will be recorded as an asset of
a Fund and will be subject to the risk of market fluctuation. The purchase price
of the delayed delivery securities is a liability of a Fund until settlement.
TBA transactions and other forward-settling mortgage-backed securities
transactions may be effected pursuant to a collateral agreement with the
counterparty under which the parties exchange collateral consisting of cash or
liquid securities in an amount as specified by the agreement that is based on
the change in the market value of the TBA transactions governed by the
agreement. A Fund or the counterparty will make payments throughout the term of
the transaction as collateral values fluctuate to maintain full
collateralization for the term of the transaction. Collateral will be
marked-to-market every business day. If the counterparty defaults on the
transaction or declares bankruptcy or insolvency, a Fund might incur expenses in
enforcing its rights, or the Fund might experience delay and costs in recovering
collateral or may suffer a loss if the value of the collateral
declines.
Short
Sales.
A
short sale involves the sale of a security which a Fund does not own in the hope
of purchasing the same security at a
later date at a lower price. To make delivery to the buyer, the Fund must borrow
the security from a broker. A Fund normally closes a short sale by purchasing an
equivalent number of shares of the borrowed security on the open market and
delivering them to the broker. A short sale is typically effected when the
Fund’s Adviser believes that the price of a particular security will decline.
Open short positions using options, futures, swaps or forward foreign currency
contracts are not deemed to constitute selling securities short.
To
secure its obligation to deliver the securities sold short to the broker and
repay the securities borrowed, a Fund will be
required to deposit cash or liquid securities with the broker as collateral. In
addition, a Fund may have to pay a fee or rate of interest to borrow the
securities, and while the loan of the security sold short is outstanding, the
Fund is required to pay to the broker the amount of any dividends paid on shares
sold short. The collateral pledged by the Fund to the broker in connection with
short sales will be marked to market daily. The collateral pledged does not have
the effect of limiting the amount of money that a Fund may lose on a short
sale.
Short
positions create a risk that the Fund will be required to cover them by buying
the security at a time when the security
has appreciated in value, thus resulting in a loss to the Fund. A short position
in a security poses more risk than holding the same security long. Because a
short position loses value as the security’s price increases, the loss on a
short sale is theoretically unlimited. The loss on a long position is limited to
what the Fund originally paid for the security together with any transaction
costs. A Fund may not always be able to borrow a security a Fund seeks to sell
short at a particular time or at an acceptable price. It is possible that the
market value of the securities the Fund holds in long positions will decline at
the same time that the market value of the securities the Fund has sold short
increases, thereby increasing the Fund’s potential
42
volatility
and losses. Because a Fund may be required to pay dividends, interest, premiums
and other expenses in
connection with a short sale, any benefit for the Fund resulting from the short
sale will be decreased, and the amount of any ultimate gain or loss will be
decreased or increased, respectively, by the amount of such
expenses.
Short
sales against the box are short sales of securities that a Fund owns or has the
right to obtain (equivalent in kind
or amount to the securities sold short). If a Fund enters into a short sale
against the box, it will be required to set aside securities equivalent in kind
and amount to the securities sold short (or securities convertible or
exchangeable into such securities) and will be required to hold such securities
while the short sale is outstanding. The Fund will incur transaction costs,
including fees or interest expenses, in connection with opening, maintaining,
and closing short sales against the box.
Short
sales against the box result in a “constructive sale” and require a Fund to
recognize any taxable gain unless an
exception to the constructive sale applies. See “Dividends, Distributions and
Tax Matters — Tax Matters — Tax Treatment of Portfolio Transactions — Options,
futures, forward contracts, swap agreements and hedging
transactions.”
Margin
Transactions. None of the Funds
will purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of portfolio securities. The payment by a Fund of initial or variation margin in
connection with futures, swaps or options transactions and the use of a reverse
repurchase agreement to finance the purchase of a security will not be
considered the purchase of a security on margin.
Interfund
Loans.
The SEC has issued an exemptive order permitting the Invesco Funds to borrow
money from and lend money to each other for temporary or emergency purposes. The
Invesco Funds’ interfund lending program is subject to a number of conditions,
including the requirements that: (1) an interfund loan generally will occur only
if the interest rate on the loan is more favorable to the borrowing fund than
the interest rate typically available from a bank for a comparable transaction
and the rate is more favorable to the lending fund than the rate available on
overnight repurchase transactions; (2) an Invesco Fund may not lend more than
15% of its net assets through the program (measured at the time of the last
loan); and (3) an Invesco Fund may not lend more than 5% of its net assets to
another Invesco Fund through the program (measured at the time of the loan). A
Fund may participate in the program only if and to the extent that such
participation is consistent with the Fund’s investment objective and investment
policies. Interfund loans have a maximum duration of seven days. Loans may be
called with one day’s notice and may be repaid on any day.
Borrowing. The Funds may
borrow money to the extent permitted under the 1940 Act Laws, Interpretations
and Exemptions (defined below) and Fund Policies. Such borrowings may be
utilized (i) for temporary or emergency purposes; (ii) in anticipation of or in
response to adverse market conditions; or, (iii) for cash management purposes.
The prospectus may specify other reasons for which such borrowings may be
utilized. All borrowings are limited to an amount not exceeding 33 1/3% of a
Fund’s total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that exceed this amount will be reduced within three
business days to the extent necessary to comply with the 33 1/3% limitation even
if it is not advantageous to sell securities at that time.
If
there are unusually heavy redemptions, a Fund may have to sell a portion of its
investment portfolio at a time when it may
not be advantageous to do so. Selling Fund securities under these circumstances
may result in a lower net asset value per share or decreased dividend income, or
both. Invesco and the Sub-Advisers believe that, in the event of abnormally
heavy redemption requests, a Fund’s borrowing ability would help to mitigate any
such effects and could make the forced sale of their portfolio securities less
likely.
The
Funds may borrow from a bank, broker-dealer, or another Invesco Fund.
Additionally, the Funds are permitted to
temporarily carry a negative or overdrawn balance in their account with their
custodian bank. To compensate the custodian bank for such overdrafts, the Funds
may either (i) leave funds as a compensating balance in their account so the
custodian bank can be compensated by earning interest on such funds; or (ii)
compensate the custodian bank by paying it an agreed upon rate.
43
Each
Fund participates in a secured, committed line of credit (the “Line of Credit”)
with certain banks as lenders. The Line
of Credit permits borrowings of up to a maximum aggregate amount by the Fund, as
negotiated from time to time. Borrowings by a Fund under the Line of Credit can
be used for liquidity purposes, and for Invesco SteelPath MLP Alpha Plus Fund,
to purchase securities for investment or for other purposes. Each Fund’s Board
determined that the Fund’s participation in the Line of Credit is consistent
with the Fund’s investment objective and policies and is in the best interests
of the Fund and its shareholders.
Lending
Portfolio Securities. A Fund may lend
its portfolio securities (principally to brokers, dealers or other financial
institutions) to generate additional income.Such loans are callable at any time
and are continuously secured by segregated collateral equal to no less than the
market value, determined daily, of the loaned securities. Such collateral will
be cash, letters of credit, or debt securities issued or guaranteed by the U.S.
government or any of its agencies. Each Fund may lend portfolio securities to
the extent of one-third of its total assets. A Fund will loan its securities
only to parties that Invesco has determined are in good standing and when, in
Invesco’s judgment, the potential income earned would justify the
risks.
Although
voting rights may pass with the lending of portfolio securities, a Fund will be
entitled to call loaned securities,
or otherwise obtain rights to vote or consent, when deemed necessary by Invesco
with respect to a material event affecting securities on loan. The Fund would
receive income in lieu of dividends on loaned securities and may, at the same
time, generate income on the loan collateral or on the investment of any cash
collateral.
If
the borrower defaults on its obligation to return the securities loaned because
of insolvency or other reasons, a Fund
could experience delays and costs in recovering securities loaned or gaining
access to the collateral. If the Fund is not able to recover the securities
loaned, the Fund may sell the collateral and purchase a replacement security in
the market. Lending securities entails a risk of loss to the Fund if and to the
extent that the market value of the loaned securities increases and the
collateral is not increased accordingly.
Any
cash received as collateral for loaned securities will be invested, in
accordance with a Fund’s investment
guidelines, in short-term money market instruments, affiliated unregistered
investment companies that are compliant with Rule 2a-7 or Affiliated Money
Market Funds. Investing this cash subjects that investment to market
appreciation or depreciation. For purposes of determining whether a Fund is
complying with its investment policies, strategies and restrictions, the Fund
will consider the loaned securities as assets of the Fund, but will not consider
any collateral received as a Fund asset. The Fund will bear any loss on the
investment of cash collateral.
For
a discussion of tax considerations relating to lending portfolio securities, see
“Dividends, Distributions and Tax Matters —
Tax Matters — Tax Treatment of Portfolio Transactions — Securities
Lending.”
Repurchase
Agreements. Repurchase
agreements are agreements under which a Fund purchases a security from a
broker-dealer or bank that agrees to repurchase that security at a mutually
agreed upon time and price (which is higher than the purchase price), thereby
resulting in a yield to the Fund during a Fund’s holding period. A Fund may
enter into a “continuing contract” or “open” repurchase agreement under which
the seller is under a continuing obligation to repurchase the underlying
securities from the Fund on demand and the effective interest rate is negotiated
on a daily basis. Repurchase agreements may be viewed as loans made by a Fund
which are collateralized by the securities subject to repurchase.
In
any repurchase agreement, the securities that are subject to the transaction may
be obligations issued by the U.S.
government or its agencies or instrumentalities. The Funds may also engage in
repurchase
44
agreements
collateralized by non-government securities that are rated investment grade or
below investment grade by the
requisite NRSROs or unrated securities of comparable quality, loan
participations, and equities.
If
the seller of a repurchase agreement fails to repurchase the security in
accordance with the terms of the agreement, a Fund
might incur expenses in enforcing its rights, and could experience a loss on the
sale of the security subject to the repurchase agreement to the extent that the
sale proceeds including accrued interest are less than the resale price provided
in the repurchase agreement, including interest. In addition, although the
Bankruptcy Code and other insolvency laws may provide certain protections for
some types of repurchase agreements, if the seller of a repurchase agreement
should be involved in bankruptcy or insolvency proceedings, a Fund may incur
delay and costs in selling the underlying security or may suffer a loss of
principal and interest if the value of the underlying security declines or the
Fund may be deemed to be an unsecured creditor and be required to return the
securities to the seller.
The
Funds may enter into repurchase agreements that involve securities that may be
subject to a court- ordered or other
“stay” in the event of the seller’s bankruptcy or insolvency. A “stay” will
prevent a Fund from selling the securities it holds under a repurchase agreement
until permitted by a court or other authority. In these situations a Fund may be
subject to greater risk that the value of the securities may decline before they
are sold, and that a Fund may experience a loss.
The
securities underlying a repurchase agreement will be marked-to-market every
business day, and if the value of the
securities falls below a specified percentage of the repurchase price (typically
102%), the counterparty will be required to deliver additional collateral to a
Fund in the form of cash or additional securities. Custody of the securities
will be maintained by a Fund’s custodian or sub-custodian for the duration of
the agreement.
The
Funds may invest their cash balances in joint accounts with other Invesco Funds
for the purpose of investing in
repurchase agreements with maturities not to exceed 60 days, and in certain
other money market instruments with remaining maturities not to exceed 90 days.
Repurchase agreements may be considered loans by a Fund under the 1940
Act.
Restricted
and Illiquid Investments. The Funds may not
acquire any illiquid investment if, immediately after the acquisition, the Fund
would have invested more than 15% of its net assets in illiquid
investments.
For
purposes of the above 15% limitation, an illiquid investment means any
investment that the Fund reasonably expects
cannot be sold or disposed of in current market conditions in seven calendar
days or less without the sale or disposition significantly changing the market
value of the investment, as determined pursuant to the 1940 Act and applicable
rules and regulations thereunder. Illiquid investments may include a wide
variety of investments, such as, for example: (1) repurchase agreements maturing
in more than seven days (unless the agreements have demand/redemption features);
(2) OTC options contracts and certain other derivatives (including certain swap
agreements); (3) fixed time deposits that are not subject to prepayment or that
provide for withdrawal penalties upon prepayment (other than overnight
deposits); (4) loan interests and other direct debt instruments; (5) municipal
lease obligations; (6) commercial paper issued pursuant to Section 4(2) of the
1933 Act; and (7) securities that are unregistered, that can be sold to
qualified institutional buyers in accordance with Rule 144A under the 1933 Act,
or that are exempt from registration under the 1933 Act or otherwise restricted
under the federal securities laws, including private placement securities sold
pursuant to Regulation S.
Limitations
on the resale of restricted investments may have an adverse effect on their
marketability, which may prevent a
Fund from disposing of them promptly at reasonable prices. The Fund may have to
bear the expense of registering such securities for resale, and the risk of
substantial delays in effecting such registrations. A Fund’s difficulty valuing
and selling restricted securities or illiquid investments may result in a loss
or be costly to the Fund.
If
a substantial market develops for a restricted security or illiquid investment
held by a Fund, it may be treated as a liquid
investment, in accordance with procedures and guidelines adopted by the Board on
behalf of the Funds.
45
Rule
144A Securities. Rule 144A
securities are securities which, while initially privately placed, are eligible
for purchase and resale pursuant to Rule 144A under the 1933 Act. This Rule
permits certain qualified institutional buyers, such as the Funds, to trade in
the securities even though such securities are not registered under the 1933
Act. Pursuant to Rule 22e-4 under the 1940 Act, a Fund will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the Fund’s
restriction on illiquid investments. The determination of whether a Rule 144A
security is liquid or illiquid will take into account relevant market trading,
and investment-specific considerations consistent with applicable SEC guidance.
Additional factors that may be considered include the (i) frequency of trades
and quotes; (ii) number of dealers and potential purchasers; (iii) dealer
undertakings to make a market; and (iv) nature of the security and of market
place trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). Investing in Rule
144A securities could increase the amount of a Fund’s illiquid investments if
qualified institutional buyers are unwilling to purchase such
securities.
Reverse
Repurchase Agreements. Reverse repurchase
agreements are agreements that involve the sale of securities held by a Fund to
financial institutions such as banks and broker-dealers, with an agreement that
the Fund will repurchase the securities at an agreed upon price and date or upon
demand. During the reverse repurchase agreement period, the Fund continues to
receive interest and principal payments on the securities sold, but pays
interest to the other party on the proceeds received. A Fund may employ reverse
repurchase agreements (i) for temporary emergency purposes, such as to meet
unanticipated net redemptions so as to avoid liquidating other portfolio
securities during unfavorable market conditions; (ii) to cover short-term cash
requirements resulting from the timing of trade settlements; or (iii) to take
advantage of market situations where the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest
expense of the transaction.
Reverse
repurchase agreements are a form of leverage and involve the risk that the
market value of securities to be
repurchased by the Fund may decline below the price at which the Fund is
obligated to repurchase the securities, resulting in a requirement for the Fund
to deliver margin to the other party in the amount of the related shortfall, or
that the other party may default on its obligation, so that the Fund is delayed
or prevented from completing the transaction. Leverage may make the Fund’s
returns more volatile and increase the risk of loss. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, a Fund’s use of the proceeds from the sale of the securities may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund’s obligation to repurchase the
securities.
Mortgage
Dollar Rolls. A dollar roll is a
type of transaction that involves the sale by a Fund of a mortgage-backed
security to a financial institution such as a bank or broker dealer, with an
agreement that the Fund will repurchase a substantially similar (i.e., same
type, coupon and maturity) security at an agreed upon price and date. The
mortgage securities that are purchased will bear the same interest rate as those
sold, but will generally be collateralized by different pools of mortgages with
different prepayment histories. During the period between the sale and
repurchase, a Fund will not be entitled to receive interest or principal
payments on the securities sold but is compensated for the difference between
the current sales price and the forward price for the future purchase. A Fund
typically enters into a dollar roll transaction to enhance the Fund’s return
either on an income or total return basis or to manage pre-payment
risk.
Dollar
roll transactions involve the risk that the market value of the securities
retained by a Fund may decline below the
price of the securities that the Fund has sold but is obligated to repurchase
under the agreement. In the event the buyer of securities under a dollar roll
transaction files for bankruptcy or becomes insolvent, a Fund’s use of the
proceeds from the sale of the securities may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund’s obligation to repurchase the securities.
Unless
the benefits of the sale exceed the income, capital appreciation or gains on the
securities sold as part of the dollar
roll, the investment performance of a Fund will be less than what the
performance would
46
have
been without the use of dollar rolls. The benefits of dollar rolls may depend
upon the Adviser or Sub-Adviser’s ability to predict
mortgage repayments and interest rates. There is no assurance that dollar rolls
can be successfully employed.
Standby
Commitments. Under a standby
commitment a bank or dealer would agree to purchase, at the Fund’s option,
specified securities at a specified price. Standby commitments generally
increase the cost of the acquisition of the underlying security, thereby
reducing the yield. Standby commitments depend upon the issuer’s ability to
fulfill its obligation upon demand. Although no definitive creditworthiness
criteria are used for this purpose, Invesco reviews the creditworthiness of the
banks and other municipal securities dealers from which the Funds obtain standby
commitments in order to evaluate those risks.
Derivatives
A
derivative is a financial instrument whose value is dependent upon the value of
other assets, rates or indices, referred
to as “underlying reference assets.” These underlying reference assets may
include, among others commodities, stocks, bonds, interest rates, currency
exchange rates or related indices. Derivatives include, among others, swaps,
options, futures and forward foreign currency contracts. Some derivatives, such
as futures and certain options, are traded on U.S. commodity and securities
exchanges, while other derivatives, such as many types of swap agreements, are
privately negotiated and entered into in the OTC market. In addition, the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
Dodd-Frank Act) and implementing rules require certain types of swaps to be
traded on public execution facilities and centrally cleared.
Derivatives
may be used for “hedging,” which means that they may be used when the portfolio
managers seek to protect the
Fund’s investments from a decline in value, which could result from changes in
interest rates, market prices, currency fluctuations and other market factors.
Derivatives may also be used when the portfolio managers seek to increase
liquidity, implement a tax or cash management strategy, invest in a particular
stock, bond or segment of the market in a more efficient or less expensive way,
modify the characteristics of the Fund’s portfolio investments, for example,
duration, and/or to enhance return. However derivatives are used, their
successful use is not assured and will depend upon, among other factors, the
portfolio managers’ ability to predict and understand relevant market
movements.
Certain
derivatives involve leverage, that is, the amount invested may be smaller than
the full economic exposure of the
derivative instrument and the Fund could lose more than it invested. The
leverage involved in these derivative transactions may result in the Fund’s net
asset value being more sensitive to changes in the value of its
investments.
General
risks associated with derivatives:
The
use by the Funds of derivatives may involve certain risks, as described
below.
Counterparty
Risk:
The risk that a counterparty under a derivatives agreement will not live up to
its obligations, including because of the counterparty’s bankruptcy or
insolvency. Certain agreements may not contemplate delivery of collateral to
support fully a counterparty’s contractual obligation; therefore, the Fund might
need to rely solely on contractual remedies to satisfy the counterparty’s full
obligation. As with any contractual remedy, there is no guarantee that the Fund
will be successful in pursuing such remedies, particularly in the event of the
counterparty’s bankruptcy or insolvency. Many derivative trading agreements,
such as an ISDA Master Agreement governing OTC swaps, provide for netting of
derivatives transactions governed by the agreement in the event of a default by
either counterparty, pursuant to which the Fund’s and the counterparty’s
obligations under the relevant transactions can be netted and set-off against
each other, in which case a Fund’s obligation or right will be the net amount
owed to or by the counterparty. Netting agreements are intended to function as a
counterparty credit risk mitigant, but in the case of a bankruptcy or insolvency
of the relevant counterparty, are subject to the risk that the insolvency regime
applicable to the counterparty might not recognize the enforceability of the
contractual netting provisions. The Fund will not enter into a derivative
transaction with any counterparty that Invesco and/or the Sub-Advisers believe
does not have the financial resources to honor its obligations under the
transaction. Invesco monitors the financial
47
stability
of counterparties. Where the obligations of the counterparty are guaranteed,
Invesco monitors the financial stability
of the guarantor and the counterparty. If a counterparty’s creditworthiness
declines, the value of the derivative would also likely decline, potentially
resulting in losses to the Fund.
Leverage
Risk:
Leverage exists when the Fund can lose more than it originally invests because
it purchases or sells an instrument or enters into a transaction without
investing an amount equal to the full economic exposure of the instrument or
transaction. Leverage may cause the Fund to be more volatile because it may
exaggerate the effect of any increase or decrease in the value of the Fund’s
portfolio securities. The use of some derivatives may result in economic
leverage, which does not result in the possibility of the Fund incurring
obligations beyond its initial investment, but that nonetheless permits the Fund
to gain exposure that is greater than would be the case in an unlevered
instrument.
Liquidity
Risk:
The risk that a particular derivative is difficult to sell or liquidate. If a
derivative transaction is particularly large or if the relevant market is
illiquid, it may not be possible to initiate a transaction or liquidate a
position at an advantageous time or price, which may result in significant
losses to the Fund.
Pricing
Risk:
The risk that the value of a particular derivative does not move in tandem or as
otherwise expected relative to the corresponding underlying
instruments.
Special
Regulatory Risks of Derivatives: The regulation of
derivatives is a rapidly changing area of law and is subject to modification by
government and judicial action. In addition, the SEC, CFTC and the exchanges are
authorized to take extraordinary actions in the event of a market emergency,
including, for example, the implementation or reduction of speculative position
limits, the implementation of higher margin requirements, the establishment of
daily price limits and the suspension of trading.
It
is not possible to predict fully the effects of current or future regulation.
However, it is possible that developments in
government regulation of various types of derivative instruments, such as
speculative position limits on certain types of derivatives, or limits or
restrictions on the counterparties with which the Fund engages in derivative
transactions, may limit or prevent the Fund from using or limit the Fund’s use
of these instruments effectively as a part of its investment strategy, and could
adversely affect the Fund’s ability to achieve its investment objective. Invesco
will continue to monitor developments in the area, particularly to the extent
regulatory changes affect the Fund’s ability to enter into desired swap
agreements. New requirements, even if not directly applicable to the Fund, may
increase the cost of the Fund’s investments and cost of doing
business.
Tax
Risks:
For a discussion of the tax considerations relating to derivative transactions,
see “Dividends, Distributions and Tax Matters — Tax Matters — Tax Treatment of
Portfolio Transactions.”
General
risks of hedging strategies using derivatives:
The
use by the Funds of hedging strategies involves special considerations and
risks, as described below.
Successful
use of hedging transactions depends upon Invesco’s and the Sub-Advisers’ ability
to predict correctly the
direction of changes in the value of the applicable markets and securities,
contracts and/or currencies. While Invesco and the Sub-Advisers are experienced
in the use of derivatives for hedging, there can be no assurance that any
particular hedging strategy will succeed.
In
a hedging transaction, there might be imperfect correlation, or even no
correlation, between the price movements of an
instrument used for hedging and the price movements of the investments being
hedged. Such a lack of correlation might occur due to factors unrelated to the
value of the investments being hedged, such as changing interest rates, market
liquidity, and speculative or other pressures on the markets in which the
hedging instrument is traded.
Hedging
strategies, if successful, can reduce risk of loss by wholly or partially
offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments. Investors should
bear in mind that a Fund is not obligated to actively engage in hedging. For
48
example,
a Fund may not have attempted to hedge its exposure to a particular foreign
currency at a time when doing so might
have avoided a loss.
Types
of derivatives:
Swaps. Generally, swap
agreements are contracts between a Fund and another party (the counterparty)
involving the exchange of payments on specified terms over periods ranging from
a few days to multiple years. A swap agreement may be negotiated bilaterally and
traded OTC between the two parties (for an uncleared swap) or, in some
instances, must be transacted through a futures commission merchant (FCM) and
cleared through a clearinghouse that serves as a central counterparty (for a
cleared swap). In a basic swap transaction, the Fund agrees with its
counterparty to exchange the returns (or differentials in returns) and/or cash
flows earned or realized on a particular asset such as an equity or debt
security, commodity, currency, interest rate or index, calculated with respect
to a “notional amount.” The notional amount is the set amount selected by the
parties to use as the basis on which to calculate the obligations that the
parties to a swap agreement have agreed to exchange. The parties typically do
not exchange the notional amount. Instead, they agree to exchange the returns
that would be earned or realized if the notional amount were invested in given
investments or at given interest rates. Examples of returns that may be
exchanged in a swap agreement are those of a particular security, a particular
fixed or variable interest rate, a particular foreign currency, or a “basket” of
securities representing a particular index. Swap agreements can also be based on
credit and other events. In some cases, such as cross currency swaps, the swap
agreement may require delivery (exchange) of the entire notional value of one
designated currency for another designated currency.
A
Fund will typically only enter into swap agreements with counterparties who use
standard International Swap and Dealers
Association, Inc. (“ISDA”) contract documentation. ISDA establishes industry
standards for the documentation of swap agreements. Virtually all principal swap
participants use ISDA documentation because it has an established set of
definitions, contract terms and counterparty obligations, including provisions
for master netting agreements. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Fund’s ability to terminate existing swap agreements or to realize amounts to be
received under such agreements. Additionally, ISDA master agreements include
credit related contingent features which allow Counterparties to OTC derivatives
to terminate derivative contracts prior to maturity in the event that, for
example, the Fund’s net assets decline by a stated percentage or the Fund fails
to meet the terms of its ISDA master agreements, which would cause the Fund to
accelerate payment of any net liability owed to the
counterparty.
Comprehensive
swaps regulation. The Dodd-Frank Act
and analogous international laws enacted after the financial crisis imposed
comprehensive regulatory requirements on swaps and swap market participants. The
U.S. regulatory framework includes: (1) registration and regulation of swap
dealers and major swap participants; (2) requiring central clearing and
electronic execution of standardized swaps on swap execution facilities; (3)
imposing margin requirements on uncleared swap transactions; (4) regulating and
monitoring swap transactions through position limits and large trader reporting
requirements; and (5) imposing record keeping and centralized and public
reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a
small segment of the market referred to as “security-based swaps,” which
includes swaps on single securities or narrow-based indices of securities and
single name credit default swaps.
Uncleared
swaps.
In an uncleared swap, the swap counterparty is typically a brokerage firm, bank
or other financial institution. In the event that one party to the swap
transaction defaults and the transaction is terminated prior to its scheduled
termination date, one of the parties may be required to make an early
termination payment to the other. An early termination payment may be payable by
either the defaulting party or the non-defaulting party, under certain
circumstances, depending upon which of them is “in-the-money” with respect to
the swap at the time of its termination. Early termination payments may be
calculated in various ways, but generally represent the amount that the
“in-the-money” party would have to pay to replace the swap as of the date of its
termination.
49
During
the term of an uncleared swap, a Fund will be required to pledge to the swap
counterparty, from time to time, an
amount of cash and/or other assets equal to the total net amount (if any) that
would be payable by the Fund to the counterparty if all outstanding swaps
between the parties were terminated on the date in question, including any early
termination payments (variation margin). Periodically, changes in the amount
pledged are made to recognize changes in value of the swap contract resulting
from, among other things market value changes in the underlying investment
referenced in the swap. Likewise, the counterparty will be required to pledge
cash or other assets to cover its obligations to a Fund. However, the amount
pledged will not always be equal to or more than the amount due to the other
party. Therefore, if a counterparty defaults in its obligations to a Fund, the
amount pledged by the counterparty and available to the Fund may not be
sufficient to cover all the amounts due to the Fund and the Fund may sustain a
loss.
Regulations
requiring initial margin to be posted by certain market participants for
uncleared swaps have been adopted and
are being phased in over time. When these rules take effect with respect to the
Funds, if a Fund is deemed to have material swaps exposure (generally, an
average gross notional amount of uncleared swaps and foreign currency forward
contracts at certain measurement dates exceeding $8 billion), it will under
these regulations be required to post initial margin in addition to variation
margin.
Uncleared
swaps are not traded on exchanges. As a result, swap participants may not be as
protected as participants on
organized exchanges. Performance of a swap agreement is the responsibility only
of the swap counterparty and not of any exchange or clearinghouse. As a result,
a Fund is subject to the risk that a counterparty will be unable or will refuse
to perform under such agreement, including because of the counterparty’s
bankruptcy or insolvency. The Fund risks the loss of the accrued but unpaid
amounts under a swap agreement, which could be substantial, in the event of a
default, insolvency or bankruptcy by a swap counterparty. In such an event, the
Fund will have contractual remedies pursuant to the swap agreement, but
bankruptcy and insolvency laws could affect the Fund’s rights as a creditor. If
the counterparty’s creditworthiness declines, the value of a swap agreement
would likely decline, potentially resulting in losses.
Cleared
Swaps.
Certain standardized swaps are subject to mandatory central clearing and trading
on execution facilities. The Dodd-Frank Act and analogous international laws
will ultimately require the clearing and trading on execution facilities of many
swaps. To date, the CFTC has designated only certain of the most common credit
default index swaps and certain interest rate swaps as subject to mandatory
clearing and certain public execution facilities have made these swaps available
to trade, but it is expected that additional categories of swaps will in the
future be designated as subject to mandatory clearing and trade execution
requirements.
In
a cleared swap, a Fund’s ultimate counterparty is a central clearinghouse rather
than a brokerage firm, bank or other
financial institution. Cleared swaps are submitted for clearing through each
party’s FCM, which must be a member of the clearinghouse that serves as the
central counterparty.
When
a Fund enters into a cleared swap, it must deliver to the clearinghouse (via the
FCM) an amount referred to as
“initial margin.” Initial margin requirements are determined by the
clearinghouse, and are typically calculated as an amount based on the volatility
in market value of the cleared swap over a fixed period, but an FCM may require
additional initial margin above the amount required by the clearinghouse. During
the term of the swap agreement, “variation margin” may also be required to be
paid by the Fund or may be received by the Fund. If the value of the Fund’s
cleared swap declines, the Fund will be required to make additional variation
margin payments to the FCM to settle the change in value. Conversely, if the
market value of the Fund’s position increases, the FCM will post additional
variation margin to the Fund’s account. At the conclusion of the term of the
swap agreement, if the Fund has a loss equal to or greater than the margin
amount, the margin amount is paid to the FCM along with any loss in excess of
the margin amount. If the Fund has a loss of less than the margin amount, the
excess margin is returned to the Fund. If the Fund has a gain, the full margin
amount and the amount of the gain are paid to the Fund.
Central
clearing is designed to reduce counterparty credit risk and increase liquidity
compared to uncleared swaps
because central clearing interposes the central clearinghouse as the
counterparty to each participant’s swap, but it does not eliminate those risks
completely. There is also a risk of loss by a Fund of the initial and variation
margin deposits in the event of bankruptcy or insolvency of the FCM through
which the
50
Fund
holds an open position, or the clearinghouse in a swap contract. The assets of a
Fund may not be fully protected in the
event of the bankruptcy or insolvency of the FCM or clearinghouse because the
Fund might be limited to recovering only a pro rata share of all available funds
and margin segregated on behalf of an FCM’s customers. If the FCM does not
provide accurate reporting, a Fund is also subject to the risk that the FCM
could use the Fund’s assets to satisfy its own financial obligations or the
payment obligations of another customer to the clearinghouse. Credit risk of
cleared swap participants is concentrated in a few clearinghouses, and the
consequences of insolvency of a clearinghouse are not clear.
With
cleared swaps, a Fund may not be able to obtain terms as favorable as it would
be able to negotiate for a bilateral,
uncleared swap. In addition, an FCM may unilaterally amend the terms of its
agreement with a Fund, which may include the imposition of position limits or
additional margin requirements with respect to the Fund’s investment in certain
types of swaps. Clearinghouses and FCMs can require termination of existing
cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation
of the swap agreement.
Finally,
a Fund is subject to the risk that, after entering into a cleared swap with an
executing broker, no FCM or
clearinghouse is willing or able to clear the transaction. In such an event, the
Fund may be required to break the trade and make an early termination payment to
the executing broker.
Commonly
used swap agreements include:
Credit
Default Swaps (CDS): A CDS is an
agreement between two parties where the first party agrees to make one or more
payments to the second party, while the second party assumes the risk of certain
defaults, generally a failure to pay or bankruptcy of the issuer on a referenced
debt obligation. CDS transactions are typically individually negotiated and
structured. A Fund may enter into CDS to create long or short exposure to
domestic or foreign corporate debt securities or sovereign debt
securities.
A
Fund may buy a CDS (buy credit protection). In this transaction the Fund makes a
stream of payments based on a fixed
interest rate (the premium) over the life of the swap in exchange for a
counterparty (the seller) taking on the risk of default of a referenced debt
obligation (the Reference Obligation). If a credit event occurs for the
Reference Obligation, the Fund would cease making premium payments and it would
deliver defaulted bonds to the seller. In return, the seller would pay the
notional value of the Reference Obligation to the Fund. Alternatively, the two
counterparties may agree to cash settlement in which the seller delivers to the
Fund (buyer) the difference between the market value and the notional value of
the Reference Obligation. If no event of default occurs, the Fund pays the fixed
premium to the seller for the life of the contract, and no other exchange
occurs.
Alternatively,
a Fund may sell a CDS (sell credit protection). In this transaction the Fund
will receive premium payments
from the buyer in exchange for taking the risk of default of the Reference
Obligation. If a credit event occurs for the Reference Obligation, the buyer
would cease to make premium payments to the Fund and deliver the Reference
Obligation to the Fund. In return, the Fund would pay the notional value of the
Reference Obligation to the buyer. Alternatively, the two counterparties may
agree to cash settlement in which the Fund would pay the buyer the difference
between the market value and the notional value of the Reference Obligation. If
no event of default occurs, the Fund receives the premium payments over the life
of the contract, and no other exchange occurs.
Credit
Default Index Swaps (CDX): A CDX is a swap on
an index of CDS. A CDX allows an investor to manage credit risk or to take a
position on a basket of credit entities (such as CDS or CMBS) in a more
efficient manner than transacting in single name CDS. If a credit event occurs
in one of the underlying companies, the protection is paid out via the delivery
of the defaulted bond by the buyer of protection in return for payment of the
notional value of the defaulted bond by the seller of protection or it may be
settled through a cash settlement between the two parties. The underlying
company is then removed from the index. New series of CDX are issued on a
regular basis. A Commercial Mortgage-Backed Index (CMBX) is a type of CDX made
up of 25 tranches of commercial mortgage-backed securities (See “Debt
Instruments — Mortgage-Backed and Asset-Backed Securities”) rather than CDS.
Unlike other CDX contracts where credit events are intended to capture an event
of default, CMBX involves a pay-as-you-go (PAUG) settlement process designed
51
to
capture non-default events that affect the cash flow of the reference
obligation. PAUG involves ongoing, two-way payments
over the life of a contract between the buyer and the seller of protection and
is designed to closely mirror the cash flow of a portfolio of cash commercial
mortgage-backed securities. A CDX index tranche provides access to customized
risk, exposing each investor to losses at different levels of subordination. The
lowest part of the capital structure is called the “equity tranche” as it has
exposure to the first losses experienced in the basket. The mezzanine and senior
tranches are higher in the capital structure but can also be exposed to loss in
value. Investments are subject to liquidity risks as well as other risks
associated with investments in credit default swaps.
Foreign
Exchange Swaps: A foreign exchange
swap involves an agreement between two parties to exchange two different
currencies on a specific date at a fixed rate, and an agreement for the reverse
exchange of those two currencies at a later date and at a fixed rate. Foreign
exchange swaps were exempted from the definition of “swaps” by the U.S. Treasury
and are therefore not subject to many rules under the CEA that apply to swaps,
including the mandatory clearing requirement. They are also not considered
“commodity interests” for purposes of CEA Regulations and Exclusions, discussed
above. However, foreign exchange swaps nevertheless remain subject to the CFTC’s
trade reporting requirements, enhanced anti-evasion authority, and strengthened
business conduct standards.
Currency
Swaps:
A currency swap is an agreement between two parties to exchange periodic cash
flows on a notional amount of two or more currencies based on the relative value
differential between them. Currency swaps typically involve the delivery of the
entire notional values of the two designated currencies. In such a situation,
the full notional value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations. A Fund
may also enter into currency swaps on a net basis, which means the two different
currency payment streams under the swap agreement are converted and netted out
to a single cash payment in just one of the currencies.
Because
currency control is of great importance to the issuing governments and
influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These actions
could result in losses to a Fund if it is unable to deliver or receive a
specified currency or funds in settlement of obligations, including swap
transaction obligations. These actions could also have an adverse effect on a
Fund’s swap transactions or cause a Fund’s hedging positions to be rendered
useless, resulting in full currency exposure as well as incurring unnecessary
transaction costs.
Interest
Rate Swaps: An agreement
between two parties pursuant to which the parties exchange a floating rate
payment for a fixed rate payment based on a specified principal or notional
amount. In other words, Party A agrees to pay Party B a fixed interest rate
multiplied by a notional amount and in return Party B agrees to pay Party A a
variable interest rate multiplied by the same notional
amount.
Commodity
Swaps:
A commodity swap agreement is a contract in which one party agrees to make
periodic payments to another party based on the change in market value of a
commodity-based underlying instrument (such as a specific commodity or commodity
index) in return for periodic payments based on a fixed or variable interest
rate or the total return from another commodity-based underlying instrument. In
a total return commodity swap, a Fund receives the price appreciation of a
commodity index, a portion of a commodity index or a single commodity in
exchange for paying an agreed-upon fee.
Total
Return Swaps: An agreement in
which one party makes payments based on a set rate, either fixed or variable,
while the other party makes payments based on the return of an underlying asset,
which includes both the income it generates and any capital
gains.
Volatility
and Variance Swaps: A volatility swap
involves an exchange between a Fund and a counterparty of periodic payments
based on the measured volatility of an underlying security, currency, commodity,
interest rate, index or other reference asset over a specified time frame.
Depending on the structure of the swap, either the Fund’s or the counterparty’s
payment obligation will typically be based on the realized volatility of the
reference asset as measured by changes in its price or level over a specified
time period while the other party’s payment obligation will be based on a
specified rate representing expected volatility for the reference
52
asset
at the time the swap is executed, or the measured volatility of a different
reference asset over a specified time
period. The Fund will typically make or lose money on a volatility swap
depending on the magnitude of the reference asset’s volatility, or size of the
movements in its price, over a specified time period, rather than general
increases or decreases in the price of the reference asset. Volatility swaps are
often used to speculate on future volatility levels, to trade the spread between
realized and expected volatility, or to decrease the volatility exposure of
other investments held by the Fund. Variance swaps are similar to volatility
swaps except payments are based on the difference between the implied and
measured volatility mathematically squared.
Inflation
Swaps:
Inflation swap agreements are contracts in which one party agrees to pay the
cumulative percentage increase in a price index, such as the Consumer Price
Index, over the term of the swap (with some lag on the referenced inflation
index), and the other party pays a compounded fixed rate. Inflation swap
agreements may be used to protect the net asset value of a Fund against an
unexpected change in the rate of inflation measured by an inflation index. The
value of inflation swap agreements is expected to change in response to changes
in real interest rates. Real interest rates are tied to the relationship between
nominal interest rates and the rate of inflation.
Swaptions: An option on a
swap agreement, also called a “swaption,” is an option that gives the buyer the
right, but not the obligation, to enter into a swap on a future date in exchange
for paying a market-based premium. A receiver swaption gives the owner the right
to receive the total return of a specified asset, reference rate, or index. A
payer swaption gives the owner the right to pay the total return of a specified
asset, reference rate, or index. Swaptions also include options that allow an
existing swap to be terminated or extended by one of the
counterparties.
Swaptions
are considered to be swaps for purposes of CFTC regulation. Although they are
currently traded OTC, the
CFTC may in the future designate certain options on swaps as subject to
mandatory clearing and exchange trading.
Options. An option is a
contract that gives the purchaser of the option, in return for the premium paid,
the right, but not the obligation, to buy from (in the case of a call) or sell
to (in the case of a put) the writer of the option at the exercise price during
the term of the option (for American style options) or on a specified date (for
European style options), the security, currency or other instrument underlying
the option (or delivery of a cash settlement price, in the case of certain
options, such as an index option and other cash-settled options). An option on a
CDS or a futures contract (described below) gives the purchaser the right, but
not the obligation, to enter into a CDS or assume a position in a futures
contract. Option transactions present the possibility of large amounts of
exposure (or leverage), which may result in a Fund’s net asset value being more
sensitive to changes in the value of the option.
The
value of an option position will reflect, among other things, the current market
value of the underlying investment, the
time remaining until expiration, the relationship of the exercise price to the
market price of the underlying investment, the price volatility of the
underlying investment and general market and interest rate
conditions.
A
Fund may effectively terminate its right or obligation under an option by
entering into an offsetting closing
transaction. For example, a Fund may terminate its obligation under a call or
put option that it had written by purchasing an identical call or put option,
which is known as a closing purchase transaction. Conversely, a Fund may
terminate a position in a put or call option it had purchased by writing an
identical put or call option, which is known as a closing sale transaction.
Closing transactions permit a Fund to realize profits or limit losses on an
option position prior to its exercise or expiration.
Options
may be either listed on an exchange or traded in OTC markets. Listed options are
tri-party contracts (i.e.,
performance of the obligations of the purchaser and seller are guaranteed by the
exchange or clearing corporation) and have standardized strike prices and
expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates and differ from exchange-traded options in that OTC
options are transacted with dealers directly and not through a clearing
corporation (which guarantees performance). In the case of OTC options, there
can be no assurance that a liquid secondary market will exist
53
for
any particular option at any specific time; therefore the Fund may be required
to treat some or all OTC options as illiquid
investments. Although a Fund will enter into OTC options only with dealers that
are expected to be capable of entering into closing transactions with it, there
is no assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to exercise or expiration. In the event of
insolvency of the dealer, a Fund might be unable to close out an OTC option
position at any time prior to its expiration.
Types
of Options:
Put
Options on Securities. A put option gives
the purchaser the right to sell, to the writer, the underlying security,
contract or foreign currency at the stated exercise price at any time prior to
the expiration date of the option (for American style options) or on a specified
date (for European style options), regardless of the market price or exchange
rate of the security, contract or foreign currency, as the case may be, at the
time of exercise. If the purchaser exercises the put option, the writer of a put
option is obligated to buy the underlying security, contract or foreign currency
for the exercise price.
Call
Options on Securities. A call option
gives the purchaser the right to buy, from the writer, the underlying security,
contract or foreign currency at the stated exercise price at any time prior to
the expiration of the option (for American style options) or on a specified date
(for European style options), regardless of the market price or exchange rate of
the security, contract or foreign currency, as the case may be, at the time of
exercise. If the purchaser exercises the call option, the writer of a call
option is obligated to sell to and deliver the underlying security, contract or
foreign currency to the purchaser of the call option for the exercise
price.
Index
Options. Index options (or
options on securities indices) give the option buyer the right to receive, upon
exercise, a cash settlement amount instead of the securities included in the
relevant index, if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. The amount of cash is equal to
the difference between the closing price of the index on the relevant option
expiration date and the exercise price of the call or put times a specified
multiple (the multiplier), which determines the total dollar value for each
point of such difference.
The
risks of investment in index options may be greater than options on securities,
especially if a Fund writes index call
options. Because index options are settled in cash, when a Fund writes a call on
an index it cannot provide in advance for its potential settlement obligations
by acquiring and holding the underlying securities. A Fund can offset some of
the risk of writing an index call option by holding a diversified portfolio of
securities similar to those included in the underlying index. However, the Fund
cannot, as a practical matter, acquire and hold a portfolio containing exactly
the same securities in the index and, as a result, bears the risk that the value
of the securities held will not be perfectly correlated with the value of the
index.
CDS
Options. A CDS option
transaction gives the buyer the right, but not the obligation, to enter into a
CDS at a specified future date and under specified terms in exchange for paying
a market based purchase price or premium. The writer of the option bears the
risk of any unfavorable move in the value of the CDS relative to the market
value on the exercise date, while the purchaser may allow the option to expire
unexercised.
Option
Techniques:
Writing
Options. A Fund may write
options to generate additional income. As the writer of an option, the Fund may
have no control over when the underlying reference asset must be sold (in the
case of a call option) or purchased (in the case of a put option), if the option
was structured as an American style option, because the option purchaser may
notify the Fund of exercise at any time prior to the expiration of the option.
In addition, if the option is cash-settled instead of deliverable, the Fund is
obligated to pay the option purchaser the difference between the exercise price
and the value of the underlying reference asset, instead of selling or
purchasing the underlying reference asset, if the option is exercised. In
general, options are rarely exercised prior to expiration. Whether or not an
option expires unexercised, the writer retains the amount of the
premium.
54
A
Fund would write a put option at an exercise price that, reduced by the premium
received on the option, reflects the price
it is willing to pay for the underlying reference asset. In return for the
premium received for writing a put option, the Fund assumes the risk that the
price of the underlying reference asset will decline below the exercise price,
in which case the put option may be exercised and the Fund may suffer a
loss.
In
return for the premium received for writing a call option on a reference asset,
the Fund foregoes the opportunity for
profit from a price increase in the underlying reference asset above the
exercise price so long as the option remains open, but retains the risk of loss
should the price of the reference asset decline.
If
an option that a Fund has written expires, the Fund will realize a gain in the
amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying reference
asset, held by the Fund during the option period. If a call option is exercised,
a Fund will realize a gain or loss from the sale of the underlying reference
asset, which will be increased or offset by the premium received. The obligation
imposed upon the writer of an option is terminated upon the expiration of the
option, or such earlier time at which a Fund effects a closing purchase
transaction by purchasing an option (put or call as the case may be) identical
to that previously sold. However, once a Fund has received an exercise notice,
it cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver (for a call) or purchase (for a
put) the underlying reference asset at the exercise price (if deliverable) or
pay the difference between the exercise price and the value of the underlying
reference asset (if cash-settled).
Purchasing
Options. A Fund may
purchase a put option on an underlying reference asset owned by the Fund in
order to protect against an anticipated decline in the value of the underlying
reference asset held by the Fund; may purchase put options on underlying
reference assets against which it has written other put options; or may
speculate on the value of an underlying reference asset, index or quantitative
measure. The premium paid for the put option and any transaction costs would
reduce any profit realized when the underlying reference asset is delivered upon
the exercise of the put option. Conversely, if the underlying reference asset
does not decline in value, the option may expire worthless and the premium paid
for the protective put would be lost. A put option may also be purchased on an
investment the Fund does not own.
A
Fund may purchase a call option for the purpose of acquiring the underlying
reference asset for its portfolio, or on
underlying reference assets against which it has written other call options. The
Fund is not required to own the underlying reference asset in order to purchase
a call option. If the Fund does not own the underlying position, the purchase of
a call option would enable a Fund to acquire the underlying reference asset at
the exercise price of the call option plus the premium paid. So long as it holds
a call option, rather than the underlying reference asset itself, the Fund is
partially protected from any unexpected increase in the market price of the
underlying reference asset. If the market price does not exceed the exercise
price, the Fund could purchase the underlying reference asset on the open market
and could allow the call option to expire, incurring a loss only to the extent
of the premium paid for the option.
Municipal
Market Data Rate Locks. A Municipal Market
Data Rate Lock (MMD Rate Lock) permits a Fund to lock in a specified municipal
interest rate for a portion of its portfolio to preserve a return on a
particular investment or a portion of its portfolio as a duration management
technique or to protect against any increase in the price of securities to be
purchased at a later date. MMD Rate Locks may be used for hedging purposes. An
MMD Rate Lock is an agreement between two parties, a Fund and an MMD Rate Lock
provider, pursuant to which the parties agree to make payments to each other on
a notional amount, contingent upon whether the Municipal Market Data AAA General
Obligation Scale is above or below a specified level on the expiration date of
the contract.
MMD
Rate Locks involve the risk that municipal yields will move in the direction
opposite than the direction
anticipated by a Fund. The risk of loss with respect to MMD Rate Locks is
limited to the amount of payments a Fund is contractually obligated to make. If
the other party to an MMD Rate Lock defaults, a Fund's risk of loss consists of
the amount of payments that the Fund contractually is entitled to receive. If
there is a default by the counterparty, a Fund may have contractual remedies
pursuant to the agreements related to the transaction, but they could be
difficult to enforce.
55
Straddles/Spreads/Collars. Each Fund for
hedging purposes, or for speculative purposes, may enter into straddles, spreads
or collars to adjust the risk and return characteristics of the Fund's overall
position.
Spread
and straddle options transactions. In “spread”
transactions, a Fund buys and writes a put or buys and writes a call on the same
underlying instrument with the options having different exercise prices,
expiration dates, or both. In “straddles,” a Fund purchases a put option and a
call option or writes a put option and a call option on the same instrument with
the same expiration date and typically the same exercise price. When a Fund
engages in spread and straddle transactions, it seeks to profit from differences
in the option premiums paid and received and in the market prices of the related
options positions when they are closed out or sold. Because these transactions
require the Fund to buy and/or write more than one option simultaneously, the
Fund’s ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the Fund were to
buy or sell a single option. Similarly, costs incurred by the Fund in connection
with these transactions will in many cases be greater than if the Fund were to
buy or sell a single option.
Option
Collars. A Fund also may
use option “collars.” A “collar” position combines a put option purchased by the
Fund (the right of the Fund to sell a specific security within a specified
period) with a call option that is written by the Fund (the right of the
counterparty to buy the same security) in a single instrument. The Fund’s right
to sell the security is typically set at a price that is below the
counterparty’s right to buy the security. Thus, the combined position “collars”
the performance of the underlying security, providing protection from
depreciation below the price specified in the put option, and allowing for
participation in any appreciation up to the price specified by the call
option.
Rights
and Warrants. Rights are equity
securities representing a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance, before the stock is
offered to the general public. A stockholder who purchases rights may be able to
retain the same ownership percentage after the new stock offering. A right
usually enables the stockholder to purchase common stock at a price below the
initial offering price. A Fund that purchases a right takes the risk that
the right might expire worthless because the market value of the common stock
falls below the price fixed by the right.
A
warrant gives the holder the right to purchase securities from the issuer at a
specific price within a certain time frame
and is similar to a call option. The main difference between warrants and call
options is that warrants are issued by the company that will issue the
underlying security, whereas options are not issued by the company. Young,
unseasoned companies often issue warrants to finance their
operations.
Futures
Contracts.
A
futures contract is a standardized agreement to buy or sell a specified amount
of a specified security, currency,
commodity, interest rate or index (or deliver a cash settlement price, in the
case of certain futures such as an index future, interest rate future or
volatility future) for a specified price at a designated future date, time and
place. A “sale” of a futures contract means the acquisition of a contractual
obligation to deliver the underlying instrument or asset called for by the
contract at a specified price on a specified date. A “purchase” of a futures
contract means the acquisition of a contractual obligation to acquire the
underlying instrument or asset called for by the contract at a specified price
on a specified date. Futures contracts are generally bought and sold on futures
exchanges referred to as designated contract markets and are held through a
broker, known as a futures commission merchant (FCM), that is a member of the
designated contract market and its related clearinghouse. The designated
contract market sets the specifications of the relevant futures contract,
including the date, time and place of delivery or settlement of the contract and
the quantity of the underlying instrument or asset per contract.
The
Fund will only enter into futures contracts that are traded (either domestically
or internationally) on futures exchanges
or certain exempt markets including exempt boards of trade and electronic
trading facilities; and are standardized as to maturity date and underlying
instrument or asset. Futures exchanges and trading thereon in the United States
are regulated under the CEA by the CFTC. Foreign futures exchanges or exempt
markets and trading thereon are not regulated by the CFTC and may not be subject
to the same regulatory controls. In addition, futures contracts that are traded
on non-U.S. exchanges or exempt markets
56
may
not be as liquid as those purchased on CFTC-designated contract markets. For a
further discussion of the risks
associated with investments in foreign securities, see “Foreign Investments”
above.
Brokerage
fees are incurred when a futures contract is bought or sold, and margin deposits
must be maintained at all
times when a futures contract is outstanding. “Margin” for a futures contract is
the amount of funds that must be deposited by a Fund with the applicable FCM in
order to initiate trading in the futures contract and maintain its open
positions in futures contract. A margin deposit made when the futures contract
is entered (initial margin) is intended to ensure the Fund’s performance under
the futures contract. The initial margin required for a particular futures
contract is set by the exchange on which the futures contract is traded and may
be significantly modified from time to time by the exchange or the FCM during
the term of the futures contract.
Subsequent
payments, called “variation margin,” received from or paid to the FCM through
which a Fund holds the futures
contract will be made on a daily basis as the futures contract price fluctuates
making the futures contract more or less valuable, a process known as
marking-to-market. When the futures contract is closed out, if the Fund has a
loss equal to or greater than the margin amount, the margin amount is paid to
the FCM along with any loss in excess of the margin amount. If the Fund has a
loss of less than the margin amount, the excess margin is returned to the Fund.
If the Fund has a gain, the full margin amount and the amount of the gain are
paid to the Fund and the FCM pays the Fund any excess gain over the margin
amount.
There
is a risk of loss by a Fund of the initial and variation margin deposits in the
event of bankruptcy or insolvency of the
FCM with which the Fund has an open position in a futures contract. The assets
of a Fund may not be fully protected in the event of the bankruptcy or
insolvency of the FCM or clearinghouse because the Fund might be limited to
recovering only a pro rata share of all available funds and margin segregated on
behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a
Fund is also subject to the risk that the FCM could use the Fund’s assets, which
are held in an omnibus account with assets belonging to the FCM’s other
customers, to satisfy its own financial obligations or the payment obligations
of another customer to the clearinghouse.
Closing
out an open futures contract is effected by entering into an offsetting futures
contract for the same aggregate amount of
the identical underlying instrument or asset and the same delivery or settlement
date. There can be no assurance, however, that a Fund will be able to enter into
an offsetting contract with respect to a particular futures contract at a
particular time. If a Fund is not able to enter into an offsetting contract, it
will continue to be required to maintain the margin deposits on the futures
contract.
In
addition, if a Fund were unable to liquidate a futures contract or an option on
a futures contract position due to the absence
of a liquid secondary market or the imposition of price limits, it could incur
substantial losses. The Fund would continue to be subject to market risk with
respect to the position. In addition, except in the case of purchased options,
the Fund would continue to be required to make daily variation margin
payments.
Types
of Futures Contracts:
Commodity
Futures: A commodity
futures contract is an exchange-traded contract to buy or sell a particular
commodity at a specified price at some time in the future. Commodity futures
contracts are highly volatile; therefore, the prices of a Fund’s shares may be
subject to greater volatility to the extent it invests in commodity
futures.
Currency
Futures: A currency futures
contract is a standardized, exchange-traded contract to buy or sell a particular
currency at a specified price at a future date (commonly three months or more).
Currency futures contracts may be highly volatile and thus result in substantial
gains or losses to the Fund.
A
Fund may either exchange the currencies specified at the maturity of a currency
futures contract or, prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. A Fund may also enter into currency futures contracts that do not
provide for physical settlement of the two currencies but instead are settled by
a single cash payment calculated as the difference between the agreed
57
upon
exchange rate and the spot rate at settlement based upon an agreed upon notional
amount. Closing transactions with
respect to currency futures contracts are usually effected with the counterparty
to the original currency futures contract.
Index
Futures: An index futures
contract is an exchange-traded contract that provides for the delivery, at a
designated date, time and place, of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of
trading on the date specified in the contract and the price agreed upon in the
futures contract; no physical delivery of securities comprising the index is
made. Index futures can be based on stock, bond or other indices. Such indices
cannot be purchased or sold directly.
Interest
Rate Futures: An interest rate
futures contract is an exchange-traded contract in which the specified
underlying security is either an interest-bearing fixed income security or an
inter-bank deposit. One example of common interest rate futures contracts are
U.S. Treasury futures. The specified security for U.S. Treasury futures is a
U.S. Treasury security.
Dividend
Futures: A dividend futures
contract is an exchange-traded contract to purchase or sell an amount equal to
the total dividends paid by a selected security, basket of securities or index,
over a period of time for a specified price that is based on the expected
dividend payments from the selected security, basket of securities or
index.
Security
Futures: A security futures
contract is an exchange-traded contract to purchase or sell, in the future, a
specified quantity of a security (other than a Treasury security), or a
narrow-based securities index at a certain price.
Options
on Futures Contracts. Options on futures
contracts are similar to options on securities or currencies except that options
on futures contracts give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put) at a specified exercise
price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures contract position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer’s futures contract margin account.
Forward
Foreign Currency Contracts.
A
forward foreign currency contract is an obligation to buy or sell a particular
currency in exchange for another currency,
which may be U.S. dollars, at a specified exchange rate on a future date.
Forward foreign currency contracts are typically individually negotiated and
privately traded by currency traders and their customers in the interbank
market. A Fund may enter into forward foreign currency contracts with respect to
a specific purchase or sale of a security, or with respect to its portfolio
positions generally.
At
the maturity of a forward foreign currency contract, a Fund may either exchange
the currencies specified at the
maturity of the contract or, prior to maturity, a Fund may enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward foreign currency contracts may or may not
be effected with the counterparty to the original forward contract. A Fund may
also enter into forward foreign currency contracts that do not provide for
physical exchange of the two currencies on the settlement date but instead
provide for settlement by a single cash payment calculated as the difference
between the agreed upon exchange rate and the spot rate at settlement based upon
an agreed upon notional amount (non-deliverable forwards).
Under
definitions adopted by the CFTC and SEC, non-deliverable forwards are considered
swaps, and therefore are
included in the definition of “commodity interests.” Although non-deliverable
forwards have historically been traded in the OTC market, as swaps they may in
the future be required to be centrally cleared and traded on public execution
facilities. For more information on central clearing and trading of cleared
swaps, see “Swaps” and “Special Regulatory Risks of Derivatives.” Forward
foreign currency contracts that qualify as deliverable forwards are not
regulated as swaps for most purposes, and are not included in the definition of
“commodity interests.” However these forwards are subject to some requirements
applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap
dealers. CFTC regulation of forward foreign currency contracts, especially
58
non-deliverable
forwards, may restrict a Fund’s ability to use these instruments in the manner
described above or subject
Invesco to CFTC registration and regulation as a CPO.
The
cost to a Fund of engaging in forward foreign currency contracts varies with
factors such as the currencies
involved, the length of the contract period, differences in prevailing interest
rates in the jurisdictions associated with the two currencies and the prevailing
market conditions. Because forward foreign currency contracts are usually
entered into on a principal basis, no fees or commissions are typically
involved. The use of forward foreign currency contracts for hedging does not
eliminate fluctuations in the prices of the underlying securities a Fund owns or
intends to acquire, but it does establish a rate of exchange in advance. While
forward foreign currency contract sales limit the risk of loss due to a decline
in the value of the hedged currencies, they also limit any potential gain that
might result should the value of the currencies increase.
LIBOR
Transition Risk
A
Fund may have investments in financial instruments that are exposed to the
London Interbank Offered Rate (LIBOR) as the
reference or benchmark rate for variable interest rate calculations (including
variable or floating rate debt securities or loans and derivatives such as
interest rate futures or swaps). LIBOR was intended to measure the rate
generally at which banks can lend and borrow from one another in the relevant
currency on an unsecured basis. LIBOR was a common benchmark interest rate index
used to make adjustments to variable-rate debt instruments, to determine
interest rates for a variety of financial instruments and borrowing arrangements
and as a reference rate in derivative contracts.
In
the years following the 2008 financial crisis, the integrity of LIBOR was
increasingly questioned because several
banks contributing to its calculation were accused of rate manipulation and
because of a general contraction in the unsecured interbank lending market. As a
result, regulators and financial industry working groups in several
jurisdictions have worked over the past several years to identify alternative
reference rates (ARRs) to replace LIBOR and to assist with the transition to the
new ARRs. The industry working group in the United States, the Alternative
Reference Rate Committee, has recommended adoption of the Secured Overnight
Financing Rate (SOFR) as a replacement for USD LIBOR. SOFR is a broad measure of
the cost of overnight borrowing of cash through repurchase agreements
collateralized by U.S. Treasury securities.
In
connection with the LIBOR transition, on March 5, 2021 the UK Financial Conduct
Authority (FCA), the regulator that
oversees LIBOR, announced that the majority of LIBOR rates would cease to be
published or would no longer be representative on January 1, 2022. Specifically,
the publication of all settings of British Pound Sterling, Swiss Franc, Euro and
Japanese Yen LIBOR, as well as the 1-week and 2-month settings of U.S. Dollar
(USD) LIBOR were phased out at the end of 2021. The remaining settings of USD
LIBOR, which are the most widely used in financial markets, ceased to be
published after June 30, 2023. Key regulators had previously instructed banking
institutions to cease entering into new contracts that reference these remaining
USD LIBOR settings after December 31, 2021, subject to certain limited
exceptions. The FCA will permit the use of synthetic U.S. dollar LIBOR rates for
non-U.S. contracts for a limited period of time after June 30, 2023, but any
such rates would be considered non-representative of the underlying
market.
While
the transition process away from LIBOR has become increasingly well-defined,
there remains uncertainty and
risks relating to converting certain longer-term securities and transactions to
a new ARR. For example, there can be no assurance that the composition or
characteristics of any ARRs or financial instruments in which a Fund invests
that utilize ARRs will be similar to or produce the same value or economic
equivalence as LIBOR or that these instruments will have the same volume or
liquidity. Additionally, although regulators have generally prohibited banking
institutions from entering into new contracts that reference those USD LIBOR
settings that continue to exist, there remains uncertainty and risks relating to
certain “legacy” USD LIBOR instruments that were issued or entered into before
December 31, 2021 and the process by which a replacement interest rate will be
identified and implemented into these instruments when USD LIBOR is ultimately
discontinued. While some “legacy” USD LIBOR instruments may contemplate a
scenario where LIBOR is no longer available by providing for an alternative or
“fallback” rate-setting methodology, there may be significant uncertainty
regarding the effectiveness of such alternative or “fallback”
59
methodologies
to replicate USD LIBOR; other “legacy” USD LIBOR instruments may not include
such “fallback”
rate-setting provisions at all. While it is expected that the market
participants will amend legacy financial instruments referencing LIBOR to
include such fallback provisions to ARRs, there remains uncertainty regarding
the willingness and ability of parties to add or amend such fallback provisions
in legacy instruments. On December 16, 2022, the Federal Reserve Board adopted
regulations implementing the Adjustable Interest Rate Act. The regulations
provide a statutory fallback mechanism to replace LIBOR, by identifying
benchmark rates based on SOFR that will replace LIBOR in certain financial
contracts after June 30, 2023. These regulations apply only to contracts
governed by U.S. law, among other limitations. The regulations include
provisions that (i) provide a safe harbor for selection or use of a replacement
benchmark rate selected by the Federal Reserve Board; (ii) clarify who may
choose the replacement benchmark rate selected by the Federal Reserve Board; and
(iii) ensure that contracts adopting a replacement benchmark rate selected by
the Federal Reserve Board will not be interrupted or terminated following the
replacement of LIBOR; however there remains significant uncertainty regarding
the effectiveness of such legislation. The Funds may have instruments linked to
other interbank offered rates that may also cease to be published in the future.
All of the foregoing may adversely affect a Fund’s performance or
NAV.
Commodity
Exchange Act (CEA) Regulation and Exclusions:
With
respect to the Funds, Invesco has claimed an exclusion from the definition of
“commodity pool operator” (CPO)
under the CEA and the rules of the Commodity Futures Trading Commission (CFTC)
and, therefore, is not subject to CFTC registration or regulation as a CPO. In
addition, Invesco is relying upon a related exclusion from the definition of
“commodity trading advisor” (CTA) under the CEA and the rules of the CFTC with
respect to the Funds.
The
terms of the CPO exclusion require the Funds, among other things, to adhere to
certain limits on its investments in
“commodity interests.” Commodity interests include commodity futures, commodity
options and swaps, which in turn include non-deliverable forwards, as further
described below. Because Invesco and the Funds intend to comply with the terms
of the CPO exclusion, the Funds may, in the future, need to adjust their
investment strategies, consistent with its investment objective, to limit its
investments in these types of instruments. The Funds are not intended as
vehicles for trading in the commodity futures, commodity options or swaps
markets. The CFTC has neither reviewed nor approved Invesco’s reliance on these
exclusions, or the Funds, their investment strategies or this SAI.
Generally,
the exclusion from CPO regulation on which Invesco relies requires the Funds to
meet one of the following tests
for their commodity interest positions, other than positions entered into for
bona fide hedging purposes (as defined in the rules of the CFTC): either (1) the
aggregate initial margin and premiums required to establish the Fund’s positions
in commodity interests may not exceed 5% of the liquidation value of the Fund’s
portfolio (after taking into account unrealized profits and unrealized losses on
any such positions); or (2) the aggregate net notional value of the Fund’s
commodity interest positions, determined at the time the most recent such
position was established, may not exceed 100% of the liquidation value of the
Fund’s portfolio (after taking into account unrealized profits and unrealized
losses on any such positions). In addition to meeting one of these trading
limitations, each Fund may not market itself as a commodity pool or otherwise as
a vehicle for trading in the commodity futures, commodity options or swaps
markets. If, in the future, a Fund can no longer satisfy these requirements,
Invesco would withdraw its notice claiming an exclusion from the definition of a
CPO, and Invesco would be subject to registration and regulation as a CPO with
respect to the Fund, in accordance with the CFTC rules that allow for
substituted compliance with CFTC disclosure and shareholder reporting
requirements based on Invesco’s compliance with comparable SEC requirements.
However, as a result of CFTC regulation with respect to the Fund, a Fund may
incur additional compliance and other expenses.
Environmental,
Social and Governance (ESG) Considerations
The
ESG considerations described herein may not be used consistently by the Funds
and will vary in accordance with
what a Fund’s investment team deems relevant when making investment decisions
and assessing an issuer's efforts to identify and potentially mitigate
ESG-related risks. The ESG considerations
60
described
herein may not be applied or evaluated with respect to each issuer or Fund
investment. Further, a Fund’s prospectus
may describe additional ESG strategies and risks.
ESG
considerations, either quantitative or qualitative, may be utilized as a
component of a Fund's investment process
to implement its investment strategy in pursuit of its investment
objective. ESG factors may be incorporated to evaluate an issuer, as part
of risk analysis, credit analysis or in other manners. ESG factors may vary
across types of investments and issuers, and not every ESG factor may be
identified or evaluated. The incorporation of ESG factors may affect a Fund’s
exposure to certain issuers or industries and may not work as intended. A Fund
may underperform other funds that do not assess an issuer’s ESG factors as part
of the investment process or that use a different methodology to identify and/or
incorporate ESG factors. Because ESG considerations may be used as one part of
an overall investment process, a Fund may still invest in securities of issuers
that are not considered ESG-focused or that may be viewed as having a high ESG
risk profile. As investors can differ in their views regarding ESG factors, a
Fund may invest in issuers that do not reflect the views with respect to ESG of
any particular investor. Information used by a Fund to evaluate such factors,
including information from reliance on third-party research and/or proprietary
research, may not be readily available, complete or accurate, and may vary
across providers and issuers as ESG is not a uniformly defined characteristic,
which could negatively impact a Fund’s ability to accurately assess an issuer,
which could negatively impact a Fund’s performance. There is no guarantee that
the evaluation of ESG considerations will be additive to a Fund’s
performance.
Receipt
of Issuer’s Nonpublic Information
The
Adviser or Sub-Advisers (through their portfolio managers, analysts, or other
representatives) may receive material
nonpublic information about an issuer that may restrict the ability of the
Adviser or Sub-Advisers to cause the Funds to buy or sell securities of the
issuer on behalf of the Funds for substantial periods of time. This may impact
the Funds' ability to realize profit or avoid loss with respect to the issuer
and may adversely affect the Funds' flexibility with respect to buying or
selling securities, potentially impacting Fund performance. For example,
activist investors of certain issuers in which the Adviser or Sub-Advisers hold
large positions may contact representatives of the Adviser or Sub-Advisers and
may disclose material nonpublic information in such communication. The Adviser
or Sub-Advisers would be restricted from trading on the basis of such material
nonpublic information, limiting their flexibility in managing the Funds and
possibly impacting Fund performance.
Business
Continuity and Operational Risk
The
Adviser, the Funds and the Funds’ service providers may experience disruptions
or operating errors, such as processing
errors or human errors, inadequate or failed internal or external processes,
systems or technology failures, or other disruptive events, that could
negatively impact and cause disruptions in normal business operations of the
Adviser, the Funds or the Funds’ service providers. The Adviser has developed a
Business Continuity Program (the “Program”) designed to minimize the disruption
of normal business operations in the event of an adverse incident affecting the
Funds, the Adviser and/or its affiliates. The Program is also designed to enable
the Adviser to reestablish normal business operations in a timely manner during
such an adverse incident; however, there are inherent limitations in such
programs (including the possibility that contingencies have not been anticipated
and procedures do not work as intended) and, under some circumstances (e.g.
natural disasters, terrorism, public health crises, power or utility shortages
and failures, system failures or malfunctions), the Adviser, its affiliates, and
any service providers or vendors used by the Adviser, its affiliates, or the
Fund could be prevented or hindered from providing services to the Funds for
extended periods of time. These circumstances could cause disruptions and
negatively impact the Funds’ service providers and the Funds’ business
operations, potentially including an inability to process Fund shareholder
transactions, an inability to calculate a Fund’s net asset value and price the
Fund’s investments, and impediments to trading portfolio
securities.
Cybersecurity
Risk
With
the increased use of technologies such as the Internet to conduct business, the
Funds, like all companies, may be
susceptible to operational, information security and related risks.
Cybersecurity incidents
61
involving
the Funds and their service providers (including, without limitation, a Fund’s
investment adviser, sub-adviser, fund
accountant, custodian, transfer agent and financial intermediaries) have the
ability to cause disruptions and impact business operations, potentially
resulting in financial losses, impediments to trading, the inability of Fund
shareholders to transact business, violations of applicable privacy and other
laws, regulatory fines, penalties, reputational damage, reimbursement or other
compensation costs, and/or additional compliance costs.
Cybersecurity
incidents can result from deliberate cyberattacks or unintentional events and
may arise from external or
internal sources. Cyberattacks may include infection by malicious software or
gaining unauthorized access to digital systems, networks or devices that are
used to service the Funds' operations (e.g., by “hacking” or “phishing”).
Cyberattacks may also be carried out in a manner that does not require gaining
unauthorized access, such as causing denial-of-service attacks on websites
(i.e., efforts to make network services unavailable to intended users). These
cyberattacks could cause the misappropriation of assets or personal information,
corruption of data or operational disruptions. Geopolitical tensions may, from
time to time, increase the scale and sophistication of deliberate
cyberattacks.
Similar
adverse consequences could result from cybersecurity incidents affecting issuers
of securities in which the Funds
invest, counterparties with which the Funds engage, governmental and other
regulatory authorities, exchange and other financial market operators, banks,
brokers, dealers, insurance companies, other financial institutions and other
parties. In addition, substantial costs may be incurred in order to prevent any
cybersecurity incidents in the future. Although the Funds’ service providers may
have established business continuity plans and risk management systems to
mitigate cybersecurity risks, there can be no guarantee or assurance that such
plans or systems will be effective, or that all risks that exist, or may develop
in the future, have been completely anticipated and identified or can be
protected against. The Funds and their shareholders could be negatively impacted
as a result.
Natural
Disaster/Epidemic Risk
Natural
or environmental disasters such as
earthquakes, wildfires, floods, hurricanes, tsunamis,
other
severe weather-related phenomena, and widespread disease including pandemics and
epidemics, can be highly disruptive to economies and markets, sometimes severely
so, and can adversely impact individual companies, sectors, industries, markets,
currencies, interest and inflation rates, credit ratings, investor sentiment,
and other factors affecting the value of the Funds’ investments. Given the
increasing interdependence among global economies and markets, conditions in one
country, market, or region are increasingly likely to adversely affect markets,
issuers, and/or foreign exchange rates in other countries, including the U.S.
These disruptions could prevent the Funds from executing advantageous investment
decisions in a timely manner and negatively impact the Funds’ ability to achieve
their investment objectives. Any such event(s) could have a significant adverse
impact on the value and risk profile of the Funds.
The
recent spread of the human coronavirus disease 2019 (COVID-19) is an
example. In the first quarter of 2020, the World Health Organization (WHO)
recognized COVID-19 as a global pandemic and both the WHO and the U.S. declared
the outbreak a public health emergency. The subsequent spread of COVID-19
resulted in,
among
other significant adverse economic impacts, instances of market closures and
dislocations, extreme volatility, liquidity constraints and increased trading
costs. Efforts to contain the spread of COVID-19 resulted in travel
restrictions, closed international borders, disruptions of healthcare systems,
business operations (including business closures) and supply chains, employee
layoffs and general lack of employee availability, lower consumer demand, and
defaults and credit downgrades, all of which contributed to disruption of global
economic activity across many industries and exacerbated other pre-existing
political, social and economic risks
domestically and
globally.
Although the WHO
and the U.S.
ended
their declarations
of
COVID-19 as a global health emergency in
May
2023, the full economic impact at the macro-level and on individual
businesses,
as
well as the potential for a future reoccurrence of COVID or the occurrence of a
similar epidemic or pandemic, are unpredictable and could result in significant
and prolonged adverse impact on economies and financial markets in specific
countries and worldwide and thereby negatively affect a Fund’s
performance.
62
Custody
and Banking Risks
The
Fund’s assets may be maintained with one or more banks or other depository
institutions (“banking institutions”),
including both US and non-US banking institutions. In addition, the Fund’s
assets may be maintained at regional (or mid-size) banking institutions or large
banking institutions. Regional banking institutions are generally subject to
fewer regulatory safeguards than large banking institutions, causing regional
banking institutions to be perceived as having greater credit risk than large
banking institutions. The Fund may enter into credit facilities or have other
financial relationships with banking institutions. The distress, impairment or
failure of one or more banking institutions, whether or not holding the Fund’s
assets, may inhibit the ability of the Fund to access depository accounts or
lines of credit at all or in a timely manner. Such events can be caused by
various factors including negative market sentiment, significant withdrawals,
fraud, or poor management. In such cases, the Fund may need to delay or forgo
making new investments, or the Fund may need to sell another investment to raise
cash when it is not desirable to do so, which could result in lower performance.
In the event of such a failure of a banking institution, access to such accounts
could be restricted and U.S. Federal Deposit Insurance Corporation (FDIC)
protection may not be available for balances in excess of the amounts insured by
the FDIC (and similar considerations may apply to banking institutions in other
jurisdictions not subject to FDIC protection). In such instances, the Fund may
not recover such excess uninsured amounts and instead would only have an
unsecured claim against the banking institution and may be able to recover only
the residual value of the banking institution’s assets, if any value is
recovered at all. The loss of any assets maintained with a banking institution
or the inability to access such assets for a period of time, even if ultimately
recovered, could be materially adverse to the Fund. In addition, the Fund’s
Adviser may not be able to identify all potential solvency or stress concerns
with respect to a banking institution or transfer assets from one bank to
another in a timely manner in the event a banking institution comes under stress
or fails. It is also possible that a Fund will incur additional expenses or
delays in putting in place alternative arrangements or that such alternative
arrangements will be less favorable than those formerly in place (with respect
to access to capital, economic terms, or otherwise).
Litigation
Risk
From
time to time, a Fund may pursue
or be involved as a named party in litigation arising in connection with its
role or status as a shareholder, bondholder, lender or holder of portfolio
investments, its own activities, or other circumstances. Litigation that affects
a Fund’s portfolio investments may result in the reduced value of such
investments or higher portfolio turnover if the Fund determines to sell such
investments. Litigation could result in significant expenses, reputational
damage, increased insurance premiums, adverse judgment liabilities, settlement
liabilities, injunctions, diversions of Fund resources, disruptions to Fund
operations and/or other similar adverse consequences, any of which may increase
the expenses incurred by a Fund or adversely affect the value of the Fund’s
shares.
Fund
Policies
Fundamental
Restrictions. Except as
otherwise noted below, each Fund is subject to the following investment
restrictions, which may be changed only by a vote of such Fund’s outstanding
shares. Fundamental restrictions may be changed only by a vote of the lesser of
(i) 67% or more of the Fund’s shares present at a meeting if the holders of more
than 50% of the outstanding shares are present in person or represented by
proxy, or (ii) more than 50% of the Fund’s outstanding shares.
(1) Invesco
SteelPath MLP Select 40 Fund is a “diversified company” as defined in the 1940
Act. The Fund will not purchase the securities of any issuer if, as a result,
the Fund would fail to be a diversified company within the meaning of the 1940
Act, and the rules and regulations promulgated thereunder, as such statute,
rules and regulations are amended from time to time or are interpreted from time
to time by the SEC staff (collectively, the 1940 Act Laws and Interpretations)
or except to the extent that the Fund may be permitted to do so by exemptive
order or similar relief (collectively, with the 1940 Act Laws and
Interpretations, the 1940 Act Laws, Interpretations and Exemptions). In
complying with this restriction, however, the Fund may purchase securities of
other investment companies to the extent permitted by the 1940 Act Laws,
Interpretations and Exemptions.
63
(2) The Fund may
not borrow money or issue senior securities, except as permitted by the 1940 Act
Laws, Interpretations and Exemptions.
(3) The Fund may
not underwrite the securities of other issuers. This restriction does not
prevent the Fund from engaging in transactions involving the acquisition,
disposition or resale of its portfolio securities, regardless of whether the
Fund may be considered to be an underwriter under the 1933 Act.
(4) The Fund will
concentrate (as that term may be defined or interpreted by the 1940 Act Laws,
Interpretations and Exemptions) its investments in the instruments of the group
of industries that comprise the energy sector.
(5) The Fund may
not purchase real estate or sell real estate unless acquired as a result of
ownership of securities or other instruments. This restriction does not prevent
the Fund from investing in issuers that invest, deal, or otherwise engage in
transactions in real estate or interests therein, or investing in securities
that are secured by real estate or interests therein.
(6) The Fund may
not purchase or sell physical commodities except to the extent permitted by the
1940 Act and any other governing statute, and by the rules thereunder, and by
the SEC or other regulatory agency with authority over the Fund.
(7) The Fund may
not make personal loans or loans of its assets to persons who control or are
under common control with the Fund, except to the extent permitted by 1940 Act
Laws, Interpretations and Exemptions. This restriction does not prevent the Fund
from, among other things, purchasing debt obligations, entering into repurchase
agreements, loaning its assets to broker-dealers or institutional investors, or
investing in loans, including assignments and participation
interests.
(8) The Fund may,
notwithstanding any other fundamental investment policy or limitation, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Fund.
The
investment restrictions set forth above provide each of the Funds with the
ability to operate under new interpretations
of the 1940 Act or pursuant to exemptive relief from the SEC without receiving
prior shareholder approval of the change. Even though each of the Funds has this
flexibility, the Board has adopted non-fundamental restrictions for each of the
Funds relating to certain of these restrictions which Invesco and, when
applicable, the Sub-Advisers must follow in managing the Funds. Any changes to
these non-fundamental restrictions, which are set forth below, require the
approval of the Board.
Explanatory
Note
For
purposes of the Fund’s fundamental restriction related to industry concentration
above, investments in tax-exempt
municipal securities where the payment of principal and interest for such
securities is derived solely from a specific project associated with an issuer
that is not a governmental entity or a political subdivision of a government are
subject to a Fund’s industry concentration policy.
For
purposes of the Fund’s fundamental restriction related to physical commodities
above, the Fund is currently permitted
to invest in futures, swaps and other instruments on physical commodities and
the 1940 Act does not prohibit a fund from owning commodities or contracts
related to commodities. The extent to which the Fund can invest in futures,
swaps and other instruments on physical commodities, and/or commodities or
contracts related to commodities, is set out in the Fund’s prospectus, this SAI,
and as permitted by the Fund’s fundamental restriction.
For
purposes of the Fund’s fundamental restriction related to real estate above, the
1940 Act does not prohibit a fund
from owning real estate. The extent to which the Fund can invest in real estate
is set out in the investment strategies described in the Fund’s prospectus or
this SAI.
For
purposes of the Fund’s fundamental restriction related to senior securities
above, the 1940 Act prohibits a fund
from issuing a “senior security,” which is generally defined as any bond,
debenture, note, or similar obligation or instrument constituting a security and
evidencing indebtedness, or any stock of a class
64
having
priority over any other class of the fund’s shares with respect to the payment
of dividends or the distribution of
fund assets, except that the fund may borrow money as described
above.
For
purposes of the Fund’s fundamental restriction related to loans above made by
the Fund, current SEC staff
interpretations under the 1940 Act prohibit a fund from lending more than
one-third of its total assets, except through the purchase of debt obligations
or the use of repurchase agreements.
Non-Fundamental
Restrictions. Non-fundamental
restrictions may be changed for any Fund without shareholder approval. The
non-fundamental investment restrictions listed below apply to each of the Funds
unless otherwise indicated.
(1) In complying
with the fundamental restriction regarding issuer diversification, Invesco
SteelPath MLP Select 40 Fund will not, with respect to 75% of its total assets,
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities
and securities issued by other investment companies), if, as a result, (i) more
than 5% of the Fund’s total assets would be invested in the securities of that
issuer, or (ii) the Fund would hold more than 10% of the outstanding voting
securities of that issuer. The Fund may purchase securities of other investment
companies as permitted by the 1940 Act Laws, Interpretations and
Exemptions.
In complying with
the fundamental restriction regarding issuer diversification, any Fund that
invests in municipal securities will regard each state (including the District
of Columbia and Puerto Rico), territory and possession of the United States,
each political subdivision, agency, instrumentality and authority thereof, and
each multi-state agency of which a state is a member as a separate “issuer.”
When the assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from the government creating the subdivision
and the security is backed only by assets and revenues of the subdivision, such
subdivision would be deemed to be the sole issuer. Similarly, in the case of an
Industrial Development Bond or Private Activity Bond, if that bond is backed
only by the assets and revenues of the non-governmental user, then that
non-governmental user would be deemed to be the sole issuer. However, if the
creating government or another entity guarantees a security, then to the extent
that the value of all securities issued or guaranteed by that government or
entity and owned by the Fund exceeds 10% of the Fund’s total assets, the
guarantee would be considered a separate security and would be treated as issued
by that government or entity. Securities issued or guaranteed by a bank or
subject to financial guaranty insurance are not subject to the limitations set
forth in the preceding sentence.
(2) In complying
with the fundamental restriction regarding borrowing money and issuing senior
securities, the Fund may borrow money in an amount not exceeding 33 1/3% of its
total assets (including the amount borrowed) less liabilities (other than
borrowings).
(3) In complying
with the fundamental restriction with regard to making loans, each Fund may lend
up to 33 1/3% of its total assets and may lend money to an Invesco Fund, on such
terms and conditions as the SEC may require in an exemptive order.
(4) Notwithstanding
the fundamental restriction with regard to investing all assets in an open-end
fund, each Fund may not invest all of its assets in the securities of a single
open-end management investment company with the same fundamental investment
objective, policies, and restrictions as the Fund.
(5) The Fund may
not acquire any securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
(6) Each Fund
invests, under normal circumstances, at least 80% of its assets in MLP
investments of issuers that are engaged in the transportation, storage,
processing, refining, marketing, exploration, production, and mining of minerals
and natural resources.
For
purposes of the foregoing, “assets” means net assets, plus the amount of any
borrowings for investment
purposes. Derivatives and other instruments that have economic characteristics
similar to the securities described above for a Fund may also be counted towards
that Fund’s 80% policy. The Fund will
65
provide
written notice to its shareholders prior to any change to this policy, as
required by the 1940 Act Laws, Interpretations and
Exemptions.
It
is the intention of each Fund, unless otherwise indicated, that with respect to
the Fund’s policies that are a result of
application of law, the Fund will take advantage of the flexibility provided by
rules or interpretations of the SEC currently in existence or promulgated in the
future, or changes to such laws.
Portfolio
Turnover
Each
Fund calculates its portfolio turnover rate by dividing the value of the lesser
of purchases or sales of portfolio
securities for the fiscal period by the monthly average of the value of
portfolio securities owned by the Fund during the fiscal period. A 100%
portfolio turnover rate would occur, for example, if all of the portfolio
securities (other than short-term securities) were replaced once during the
fiscal period. Portfolio turnover rates will vary from year to year, depending
on market conditions.
Policies
and Procedures for Disclosure of Fund Holdings
The
Board has adopted policies and procedures with respect to the disclosure of the
Funds' portfolio holdings (the
Holdings Disclosure Policy). Invesco and the Board may amend the Holdings
Disclosure Policy at any time without prior notice. Details of the Holdings
Disclosure Policy and a description of the basis on which employees of Invesco
and its affiliates may release information about portfolio securities in certain
contexts are provided below. As used in the Holdings Disclosure Policy and
throughout the SAI, the term “portfolio holdings information” includes
information with respect to the portfolio holdings of a Fund, including holdings
that are derivatives and holdings held as short positions. Information generally
excluded from “portfolio holdings information” includes, without limitation, (i)
descriptions of allocations among asset classes, regions, countries, industries
or sectors; (ii) aggregated data such as average or median ratios, market
capitalization, credit quality or duration; (iii) performance attributions by
asset class, country, industry or sector; (iv) aggregated risk statistics,
analysis and simulations, such as stress testing; (v) the characteristics of the
stock and bond components of a Fund’s portfolio holdings and other investment
positions; (vi) the volatility characteristics of a Fund; (vii) information on
how various weightings and factors contributed to Fund performance; (viii)
various financial characteristics of a Fund or its underlying portfolio
investments; and (ix) other information where, in the reasonable belief of the
Funds' Chief Compliance Officer (or a designee), the release of such information
would not present risks of dilution, arbitrage, market timing, insider trading
or other inappropriate trading for the applicable Fund.
Public
release of portfolio holdings. The Adviser has
determined that disclosure of portfolio holdings information on a monthly basis
without a sufficient lag would be detrimental to the Funds and their
shareholders.
The
Funds ("Exception Funds") disclose portfolio holdings on the schedule shown
below. (The Funds in this SAI are considered to be Exception Funds.)
The
Exception Funds disclose the following portfolio holdings information at
www.invesco.com/us.1
|
Information |
Approximate
Date of Website Posting |
Information
Remains Posted
on
Website |
|
Select
portfolio holdings information,
such
as top ten holdings as of the
month-end |
15
calendar days after month-end |
Until
replaced with the
following
month’s top ten
holdings |
|
|
|
|
|
Select
portfolio holdings information
(e.g.,
buys/sells,
contributors/detractors
and/or
relevant
to market environment) |
15
calendar days after month-end |
Until
replaced with the
following
quarter’s select
portfolio
holdings
information |
|
|
|
|
|
Complete
portfolio holdings
information
as of calendar quarter-
end |
30
calendar days after calendar quarter-end |
For twelve
months from
the date of
posting |
|
|
|
|
66
|
Information |
Approximate
Date of Website Posting |
Information
Remains Posted
on
Website |
|
Complete
portfolio holdings
information
as of fiscal quarter-end |
60-70
calendar days after fiscal quarter-end |
For twelve
months from
the date of
posting |
|
|
|
|
1
To locate
each Fund’s portfolio holdings information, go to www.invesco.com/us, select
“Financial Professional” or “Individual Investor,” if applicable. Hover over the
“Products” tab and then click on “Mutual Funds.” On the “Mutual Funds” page
click on “Fund Materials.” Links to each Fund’s portfolio holdings are located
under the “Holdings” column.
You
may also obtain the publicly available portfolio holdings information described
above by contacting us at
1-800-959-4246.
Notwithstanding
the other provisions of the Holdings Disclosure Policy, Invesco and its
affiliates may disclose portfolio
holdings information on its website earlier than dictated by the Holdings
Disclosure Policy in the case of market, geopolitical or company-specific (or
other) events that cause Invesco to conclude that posting such information on
its website is consistent with its fiduciary duties to the
Funds.
Selective
disclosure of portfolio holdings information pursuant to Non-Disclosure
Agreement.
Employees of
Invesco and its affiliates may disclose non-public full portfolio holdings
information on a selective basis only if Invesco approves the parties to whom
disclosure of non-public full portfolio holdings information will be made.
Invesco must determine that the proposed selective disclosure will be made for
business purposes of the applicable Fund and is in the best interest of the
applicable Fund’s shareholders. In making such determination, Invesco will
address any perceived conflicts of interest between shareholders of such Fund
and Invesco or its affiliates as part of granting its approval.
The
Board exercises continuing oversight of the disclosure of Fund portfolio
holdings information by (1) overseeing the
implementation and enforcement of the Holdings Disclosure Policy and the Invesco
Funds’ Code of Ethics by the Chief Compliance Officer (or his designee) of
Invesco and the Invesco Funds and (2) considering reports and recommendations by
the Chief Compliance Officer concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment
Advisers Act of 1940, as amended (the Advisers Act)) that may arise in
connection with the Holdings Disclosure Policy. Pursuant to the Holdings
Disclosure Policy, the Board receives reports on the specific types of
situations in which Invesco proposes to provide such selective disclosure and
the situations where providing selective disclosure raises perceived conflicts
of interest between shareholders of the applicable Fund and Invesco or its
affiliates. In any specific situation where Invesco addresses a perceived
conflict, Invesco will report to the Board on the persons to whom such
disclosures are to be made and the treatment of any such conflicts before
agreeing to provide selective disclosure.
Invesco
discloses non-public full portfolio holdings information to the following
persons in connection with the day-to-day
operations and management of the funds advised by Invesco (the Invesco
Funds):
•
Attorneys and
accountants;
•
Securities lending
agents;
•
Lenders to the
Invesco Funds;
•
Rating and rankings
agencies;
•
Persons assisting
in the voting of proxies;
•
Invesco Funds’
custodians;
•
The Invesco Funds’
transfer agent(s) (in the event of a redemption in kind);
•
Pricing services,
market makers, or other fund accounting software providers (to determine the
price of investments held by an Invesco Fund);
•
Brokers identified
by the Invesco Funds’ portfolio management team who provide execution and
research services to the team;
67
•
Analysts hired to
perform research and analysis for the Invesco Funds’ portfolio management team;
and
•
Insurance companies
which may receive portfolio holdings information before Invesco posts portfolio
holdings information to Invesco's website (to allow such insurance companies to
post portfolio holdings information to their websites at approximately the same
time that Invesco posts portfolio holdings information to Invesco's
website).
In
many cases, Invesco will disclose current portfolio holdings information on a
daily basis to these persons. In these
situations, Invesco has entered into non-disclosure agreements which provide
that the recipient of the portfolio holdings information will maintain the
confidentiality of such portfolio holdings information and will not trade on
such information (Non-disclosure Agreements). Please refer to Appendix B for a
list of examples of persons to whom Invesco provides non-public portfolio
holdings information on an ongoing basis.
Invesco
will also disclose non-public portfolio holdings information if such disclosure
is required by applicable laws,
rules or regulations, or by regulatory authorities having jurisdiction over
Invesco and its affiliates or the Invesco Funds, and where there is no other way
to transact the Funds' business without disclosure of such portfolio holdings
information.
The
Holdings Disclosure Policy provides that the Funds, Invesco or any other party
in connection with the disclosure of
portfolio holdings information will not request, receive or accept any
compensation (including compensation in the form of the maintenance of assets in
any Fund or other mutual fund or account managed by Invesco or one of its
affiliates) for the selective disclosure of portfolio holdings
information.
Disclosure
of certain portfolio holdings information without Non-Disclosure
Agreement. Invesco and its
affiliates that provide services to the Funds, the Sub-Advisers and each of
their employees may receive or have access to portfolio holdings information as
part of the day to day operations of the Funds.
Employees
of Invesco and its affiliates may express their views orally or in writing on
one or more of the Funds' portfolio
investments or may state that a Fund has recently purchased or sold, or
continues to own, one or more investments. The investments subject to these
views and statements may be ones that were purchased or sold since the date on
which portfolio holdings was made available on the Fund’s website and therefore
may not be reflected on the portfolio holdings information disclosed on the
website. Such views and statements may be made to various persons, including
members of the press, shareholders in the applicable Fund, persons considering
investing in the applicable Fund or representatives of such shareholders or
potential shareholders, such as fiduciaries of a 401(k) plan and their advisers.
The nature and content of the views and statements provided to each of these
persons may differ.
Disclosure
of portfolio holdings information to traders. Additionally,
employees of Invesco and its affiliates may disclose one or more of the
investments held by a Fund when purchasing and selling investments through
broker-dealers, futures commissions merchants, clearing agencies and other
counterparties requesting bids on investments, obtaining price quotations on
investments, or in connection with litigation involving the Funds' portfolio
investments. Invesco does not enter into formal Non-Disclosure Agreements in
connection with these situations; however, the Funds would not continue to
conduct business with a person who Invesco believed was misusing the disclosed
information.
Disclosure
of portfolio holdings of other Invesco-managed products. Invesco and its
affiliates manage products sponsored by companies other than Invesco, including
investment companies, offshore funds, and separate accounts. In many cases,
these other products are managed in a similar fashion to certain Invesco Funds
(as defined herein) and thus have similar portfolio holdings. The sponsors of
these other products managed by Invesco and its affiliates may disclose the
portfolio holdings of their products at different times than Invesco discloses
portfolio holdings for the Invesco Funds.
68
MANAGEMENT
OF THE TRUST
Board
of Trustees
The
Trustees and officers of the Trust, their principal occupations during at least
the last five years and certain other
information concerning them are set forth in Appendix C.
Qualifications
and Experience. In addition to the
information set forth in Appendix C, the following sets forth additional
information about the qualifications and experience of each of the
Trustees.
Interested
Trustees
Jeffrey
H. Kupor, Trustee
Jeffrey
Kupor
has
been a member of the Board of Trustees of the Invesco Funds since 2024. Mr.
Kupor is Senior Managing Director and General Counsel at Invesco
Ltd.
Mr.
Kupor joined Invesco Ltd. in 2002 and has held a number of legal roles,
including, most recently, Head of Legal,
Americas, in which role he was responsible for legal support for Invesco's
Americas business. Prior to joining the firm, he practiced law at Fulbright
& Jaworski LLP (now known as Norton Rose Fulbright), specializing in complex
commercial and securities litigation. He also served as the general counsel of a
publicly traded communication services company.
Mr.
Kupor
earned a
BS
degree
in economics from the Wharton
School
at the
University of Pennsylvania and a JD from the Boalt Hall School of
Law
(now
known as Berkeley Law) at the University of California
at
Berkeley.
The
Board believes that Mr. Kupor’s current and past positions with the Invesco
complex along with his legal background
and experience as an executive in the investment management area benefits the
Funds.
Douglas
Sharp, Trustee
Douglas
Sharp has been a member of the Board of Trustees of the Invesco Funds since
2024. Mr. Sharp is Senior Managing
Director, Head of Americas & EMEA (Europe, the Middle East, and Africa) at
Invesco Ltd. He also served as Director and Chairman of the Board of Invesco UK
Limited (Invesco’s European subsidiary board).
Mr.
Sharp
joined Invesco Ltd. in 2008 and has served in multiple leadership roles across
the company, including his previous role as Head of EMEA. Prior to that,
he
ran
Invesco
Ltd.’s
EMEA retail business and served as head of strategy and business planning and as
chief administrative officer for Invesco Ltd.’s US institutional business.
Before joining the firm, he was with the strategy consulting firm McKinsey &
Co., where he served clients in the financial services, energy, and logistics
sectors.
The
Board believes that Mr. Sharp’s current and
past positions within the Invesco complex along with his experience in the
investment management business benefits the Funds.
Independent
Trustees
Beth
Ann Brown, Trustee and Chair
Beth
Ann Brown has been a member of the Board of Trustees of the Invesco Funds since
2019 and Chair since 2022. From
2016 to 2019, Ms. Brown served on the boards of certain investment companies in
the Oppenheimer Funds complex.
Ms.
Brown has served as Director of Caron Engineering, Inc. since 2018 and as an
Independent Consultant since
2012.
Previously,
Ms. Brown served in various capacities at Columbia Management Investment
Advisers LLC, including Head of
Intermediary Distribution, Managing Director, Strategic Relations and Managing
Director, Head of National Accounts. She also served as Senior Vice President,
National Account Manager from 2002-2004 and Senior Vice President, Key Account
Manager from 1999 to 2002 of Liberty Funds Distributor, Inc.
69
From
2013 through 2022, she served as Director, Vice President (through 2019) and
President (2019-2022) of Grahamtastic
Connection, a non-profit organization.
From
2014 to 2017, Ms. Brown served on the Board of Advisors of Caron Engineering
Inc. and also served as President
and Director of Acton Shapleigh Youth Conservation Corps, a non–profit
organization, from 2012 to 2015.
The
Board believes that Ms. Brown’s experience in financial services and investment
management and as a director of other
investment companies benefits the Funds.
Carol
Deckbar, Trustee
Carol
Deckbar has been a member of the Board of Trustees of the Invesco Funds since
2024. Ms. Deckbar previously
served as Executive Vice President and Chief Product Officer at Teachers
Insurance and Annuity Association (TIAA) Financial Services from 2019 to 2021.
She also served as Executive Vice President and Principal of College Retirement
Equities Fund at TIAA from 2014 to 2021. Ms. Deckbar served in various other
capacities at TIAA since joining in 2007, including Executive Vice President and
Head of Institutional Investments and Endowment Services from 2016 to
2019.
Prior
to joining TIAA, Ms. Deckbar was a Senior Vice President of AMSOUTH Bank from
2002 to 2006, and before that she
served as Senior Vice President, Managing Director, for Bank of America Capital
Management from 1999 to 2002. She began her asset management career with the
Evergreen Funds where she served as Senior Vice President, Managing Director
from 1991 to 1998.
From
2019 to 2020, Ms. Deckbar served as Chairman of the TIAA Retirement Plan
Investments Committee and as an
Executive Sponsor at Advance, a council for the advancement of women. She has
also held various memberships, including at Investment Company Institute, from
2017 to 2019, Fortune 400 Most Powerful Women Network, from 2012 to 2015, and
Mutual Fund Education Alliance, from 2010 to 2015.
The
Board believes that Ms. Deckbar’s experience in financial services and
investment management benefits the
Funds.
Cynthia
Hostetler, Trustee
Cynthia
Hostetler has been a member of the Board of Trustees of the Invesco Funds since
2017.
Ms.
Hostetler is currently a member of the board of directors of the Vulcan
Materials Company, a public company engaged in
the production and distribution of construction materials, Trilinc Global Impact
Fund LLC, a publicly registered non-traded limited liability company that
invests in a diversified portfolio of private debt instruments, Resideo
Technologies, Inc., a public company that manufactures and distributes smart
home security products and solutions worldwide, and Textainer Group Holdings, a
public company that is the world’s second largest shipping container leasing
company. Ms. Hostetler also serves on the board of governors of the Investment
Company Institute and is a member of the governing council of the Independent
Directors Council, both of which are professional organizations in the
investment management industry.
Previously,
Ms. Hostetler served as a member of the board of directors/trustees of Aberdeen
Investment Funds, a mutual
fund complex, Edgen Group Inc., a public company that provides products and
services to energy and construction companies, from 2012 to 2013, prior to its
sale to Sumitomo, and Genesee & Wyoming, Inc., a public company that owns
and operates railroads worldwide, from 2018 to 2019, prior to its sale to
Brookfield Asset Management. Ms. Hostetler was also a member of the board of
directors of the Eisenhower Foundation, a non-profit organization.
From
2001 to 2009, Ms. Hostetler served as Head of Investment Funds and Private
Equity at Overseas Private Investment
Corporation (“OPIC”), a government agency that supports US investment in the
emerging markets. Ms. Hostetler oversaw a multi-billion dollar investment
portfolio in private equity funds. Prior to joining OPIC, Ms. Hostetler served
as President and member of the board of directors of First Manhattan
Bancorporation, a bank holding company, from 1991 to 2007, and its largest
subsidiary, First Savings Bank, from 1991 to 2006 (Board Member) and from 1996
to 2001 (President).
70
The
Board believes that Ms. Hostetler’s knowledge of financial services and
investment management, her experience as a
director of other companies, including a mutual fund complex, her legal
background, and other professional experience gained through her prior
employment benefit the Funds.
Dr.
Eli Jones, Trustee
Dr.
Eli Jones has been a member of the Board of Trustees of the Invesco Funds since
2016.
Dr.
Jones has served as Board Member of the regional board, First Financial Bank
Texas since 2021 and Board Member, First
Financial Bankshares, Inc. Texas since 2022. Since 2020, Dr. Jones has served as
a director on the board of directors of Insperity, Inc. (“Insperity”). From 2004
to 2016, Dr. Jones was chair of the Compensation Committee, a member of the
Nominating and Corporate Governance Committee and a director on the board of
directors of Insperity.
Dr.
Jones is a Professor of Marketing, Lowry and Peggy Mays Eminent Scholar, and
Dean Emeritus of Mays Business
School at Texas A&M University. From 2015 to 2021, Dr. Jones served as Dean
of Mays Business School at Texas A&M University. From 2012 to 2015, Dr.
Jones was the dean of the Sam M. Walton College of Business at the University of
Arkansas and holder of the Sam M. Walton Leadership Chair in Business. Prior to
joining the faculty at the University of Arkansas, he was dean of the E. J.
Ourso College of Business and Ourso Distinguished Professor of Business at
Louisiana State University from 2008 to 2012; professor of marketing and
associate dean at the C.T. Bauer College of Business at the University of
Houston from 2007 to 2008; an associate professor of marketing from 2002 to
2007; and an assistant professor from 1997 until 2002. He taught at Texas
A&M University for several years before joining the faculty of the
University of Houston.
Dr.
Jones served as the executive director of the Program for Excellence in Selling
and the Sales Excellence
Institute at the University of Houston from 1997 to 2007. Before becoming a
professor, he worked in sales and sales management for three Fortune 100
companies: Quaker Oats, Nabisco, and Frito-Lay. Dr. Jones is a past director of
Arvest Bank. He received his Bachelor of Science degree in journalism in 1982,
his MBA in 1986 and his Ph.D. in 1997, all from Texas A&M
University.
The
Board believes that Dr. Jones’ experience in academia and his experience in
marketing benefits the Funds.
Elizabeth
Krentzman, Trustee
Elizabeth
Krentzman has been a member of the Board of Trustees of the Invesco Funds since
2019. From 2014 to 2019,
Ms. Krentzman served on the boards of certain investment companies in the
Oppenheimer Funds complex.
Ms.
Krentzman served from 2017 to 2022, as a member of the Cartica Funds Board of
Directors (private investment funds).
Ms. Krentzman previously served as a member of the Board of Trustees of the
University of Florida National Board Foundation from 2016 to 2021. She also
served as a member of the Board of Trustees of the University of Florida Law
Center Association, Inc. from 2016 to 2021, as a member of its Audit Committee
from 2016 to 2020, and as a member of its Membership Committee from 2020 to
2021.
Ms.
Krentzman served from 1997 to 2004 and from 2007 and 2014 in various capacities
at Deloitte & Touche LLP,
including Principal and Chief Regulatory Advisor for Asset Management Services,
U.S. Mutual Fund Leader and National Director of the Investment Management
Regulatory Consulting Practice. She served as General Counsel of the Investment
Company Institute from 2004 to 2007.
From
1996 to 1997, Ms. Krentzman served as an Assistant Director of the Division of
Investment Management - Office
of Disclosure and Investment Adviser Regulation of the U.S. Securities and
Exchange Commission. She also served from 1991 to 1996 in various positions with
the Division of Investment Management – Office of Regulatory Policy of the U.S.
Securities and Exchange Commission and from 1987 to 1991 as an Associate at
Ropes & Gray LLP.
71
The
Board believes that Ms. Krentzman’s legal background, experience in financial
services and accounting and as a
director of other investment companies benefits the Funds.
Anthony
J. LaCava, Jr., Trustee
Anthony
J. LaCava, Jr. has been a member of the Board of Trustees of the Invesco Funds
since 2019.
Previously,
Mr. LaCava served as a member of the board of directors and as a member of the
audit committee of Blue
Hills Bank, a publicly traded financial institution.
Mr.
LaCava retired after a 37-year career with KPMG LLP (“KPMG”) where he served as
senior partner for a wide range of
firm clients across the retail, financial services, consumer markets, real
estate, manufacturing, health care and technology industries. From 2005 to 2013,
Mr. LaCava served as a member of the board of directors of KPMG and chair of the
board’s audit and finance committee and nominating committee. He also previously
served as Regional Managing Partner from 2009 through 2012 and Managing Partner
of KPMG’s New England practice.
Mr.
LaCava currently serves as Member and Chairman of the Business School Advisory
Council of Bentley University
and as a member of American College of Corporate Directors and Board Leaders,
Inc.
The
Board believes that Mr. LaCava’s experience in audit and financial services
benefits the Funds.
James
“Jim” Liddy, Trustee
James
“Jim” Liddy has been a member of the Board of Trustees of the Invesco Funds
since 2024. Mr. Liddy previously
served as Chairman of KPMG LLP (KPMG)’s Global Financial Services, Americas
practice from 2017 through 2021. He also led KPMG’s U.S. Financial Services
practice from 2015 through 2021.
Prior
to assuming his most recent role in 2017, Mr. Liddy served as Vice Chair of
Audit and on various other committees at
KPMG. He also previously served as National Managing Partner of Audit and was a
member of the firm’s Global Audit Steering Group.
The
Board believes that Mr. Liddy’s audit experience and knowledge of financial
services and investment management benefits
the Funds.
Dr.
Prema Mathai-Davis, Trustee
Dr.
Prema Mathai-Davis has been a member of the Board of Trustees of the Invesco
Funds since 1998.
Since
2021, Dr. Mathai-Davis has served as a member of the Board of Positive Planet
US, a non-profit organization and
Healthcare Chaplaincy Network, a non-profit organization.
Previously,
Dr. Mathai-Davis served as co-founder and partner of Quantalytics Research, LLC,
(a FinTech Investment Research
Platform) from 2017 to 2019, when the firm was acquired by Forbes Media
Holdings, LLC.
Dr.
Mathai-Davis previously served as Chief Executive Officer of the YWCA of the USA
from 1994 until her retirement in
2000. Prior to joining the YWCA, Dr. Mathai-Davis served as the Commissioner of
the New York City Department for the Aging. She was a Commissioner and Board
Member of the Metropolitan Transportation Authority of New York, the largest
regional transportation network in the U.S. Dr. Mathai-Davis also served as a
Trustee of the YWCA Retirement Fund, the first and oldest pension fund for
women, and on the advisory board of the Johns Hopkins Bioethics Institute. She
was a member of the Board of Visitors of the University of Maryland School of
Public Policy, and on the visiting Committee of The Harvard University Graduate
School of Education.
Dr.
Mathai-Davis was the president and chief executive officer of the Community
Agency for Senior Citizens, a
non-profit social service agency that she established in 1981. She also directed
the Mt. Sinai School of Medicine-Hunter College Long-Term Care Gerontology
Center, one of the first of its kind.
The
Board believes that Dr. Mathai-Davis’ extensive experience in running public and
charitable institutions
benefits the Funds.
72
Joel
W. Motley, Trustee
Joel
W. Motley has been a member of the Board of Trustees of the Invesco Funds since
2019. From 2002 to 2019, Mr. Motley
served on the boards of certain investment companies in the Oppenheimer Funds
complex.
In
May 2022, Mr. Motley rejoined the Vestry and the Investment Committee of Trinity
Church Wall Street. Since 2021, Mr.
Motley has served as a Board member of the Trust for Mutual Understanding, which
makes grants to arts and environmental organizations in Eastern Europe. Since
2021, Mr. Motley has served as a member of the board of Blue Ocean Acquisition
Corp. Since 2016, Mr. Motley has served as an independent director of the Office
of Finance of the Federal Home Loan Bank System. He has served as Managing
Director of Carmona Motley, Inc., a privately-held financial advisory firm,
since 2002.
Mr.
Motley also serves as a member of the Council on Foreign Relations and its
Finance and Budget Committee. He is a
member of the Investment Committee and is Chairman Emeritus of the Board of
Human Rights Watch and a member of the Investment Committee and the Board of
Historic Hudson Valley, a non-profit cultural organization.
Since
2011, he has served as a Board Member and Investment Committee Member of the
Pulitzer Center for Crisis
Reporting, a non-profit journalism organization. Mr. Motley also serves as
Director and member of the Board and Investment Committee of The Greenwall
Foundation, a bioethics research foundation, and as a Director of Friends of the
LRC, a South Africa legal services foundation.
Previously,
Mr. Motley served as Managing Director of Public Capital Advisors, LLC, a
privately held financial advisory
firm, from 2006 to 2017. He also served as Managing Director of Carmona Motley
Hoffman Inc. a privately-held financial advisor, and served as a Director of
Columbia Equity Financial Corp., a privately-held financial advisor, from 2002
to 2007.
The
Board believes that Mr. Motley’s experience in financial services and as a
director of other investment companies benefits
the Funds.
Teresa
M. Ressel, Trustee
Teresa
Ressel has been a member of the Board of Trustees of the Invesco Funds since
2017.
Ms.
Ressel has previously served within the private sector and the U.S. government
as well as consulting. Formerly, Ms.
Ressel served at UBS AG in various capacities, including as Chief Executive
Officer of UBS Securities LLC, a broker-dealer division of UBS Investment Bank,
and as Group Chief Operating Officer of the Americas.
Between
2001 and 2004, Ms. Ressel served at the U.S. Treasury, initially as Deputy
Assistant Secretary for Management
& Budget and then as Assistant Secretary for Management and Chief Financial
Officer. Ms. Ressel was confirmed by the U.S. Senate and anchored financial
duties at the Department, including finance, accounting, risk, audit and
performance measurement.
Ms.
Ressel also volunteers within her community across a number of functions and
serves on the board of GAVI, the Global
Vaccine Alliance (non-profit) supporting children’s health.
The
Board believes that Ms. Ressel’s risk management and financial experience in
both the private and public sectors
benefits the Funds.
Robert
C. Troccoli, Trustee
Robert
C. Troccoli has been a member of the Board of Trustees of the Invesco Funds
since 2016.
Mr.
Troccoli retired after a 39-year career with KPMG LLP (“KPMG”), where he served
as a senior Partner. From 2013
to 2017, he was an adjunct professor at the University of Denver’s Daniels
College of Business.
73
Mr.
Troccoli’s leadership roles during his career with KPMG included managing
partner and partner in charge of the
Denver office’s Financial Services Practice. He served regulated investment
companies, investment advisors, private partnerships, private equity funds,
sovereign wealth funds, and financial services companies. Toward the end of his
career, Mr. Troccoli was a founding member of KPMG’s Private Equity Group in New
York City, where he served private equity firms and sovereign wealth funds. Mr.
Troccoli also served mutual fund clients along with several large private equity
firms as Global Lead Partner of KPMG’s Private Equity Group.
The
Board believes that Mr. Troccoli’s experience as a partner in a large accounting
firm and his knowledge of
investment companies, investment advisors, and private equity firms benefits the
Funds.
Daniel
S. Vandivort, Trustee
Daniel
S. Vandivort has been a member of the Board of Trustees of the Invesco Funds
since 2019. From 2014 to 2019, Mr.
Vandivort served on the boards of certain investment companies in the
Oppenheimer Funds complex, as a Trustee and as the Governance Committee
Chair.
Mr.
Vandivort also served as Chairman, Lead Independent Director, and Chairman of
the Audit Committee of the Board of
Directors of the Value Line Funds from 2008 through 2014.
Previously,
Mr. Vandivort also served as a Trustee and Chairman of the Weiss Peck and Greer
Mutual Funds Board from
2004 to 2005.
Previously,
Mr. Vandivort served at Weiss Peck and Greer/Robeco Investment Management from
1994 to 2007, as President
and Chief Investment Officer and prior to that as Managing Director and Head of
Fixed Income. Mr. Vandivort also served in various capacities at CS First Boston
from 1984 to 1994, including as Head of Fixed Income at CS First Boston
Investment Management.
Mr.
Vandivort was also a Trustee on the Board of Huntington Disease Foundation of
America from 2007 to 2013 and from 2015
to 2019. He also served as Treasurer and Chairman of the Audit and Finance
Committee of Huntington Disease Foundation of America from 2016 to
2019.
Mr.
Vandivort currently serves as President of Flyway Advisory Services LLC, a
consulting and property management company.
He is also a Member of the Investment Committee for the Historic Charleston
Foundation.
The
Board believes that Mr. Vandivort’s experience in financial services and
investment management and as a director of
other investment companies benefits the Funds.
Management
Information
The
Trustees have the authority to take all actions that they consider necessary or
appropriate in connection with
oversight of the Trust, including, among other things, approving the investment
objectives, investment policies and fundamental investment restrictions for the
Funds. The Trust has entered into agreements with various service providers,
including the Funds’ investment advisers, administrator, transfer agent,
distributor and custodians, to conduct the day-to-day operations of the Funds.
The Trustees are responsible for selecting these service providers, approving
the terms of their contracts with the Funds, and exercising general oversight of
these arrangements on an ongoing basis.
Certain
Trustees and officers of the Trust are affiliated with Invesco and Invesco Ltd.,
the parent corporation of
Invesco. All of the Trust’s executive officers hold similar offices with some or
all of the other Trusts.
Leadership
Structure and the Board of Trustees. The Board is
currently composed of fourteen Trustees, including twelve Trustees who are not
“interested persons” of the Funds, as that term is defined in the 1940 Act
(collectively, the Independent Trustees and each, an Independent Trustee). In
addition to eight regularly scheduled meetings per year, the Board holds special
meetings or informal conference calls to discuss specific matters that may
require action prior to the next regular meeting. As discussed below, the Board
has
74
established
four standing committees – the Audit Committee, the Compliance Committee, the
Governance Committee and the
Investments Committee (the Committees), to assist the Board in performing its
oversight responsibilities.
The
Board has appointed an Independent Trustee to serve in the role of Chair. The
Chair’s primary role is to preside at
meetings of the Board and act as a liaison with the Adviser and other service
providers, officers, attorneys, and other Trustees between meetings. The Chair
also participates in the preparation of the agenda for the meetings of the
Board, is active with mutual fund industry organizations, and may perform such
other functions as may be requested by the Board from time to time. Except for
any duties specified pursuant to the Trust’s Declaration of Trust or By-laws,
the designation of Chair does not impose on such Independent Trustee any duties,
obligations or liability that is greater than the duties, obligations or
liability imposed on such person as a member of the Board generally.
The
Board believes that its leadership structure, including having an Independent
Trustee as Chair, allows for effective
communication between the Trustees and management, among the Trustees and among
the Independent Trustees. The existing Board structure, including its Committee
structure, provides the Independent Trustees with effective control over Board
governance while also allowing them to receive and benefit from insight from the
interested Trustee who is an active officer of the Funds’ investment adviser.
The Board’s leadership structure promotes dialogue and debate, which the Board
believes allows for the proper consideration of matters deemed important to the
Funds and their shareholders and results in effective
decision-making.
Risk
Oversight. The Board
considers risk management issues as part of its general oversight
responsibilities throughout the year at its regular meetings and at regular
meetings of its Committees. Invesco prepares regular reports that address
certain investment, valuation and compliance matters, and the Board as a whole
or the Committees also receive special written reports or presentations on a
variety of risk issues at the request of the Board, a Committee or the Senior
Officer.
The
Board also considers liquidity risk management issues as part of its general
oversight responsibilities and oversees the
Trust's liquidity risk through, among other things, receiving periodic reporting
and presentations by Invesco personnel that address liquidity matters. As
required by Rule 22e-4 under the 1940 Act, the Board, including a majority of
the Independent Trustees, has approved the Trust’s Liquidity Risk Management
("LRM") Program, which is reasonably designed to assess and manage the Trust’s
liquidity risk, and has appointed the LRM Program Administrator that is
responsible for administering the LRM Program. The Board also reviews, no less
frequently than annually, a written report prepared by the LRM Program
Administrator that addresses, among other items, the operation of the program
and assesses its adequacy and effectiveness of implementation. The Board also
oversees risks related to certain Funds’ use of derivatives as part of its
general oversight responsibilities. The Board has approved a derivatives risk
manager, which is responsible for administering the derivatives risk management
program (“DRM Program”) for the Funds that are required to implement a DRM
Program. The Board meets with the derivatives risk manager on a periodic basis,
including receiving quarterly and annual reports from the derivatives risk
manager, to review the implementation of the DRM Program.
The
Audit Committee assists the
Board
with
its
oversight of the Funds'
accounting and
auditing process. The Audit Committee is responsible for selecting the
Funds'
independent
registered public accounting firm
(auditors),
including
evaluating their independence and meeting with such auditors to consider and
review matters relating to the Funds' financial reports and internal controls.
In addition, the Audit Committee meets regularly with representatives of Invesco
Ltd.’s internal audit group to review reports on their examinations of functions
and processes within Invesco that affect the Funds. The Audit Committee also
oversees the Adviser’s process for valuing the Funds’ portfolio investments and
receives reports from management regarding its process and the valuation of the
Funds’ portfolio investments as consistent with the valuation policy approved by
the Board and related procedures.
The
Compliance Committee receives regular compliance reports prepared by Invesco’s
compliance group and meets regularly
with the Fund’s Chief Compliance Officer (CCO) to discuss compliance issues,
including compliance risks. The Compliance Committee has recommended and the
Board has adopted compliance
75
policies
and procedures for the Funds and for the Funds’ service providers. The
compliance policies and procedures are
designed to detect, prevent and correct violations of the federal securities
laws.
The
Governance Committee monitors the composition of the Board and each of its
Committees and monitors the
qualifications of the Trustees to ensure adherence to certain governance
undertakings applicable to the Funds. In addition, the Governance Committee
oversees an annual self-assessment of the Board and its committees and addresses
governance risks, including insurance and fidelity bond matters, for the
Trust.
The
Investments Committee and its sub-committees receive regular written reports
describing and analyzing the
investment performance of the Invesco Funds. In addition, Invesco’s Chief
Investment Officers and the portfolio managers of the Funds meet regularly with
the Investments Committee or its sub-committees to discuss portfolio
performance, including investment risk, such as the impact on the Funds of
investments in particular types of securities or instruments, such as
derivatives. To the extent that a Fund changes a particular investment strategy
that could have a material impact on the Fund’s risk profile, the Board
generally is consulted in advance with respect to such
change.
Committee
Structure
The
members of the Audit Committee are Messrs. LaCava (Chair),
Liddy
and Troccoli, Dr. Jones, and Mss. Hostetler and Ressel. The Audit Committee
performs a number of functions with respect to the oversight of the Funds’
accounting and financial reporting, including: (i) assisting the Board with its
oversight of the qualifications, independence and performance of the independent
registered public accountants; (ii) selecting independent registered public
accountants for the Funds; (iii) to the extent required, pre-approving certain
audit and permissible non-audit services; (iv) overseeing the financial
reporting process for the Funds; (v) assisting the Board with its oversight of
the integrity of the Funds’ financial statements and compliance with legal and
regulatory requirements that relate to the Funds’ accounting and financial
reporting, internal control over financial reporting and independent audits;
(vi) pre-approving engagements for non-audit services to be provided by the
Funds’ independent auditors to the Funds’ investment adviser or to any of its
affiliates; and (vii) overseeing the performance of the fair valuation
determinations by the Adviser. During the fiscal year ended November 30, 2023,
the Audit Committee held five meetings.
The
members of the Compliance Committee are Messrs. Motley and Vandivort, and Mss.
Brown,
Deckbar and
Krentzman (Chair) and Dr. Mathai-Davis. The Compliance Committee performs a
number of functions with respect to compliance matters, including: (i) reviewing
and making recommendations concerning the qualifications, performance and
compensation of the Funds’ Chief Compliance Officer; (ii) reviewing
recommendations and reports made by the Chief Compliance Officer of the Funds
regarding compliance matters; (iii) overseeing compliance policies and
procedures of the Funds and their service providers; (iv) overseeing potential
conflicts of interest that are reported to the Compliance Committee by Invesco,
the Chief Compliance Officer or other independent advisors; (v) reviewing
reports prepared by a third party’s compliance review of Invesco; (vi) if
requested by the Board, overseeing risk management with respect to the Funds
(other than risks overseen by the other Committees), including receiving and
overseeing risk management reports from Invesco that are applicable to the Funds
and their service providers; and (vii) reviewing reports by Invesco on
correspondence with regulators or governmental agencies with respect to the
Funds and recommending to the Board what action, if any, should be taken by the
Funds in light of such reports. During the fiscal year ended November 30, 2023,
the Compliance Committee held five meetings.
The
members of the Governance Committee are Messrs. Motley and Vandivort (Chair) and
Mss. Brown and Hostetler and
Dr. Mathai-Davis. The Governance Committee performs a number of functions with
respect to governance, including: (i) nominating persons to serve as Independent
Trustees and as members of each Committee, and nominating the Chair of the
Board, the Chair of each Committee and the Chair of each Sub-Committee of the
Investments committee; (ii) reviewing and making recommendations to the full
Board regarding the size and composition of the Board and the compensation
payable to the Independent Trustees;(iii) overseeing the annual evaluation of
the performance of the Board and its Committees; (iv) considering and overseeing
the selection of independent legal counsel to the Independent Trustees; (v)
considering and overseeing the selection and engagement of a Senior Officer if
and as they deem
76
appropriate,
including compensation and scope of services, and recommending all such matters
to the Board or the independent
trustees as appropriate; (vi) reviewing administrative and/or logistical matters
pertaining to the operations of the Board; and (vii) reviewing annually
recommendations from Invesco regarding amounts and coverage of primary and
excess directors and officers/errors and omissions liability insurance and
allocation of premiums. During the fiscal year ended November 30, 2023, the
Governance Committee held nine meetings.
The
Governance Committee will consider nominees recommended by a shareholder to
serve as trustees, provided: (i) that
such submitting shareholder provides the information required by, and otherwise
complies with the applicable provisions of, the Fund’s governing
instruments,
(ii)
that such submitting shareholder is a shareholder of record at the time he or
she submits such names and is entitled to vote at the meeting of shareholders at
which trustees will be elected; and (iii) that the Governance Committee or the
Board, as applicable, shall make the final determination of persons to be
nominated. Notice procedures set forth in the Trust’s bylaws require that any
shareholder of a Fund desiring to nominate a candidate for election at a
shareholder meeting must provide certain information about itself and the
candidate, and must submit to the Trust’s Secretary the nomination in writing
not later than the close of business on the later of the 90th day, nor earlier
than the close of business on the 120th day, prior to the first anniversary of
the preceding year’s annual meeting; provided, however, that in the event that
the date of the annual meeting is advanced by more than 30 days or delayed by
more than 60 days from such anniversary date or if the Trust has not previously
held an annual meeting, notice by the Shareholder to be timely must be so
delivered not earlier than the close of business on the 120th day prior to such
annual meeting and not later than the close of business on the later of the 90th
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made by the
Trust.
The
members of the Investments Committee are Messrs. LaCava, Liddy,
Motley (Sub-Committee Chair), Troccoli (Sub-Committee Chair) and Vandivort, Mss.
Brown, Deckbar, Hostetler (Chair), Krentzman and Ressel and Drs. Jones and
Mathai-Davis (Sub-Committee Chair). The Investments Committee’s primary purposes
are to assist the Board in its oversight of the investment management services
provided by Invesco and the Sub-Advisers and to periodically review Fund
performance information, and information regarding the investment personnel and
other resources devoted to the management of the Funds and make recommendations
to the Board, when applicable. During the fiscal year ended November 30, 2023,
the Investments Committee held five meetings.
The
Investments Committee has established three Sub-Committees and delegated to the
Sub-Committees responsibility
for, among other matters: (i) reviewing the performance of the Invesco Funds
that have been assigned to a particular Sub-Committee (for each Sub-Committee,
the Designated Funds), except to the extent the Investments Committee takes such
action directly; (ii) reviewing with the applicable portfolio managers from time
to time the investment objective(s), policies, strategies, performance and risks
and other investment-related matters of the Designated Funds; and (iii) being
generally familiar with the investment objectives and principal investment
strategies of the Designated Funds.
Trustee
Ownership of Fund Shares
The
dollar range of equity securities beneficially owned by each trustee (i) in the
Funds and (ii) on an aggregate basis, in
all registered investment companies overseen by the trustee within the Invesco
Funds complex, is set forth in Appendix C.
Compensation
Each
Trustee who is not affiliated with Invesco is compensated for his or her
services according to a fee schedule that
recognizes the fact that such Trustee also serves as a Trustee of other Invesco
Funds. Each such Trustee receives a fee, allocated among the Invesco Funds for
which he or she serves as a Trustee that consists of an annual retainer
component and a meeting fee component. The Chair of the Board and of each
Committee and Sub-Committee receive additional compensation for their
services.
77
Information
regarding compensation paid or accrued for each Trustee of the Trust who was not
affiliated with Invesco during
the year ended December 31, 2023 is found in Appendix D.
Retirement
Policy
The
Trustees have adopted a retirement policy that permits each Trustee to serve
until December 31 of the year in which
the Trustee turns 75.
Pre-Amendment
Retirement Plan For Trustees
The
Trustees have adopted a Retirement Plan for the Trustees who are not affiliated
with the Adviser. A description of the
pre-amendment Retirement Plan follows. Annual retirement benefits are available
from the Funds and/or the other Invesco Funds for which a Trustee serves (each,
a Covered Fund), for each Trustee who is not an employee or officer of the
Adviser, who either (a) became a Trustee prior to December 1, 2008, and who has
at least five years of credited service as a Trustee (including service to a
predecessor fund) of a Covered Fund, or (b) was a member of the Board of
Trustees of a Van Kampen Fund immediately prior to June 1, 2010 (Former Van
Kampen Trustee), and has at least one year of credited service as a Trustee of a
Covered Fund after June 1, 2010.
For
Trustees other than Former Van Kampen Trustees, effective January 1, 2006, for
retirements after December 31, 2005,
the retirement benefits will equal 75% of the Trustee’s annual retainer paid to
or accrued by any Covered Fund with respect to such Trustee during the
twelve-month period prior to retirement, including the amount of any retainer
deferred under a separate deferred compensation agreement between the Covered
Fund and the Trustee. The amount of the annual retirement benefit does not
include additional compensation paid for Board meeting fees or compensation paid
to the Chair of the Board and the Chairs and Vice Chairs of certain Board
committees, whether such amounts are paid directly to the Trustee or deferred.
The annual retirement benefit is payable in quarterly installments for a number
of years equal to the lesser of (i) sixteen years or (ii) the number of such
Trustee’s credited years of service. If a Trustee dies prior to receiving the
full amount of retirement benefits, the remaining payments will be made to the
deceased Trustee’s designated beneficiary for the same length of time that the
Trustee would have received the payments based on his or her service or, if the
Trustee has elected, in a discounted lump sum payment. A Trustee must have
attained the age of 65 (60 in the event of disability) to receive any retirement
benefit. A Trustee may make an irrevocable election to commence payment of
retirement benefits upon retirement from the Board before age 72; in such a
case, the annual retirement benefit is subject to a reduction for early
payment.
If
the Former Van Kampen Trustee completes at least 10 years of credited service
after June 1, 2010, the retirement benefit
will equal 75% of the Former Van Kampen Trustee’s annual retainer paid to or
accrued by any Covered Fund with respect to such Trustee during the twelve-month
period prior to retirement, including the amount of any retainer deferred under
a separate deferred compensation agreement between the Covered Fund and such
Trustee. The amount of the annual retirement benefit does not include additional
compensation paid for Board meeting fees or compensation paid to the Chair of
the Board and the Chairs and Vice Chairs of certain Board committees, whether
such amounts are paid directly to the Trustee or deferred. The annual retirement
benefit is payable in quarterly installments for 10 years beginning after the
later of the Former Van Kampen Trustee’s termination of service or attainment of
age 72 (or age 60 in the event of disability or immediately in the event of
death). If a Former Van Kampen Trustee dies prior to receiving the full amount
of retirement benefits, the remaining payments will be made to the deceased
Trustee’s designated beneficiary or, if the Trustee has elected, in a discounted
lump sum payment.
If
the Former Van Kampen Trustee completes less than 10 years of credited service
after June 1, 2010, the retirement
benefit will be payable at the applicable time described in the preceding
paragraph, but will be paid in two components successively. For the period of
time equal to the Former Van Kampen Trustee’s years of credited service after
June 1, 2010, the first component of the annual retirement benefit will equal
75% of the compensation amount described in the preceding paragraph. Thereafter,
for the period of time equal to the Former Van Kampen Trustee’s years of
credited service after June 1, 2010, the second component of the annual
retirement benefit will equal the excess of (x) 75% of the compensation amount
described in the
78
preceding
paragraph, over (y) $68,041 plus an interest factor of 4% per year compounded
annually measured from June 1, 2010
through the first day of each year for which payments under this second
component are to be made. In no event, however, will the retirement benefits
under the two components be made for a period of time greater than 10 years. For
example, if the Former Van Kampen Trustee completes 7 years of credited service
after June 1, 2010, he or she will receive 7 years of payments under the first
component and thereafter 3 years of payments under the second component, and if
the Former Van Kampen Trustee completes 4 years of credited service after June
1, 2010, he or she will receive 4 years of payments under the first component
and thereafter 4 years of payments under the second component.
Amendment
of Retirement Plan and Conversion to Defined Contribution Plan
The
Trustees approved an amendment to the Retirement Plan to convert it to a defined
contribution plan for active Trustees
(the Amended Plan). Under the Amended Plan, the benefit amount was amended for
each active Trustee to the present value of the Trustee’s existing retirement
plan benefit as of December 31, 2013 (the Existing Plan Benefit) plus the
present value of retirement benefits expected to be earned under the Retirement
Plan through the end of the calendar year in which the Trustee attained age 75
(the Expected Future Benefit and, together with the Existing Plan Benefit, the
Accrued Benefit). On the conversion date, the Covered Funds established
bookkeeping accounts in the amount of their pro rata share of the Accrued
Benefit, which is deemed to be invested in one or more Invesco Funds selected by
the participating Trustees. Such accounts will be adjusted from time to time to
reflect deemed investment earnings and losses. Each Trustee’s Accrued Benefit is
not funded and, with respect to the payments of amounts held in the accounts,
the participating Trustees have the status of unsecured creditors of the Covered
Funds. Trustees will be paid the adjusted account balance under the Amended Plan
in quarterly installments for the same period as described above.
Deferred
Compensation Agreements
Certain former
Trustees
and
current
Independent
Trustees (for
purposes of this paragraph only, the Deferring Trustees) have executed a
Deferred Compensation Agreement (collectively, the Compensation Agreements).
Pursuant to the Compensation Agreements, the Deferring Trustees have the option
to elect to defer receipt of up to 100% of their compensation payable by the
Funds, and such amounts are placed into a deferral account and deemed to be
invested in one or more Invesco Funds selected by the Deferring Trustees.
Amounts deferred by Deferring Trustees pursuant to a Compensation Agreement
during the most recent fiscal year are shown in Appendix D – Trustee
Compensation Table.
Distributions
from these deferral accounts will be paid in cash, generally in equal quarterly
installments over a period of up
to ten (10) years (depending on the Compensation Agreement) beginning on the
date selected under the Compensation Agreement. If a Deferring Trustee dies
prior to the distribution of amounts in his or her deferral account, the balance
of the deferral account will be distributed to his or her designated
beneficiary. The Compensation Agreements are not funded and, with respect to the
payments of amounts held in the deferral accounts, the Deferring Trustees have
the status of unsecured creditors of the Funds and of each other Invesco Fund
from which they are deferring compensation.
Purchase
of Class A Shares of the Funds at Net Asset Value
The
Trustees and certain other affiliated persons of the Trust may purchase Class A
shares of the Invesco Funds without
paying an initial sales charge. Invesco Distributors permits such purchases
because there is a reduced sales effort involved in sales to such purchasers,
thereby resulting in relatively low expenses of distribution. For a complete
description of the persons who will not pay an initial sales charge on purchases
of Class A shares of the Invesco Funds, see Appendix L — “Purchase, Redemption,
Exchange and Pricing of Shares — Purchase and Redemption of Shares — Class A
Shares Sold Without an Initial Sales Charge.”
79
Purchases
of Class Y Shares of the Funds
The
Trustees and certain other affiliated persons of the Trust may purchase Class Y
shares of the Invesco Funds. For a
description please see “Appendix L — Purchase, Redemption, Exchange and Pricing
of Shares — Purchase and Redemption of Shares — Purchases of Class Y
Shares.”
Code
of Ethics
Invesco,
the Trust, Invesco Distributors and certain of the Sub-Advisers each have
adopted a Code of Ethics that applies
to all Invesco Fund trustees and officers, and employees of Invesco, the
Sub-Advisers and their affiliates, and governs, among other things, the personal
trading activities of all such persons. Certain Sub-Advisers have adopted their
own Code of Ethics. Each Code of Ethics is designed to detect and prevent
improper personal trading by portfolio managers and certain other employees that
could compete with or take advantage of the Fund’s portfolio transactions.
Unless specifically noted, to the extent a Sub-Adviser has adopted its own Code
of Ethics, each Sub-Adviser’s Code of Ethics does not materially differ from
Invesco’s Code of Ethics discussed below. The Code of Ethics is intended to
address conflicts of interest with the Trust that may arise from personal
trading in the Invesco Funds. Personal trading, including personal trading
involving securities that may be purchased or held by an Invesco Fund, is
permitted under the Code of Ethics subject to certain restrictions; however,
employees are required to pre-clear security transactions with the Compliance
Officer or a designee and to report transactions on a regular
basis.
Proxy
Voting Policies
Invesco
has adopted its own specific Proxy Voting Policies.
The
Board has delegated responsibility for decisions regarding proxy voting for
securities held by each Fund to the
following Adviser/Sub-Adviser(s):
|
Fund
Name |
Adviser/Sub-Adviser |
|
Invesco
SteelPath MLP Select 40
Fund |
Invesco
Advisers, Inc. |
|
Invesco
SteelPath MLP Alpha Fund |
Invesco
Advisers, Inc. |
|
Invesco
SteelPath MLP Income
Fund |
Invesco
Advisers, Inc. |
|
Invesco
SteelPath MLP Alpha Plus
Fund |
Invesco
Advisers, Inc. |
Invesco
(the Proxy Voting Entity) will vote such proxies in accordance with its proxy
voting policies and procedures, as
outlined above, which have been reviewed and approved by the Board, and which
are found in Appendix E. Any material changes to the proxy voting policies and
procedures will be submitted to the Board for approval. The Board will be
supplied with a summary quarterly report of the Fund’s proxy voting record.
Information regarding how the Funds voted proxies related to their portfolio
securities during the twelve months ended June 30, 2023, is available without
charge at our website, http://www.invesco.com/us. This information will also be
available at the SEC website, http://www.sec.gov.
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Information
about the ownership of each class of each Fund’s shares by beneficial or record
owners of such Fund and
ownership of Fund shares by trustees and officers as a group is found in
Appendix F. A shareholder who owns beneficially 25% or more of the outstanding
shares of a Fund is presumed to “control” that Fund.
INVESTMENT
ADVISORY AND OTHER SERVICES
Investment
Adviser
Invesco
serves as the Funds’ investment adviser. The Adviser manages the investment
operations of the Funds as well as
other investment portfolios that encompass a broad range of investment
objectives, and has
80
agreed
to perform or arrange for the performance of the Funds’ day-to-day management.
The Adviser, as successor in
interest to multiple investment advisers, has been an investment adviser since
1976. Invesco Advisers, Inc. is an indirect, wholly-owned subsidiary of Invesco
Ltd. Invesco Ltd. and its subsidiaries are an independent global investment
management group. Certain of the directors and officers of Invesco are also
executive officers of the Trust and their affiliations are shown under
“Management Information” herein.
As
investment adviser, Invesco supervises all aspects of the Funds’ operations and
provides investment advisory services
to the Funds. Invesco obtains and evaluates economic, statistical and financial
information to formulate and implement investment programs for the Funds. The
Master Investment Advisory Agreement (Advisory Agreement) provides that, in
fulfilling its responsibilities, Invesco may engage the services of other
investment managers with respect to the Funds. The investment advisory services
of Invesco are not exclusive and Invesco is free to render investment advisory
services to others, including other investment companies.
The
Advisory Agreement provides that each Fund will pay or cause to be paid all
expenses of such Fund not assumed by
Invesco, including, without limitation: brokerage commissions, taxes, legal,
auditing or governmental fees, custodian, transfer and shareholder service agent
costs, expenses of issue, sale, redemption, and repurchase of shares, expenses
of registering and qualifying shares for sale, expenses relating to trustee and
shareholder meetings, the cost of preparing and distributing reports and notices
to shareholders, the fees and other expenses incurred by the Trust on behalf of
each Fund in connection with membership in investment company organizations, and
the cost of printing copies of prospectuses and statements of additional
information distributed to the Funds’ shareholders.
Invesco,
at its own expense, furnishes to the Trust office space and facilities. Invesco
furnishes to the Trust all personnel
for managing the affairs of the Trust and each of its series of
shares.
Pursuant
to its Advisory Agreement with the Trust, Invesco receives a monthly fee from
each Fund calculated at the
annual rates indicated in the second column below, based on the average daily
net assets of each Fund during the year. Each Fund allocates advisory fees to a
class based on the relative net assets of each class.
|
Fund
Name |
Annual
Rate/Net Assets Per Advisory Agreement |
|
Invesco
SteelPath MLP Select 40 Fund |
First $3
billion 0.70% |
|
|
Next $2
billion 0.68% |
|
|
Over $5
billion 0.65% |
|
Invesco
SteelPath MLP Alpha Fund |
First $3
billion 1.10% |
|
|
Next $2
billion 1.08% |
|
|
Over $5
billion 1.05% |
|
Invesco
SteelPath MLP Income Fund |
First $3
billion 0.95% |
|
|
Next $2
billion 0.93% |
|
|
Over $5
billion 0.90% |
|
Invesco
SteelPath MLP Alpha Plus Fund |
First $3
billion 1.25% |
|
|
Next $2
billion 1.23% |
|
|
Over $5
billion 1.20% |
Invesco
may from time to time waive or reduce its fee. Voluntary fee waivers or
reductions may be rescinded at any
time without further notice to investors. During periods of voluntary fee
waivers or reductions, Invesco will retain its ability to be reimbursed for such
fee prior to the end of each fiscal year in which the voluntary fee waiver or
reduction was made. After discussions with the Board, Invesco previously
had
voluntarily agreed
to reduce the advisory fee of the Invesco SteelPath MLP Alpha Plus Fund by 0.25%
of the Fund's daily net assets. This waiver applied to all share classes of the
Fund. The advisory fee reduction was a voluntary undertaking and was
terminated effective July 1, 2023. In addition, to the extent any fees are paid
under the Administrative Services Agreement between the Funds and Invesco, as
discussed below, the advisory fee payable by each Fund shall be reduced by any
amounts paid by the Fund under such Administrative Services
Agreement.
81
Invesco
has contractually agreed through at least June 30, 2025, to waive
advisory fees payable by each Fund in an amount equal to 100% of the net
advisory fee Invesco receives from the Affiliated Money Market Funds as a result
of each Fund’s investment of uninvested cash in the Affiliated Money Market
Funds. See “Description of the Funds and Their Investments and Risks –
Investment Strategies and Risks – Other Investments – Other Investment
Companies.” If applicable, such contractual fee waiver or reduction is set forth
in the fee table to each Fund’s prospectus. Unless Invesco continues the fee
waiver agreement, it will terminate as indicated above. During Their terms, the
fee waiver agreement cannot be terminated or amended to reduce the advisory fee
waiver without approval of the Board. The management fees payable by the Funds,
the amounts waived by Invesco and the net fees paid by the Funds are found in
Appendix G.
For
Funds that have expense limitations (“Expense Limitations”) or boundary limits
(“Boundary Limits”), as applicable, Invesco
has agreed until at least the
expiration date
(the "Expiration Date") for the Expense Limitations, or for an indefinite period
until further notice to the Board of Trustees for the Boundary Limits, that
Invesco will waive its fees or reimburse expenses to the extent that expenses of
the applicable class
(excluding (i)
interest; (ii) taxes; (iii) dividend expense on short sales; (iv) extraordinary
or non-routine items, including litigation expenses; and (v) expenses that each
Fund has incurred but did not actually pay because of an expense offset
arrangement, if applicable) exceed the Expense Limitation or Boundary Limit
rate, on an average of the daily net assets allocable to such class on an
annualized basis. (It should be noted that Acquired Fund Fees and Expenses are
not operating expenses of the Funds directly, but are fees and expenses,
including management fees of the investment companies in which the Funds invest.
As a result, the Total Annual Fund Operating Expenses After Fee Waiver and/or
Expense Reimbursement may exceed a Fund’s expense limit.)
Expense
Limitations. Neither the Trust
nor Invesco may remove or amend the Expense Limitations to each Fund's detriment
prior to the Expiration Date without requesting and receiving the approval of
the Board of Trustees of the Fund’s Trust to remove or amend such Expense
Limitations. Invesco does not have any right to reimbursement of any amount so
waived or reimbursed. For the Expense Limitations, Invesco will review the
then-current Expense Limitations for each class of the Fund prior to the
Expiration Date to determine whether such limitations should be amended,
continued or terminated. The Expense Limitations will expire upon the Expiration
Date unless Invesco agrees to continue them. These Expense Limitations are set
forth in the Expense Limitations table below.
|
Fund |
Annual
Rate/Net Assets Per Expense Limitation
Agreement |
Expiration
Date |
|
Invesco
SteelPath MLP Alpha Fund |
|
|
|
Class
A Shares |
1.50% |
March
31, 2024 |
|
Class
C Shares |
2.25% |
March
31, 2024 |
|
Class
R Shares |
1.75% |
March
31, 2024 |
|
Class
Y Shares |
1.25% |
March
31, 2024 |
|
Class
R5 Shares |
1.24% |
March
31, 2024 |
|
Class
R6 Shares |
1.19% |
March
31, 2024 |
|
|
|
|
|
Invesco
SteelPath MLP Alpha Fund |
|
|
|
Class
A Shares |
1.57% |
March
31, 2025 |
|
Class
C Shares |
2.32% |
March
31, 2025 |
|
Class
R Shares |
1.82% |
March
31, 2025 |
|
Class
Y Shares |
1.32% |
March
31, 2025 |
|
Class
R5 Shares |
1.32% |
March
31, 2025 |
|
Class
R6 Shares |
1.32% |
March
31, 2025 |
|
|
|
|
|
Invesco
SteelPath MLP Alpha Plus Fund |
|
|
|
Class
A Shares |
1.83% |
March
31, 2024 |
|
Class
C Shares |
2.60% |
March
31, 2024 |
|
Class
R Shares |
2.08% |
March
31, 2024 |
|
Class
Y Shares |
1.61% |
March
31, 2024 |
|
Class
R5 Shares |
1.51% |
March
31, 2024 |
82
|
Fund |
Annual
Rate/Net Assets Per Expense Limitation
Agreement |
Expiration
Date |
|
Class
R6 Shares |
1.46% |
March
31, 2024 |
|
|
|
|
|
Invesco
SteelPath MLP Alpha Plus Fund |
|
|
|
Class
A Shares |
1.83% |
March
31, 2025 |
|
Class
C Shares |
2.58% |
March
31, 2025 |
|
Class
R Shares |
2.08% |
March
31, 2025 |
|
Class
Y Shares |
1.58% |
March
31, 2025 |
|
Class
R5 Shares |
1.58% |
March
31, 2025 |
|
Class
R6 Shares |
1.58% |
March
31, 2025 |
|
|
|
|
|
Invesco
SteelPath MLP Income Fund |
|
|
|
Class
A Shares |
1.35% |
March
31, 2024 |
|
Class
C Shares |
2.10% |
March
31, 2024 |
|
Class
R Shares |
1.60% |
March
31, 2024 |
|
Class
Y Shares |
1.10% |
March
31, 2024 |
|
Class
R5 Shares |
1.08% |
March
31, 2024 |
|
Class
R6 Shares |
1.03% |
March
31, 2024 |
|
|
|
|
|
Invesco
SteelPath MLP Income Fund |
|
|
|
Class
A Shares |
1.42% |
March
31, 2025 |
|
Class
C Shares |
2.17% |
March
31, 2025 |
|
Class
R Shares |
1.67% |
March
31, 2025 |
|
Class
Y Shares |
1.17% |
March
31, 2025 |
|
Class
R5 Shares |
1.17% |
March
31, 2025 |
|
Class
R6 Shares |
1.17% |
March
31, 2025 |
|
|
|
|
|
Invesco
SteelPath MLP Select 40 Fund |
|
|
|
Class
A Shares |
1.10% |
March
31, 2024 |
|
Class
C Shares |
1.85% |
March
31, 2024 |
|
Class
R Shares |
1.35% |
March
31, 2024 |
|
Class
Y Shares |
0.85% |
March
31, 2024 |
|
Class
R5 Shares |
0.84% |
March
31, 2024 |
|
Class
R6 Shares |
0.79% |
March
31, 2024 |
|
|
|
|
|
Invesco
SteelPath MLP Select 40 Fund |
|
|
|
Class
A Shares |
1.11% |
March
31, 2025 |
|
Class
C Shares |
1.86% |
March
31, 2025 |
|
Class
R Shares |
1.36% |
March
31, 2025 |
|
Class
Y Shares |
0.86% |
March
31, 2025 |
|
Class
R5 Shares |
0.86% |
March
31, 2025 |
|
Class
R6 Shares |
0.86% |
March
31, 2025 |
|
|
|
|