2024-01-08AMF-STAT-PRO_11422
|
| |
abrdn
Funds |
|
Statement
of Additional Information |
|
February
29, 2024 |
|
abrdn
Focused
U.S. Small Cap Equity Fund (formerly, abrdn U.S.
Sustainable Leaders Smaller Companies Fund)
Class
A - MLSAX ■
Class R - GLSRX ■
Institutional Class - GGUIX ■
Institutional Service Class - AELSX
abrdn
U.S. Small Cap Equity Fund
Class
A - GSXAX ■
Class C - GSXCX ■
Class R - GNSRX ■
Institutional Class - GSCIX ■
Institutional Service Class - GSXIX
abrdn
China A Share Equity Fund
Class
A - GOPAX ■
Class C - GOPCX ■
Class R - GOPRX ■
Institutional Class - GOPIX ■
Institutional Service Class - GOPSX
abrdn
Emerging Markets Sustainable Leaders Fund
Class
A - GIGAX ■
Class C - GIGCX ■
Class R - GIRRX ■
Institutional Class - GIGIX ■
Institutional Service Class - GIGSX
abrdn
Emerging Markets ex-China Fund
Class
A - GLLAX ■
Class C - GLLCX ■
Class R - GWLRX ■
Institutional Class - GWLIX ■
Institutional Service Class - GLLSX
abrdn
Emerging Markets Fund
Class
A - GEGAX ■
Class C - GEGCX ■
Class R - GEMRX ■
Institutional Class - ABEMX ■
Institutional Service Class - AEMSX
abrdn
Infrastructure
Debt Fund (formerly, abrdn Global
Absolute Return Strategies Fund)
Class
A - CUGAX ■
Institutional Class - AGCIX ■
Institutional Service Class - CGFIX
abrdn
International Small Cap Fund
Class
A – WVCCX ■
Class C – CPVCX ■
Class R – WPVAX ■
Institutional Class – ABNIX
abrdn
Intermediate Municipal Income Fund
Class
A – NTFAX ■
Class C – GTICX ■
Institutional Class – ABEIX ■
Institutional Service Class – ABESX
abrdn
U.S. Sustainable Leaders Fund
Class
A – GXXAX ■
Class C – GXXCX ■
Institutional Class – GGLIX ■
Institutional Service Class – GXXIX
abrdn
Dynamic Dividend Fund
Class
A – ADAVX ■
Institutional Class – ADVDX
abrdn
Global Infrastructure Fund
Class
A – AIAFX ■
Institutional Class – AIFRX
abrdn
Short Duration High Yield Municipal Fund
Class
A – AAHMX ■
Class C – ACHMX ■
Institutional Class – AHYMX
abrdn
Realty Income & Growth Fund
Class
A – AIAGX ■
Institutional Class – AIGYX
abrdn
Ultra Short Municipal Income Fund
Class
A – ATOAX ■
Class A1 – ATOBX ■
Institutional Class – ATOIX
abrdn
Emerging
Markets Dividend Fund (formerly, abrdn International
Sustainable Leaders Fund)
Class
A – BJBIX ■
Institutional Class – JIEIX
abrdn
Global Equity Impact Fund
Class
A – JETAX ■
Institutional Class – JETIX
abrdn
High
Income Opportunities Fund (formerly, abrdn Global
High Income Fund)
Class
A – BJBHX ■
Institutional Class – JHYIX
abrdn
Funds (the “Trust”) is a registered open-end investment company consisting of 19
series as of the date hereof. This Statement of Additional
Information (“SAI”) relates to the series of the Trust listed above (each, a
“Fund” and collectively, the “Funds”). This SAI is not a prospectus
but is incorporated by reference into the Prospectus for the Funds. It contains
information in addition to and more detailed than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus for the Funds dated February 29,
2024, as amended.
Terms
not defined in this SAI have the meanings assigned to them in the Prospectus.
You can order copies of the Prospectus without charge
by writing to abrdn Funds, c/o SS&C GIDS, Inc. (”SS&C”)
at 430 W. 7th Street, Ste. 219534, Kansas City, MO 64105- 1407 or calling
(toll-free)
866-667-9231.
The
audited financial statements with respect to each of the Funds for the fiscal
year ended October 31, 2023,
and the related report of KPMG,
LLP (“KPMG”), independent registered public accounting firm for the Funds, which
are contained in the Funds’ October 31, 2023 Annual Report,
are incorporated herein by reference in the section “Financial Statements.” No
other parts of the Annual Report are incorporated
by reference herein. A copy of the Annual Report may be obtained upon request
and without charge by writing to abrdn Funds
at 430 W. 7th Street, Ste. 219534, Kansas City, MO 64105-1407 or by calling
866-667-9231.
General
Information
The
Trust is an open-end management investment company formed as a statutory trust
under the laws of the state of
Delaware by a Certificate of Trust filed on September 27, 2007. The Trust
currently consists of 19 separate series, each with
its own investment objective.
Certain
Funds in this SAI were formed to acquire the assets and liabilities of the
corresponding Fund of the Nationwide
Mutual Funds (the
“Nationwide Predecessor Funds”) as shown in the chart below.
| |
Fund
|
Corresponding
Predecessor Fund |
abrdn
Emerging Markets ex-China Fund (“Emerging Markets ex-China
Fund”) |
Nationwide
Worldwide Leaders Fund |
abrdn
China A Share Equity Fund (“China A Fund”) |
Nationwide
China Opportunities Fund |
abrdn
Emerging Markets Sustainable Leaders Fund (“Emerging Markets
Sustainable
Leaders Fund”) |
Nationwide
International Growth Fund |
abrdn
Focused U.S. Small Cap Equity Fund (formerly, abrdn U.S. Sustainable
Leaders
Smaller Companies Fund) (“Focused U.S. Small Cap Equity
Fund”) |
Nationwide
U.S. Growth Leaders Long-Short Fund |
abrdn
U.S. Small Cap Equity Fund (“U.S. Small Cap Equity
Fund”) |
Nationwide
Small Cap Fund |
abrdn
Intermediate Municipal Income Fund (“Intermediate Municipal Income
Fund”) |
Nationwide
Tax-Free Income Fund |
The
Nationwide Predecessor Funds, for purposes of the relevant reorganization, are
considered the accounting survivors
and accordingly, certain financial history of the Nationwide Predecessor Funds
is included in this SAI. Prior to February
28, 2022, the Intermediate Municipal Income Fund was known as the Aberdeen
Intermediate Municipal Income Fund.
Prior to February 28, 2019, the Intermediate Municipal Income Fund was known as
the Aberdeen Tax-Free Income Fund.
Prior to February 28, 2022, the China A Fund was known as the Aberdeen China A
Share Equity Fund. Prior
to June 13,
2019, the China A Fund was known as the Aberdeen China Opportunities
Fund.
Prior to February 29, 2024, the Focused
U.S. Small Cap Equity Fund was known as the abrdn U.S. Sustainable Leaders
Smaller Companies Fund. Prior
to February
28, 2022, the U.S. Sustainable Leaders Smaller Companies Fund was known as the
Aberdeen U.S. Sustainable Leaders
Smaller Companies Fund. Prior to December 1, 2020, the U.S. Sustainable Leaders
Smaller Companies Fund was known
as the Aberdeen Focused U.S. Equity Fund, and prior to November 15, 2017, the
Aberdeen Focused U.S. Equity Fund
was known as the Aberdeen Equity Long-Short Fund. Prior to February 28, 2022,
the Emerging Markets Sustainable Leaders
Fund was known as the Aberdeen Emerging Markets Sustainable Leaders Fund. Prior
to December 1, 2020, the Emerging
Markets Sustainable Leaders Fund was known as the Aberdeen International Equity
Fund. Prior to February 28, 2022,
the abrdn Emerging Markets ex-China Fund was known as the Aberdeen Global Equity
Fund.
Certain
Funds in this SAI were formed to acquire the assets and liabilities of the
corresponding Fund of the Credit Suisse
Funds (each a “Credit Suisse Predecessor Fund,” and collectively, the “Credit
Suisse Predecessor Funds”) as shown in
the chart below.
| |
Fund
|
Corresponding
Predecessor Fund |
abrdn
Infrastructure Debt Fund (formerly, abrdn Global Absolute Return
Strategies Fund)
(“Infrastructure Debt Fund”) |
Credit
Suisse Global Fixed Income Fund |
abrdn
International Small Cap Fund (“International Small Cap
Fund”) |
Credit
Suisse Global Small Cap Fund |
The
Credit Suisse Predecessor Funds, for purposes of the relevant reorganization,
are considered the accounting survivors
and accordingly, certain financial history of the Credit Suisse Predecessor
Funds is included in this SAI. Prior to August
18, 2023, the abrdn Infrastructure Debt Fund was known as the abrdn Global
Absolute Return Strategies Fund. Prior
to February
28, 2022, the abrdn
Global Absolute Return Strategies
Fund was known as the Aberdeen Global Absolute
Return Strategies Fund. Prior to November 15, 2019, the Aberdeen
Global Absolute Return Strategies
Fund was known
as the Aberdeen Global Unconstrained Fixed Income Fund, and prior to August 15,
2016, the Aberdeen Global Unconstrained
Fixed Income Fund was known as the Aberdeen Global Fixed Income Fund. Prior to
February 28, 2022, the International
Small Cap Fund was known as the Aberdeen International Small Cap
Fund.
Certain
Funds in this SAI acquired the assets and liabilities of the corresponding Fund
of the Pacific Capital Funds (each
a “Pacific Capital Predecessor Fund,” and collectively, the “Pacific Capital
Predecessor Funds”), as shown in the chart
below.
| |
Fund
|
Corresponding
Predecessor Fund |
U.S.
Small Cap Equity Fund |
Pacific
Capital Small Cap Fund |
Class
A Shares |
Class
A and B Shares |
Class
C Shares |
Class
C Shares |
Institutional
Class Shares |
Class
Y Shares |
Prior
to February 28, 2022, the abrdn Emerging Markets Fund (“Emerging Markets Fund”)
was known as the Aberdeen
Emerging Markets Fund. The Emerging Markets Fund was formed to acquire the
assets and liabilities of a former
Aberdeen Emerging Markets Fund, which was a series of The Advisors’ Inner Circle
Fund II (the “Emerging Markets Predecessor
Fund”). On May 21, 2012, the Emerging Markets Fund acquired the assets of the
Aberdeen Emerging Markets
Fund (the “Acquired Fund”), another series of the Trust, which had Class A, C
and R Shares. The Emerging Markets
Predecessor Fund, for purposes of the reorganization, is considered the
accounting survivor and accordingly, certain
financial history of the Emerging Markets Predecessor Fund is included in this
SAI.
Prior
to February 28, 2022, the abrdn U.S. Sustainable Leaders Fund (“Sustainable
Leaders Fund”) was known as the Aberdeen
U.S. Sustainable Leaders Fund, and prior to December 1, 2020, the U.S.
Sustainable Leaders Fund was known as the
Aberdeen U.S. Multi-Cap Equity Fund (“U.S. Multi-Cap Equity Fund”). Prior to
October 31, 2015, the U.S. Multi-Cap Equity
Fund was known as the Aberdeen U.S. Equity Fund. The Aberdeen U.S. Equity Fund
(“U.S. Equity Fund”) was created to
acquire the assets and liabilities of the Credit Suisse Large Cap Blend Fund,
Inc., a Maryland corporation, and a former series
of the Trust with a U.S. equity strategy (“Aberdeen U.S. Equity Predecessor
Fund”). The Aberdeen U.S. Equity Predecessor
Fund, for purposes of the reorganization, is considered the accounting survivor
and accordingly, certain financial
history of the Aberdeen U.S. Equity Predecessor Fund is included in this SAI. On
February 25, 2013, the U.S. Equity Fund
acquired the assets of the Aberdeen U.S. Equity II Fund, another series of the
Trust, which offered Class A, Class C, Class
R, Institutional Class and Institutional Service Class Shares. The U.S. Equity
Fund, for purposes of the reorganization, is
considered the accounting survivor.
Certain
Funds in this SAI were formed to acquire the assets and liabilities of certain
series of the Alpine Equity Trust, Alpine
Series Trust or Alpine Income Trust (each, an “Alpine Predecessor Fund,” and
collectively, the “Alpine Predecessor Funds”),
as shown in the chart below.
| |
Fund
|
Corresponding
Predecessor Fund |
abrdn
Dynamic Dividend Fund (“Dynamic Dividend Fund”) |
Alpine
Dynamic Dividend Fund, a series of Alpine Series
Trust |
abrdn
Global Infrastructure Fund (“Global Infrastructure
Fund”) |
Alpine
Global Infrastructure Fund, a series of Alpine
Equity Trust |
abrdn
Realty Income & Growth Fund (“Realty Income & Growth
Fund”) |
Alpine
Realty Income & Growth Fund, a series of Alpine
Equity Trust |
abrdn
Short Duration High Yield Municipal Fund (“Short Duration High Yield
Municipal
Fund”) |
Alpine
High Yield Managed Duration Municipal Fund,
a series of Alpine Income Trust |
abrdn
Ultra Short Municipal Income Fund (“Ultra Short Municipal Income
Fund”) |
Alpine
Ultra Short Municipal Income Fund, a series of
Alpine Income Trust |
The
Alpine Predecessor Funds, for purposes of the relevant reorganization, are
considered the accounting survivors and
accordingly, certain financial history of the Alpine Predecessor Funds is
included in this SAI.
Prior
to February 28, 2022, the Dynamic Dividend Fund was known as the Aberdeen
Dynamic Dividend Fund. Prior to February
28, 2022, the Global Infrastructure Fund was known as the Aberdeen Global
Infrastructure Fund. Prior to February
28, 2022, the Realty Income & Growth Fund was known as the Aberdeen Realty
Income & Growth Fund. Prior to February
28, 2022, the Short Duration High Yield Municipal Fund was known as the Aberdeen
Short Duration High Yield Municipal
Fund. Prior to February 28, 2019, the Short Duration High Yield Municipal Fund
was known as the Aberdeen High Yield
Managed Duration Municipal Fund. Prior to February 28, 2022, the Ultra Short
Fund was known as the Aberdeen Ultra
Short Municipal Income Fund.
Certain
Funds in this SAI were formed to acquire the assets and liabilities of certain
series of the corresponding Fund of
the Aberdeen Investment Funds (each, an “Aberdeen Investment Funds Predecessor
Fund,” and collectively, the “Aberdeen
Investment Funds Predecessor Funds”), as shown in the chart below.
| |
Fund
|
Corresponding
Aberdeen Investment Funds Predecessor Fund |
abrdn
Emerging Markets Dividend Fund (formerly, abrdn International Sustainable
Leaders
Fund) (“Emerging Markets Dividend Fund”) |
Aberdeen
International Sustainable Leaders Fund,
a series of Aberdeen Investment Funds |
abrdn
Global Equity Impact Fund (“Global Equity Impact
Fund”) |
Aberdeen
Global Equity Impact Fund, a series of Aberdeen
Investment Funds |
abrdn
High Income Opportunities Fund (formerly, abrdn Global High Income Fund)
(“High
Income Opportunities Fund”) |
Aberdeen
Global High Income Fund, a series of Aberdeen
Investment Funds |
The
Aberdeen Investment Funds Predecessor Funds, for purposes of the relevant
reorganization, are considered the accounting
survivors and accordingly, certain financial history of the Aberdeen Investment
Funds Predecessor Funds is included
in this SAI. Prior to February 29,
2024, the Emerging Markets Dividend Fund was known as the abrdn International
Sustainable
Leaders Fund. Prior to February 28,
2022, the Emerging
Markets Dividend
Fund was known as the Aberdeen International
Sustainable Leaders Fund. Prior to February 28, 2022, the Global Equity Impact
Fund was known as the
Aberdeen
Global Equity Impact Fund. Prior to August
18, 2023, the High Income Opportunities Fund was known as the abrdn
Global High Income Fund. Prior to February
28, 2022, the abrdn
Global
High Income Fund was known as the Aberdeen
Global High Income Fund.
Each
of the Funds, except the Realty Income & Growth Fund, is a diversified
open-end management investment company
as defined in the Investment Company Act of 1940, as amended (the “1940 Act”).
The Realty Income & Growth Fund
is a non-diversified open-end management investment company as defined in the
1940 Act.
Additional
Information on Portfolio Instruments and Investment Policies
The
Funds invest in a variety of securities and employ a number of investment
techniques that involve certain risks. The
Prospectus for the Funds highlights the principal investment strategies,
investment techniques and risks. This SAI contains
additional information regarding the principal investment strategies for the
Funds and information about non-principal
investment strategies of the Funds. The following tables set forth additional
information concerning permissible
investments and techniques for each of the Funds and risk factors. A
“●”
in the table indicates that the Fund may
invest in the corresponding instrument or technique or is subject to such risk
factor. An empty box indicates that the Fund
does not intend to invest in the corresponding instrument or follow the
corresponding technique or is not subject to such
risk factor.
Please
review the discussions in the Prospectus for further information regarding the
investment objective and policies
of each Fund.
References
to the “Adviser” in this section also include the Subadviser(s),
as applicable.
|
|
|
|
|
|
|
| |
Type
of Investment, Technique
or Risk Factor |
China
A Fund |
Emerging
Markets Dividend
Fund |
Emerging
Markets ex-China
Fund |
Emerging Markets
Fund |
Emerging
Markets Sustainable Leaders
Fund |
Focused
U.S. Small Cap
Equity Fund |
U.S.
Small Cap Equity
Fund |
U.S.
Sustainable Leaders
Fund |
Adjustable,
Floating and
Variable Rate Instruments
|
● |
|
● |
● |
● |
● |
● |
● |
Bank
Obligations |
|
● |
|
|
|
● |
● |
● |
Borrowing
|
● |
● |
● |
● |
● |
● |
● |
● |
Common
Stock |
● |
● |
● |
● |
● |
● |
● |
● |
Convertible
Securities |
● |
● |
|
|
|
● |
● |
● |
Currency
Transactions |
● |
● |
● |
● |
● |
● |
● |
● |
Custody/Sub-Custody
Risk
|
● |
● |
● |
● |
● |
● |
● |
● |
Cybersecurity
Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Debt
Securities |
● |
|
|
|
|
● |
● |
● |
Depositary
Receipts |
● |
● |
● |
● |
● |
● |
● |
● |
Derivatives
|
● |
● |
|
|
|
● |
● |
● |
Dividend
Strategy Risk |
|
● |
|
|
|
|
|
|
Emerging
Markets Securities
|
● |
● |
● |
● |
● |
● |
● |
● |
Equity-Linked
Securities
|
● |
|
|
|
|
|
|
|
Event
Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Exchange-Traded
Funds
|
● |
● |
● |
● |
● |
● |
● |
● |
Focus
Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Foreign
Commercial Paper
|
|
● |
● |
● |
● |
|
|
|
Foreign
Currencies Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Foreign
Government Securities
|
● |
● |
● |
● |
● |
|
|
|
Foreign
Securities |
● |
● |
● |
● |
● |
● |
● |
● |
Frontier
Market Securities
|
● |
● |
● |
● |
● |
|
|
|
Futures
|
● |
● |
|
|
|
● |
● |
● |
Illiquid
Investments Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Impact
of Large Redemptions
and Purchases
of Fund Shares
|
● |
● |
● |
● |
● |
● |
● |
● |
Indexed
Securities |
● |
|
● |
● |
● |
● |
● |
● |
Inflation/Deflation
Risk |
● |
● |
● |
● |
● |
● |
● |
● |
6 Additional
Information on Portfolio Instruments and Investment Policies
|
|
|
|
|
|
|
| |
Type
of Investment, Technique
or Risk Factor |
China
A Fund |
Emerging
Markets Dividend
Fund |
Emerging
Markets ex-China
Fund |
Emerging Markets
Fund |
Emerging
Markets Sustainable Leaders
Fund |
Focused
U.S. Small Cap
Equity Fund |
U.S.
Small Cap Equity
Fund |
U.S.
Sustainable Leaders
Fund |
Initial
Public Offerings |
● |
● |
● |
● |
● |
● |
● |
● |
Interests
in Publicly Traded
Limited Partnerships
|
● |
● |
● |
● |
● |
● |
● |
● |
Market
Events Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Medium
Company, Small
Company and Emerging
Growth Securities
|
● |
● |
● |
● |
● |
● |
● |
● |
Money
Market Instruments
|
● |
● |
● |
● |
● |
● |
● |
● |
Operational
Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Options
|
● |
● |
|
|
|
● |
● |
● |
Preferred
Stock |
● |
● |
● |
● |
● |
● |
● |
● |
Private
Placements and
Other Restricted Securities
Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Real
Estate Investment Trusts
|
● |
● |
● |
● |
● |
● |
● |
● |
Real
Estate Securities Risk
|
● |
● |
● |
● |
● |
● |
● |
● |
Regulation
of Commodity
Interests |
● |
● |
● |
● |
● |
● |
● |
● |
Repurchase
Agreements
|
● |
|
|
|
|
|
● |
● |
Reverse
Repurchase Agreements
|
● |
|
|
|
|
|
● |
● |
Rights
Issues and Warrants
|
● |
● |
● |
● |
● |
● |
● |
● |
Secondary
Offerings |
● |
|
● |
● |
● |
● |
● |
● |
Securities
Lending |
● |
|
● |
● |
● |
|
● |
|
Securities
of Investment
Companies
|
● |
● |
● |
● |
● |
● |
● |
● |
“Special
Situations” Companies
Risk |
● |
● |
● |
● |
● |
● |
● |
● |
Strategic
Transactions, Derivatives
and Synthetic
Investments |
● |
● |
● |
● |
● |
● |
● |
● |
Sustainable
Investing Risk
|
|
|
|
|
● |
|
|
● |
Tax
Reclaim Risk |
|
● |
|
|
● |
|
|
|
Temporary
Investments
|
● |
● |
● |
● |
● |
● |
● |
● |
U.S.
Government Securities
|
● |
● |
● |
● |
● |
● |
● |
● |
When-Issued
Securities
and Delayed-Delivery
|
● |
● |
● |
● |
● |
● |
● |
● |
|
|
|
|
| |
Type
of Investment, Technique or Risk
Factor |
Dynamic Dividend
Fund |
Global
Equity Impact
Fund |
Global Infrastructure Fund |
International Small
Cap Fund |
Realty
Income & Growth
Fund |
Adjustable,
Floating and Variable
Rate Instruments |
|
|
|
|
● |
Additional
Information on Portfolio Instruments and Investment Policies 7
|
|
|
|
| |
Type
of Investment, Technique or Risk
Factor |
Dynamic Dividend
Fund |
Global
Equity Impact
Fund |
Global Infrastructure Fund |
International Small
Cap Fund |
Realty
Income & Growth
Fund |
Asset-Backed
Securities |
|
|
|
|
● |
Borrowing
|
● |
● |
● |
● |
● |
Business
Development Companies (“BDCs”) |
● |
|
|
|
● |
Closed-end
Funds |
● |
|
● |
|
● |
Common
Stock |
● |
● |
● |
● |
● |
Convertible
Securities |
|
● |
|
● |
● |
Currency
Transactions |
● |
● |
● |
● |
|
Custody/Sub-Custody
Risk |
● |
● |
● |
● |
● |
Cybersecurity
Risk |
● |
● |
● |
● |
● |
Debt
Securities |
|
|
|
● |
● |
Depositary
Receipts |
● |
● |
● |
● |
● |
Derivatives
|
● |
● |
● |
● |
● |
Dividend
Strategy Risk |
● |
|
● |
|
● |
Emerging
Markets Securities |
● |
● |
● |
● |
|
Equity-Linked
Securities |
● |
|
● |
|
● |
Event
Risk |
● |
● |
● |
● |
● |
Exchange-Traded
Funds |
● |
● |
● |
● |
● |
Focus
Risk |
|
● |
● |
● |
|
Foreign
Commercial Paper |
|
● |
|
|
● |
Foreign
Currencies Risk |
● |
● |
● |
● |
● |
Foreign
Government Securities |
|
● |
|
|
|
Foreign
Securities |
● |
● |
● |
● |
● |
Frontier
Market Securities |
● |
● |
● |
● |
|
Futures
|
● |
● |
● |
|
|
Illiquid
Investments Risk |
● |
● |
● |
● |
● |
Impact
Investing Risk |
|
● |
|
|
|
Impact
of Large Redemptions and Purchases of Fund Shares |
● |
● |
● |
● |
● |
Indexed
Securities |
|
|
|
|
● |
Inflation/Deflation
Risk |
● |
● |
● |
● |
● |
Initial
Public Offerings |
● |
● |
● |
● |
● |
Interests
in Publicly Traded Limited Partnerships |
● |
● |
● |
● |
● |
Market
Events Risk |
● |
● |
● |
● |
● |
Medium
Company, Small Company and Emerging Growth Securities
|
● |
● |
● |
● |
● |
Money
Market Instruments |
● |
● |
● |
● |
● |
Mortgage-Related
Securities |
|
|
|
|
● |
Operational
Risk |
● |
● |
● |
● |
● |
Options
|
● |
● |
● |
|
|
Preferred
Stock |
● |
● |
● |
● |
● |
Private
Placements and Other Restricted Securities Risk |
● |
|
● |
● |
|
Real
Estate Investment Trusts |
● |
● |
● |
● |
● |
Real
Estate Related Securities Risk |
|
|
|
|
● |
Real
Estate Securities Risk |
● |
● |
● |
● |
● |
Regulation
of Commodity Interests |
● |
● |
● |
● |
● |
Rights
Issues and Warrants |
● |
● |
● |
● |
● |
Secondary
Offerings |
● |
|
● |
● |
● |
Securities
Lending |
|
|
● |
● |
● |
8 Additional
Information on Portfolio Instruments and Investment Policies
|
|
|
|
| |
Type
of Investment, Technique or Risk
Factor |
Dynamic Dividend
Fund |
Global
Equity Impact
Fund |
Global Infrastructure Fund |
International Small
Cap Fund |
Realty
Income & Growth
Fund |
Securities
of Investment Companies |
● |
● |
● |
● |
● |
“Special
Situations”Companies Risk |
● |
● |
● |
● |
|
Strategic
Transactions, Derivatives and Synthetic Investments
|
● |
● |
● |
|
|
Tax
Reclaim Risk |
● |
● |
|
|
|
Temporary
Investments |
● |
● |
● |
● |
● |
U.S.
Government Securities |
|
● |
|
● |
● |
When-Issued
Securities and Delayed-Delivery |
● |
● |
● |
● |
● |
|
|
|
|
| |
Type
of Investment, Technique
or Risk Factor |
Infrastructure
Debt
Fund |
High
Income Opportunities
Fund |
Intermediate Municipal Income
Fund |
Short
Duration High
Yield Municipal
Fund |
Ultra
Short Municipal Income
Fund |
Adjustable,
Floating and Variable Rate Instruments |
● |
● |
● |
● |
● |
Asset-Backed
Securities |
● |
● |
● |
● |
● |
Bank
Loans |
|
● |
|
|
|
Bank
Obligations |
● |
● |
● |
● |
● |
Bonds
with Warrants Attached |
● |
● |
|
|
|
Borrowing
|
● |
● |
● |
● |
● |
Bridge
Loans |
● |
● |
|
|
|
Catastrophe
Bond |
● |
● |
● |
● |
● |
Common
Stock |
● |
● |
|
|
|
Convertible
Securities |
● |
● |
|
|
|
Corporate
Obligations |
● |
● |
● |
● |
● |
Credit
Linked Notes |
● |
● |
|
|
|
Currency
Transactions |
● |
● |
|
|
|
Custody/Sub-Custody
Risk |
● |
● |
|
|
|
Cybersecurity
Risk |
● |
● |
● |
● |
● |
Debt
Securities |
● |
● |
● |
● |
● |
Derivatives
|
● |
● |
|
|
|
Direct
Debt Instruments |
|
● |
|
|
|
Distressed
Securities |
|
● |
● |
● |
|
Emerging
Markets Securities |
● |
● |
|
|
|
Equity-Linked
Securities |
● |
● |
|
|
|
Eurodollar
Instruments |
● |
● |
|
|
|
European
Sovereign Debt Risk |
● |
● |
|
|
|
Event
Risk |
● |
● |
|
|
|
Exchange-Traded
Funds |
● |
● |
● |
● |
● |
Foreign
Commercial Paper |
● |
● |
|
|
|
Foreign
Currencies |
● |
● |
|
|
|
Foreign
Fixed Income Securities |
● |
● |
|
|
|
Foreign
Government Securities |
● |
● |
|
|
|
Foreign
Securities |
● |
● |
|
|
|
Frontier
Market Securities |
● |
● |
|
|
|
Futures
|
● |
● |
|
|
|
Illiquid
Investments Risk |
● |
● |
● |
● |
● |
Impact
of Large Redemptions and Purchases of Fund Shares |
● |
● |
● |
● |
● |
Income
Deposit Securities |
|
● |
|
|
|
Indexed
Securities |
● |
● |
|
|
|
Inflation/Deflation
Risk |
● |
● |
● |
● |
● |
Additional
Information on Portfolio Instruments and Investment Policies 9
|
|
|
|
| |
Type
of Investment, Technique
or Risk Factor |
Infrastructure
Debt
Fund |
High
Income Opportunities
Fund |
Intermediate Municipal Income
Fund |
Short
Duration High
Yield Municipal
Fund |
Ultra
Short Municipal Income
Fund |
Inverse
Floating Rate Instruments |
● |
● |
● |
● |
● |
LIBOR
and Replacement Rates Risk |
● |
● |
|
|
|
Loans
|
● |
● |
● |
● |
● |
Market
Events Risk |
● |
● |
● |
● |
● |
Medium
Company, Small Company and Emerging Growth Securities
|
● |
● |
|
|
|
Money
Market Instruments |
● |
● |
● |
● |
● |
Mortgage-Related
Securities |
● |
● |
|
|
|
Municipal
Securities |
● |
● |
● |
● |
● |
Non-Deliverable
Forwards |
● |
● |
|
|
|
Operational
Risk |
● |
● |
● |
● |
● |
Options
|
● |
● |
|
|
|
Pay-In-Kind
Bonds and Deferred Payment Securities |
● |
● |
|
|
|
Preferred
Stock |
● |
● |
|
|
|
Private
Placements and Other Restricted Securities |
● |
● |
● |
● |
● |
Put
Bonds |
● |
● |
● |
● |
● |
Real
Estate Investment Trusts |
● |
● |
|
|
|
Real
Estate Securities Risk |
● |
● |
|
|
|
Regulation
of Commodity Interests |
● |
● |
● |
● |
● |
Repurchase
Agreements |
● |
● |
|
|
|
Reverse
Repurchase Agreements |
● |
● |
|
|
|
Rights
Issues and Warrants |
● |
● |
● |
● |
● |
Securities
Backed by Guarantees |
● |
● |
● |
● |
● |
Securities
Lending |
● |
● |
● |
● |
● |
Securities
of Investment Companies |
● |
● |
● |
● |
● |
Short
Sales |
|
● |
|
|
|
“Special
Situations” Companies Risk |
● |
● |
|
|
|
Standby
Commitment Agreements |
● |
● |
● |
● |
● |
Strategic
Transactions, Derivatives and Synthetic Investments
|
● |
● |
|
|
|
Structured
Notes |
● |
● |
|
|
|
Structured
Securities |
● |
● |
● |
● |
● |
Supranational
Entities |
● |
● |
|
|
|
Swaps,
Caps, Floors and Collars |
● |
● |
|
|
|
Temporary
Investments |
● |
● |
● |
● |
● |
Transactions
Leverage Risk |
● |
● |
|
|
|
Trust
Preferred Securities |
● |
● |
|
|
|
U.S.
Government Securities |
● |
● |
● |
● |
● |
When-Issued
Securities and Delayed-Delivery |
● |
● |
● |
● |
● |
Zero
Coupon, Discount and Payment-In-Kind Securities |
● |
● |
● |
● |
● |
General
Information about the Fund’s Portfolio Instruments and Investment
Policies
The
following is a description of various types of securities, instruments and
techniques that may be purchased and/or used by
the Funds as well as certain risks to which the Funds are
subject.
Adjustable, Floating and Variable Rate
Instruments.
Floating, adjustable rate or variable rate obligations bear interest
at
rates that are not fixed, but vary with changes in specified market rates or
indices, such as the prime rate, or at specified
intervals. The interest rate on floating-rate securities varies with changes in
the underlying index (such as the Treasury
bill rate), while the interest rate on variable or adjustable rate securities
changes at preset times based upon an underlying
index. Certain of the floating or variable rate obligations that may be
purchased by a Fund may carry a demand
feature that would permit the holder to tender them back to the issuer of the
instrument or to a third-party at par
value prior to maturity.
10 Additional
Information on Portfolio Instruments and Investment Policies
The
interest rates paid on the adjustable rate securities in which a Fund may invest
generally are readjusted at intervals
of one year or less to an increment over some predetermined interest rate index.
There are three main categories
of indices: those based on U.S. Treasury securities, those derived from a
calculated measure such as a cost of funds
index and those based on a moving average of mortgage rates. Commonly used
indices include the one-year, three-year
and five-year constant maturity Treasury rates, the three-month Treasury bill
rate, the 180-day Treasury bill rate,
rates on longer-term Treasury securities, the 11th District Federal Home Loan
Bank Cost of Funds, and the National Median
Cost of Funds. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market
interest rate levels. Others, such as the 11th Federal District Home Loan Bank
Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less
volatile.
Auction
rate securities are variable rate bonds whose interest rates are reset at
specified intervals through a “Dutch” auction
process. A “Dutch” auction is a competitive bidding process designed to
determine a single uniform clearing rate that
enables purchases and sales of the auction rate securities to take place at par.
All accepted bids and holders of the auction
rate securities receive the same rate. Auction rate securities holders rely on
the liquidity generated by the auction.
There is a risk that an auction will fail due to insufficient demand for the
securities. If an auction fails, an auction rate
security may become illiquid until a subsequent successful auction is conducted,
the issuer redeems the issue, or a secondary
market develops. See “Municipal Securities” below for more information about
auction rate securities.
Demand
Instruments.
Demand instruments usually have a stated maturity of more than one year but
contain a demand
feature (or “put”) that enables the holder to redeem the investment.
Variable-rate demand instruments provide for
automatic establishment of a new interest rate on set dates. Floating-rate
demand instruments provide for automatic adjustment
of interest rates whenever a specified interest rate (e.g., the prime rate)
changes. These floating and variable rate
instruments are payable upon a specified period of notice which may range from
one day up to one year. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily to up to one year and the adjustments
are based upon the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the
respective instruments. Variable rate instruments include participation
interests in variable- or fixed-rate municipal obligations
owned by a bank, insurance company or other financial institution or affiliated
organizations. Although the rate
of the underlying municipal obligations may be fixed, the terms of the
participation interest may result in a fund receiving
a variable rate on its investment.
Because
of the variable rate nature of the instruments, when prevailing interest rates
decline the yield on these instruments
will generally decline. On the other hand, during periods when prevailing
interest rates increase, the yield on these
instruments will generally increase and the instruments will have less risk of
capital depreciation than instruments bearing
a fixed rate of return.
Some
of the demand instruments purchased by a Fund may not be traded in a secondary
market and derive their liquidity
solely from the ability of the holder to demand repayment from the issuer or
third-party providing credit support. If
a demand instrument is not traded in a secondary market, a Fund will nonetheless
treat the instrument as “readily marketable”
for the purposes of its investment restriction limiting investments in illiquid
securities unless the demand feature
has a notice period of more than seven days in which case the instrument will be
characterized as “not readily marketable”
and therefore illiquid. Such obligations include variable rate master demand
notes, which are unsecured instruments
issued pursuant to an agreement between the issuer and the holder that permit
the indebtedness thereunder
to vary and to provide for periodic adjustments in the interest rate. A Fund
will limit its purchases of floating and
variable rate obligations to those of the same quality as it is otherwise
allowed to purchase. abrdn Inc. (“abrdn Inc.” or the
“Adviser”) will monitor on an ongoing basis the ability of an issuer of a demand
instrument to pay principal and interest on
demand. A Fund’s right to obtain payment at par on a demand instrument could be
affected by events occurring between
the date the Fund elects to demand payment and the date payment is due that may
affect the ability of the issuer
of the instrument or third-party providing credit support to make payment when
due, except when such demand instruments
permit same day settlement. To facilitate settlement, these same day demand
instruments may be held in book
entry form at a bank other than a Fund’s custodian subject to a sub-custodian
agreement approved by the Fund between
that bank and the Fund’s custodian.
Asset-Backed
Securities.
Asset-backed securities, issued by trusts and special purpose corporations, are
pass-through
securities, meaning that principal and interest payments, net of expenses, made
by the borrower on the underlying
asset (such as credit card or automobile loan receivables) are passed to a Fund.
Asset-backed securities may include
pools of loans, receivables or other assets. Payment of principal and interest
may be largely dependent upon the cash
flows generated by the assets backing the securities. Asset-backed securities
present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the
related assets. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. There is the possibility
that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failures
by obligors on underlying assets to make payments, the securities may contain
elements of credit support which fall
into two categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity
Additional
Information on Portfolio Instruments and Investment Policies 11
administering
the pool of assets, to ensure that the receipt of payments on the underlying
pool occurs in a timely fashion. Protection
against losses results from payment of the insurance obligations on at least a
portion of the assets in the pool. This
protection may be provided through guarantees, policies or letters of credit
obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction or through a
combination of such approaches. A Fund will
not pay any additional or separate fees for credit support. The degree of credit
support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets.
Delinquency
or loss in excess of that anticipated or failure of the credit support could
adversely affect the return on an
investment in such a security. The availability of asset-backed securities may
be affected by legislative or regulatory developments.
It is possible that such developments may require the Fund to dispose of any
then-existing holdings of such
securities. Additionally, the risk of default by borrowers is greater during
periods of rising interest rates and/or unemployment
rates. In addition, instability in the markets for asset-backed securities may
affect the liquidity of such securities,
which means a Fund may be unable to sell such securities at an advantageous time
and price. As a result, the value
of such securities may decrease and a Fund may incur greater losses on the sale
of such securities than under more
stable market conditions. Furthermore, instability and illiquidity in the market
for lower-rated asset-backed securities
may affect the overall market for such securities thereby impacting the
liquidity and value of higher-rated securities.
Several
types of asset-backed securities have been offered to investors, including
Certificates of Automobile ReceivablesSM
(“CARSSM”).
CARSSM
represent undivided fractional interests in a trust whose assets consist of a
pool of motor
vehicle retail installment sales contracts and security interests in the
vehicles securing the contracts. Payments of principal
and interest on CARSSM
are passed through monthly to certificate holders, and are guaranteed up to
certain amounts
and for a certain time period by a letter of credit issued by a financial
institution unaffiliated with the trustee or originator
of the trust. An investor’s return on CARSSM
may be affected by early prepayment of principal on the underlying vehicle
sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on
a sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining
of deficiency judgments following such sales or because of depreciation, damage
or loss of a vehicle, the application
of federal and state bankruptcy and insolvency laws, or other factors. As a
result, certificate holders may experience
delays in payments or losses if the letter of credit is exhausted.
A
Fund may also invest in residual interests in asset-backed securities. In the
case of asset-backed securities issued in
a pass-through structure, the cash flow generated by the underlying assets is
applied to make required payments on the
securities and to pay related administrative expenses. The residual in an
asset-backed security pass-through structure
represents the interest in any excess cash flow remaining after making the
foregoing payments. The amount of residual
cash flow resulting from a particular issue of asset-backed securities will
depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative
expenses and the actual prepayment experience on the underlying assets.
Asset-backed security residuals
not registered under the Securities Act of 1933, as amended (the “Securities
Act”) may be subject to certain restrictions
on transferability. In addition, there may be no liquid market for such
securities.
Asset-backed
securities present certain risks. For instance, in the case of credit card
receivables, these securities may
not have the benefit of any security interest in the related collateral. Credit
card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers
of automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were
to sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because of the
large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities. The
underlying assets (e.g., loans) are also subject to prepayments, which shorten
the securities’ weighted average life and
may lower their return.
Bank Loans.
Bank loans include floating and fixed-rate debt obligations. Floating rate loans
are debt obligations issued
by companies or other entities with floating interest rates that reset
periodically. Bank loans may include, but are not
limited to, term loans, delayed funding loans, bridge loans and revolving credit
facilities. Loan interests will primarily take
the form of assignments purchased in the primary or secondary market, but may
include participations. Floating rate
loans are secured by specific collateral of the borrower and are senior to most
other securities of the borrower (e.g., common
stock or debt instruments) in the event of bankruptcy. Floating rate loans are
often issued in connection with recapitalizations,
acquisitions, leveraged buyouts, and refinancings. Floating rate loans are
typically structured and administered
by a financial institution that acts as the agent of the lenders participating
in the floating rate loan. Floating rate
loans may be acquired directly through the agent, as an assignment from another
lender who holds a direct interest in
the floating rate loan, or as a participation interest in another lender’s
portion of the floating rate loan.
A
Fund generally invests in floating rate loans directly through an agent, by
assignment from another holder of the loan,
or as a participation interest in another holder’s portion of the loan.
Assignments and participations involve credit, interest
rate, and liquidity risk. Interest rates on floating rate loans adjust
periodically and are tied to a benchmark lending
12 Additional
Information on Portfolio Instruments and Investment Policies
rate
such as the Secured
Overnight Financing Rate (“SOFR”) or another rate based on the SOFR.
The
lending rate could also
be tied to the prime rate offered by one or more major U.S. banks or the rate
paid on large certificates of deposit traded
in the secondary markets. If the benchmark lending rate changes, the rate
payable to lenders under the loan will change
at the next scheduled adjustment date specified in the loan agreement. Investing
in floating rate loans with longer
interest rate reset periods may increase fluctuations in a Fund’s net asset
value (“NAV”) as a result of changes in interest
rates.
When
a Fund purchases an assignment, it generally assumes all the rights and
obligations under the loan agreement
and will generally become a “lender” for purposes of the particular loan
agreement. The rights and obligations
acquired by a Fund under an assignment may be different, and be more limited,
than those held by an assigning
lender. Subject to the terms of a loan agreement, the Fund may enforce
compliance by a borrower with the terms
of the loan agreement and may have rights with respect to any funds acquired by
other lenders through set-off. If a
loan is foreclosed, the Fund may become part owner of any collateral securing
the loan, and may bear the costs and liabilities
associated with owning and disposing of any collateral. The Fund could be held
liable as a co-lender. In addition, there
is no assurance that the liquidation of any collateral from a secured loan would
satisfy a borrower’s obligations or that
any collateral could be liquidated.
If
a Fund purchases a participation interest, it typically will have a contractual
relationship with the lender and not with
the borrower. The Fund may only be able to enforce its rights through the lender
and may assume the credit risk of both
the borrower and the lender, or any other intermediate participant. The Fund may
have the right to receive payments
of principal, interest, and any fees to which it is entitled only from the
lender and only upon receipt by the lender
of the payments from the borrower. The failure by the Fund to receive scheduled
interest or principal payments may
adversely affect the income of the Fund and may likely reduce the value of its
assets, which would be reflected by a reduction
in the Fund’s NAV.
In
the cases of a Fund’s investments in floating rate loans through participation
interests, it may be more susceptible to
the risks of the financial services industries. The Fund may also be subject to
greater risks and delays than if the Fund could
assert its rights directly against the borrower. In the event of the insolvency
of an intermediate participant who sells a
participation interest to a Fund, it may be subject to loss of income and/or
principal. Additionally, a Fund may not have any
right to vote on whether to waive any covenants breached by a borrower and may
not benefit from any collateral securing
a loan. Parties through which the Fund may have to enforce its rights may not
have the same interests as the Fund.
The
borrower of a loan in which a Fund holds an assignment or participation interest
may, either at its own election or
pursuant to the terms of the loan documentation, prepay amounts of the loan from
time to time. There is no assurance that
the Fund will be able to reinvest the proceeds of any loan prepayment at the
same interest rate or on the same terms
as those of the original loan participation. This may result in a Fund realizing
less income on a particular investment and
replacing the loan with a less attractive security, which may provide less
return to the Fund.
The
secondary market on which floating rate loans are traded may be less liquid than
the market for investment grade
securities or other types of income producing securities. Therefore, a Fund may
have difficulty trading assignments
and participations to third parties. There is also a potential that there is no
active market to trade floating rate
loans. There may be restrictions on transfer and only limited opportunities may
exist to sell such securities in secondary
markets. As a result, the Fund may be unable to sell assignments or
participations at the desired time or only at
a price less than fair market value. The secondary market may also be subject to
irregular trading activity, wide price spreads,
and extended trade settlement periods. The lack of a liquid secondary market may
have an adverse impact on the
market price of the security.
Assignments
and participations of bank loans also may be less liquid at times because of
potential delays in the settlement
process. Bank loans may settle on a delayed basis, resulting in the proceeds
from the sale of such loans not being
readily available to make additional investments or to meet a Fund’s redemption
obligations. To the extent the extended
settlement process gives rise to short-term liquidity needs, a Fund may hold
additional cash, sell investments or temporarily
borrow from banks or other lenders. Settlement risk is heightened for bank loans
in certain foreign markets, which
differ significantly and may be less established from those in the United
States. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically generated
by the settlement of U.S. loans and other debt securities. Communications
between the United States and emerging
market countries may be unreliable, increasing the risk of delayed settlements.
If a Fund cannot settle or there is
a delay in settling a purchase of a loan or other security, that Fund may miss
attractive investment opportunities and certain
assets may be uninvested with no return earned thereon for some period. In
addition, that Fund may lose money if
the value of the security then declines or, if there is a contract to sell the
security to another party, the Fund could be liable
to that party for any losses incurred. Furthermore, some foreign markets in
which a Fund may invest in loans may not
operate with the concept of delayed compensation, or a pricing adjustment
payable by the parties to a secondary loan
trade that settles after an established time intended to assure that neither
party derives an economic advantage from
the delay (established in the U.S. as T+7 and T+20 for par/near par trades and
distressed trades, respectively). Where
there is no delayed compensation, one party will typically bear the risk of the
other’s delaying settlement for economic
gain.
Additional
Information on Portfolio Instruments and Investment Policies 13
In
certain circumstances, loans may not be deemed to be securities, and in the
event of fraud or misrepresentation by
a borrower, lenders and purchasers of interests in loans, such as a Fund, will
not have the protection of the anti-fraud provisions
of the federal securities laws, as would be the case for bonds or stocks.
Instead, in such cases, lenders generally rely
on the contractual provisions in the loan agreement itself, and common law fraud
protections under applicable state law.
Loan Participations and
Assignments.
A participation in commercial loans may be secured or unsecured. Loan
participations
typically represent direct participation in a loan to a corporate borrower, and
generally are offered by banks
or other financial institutions or lending syndicates. A Fund may participate in
such syndications, or can buy part of a
loan, becoming a part lender. Participations and assignments involve credit
risk, interest rate risk, liquidity risk, and the risk
of being a lender.
When
purchasing loan participations, a Fund assumes the credit risk associated with
the corporate borrower and may
assume the credit risk associated with an interposed bank or other financial
intermediary; however, the Fund may only
be able to enforce its rights through the lender. The participation interests in
which a Fund invests may not be rated by
any nationally recognized statistical rating organization
(“NRSRO”).
A
loan is often administered by an agent bank acting as agent for all holders. The
agent bank administers the terms of
the loan, as specified in the loan agreement. In addition, the agent bank is
normally responsible for the collection of principal
and interest payments from the corporate borrower and the apportionment of these
payments to the credit of all
institutions which are parties to the loan agreement. Unless, under the terms of
the loan or other indebtedness, a Fund has
direct recourse against the corporate borrower, the Fund may have to rely on the
agent bank or other financial intermediary
to apply appropriate credit remedies against a corporate borrower.
A
financial institution’s employment as agent bank might be terminated in the
event that it fails to observe a requisite standard
of care or becomes insolvent. A successor agent bank would generally be
appointed to replace the terminated agent
bank, and assets held by the agent bank under the loan agreement should remain
available to holders of such indebtedness.
However, if assets held by the agent bank for the benefit of a Fund were
determined to be subject to the claims
of the agent bank’s general creditors, the Fund might incur certain costs and
delays in realizing payment on a loan or
loan participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions
(e.g., an insurance company or governmental agency) similar risks may
arise.
Purchasers
of loans and other forms of direct indebtedness depend primarily upon the
creditworthiness of the corporate
borrower for payment of principal and interest. If a Fund does not receive
scheduled interest or principal payments
on such indebtedness, the Fund’s share price and yield could be adversely
affected. Loans that are fully secured
offer a Fund more protection than an unsecured loan in the event of non-payment
of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower’s
obligation, or that the collateral can be liquidated.
A
Fund may invest in loan participations with credit quality comparable to that of
issuers of its securities investments. Indebtedness
of companies whose creditworthiness is poor involves substantially greater risks
and may be highly speculative.
Some companies may never pay off their indebtedness, or may pay only a small
fraction of the amount owed.
Consequently, when investing in indebtedness of companies with poor credit, a
Fund bears a substantial risk of losing
the entire amount invested.
For
purposes of a Fund’s concentration limits, a Fund generally will treat the
corporate borrower as the “issuer” of indebtedness
held by the Fund. In the case of loan participations where a bank or other
lending institution serves as a financial
intermediary between a Fund and the corporate borrower, if the participation
does not shift to the Fund the direct
debtor-creditor relationship with the corporate borrower, SEC interpretations
require the Fund to treat both the lending
bank or other lending institution and the corporate borrower as “issuers.”
Treating a financial intermediary as an issuer
of indebtedness may restrict a Fund’s ability to invest in indebtedness related
to a single financial intermediary, or a group
of intermediaries engaged in the same industry, even if the underlying borrowers
represent many different companies
and industries.
Loans
and other types of direct indebtedness may not be readily marketable and may be
subject to restrictions on resale.
In some cases, negotiations involved in disposing of indebtedness may require
weeks to complete. Consequently, some
indebtedness may be difficult or impossible to dispose of readily at what the
Adviser believes to be a fair price. In addition,
valuation of illiquid indebtedness involves a greater degree of judgment in
determining a Fund’s NAV than if that value
were based on available market quotations, and could result in significant
variations in a Fund’s daily share price. At the
same time, some loan interests are traded among certain financial institutions
and accordingly may be deemed liquid.
As the market for different types of indebtedness develops, the liquidity of
these instruments is expected to improve.
In addition, each Fund currently intends to treat indebtedness for which there
is no readily available market as illiquid
for purposes of a Fund’s limitation on illiquid investments. Investments in loan
participations are considered to be debt
obligations for purposes of the Trust’s investment restriction relating to the
lending of funds or assets by a Fund.
Investments
in loans through a direct assignment of the financial institution’s interests
with respect to the loan may involve
additional risks to a Fund. For example, if a loan is foreclosed, a Fund could
become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is
14 Additional
Information on Portfolio Instruments and Investment Policies
conceivable
that under emerging legal theories of lender liability, a Fund could be held
liable as co-lender. It is unclear whether
loans and other forms of direct indebtedness offer securities law protections
against fraud and misrepresentation.
In the absence of definitive regulatory guidance, a Fund relies on the Adviser’s
research in an attempt to
avoid situations where fraud or misrepresentation could adversely affect the
Fund.
A
Fund may also enter into, or acquire participations in, delayed funding loans
and revolving credit facilities. Delayed funding
loans and revolving credit facilities are borrowing arrangements in which the
lender agrees to make loans up to a maximum
amount upon demand by the borrower during a specified term. A revolving credit
facility differs from a delayed
funding loan in that as the borrower repays the loan, an amount equal to the
repayment may be borrowed again
during the term of the revolving credit facility. Delayed funding loans and
revolving credit facilities usually provide for
floating or variable rates of interest. These commitments may have the effect of
requiring a Fund to increase its investment
in a company at a time when it might not otherwise decide to do so (including at
a time when the company’s financial
condition makes it unlikely that such amounts will be repaid). In accordance
with current federal securities laws, rules,
and staff positions, to the extent that a Fund is committed to advance
additional funds, it will at all times segregate or
“earmark” assets, determined to be liquid by the Adviser in accordance with
procedures established by the board of trustees
of the Trust (the “Board of Trustees”), in an amount sufficient to meet such
commitments.
A
Fund may invest in delayed funding loans and revolving credit facilities with
credit quality comparable to that of issuers
of its securities investments. Delayed funding loans and revolving credit
facilities may be subject to restrictions on transfer,
and only limited opportunities may exist to resell such instruments. As a
result, a Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
The Funds currently intend to treat
delayed funding loans and revolving credit facilities for which there is no
readily available market as illiquid for purposes
of a Fund’s limitation on illiquid investments. Participation interests in
revolving credit facilities will be subject to the
limitations discussed above. Delayed funding loans and revolving credit
facilities are considered to be debt obligations
for purposes of the Trust’s investment restriction relating to the lending of
funds or assets by a Fund.
Delayed Funding Loans and Revolving Credit
Facilities.
Delayed funding loans and revolving credit facilities are borrowings
in which the Fund agrees to make loans up to a maximum amount upon demand by the
borrowing issuer for a
specified term. A revolving credit facility differs from a delayed funding loan
in that as the borrowing issuer repays the loan,
an amount equal to the repayment is again made available to the borrowing issuer
under the facility. The borrowing issuer
may at any time borrow and repay amounts so long as, in the aggregate, at any
given time the amount borrowed does
not exceed the maximum amount established by the loan agreement. Delayed funding
loans and revolving credit facilities
usually provide for floating or variable rates of interest.
There
are a number of risks associated with an investment in delayed funding loans and
revolving credit facilities including,
credit, interest rate and liquidity risk and the risks of being a lender. There
may be circumstances under which the
borrowing issuer’s credit risk may be deteriorating and yet a Fund may be
obligated to make loans to the borrowing issuer
as the borrowing issuer’s credit continues to deteriorate, including at a time
when the borrowing issuer’s financial condition
makes it unlikely that such amounts will be repaid.
Delayed
funding loans and revolving credit facilities may be subject to restrictions on
transfer, and only limited opportunities
may exist to resell such instruments. As a result, a Fund may be unable to sell
such investments at an opportune
time or may have to resell them at less than fair market value. These risks
could cause a Fund to lose money on
its investment, which in turn could affect a Fund’s returns. A Fund may treat
delayed funding loans and revolving credit facilities
for which there is no readily available market as illiquid for purposes of the
Fund’s limitation on illiquid investments.
Bank
Obligations.
Bank obligations are obligations issued or guaranteed by U.S. or foreign banks.
Bank obligations, including
without limitation, time deposits, bankers’ acceptances and certificates of
deposit, may be general obligations of
the parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulations.
Banks are subject to extensive but different governmental regulations which may
limit both the amount and types
of loans which may be made and interest rates which may be charged. General
economic conditions as well as exposure
to credit losses arising from possible financial difficulties of borrowers play
an important part in the operation of the
banking industry.
Certificates
of deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees
to pay the amount deposited plus interest to the bearer of the receipt on the
date specified on the certificate. The certificate
usually can be traded in the secondary market prior to maturity. Bankers’
acceptances typically arise from short-term
credit arrangements designed to enable businesses to obtain funds to finance
commercial transactions. Generally,
an acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds
to pay for specific merchandise. The draft is then “accepted” by a bank that, in
effect, unconditionally guarantees to
pay the face value of the instrument on its maturity date. The acceptance may
then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities
for acceptances can be as long as 270 days, most acceptances have maturities of
six months or less.
A
Fund may also invest in certificates of deposit issued by banks and savings and
loan institutions which had, at the time
of their most recent annual financial statements, total assets of less than $1
billion, provided that (i) the principal amounts
of such certificates of deposit are insured by an agency of the U.S. Government,
(ii) at no time will a Fund hold
Additional
Information on Portfolio Instruments and Investment Policies 15
more
than $100,000 principal amount of certificates of deposit of any one such bank,
and (iii) at the time of acquisition, no
more than 10% of a Fund’s assets (taken at current value) are invested in
certificates of deposit of such banks having total
assets not in excess of $1 billion.
Bankers’
acceptances are credit instruments evidencing the obligations of a bank to pay a
draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument
upon maturity.
Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated
interest rate. Time deposits which may be held by a Fund will not benefit from
insurance from the Bank Insurance Fund
or the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation. Fixed time deposits
may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties that vary with market
conditions and the remaining maturity of the obligation. Fixed time deposits
subject to withdrawal penalties maturing
in more than seven calendar days are subject to a Fund’s limitation on
investments in illiquid securities.
Bonds with Warrants
Attached.
Bonds with warrants attached are bonds issued as a unit with warrants. A Fund
may dispose
of the common stock received upon conversion of a convertible security or
exercise of a warrant as promptly as it
can and in a manner that it believes reduces the risk to the Fund of a loss in
connection with the sale. A Fund does not intend
to retain in its portfolio any warrant acquired as a unit with bonds if the
warrant begins to trade separately from the related
bond.
Borrowing.
Each Fund, to the extent permitted by its fundamental investment restrictions,
may borrow money from banks.
Each Fund will limit borrowings to amounts not in excess of 33⅓% of the value of
the Fund’s total assets less liabilities
(other than borrowings), unless a Fund’s fundamental investment restrictions set
forth a lower limit. Any borrowings
that exceed this amount will be reduced within three days (not including Sundays
and holidays) to the extent necessary
to comply with the 33⅓% limitation or fundamental investment restriction. Each
Fund may borrow money as a temporary
measure for defensive or emergency purposes in order to meet redemption requests
without immediately selling
any portfolio securities. Investments in mortgage dollar roll and reverse
repurchase agreements are not considered
a form of borrowing where the Fund covers its exposure by segregating or
earmarking liquid assets. Rule 18f-4
under the 1940 Act (“Rule 18f-4”) permits the Funds to treat reverse repurchase
transactions either as borrowings or
as “derivative transactions” subject to the risk-based limits of the rule, and
does not require a Fund to maintain in a segregated
account assets to meet its asset coverage requirements.
Certain
types of borrowings by a Fund may result in the Fund being subject to covenants
in credit agreements relating
to asset coverage, portfolio composition requirements and other matters. It is
not anticipated that observance of such
covenants would impede the Adviser from managing the Fund’s portfolio in
accordance with the Fund’s investment objective(s)
and policies. However, a breach of any such covenants not cured within the
specified cure period may result in
acceleration of outstanding indebtedness and require a Fund to dispose of
portfolio investments at a time when it may be
disadvantageous to do so.
Bridge Loans.
Bridge loans or bridge facilities are short-term loan arrangements (e.g., 12 to
18 months) typically made
by a borrower in anticipation of intermediate-term or long-term permanent
financing. Most bridge loans are structured
as floating-rate debt with step-up provisions under which the interest rate on
the bridge loan rises the longer the
loan remains outstanding. In addition, bridge loans commonly contain a
conversion feature that allows the bridge loan
investor to convert its loan interest into senior exchange notes if the loan has
not been prepaid in full on or prior to its maturity
date. Bridge loans may be subordinate to other debt and may be secured or
unsecured. Like any loan, bridge loans
involve credit risk. Bridge loans are generally made with the expectation that
the borrower will be able to obtain permanent
financing in the near future. Any delay in obtaining permanent financing
subjects the bridge loan investor to increased
risk. A borrower’s use of bridge loans also involves the risk that the borrower
may be unable to locate permanent
financing to replace the bridge loan, which may impair the borrower’s perceived
creditworthiness. From time to
time, a Fund may make a commitment to participate in a bridge loan facility,
obligating itself to participate in the facility
if it funds. In return for this commitment, a Fund receives a fee.
Business Development Companies
(“BDCs”).
BDCs are typically publicly-held, closed-end investment funds that are
regulated
by the 1940 Act. BDCs primarily lend to or invest in private or thinly-traded
companies. They also offer managerial
assistance to the companies in which they invest. BDCs must adhere to various
substantive regulatory requirements
under the 1940 Act. For example, the 1940 Act restricts the types of assets in
which a BDC may invest (i.e., at
least 70% of the BDC’s total assets must be “qualifying assets,” as defined in
the 1940 Act). The 1940 Act also regulates how
BDCs employ “leverage” (i.e., how BDCs use borrowed funds to make investments).
Because the 1940 Act applies unique
“coverage ratio” tests to BDCs, BDCs may incur more debt than other regulated
closed-end investment companies.
Specifically, on one hand, the total assets of a closed-end investment company
(other than a BDC) must exceed
the fund’s outstanding debt by at least 300%. On the other hand, the total
assets of a BDC must exceed the BDC’s outstanding
debt by only 200%, thereby allowing a BDC to employ more leverage than other
regulated closed-end investment
companies. Leverage magnifies the potential for gain and loss on amounts
invested and, as a result, increases the
risks associated with the securities of leveraged companies.
16 Additional
Information on Portfolio Instruments and Investment Policies
Privately-held
and thinly-traded companies are generally considered to be below investment
grade, and the debt securities
of those companies, in turn, are often referred to as “high-yield” or “junk.”
The revenues, income (or losses) and valuations
of these companies can, and often do, fluctuate suddenly and dramatically, and
they face considerable risk of loss.
In addition, the fair value of a BDC’s investments in privately-held or
thinly-traded companies often is not readily determinable.
Although each BDC’s board of directors is responsible for determining the fair
value of these securities, the uncertainty
regarding fair value may adversely affect the determination of the BDC’s NAV.
This could cause a Fund’s investments
in a BDC to be inaccurately valued. BDCs often borrow funds to make investments
and, as a result, are exposed
to the risks of leverage. Leverage magnifies the potential loss on amounts
invested and therefore increases the risks
associated with an investment in a leveraged BDC’s securities. Leverage is
generally considered a speculative investment
technique. Moreover, BDCs’ management fees, which are generally higher than the
management fees charged
to other funds, are normally payable on gross assets, including those assets
acquired through the use of leverage.
This may give a BDC’s investment adviser a financial incentive to incur
leverage.
Catastrophe
Bond.
A catastrophe bond (“cat bond”) is a high-yield debt instrument that is usually
insurance linked and
meant to raise money in case of a catastrophe such as a hurricane or earthquake.
If an “issuer,” such as an insurance company
or reinsurance company (a company that insures insurance companies), wants to
transfer some or all of the risk
it assumes in insuring a catastrophe, it can set up a separate legal
structure—commonly known as a special purpose vehicle
(“SPV”). Foreign governments and private companies also have sponsored cat bonds
as a hedge against natural disasters.
The
SPV issues cat bonds and typically invests the proceeds from the bond issuance
in low-risk securities, such as in investment
grade money market or treasury funds, which are those rated Aaa by Moody’s
Investors Service Inc. (“Moody’s”)
or AAA by Fitch, Inc. (“Fitch”) or a comparable rating by another NRSRO (the
collateral). The earnings on these
low-risk securities, as well as insurance premiums paid to the issuer, are used
to make periodic, variable rate interest
payments to investors.
As
long as the natural disaster covered by the bond does not occur during the time
investors own the bond, investors will
receive their interest payments and, when the bond matures, their principal back
from the collateral. Most cat bonds generally
mature in three years, although terms range from one to five years, depending on
the bond.
If
the event does occur, however, the issuer’s right to the collateral is
“triggered.” This means the issuer receives the collateral,
instead of investors receiving it when the bond matures, causing investors to
lose most—or all—of their principal and
unpaid interest payments. You may hear this described as a “credit cliff.” When
this happens, the SPV might also have the
right to extend the maturity of the bonds to verify that the trigger did occur
or to process and audit insurance claims. Depending
on the bond, the extension can last anywhere from three months to two years or
more. In some cases, cat bonds
cover multiple events to reduce the chances that investors will lose all of
their principal.
Each
cat bond has its own triggering event(s), which is(are) spelled out in the
bond’s offering documents. These documents
typically are only available to purchasers or potential purchasers, however,
because cat bonds are not subject
to the Securities and Exchange Commission’s (“SEC”) registration and disclosure
requirements. A number of different
types of triggers have developed. The question of whether a triggering event
occurred—or the true meaning of a
triggering event—can be complex and could wind up being litigated and require a
ruling from a court. This in turn may add
additional uncertainty to the way these securities perform.
Because
cat bond holders face potentially huge losses, cat bonds are typically rated BB,
or “non-investment grade” by
credit rating agencies such as Fitch, Moody’s and Standard & Poor’s Global
Ratings (“Standard & Poor’s”). Non-investment
grade bonds are also known as “high yield” or “junk” bonds. These ratings
agencies, as well as sponsors and
underwriters of cat bonds, rely heavily on a handful of firms that specialize in
modeling natural disasters. These “risk modeling”
firms employ meteorologists, seismologists, statisticians, and other experts who
use large databases of historical
or simulated data to estimate the probabilities and potential financial damage
of natural disasters.
The
potential advantages of cat bonds are that they are not closely linked with the
stock market or economic conditions
and offer significant attractions to investors. For example, for the same level
of risk, investors can usually obtain a
higher yield with cat bonds relative to alternative investments. Another
potential benefit is that the insurance risk securitization
of cat bonds shows no correlation with equities or corporate bonds, meaning they
may provide a good diversification
of risks.
As
with any financial instrument, cat bonds also present risks, which include the
following:
Credit
Cliff:
A cat bond can cause the investor rapidly to lose most or all of his or her
principal and any unpaid interest
if a triggering event occurs. The high yield will not make investors whole if
the triggering event actually occurs.
Modeling
Risk:
Prices, yields and ratings of cat bonds rely almost exclusively on complex
computer modeling techniques,
which in turn are extremely sensitive to the data used in the models. The
quality and quantity of data vary depending
on the catastrophe.
Additional
Information on Portfolio Instruments and Investment Policies 17
Liquidity
Risk:
Secondary trading for cat bonds is very limited, so in a pinch an investor may
not be able to sell. In addition,
the secondary transactions that do occur are privately negotiated, so pricing
information is not generally available
to the public. In addition, as noted, the maturity of some cat bonds can be
extended during the worst possible time—when
a trigger may have occurred, which can cause the bonds’ value to plummet,
potentially making them even harder
to sell.
Unregistered
Investments:
Most cat bonds are issued in offerings pursuant to Rule 144A under the
Securities Act (“Rule
144A”), which are available only to large institutional investors and are not
subject to the SEC’s registration and disclosure
requirements. As a result, many of the normal investor protections that are
common to most traditional registered
investments are missing. For example, issuers of cat bonds are not required to
file a registration statement or periodic
reports with the SEC, unlike issuers of registered bonds. While general
prohibitions against securities fraud apply to
Rule 144A offerings, the lack of public disclosure may make it difficult to
obtain and evaluate the information used to price
and structure cat bonds.
Closed-end
Funds.
The value of the shares of a closed-end fund may be higher or lower than the
value of the portfolio
securities held by the closed-end fund. Closed-end investment funds may trade
infrequently and with small volume,
which may make it difficult for a Fund to buy and sell shares. Also, the market
price of closed-end investment companies
tends to rise more in response to buying demand and fall more in response to
selling pressure than is the case with
larger capitalization companies.
Common Stock.
Common stock is issued by companies to raise cash for business purposes and
represents a proportionate
interest in the issuing companies. Therefore, a Fund participates in the success
or failure of any company in which
it holds stock. The market value of common stock can fluctuate significantly,
reflecting the business performance of
the issuing company, investor perception,
general economic or financial market movements,
or the occurrence of political,
geopolitical, social or economic events affecting issuers.
Smaller companies are especially sensitive to these factors
and may even become valueless. Despite the risk of price volatility, however,
common stocks also offer a greater potential
for gain on investment, compared to other classes of financial assets such as
bonds or cash equivalents. A Fund may
also receive common stock as proceeds from a defaulted debt security held by the
Fund or from a convertible bond converting
to common stock. In such situations, a Fund will hold the common stock at the
Adviser’s discretion.
Convertible
Securities.
Convertible securities are bonds, notes, debentures, preferred stocks and other
securities which
are convertible into common stock. Investments in convertible securities can
provide an opportunity for capital appreciation
and/or income through interest and dividend payments by virtue of their
conversion or exchange features.
The
convertible securities in which a Fund may invest are either fixed income or
zero coupon debt securities which may
be converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The
exchange ratio for any particular convertible security may be adjusted from time
to time due to stock splits, dividends,
spin-offs, other corporate distributions or scheduled changes in the exchange
ratio. Convertible debt securities
and convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities.
Although to a lesser extent than with debt securities generally, the market
value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion
or exchange feature, the market value of convertible securities typically
changes as the market value of the underlying
common stock changes, and, therefore, also tends to follow movements in the
general market for equity securities.
A unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same
extent as the underlying common stock. When the market price of the underlying
common stock increases, the prices
of the convertible securities tend to rise as a reflection of the value of the
underlying common stock, although typically
not as much as the underlying common stock. While no securities investments are
without risk, investments in convertible
securities generally entail less risk than investments in common stock of the
same issuer.
As
debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon
securities, accretion of income) with generally higher yields than common
stocks. Convertible securities generally
offer lower yields than non-convertible securities of similar quality because of
their conversion or exchange features.
Like
all debt securities, there can be no assurance of income or principal payments
because the issuers of the convertible
securities may default on their obligations.
Convertible
securities generally are subordinated to other similar but non-convertible
securities of the same issuer, although
convertible bonds, as corporate debt obligations, enjoy seniority in right of
payment to all equity securities, and convertible
preferred stock is senior to common stock, of the same issuer. However, because
of the subordination feature,
convertible bonds and convertible preferred stock typically have lower ratings
than similar non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes
and bonds, including Liquid Yield Option Notes (“LYONs”™).
Zero
coupon convertible securities are debt securities which are issued at a discount
to their face amount and do not
entitle the holder to any periodic payments of interest prior to maturity.
Rather, interest earned on zero coupon convertible
securities accretes at a stated yield until the security reaches its face amount
at maturity. Zero coupon
18 Additional
Information on Portfolio Instruments and Investment Policies
convertible
securities are convertible into a specific number of shares of the issuer’s
common stock. In addition, zero coupon
convertible securities usually have put features that provide the holder with
the opportunity to sell the securities back
to the issuer at a stated price before maturity. Generally, the prices of zero
coupon convertible securities may be more
sensitive to market interest rate fluctuations than conventional convertible
securities.
Contingent Convertible
Securities.
Certain Funds may invest in contingent convertible securities, or “CoCos”. These
securities
are usually deeply subordinated instruments with long maturities that contain a
conversion mechanism that is governed
by the issuer’s ability to meet certain minimum financial and accounting ratios
as promulgated by statutory regulatory
authorities such as banking regulators or macro prudential regulatory
authorities. If the issuer triggers the CoCo’s
conversion mechanism, the contingent convertible security’s principal may be (1)
permanently written off in total,
(2) temporarily written off in total or in part with principal reinstatement
contingent upon the issuer re-attaining compliance
with statutorily required financial and accounting ratios, or (3) converted into
common equity or into a security
ranking junior to the contingent convertible security. In any or all of these
circumstances, the CoCo’s value may be
partially or completely impaired either temporarily or permanently.
Many,
but not all, contingent convertible securities are rated as speculative or ‘High
Yield’ by NRSROs. Like many other
fixed income securities, the contingent convertible security’s market value
tends to decline as interest rates rise and tends
to rise as interest rates fall. Because of the CoCo’s subordinated status within
the issuer’s capital structure, market value
fluctuations may be greater than for other more senior securities issued by the
issuer. Also the contingent convertible
security’s value may fluctuate more closely with the issuer’s equity than with
its debt given the CoCo’s subordination
and given the embedded conversion mechanism. Because most CoCo conversion
mechanisms are triggered
by the issuer failing to meet minimum financial and accounting thresholds due to
financial stress, unforeseen economic
conditions, or unforeseen regulatory changes (among others), there is risk that
the contingent convertible security
will lose most if not all of its value upon conversion.
In
addition, some such instruments have a set stock conversion rate that would
cause an automatic write-down of capital
if the price of the stock is below the conversion price on the conversion date.
In another version of a security with loss
absorption characteristics, the liquidation value of the security may be
adjusted downward to below the original par value
under certain circumstances similar to those that would trigger a CoCo. The
write down of the par value would occur
automatically and would not entitle the holders to seek bankruptcy of the
company. In certain versions of the instruments,
the notes will write down to zero under certain circumstances and investors
could lose everything, even as the
issuer remains in business.
Corporate
Obligations.
Investment in corporate debt obligations involves credit and interest rate risk.
The value of fixed
income investments will fluctuate with changes in interest rates and bond market
conditions, tending to rise as interest
rates decline and to decline as interest rates rise. Corporate debt obligations
generally offer less current yield than
securities of lower quality, but lower-quality securities generally have less
liquidity, greater credit and market risk, and
as a result, more price volatility. Longer term bonds are, however, generally
more volatile than bonds with shorter maturities.
Credit Linked
Notes.
Credit linked securities are generally issued by a limited purpose trust or
other vehicle that, in turn,
invests in a derivative instrument or basket of derivative instruments, such as
credit default swaps, interest rate swaps
and other securities, in order to provide exposure to certain fixed income
markets. For instance, credit linked securities
may be used as a cash management tool in order to gain exposure to a certain
market and/or to remain fully invested
when more traditional income producing securities are not
available.
Like
an investment in a bond, investments in credit linked securities generally
represent the right to receive periodic income
payments (in the form of distributions) and payment of principal at the end of
the term of the security. However, these
payments are conditioned on the issuer’s receipt of payments from, and the
issuer’s potential obligations to, the counterparties
to the derivative instruments and other securities in which the issuer invests.
For instance, the issuer may sell
one or more credit default swaps, under which the issuer would receive a stream
of payments over the term of the swap
agreements provided that no event of default has occurred with respect to the
referenced debt obligation upon which
the swap is based. If a default occurs, the stream of payments may stop and the
issuer would be obligated to pay the
counterparty the par value (or other agreed upon value) of the referenced debt
obligation. This, in turn, would reduce the
amount of income and principal that a Fund would receive. The Fund’s investments
in these instruments are indirectly subject
to the risks associated with derivative instruments, including, among others,
credit risk, default or similar event risk, counterparty
risk, interest rate risk, leverage risk and management risk. It is also expected
that the securities will be exempt
from registration under the Securities Act. Accordingly, there may be no
established trading market for the securities
and they may constitute illiquid investments.
Currency
Transactions.
A Fund may engage in currency transactions as described in the prospectus or
this SAI. Generally,
except as provided otherwise, a Fund may engage with counterparties primarily in
order to hedge, or manage the
risk of the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and over-the-counter (“OTC”) options
on currencies, and currency swaps. A Fund may enter into currency transactions
with creditworthy counterparties
that have been approved by the Adviser’s Counterparty Credit Risk Department in
accordance with its Credit
Risk Management Policy.
Additional
Information on Portfolio Instruments and Investment Policies 19
Forward Currency
Contracts.
A forward currency contract involves an obligation to purchase or sell a
specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties,
at a price set at the time of the contract. These contracts are entered into in
the interbank market conducted directly
between currency traders (usually large commercial banks) and their
customers.
At
or before the maturity of a forward currency contract, a Fund may either sell a
portfolio security and make delivery
of the currency, or retain the security and fully or partially offset its
contractual obligation to deliver the currency by
purchasing a second contract. If a Fund retains the portfolio security and
engages in an offsetting transaction, the Fund,
at the time of execution of the offsetting transaction, will incur a gain or a
loss to the extent that movement has occurred
in forward currency contract prices.
The
precise matching of forward currency contract amounts and the value of the
securities involved generally will not
be possible because the value of such securities, measured in the foreign
currency, will change after the foreign currency
contract has been established. Thus, a Fund might need to purchase or sell
foreign currencies in the spot (cash) market
to the extent such foreign currencies are not covered by forward currency
contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy
is highly uncertain.
In
general, in accordance with current federal securities laws, rules, and staff
positions, the Funds cover their daily obligation
requirements for outstanding forward foreign currency contracts by earmarking or
segregating liquid portfolio securities.
To the extent that a Fund is not able to cover its forward currency positions
with underlying portfolio securities, the
Fund segregates cash. If the value of the securities used to cover a position or
the value of segregated assets declines,
a Fund will find alternative cover or segregate additional cash or other liquid
assets on a daily basis so that the value
of the ear-marked or segregated assets will be equal to the amount of such
Fund’s commitments with respect to such
contracts.
Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of a Fund, which
will generally arise in connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated
or generally quoted in that currency.
Cross Hedge.
If a particular currency is expected to decrease against another currency, a
Fund may sell the currency
expected to decrease and purchase a currency which is expected to increase
against the currency sold in an amount
approximately equal to the lesser of some or all of the Fund’s portfolio
holdings denominated in or exposed to the
currency sold.
Proxy-Hedge.
A Fund may also enter into a position hedge transaction in a currency other than
the currency being hedged
(a “proxy hedge”). A Fund may enter into a proxy hedge if the Adviser believes
there is a correlation between the currency
being hedged and the currency in which the proxy hedge is denominated. Proxy
hedging is often used when the
currency to which a Fund’s portfolio is exposed is difficult to hedge or to
hedge against the dollar. This type of hedging entails
an additional risk beyond a direct position hedge because it is dependent on a
stable relationship between two currencies
paired as proxies. Overall risk to a Fund may increase or decrease as a
consequence of the use of proxy hedges.
Currency
Hedging.
While the value of forward currency contracts, currency options, currency
futures and options on futures
may be expected to correlate with exchange rates, they will not reflect other
factors that may affect the value of a
Fund’s investments. A currency hedge, for example, should protect a
yen-denominated bond against a decline in the yen,
but will not protect a Fund against price decline if the issuer’s
creditworthiness deteriorates. Because the value of a Fund’s
investments denominated in foreign currency will change in response to many
factors other than exchange rates, a
currency hedge may not be entirely successful in mitigating changes in the value
of the Fund’s investments denominated
in that currency over time.
A
decline in the dollar value of a foreign currency in which a Fund’s securities
are denominated will reduce the dollar value
of the securities, even if their value in the foreign currency remains constant.
The use of currency hedges does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved
in the future. In order to protect against such diminutions in the value of
securities it holds, a Fund may purchase put
options on the foreign currency. If the value of the currency does decline, a
Fund will have the right to sell the currency for
a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its securities that otherwise would
have resulted. Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated
is projected, thereby potentially increasing the cost of the securities, a Fund
may purchase call options on the
particular currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements
in exchange rates. Although currency hedges limit the risk of loss due to a
decline in the value of a hedged currency,
at the same time, they also limit any potential gain that might result should
the value of the currency increase.
A
Fund may enter into foreign currency exchange transactions to hedge its currency
exposure in specific transactions
or portfolio positions. Transaction hedging is the purchase or sale of forward
currency contracts with respect
to specific receivables or payables of a Fund generally accruing in connection
with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward currency contracts with
respect to portfolio security positions.
20 Additional
Information on Portfolio Instruments and Investment Policies
The
currencies of certain emerging market countries have experienced devaluations
relative to the U.S. Dollar, and future
devaluations may adversely affect the value of assets denominated in such
currencies. In addition, currency hedging
techniques may be unavailable in certain emerging market countries. Many
emerging market countries have experienced
substantial, and in some periods extremely high, rates of inflation or deflation
for many years, and future inflation
may adversely affect the economies and securities markets of such
countries.
Position Hedge.
A Fund may hedge some or all of its investments denominated in a foreign
currency or exposed to foreign
currency fluctuations against a decline in the value of that currency relative
to the U.S. Dollar by entering into forward
foreign currency contracts to sell an amount of that currency approximating the
value of some or all of its portfolio
securities denominated in or exposed to that currency and buying U.S. Dollars or
by participating in options or future
contracts with respect to the currency. Such transactions do not eliminate
fluctuations caused by changes in the local
currency prices of security investments, but rather, establish an exchange rate
at a future date. Although such contracts
are intended to minimize the risk of loss due to a decline in the value of the
hedged currencies, at the same time
they tend to limit any potential gain which might result should the value of
such currencies increase. The Adviser may
from time to time seek to reduce foreign currency risk by hedging some or all of
a Fund’s foreign currency exposure back
into the U.S. Dollar.
Currency
Futures.
A Fund may also seek to enhance returns or hedge against the decline in the
value of a currency through
use of currency futures or options thereon. Currency futures are similar to
forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts while forward
foreign exchange transactions
are traded in the OTC market. Currency futures involve currency risk equivalent
to currency forwards.
Currency
Options.
A Fund that invests in foreign currency-denominated securities may buy or sell
put and call options
on foreign currencies either on exchanges or in the OTC market. A put option on
a foreign currency gives the purchaser
of the option the right to sell a foreign currency at the exercise price until
the option expires. A call option on a foreign
currency gives the purchaser of the option the right to purchase the currency at
the exercise price until the option expires.
A Fund may also write covered options on foreign currencies. For example, to
hedge against a potential decline in the
U.S. Dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, a Fund could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option
will most likely not be exercised and the decline in value of portfolio
securities will be offset by the amount of the premium
received. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the
ability of a Fund to reduce foreign currency risk using such options. OTC
options differ from exchange traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller, and generally do not
have as much market liquidity as exchange-traded options.
Under
definitions adopted by the Commodity
Futures Trading Commission (“CFTC”) and U.S. Securities and Exchange
Commission (“SEC”),
many foreign currency options are considered swaps for certain purposes,
including determination
of whether such instruments need to be exchange-traded and centrally
cleared.
Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency
transactions can result in losses to a Fund if the currency being hedged
fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not
be present or may not be present during the particular time that a Fund is
engaging in proxy hedging.
Risks of Currency
Transactions.
Currency transactions are subject to risks different from those of other
portfolio transactions.
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 can result in losses
to a Fund if it is unable to deliver or receive currency or funds in settlement
of obligations and could also cause hedges
it has entered into to be rendered useless, resulting in full currency exposure
as well as incurring transaction costs. Buyers
and sellers of currency futures are subject to the same risks that apply to the
use of futures generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur at
a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options
is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may
fluctuate based on factors extrinsic to that country’s economy.
Risk Factors in Hedging Foreign Currency
Risks.
Hedging transactions involving currency instruments involve substantial
risks, including correlation risk. While an objective of a Fund’s use of
currency instruments to effect hedging strategies
is intended to reduce the volatility of the NAV of the Fund’s shares, the NAV of
the Fund’s shares will fluctuate. Moreover,
although currency instruments will be used with the intention of hedging against
adverse currency movements,
transactions in currency instruments involve the risk that such currency
movements may not occur and that the
Fund’s hedging strategies may be ineffective. To the extent that a Fund hedges
against anticipated currency movements
that do not occur, the Fund may realize losses and decrease its total return as
the result of its hedging transactions.
Furthermore, a Fund will only engage in hedging activities from time to time and
may not be engaging in hedging
activities when movements in currency exchange rates occur.
Additional
Information on Portfolio Instruments and Investment Policies 21
In
connection with its trading in forward foreign currency contracts, a Fund will
contract with a foreign or domestic bank,
or foreign or domestic securities dealer, to make or take future delivery of a
specified amount of a particular currency.
There are no limitations on daily price moves in such forward contracts, and
banks and dealers are not required to
continue to make markets in such contracts. There have been periods during which
certain banks or dealers have refused
to quote prices for such forward contracts or have quoted prices with an
unusually wide spread between the price
at which the bank or dealer is prepared to buy and that at which it is prepared
to sell. Governmental imposition of credit
controls might limit any such forward contract trading. With respect to its
trading of forward contracts, if any, a Fund
may be subject to the risk of bank or dealer failure and the inability of, or
refusal by, a bank or dealer to perform with respect
to such contracts. Any such default would deprive the Fund of any profit
potential or force the Fund to cover its commitments
for resale, if any, at the then market price and could result in a loss to the
Fund. It may not be possible for a Fund
to hedge against currency exchange rate movements, even if correctly
anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction
at an effective price, or (ii) the currency exchange rate movement relates to a
market with respect to which currency
instruments are not available and it is not possible to engage in effective
foreign currency hedging. The cost to a Fund
of engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract
period and the market conditions then prevailing. In addition, a Fund may not
always be able to enter into forward
contracts at attractive prices and may be limited in its ability to use these
contracts to hedge Fund assets. Since transactions
in foreign currency exchanges usually are conducted on a principal basis, no
fees or commissions are involved.
New
regulations governing certain OTC derivatives may also increase the costs of
using these types of instruments or
make them less effective, as described under “Strategic Transactions,
Derivatives and Synthetic Investments – Risks of Strategic
Transactions Inside the U.S.”
See
“Regulation of Commodity Interests” for additional information about the Funds’
use of derivatives in connection with
CFTC exclusions.
Custody/Sub-Custody
Risk.
To the extent that a Fund invests in markets where custodial and/or settlement
systems are
not fully developed, the Fund is subject to foreign custody/sub-custody risk.
Foreign custody risk refers to the risks inherent
in the process of clearing and settling trades and to the holding of securities,
cash and other assets by banks, agents
and depositories in securities markets that are less developed than those in the
United States. Low trading volumes
and volatile prices in less developed markets make trades harder to complete and
settle, and governments or trade
groups may compel non-U.S. agents to hold securities in designated depositories
that may not be subject to independent
evaluation. The laws of certain countries may place limitations on the ability
to recover assets if a non-U.S. bank,
agent or depository becomes insolvent or enters bankruptcy. Non-U.S. agents are
held only to the standards of care
of their local markets, and thus may be subject to limited or no government
oversight. In general, the less developed a
country’s securities market is, or the more difficult communication is with that
location, the greater the likelihood of custody
problems.
Cybersecurity
Risk.
With the increased use of technologies such as mobile devices and Web-based or
“cloud” applications,
and the dependence on the Internet and computer systems to conduct business, the
Funds are susceptible to
operational, information security and related risks. In general, cybersecurity
incidents can result from deliberate attacks
or unintentional events (arising from external or internal sources) that may
cause a Fund to lose proprietary information,
suffer data corruption, physical damage to a computer or network system or lose
operational capacity. Cybersecurity
attacks include, but are not limited to, artificial
intelligence spoofing, infection
by malicious software, such as
malware or computer viruses or gaining unauthorized access to digital systems,
networks or devices that are used to service
a Fund’s operations (e.g., through “hacking,” “phishing” or malicious software
coding) or other means for purposes of
misappropriating assets or sensitive information, corrupting data, or causing
operational disruption. Cybersecurity attacks
may also be carried out in a manner that does not require gaining unauthorized
access, such as causing denial-of-service
attacks on a Fund’s websites (i.e., efforts to make network services unavailable
to intended users). In addition,
authorized persons could inadvertently or intentionally release confidential or
proprietary information stored on a
Fund’s systems.
The use of cloud-based service providers could heighten or change these
risks.
Cybersecurity
incidents affecting the Funds’ Adviser, other service providers to a Fund or its
shareholders (including, but
not limited to, fund accountants, custodians, sub-custodians, transfer agents
and financial intermediaries) have the ability
to cause disruptions and impact business operations, potentially resulting in
financial losses to both a Fund and shareholders,
interference with a Fund’s ability to calculate its NAV, impediments to trading,
the inability of Fund shareholders
to transact business and of a Fund to process transactions (including
fulfillment of Fund share purchases and
redemptions), violations of applicable privacy and other laws (including the
release of private shareholder information)
and attendant breach notification and credit monitoring costs, regulatory fines,
penalties, litigation costs, reputational
damage, reimbursement or other compensation costs, forensic investigation and
remediation costs, and/ or additional
compliance costs. Similar adverse consequences could result from cybersecurity
incidents affecting issuers of securities
in which a Fund invests, counterparties with which a Fund engages in
transactions, governmental and other regulatory
authorities, exchange and other financial market operators, banks, brokers,
dealers, insurance companies and
other financial institutions (including financial intermediaries and other
service providers) and other parties. In addition,
substantial costs may be incurred in order to safeguard against and reduce the
risk of any cybersecurity
22 Additional
Information on Portfolio Instruments and Investment Policies
incidents
in the future. In addition to administrative, technological and procedural
safeguards, the Adviser has established business
continuity plans in the event of such cybersecurity incidents. However, there
are inherent limitations in such plans
and systems, including the possibility that certain risks have not been
identified, as well as the rapid development of new
threats. Furthermore, a Fund cannot control the cybersecurity plans and systems
put in place by its service providers or
any other third parties whose operations may affect a Fund or its shareholders.
A Fund and its shareholders could be negatively
impacted as a result. In addition, work-from-home arrangements by the Funds, the
Adviser or their service providers
could increase all of the above risks, create additional data and information
accessibility concerns, and make the
Funds, the Adviser or their service providers susceptible to operational
disruptions, any of which could adversely impact
their operations. Furthermore, the Funds may be an appealing target for
cybersecurity threats such as hackers and
malware.
Debt
Securities.
Debt
Securities Generally.
The
principal risks involved with investments in debt securities include interest
rate risk, credit risk and pre-payment risk.
Interest rate risk refers to the likely decline in the value of bonds as
interest rates rise. Generally, longer-term securities are
more susceptible to changes in value as a result of interest-rate changes than
are shorter-term securities. Changing interest
rate environments (whether downward or upward) impact the various sectors if the
economy in different ways. During
periods when interest rates are low (or negative), a Fund’s yield (or total
return) may also be low and fall below zero.
A Fund may be subject to heightened levels of interest rate risk because the
U.S. Federal Reserve (“the Fed”) has sharply
raised interest rates from relatively low levels and has signaled an intention
to continue to do so until current inflation
levels re-align with the Fed’s long-term inflation target. To the extent the Fed
continues to raise interest rates, there
is a risk that rates across the financial system may rise. Credit risk refers to
the risk that an issuer of a bond may default
with respect to the payment of principal and interest. The lower a bond is
rated, the more it is considered to be a speculative
or risky investment. Pre-payment risk is commonly associated with pooled debt
securities, such as mortgage-backed
securities and asset-backed securities, but may affect other debt securities as
well. When the underlying
debt obligations are prepaid ahead of schedule, the return on the security will
be lower than expected. Pre-payment
rates usually increase when interest rates are falling.
Lower-rated
securities are more likely to react to developments affecting these risks than
are more highly rated securities,
which react primarily to movements in the general level of interest rates.
Although the fluctuation in the price of debt
securities is normally less than that of common stocks, in the past there have
been extended periods of cyclical increases
in interest rates that have caused significant declines in the price of debt
securities in general and have caused the
effective maturity of securities with prepayment features to be extended, thus
effectively converting short or intermediate
term securities (which tend to be less volatile in price) into long term
securities (which tend to be more volatile
in price).
Ratings as Investment
Criteria.
High-quality, medium-quality and non-investment grade debt obligations are
characterized
as such based on their ratings by NRSROs, such as Standard & Poor’s or
Moody’s. In general, the ratings of NRSROs
represent the opinions of these agencies as to the quality of securities that
they rate. Such ratings, however, are relative
and subjective, and are not absolute standards of quality and do not evaluate
the market value risk of the securities.
These ratings are used by a Fund as initial criteria for the selection of
portfolio securities, but a Fund also relies upon
the independent advice of the Adviser to evaluate potential investments. This is
particularly important for lower-quality
securities. Among the factors that will be considered is the long-term ability
of the issuer to pay principal and
interest and general economic trends, as well as an issuer’s capital structure,
existing debt and earnings history. Appendix
B to this SAI contains further information about the rating categories of NRSROs
and their significance.
Subsequent
to its purchase by a Fund, an issuer of securities may cease to be rated or its
rating may be reduced below
the minimum required for purchase by such Fund. In addition, it is possible that
an NRSRO might not change its rating
of a particular issuer to reflect subsequent events. None of these events
generally will require sale of such securities,
but the Adviser will consider such events in its determination of whether the
Fund should continue to hold the securities.
In addition, to the extent that the ratings change as a result of changes in an
NRSRO or its rating systems, or due
to a corporate reorganization, a Fund will attempt to use comparable ratings as
standards for its investments in accordance
with its investment objective and policies.
Investment Grade Debt
Securities.
The Funds may purchase “investment grade” bonds, which are those rated Aaa,
Aa,
A or Baa by Moody’s or AAA, AA, A or BBB by Standard & Poor’s or Fitch or a
comparable rating by another NRSRO; or, if
unrated, judged to be of equivalent quality as determined by the Adviser. For
the avoidance of doubt, bonds rated Baa3 by
Moody’s or BBB- by Standard & Poor’s or BBB- by Fitch are considered to be
investment grade. In general, but not always,
investments in securities rated in the BBB category tend to have more risk than
securities in the A, AA or AAA categories
due to greater exposure to, among other things: adverse economic conditions;
higher levels of debt; or more volatile
industry performance. Securities within the BBB category can also experience
greater market value fluctuations over
time. To the extent that a Fund invests in higher-grade securities, the Fund may
not be able to avail itself of opportunities
for higher income that may be available at lower grades.
Additional
Information on Portfolio Instruments and Investment Policies 23
Lower Quality (High-Risk) Debt
Securities.
Non-investment grade debt or lower quality/rated securities, commonly
known
as junk bonds or high yield securities (hereinafter referred to as
“lower-quality securities”) include (i) bonds rated below
Baa3 by Moody’s or below BBB- by Standard & Poor’s or Fitch, (ii) commercial
paper rated at or below C by Standard
& Poor’s, Not Prime by Moody’s or Fitch 4 by Fitch; and (iii) unrated debt
securities of comparable quality as determined
by the Adviser. The lower the ratings of such lower-quality securities, the more
their risks render them like equity
securities. Securities rated D may be in default with respect to payment of
principal or interest. Lower-quality securities,
while generally offering higher yields than investment grade securities with
similar maturities, involve greater risks,
including a higher possibility of default or bankruptcy. There is more risk
associated with these investments because of
reduced creditworthiness and increased risk of default. Lower-quality securities
generally involve greater volatility of price
and risk to principal and income, and may be less liquid, than securities in the
higher rating categories. Under NRSRO
guidelines, lower-quality securities and comparable unrated securities will
likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Lower-quality
securities are also considered to be at risk of, among other things: failing to
attain improved credit quality
and NRSRO investment grade rating status; having a current identifiable
vulnerability to default or to be in default; not
having the capacity to make required interest payments and repay principal when
due in the event of adverse business,
financial or economic conditions; or, being in default or not current in the
payment of interest or principal. They are
regarded as predominantly speculative with respect to the issuer’s capacity to
pay interest and repay principal.
Issuers
of lower-quality securities often are highly leveraged and may not have
available to them more traditional methods
of financing. Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is
the case with higher rated securities. For example, during an economic downturn
or a sustained period of rising interest rates,
highly leveraged issuers of lower-quality securities may experience financial
stress. During such periods, such issuers
may not have sufficient revenues to meet their interest payment obligations. The
issuer’s ability to service its debt obligations
may also be adversely affected by specific corporate developments, or the
issuer’s inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss from default by the issuer is significantly
greater for the holders of high yield securities because such securities are
generally unsecured and are often subordinated
to other creditors of the issuer. Prices and yields of high yield securities
will fluctuate over time and, during periods
of economic uncertainty, volatility of high yield securities may adversely
affect a Fund’s NAV. In addition, investments
in high yield zero coupon or pay-in-kind bonds, rather than income-bearing high
yield securities, may be more
speculative and may be subject to greater fluctuations in value due to changes
in interest rates.
A
Fund may have difficulty disposing of certain lower-quality securities because
they may have a thin trading market.
Because not all dealers maintain markets in all high yield securities, a Fund
anticipates that such securities could be
sold only to a limited number of dealers or institutional investors. The lack of
a liquid secondary market may have an adverse
effect on the market price and a Fund’s ability to dispose of particular issues
and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing the Fund’s
assets. Market quotations generally are
available on many lower-quality issues only from a limited number of dealers and
may not necessarily represent firm bids
of such dealers or prices for actual sales. Adverse publicity and investor
perceptions may decrease the values and liquidity
of high-yield securities. These securities may also involve special registration
responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Credit
quality (or perceived credit quality) in the lower-quality securities market can
change suddenly and unexpectedly,
and even recently-issued credit ratings may not fully reflect the actual risks
posed by a particular high-yield
security. For these reasons, it is generally the policy of the Adviser not to
rely exclusively on ratings issued by established
credit rating agencies, but to supplement such ratings with its own independent
and on-going review of credit
quality. The achievement of a Fund’s investment objective by investment in such
securities may be more dependent
on the Adviser’s credit analysis than is the case for higher quality bonds.
Should the rating of a portfolio security
be downgraded, the Adviser will determine whether it is in the best interests of
a Fund to retain or dispose of such security.
Prices
for lower-quality securities may be affected by legislative and regulatory
developments. Also, Congress has from
time to time considered legislation which would restrict or eliminate the
corporate tax deduction for interest payments
on these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of
outstanding securities of this type.
A
portion of the lower-quality securities acquired by a Fund may be purchased upon
issuance, which may involve special
risks because the securities so acquired are new issues. In such instances, a
Fund may be a substantial purchaser of
the issue and therefore have the opportunity to participate in structuring the
terms of the offering. Although this may enable
a Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless
remain applicable.
Information Concerning
Duration.
Duration is a risk measure that describes how much the price of a fixed income
security
changes given a change in the level of interest rates. Duration was developed as
a more precise alternative to the
concepts of “term to maturity” or “average dollar weighted maturity”, which had
been used historically in the market as
rough measures of “volatility” or “risk” associated with changes in interest
rates. Duration incorporates a security’s yield, coupon
interest payments, final maturity and call features into one
measure.
24 Additional
Information on Portfolio Instruments and Investment Policies
Most
debt obligations provide interest (“coupon”) payments in addition to final
(“par”) payment at maturity. Some obligations
also have call provisions. Depending on the relative magnitude of these payments
and the nature of the call provisions,
the market values of debt obligations may respond differently to changes in
interest rates.
Traditionally,
a debt security’s “term-to-maturity” has been used as a measure of the
sensitivity of the security’s price to
changes in interest rates (which is the “interest rate risk” or “volatility” of
the security). However, “term-to-maturity” measures
only the time until a debt security provides its final payment, taking no
account of the pattern of the security’s payments
prior to maturity. Average dollar weighted maturity is calculated by averaging
the terms of maturity of each debt
security held with each maturity “weighted” according to the percentage of
assets that it represents. Duration is a measure
of the expected life of a debt security on a present value basis and reflects
both principal and interest payments.
Duration takes the length of the time intervals between the present time and the
time that the interest and principal
payments are scheduled or, in the case of a callable security, expected to be
received, and weights them by the present
values of the cash to be received at each future point in time. For any debt
security with interest payments occurring
prior to the payment of principal, duration is ordinarily less than maturity. In
general, all other factors being the same,
the lower the stated or coupon rate of interest of a debt security, the longer
the duration of the security; conversely,
the higher the stated or coupon rate of interest of a debt security, the shorter
the duration of the security.
There
are some situations where the standard duration calculation does not properly
reflect the interest rate exposure
of a security. For example, floating and variable rate securities often have
final maturities of ten or more years; however,
their interest rate exposure corresponds to the frequency of the coupon reset.
Another example where the interest
rate exposure is not properly captured by duration is the case of mortgage
pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities’
interest rate exposure. In these and other similar situations, the Funds’ will
use more sophisticated analytical techniques
to project the economic life of a security and estimate its interest rate
exposure. Since the computation of duration
is based on predictions of future events rather than known factors, there can be
no assurance that a Fund will at all
times achieve its targeted portfolio duration.
The
change in market value of U.S. Government fixed income securities is largely a
function of changes in the prevailing
level of interest rates. When interest rates are falling, a portfolio with a
shorter duration generally will not generate
as high a level of total return as a portfolio with a longer duration. When
interest rates are stable, shorter duration
portfolios generally will not generate as high a level of total return as longer
duration portfolios (assuming that long-term
interest rates are higher than short-term rates, which is commonly the case).
When interest rates are rising, a portfolio
with a shorter duration will generally outperform longer duration portfolios.
With respect to the composition of a fixed
income portfolio, the longer the duration of the portfolio, generally, the
greater the anticipated potential for total return,
with, however, greater attendant interest rate risk and price volatility than
for a portfolio with a shorter duration.
Newly Issued Debt
Securities.
New issues of certain debt instruments are often offered on a when-issued or
firm-commitment
basis; that is, the payment obligation and the interest rate are fixed at the
time the buyer enters into the
commitment, but delivery and payment for the securities normally take place
after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery
depending on market conditions and changes in interest rate levels. However, a
Fund will not accrue any income on
these securities prior to delivery. Rule 18f-4 under the 1940 Act provides that
funds may invest in securities on a when-issued
or forward-settling basis, or with a non-standard settlement cycle. These
transactions will not be deemed to
involve a senior security, and thus generally will not require the Fund to
maintain a “segregated account” when engaging
in these types of transactions, subject to certain conditions and any other
restrictions that the Fund has adopted.
Depositary
Receipts.
Depositary receipts include American Depositary Receipts (“ADRs”), European
Depositary Receipts
(“EDRs”) and Global Depositary Receipts (“GDRs”) or other securities convertible
into securities of issuers based in
foreign countries. These securities may not necessarily be denominated in the
same currency as the securities into which
they may be converted. Generally, ADRs, in registered form, are denominated in
U.S. Dollars and are designed for use
in the U.S. securities markets, GDRs, in bearer form, are issued and designed
for use outside the United States and EDRs
(also referred to as Continental Depositary Receipts (“CDRs”)), in bearer form,
may be denominated in other currencies
and are designed for use in European securities markets. ADRs are receipts
typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement.
GDRs are receipts typically issued by non-U.S. banks and trust companies that
evidence ownership of either
foreign or domestic securities. For purposes of a Fund’s investment policies,
ADRs, GDRs and EDRs are deemed to have
the same classification as the underlying securities they represent. Thus, an
ADR, GDR or EDR representing ownership
of common stock will be treated as common stock.
A
Fund may invest in depositary receipts through “sponsored” or “unsponsored”
facilities. While ADRs issued under these
two types of facilities are in some respects similar, there are distinctions
between them relating to the rights and obligations
of ADR holders and the practices of market participants.
A
depositary may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of)
the issuer of the deposited securities, although typically the depositary
requests a letter of non-objection from such issuer
prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities.
Additional
Information on Portfolio Instruments and Investment Policies 25
The
depositary usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends
into U.S. Dollars, the disposition of non-cash distributions, and the
performance of other services. The depositary
of an unsponsored facility frequently is under no obligation to pass through
voting rights to ADR holders in respect
of the deposited securities. In addition, an unsponsored facility is generally
not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer
in the U.S. and thus there may not be a correlation between such information and
the market value of the depositary
receipts. Unsponsored ADRs tend to be less liquid than sponsored
ADRs.
Sponsored
ADR facilities are created in generally the same manner as unsponsored
facilities, except that the issuer of
the deposited securities enters into a deposit agreement with the depositary.
The deposit agreement sets out the rights
and responsibilities of the issuer, the depositary, and the ADR holders. With
sponsored facilities, the issuer of the deposited
securities generally will bear some of the costs relating to the facility (such
as dividend payment fees of the depositary),
although ADR holders continue to bear certain other costs (such as deposit and
withdrawal fees). Under the terms
of most sponsored arrangements, depositaries agree to distribute notices of
shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer
of the deposited securities.
In
addition, the issuers of depositary receipts may discontinue issuing new
depositary receipts and withdraw existing depositary
receipts at any time, which may result in costs and delays in the distribution
of the underlying assets to the Fund
and may negatively impact a Fund’s performance.
Derivatives.
Derivatives are financial instruments whose values are derived from another
security, a commodity (such
as gold or oil), an index, a currency (a measure of value or rates, such as the
Standard & Poor’s 500 Index or the prime
lending rate) or other reference asset. A Fund typically uses derivatives as a
substitute for taking a position or reducing
exposure to underlying assets. A Fund may invest in derivative instruments
including the purchase or sale of futures
contracts, swaps (including credit default swaps), options (including options on
futures and options on swaps), forward
contracts, structured notes, and other equity-linked derivatives. A Fund may use
derivative instruments for hedging
(offset risks associated with an investment) purposes. A Fund may also use
derivatives for non-hedging purposes
to seek to enhance returns. When a Fund invests in a derivative for non-hedging
purposes, the Fund will be fully exposed
to the risks of loss of that derivative, which may sometimes be greater than the
derivative’s cost. No Fund may use
any derivative to gain exposure to an asset or class of assets that it would be
prohibited by its investment restrictions from
purchasing directly. Investments in derivatives in general are subject to market
risks that may cause their prices to fluctuate
over time. Fixed income derivatives are subject to interest rate risk.
Investments in derivatives may not correctly correlate
with the price movements of the underlying instrument. As a result, the use of
derivatives may expose a Fund to additional
risks that it would not be subject to if it invested directly in the securities
underlying those derivatives. The use of derivatives
may result in larger losses or smaller gains than otherwise would be the case. A
Fund may also take a short position
through a derivative. A Fund may increase its use of derivatives in response to
unusual market conditions.
Derivatives
can be volatile and may involve significant risks, including:
Accounting
risk
– the accounting treatment of derivative instruments, including their initial
recording, income recognition,
and valuation, may require detailed analysis of relevant accounting guidance as
it applies to the specific instrument
structure.
Correlation
risk
– if the value of a derivative does not correlate well with the particular
market or other asset class the
derivative is intended to provide exposure to, the derivative may not have the
anticipated effect.
Counterparty
risk
– the risk that the counterparty (the party on the other side of the
transaction) on a derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency
risk
– the risk that changes in the exchange rate between currencies will adversely
affect the value (in U.S. Dollar
terms) of an investment.
Index
risk
– if the derivative is linked to the performance of an index, it will be subject
to the risks associated with changes
in that index. If the index changes, the Fund could receive lower interest
payments or experience a reduction in the
value of the derivative to below what the Fund paid. Certain indexed securities
may create leverage, to the extent that
they increase or decrease in value at a rate that is a multiple of the changes
in the applicable index.
Leverage
risk
– the risk associated with certain types of leveraged investments or trading
strategies pursuant to which
relatively small market movements may result in large changes in the value of an
investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.
Liquidity
risk
– the risk that certain derivative instruments may be difficult or impossible to
sell at the time that the seller
would like or at the price that the seller believes the instrument is currently
worth. In addition, a Fund may need to sell
portfolio securities at an inopportune time to satisfy margin or payment
obligations under derivatives transactions.
Operational
risk
– derivatives may require customized, manual processing and documentation of
transactions and may
not fit within existing automated systems for confirmations, reconciliations and
other operational processes used for (traditional)
securities.
26 Additional
Information on Portfolio Instruments and Investment Policies
Short
position risk
– a Fund will incur a loss from a short position if the value of the reference
asset increases after the Fund
has entered into the short position. Short positions generally involve a form of
leverage, which can exaggerate a Fund’s
losses. If a Fund engages in a short derivatives position, it may lose more
money than the actual cost of the short position
and its potential losses may be unlimited. Any gain from a short position will
be offset in whole or in part by the transaction
costs associated with the short position.
Tax
risk
– derivatives raise issues under Subchapter M of the Internal Revenue Code of
1986, as amended (the “Code”
or the “Internal Revenue Code”) requirements for qualifications as a regulated
investment company.
Valuation
risk
– depending on their structure, some categories of derivatives may present
special valuation challenges.
For example, valuation of derivatives may be affected by considerations such as
volatility, leverage, default risk
and lack of trading on a recognized market, among other things.
The
use of derivatives is a highly specialized activity that can involve investment
techniques and risks different from, and
in some respects greater than, those associated with investing in more
traditional investments such as stocks and bonds.
Derivatives may have a return that is tied to a formula based upon an interest
rate, index or other measurement which
may differ from the return of a simple security of the same maturity. A formula
may have a cap or other limitation on
the rate of interest to be paid. Derivatives may have varying degrees of
volatility at different times, or under different market
conditions, and may perform in unanticipated ways, each of which may affect
valuation.
OTC
risk
– Derivatives may generally be traded OTC, through a swap execution facility
(“SEF”), or on an exchange. Derivatives
traded through a SEF or exchange generally must be centrally cleared through a
regulated clearing agency, and
derivatives traded OTC may be centrally cleared, but typically are not. OTC
derivatives are agreements that are individually
negotiated between parties and can be tailored to meet a purchaser’s needs. OTC
derivatives are not guaranteed
by a clearing agency and may be subject to increased credit risk. Funds entering
in cleared or non-cleared OTC
derivatives must post variation margin. Starting in September 2021, rules
requiring counterparties to OTC derivatives, such
as the Funds, to post initial margin have started to go into effect and will be
phased in through 2022. The Funds currently
may agree to post initial margin to counterparties even though not required as a
regulatory matter. The Funds are
subject to counterparty risk when trading OTC derivatives. In order to mitigate
the risk that the Funds will not be able to
collect amounts due to the Funds upon bankruptcy of the counterparty, the Funds
continuously evaluate the creditworthiness
of counterparties and enter into master netting agreements in respect to OTC
derivatives that allow the Funds
to close out the contracts upon the bankruptcy of the counterparty and net
exposures. As a result of Title II of the Dodd-Frank
Act (as defined below) and regulations imposed by the U.S. prudential
regulators, when transacting with counterparties
subject to regulation by the bank regulators, the Funds must enter into
contractual provisions that suspend
or stay the Funds’ rights to close out in cases when the counterparty is subject
a resolution bankruptcy proceeding
and are restricted in exercising cross-default rights and certain other default
rights.
Risk
of Government Regulation of Derivatives
– It is possible that additional government regulation of various types
of
derivatives instruments and regulation of certain market participants’ use of
such instruments may impact or prevent a
Fund’s use of such instruments and/or adversely affect the value of derivatives
or Fund performance. In addition, capital
requirements imposed on Fund counterparties to increase the cost of entering
into certain derivatives transactions,
and margin requirements may require more assets of a Fund to be used for
collateral in support of those derivatives.
Regulations are now in effect that require dealers in derivatives subject to
regulation by the CFTC (such as interest
rate swaps, swaps on broad-based securities indices and swaps on broad-based
indices of credit-default swaps)
to post and collect variation margin (comprised of specified liquid instruments
and subject to a required haircut) in
connection with trading of OTC swaps with a Fund, to trade report the
transactions, to clear the derivatives through a clearing
agency and to comply with a number of business conduct and other requirements.
With respect to transactions in
swaps and security-based swaps with dealers in derivatives that are regulated by
the U.S. prudential regulators, the Funds
are subject to margin posting and collection. However, security-based swap
dealers subject to regulation by the SEC
are not yet subject to margining, trade reporting, central clearing and trading
and other requirements but are expected
to be in the near future. In addition, as noted above, regulations adopted by
prudential regulators that are now in
effect require certain bank-regulated counterparties and certain of their
affiliates to include in certain financial contracts,
including many derivatives contracts, terms that delay or restrict the rights of
counterparties, such as a Fund, to
terminate such contracts, foreclose upon collateral, exercise other default
rights or restrict transfers of credit support in the
event that the counterparty and/or its affiliates are subject to certain types
of resolution or insolvency proceedings.
In
October 2020, the SEC adopted new regulations, that became effective in August
of 2022, applicable to the Funds’
use of derivatives, short sales, reverse repurchase agreements, and certain
other transactions that, among other things,
require a Fund to adopt a derivatives risk management program and appoint a
derivatives risk manager that will manage
the program and communicate to the board of directors of the Fund. However,
subject to certain conditions, Funds
that do not invest heavily in derivatives may qualify as limited derivatives
users and are not be subject to the full requirements
of the new rule. The SEC also eliminated the asset segregation and coverage
framework arising from prior SEC
guidance for covering derivatives and certain financial instruments. The new
rule could impact the effectiveness or raise
the costs of a Fund’s derivatives transactions, impede the employment of the
Fund’s derivatives strategies, or adversely
affect Fund performance and cause the Fund to lose value.
Additional
Information on Portfolio Instruments and Investment Policies 27
See
“Regulation of Commodity Interests” for additional information about the Funds’
use of derivatives in connection with
CFTC exclusions.
Direct Debt
Instruments.
Direct debt instruments are interests in amounts owed by a corporate,
governmental or other
borrower to lenders (direct loans), to suppliers of goods or services (trade
claims or other receivables) or to other parties.
When
a Fund participates in a direct loan it will be lending money directly to an
issuer. Direct loans generally do not have
an underwriter or agent bank, but instead, are negotiated between a company’s
management team and a lender or
group of lenders. Direct loans typically offer better security and structural
terms than other types of high yield securities.
Direct debt obligations are often the most senior-obligations in an issuer’s
capital structure or are well-collateralized
so that overall risk is lessened.
Trade
claims are unsecured rights of payment arising from obligations other than
borrowed funds. Trade claims include
vendor claims and other receivables that are adequately documented and available
for purchase from high yield broker-dealers.
Trade claims typically may sell at a discount. In addition to the risks
otherwise associated with low-quality obligations,
trade claims have other risks, including the possibility that the amount of the
claim may be disputed by the obligor.
Trade claims normally would be considered illiquid and pricing can be
volatile.
Direct
debt instruments involve a risk of loss in case of default or insolvency of the
borrower. A Fund will rely primarily upon
the creditworthiness of the borrower and/or the collateral for payment of
interest and repayment of principal. The value
of a Fund’s investments may be adversely affected if scheduled interest or
principal payments are not made. Because
most direct loans will be secured, there will be a smaller risk of loss with
direct loans than with an investment in unsecured
high yield bonds or trade claims. Indebtedness of borrowers whose
creditworthiness is poor involves substantially
greater risks and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay
off their indebtedness or may pay only a small fraction of the amount owed.
Investments in direct debt instruments also
involve interest rate risk and liquidity risk. However, interest rate risk is
lessened by the generally short-term nature of direct
debt instruments and their interest rate structure, which typically floats. To
the extent the direct debt instruments in which
a Fund invests are considered illiquid, the lack of a liquid secondary market
(1) will have an adverse impact on the value
of such instruments, (2) will have an adverse impact on the Fund’s ability to
dispose of them when necessary to meet
the Fund’s liquidity needs or in response to a specific economic event, such as
a decline in creditworthiness of the issuer,
and (3) may make it more difficult for the Fund to assign a value of these
instruments for purposes of valuing the Fund’s
portfolio and calculating its NAV. In order to lessen liquidity risk, a Fund
anticipates investing primarily in direct debt instruments
that are quoted and traded in the high yield market and will not invest in these
instruments if it would cause more
than 15% of the Fund’s net assets to be illiquid. Trade claims may also present
a tax risk to the Fund.
A
Fund will not invest in trade claims if it affects the Fund’s qualification as a
regulated investment company under Subchapter
M of the Internal Revenue Code.
Distressed
Securities.
Distressed securities generally trade significantly below “par” or full value
because investments in
such securities and debt of distressed issuers or issuers in default are
considered speculative and involve substantial risks
in addition to the risks of investing in junk bonds. A Fund will generally not
receive interest payments on the distressed securities
and may incur costs to protect its investment. In addition, distressed
securities involve the substantial risk that principal
will not be repaid. These securities may present a substantial risk of default
or may be in default at the time of investment.
A Fund may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment
of principal of or interest on its portfolio holdings. In any reorganization or
liquidation proceeding relating to a portfolio
company, a Fund may lose its entire investment or may be required to accept cash
or securities with a value less than
its original investment. Distressed securities and any securities received in an
exchange for such securities may be subject
to restrictions on resale.
Dividend Strategy
Risk.
There is no guarantee that the issuers of the securities held by the Fund will
declare dividends in
the future or that, if dividends are declared, they will remain at their current
levels or increase over time. The Fund’s emphasis
on dividend-paying stocks could cause the Fund to underperform similar funds
that invest without consideration
of a company’s track record of paying dividends or ability to pay dividends in
the future. Dividend-paying stocks
may not participate in a broad market advance to the same degree as other
stocks, and a sharp rise in interest rates
or an economic downturn could cause a company to unexpectedly reduce or
eliminate its dividend.
A
Fund may hold securities for short periods of time related to the dividend
payment periods for those securities and may
experience loss during these periods. There is the possibility that the
anticipated acceleration of dividend could not occur.
Dollar Roll
Transactions.
Dollar roll transactions consist of the sale by a Fund to a bank or
broker/dealer (the “counterparty”)
of GNMA certificates or other mortgage-backed securities together with a
commitment to purchase from
the counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all
principal and interest payments, including prepayments, made on the security
while it is the holder. A Fund receives a fee
from the counterparty as consideration for entering into the commitment to
purchase. Dollar rolls may be renewed over
a period of several months with a different purchase and repurchase price fixed
and a cash settlement made at each
renewal without physical delivery of securities. Moreover, the transaction may
be preceded by a firm commitment
28 Additional
Information on Portfolio Instruments and Investment Policies
agreement
pursuant to which a Fund agrees to buy a security on a future date. In
accordance with current federal securities
laws, rules, and staff positions, a Fund will segregate cash or other liquid
assets in an amount sufficient to meet its
purchase obligations under the transactions. Depending on whether the segregated
assets are cash equivalent or some
other type of security, entering into dollar rolls may subject a Fund to
additional interest rate sensitivity. If the segregated
assets are cash equivalents that mature prior to the dollar roll settlement,
there is little likelihood that the sensitivity
will increase; however, if the segregated assets are subject to interest rate
risk because they settle later, then the
Fund’s interest rate sensitivity could increase.
Dollar
rolls may be treated for purposes of the 1940 Act as borrowings of a Fund (see
“Borrowing”) because they involve
the sale of a security coupled with an agreement to repurchase. Like all
borrowings, a dollar roll involves costs to a Fund.
For example, while a Fund receives a fee as consideration for agreeing to
repurchase the security, the Fund forgoes the
right to receive all principal and interest payments while the counterparty
holds the security. These payments to the counterparty
may exceed the fee received by a Fund, thereby effectively charging the Fund
interest on its borrowing. Further,
although a Fund can estimate the amount of expected principal prepayment over
the term of the dollar roll, a variation
in the actual amount of prepayment could increase or decrease the cost of the
Fund’s borrowing.
Dollar
rolls may be used as arbitrage transactions in which a Fund will maintain an
offsetting position in investment grade
debt obligations or repurchase agreements that mature on or before the
settlement date on the related dollar roll or
reverse repurchase agreements. Since a Fund will receive interest on the
securities or repurchase agreements in which
it invests the transaction proceeds, such transactions may involve
leverage.
The
entry into dollar rolls involves potential risks of loss that are different from
those related to the securities underlying
the transactions. For example, if the counterparty becomes insolvent, a Fund’s
right to purchase from the counterparty
might be restricted. Additionally, the value of such securities may change
adversely before a Fund is able to purchase
them. Similarly, a Fund may be required to purchase securities in connection
with a dollar roll at a higher price than
may otherwise be available on the open market. Since, as noted above, the
counterparty is required to deliver a similar,
but not identical security to a Fund, the security that the Fund is required to
buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that a Fund’s use
of the cash that it receives from a dollar
roll will provide a return that exceeds borrowing costs.
Emerging Markets
Securities.
Although there is no universally accepted definition, an emerging or developing
country is
generally considered to be a country which is in the initial stages of
industrialization. Investing in emerging markets can involve
unique risks in addition to and greater than those generally associated with
investing in developed markets. Shareholders
should be aware that investing in the equity and fixed income markets of
developing countries involves exposure
to unstable governments, economies based on only a few industries, and
securities markets which trade a small
number of securities. Securities markets of developing countries tend to be more
volatile than the markets of developed
countries; however, such markets have in the past provided the opportunity for
higher rates of return to investors.
The
value and liquidity of investments in developing countries may be affected
favorably or unfavorably by political, economic,
fiscal, regulatory or other developments in the particular countries or
neighboring regions. The extent of economic
development, political stability and market depth of different countries varies
widely. Such investments typically
involve greater potential for gain or loss than investments in securities of
issuers in developed countries.
The
securities markets in developing countries are substantially smaller, less
liquid and more volatile than the major securities
markets in the United States. A high proportion of the shares of issuers in
developing countries may be held by a limited
number of persons and financial institutions, which may limit the number of
shares available for investment by a Fund.
The small size, limited trading volume and relative inexperience of the
securities markets in these countries may make
investments in securities traded in emerging markets less liquid and more
volatile than investments in securities traded
in more developed countries. For example, limited market size may cause prices
to be unduly influenced by traders
who control large positions. A limited number of issuers in developing
countries’ securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
The limited liquidity of securities markets
in developing countries may also affect a Fund’s ability to acquire or dispose
of securities at the price and time it wishes
to do so. Accordingly, during periods of rising securities prices in the more
illiquid securities markets, a Fund’s ability
to participate fully in such price increases may be limited by its investment
policy of investing not more than 15% of its
total net assets in illiquid investments. Conversely, a Fund’s inability to
dispose fully and promptly of positions in declining
markets could cause the Fund’s NAV to decline as the value of the unsold
positions is marked to lower prices. In addition,
a Fund may be required to establish special custodial or other arrangements
before making investments in securities
traded in emerging markets. There may be little financial or accounting
information available with respect to issuers
of emerging market securities, and it may be difficult as a result to assess the
value of prospects of an investment in
such securities.
Investments
in the securities of issuers located in emerging markets could also be affected
by risks associated with pervasiveness
of corruption and crime, armed conflict (e.g., the ongoing Russian-Ukraine
conflict), the impact on the economy
of civil war, religious or ethnic unrest and the withdrawal or non-renewal of
any license enabling the Fund to trade
in securities of a particular country, confiscatory taxation, restrictions on
transfers of assets, less publicly available financial
and other information. International trade barriers or economic sanctions
against foreign countries,
Additional
Information on Portfolio Instruments and Investment Policies 29
organizations,
entities and/or individuals in response to geopolitical tensions or conflicts
may adversely affect the value of the
Fund’s foreign holdings. The type and severity of sanctions and other similar
measures are difficult to measure or predict.
Emerging
market countries typically have less established legal, accounting and financial
reporting systems than those
in more developed markets, which may reduce the scope or quality of financial
information available to investors. Governments
in emerging market countries are often less stable and more likely to take
extra-legal action with respect to
companies, industries, assets, or foreign ownership than those in more developed
markets. Moreover, it can be more difficult
for investors to bring litigation or enforce judgments against issuers in
emerging markets or for U.S. regulators to bring
enforcement actions against such issuers. Funds may also be subject to Emerging
Markets Risk if they invest in derivatives
or other securities or instruments whose value or return are related to the
value or returns of emerging markets
securities.
The
currencies of certain emerging market countries have experienced devaluations
relative to the U.S. Dollar, and future
devaluations may adversely affect the value of assets denominated in such
currencies. In addition, currency hedging
techniques may be unavailable in certain emerging market countries. Many
emerging market countries have experienced
substantial, and in some periods extremely high, rates of inflation or deflation
for many years, and future inflation
may adversely affect the economies and securities markets of such
countries.
Political
and economic structures in many such countries may be undergoing significant
evolution and rapid development,
and such countries may lack the social, political and economic stability
characteristics of the United States. In
addition, unanticipated political or social developments may affect the value of
investments in emerging markets and the
availability of additional investments in these markets. Any change in the
leadership or politics of emerging market countries,
or the countries that exercise a significant influence over those countries, may
halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities. Certain
countries have in the past failed to recognize private property rights and have
at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or
expropriation of assets, may be heightened.
Economies
of developing countries may differ favorably or unfavorably from the United
States’ economy in such respects
as rate of growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance
of payments position. The economy of some emerging markets may be particularly
exposed to or affected by a certain
industry or sector, and therefore issuers and/or securities of such emerging
markets may be more affected by the
performance of such industries or sectors. Certain developing countries do not
have comprehensive systems of laws, although
substantial changes have occurred in many such countries in this regard in
recent years. Laws regarding fiduciary
duties of officers and directors and the protection of shareholders may not be
well developed. Even where adequate
law exists in such developing countries, it may be impossible to obtain swift
and equitable enforcement of such law,
or to obtain enforcement of the judgment by a court of another
jurisdiction.
The
risk also exists that an emergency situation may arise in one or more emerging
markets as a result of which trading
of securities may cease or may be substantially curtailed and prices for a
Fund’s securities in such markets may not
be readily available. A Fund may suspend redemption of its shares for any period
during which an emergency exists, as
determined by the SEC. Accordingly if a Fund believes that appropriate
circumstances exist, it will promptly apply to the
SEC for a determination that an emergency is present. During the period
commencing from a Fund’s identification of such
condition until the date of the SEC action, a Fund’s securities in the affected
markets will be valued at fair value determined
in good faith by or under the direction of the Fund’s Board.
Governments
of many emerging market countries have become overly reliant on the
international capital markets and
other forms of foreign credit to finance large public spending programs that
cause huge budget deficits. As a result of
either an inability to pay or submission to political pressure, the governments
have sought to restructure their loan and/or
bond obligations, have declared a temporary suspension of interest payments, or
have defaulted (in part or full) on their
outstanding debt obligations. These events have adversely affected the values of
securities issued by the governments
and corporations domiciled in these emerging market countries and have
negatively affected not only their
cost of borrowing but also their ability to borrow in the future. The economic
and political environment has presented
significant challenges to the economies of emerging markets, including, among
others, rising inflation, food insecurity,
subdued employment growth, and economic setback caused by supply chain
disruption and the reduction in exports.
Certain
of the foregoing risks may also apply to some extent to securities of U.S.
issuers that are denominated in foreign
currencies or that are traded in foreign markets, or securities of U.S. issuers
having significant foreign operations.
Trading
in futures contracts on foreign commodity exchanges may be subject to the same
or similar risks as trading in
foreign securities.
Asian Risk.
Certain Funds may invest their assets in Asian securities, and those Funds may
be subject to general economic
and political conditions in Asia. Certain Funds may invest a significant portion
of their assets in Asian securities, and
those Funds may be more volatile than a fund which is broadly diversified
geographically. Additional factors relating to
Asia that an investor should consider include the following:
30 Additional
Information on Portfolio Instruments and Investment Policies
Political,
Social and Economic Factors.
Some parts of the Asian region may be subject to a greater degree of
economic,
political and social instability than is the case in the United States and
Europe. Such instability may result from, among
other things, the following: (i) authoritarian governments or military
involvement in political and economic decision-making,
including changes in government through extra-constitutional means; (ii) popular
unrest associated with
demands for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection. Such social,
political and economic instability could significantly
disrupt the principal financial markets in which the Funds invest and adversely
affect the value of the Funds’ assets.
Some
Asian economies are reliant on exports in varying degrees as a major
contribution to economic growth and as such
may be affected by developments in the economies of their principal trading
partners. These economies may be accordingly
affected by protective trade barriers and the economic conditions of their
trading partners, principally, the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners
of protectionist trade legislation, reduction of foreign investment in local
economies and general declines in the international
securities markets could have a significant adverse effect upon the securities
markets of Asia.
Some
Asian economies have limited natural resources, resulting in dependence on
foreign sources for certain raw materials
and economic vulnerability to global fluctuations of price and supply. Other
economies such as Indonesia and Malaysia,
for example, are commodity exporters susceptible to world prices for their
commodity exports, including crude oil.
Some
governments in the Asian region are authoritarian in nature and influenced by
security forces. For example, during
the course of the last twenty-five years, certain governments in the region have
been installed or removed as a result
of military coups while others have periodically demonstrated their repressive
police state nature. Disparities of wealth,
among other factors, have also led to social unrest in some Asian countries
accompanied, in certain cases, by violence
and labor unrest. Ethnic, religious and racial disaffection, as evidenced in
India, Myanmar, Pakistan and Sri Lanka, have
created social, economic and political problems.
Several
Asian countries have or in the past have had hostile relationships with
neighboring nations or have experienced
internal insurgency. For example, Thailand experienced border battles with Laos
and India is engaged in border
disputes with several of its neighbors, including China and Pakistan. An uneasy
truce exists between North Korea and
South Korea and the two countries technically remain in a state of war. In
addition, North Korea’s nuclear weapons program
has caused an increased level of risk of military conflict in the
area.
There
may be the possibility of expropriations, confiscatory taxation, political,
economic or social instability or diplomatic
developments which would adversely affect assets of the Funds held in foreign
countries. Governments in certain
Asian countries participate to a significant degree, through ownership interests
or regulation, in their respective economies.
Action by these governments could have a significant adverse effect on market
prices of a Fund’s securities and
its share price.
Market
Characteristics.
Most of the securities markets of Asia have substantially less volume than the
NYSE, and equity
securities of most companies in Asia are less liquid and more volatile than
equity securities of U.S. companies of comparable
size. Some of the stock exchanges in Asia, such as those in China, are in the
early stages of their development.
Many companies traded on securities markets in Asia are smaller, newer and less
seasoned than companies
whose securities are traded on securities markets in the United States. In some
Asian countries, there is no established
secondary market for securities. Therefore, liquidity in these countries is
generally low and transaction costs high.
Reduced liquidity often creates higher volatility, as well as difficulties in
obtaining accurate market quotations for financial
reporting purposes and for calculating NAVs, and sometimes also an inability to
buy and sell securities. Market quotations
on many securities may only be available from a limited number of dealers and
may not necessarily represent
firm bids from those dealers or prices for actual sales. Additionally, market
making and arbitrage activities are generally
less extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets.
Investments in smaller companies involve greater risk than is customarily
associated with investing in larger companies.
Smaller companies may have limited product lines, markets or financial or
managerial resources and may be
more susceptible to losses and risks of bankruptcy. Accordingly, each of these
markets may be subject to greater influence
by adverse events generally affecting the market, and by large investors trading
significant blocks of securities, than
is usual in the U.S. To the extent that any of the Asian countries experiences
rapid increases in its money supply and investment
in equity securities for speculative purposes, the equity securities traded in
any such country may trade at price-earning
multiples higher than those of comparable companies trading on securities
markets in the United States, which
may not be sustainable.
Brokerage
commissions and other transaction costs on securities exchanges in Asia are
generally higher than in the U.S.
Settlement procedures in certain Asian countries are less developed and reliable
than those in the U.S. and in other developed
markets, and a Fund may experience settlement delays or other material
difficulties. Securities trading in certain
Asian securities markets may be subject to risks due to a lack of experience of
securities brokers, a lack of modern
technology and a possible lack of sufficient capital to expand market
operations. The foregoing factors could impede
the ability of a Fund to effect portfolio transactions on a timely basis and
could have an adverse effect on the NAV
of shares of the Fund.
Additional
Information on Portfolio Instruments and Investment Policies 31
There
is also less government supervision and regulation of foreign securities
exchanges, brokers, and listed companies
in the Asian countries than exists in the United States. In addition, existing
laws and regulations are often inconsistently
applied. As legal systems in Asian countries develop, foreign investors may be
adversely affected by new laws
and regulations, changes to existing laws and regulations and preemption of
local laws and regulations by national laws.
In circumstances where adequate laws exist, it may not be possible to obtain
swift and equitable enforcement of the
law. Less information will, therefore, be available to a Fund than in respect of
investments in the U.S. Further, in certain Asian
countries, less information may be available to a Fund than to local market
participants. Brokers in Asian countries may
not be as well capitalized as those in the U.S., so that they are more
susceptible to financial failure in times of market, political,
or economic stress.
In
addition, accounting and auditing standards applied in certain Asian countries
frequently do not conform with the generally
accepted accounting principles (“GAAP”) used in the United States. The use of
some accounting policies, such as
the constant purchasing power method, can cause distortion in some cases. Also,
substantially less financial information
is generally publicly available about issuers in Asian countries and, where
available, may not be independently
verifiable.
Energy.
Asia has historically depended on oil for most of its energy requirements.
Certain Asian countries are highly dependent
on imported oil. In the past, oil prices have had a major impact on Asian
economies. Oil prices are generally subject
to extreme volatility. Continuing increases in levels of worldwide oil and gas
reserves and production may further depress
the value of investments related to the natural resources industry. This trend
is causing producers to curtail production
or reduce capital spending for exploration activities. This could increase the
time period a Fund would need to see
a realization of its investments in the energy industry.
Natural
Disasters. The Asian region has in the past experienced earthquakes, mud slides
and tidal waves of varying degrees
of severity (e.g., tsunamis), and the risks of such phenomena, and the damage
resulting from natural disasters, continue
to exist. The long-term economic effects of such geological factors on the Asian
economy as a whole, and on a Fund’s
investments and share price, cannot be predicted.
Investing in
China.
In addition to the risks listed above under “Foreign Securities,” “Emerging
Markets Securities” and “Asian
Risk,” investing in China presents additional risks. Investing in China involves
a high degree of risk and special considerations
not typically associated with investing in other more established economies or
securities markets. Such risks
may include: (a) the risk of nationalization or expropriation of assets or
confiscatory taxation; (b) greater social, economic
and political uncertainty (including the risk of war and social unrest); (c)
dependency on exports and the corresponding
importance of international trade; (d) the increasing competition from Asia’s
other low-cost emerging market
economies; (e) greater price volatility and significantly smaller market
capitalization of securities markets; (f) substantially
less liquidity, particularly of certain share classes of Chinese securities; (g)
currency exchange rate fluctuations
and the lack of available currency hedging instruments; (h) higher rates of
inflation; (i) controls on foreign investment
and limitations on repatriation of invested capital and on a Fund’s ability to
exchange local currencies for U.S. Dollars;
(j) greater governmental involvement in and control over the economy, including
over securities exchanges; (k) the
risk that the Chinese government may decide not to continue to support the
economic reform programs implemented
since 1978 and could return to the prior, completely centrally planned, economy;
(l) the fact that China companies,
particularly those located in China, may be smaller, less seasoned and
newly-organized; (m) the difference in,
or lack of, auditing and financial reporting standards which may result in
unavailability of material information about issuers,
particularly in China; (n) the fact that statistical information regarding the
economy of China may be inaccurate or
not comparable to statistical information regarding the U.S. or other economies;
(o) the less extensive, and still developing,
regulation of the securities markets, business entities and commercial
transactions; (p) the fact that the settlement
period of securities transactions in foreign markets may be longer; (q) the
willingness and ability of the Chinese
government to support the Chinese and Hong Kong economies and markets is
uncertain; (r) the risk that it may be
more difficult, or impossible, to obtain and/or enforce a judgment than in other
countries; and (s) the rapidity and erratic
nature of growth, particularly in China, resulting in efficiencies and
dislocations. In addition, any spread of an infectious
illness, public health threat or similar issue could reduce consumer demand or
economic output, result in market
closures, travel restrictions or quarantines, and generally have a significant
impact on the Chinese economy, which
in turn could adversely affect the Fund’s investments.
Investments in China may subject a Fund’s investments to a number
of tax rules, and the application of many of those rules may be uncertain.
Moreover, China has implemented a number
of tax reforms in recent years, and may amend or revise its existing tax laws
and/or procedures in the future, possibly
with retroactive effect. Changes in applicable Chinese tax law could reduce the
after-tax profits of the Funds, directly
or indirectly, including by reducing the after-tax profits of companies in China
in which a Fund invests. Chinese taxes
that may apply to a Fund’s investments include income tax or withholding tax on
dividends, interest or gains earned by
the Fund, business tax and stamp duty. Uncertainties in Chinese tax rules could
result in unexpected tax liabilities for the
Funds.
In
December 2020, the U.S. Congress passed the Holding Foreign Companies
Accountable Act (“HFCAA”). The HFCAA
provides that after three consecutive years of determinations by the U.S. Public
Company Accounting Oversight Board
(“PCAOB”) that positions taken by authorities in China obstructed the PCAOB’s
ability to inspect and investigate registered
public accounting firms in mainland China and Hong Kong completely, the
companies audited by those firms would
be subject to a trading prohibition on U.S. markets. On August 26, 2022, the
PCAOB signed a Statement of Protocol
32 Additional
Information on Portfolio Instruments and Investment Policies
with
the China Securities Regulatory Commission and the Ministry of Finance of the
People’s Republic of China to grant the
PCAOB access to inspect and investigate registered public accounting firms in
mainland China and Hong Kong completely,
consistent with U.S. law. To the extent the PCAOB remains unable to inspect
audit work papers and practices of
PCAOB-registered accounting firms in China with respect to their audit work of
U.S. reporting companies, such inability may
impose significant additional risks associated with investments in China.
Further, to the extent a Fund invests in the securities
of a company whose securities become subject to a trading prohibition, the
Fund’s ability to transact in such securities,
and the liquidity of the securities, as well as their market price, would likely
be adversely affected.
Investment
in China is subject to certain political risks. Following the establishment of
the People’s Republic of China (“PRC”)
by the Communist Party in 1949, the Chinese government renounced various debt
obligations incurred by China’s
predecessor governments, which obligations remain in default, and expropriated
assets without compensation. There
can be no assurance that the Chinese government will not take similar action in
the future. The political reunification
of China and Taiwan is a highly problematic issue and is unlikely to be settled
in the near future. This situation poses
a threat to Taiwan’s economy and could negatively affect its stock
market.
Hong
Kong reverted to Chinese sovereignty on July 1, 1997 as a Special Administrative
Region of the People’s Republic
of China under the principle of “one country, two systems.” Although China is
obligated to maintain the current capitalist
economic and social system of Hong Kong through June 30, 2047, the continuation
of economic and social freedoms
enjoyed in Hong Kong is dependent on the government of China. Any attempt by
China to tighten its control over
Hong Kong’s political, economic, legal or social policies may result in an
adverse effect on Hong Kong’s markets. Uncertainty
over Hong Kong’s political future arising from interactions with China has
resulted in social unrest, which could in
turn cause uncertainty in the markets. In addition, the Hong Kong dollar trades
at a fixed exchange rate in relation to (or,
is “pegged” to) the U.S. dollar, which has contributed to the growth and
stability of the Hong Kong economy. However, it
is uncertain how long the currency peg will continue or what effect the
establishment of an alternative exchange rate system
would have on the Hong Kong economy. Because the Funds’ NAV is denominated in
U.S. dollars, the establishment
of an alternative exchange rate system could result in a decline in a Fund’s
NAV.
The
Chinese economy has grown rapidly in the past but there is no assurance that
this growth rate will be maintained.
In fact, the Chinese economy may experience a significant slowdown as a result
of, among other things, a deterioration
in global demand for Chinese exports, as well as contraction in spending on
domestic goods by Chinese consumers.
An
economic downturn in China or geopolitical tensions involving China could
adversely impact investments in
Chinese or Chinese-related issuers because, among other possibilities, certain
Chinese issuers may be sanctioned by the
U.S. government in the event of a geopolitical tension. In
addition, China may experience substantial rates of inflation or
economic recessions, which would have a negative effect on the economy and
securities market. Delays in enterprise restructuring,
slow development of well-functioning financial markets and widespread corruption
have also hindered performance
of the Chinese economy. China continues to receive substantial pressure from
trading partners to liberalize official
currency exchange rates. Chinese authorities may intervene in the China
Securities market and halt or suspend trading
of securities for short or even longer periods of time. Recently, the China
Securities market has experienced considerable
volatility and been subject to relatively frequent and extensive trading halts
and suspensions. These trading halts
and suspensions have, among other things, contributed to uncertainty in the
markets and reduced the liquidity of the
securities subject to such trading halts and suspensions, which could include
securities held by a Fund.
The
current political climate has intensified concerns about a potential trade war
between China and the United States,
as each country has imposed, and may in the future impose additional, tariffs on
the other country’s products. These
actions may trigger a significant reduction in international trade, the
oversupply of certain manufactured goods, substantial
price reductions of goods and possible failure of individual companies and/or
large segments of China’s export
industry, which could have a negative impact on a Fund’s performance. Certain
securities are, or may in the future
become, restricted, and a Fund may be forced to sell such restricted securities
and incur a loss as a result. U.S. companies
that source material and goods from China and those that make large amounts of
sales in China would be particularly
vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome
of the trade tensions and the
potential for a trade war could cause the U.S. dollar to decline against safe
haven currencies, such as the Japanese yen
and the euro. Events such as these and their consequences are difficult to
predict and it is unclear whether further tariffs
may be imposed or other escalating actions may be taken in the
future.
Historically,
investments in stocks, bonds, and warrants listed and traded on a Mainland China
stock exchange, investment
companies, and other financial instruments (collectively referred to as “China
Securities”) approved by the China
Securities Regulatory Commission (“CSRC”) were not eligible for investment by
non-Chinese investors. However, the
CSRC may grant qualified foreign institutional investor (“QFII”) licenses and
renminbi qualified foreign institutional investor
(“RQFII”) licenses that allow non-Chinese institutional investors to invest in
China securities. Each QFII and RQFII license
holder is authorized to invest in China Securities only up to a specified quota
established by the Chinese State Administration
of Foreign Exchange (“SAFE”). The provisions regarding such quotas may be
subject to change with little or
notice given by SAFE. abrdn Asia Limited (“aAL”),
a Subadviser to some of the Funds, has received a QFII license and an
RQFII
license and specified quotas to be invested in China Securities, the QFII quota
specifically referring to a nominee quota
in this instance (the “QFII Quota” and “RQFII Quota” respectively).
Additional
Information on Portfolio Instruments and Investment Policies 33
Although
China law permits the use of nominee accounts for clients of investment managers
who are QFII or RQFII license
holders, the Chinese regulators require the securities trading and settlement
accounts to be maintained in the name
of the QFII or RQFII license holder. As a result, there is a risk that creditors
of aAL
may assert that aAL,
and not the individual
fund, is the legal owner of the securities and other assets in the accounts.
aAL
has obtained a legal opinion from Chinese
counsel confirming that, as a matter of Chinese law, aAL
as QFII license holder has no ownership interest in the assets
in a Fund account held as a nominee account and the relevant Fund will be
ultimately and exclusively entitled to ownership
of the assets in such nominee accounts. Nonetheless, if a court upholds a
creditor’s assertion that the assets held
under the QFII Quota belong to aAL
as license holder, then creditors of aAL
could seek payment from the China Securities
held under the QFII Quota.
Variable
Interest Entities.
A Fund may obtain exposure to companies based or operated in China by investing
through
legal structures known as variable interest entities (VIEs). Because of Chinese
governmental restrictions on non- Chinese
ownership of companies in certain industries in China, certain Chinese companies
have used VIEs to facilitate foreign
investment without distributing direct ownership of companies based or operated
in China. In such cases, the Chinese
operating company establishes an offshore company, and the offshore company
enters into contractual arrangements
with the Chinese company. These contractual arrangements are intended to give
the offshore company the
ability to exercise power over and obtain economic rights from the Chinese
company. Shares of the offshore company,
in turn, are listed and traded on exchanges outside of China and are available
to non-Chinese investors, such as
a Fund. This arrangement allows non-Chinese investors in the offshore company to
obtain economic exposure to the Chinese
company without direct equity ownership in the Chinese company.
Although
VIEs are a longstanding industry practice and well known to officials and
regulators in China, VIEs are not formally
recognized under Chinese law. There is a risk that China may cease to tolerate
VIEs at any time or impose new restrictions
on the structure, in each case either generally or with respect to specific
industries, sectors or companies. Investments
involving a VIE may also pose additional risks because such investments are made
through a company whose
interests in the underlying Chinese company are established through contract
rather than through equity ownership.
For example, in the event of a dispute, the offshore company’s contractual
claims with respect to the Chinese company
may be deemed unenforceable in China, thus limiting (or eliminating) the
remedies and rights available to the offshore
company and its investors. Such legal uncertainty may also be exploited against
the interests of the offshore company
and its investors. Further, the interests of the equity owners of the Chinese
company may conflict with the interests
of the investors of the offshore company, and the fiduciary duties of the
officers and directors of the Chinese company
may differ from, or conflict with, the fiduciary duties of the officers and
directors of the offshore company. The VIE
structure generally restricts a Fund’s ability to influence the Chinese company
through proxy voting and other means and
may restrict the ability of an issuer to pay dividends to shareholders from the
Chinese company’s earnings. VIE structures
also could face delisting or other ramifications for failure to meet the
requirements of the SEC, the Public Company
Accounting Oversight Board (PCAOB) or other United States regulators. If these
risks materialize, the value of investments
in VIEs could be adversely affected and a fund could incur significant losses
with no recourse available.
QFII
Regulations.
The QFII Quota for investment in China Securities is measured by aAL’s
investments across all accounts
that it manages that are invested in China Securities using the QFII Quota. Net
realized profits for any financial year
may not currently be repatriated until the completion of an audit by a
registered accountant in China and payment of
all applicable taxes. SAFE retains its power to exercise macro prudential
supervision over the repatriation of capital by QFIIs,
based on China’s financial situation, foreign exchange market supply and demand
and international balance of payment
position. The application and interpretation of the QFII regulations are subject
to uncertainty as to how they will be
applied and the regulations can be changed at any time.
RQFII
Regulations.
Where a Fund is invested through aAL’s
RQFII Quota, repatriation is subject to the RQFII regulations in
effect from time to time (“RQFII Regulations”). Currently, there is no
regulatory prior approval requirement for repatriation
of funds from aAL’s
RQFII Quota. Net realized profits for any financial year may not currently be
repatriated until
the completion of an audit by a registered accountant in China and payment of
all applicable taxes. However, there is
no certainty that regulatory restrictions will not be imposed on the
repatriation of funds in the future. The RQFII license and
the RQFII Regulations may be changed by the CSRC with little or no notice. The
application and interpretation of the RQFII
Regulations by the CSRC and SAFE are subject to uncertainty.
RQFII
Regulations apply to aAL’s
RQFII Quota as a whole. Thus, violations of the RQFII Regulations related to any
additional
RQFII quota obtained by aAL
that is not allocated to a Fund could result in the revocation of or other
regulatory action
in respect of the RQFII quota held by aAL
as a whole. Likewise, the ability of a Fund to make investments and/ or
repatriate
monies from aAL’s
RQFII quota may be affected adversely by the activities of other investors
utilizing any additional
RQFII quota obtained by aAL.
RQFII
Systems Risk.
The prevailing rules and regulations governing RQFIIs under the RQFII
Regulations impose restrictions
on investments and other operational aspects of investments which will restrict
or affect a Fund’s investments.
RQFII Eligible Securities are generally subject to the following
restrictions:
i. |
each
RQFII’s investment in one listed company should not exceed 10% of the
total outstanding shares of that company;
and |
34 Additional
Information on Portfolio Instruments and Investment Policies
ii. |
the
total shares held by all RQFIIs in the RQFII Eligible Securities of one
listed company should not exceed 30 per cent of
the total outstanding shares of that company. |
However,
strategic investments in listed companies listed on the Chinese Stock Exchanges
in accordance with the “Measures
for the Administration of Strategic Investment of Foreign Investors in Listed
Companies” are not subject to the above
limits. Such rules and restrictions imposed by the Chinese government on RQFIIs
may have an adverse effect on a Fund’s
liquidity and performance. aAL may select up to three PRC brokers (each a “PRC
Broker”) to act on its behalf in each
of the Shanghai Stock Exchange and Shenzhen Stock Exchange. In the event of any
default of either the relevant PRC
Broker or the custodian appointed in respect of a Fund (the “PRC Custodian”)
(directly or through its delegate) in the execution
or settlement of any transaction or in the transfer of any funds or securities
in the PRC, a Fund may encounter delays
in recovering its assets, which may in turn adversely impact the NAV of such
Fund.
China
Interbank Bond Market.
Certain Funds may transact in the China Interbank Bond Market (“CIBM”) when
buying
or selling portfolio securities for the Funds. The China bond market is made up
of the CIBM and the exchange listed
bond market. The CIBM was established in 1997. Currently, approximately 90% of
PRC bond trading activity takes place
in the CIBM, and the main products traded in this market include government
bonds, central bank papers, policy bank
bonds and non-financial firms’ medium-term notes. The China bond market is made
up of the CIBM and the exchange
listed bond market.
The
CIBM was established in 1997 and was limited to domestic participants, but
access to the market has since been
expanded to foreign institutional investors. To the extent permissible by the
relevant regulations or authorities, the Fund
may invest in the CIBM through CIBM Direct or Bond Connect. Under the CIBM
Direct regime, foreign institutional investors
have direct access to bonds traded on the CIBM, subject to the relevant rules
established by the People’s Bank of
China (“PBOC”) (“CIBM Direct Rules”). An onshore trading and settlement agent
shall be engaged to make the filing on behalf
of the relevant Fund and conduct trading and settlement agency services for the
Fund. PBOC will exercise on-going
supervision on the onshore settlement agent and the Fund’s trading under the
CIBM Direct Rules and may take relevant
administrative actions such as suspension of trading and mandatory exit against
the Fund and/or aAL
in the event
of any incompliance with the CIBM Direct Rules. The CIBM Direct Rules are
relatively new and are still subject to continuous
evolvement, which may adversely affect the Fund’s capability to invest in the
CIBM.
Market
volatility and potential lack of liquidity due to low trading volume of certain
debt securities may result in prices of
debt securities traded on such market fluctuating significantly. The bid and
offer spreads of the prices of the PRC bonds
may be large, and Funds transacting in the CIBM may therefore incur significant
trading and realization costs and may
even suffer losses when selling such investments.
Stock
Connect.
In recent years, non-Chinese investors, including certain of the Funds, have
been permitted to make investments
usually only available to foreign investors through a quota license or by
purchasing from specified brokers in locations
that have stock connect programs. China Stock Exchange-listed securities are
available via brokers in Hong Kong
through the Shanghai-Hong Kong Stock Connect program, through the Shenzhen-Hong
Kong Stock Connect Program,
and may be available in the future through additional stock connect programs as
they are developed in different
locations (collectively, “Stock Connect Programs”). The Shenzhen and Shanghai
Stock Connect Programs are securities
trading and clearing programs developed between the Stock Exchange of Hong Kong,
the China Securities Depository
and Clearing Corporation Limited and either the Shanghai Stock Exchange or the
Shenzhen Stock Exchange. They
facilitate foreign investment in the People’s Republic of China (“PRC”) via
brokers in Hong Kong. Investors through Stock
Connect Programs are subject to PRC regulations and Shanghai or Shenzhen Stock
Exchange listing rules, among others.
These could include limitations on trading or suspension of trading. The
regulations governing Stock Connect Programs
are relatively new, untested and subject to changes which could adversely impact
a Fund’s rights with respect to
the securities. As Stock Connect Programs are relatively new there are no
assurances that the necessary systems to run
the programs will function properly.
Stock
Connect Programs are subject to aggregate and daily quota limitations on
purchases and a Fund may experience
delays in transacting via Stock Connect Programs. Once the daily quota is
reached, the remaining orders for that
day are rejected, however, the Fund would still be permitted to sell A-shares
regardless of the daily quota. A-shares obtained
on Stock Connect Programs may only be sold, purchased or otherwise transferred
through Stock Connect Programs.
Stock Connect Programs only operate when both PRC and Hong Kong markets are open
for trading and when
banking services are available in both markets for the corresponding settlement
dates. If one or both of the Chinese
and Hong Kong markets are closed on a U.S. trading day, the Fund may not be able
to acquire or dispose of A-shares
through Stock Connect in a timely manner, which could adversely affect the
Fund’s performance. Additionally, investments
through Stock Connect Programs are subject to various risks, including liquidity
risk, currency risk, legal and regulatory
uncertainty risk, execution risk, operational risk, tax risk and credit
risk.
Hong Kong.
Investment in Hong Kong issuers may subject a Fund to legal, regulatory, and
political risks, specific to Hong
Kong. Hong Kong is closely tied to China, economically and politically,
following the UK’s 1997 handover of the former
colony to China to be governed as a Special Administrative Region. Changes to
Hong Kong’s legal, financial, and monetary
system could negatively impact its economic prospects. Hong Kong’s evolving
relationship with the central government
in Beijing has been a source of political unrest and may result in economic
disruption. By treaty, China has committed
to preserve Hong Kong’s high degree of autonomy in certain matters until 2047.
However, as demonstrated
Additional
Information on Portfolio Instruments and Investment Policies 35
by
Hong Kong protests in recent years over political, economic, and legal freedoms,
and the Chinese government’s response
to them, there continues to exist political uncertainty within Hong Kong. For
example, in June 2020 China adopted
a new security law that severely limits freedom of speech in Hong Kong and
expands police powers to seize electronic
devices and intercept communications of suspects. Widespread protests were held
in Hong Kong in response to
the new law, and the United States imposed sanctions on certain Hong Kong
officials for cracking down on pro-democracy
protests. There is no guarantee that additional protests will not arise in the
future or whether the United States
will respond to such protests with additional sanctions. Further, any changes in
the Chinese economy, trade regulations,
or control over Hong Kong may have an adverse impact on Hong Kong’s economy and
thereby impact a Fund.
Latin America.
The economies in Latin America are considered emerging market economies. As a
result, investing in Latin
America imposes risks greater than, or in addition to, the risks of investing in
more developed foreign markets. Most economies
in Latin America have historically been characterized by high levels of
inflation, including, in some cases, hyperinflation
and currency devaluations. In the past, these conditions have led to high
interest rates, extreme measures by
governments to limit inflation, and limited economic growth. Although inflation
in many countries has lessened, the economies
of the Latin American region continue to be volatile and characterized by high
interest rates and unemployment.
In addition, the economies of many Latin American countries are sensitive to
fluctuations in commodities prices
because exports of agricultural products, minerals and metals represent a
significant percentage of Latin American
exports.
The
economies of many Latin American countries are heavily dependent on
international trade and can be adversely
affected by trade barriers, exchange controls and other measures imposed or
negotiated by the countries with
which they trade. Since the early 1990s most governments in the Latin American
region have transitioned from protectionist
policies to policies that promote regional and global exposure. Many countries
in the Latin American region have
reduced trade barriers and are parties to trade agreements, although there is no
guarantee that this trend will continue.
Many countries in the Latin American region are dependent on the United States
economy, and any declines in the
United States economy are likely to affect the economies throughout the Latin
American region. Mexico is particularly vulnerable
to fluctuations in the United States economy because the majority of its exports
are directed to the United States.
In addition, China is a major buyer of Latin America’s commodities and a key
investor in South America, and therefore,
conditions in China may significantly impact the economy of the Latin American
region.
Many
Latin American countries are dependent on foreign loans from developed countries
and several Latin American
countries are among the largest debtors among emerging market economies. To the
extent that there are rising
interest rates, some countries may be forced to restructure loans or risk
default on their obligations, which may adversely
affect securities markets. Some central banks have recently eased their monetary
policies in response to liquidity
shortages, but Latin American countries continue to face significant economic
difficulties as a result of their high level
of indebtedness and dependence on foreign credit.
The
economies of certain Latin American countries have experienced high interest and
inflation rates, economic volatility,
currency devaluations, government defaults and high unemployment rates. In
addition, commodities (such as oil,
gas and minerals) represent a significant percentage of the region’s exports,
and many economies in this region are particularly
sensitive to fluctuations in commodity prices. The economies of Latin American
countries are heavily dependent
on trading relationships with key trading partners, including the U.S., Europe,
Asia and other Latin American countries.
Adverse economic events in one country may have a significant adverse effect on
other countries of this region.
In addition, in the past, certain Latin American economies have been influenced
by changing supply and demand for
a particular currency, monetary policies of governments (including exchange
control programs, restrictions on local exchanges
or markets and limitations on foreign investment in a country or on investment
by residents of a country in other
countries), and currency devaluations and revaluations. For example, the
government of Brazil imposes a tax on foreign
investment in Brazilian stocks and bonds, which may affect the value of the
Fund’s investments in the securities of Brazilian
issuers.
Structural Risk.
Certain Latin American countries are subject to a considerable degree of
economic, political and social
instability, which could adversely affect investments in the Fund.
Economic Risk.
Certain Latin American countries have experienced economic instability resulting
from periods of high
inflation and currency devaluations.
Political and Social
Risk.
Certain Latin American countries have experienced periods of instability and
social unrest in the
past. For example, Mexico has been destabilized by local insurrections, social
upheavals and drug related violence. Disparities
of wealth, the pace and success of democratization and capital market
development and ethnic, religious and
racial disaffection may exacerbate social unrest, violence and labor unrest in a
number of Latin American countries. Certain
Latin American countries experience significant unemployment in certain regions,
as well as widespread underemployment.
Russia.
Investing in Russian securities is highly speculative and involves significant
risks and special considerations not typically
associated with investing in the securities markets of the United States and
most other developed countries.
36 Additional
Information on Portfolio Instruments and Investment Policies
In
particular, investments in Russia are subject to the risk that the United States
and/or other countries may impose economic
sanctions. Such sanctions – which may impact companies in many sectors,
including energy, financial services
and defense, among others – may negatively impact a Fund’s performance and/or
ability to achieve its investment
objective. For example, certain investments in Russian companies or instruments
tied to Russian companies may
be prohibited and/or existing investments may become illiquid (e.g., in the
event that a Fund is prohibited from transacting
in certain existing investments tied to Russia), which could cause a Fund to
sell other portfolio holdings at a disadvantageous
time or price in order to meet shareholder redemptions. It is also possible that
such sanctions may prevent
U.S.-based entities that provide services to a Fund from transacting with
Russian entities. Under such circumstances,
a Fund may not receive payments due with respect to certain investments, such as
the payments due in connection
with the Fund’s holding of a fixed income security. The sanctions imposed on
Russia by the United States and the
European Union, as well as the threat of additional sanctions, could have
further adverse consequences for the Russian
economy, including continued weakening of the ruble, additional downgrades in
the country’s credit rating, and a significant
decline in the value and liquidity of securities issued by Russian companies or
the Russian government.
Over
the past century, Russia has experienced political and economic turbulence and
has endured decades of communist
rule under which tens of millions of its citizens were collectivized into state
agricultural and industrial enterprises.
Since the collapse of the Soviet Union, Russia’s government has been faced with
the daunting task of stabilizing
its domestic economy, while transforming it into a modern and efficient
structure able to compete in international
markets and respond to the needs of its citizens. However, to date, many of the
country’s economic reform initiatives
have floundered or been retrenched. In this environment, political and economic
policies could shift suddenly in ways
detrimental to the interest of foreign and private investors.
Russia
has attempted, and may attempt in the future, to assert its influence in the
region through economic or military
measures. In February 2022, the Russian military invaded Ukraine, which
amplified existing geopolitical tensions among
Russia, Ukraine, Europe, and many other countries including the U.S. and other
members of the North Atlantic Treaty
Organization (“NATO”). Russia’s invasion of Ukraine has led to, and additional
Russian military actions may lead to further
or additional sanctions being levied by the United States, the United Kingdom,
and members of the EU against Russia.
In particular, U.S. sanctions prohibit any “new investment” in Russia which is
defined to include any new purchases of
Russian securities. U.S. persons also are required to freeze securities issued
by certain Russian entities identified on the List
of Specially Designated Nationals, which includes several large publicly traded
Russian banks and other companies. Russia
has issued various countermeasures that affect the ability of non-Russian
persons to trade in Russian securities. In addition,
a number of large corporations and U.S. and foreign entities have divested
interests or otherwise curtailed business
dealings in Russia or with certain Russian business or announced plans to do so.
Russia’s military incursion and the
resulting sanctions have and could further adversely affect global energy and
financial markets and thus could affect the
value of a Fund’s investments, even beyond any direct exposure the Fund may have
to issuers in Russia or the adjoining
geographic regions.
An
increasingly assertive Russia poses its own set of risks for the EU, as
evidenced by the ongoing Russian-Ukraine conflict.
Opposition to EU expansion to members of the former Soviet bloc may prompt more
intervention by Russia in the affairs
of its neighbors. This interventionist stance may carry various negative
consequences, including direct effects, such
as export restrictions on Russia’s natural resources, Russian support for
separatist groups or pro-Russian parties located
in EU countries, Russian interference in the internal political affairs of
current or potential EU members or of the EU itself,
externalities of ongoing conflict, such as an influx of refugees from Ukraine
and Syria, or collateral damage to foreign
assets in conflict zones, all of which could negatively impact EU economic
activities. Russia’s war against Ukraine remains
ongoing as of the date of this SAI, and the extent and duration of this war and
the resulting sanctions’ impact on markets
remains impossible to predict but could be substantial.
Poor
accounting standards, inept management, pervasive corruption, insider trading
and crime, and inadequate regulatory
protection for the rights of investors all pose a significant risk, particularly
to foreign investors. In addition, enforcement
of the Russian tax system is prone to inconsistent, arbitrary, retroactive,
confiscatory, and/or exorbitant taxation.
Investments in Russia may be subject to the risk of nationalization or
expropriation of assets. Regional armed conflict
and its collateral economic and market effects may also pose risks for
investments in Russia.
Compared
to most national stock markets, the Russian securities market suffers from a
variety of problems not encountered
in more developed markets. There is little long-term historical data on the
Russian securities market because
it is relatively new and a substantial proportion of securities transactions in
Russia are privately negotiated outside
of stock exchanges. The inexperience of the Russian securities market and the
limited volume of trading in securities
in the market may make obtaining accurate prices on portfolio securities from
independent sources more difficult
than in more developed markets. Additionally, there is little solid corporate
information available to investors because
of less stringent auditing and financial reporting standards that apply to
companies operating in Russia. As a result,
it may be difficult to assess the value or prospects of an investment in Russian
companies. Securities of Russian companies
also may experience greater price volatility than securities of U.S.
companies.
Because
of the recent formation of the Russian securities market as well as the
underdeveloped state of the banking and
telecommunications systems, settlement, clearing and registration of securities
transactions are subject to significant
risks. Prior to the implementation of the National Settlement Depository
(“NSD”), a recognized central securities
depository, there was no central registration system for equity share
registration in Russia and registration was
Additional
Information on Portfolio Instruments and Investment Policies 37
carried
out by either the issuers themselves or by registrars located throughout Russia.
Title to Russian equities held through
the NSD is now based on the records of the NSD and not the registrars. Although
the implementation of the NSD has
enhanced the efficiency and transparency of the Russian securities market,
issues resulting in loss still can occur. Ownership
of securities issued by Russian companies that are not held through depositories
such as the NSD may be defined
according to entries in the company’s share register and normally evidenced by
extracts from the register or by formal
share certificates. In such cases, the risk is increased that a Fund could lose
ownership rights through fraud, negligence,
or even mere oversight. While a Fund will endeavor to ensure that its interest
continues to be appropriately recorded
either itself or through a custodian or other agent by inspecting the share
register and by obtaining extracts of share
registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent
illegal amendment or other fraudulent act may deprive the Fund of its ownership
rights or improperly dilute its
interests. In addition, while applicable Russian regulations impose liability on
registrars for losses resulting from their errors,
it may be difficult for a Fund to enforce any rights it may have against the
registrar or issuer of the securities in the event
of loss of share registration. Furthermore, significant delays or problems may
occur in registering the transfer of securities,
which could cause a Fund to incur losses due to a counterparty’s failure to pay
for securities the Fund has delivered
or the Fund’s inability to complete its contractual obligations because of theft
or other reasons.
In
addition, issuers and registrars are still prominent in the validation and
approval of documentation requirements for
corporate action processing in Russia. Because the documentation requirements
and approval criteria vary between registrars
and issuers, there remain unclear and inconsistent market standards in the
Russian market with respect to the completion
and submission of corporate action elections. To the extent that a Fund suffers
a loss relating to title or corporate
actions relating to its portfolio securities, it may be difficult for the Fund
to enforce its rights or otherwise remedy
the loss. Russian securities laws may not recognize foreign nominee accounts
held with a custodian bank, and therefore
the custodian may be considered the ultimate owner of securities they hold for
their clients. A Fund also may experience
difficulty in obtaining and/or enforcing judgments in Russia.
The
Russian economy is heavily dependent upon the export of a range of commodities
including industrial metals, forestry
products, oil, and gas. Accordingly, it is strongly affected by international
commodity prices and is particularly vulnerable
to any weakening in global demand for these products. Furthermore, the sale and
use of certain strategically important
commodities, such as gas, may be dictated by political, rather than economic,
considerations.
Foreign
investors also face a high degree of currency risk when investing in Russian
securities and a lack of available currency
hedging instruments. Any investment denominated in rubles may be subject to
significant devaluation in the future.
Although official sovereign debt to GDP figures are low for a developed economy,
sovereign default remains a risk. Even
absent a sovereign default, foreign investors could face the possibility of
further devaluations. There is the risk that the
government may impose capital controls on foreign portfolio investments in the
event of extreme financial or political crisis.
Such capital controls could prevent the sale of a portfolio of foreign assets
and the repatriation of investment income
and capital.
Equity-Linked
Securities.
A Fund may invest in equity-linked securities, including, but not limited to,
participation notes, and
certificates of participation. Equity-linked securities are privately issued
securities whose investment results are designed
to correspond generally to the performance of a specified stock index or
“basket” of stocks, or a single stock. To the
extent that a Fund invests in equity-linked securities whose return corresponds
to the performance of a foreign security
index or one or more foreign stocks, investing in equity-linked securities will
involve risks similar to the risks of investing
in foreign securities and subject to a Fund’s restrictions on investments in
foreign securities. In addition, a Fund bears
the risk that the counterparty of an equity-linked security may default on its
obligations under the security. If the underlying
security is determined to be illiquid, the equity-linked security would also be
considered illiquid and thus subject
to a Fund’s restrictions on investments in illiquid securities.
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 a Fund as an alternative
means to access the securities market of a country. The performance results of
participation notes will not replicate
exactly the performance of the foreign companies or foreign securities markets
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 markets that they seek
to replicate. There can be no assurance
that the trading price of participation notes will equal the underlying value of
the foreign companies or foreign securities
markets that they seek to replicate. Participation notes are generally traded
over-the-counter. Participation notes
are subject to counterparty risk, which is the risk that the broker-dealer or
bank that issues them will not fulfill its contractual
obligation to complete the transaction with a Fund. Participation notes
constitute general unsecured contractual
obligations of the banks or broker-dealers that issue them, the counterparty,
and a Fund is relying on the creditworthiness
of such counterparty and has no rights under a participation note against the
issuer of the underlying security.
Participation notes involve transaction costs. If the underlying security is
determined to be illiquid, participation notes
may be illiquid and therefore subject to a Fund’s percentage limitation for
investments in illiquid securities. Participation
notes offer a return linked to a particular underlying equity, debt or
currency.
Eurodollar
Instruments.
Eurodollar instruments are U.S. Dollar-denominated futures contracts or options
thereon,
although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers
to obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. A Fund may
38 Additional
Information on Portfolio Instruments and Investment Policies
invest
in Eurodollar instruments for hedging purposes or to enhance potential gain.
Additionally,
Eurodollar instruments are
subject to certain sovereign risks and other risks associated with foreign
investments. One such risk is the possibility that
a sovereign country might prevent capital, in the form of dollars, from flowing
across its borders. Other risks include: adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions;
the imposition of foreign withholding taxes; and the expropriation or
nationalization of foreign issues.
Eurodollar and Yankee
Obligations.
Eurodollar bank obligations are dollar-denominated certificates of deposit and
time
deposits issued outside the U.S. capital markets by foreign branches of U.S.
banks and by foreign banks. Yankee bank obligations
are dollar-denominated obligations issued in the U.S. capital markets by foreign
banks.
Eurodollar
and Yankee bank obligations are subject to the same risks that pertain to
domestic issues, notably credit risk,
market risk and liquidity risk. Additionally, Eurodollar (and to a limited
extent, Yankee) bank obligations are subject to certain
sovereign risks and other risks associated with foreign investments. One such
risk is the possibility that a sovereign country
might prevent capital, in the form of dollars, from flowing across its borders.
Other risks include: adverse political and
economic developments; the extent and quality of government regulation of
financial markets and institutions; the imposition
of foreign withholding taxes, and the expropriation or nationalization of
foreign issues. However, Eurodollar and Yankee
bank obligations held in a Fund will undergo the same credit analysis as
domestic issuers in which the Fund invests,
and will have at least the same financial strength as the domestic issuers
approved for the Fund.
European Sovereign Debt
Risk.
European banks have historically held significant investments in the sovereign
debt of European
countries. Since late 2009, concern has been rising about the escalating
government debt levels in certain European
countries. More recently, the ratings agencies initiated a series of downgrades
of the sovereign debt of various European
countries. Troubled economies in Europe coupled with the European debt
downgrades have increased concerns
about the possibility of default. A government’s default on its debt could cause
the value of securities held by a Fund
to decline significantly. See
“Market Events Risk,” below, for additional discussion of factors that may
affect he economies
of Europe.”
Event Risk.
Event risk is the risk that a corporate event such as a restructuring, merger,
leveraged buyout, takeover, or similar
action may cause a decline in market value or credit quality of the issuer’s
stocks or bonds due to factors including an
unfavorable market response or a resulting increase in the issuer’s debt. Added
debt may significantly reduce the credit
quality and market value of an issuer’s bonds.
Exchange-Traded Funds
(“ETFs”).
ETFs are ownership interests in investment companies, unit investment trusts,
depositary
receipts and other pooled investment vehicles that are traded on an exchange and
that hold a portfolio of securities
or other financial instruments (the “Underlying Assets”). The Underlying Assets
are typically selected to correspond
to the securities that comprise a particular broad-based sector or international
index, or to provide exposure to
a particular industry sector or asset class, including precious metals or other
commodities. “Short ETFs” seek a return similar
to the inverse, or a multiple of the inverse, of a reference index. Short ETFs
carry additional risks because their Underlying
Assets may include a variety of financial instruments, including futures and
options on futures, options on securities
and securities indexes, swap agreements and forward contracts, and a short ETF
may engage in short sales. An
ETF’s losses on short sales are potentially unlimited; however, a Fund’s risk
would be limited to the amount it invested in the
ETF. Certain ETFs are actively managed by a portfolio manager or management team
that makes investment decisions
on Underlying Assets without seeking to replicate the performance of a reference
index or industry sector or asset
class.
Unlike
shares of typical open-end management investment companies or unit investment
trusts, shares of ETFs are designed
to be traded throughout the trading day and bought and sold based on market
price rather than NAV.
Shares can
trade at either a premium or discount to NAV.
The portfolios held by ETFs are typically publicly disclosed on each
trading
day and an approximation of actual NAV
is disseminated throughout the trading day. Because of this transparency,
the trading prices of ETFs tend to closely track the actual NAV
of the Underlying Assets and the ETF will generally
gain or lose value depending on the performance of the Underlying Assets. In the
future, as new products become
available, a Fund may invest in ETFs that do not have this same level of
transparency and, therefore, may be more
likely to trade at a larger discount or premium to actual NAVs.
Gains
or losses on a Fund’s investment in ETFs will ultimately depend on the purchase
and sale price of the ETF. An active
trading market for an ETF’s shares may not develop or be maintained and trading
of an ETF’s shares may be halted
if the listing exchange’s officials deem such action appropriate, the shares are
delisted from the exchange or the activation
of market-wide “circuit breakers” (which are tied to large decreases in stock
prices) halts stock trading generally.
The performance of an ETF will be reduced by transaction and other expenses,
including fees paid by the ETF to
service providers. Investors in ETFs are eligible to receive their portion of
income, if any, accumulated on the securities held
in the portfolio, less fees and expenses of the ETF.
An
investment in an ETF involves risks similar to investing directly in the
Underlying Assets, including the risk that the value
of the Underlying Assets may fluctuate in accordance with changes in the
financial condition of their issuers, the value
of securities and other financial instruments generally, and other market
factors.
Additional
Information on Portfolio Instruments and Investment Policies 39
If
an ETF is a registered investment company (as defined in the 1940 Act), the
limitations applicable to a Fund’s ability to
purchase securities issued by other investment companies apply absent exemptive
relief. Rule 12d1-4 under the 1940 Act
exempts certain ETFs that permit investments in those ETFs by other investment
companies (such as the Funds) in excess
of these limits, subject to certain conditions. Some ETFs are not structured as
investment companies and thus are not
regulated under the 1940 Act.
Focus Risk.
To the extent that a Fund invests a greater proportion of its assets in the
securities of a smaller number of issuers,
the Fund may be subject to greater volatility with respect to its investments
than a fund that invests in a larger number
of securities.
Foreign Commercial
Paper.
Commercial paper is indexed to certain specific foreign currency exchange rates.
The terms
of such commercial paper provide that its principal amount is adjusted upwards
or downwards (but not below zero)
at maturity to reflect changes in the exchange rate between two currencies while
the obligation is outstanding. A Fund
will purchase such commercial paper with the currency in which it is denominated
and, at maturity, will receive interest
and principal payments thereon in that currency, but the amount or principal
payable by the issuer at maturity will
change in proportion to the change (if any) in the exchange rate between two
specified currencies between the date the
instrument is issued and the date the instrument matures. While such commercial
paper entails the risk of loss of principal,
the potential for realizing gains as a result of changes in foreign currency
exchange rate enables a Fund to hedge
or cross-hedge against a decline in the U.S. Dollar value of investments
denominated in foreign currencies while providing
an attractive money market rate of return. A Fund will purchase such commercial
paper for hedging purposes only,
not for speculation. A Fund believes that such investments do not involve the
creation of a senior security, but, in accordance
with current federal securities laws, rules, and staff positions, nevertheless
will establish a segregated account
with respect to its investments in this type of commercial paper and maintain in
such account cash not available for
investment or other liquid assets having a value equal to the aggregate
principal amount of outstanding commercial paper
of this type.
Foreign
Currencies Risk.
Because investments in foreign securities usually will involve currencies of
foreign countries, and
because a Fund may hold foreign currencies and forward contracts, futures
contracts and options on foreign currencies
and foreign currency futures contracts, the value of the assets of the Fund as
measured in U.S. Dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the
Fund may incur costs and experience conversion difficulties and uncertainties in
connection with conversions between
various currencies. Fluctuations in exchange rates may also affect the earning
power and asset value of the foreign
entity issuing the security.
The
strength or weakness of the U.S. Dollar against these currencies is responsible
for part of a Fund’s investment performance.
If the U.S. Dollar falls in value relative to the Japanese yen, for example, the
U.S. Dollar value of a Japanese stock
held by a Fund will rise even though the price of the stock remains unchanged.
Conversely, if the U.S. Dollar rises in value
relative to the Japanese yen, the U.S. Dollar value of the Japanese stock will
fall. Many foreign currencies have experienced
significant devaluation relative to the U.S. Dollar.
Although
a Fund values its assets daily in terms of U.S. Dollars, it does not intend to
convert its holdings of foreign currencies
into U.S. Dollars on a daily basis. It will do so from time to time, and
investors should be aware of the costs of currency
conversion. Although foreign exchange dealers typically do not charge a fee for
conversion, they do realize a profit
based on the difference (the “spread”) between the prices at which they are
buying and selling various currencies. Thus,
a dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer. A Fund will conduct its
foreign currency exchange transactions (“FX transactions”)
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through
entering into options or forward or futures contracts to purchase or sell
foreign currencies.
In
general, the FX transactions executed for the Funds are divided into two main
categories: (1) FX transactions in restricted
markets (“Restricted Market FX”) and (2) FX transactions in unrestricted markets
(“Unrestricted Market FX”). Restricted
Market FX are required to be executed by a local bank in the applicable market.
Unrestricted Market FX are not required
to be executed by a local bank. The Adviser or a third-party agent executes
Unrestricted Market FX relating to trading
decisions. The Funds’ custodian executes all Restricted Market FX because it has
local banks or relationships with local
banks in each of the restricted markets where custodial client accounts hold
securities. Unrestricted Market FX relating
to the repatriation of dividends and/or income/expense items not directly
relating to trading may be executed by
the Adviser or by the Funds’ custodian due to the small currency amount and
lower volume of such transactions. The Funds
and the Adviser have limited ability to negotiate prices at which certain FX
transactions are customarily executed by
the Funds’ custodian, i.e., transactions in Restricted Market FX and
repatriation transactions.
Foreign Fixed Income
Securities.
Most foreign fixed income securities are rated, however, some are not.
Therefore, if a Fund
invests in unrated foreign fixed income securities, it will do so based on the
Adviser’s analysis. To the extent that a Fund
includes significant unrated securities, achievement of the Fund’s goals may
depend more upon the abilities of the Adviser
than would otherwise be the case.
The
value of the foreign fixed income securities held by a Fund, and thus the NAV of
the Fund’s shares, generally will fluctuate
with (a) changes in the perceived creditworthiness of the issuers of those
securities, (b) movements in interest rates,
and (c) changes in the relative values of the currencies in which a Fund’s
investments in fixed income securities are
40 Additional
Information on Portfolio Instruments and Investment Policies
denominated
with respect to the U.S. Dollar. The extent of the fluctuation will depend on
various factors, such as the average
maturity of a Fund’s investments in foreign fixed income securities, and the
extent to which the Fund hedges its interest
rate, credit and currency exchange rate risks. A longer average maturity
generally is associated with a higher level
of volatility in the market value of such securities in response to changes in
market conditions.
Privatized
Enterprises.
Investments in foreign securities may include securities issued by enterprises
that have undergone
or are currently undergoing privatization. The governments of certain foreign
countries have, to varying degrees,
embarked on privatization programs contemplating the sale of all or part of
their interests in state enterprises. A Fund’s
investments in the securities of privatized enterprises may include privately
negotiated investments in a government
or state-owned or controlled company or enterprise that has not yet conducted an
initial equity offering, investments
in the initial offering of equity securities of a state enterprise or former
state enterprise and investments in the securities
of a state enterprise following its initial equity offering.
In
certain jurisdictions, the ability of foreign entities, such as the Funds, to
participate in privatizations may be limited by
local law, or the price or terms on which a Fund may be able to participate may
be less advantageous than for local investors.
Moreover, there can be no assurance that governments that have embarked on
privatization programs will continue
to divest their ownership of state enterprises, that proposed privatizations
will be successful or that governments
will not re-nationalize enterprises that have been privatized.
In
the case of the enterprises in which a Fund may invest, large blocks of the
stock of those enterprises may be held by
a small group of stockholders, even after the initial equity offerings by those
enterprises. The sale of some portion or all of
those blocks could have an adverse effect on the price of the stock of any such
enterprise.
Prior
to making an initial equity offering, most state enterprises or former state
enterprises go through an internal reorganization
or management. Such reorganizations are made in an attempt to better enable
these enterprises to compete
in the private sector. However, certain reorganizations could result in a
management team that does not function
as well as an enterprise’s prior management and may have a negative effect on
such enterprise. In addition, the privatization
of an enterprise by its government may occur over a number of years, with the
government continuing to hold
a controlling position in the enterprise even after the initial equity offering
for the enterprise.
Prior
to privatization, most of the state enterprises in which a Fund may invest enjoy
the protection of and receive preferential
treatment from the respective sovereigns that own or control them. After making
an initial equity offering, these
enterprises may no longer have such protection or receive such preferential
treatment and may become subject to
market competition from which they were previously protected. Some of these
enterprises may not be able to operate effectively
in a competitive market and may suffer losses or experience bankruptcy due to
such competition.
Foreign Government
Securities.
Investment in debt issued by foreign governments can involve a high degree of
risk. Debt
securities issued by a foreign government are often supported by the full faith
and credit of that foreign government.
These foreign governments may permit their subdivisions, agencies or
instrumentalities to have the full faith and
credit of the foreign governments. The governmental entity that controls the
repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental
entity’s willingness or ability to repay principal and interest due in a timely
manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on
the date a payment is due, the relative size of the debt service burden to the
economy as a whole, the governmental entity’s
policy toward the International Monetary Fund (“IMF”), and the political
constraints to which a governmental entity may
be subject. Periods of economic uncertainty may result in the illiquidity and
increased price volatility of a foreign government’s
debt securities. A foreign government’s default on its debt securities may cause
the value of securities held by
a Fund to decline significantly. A Fund may have limited recourse to compel
payment in the event of a default.
Governmental
entities may also be dependent on expected disbursements from foreign
governments, multilateral agencies
and others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity’s implementation
of economic reforms and/or economic performance and the timely service of such
debtor’s obligations. Failure
to implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may
result in the cancellation of such third parties’ commitments to lend funds to
the governmental entity, which may further
impair such debtor’s ability or willingness to service its debts in a timely
manner. Consequently, governmental entities
may default on their sovereign debt. Holders of sovereign debt may be requested
to participate in the rescheduling
of such debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which
sovereign debt on which governmental entities have defaulted may be collected in
whole or in part.
To
the extent that a Fund invests in obligations issued by emerging market
governments, the risks associated with such
sovereign debt investments are greater than those issued by developed countries.
Sovereign obligors in emerging market
countries are among the world’s largest debtors to commercial banks, other
governments, international financial organizations
and other financial institutions. These obligors have in the past experienced
substantial difficulties in servicing
their external debt obligations, which led to defaults on certain obligations
and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal
payments by negotiating new or amended credit agreements, and obtaining new
credit for finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of
Additional
Information on Portfolio Instruments and Investment Policies 41
such
obligations and to extend further loans to their issuers. There can be no
assurance that the foreign sovereign debt securities
in which a Fund may invest will not be subject to similar restructuring
arrangements or to requests for new credit
which may adversely affect a Fund’s holdings.
Foreign
Securities.
Investing in foreign securities (including through the use of depositary
receipts) involves certain special
considerations which typically are not associated with investing in U.S.
securities. Since investments in foreign companies
will frequently be denominated in the currencies of foreign countries (these
securities are translated into U.S. Dollars
on a daily basis in order to value a Fund’s shares), and since a Fund may hold
securities and funds in foreign currencies,
a Fund may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations,
if any, and may incur costs in connection with conversions between various
currencies. There may be less information
publicly available about a foreign issuer than about a U.S. issuer, and foreign
issuers may not be subject to accounting,
auditing and financial reporting standards and practices comparable to those in
the U.S. Most foreign stock markets,
while growing in volume of trading activity, have less volume than the New York
Stock Exchange, and securities of
some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. Similarly,
volume and liquidity in most foreign bond markets are less than in the United
States and, at times, volatility of price
can be greater than in the United States. Additionally, a foreign jurisdiction
may halt trading of securities for an extended
period of time, which poses liquidity, valuation and other risks. Additionally,
a foreign jurisdiction may halt trading
of securities for an extended period of time, which poses liquidity, valuation
and other risks. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on United
States exchanges, although each
Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed companies
in foreign countries than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment
or delivery of securities or in the recovery of a Fund’s assets held abroad) and
expenses not present in the settlement
of investments in U.S. markets. Payment for securities without delivery may be
required in certain foreign markets.
In
addition, foreign securities may be subject to the risk of nationalization or
expropriation of assets, imposition of currency
exchange controls or restrictions on the repatriation of foreign currency,
confiscatory taxation, political or financial
instability and diplomatic developments which could affect the value of a Fund’s
investments in certain foreign countries.
Governments of many countries have exercised and continue to exercise
substantial influence over many aspects
of the private sector through the ownership or control of many companies,
including some of the largest in these countries.
As a result, government actions in the future could have a significant effect on
economic conditions which may adversely
affect prices of certain portfolio securities. Foreign securities may be subject
to foreign government taxes, higher
custodian fees, higher brokerage costs and dividend collection fees which could
reduce the yield on such securities.
Foreign
economies may differ favorably or unfavorably from the U.S. economy in various
respects, including growth of
gross domestic product, rates of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance
of payments positions. Many foreign securities are less liquid and their prices
more volatile than comparable U.S. securities.
From time to time, foreign securities may be difficult to liquidate rapidly
without adverse price effects.
Legal
remedies available to investors in certain foreign countries may be more limited
than those available with respect
to investments in the U.S. or in other foreign countries. The laws of some
foreign countries may limit a Fund’s ability
to invest in securities of certain issuers organized under the laws of those
foreign countries.
Of
particular importance, many foreign countries are heavily dependent upon
exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by
protectionist trade policies, trade barriers,
managed adjustments in relative currency values, and other protectionist
measures imposed or negotiated by the
United States and other countries with which they trade. These economies also
have been and may continue to be negatively
impacted by economic conditions in the United States and other trading partners,
which can lower the demand
for goods produced in those countries.
All
the risks above can be heightened under adverse economic, market, geopolitical
and other conditions.
Frontier Market
Securities.
The risks associated with investments in frontier market countries include all
the risks described
above for investments in “Foreign Securities” and “Emerging Markets Securities,”
although the risks are magnified
for frontier market countries. Because frontier markets are among the smallest,
least mature and least liquid of
the emerging markets, investments in frontier markets generally are subject to a
greater risk of loss than are investments
in developed markets or traditional emerging markets. Frontier market countries
have smaller economies, less
developed capital markets, greater market volatility, lower trading volume, more
political and economic instability, greater
risk of a market shutdown and more governmental limitations on foreign
investments than are typically found in more
developed markets.
Futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed with payment of
initial and variation margin as described below. A Fund may enter into futures
contracts or purchase or sell put and call options
on such futures as a hedge against anticipated interest rate, currency or equity
market changes, and for duration management,
risk management and return enhancement purposes.
42 Additional
Information on Portfolio Instruments and Investment Policies
The
sale of a futures contract creates a firm obligation by a Fund, as seller, to
deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except
that an option on a futures contract gives the purchaser the right in return for
the premium paid to assume a position
in a futures contract and obligates the seller to deliver such
position.
Futures
and options on futures may be entered into for bona fide hedging, risk
management (including duration management)
or other portfolio and return enhancement management purposes to the extent
consistent with the exclusion
from commodity pool operator registration with respect to a Fund.
Typically, maintaining a futures contract or selling
an option thereon requires a Fund to deposit with a financial intermediary as
security for its obligations an amount of
cash or other specified assets (initial margin) which initially is typically 1%
to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be paid thereafter
on a daily basis as the marked to market value of the contract fluctuates. The
purchase of an option on financial
futures involves payment of a premium for the option without any further
obligation on the part of a Fund. If a Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are
generally settled by entering into an offsetting transaction but there can be no
assurance that the position can be offset
prior to settlement at an advantageous price, or that delivery will
occur.
There
are several risks associated with the use of futures contracts and futures
options as hedging techniques, including
market price, interest rate, leverage, liquidity, counterparty, operational and
legal risks. Under certain circumstances,
futures exchanges may establish daily limits on the amount that the price of a
future or option on a futures
contract can vary from the previous day’s settlement price; once that limit is
reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit
for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If
a Fund were unable to liquidate a futures or 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,
because it would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a Fund would continue
to be required to make daily variation margin payments and might be required to
maintain the position being hedged
by the future or, in accordance with current federal securities laws, rules, and
staff positions, option or to maintain cash
or securities in a segregated account.
Certain
characteristics of the futures market might increase the risk that movements in
the prices of futures contracts
or options on futures contracts might not correlate perfectly with movements in
the prices of the investments being
hedged. For example, all participants in the futures and options on futures
contracts markets are subject to daily variation
margin calls and might be compelled to liquidate futures or options on futures
contracts positions whose prices are
moving unfavorably to avoid being subject to further calls. These liquidations
could increase price volatility of the instruments
and distort the normal price relationship between the futures or options and the
investments being hedged. Also,
because initial margin deposit requirements in the futures markets are less
onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might
cause temporary price distortions. In addition, activities of large traders in
both the futures and securities markets involving
arbitrage, “program trading” and other investment strategies might result in
temporary price distortions.
The
U.S. Commodity Futures Trading Commission (the “CFTC”) and various exchanges
have rules limiting the maximum
net long or short positions which any person or group may own, hold or control
in any given futures contract or option
on such futures contract. The Adviser will need to consider whether the exposure
created under these contracts might
exceed the applicable limits in managing a Fund, and the limits may constrain
the ability of a Fund to use such contracts.
See
“Regulation of Commodity Interests” for additional information about the Funds’
use of derivatives in connection with
CFTC exclusions.
Illiquid Investments
Risk.
Pursuant to Rule 22e-4 under the 1940 Act, each Fund may not invest more than
15% of its net
assets in illiquid investments. An illiquid investment is any investment that a
Fund reasonably expects cannot be sold or
disposed of in the current market conditions in seven calendar days or less
without the sale or disposition significantly changing
the market value of the investment. Illiquid investments include repurchase
agreements which have a maturity of
longer than seven days, time deposits maturing in more than seven days, and
securities with a contractual restriction on
resale (“restricted securities”) or other factors limiting the marketability of
the security. Repurchase agreements subject
to demand are deemed to have a maturity equal to the notice period. If a change
in NAV or other external events cause
a Fund’s investments in illiquid investments to exceed the limit set forth above
for a Fund’s investment in illiquid investments,
the Fund will act to cause the aggregate amount of such investments to come
within such limit as soon as reasonably
practicable. In such event, however, a Fund would not be required to liquidate
any portfolio securities where the
Fund would suffer a loss on the sale of such investments.
A
Fund may purchase investments that are not subject to legal or contractual
restrictions on resale, but that are deemed
illiquid. Such investments may be illiquid, for example, because there is a
limited trading market for them. A Fund may
be unable to sell a restricted or illiquid investment. In addition, it may be
more difficult to determine a market value
Additional
Information on Portfolio Instruments and Investment Policies 43
for
restricted or illiquid investments. Moreover, if adverse market conditions were
to develop during the period between a Fund’s
decision to sell a restricted or illiquid investment and the point at which the
Fund is permitted or able to sell such investment,
the Fund might obtain a price less favorable than the price that prevailed when
it decided to sell. This investment
practice, therefore, could have the effect of decreasing the level of liquidity
of such Fund.
The
Adviser employs procedures and tests using third-party and internal data inputs
that seek to assess and manage
the liquidity of a Fund’s portfolio holdings. These procedures and tests take
into account a Fund’s investment strategy
and liquidity of portfolio investments during both normal and foreseeable
stressed conditions, cash-flow projections
during both normal and reasonable foreseeable stressed conditions, relevant
market, trading and other factors,
and monitor whether liquidity should be adjusted based on changed market
conditions. These procedures and tests
are designed to assist a Fund in determining its ability to meet redemption
requests in various market conditions. In light
of the dynamic nature of markets, there can be no assurance that these
procedures and tests will enable a Fund to ensure
that it has sufficient liquidity to meet redemption requests.
Rule
22e-4 under the 1940 Act (the “Liquidity Rule”) requires the Funds to establish
a liquidity risk management program.
As required by the Liquidity Rule, the Funds have implemented a liquidity risk
management program, including classifying
each investment as a “highly liquid investment,” “moderately liquid investment,”
“less liquid investment” or “illiquid
investment” (the “Liquidity Program”), and the Board of Trustees, including a
majority of the independent trustees, appointed
the Adviser as the Liquidity Risk Program administrator. If the limitation on
illiquid investments is exceeded, other
than by a change in market values, the condition will be reported to the Board
and, when required by the Liquidity Rule,
to the SEC.
Impact of Large Redemptions and Purchases of
Fund Shares.
From time to time, shareholders of a Fund (which may include
affiliated and/or non-affiliated registered investment companies that invest in
a Fund) may make relatively large redemptions
or purchases of Fund shares. These transactions may cause a Fund to have to sell
securities or invest additional
cash, as the case may be. While it is impossible to predict the overall impact
of these transactions over time, there
could be adverse effects on a Fund’s performance to the extent that the Fund may
be required to sell securities or invest
cash at times, or in odd-lot amounts, when it would not otherwise do so. These
transactions could also accelerate the
realization of taxable income if sales of securities resulted in capital gains
or other income and could also increase transaction
costs, which may impact a Fund’s expense ratio. In addition, large redemption
requests may exceed the cash balance
of a Fund and result in credit line borrowing fees or overdraft charges to the
Fund until the sales of portfolio securities
necessary to cover the redemption request settle, which is typically a few
days.
Income Deposit Securities
(“IDS”).
IDS consist of two securities, common shares and subordinated notes of the
issuer, which
are “clipped” together. Holders of IDS receive dividends on the common shares
and interest at a fixed rate on the subordinated
notes to produce a blended yield. The distribution policies of IDS issuers are
similar to those of real estate investment
trusts (“REITs”), master limited partnerships and income trusts, which
distribute a significant portion of their free
cash flow. IDS are listed on a stock exchange, but initially the underlying
securities are not. However, in time (typically in
the range of 45 to 90 days after the closing of the offering), holders may
unclip the components of the IDS and trade the
common shares and subordinated notes separately.
Indexed
Securities.
Indexed securities differ from other types of debt securities in which a Fund
may invest in several respects.
First, the interest rate or, unlike other debt securities, the principal amount
payable at maturity of an indexed security
may vary based on changes in one or more specified reference instruments
(defined below), such as an interest rate
compared with a fixed interest rate or the currency exchange rates between two
currencies (neither of which need be
the currency in which the instrument is denominated). The reference instrument
need not be related to the terms of the
indexed security. For example, the principal amount of a U.S. Dollar denominated
indexed security may vary based on
the exchange rate of two foreign currencies. The value of indexed securities is
linked to currencies, interest rates, commodities,
indices or other financial indicators (“reference instruments”). An indexed
security may be positively or negatively
indexed; that is, its value may increase or decrease if the value of the
reference instrument increases. Further, the
change in the principal amount payable or the interest rate of an indexed
security may be a multiple of the percentage
change (positive or negative) in the value of the underlying reference
instrument(s).
Investment
in indexed securities involves certain risks. In addition to the credit risk of
the security’s issuer and the normal
risks of price changes in response to changes in interest rates, the principal
amount of indexed securities may decrease
as a result of changes in the value of reference instruments. Further, in the
case of certain indexed securities in which
the interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines
in the value of the security may then reduce the principal amount payable on
maturity. Finally, indexed securities
may be more volatile than the reference instruments underlying the indexed
securities.
Inflation/Deflation
Risk.
A Fund’s investments may be subject to inflation risk, which is the risk that
the real value (i.e., nominal
price of the asset adjusted for inflation) of assets or income from investments
will be less in the future because inflation
decreases the purchasing power and value of money (i.e., as inflation increases,
the real value of a Fund’s assets can
decline). Inflation rates may change frequently and significantly as a result of
various factors, including unexpected shifts
in the domestic or global economy and changes in monetary or economic policies
(or expectations that these
44 Additional
Information on Portfolio Instruments and Investment Policies
policies
may change). A Fund’s investments may not keep pace with inflation, which would
adversely affect the real value
of Fund shareholders’ investment in the Fund. This risk is greater for
fixed-income instruments with longer maturities.
Deflation
risk is the risk that prices throughout the economy decline over time. Deflation
may have an adverse effort on
the creditworthiness of issuers and may make issuer default more likely, which
may result in a decline in the value of a Fund’s
assets.
Initial Public Offerings
(“IPOs”).
An IPO is a type of public offering where shares of stock in a company are sold
to the general
public, on a securities exchange, for the first time. Through this process, a
private company transforms into a public
company. IPOs are used by companies to raise expansion capital, to possibly
monetize the investments of early private
investors, and to become publicly traded enterprises. A company selling shares
is never required to repay the capital
to its public investors. The availability of IPOs may be limited and a Fund may
not be able to buy any shares at the offering
price, or may not be able to buy as many shares at the offering price as it
would like. Further, IPO prices often are subject
to greater and more unpredictable price changes than more established
stocks.
Interests in Publicly Traded Limited
Partnerships.
Publicly traded limited partnerships represent equity interests in the
assets
and earnings of the partnership’s trade or business. Unlike common stock in a
corporation, limited partnership interests
or units have limited or no voting rights. However, many of the risks of
investing in common stocks are still applicable
to investments in limited partnership interests. In addition, limited
partnership interests are subject to risks not present
in common stock. For example, non-investment income generated from limited
partnerships deemed not to be “publicly
traded” will not be considered “qualifying income” under the Internal Revenue
Code and may trigger adverse tax consequences.
Also, since publicly traded limited partnerships are a less common form of
organizational structure than corporations,
the limited partnership units may be less liquid than publicly traded common
stock. Also, because of the difference
in organizational structure, the fair value of limited partnership units in a
Fund’s portfolio may be based either upon
the current market price of such units, or if there is no current market price,
upon the pro rata value of the underlying
assets of the partnership. Limited partnership units also have the risk that the
limited partnership might, under certain
circumstances, be treated as a general partnership, giving rise to broader
liability exposure to the limited partners for
activities of the partnership. Further, the general partners of a limited
partnership may be able to significantly change the
business or asset structure of a limited partnership without the limited
partners having any ability to disapprove any such
changes. In certain limited partnerships, limited partners may also be required
to return distributions previously made
in the event that excess distributions have been made by the partnership, or in
the event that the general partners, or
their affiliates, are entitled to indemnification.
Inverse Floating Rate Instruments (“Inverse
Floaters”).
An Inverse Floater is a type of bond or other type of debt instrument
used in finance whose coupon rate has an inverse relationship to short-term
interest rates (or its reference rate).
The interest rate on an Inverse Floater resets in the opposite direction from
the market rate of interest to which the Inverse
Floater is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of
similar credit quality.
A
floater may be considered to be leveraged to the extent that its interest rate
varies by a magnitude that exceeds the
magnitude of the change in the index rate of interest. The higher degree of
leverage inherent in some floaters is associated
with greater volatility in their market values.
With
respect to purchasable variable and floating rate instruments, the Adviser will
consider the earning power, cash flows
and liquidity ratios of the issuers and guarantors of such instruments and, if
the instruments are subject to a demand
feature, will monitor their financial status to meet payment on demand. Such
instruments may include variable amount
master demand notes that permit the indebtedness thereunder to vary in addition
to providing for periodic adjustments
in the interest rate. The absence of an active secondary market with respect to
particular variable and floating
rate instruments could make it difficult for a Fund to dispose of a variable or
floating rate note if the issuer defaulted
on its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund
could, for these or other reasons, suffer a loss with respect to such
instruments. In determining average-weighted portfolio
maturity, an instrument will be deemed to have a maturity equal to either the
period remaining until the next interest
rate adjustment or the time the Fund involved can recover payment of principal
as specified in the instrument, depending
on the type of instrument involved.
LIBOR and Replacement Rates
Risk.
LIBOR, the London Interbank Offered Rate, was a leading floating rate
benchmark
used in loans, notes, derivatives and other instruments or investments. As a
result of benchmark reforms, publication
of most LIBOR settings has ceased. Some LIBOR settings continue to be published
but only on a temporary, synthetic
and non-representative basis. Regulated entities have generally ceased entering
into new LIBOR contracts in connection
with regulatory guidance or prohibitions. Public and private sector actors have
worked to establish new or alternative
reference rates (e.g., the Secured Overnight Financing Rate (“SOFR”), which
measures the cost of overnight borrowings
through repurchase agreement transactions collateralized with U.S. Treasury
securities and is intended to replace
U.S. dollar LIBOR with certain adjustments).
The
elimination of LIBOR, changes to other reference rates or any other changes or
reforms to the determination or supervision
of reference rates could have an adverse impact on the market for, or value of,
any securities or payments linked
to those reference rates, which may adversely affect the Funds’ performance
and/or net asset value.
Additional
Information on Portfolio Instruments and Investment Policies 45
Replacement
rates that have been identified include SOFR and the Sterling Overnight Index
Average Rate (SONIA, which
is intended to replace GBP LIBOR and measures the overnight interest rate paid
by banks for unsecured transactions
in the sterling market), although other replacement rates could be adopted by
market participants. If no widely
accepted conventions develop, it is uncertain what effect broadly divergent
interest rate calculation methodologies
in the markets will have on the price and liquidity of certain equity and debt
securities in which the Funds may
invest.
Alteration
of the terms of a debt instrument or a modification of the terms of other types
of contracts to replace LIBOR or another
interbank offered rate (“IBOR”) with a new reference rate could also result in a
taxable exchange and the realization
of income and gain/loss for U.S. federal income tax purposes.
Loans.
Loans include floating or adjustable rate loans (“Loans”) made to U.S. and
foreign borrowers that are corporations,
partnerships, or other business entities (“Borrowers”). These Borrowers operate
in a variety of industries and geographic
regions. A Fund acquires Loans from lenders such as banks (see “Bank Loans”
above), insurance companies, finance
companies, other investment companies, and private investment funds. The Loans
are loans that are typically made
to business borrowers to finance leveraged buy-outs, recapitalizations, mergers,
stock repurchases, or internal growth.
The Loans generally are negotiated between a Borrower and several financial
institution lenders (“Lenders”) represented
by one or more Lenders acting as agent of all the Lenders (“Agent”). The Agent
is responsible for negotiating the
loan agreement (the “Loan Agreement”) that establishes the terms and conditions
of the Loan and the rights of the Borrower
and the Lenders. A Fund may act as one of the group of original Lenders
originating a Loan, may purchase assignments
of portions of Loans from third parties and may invest in participations in
Loans.
The
Loans have the most senior position in a Borrower’s capital structure or share
the senior position with other senior
debt securities of the Borrower. This capital structure position generally gives
holders of the Loans a priority claim on
some or all of the Borrower’s assets in the event of default and therefore the
Lenders will be paid before certain other creditors
of the Borrower. The Loans also have contractual terms designed to protect
Lenders. These covenants may include
mandatory prepayment out of excess cash flows, restrictions on dividend
payments, the maintenance of minimum
financial ratios, limits on indebtedness and other financial tests. Breach of
these covenants generally is an event of
default and, if not waived by the Lenders, may give Lenders the right to
accelerate principal and interest payments. The
Funds generally acquire Loans of Borrowers that, among other things, in the
Adviser’s judgment, can make timely payments
on their Loans and that satisfy other credit standards established by the
Adviser. The Adviser performs its own independent
credit analysis of the Borrower and the collateral securing each loan in
addition to utilizing information prepared
and supplied by the Agent or other Lenders. The Loans are generally credit rated
less than investment grade and
may be subject to restrictions on resale. Below investment grade fixed income
securities are securities rated BB/Ba or
lower by Standard & Poor’s, Fitch, or Moody’s or similarly rated by another
NRSRO.
Loans
involve the risk that a Fund will not receive payment of principal, interest,
and other amounts due in connection
with these investments and will depend primarily on the financial condition of
the borrower. Loans that are fully
secured offer a Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal,
although there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower’s
obligation, or that the collateral can be liquidated. Some loans or claims may
be in default at the time of purchase.
As a Fund may be required to rely upon another lending institution to collect
and pass onto the Fund amounts payable
with respect to the Loan and to enforce the Fund’s rights under the Loan, an
insolvency, bankruptcy, or reorganization
of the lending institution may delay or prevent the Fund from receiving such
amounts. The highly leveraged
nature of many such Loans may make such loans especially vulnerable to adverse
changes in economic or market
conditions.
Market Events
Risk.
The market values of securities or other assets will fluctuate, sometimes
sharply and unpredictably,
due to changes in general market conditions, overall economic trends or events,
governmental actions or intervention,
actions taken by the U.S. Federal Reserve or foreign central banks, market
disruptions caused by trade disputes
or other factors, political developments, investor sentiment and other factors
that may or may not be related to the
issuer of the security or other asset. Economies and financial markets
throughout the world are increasingly interconnected.
Economic, financial, public health, labor and other global market developments
and disruptions, including
those arising out of political and geopolitical events, public health
emergencies (such as the spread of infectious
diseases, pandemics and epidemics), natural/environmental or
man-made disasters,
war, terrorism, social unrest,
recessions, inflation, rapid interest rate changes, supply chain disruptions,
governmental or quasi-governmental actions
(including sanctions and other similar measures) and other circumstances in one
country or region could have profound
impacts on global economies or markets. As a result, whether or not the fund
invests in securities of issuers located
in or with significant exposure to the countries directly affected, the value
and liquidity of the fund’s investments may
be negatively affected.
U.S.
and global markets have experienced increased volatility, including as a result
of the recent failures of certain U.S.
and non-U.S. banks, which could be harmful to the Fund and issuers in which it
invests. Even if banks used by issuers in which
a Fund invests remain solvent, continued volatility in the banking sector could
cause or intensify an economic recession,
increase the costs of capital and banking services or result in the issuers
being unable to obtain or refinance indebtedness
at all or on as favorable terms as could otherwise have been obtained.
Conditions in the banking sector are evolving,
and the scope of any potential impacts to the Fund and issuers, both from market
conditions and also potential
46 Additional
Information on Portfolio Instruments and Investment Policies
legislative
or regulatory responses, are uncertain. Such conditions and responses, as well
as a changing interest rate environment,
can contribute to decreased market liquidity and decrease the value of certain
holdings. Continued market volatility
and uncertainty and/or a downturn in market and economic and financial
conditions, as a result of developments
in the banking industry or otherwise, could have an adverse impact on the Fund
and issuers in which it invests.
Europe – Recent
Events.
A number of countries in Europe have experienced severe economic and financial
difficulties.
Many non-governmental issuers, and even certain governments, have defaulted on,
or been forced to restructure,
their debts; many other issuers have faced difficulties obtaining credit or
refinancing existing obligations; financial
institutions have in many cases required government or central bank support,
have needed to raise capital, and/or
have been impaired in their ability to extend credit; and financial markets in
Europe and elsewhere have experienced extreme
volatility and declines in asset values and liquidity. These difficulties may
continue, worsen or spread within and outside
Europe. Responses to the financial problems by European governments, central
banks and others, including austerity
measures and reforms, may not work, may result in social unrest and may limit
future growth and economic recovery
or have other unintended consequences. Further defaults or restructurings by
governments and others of their debt
could have additional adverse effects on economies, financial markets and asset
valuations around the world.
For
example, the uncertainties and potentially adverse
events related to the
United Kingdom’s exit from the European
Union (“Brexit”)
could increase taxes and costs of business and cause volatility in currency
exchange rates and interest
rates. Brexit could adversely affect the performance of contracts in existence
at the date of Brexit and European, UK
or worldwide political, regulatory, economic or market conditions and could
contribute to instability in political institutions,
regulatory agencies and financial markets. Brexit could also lead to legal
uncertainty and politically divergent national
laws and regulations as a new relationship between the UK and EU is defined and
the UK determines which EU laws
to replace or replicate. Any of these effects of Brexit, and others that cannot
be anticipated, could adversely affect the
price of the Shares. The impact of Brexit on the Trust, the Trust’s service
providers, and markets generally may not be fully
known for some time.
Economies
and financial markets throughout the world are becoming increasingly
interconnected. As a result, whether
or not a Fund invests in securities of issuers located in or with significant
exposure to countries experiencing economic
and financial difficulties, the value and liquidity of the Fund’s investments
may be negatively affected by such events.
In addition, any spread of an infectious illness, public health threat or
similar issue could reduce consumer demand
or economic output, result in market closures, travel restrictions or
quarantines, and generally have a significant impact
on the world economy, which in turn could adversely affect the Fund’s
investments.
Medium Company, Small Company and Emerging
Growth Securities.
Investing in securities of medium-sized companies,
small-sized, including micro-capitalization companies and emerging growth
companies, may involve greater
risks than investing in the securities of larger, more established companies,
including possible risk of loss. Also, because
these securities may have limited marketability, their prices may be more
volatile than securities of larger, more established
companies or the market averages in general. Because medium-sized, small-sized
and emerging growth companies
normally have fewer shares outstanding than larger companies, it may be more
difficult for a Fund to buy or sell
significant numbers of such shares without an unfavorable impact on prevailing
prices. Medium-sized, small-sized and
emerging growth companies may have limited product lines, markets or financial
resources and may lack management
depth. In addition, medium-sized, small-sized and emerging growth companies are
typically subject to wider
variations in earnings and business prospects than are larger, more established
companies. There is typically less publicly
available information concerning medium sized, small-sized and emerging growth
companies than for larger, more
established ones.
Money Market Instruments and Associated
Regulatory Risk.
Each Fund
may
invest up to 20% of its net assets in short term
investment grade money market obligations at the time of purchase. Money
market instruments may include the following
types of instruments:
● |
obligations
issued or guaranteed as to interest and principal by the U.S. Government,
its agencies, or instrumentalities, or
any federally chartered corporation, with remaining maturities of 397 days
or less; |
● |
obligations
of sovereign foreign governments, their agencies, instrumentalities and
political subdivisions, with remaining
maturities of 397 days or less; |
● |
obligations
of municipalities and states, their agencies and political subdivisions
with remaining maturities of 397 days or
less; |
● |
asset-backed
commercial paper whose own rating or the rating of any guarantor is in one
of the two highest categories
of any NRSRO; |
● |
bank
or savings and loan obligations; |
● |
certificates
of deposit maturing in one year or less; |
● |
commercial
paper (including asset-backed commercial paper), which are short-term
unsecured promissory notes issued
by corporations in order to finance their current operations. It may also
be issued by foreign governments, and states
and municipalities. Generally the commercial paper or its guarantor will
be rated within the top two rating |
Additional
Information on Portfolio Instruments and Investment Policies 47
|
categories
by a NRSRO, or if not rated, is issued and guaranteed as to payment of
principal and interest by companies which
at the date of investment have a high quality outstanding debt
issue; |
● |
bank
loan participation agreements representing obligations of corporations
having a high quality short-term rating, at
the date of investment, and under which a Fund will look to the credit
worthiness of the lender bank, which is obligated
to make payments of principal and interest on the loan, as well as to
credit worthiness of the borrower; |
● |
high
quality short-term (maturity in 397 days or less) corporate obligations,
rated within the top two rating categories by
a NRSRO or, if not rated, deemed to be of comparable quality by the
Adviser; |
● |
extendable
commercial notes, which differ from traditional commercial paper because
the issuer can extend the maturity
of the note up to 397 days with the option to call the note any time
during the extension period; and |
● |
unrated
short-term (maturing in 397 days or less) debt obligations that are
determined by the Adviser to be of comparable
quality to the securities described above.
|
The
SEC adopted changes to the rules that govern SEC registered money market funds
in July 2023. These changes include,
among other things: (1) substantially increasing the required minimum levels of
liquid assets a fund must hold; (2) allowing
a money market fund’s board or its delegate to charge liquidity fees when it
determines such fee would be in the best
interests of the fund; (3) removing a fund’s ability to impose a temporary
suspension of redemptions (except under extraordinary
circumstances as part of a liquidation); (4) substantially increasing the
required minimum levels of liquid assets
a fund must hold; (5) allowing certain money market funds to engage in certain
practices in order to maintain a stable
NAV in a negative interest rate environment; and (6) enhancing reporting
requirements for all money market funds. These
changes may affect the performance, yield, and operating expenses of the
Fund.
Mortgage-Related
Securities.
Mortgage-related securities are interests in pools of residential or commercial
mortgage
loans, including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and
others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related
and private organizations. The pools underlying mortgage pass-through securities
consist of mortgage
loans secured by mortgages or deeds of trust creating a first lien on
commercial, residential, residential multi-family
and mixed residential/commercial properties. Underlying mortgages may be of a
variety of types, including adjustable
rate, conventional 30-year, graduated payment and 15-year. Most mortgage-related
securities are pass-through
securities, which means that investors receive payments consisting of a pro rata
share of both principal and
interest (less servicing and other fees). Additional payments are caused by
repayments of principal resulting from the
sale of the underlying property, refinancing or foreclosure, net of fees or
costs which may be incurred. Compared to other
fixed income investments with similar maturity and credit, mortgage-related
securities generally increase in value to
a lesser extent when interest rates decline and generally decline in value to a
similar or greater extent when interest rates
rise.
Adjustable
rate mortgage securities (“ARMs”) are a form of pass-through security
representing interests in pools of mortgage
loans, the interest rates of which are adjusted from time to time. The
adjustments usually are determined in accordance
with a predetermined interest rate index and may be subject to certain limits.
The adjustment feature of ARMs
tends to make their values less sensitive to interest rate changes. As the
interest rates on the mortgages underlying ARMs
are reset periodically, yields of such securities will gradually align
themselves to reflect changes in market rates. Unlike
fixed-rate mortgages, which generally decline in value during periods of rising
interest rates, ARMs allow a Fund to participate
in increases in interest rates through periodic adjustments in the coupons of
the underlying mortgages, resulting
in both higher current yields and low price fluctuations. A Fund will not
benefit from increases in interest rates to the
extent that interest rates rise to the point where they cause the current coupon
of the underlying adjustable rate mortgages
to exceed any maximum allowable annual or lifetime reset limits (or “cap rates”)
for a particular mortgage. In this
event, the value of the adjustable rate mortgage-backed securities in a Fund
would likely decrease. Furthermore, if prepayments
of principal are made on the underlying mortgages during periods of rising
interest rates, the Fund may be able
to reinvest such amounts in securities with a higher current rate of return.
During periods of declining interest rates, of course,
the coupon rates may readjust downward, resulting in lower yields to the Fund.
Further, because of this feature, the
values of ARMs are unlikely to rise during periods of declining interest rates
to the same extent as fixed rate instruments.
Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. Such issuers may
be the originators and/or servicers of the underlying mortgage loans as well as
the guarantors of the mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees
of payments in the former pools. However, timely payment of interest and
principal of these pools may be supported
by various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters
of credit, which may be issued by governmental entities or private insurers.
Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets minimum
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements.
48 Additional
Information on Portfolio Instruments and Investment Policies
Due
to the possibility of prepayments of the underlying mortgage instruments,
mortgage-backed securities generally
do not have a known maturity. In the absence of a known maturity, market
participants generally refer to an estimated
average life. An average life estimate is a function of an assumption regarding
anticipated prepayment patterns,
based upon current interest rates, current conditions in the relevant housing
markets and other factors. The assumption
is necessarily subjective, and thus different market participants can produce
different average life estimates with
regard to the same security. There can be no assurance that estimated average
life will be a security’s actual average
life. Like fixed income securities in general, mortgage-related securities will
generally decline in price when interest
rates rise. Rising interest rates also tend to discourage refinancing of home
mortgages, with the result that the average
life of mortgage-related securities held by a fund may be lengthened. As average
life extends, price volatility generally
increases. For that reason, extension of average life causes the market price of
the mortgage-related securities to
decrease further when interest rates rise than if the average lives were fixed.
Conversely, when interest rates fall, mortgages
may not enjoy as large a gain in market value due to prepayment risk.
Prepayments in mortgages tend to increase,
average life tends to decline and increases in value are correspondingly
moderated.
To
the extent that such mortgage-backed securities are held by a Fund, the
prepayment right will tend to limit to some
degree the increase in NAV of the Fund because the value of the mortgage-backed
securities held by the Fund may
not appreciate as rapidly as the price of non-callable debt securities.
Mortgage-backed securities are subject to the risk
of prepayment and the risk that the underlying loans will not be repaid. Because
principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities.
Private
lenders or government-related entities may also create mortgage loan pools
offering pass-through investments
where the mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was
previously customary. As new types of mortgage-related securities are developed
and offered to investors, a Fund, consistent
with its investment objective and policies, may consider making investments in
such new types of securities.
Impact of Sub-Prime Mortgage
Market.
Mortgage-backed, asset-backed and other fixed income securities’ value
and
liquidity may be adversely affected by the critical downturn in the sub-prime
mortgage lending market in the U.S. sub-prime
loans, which have higher interest rates, are made to borrowers with low credit
ratings or other factors that increase
the risk of default. Concerns about widespread defaults on sub-prime loans have
also created heightened volatility
and turmoil in the general credit markets. As a result, a Fund’s investments in
certain fixed income securities may decline
in value, its market value may be more difficult to determine, and the Fund may
have more difficulty disposing of them.
Agency-Mortgage-Related
Securities.
The dominant issuers or guarantors of mortgage-related securities today are
Ginnie
Mae, Fannie Mae and Freddie Mac. GNMA creates pass-through securities from pools
of U.S. Government guaranteed
or insured (such as by the Federal Housing Authority or Veterans Administration)
mortgages originated by mortgage
bankers, commercial banks and savings associations. FNMA and FHLMC issue
pass-through securities from pools
of conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including
savings associations, savings banks, commercial banks, credit unions and
mortgage bankers.
Mortgage-backed
securities either issued or guaranteed by GNMA, the FHLMC or FNMA
(“Certificates”) are called pass-through
Certificates because a pro rata share of both regular interest and principal
payments (less GNMA’s, FHLMC’s
or FNMA’s fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying
mortgage pool, are passed through monthly to the holder of the Certificate
(i.e., a Fund). The yields provided by
these mortgage-backed securities have historically exceeded the yields on other
types of U.S. Government Securities with
comparable maturities in large measure due to the prepayment risk discussed
below.
In
September 2008, the Federal Housing Finance Agency placed FNMA and FHLMC into
conservatorship. FNMA and FHLMC
are continuing to operate as going concerns while in conservatorship and each
remain liable for all of its obligations,
including its guaranty obligations, associated with its mortgage-backed
securities. Although the U.S. Government
has provided financial support to Fannie Mae and Freddie Mac, there can be no
assurance that it will support
these or other government-sponsored enterprises in the future.
Fannie Mae
Securities.
FNMA is a federally chartered and privately owned corporation established under
the Federal
National Mortgage Association Charter Act. FNMA provides funds to the mortgage
market primarily by purchasing
home mortgage loans from local lenders, thereby providing them with funds for
additional lending. FNMA uses
its funds to purchase loans from investors that may not ordinarily invest in
mortgage loans directly, thereby expanding
the total amount of funds available for housing.
Each
FNMA pass-through security represents a proportionate interest in one or more
pools of loans, including conventional
mortgage loans (that is, mortgage loans that are not insured or guaranteed by
any U.S. Government agency).
The pools consist of one or more of the following types of loans: (1) fixed-rate
level payment mortgage loans; (2)
fixed-rate growing equity mortgage loans; (3) fixed-rate graduated payment
mortgage loans; (4) variable rate mortgage
loans; (5) other adjustable rate mortgage loans; and (6) fixed-rate mortgage
loans secured by multifamily projects.
Additional
Information on Portfolio Instruments and Investment Policies 49
Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA but are
not backed by the full faith and credit of the U.S. Government.
Federal Home Loan Mortgage Corporation
Securities (FHLMC).
FHLMC is a corporate instrumentality of the U.S. Government
and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential
housing. Its stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates (“PCs”)
which represent interests in conventional mortgages from FHLMC’s national
portfolio. FHLMC guarantees the timely
payment of interest and ultimate collection of principal, but PCs are not backed
by the full faith and credit of the U.S.
Government.
The
operations of FHLMC currently consist primarily of the purchase of first lien,
conventional, residential mortgage loans
and participation interests in mortgage loans and the resale of the mortgage
loans in the form of mortgage-backed
securities.
The
mortgage loans underlying FHLMC securities typically consist of fixed-rate or
adjustable rate mortgage loans with
original terms to maturity of between 10 to 30 years, substantially all of which
are secured by first liens on one-to-four-family
residential properties or multifamily projects. Each mortgage loan must be whole
loans, participation interests
in whole loans and undivided interests in whole loans or participation in
another FHLMC security.
Government National Mortgage Association
Securities.
GNMA is a wholly-owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. GNMA is
authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools
of FHA-insured or VA-guaranteed mortgages. In order to meet its obligations
under a guarantee, GNMA is authorized
to borrow from the U.S. Treasury with no limitations as to amount. These
guarantees, however, do not apply to the
market value or yield of mortgage-backed securities or to the value of Fund
shares. Also, GNMA securities often are purchased
at a premium over the maturity value of the underlying mortgages. This premium
is not guaranteed and will be
lost if prepayment occurs.
GNMA
pass-through securities may represent a proportionate interest in one or more
pools of the following types of mortgage
loans: (1) fixed-rate level payment mortgage loans; (2) fixed-rate graduated
payment mortgage loans; (3) fixed-rate
growing equity mortgage loans; (4) fixed-rate mortgage loans secured by
manufactured (mobile) homes; (5) mortgage
loans on multifamily residential properties under construction; (6) mortgage
loans on completed multifamily projects;
(7) fixed-rate mortgage loans as to which escrowed funds are used to reduce the
borrower’s monthly payments
during the early years of the mortgage loans (“buydown” mortgage loans); (8)
mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans;
and (9) mortgage-backed serial notes.
The
principal and interest on GNMA pass-through securities are guaranteed by GNMA
and backed by the full faith and
credit of the U.S. Government. FNMA guarantees full and timely payment of all
interest and principal, while FHLMC guarantees
timely payment of interest and ultimate collection of principal, of its
pass-through securities. FNMA and FHLMC
securities are not backed by the full faith and credit of the United States;
however, they are generally considered to
present minimal credit risks. The yields provided by these mortgage-related
securities historically have exceeded the yields
on other types of U.S. Government securities with comparable maturities in large
measure due to the risks associated
with prepayment.
Municipal
Securities.
Municipal securities include debt obligations issued by governmental entities to
obtain funds for various
public purposes, such as the construction of a wide range of public facilities,
the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities.
Private activity bonds that are issued by or on behalf of public authorities to
finance various privately-operated facilities
are deemed to be municipal securities, only if the interest paid thereon is
exempt from federal taxes.
Other
types of municipal securities include short-term General Obligation Notes, Tax
Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Project Notes, Tax-Exempt Commercial Paper,
Construction Loan Notes and
other forms of short-term tax-exempt loans. Such instruments are issued with a
short-term maturity in anticipation of
the receipt of tax funds, the proceeds of bond placements or other revenues. In
addition, the Intermediate Municipal Income
Fund and Short Duration High Yield Municipal Fund may invest in other types of
tax-exempt instruments, such as municipal
bonds, private activity bonds, and pollution control bonds.
Project
Notes are issued by a state or local housing agency and are sold by the
Department of Housing and Urban Development.
While the issuing agency has the primary obligation with respect to its Project
Notes, they are also secured by
the full faith and credit of the United States through agreements with the
issuing authority which provide that, if required,
the federal government will lend the issuer an amount equal to the principal of
and interest on the Project Notes.
The
two principal classifications of municipal securities consist of “general
obligation” and “revenue” issues. Each Fund
may also acquire “moral obligation” issues, which are normally issued by special
purpose authorities. There are, of course,
variations in the quality of municipal securities, both within a particular
classification and between classifications, and
the yields on municipal securities depend upon a variety of factors, including
the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the
50 Additional
Information on Portfolio Instruments and Investment Policies
rating
of the issue. Ratings represent the opinions of an NRSRO as to the quality of
municipal securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality, and
municipal securities with the
same maturity, interest rate and rating may have different yields, while
municipal securities of the same maturity and interest
rate with different ratings may have the same yield. Subsequent to purchase, an
issue of municipal securities may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase. The Adviser will consider such
an event in determining whether the Fund should continue to hold the
obligation.
Municipal
securities are subject to interest rate risk. Interest rate risk is the chance
that security prices overall will decline
over short or even long periods because of rising interest rates. Interest rate
risk is higher or long-term bonds, whose
prices are more sensitive to interest rates changes than are the prices of
short-term bonds. Generally, prices of longer
maturity issues tend to fluctuate more than prices of shorter maturity issues.
Prices and yields on municipal bonds are
dependent on a variety of factors, including general credit conditions, the
financial condition of the issuer, general conditions
of the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the
issue. In markets environments where interest rates are rising, issuers may be
less willing or able to make principal and/or
interest payments on securities when due. A number of these factors, including
the ratings of particular issues, are subject
to change from time to time. Information about the financial condition of an
issuer of municipal bonds may not be as
extensive as that which is made available by corporations whose securities are
publicly traded. The secondary market for
municipal bonds typically has been less liquid than that for taxable debt/fixed
income securities, and this may affect the
Fund’s ability to sell particular municipal bonds at then-current market prices,
especially in periods when other investors
are attempting to sell the same securities.
Issuers
of municipal bonds in a state, territory, commonwealth or possession or
instrumentality in which the Fund invests
may experience significant financial difficulties for various reasons, including
as the result of events that cannot be reasonably
anticipated or controlled such as economic downturns or similar periods of
economic stress, social conflicts or
unrest, labor disruption, natural disasters, or public health conditions. Such
financial conditions may lead to credit rating downgrades
or defaults of such issuers which, in turn, could affect the market values and
marketability of many or all municipal
bonds of such issuers. An issuer’s obligations under its municipal securities
are subject to the provisions of bankruptcy,
insolvency, and other laws affecting the rights and remedies of creditors, such
as the federal bankruptcy code,
and laws, if any, which may be enacted by Congress or state legislatures
extending the time for payment of principal
or interest, or both, or imposing other constraints upon the enforcement of such
obligations or upon the ability of municipalities
to levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal
of its municipal securities may be materially adversely affected by litigation
or other conditions. Federal tax laws limit
the types and amounts of tax-exempt municipal bonds issuable for certain
purposes, especially industrial development
bonds and private activity bonds. Such limits may affect the future supply and
yields of these types of tax-exempt
municipal securities. Further proposals limiting the issuance of tax-exempt
municipal securities may well be introduced
in the future. Shareholders should consult their tax advisers for the current
law on tax-exempt bonds and securities.
A
Fund may invest in certain tax-exempt municipal bonds. The Fund will rely on the
opinion of issuers’ bond counsel and,
in the case of derivative securities, sponsors’ counsel, on the tax-exempt
status of interest on municipal bonds and payments
under tax-exempt derivative securities. The Fund will not independently review
the bases for those tax opinions.
If the Internal Revenue Service or state tax authorities determine that an
issuer of a tax-exempt municipal bond has
not complied with applicable tax requirements, interest from the security could
become taxable at the federal, state and/or
local level and the security could decline significantly in value. Issuers or
other parties generally enter into covenants
requiring continuing compliance with federal tax requirements to preserve the
tax-free status of interest payments
over the life of the security. If at any time the covenants are not complied
with, or if the Internal Revenue Service
otherwise determines that the issuer did not comply with relevant tax
requirements, interest payments from a security
could become taxable, possibly retroactively to the date the security was
issued.
Private Activity
Bonds.
Private activity bonds are issued by or on behalf of public authorities to
provide funds, usually through
a loan or lease arrangement, to a private entity for the purpose of financing
construction of privately operated industrial
facilities, such as warehouse, office, plant and storage facilities and
environmental and pollution control facilities. Such
bonds are secured primarily by revenues derived from loan repayments or lease
payments due from the entity, which
may or may not be guaranteed by a parent company or otherwise secured. Private
activity bonds generally are not
secured by a pledge of the taxing power of the issuer of such bonds. Therefore,
repayment of such bonds generally depends
on the revenue of a private entity. The continued ability of an entity to
generate sufficient revenues for the payment
of principal and interest on such bonds will be affected by many factors,
including the size of the entity, its capital
structure, demand for its products or services, competition, general economic
conditions, government regulation and
the entity’s dependence on revenues for the operation of the particular facility
being financed.
Under
current federal income tax law, interest on municipal bonds issued after August
7, 1986 which are specified private
activity bonds and the proportionate share of any exempt-interest dividend paid
by a regulated investment company
that receives interest from such private activity bonds, will be treated as an
item of tax preference for purposes of
the alternative minimum tax (“AMT”) that is imposed on individuals by the Code,
though for regular federal income tax purposes
such interest will remain fully tax-exempt. Bonds issued in 2009 and 2010
generally will not be treated as private activity
bonds, and interest earned on such bonds generally will not be treated as a tax
preference item.
Additional
Information on Portfolio Instruments and Investment Policies 51
Industrial Development
Bonds.
Industrial development bonds (“IDBs”) are issued by public authorities to obtain
funds to
provide financing for privately-operated facilities for business and
manufacturing, housing, sports, convention or trade show
facilities, airport, mass transit, port and parking facilities, air or water
pollution control facilities, and certain facilities for
water supply, gas, electricity or sewerage or solid waste disposal. Although
IDBs are issued by municipal authorities, the
payment of principal and interest on IDBs is dependent solely on the ability of
the user of the facilities financed by the bonds
to meet its financial obligations and the pledge, if any, of the real and
personal property being financed as security for
such payments. IDBs are considered municipal securities if the interest paid is
exempt from regular federal income tax.
Interest earned on IDBs may be subject to the AMT.
Hospital and Health Care Facility
Bonds.
The ability of hospitals and other health care facilities to meet their
obligations
with respect to revenue bonds issued on their behalf is dependent on various
factors. Some such factors are the
level of payments received from private third-party payors and government
programs and the cost of providing health
care services. There can be no assurance that payments under governmental
programs will be sufficient to cover the
costs associated with their bonds. It may also be necessary for a hospital or
other health care facility to incur substantial
capital expenditures or increased operating expenses to effect changes in its
facilities, equipment, personnel and
services. Hospitals and other health care facilities are additionally subject to
claims and legal actions by patients and others
in the ordinary course of business. There can be no assurance that a claim will
not exceed the insurance coverage of
a health care facility or that insurance coverage will be available to a
facility.
Single Family and Multi-Family Housing
Bonds.
Multi-family housing revenue bonds and single family mortgage revenue
bonds are state and local housing issues that have been issued to provide
financing for various housing projects.
Multi-family
housing revenue bonds are payable primarily from mortgage loans to housing
projects for low to moderate
income families. Single-family mortgage revenue bonds are issued for the purpose
of acquiring notes secured by
mortgages on residences. The ability of housing issuers to make debt service
payments on their obligations may be affected
by various economic and non-economic factors. Such factors include: occupancy
levels, adequate rental income
in multi-family projects, the rate of default on mortgage loans underlying
single family issues and the ability of mortgage
insurers to pay claims. All single-family mortgage revenue bonds and certain
multi-family housing revenue bonds
are prepayable over the life of the underlying mortgage or mortgage pool.
Therefore, the average life of housing obligations
cannot be determined. However, the average life of these obligations will
ordinarily be less than their stated maturities.
Mortgage loans are frequently partially or completely prepaid prior to their
final stated maturities.
Power Facility
Bonds.
The ability of utilities to meet their obligations with respect to bonds they
issue is dependent on various
factors. These factors include the rates that they may charge their customers,
the demand for a utility’s services and
the cost of providing those services. Utilities are also subject to extensive
regulations relating to the rates which they may
charge customers. Utilities can experience regulatory, political and consumer
resistance to rate increases. Utilities engaged
in long-term capital projects are especially sensitive to regulatory lags in
granting rate increases. Utilities are additionally
subject to increased costs due to governmental environmental regulation and
decreased profits due to increasing
competition. Any difficulty in obtaining timely and adequate rate increases
could adversely affect a utility’s results
of operations. The Adviser cannot predict the effect of such factors on the
ability of issuers to meet their obligations
with respect to bonds.
Water and Sewer Revenue
Bonds.
Water and sewer bonds are generally payable from user fees. The ability of state
and
local water and sewer authorities to meet their obligations may be affected by a
number of factors. Some such factors
are the failure of municipalities to utilize fully the facilities constructed by
these authorities, declines in revenue from
user charges, rising construction and maintenance costs, impact of environmental
requirements, the difficulty of obtaining
or discovering new supplies of fresh water, the effect of conservation programs,
the impact of “no growth” zoning
ordinances and the continued availability of federal and state financial
assistance and of municipal bond insurance
for future bond issues.
University and College
Bonds.
The ability of universities and colleges to meet their obligations is dependent
upon various
factors. Some of these factors of which an investor should be aware are the size
and diversity of their sources of revenues,
enrollment, reputation, management expertise, the availability and restrictions
on the use of endowments and other
funds and the quality and maintenance costs of campus facilities. Also, in the
case of public institutions, the financial
condition of the relevant state or other governmental entity and its policies
with respect to education may affect an
institution’s ability to make payments on its own.
Auction Rate
Securities.
Auction rate municipal securities are tax-exempt debt securities with coupons
based on a rate
set via a “Dutch” auction. The auction is held at regularly scheduled intervals
as set forth in the indenture for a security.
The auction sets the coupon rate, and investors may submit bids to buy, sell or
hold securities in the auction. Provided
that the auction mechanism is successful, auction rate securities permit the
holder to sell the securities in an auction
at par value. The coupon is reset via an auction in which bids are made by
broker-dealers and other institutions on
behalf of their investors for a certain amount of securities at a specified
minimum yield. The rate set by the auction is the
lowest interest rate that covers all securities available for sale. While this
process is designed to permit auction rate securities
to be traded at par value, there is a risk that an auction will fail due to
insufficient demand for the securities. In the
event an auction fails, the interest rate is set by a formula set forth in the
indenture for a security. In certain recent market
environments, auction failures have been more prevalent and the auctions have
continued to fail for an extended
52 Additional
Information on Portfolio Instruments and Investment Policies
period
of time. Failed auctions may adversely affect the liquidity and price of auction
rate securities. Although some issuers
have redeemed such securities, the issuers are not obligated to do so and,
therefore, there is no guarantee that a liquid
market will exist for the Funds’ investments in auction rate securities at a
time when the Funds wish to dispose of such
securities. Moreover, between auctions, there may be no active secondary market
for these securities, and sales conducted
on a secondary market may not be on terms favorable to the seller. The Funds may
purchase auction rate securities
at par in situations where the auction mechanism is functioning normally, but
generally will purchase them at a discount
where the auctions have failed. In the latter case, the Funds could realize a
gain if successful auctions resume at a
later date or the issuer calls the security or tenders for the security rather
than pay the rate required due to the failed auction.
The Funds may treat an auction rate security as illiquid if it is or becomes
subject to prices established as a result of
a failed auction if reliable prices are not available. The Funds will use the
time remaining until the next scheduled auction
date for the purpose of determining the auction rate securities’ duration. In
addition to liquidity and interest rate risk,
the Funds’ investments in auction rate securities are subject to credit and
market risk, as described in the Funds’ Prospectus.
See “Additional Information about Investments, Investment Techniques and
Risks.”
Advance Refunded Bonds (or pre-refunded
bonds).
Advance refunded bonds are municipal securities that are subsequently
refunded by the issuance and delivery of a new issue of bonds prior to the date
on which the outstanding issue
of bonds can be redeemed or paid. The proceeds from the new issue of bonds are
typically placed in an escrow fund
consisting of U.S. Government obligations that are used to pay the interest,
principal and call premium on the issue being
refunded. A Fund may also purchase municipal securities that have been refunded
prior to purchase by the Fund.
Tender Option
Bonds.
Tender option bonds are created by coupling an intermediate- or long-term,
fixed-rate, tax-exempt
bond (generally held pursuant to a custodial arrangement) with a tender
agreement that gives the holder the
option to tender the bond at its face value. As consideration for providing the
tender option, the sponsor (usually a bank,
broker-dealer, or other financial institution) receives periodic fees equal to
the difference between the bond’s fixed coupon
rate and the rate (determined by a remarketing or similar agent) that would
cause the bond, coupled with the tender
option, to trade at par on the date of such determination. After a payment of
the tender option fee, a Fund effectively
holds a demand obligation that bears interest at the prevailing short-term
tax-exempt rate. In selecting tender option
bonds for a Fund, the Adviser will consider the creditworthiness of the issuer
of the underlying bond, the custodian and
the third-party provider of the tender option. In certain instances, a sponsor
may terminate a tender option if, for example,
the issuer of the underlying bond defaults on an interest payment.
Municipal
Leases.
Municipal leases or installment purchase contracts are issued by a state or
local government to acquire
equipment or facilities. Municipal leases frequently have special risks not
normally associated with general obligation
bonds or revenue bonds. Many leases include “non-appropriation” clauses that
provide that the governmental issuer
has no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose
by the appropriate legislative body on a yearly or other periodic basis.
Although the obligations are typically secured
by the leased equipment or facilities, the disposition of the property in the
event of non- appropriation or foreclosure
might, in some cases, prove difficult or, if sold, may not fully cover a fund’s
exposure.
Municipal Notes.
There are four major varieties of state and municipal notes: Tax and Revenue
Anticipation Notes (“TRANs”);
Tax Anticipation Notes (“TANs”); Revenue Anticipation Notes (“RANs”); and Bond
Anticipation Notes (“BANs”). TRANs,
TANs and RANs are issued by states, municipalities and other tax-exempt issuers
to finance short-term cash needs
or, occasionally, to finance construction. Many TRANs, TANs and RANs are general
obligations of the issuing entity payable
from taxes or designated revenues, respectively, expected to be received within
the related fiscal period. BANs are
issued with the expectation that their principal and interest will be paid out
of proceeds from renewal notes or bonds to
be issued prior to the maturity of the BANs. BANs are issued most frequently by
both general obligation and revenue bond
issuers usually to finance such items as land acquisition, facility acquisition
and/or construction and capital improvement
projects.
Tax-Exempt Commercial
Paper.
Tax-exempt commercial paper is a short-term obligation with a stated maturity of
270
days or less. It is issued by state and local governments or their agencies to
finance seasonal working capital needs or
as short-term financing in anticipation of longer term financing. While
tax-exempt commercial paper is intended to be repaid
from general revenues or refinanced, it frequently is backed by a letter of
credit, lending arrangement, note repurchase
agreement or other credit facility agreement offered by a bank or financial
institution.
Tax Risk.
The Code imposes certain continuing requirements on issuers of tax-exempt bonds
regarding the use, expenditure
and investment of bond proceeds and the payment of rebates to the U.S.
government. Failure by the issuer to
comply after the issuance of tax-exempt bonds with certain of these requirements
could cause interest on the bonds to
become includable in gross income retroactive to the date of
issuance.
From
time to time, proposals have been introduced before Congress for the purpose of
restricting or eliminating the federal
income tax exemption for interest on municipal obligations, and similar
proposals may be introduced in the future. In
addition, the federal income tax exemption has been, and may in the future be,
the subject of litigation. If one of these proposals
were enacted, the availability of tax-exempt obligations for investment by a
fund and the value of the fund’s investments
would be affected.
Additional
Information on Portfolio Instruments and Investment Policies 53
Opinions
relating to the validity of municipal obligations and to the exclusion of
interest thereon from gross income for
regular federal and/or state income tax purposes are rendered by bond counsel to
the respective issuers at the time of
issuance. A fund and its service providers will rely on such opinions and will
not review the proceedings relating to the issuance
of municipal obligations or the bases for such opinions.
Information
Risk.
Information about the financial condition of issuers of municipal obligations
may be less available than
about corporations whose securities are publicly traded.
State and Federal Law
Risk.
Municipal obligations are subject to the provisions of bankruptcy, insolvency
and other laws
affecting the rights and remedies of creditors, such as the federal Bankruptcy
Code, and laws, if any, that may be enacted
by Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of any
one or more issuers to pay, when due, the
principal of and interest on its or their municipal obligations may be
materially affected.
Market and Ratings
Risk.
The yields on municipal obligations are dependent on a variety of factors,
including economic
and monetary conditions, general market conditions, supply and demand, general
conditions of the municipal market,
size of a particular offering, the maturity of the obligation and the rating of
the issue. Adverse economic, business, legal
or political developments might affect all or substantial portions of a fund’s
municipal obligations in the same manner.
Unfavorable
developments in any economic sector may have far-reaching ramifications for the
overall or any state’s
municipal market.
Although
the ratings of tax-exempt securities by ratings agencies are relative and
subjective, and are not absolute standards
of quality, such ratings reflect the assessment of the ratings agency, at the
time of issuance of the rating, of the economic
viability of the issuer of a general obligation bond or, with respect to a
revenue bond, the special revenue source,
with respect to the timely payment of interest and the repayment of principal in
accordance with the terms of the obligation,
but do not reflect an assessment of the market value of the obligation. See
Appendix B for additional information
regarding ratings. Consequently, municipal obligations with the same maturity,
coupon and rating may have different
yields when purchased in the open market, while municipal obligations of the
same maturity and coupon with different
ratings may have the same yield.
Liquidity Risk.
In general, the secondary market for tax-exempt securities may be less liquid
than that for taxable fixed-income
securities.
Additional Risk
Considerations.
The U.S. federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions
and authorities of states of the United States provide that, in certain
circumstances, such subdivisions or authorities
may be authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings
could result in material adverse changes in the rights of holders of obligations
issued by such subdivisions or authorities.
Litigation
challenging the validity under the state constitutions of present systems of
financing public education has been
initiated or adjudicated in a number of states, and legislation has been
introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue
bonds or the validity of their issuance under state or federal law which
ultimately could affect the validity of those
municipal securities or the tax-free nature of the interest
thereon.
Proposals
to restrict or eliminate the federal income tax exemption for interest on
municipal obligations are introduced
before the Congress from time to time. Proposals also may be introduced before
state legislatures that would affect
the state tax treatment of a Fund’s distributions. If such proposals were
enacted, the availability of municipal obligations
and the value of a Fund’s holdings would be affected and the Board of Trustees
would reevaluate the Fund’s investment
objective and policies.
State-Specific
Risk.
A Fund may from time to time invest a substantial amount of its total assets in
municipal securities
of issuers in one or more states and, therefore, is subject to the risk that the
economies of the states in which it invests,
and the revenues supporting the municipal securities, may decline. Investing a
substantial amount of its total assets
in one or more states means that a Fund is more susceptible to the economic,
market, political, regulatory or other occurrences
that affect the issuers in those states. The particular states in which a Fund
may focus its investments may change
over time and the Fund may alter its focus at inopportune times. The current
economic environment, including prolonged
inflation and rising interest rates, also may also negatively affect the economy
of states in which the Funds invest.
Pennsylvania State-Specific
Risk.
To the extent the Fund invests a substantial amount of its assets in
Pennsylvania municipal
securities, the Fund may be affected by economic, regulatory or political
developments affecting the ability of Pennsylvania
issuers to pay interest or repay principal. Pennsylvania’s economy and finances
are especially vulnerable to changes
in the performance of the service, agriculture, mining, and manufacturing
sectors.
54 Additional
Information on Portfolio Instruments and Investment Policies
New York State-Specific
Risk. To
the extent the Fund invests a substantial amount of its assets in New York
municipal securities,
the Fund may be affected by economic, regulatory or political developments
affecting the ability of New York issuers
to pay interest or repay principal. New York’s economy and finances are
especially vulnerable to changes in the performance
of the financial services industry.
Mississippi State-Specific
Risk.
To the extent the Fund invests a substantial amount of its assets in Mississippi
municipal
securities, the Fund may be affected by economic, regulatory or political
developments affecting the ability of Mississippi
issuers to pay interest or repay principal. Mississippi’s economy and finances
are especially vulnerable to changes
in the performance of the agriculture, manufacturing, gaming, and service
industries.
Texas State-Specific
Risk.
To the extent the Fund invests a substantial amount of its assets in Texas
municipal securities,
the Fund may be affected by economic, regulatory or political developments
affecting the ability of Texas issuers
to pay interest or repay principal. Texas’ economy in especially vulnerable to
changes in the economy of the oil and
gas industry, chemicals production, technology and telecommunications equipment
manufacturing and international
trade.
Puerto Rico.
Certain Funds may invest in the municipal securities of U.S. territories,
including Puerto Rican municipal securities.
To the extent that a Fund invests in Puerto Rican municipal securities, events
in Puerto Rico are likely to affect such
a Fund’s investments and its performance. These events may include economic or
political policy changes, natural disasters,
environmental and weather events, public health emergencies, political
instability, tax base erosion, territory constitutional
limits on tax increases, budget deficits and other financial difficulties,
growing pension obligations, and changes
in the credit ratings assigned to Puerto Rico’s municipal issuers. As with
Puerto Rican municipal securities, events in
any of the other territories where a Fund is invested may affect a Fund’s
investments and its performance.
In
the past several years, securities issued by Puerto Rico and its agencies and
instrumentalities have been subject to multiple
credit downgrades as a result of Puerto Rico’s ongoing fiscal challenges,
growing debt obligations and uncertainty
about its ability to make full repayment on these obligations. Puerto Rico has
been in bankruptcy proceedings
for approximately five years. However, in quarter one of 2022, the central
government executed a debt exchange
and exited bankruptcy. A debt adjustment plan was approved by Puerto Rico’s
bankruptcy court in January 2022,
and a debt exchange went effective in March 2022. As a result, Puerto Rico’s
direct debt obligations were significantly
reduced. However, the outcome of the debt restructuring and any future debt
restructuring, both within and outside
bankruptcy-type proceedings, is uncertain, and could adversely affect the Fund.
Puerto Rican financial difficulties
could potentially lead to worsening liquidity for its bonds and wider spreads
and consequently may affect a Fund’s
investments and its performance. The current economic environment, including
prolonged inflation and rising interest
rates, also may also negatively affect the economy of Puerto Rico. There can be
no assurances that Puerto Rico will
be able to negotiate settlements with respect to the balance of its outstanding
debt. In addition, the composition of the
Oversight Board has changed significantly in recent years, and there is no
assurance that the board members will approve
future restructuring agreements with other creditors.
Non-Deliverable
Forwards.
A non-deliverable forward (“NDF”) is a cash-settled forward contract in which
counterparties
settle the difference between the contracted NDF price or rate and the
prevailing spot price or rate on an agreed
notional amount. NDFs are used in various markets such as foreign exchange and
commodities. NDFs are primarily
used to trade emerging market currencies where physically-settled forward
contracts may be restricted by regulation.
Non-Hedging Foreign Currency Trading
Risk.
Certain Funds may engage in forward foreign currency transactions for
speculative
purposes. In pursuing this strategy, the Adviser seeks to profit from
anticipated movements in currency rates by
establishing “long” and/or “short” portions in forward contracts on various
foreign currencies. Foreign exchange rates can
be extremely volatile and a variance in the degree of volatility of the market
or in the direction of the market from the Adviser’s
expectations may produce significant losses to a Fund.
Operational
Risk.
Your ability to transact with a Fund or the valuation of your investment may be
negatively impacted because
of the operational risks arising from factors such as processing errors and
human errors, inadequate or failed internal
or external processes, failures in systems and technology, changes in personnel,
and errors caused by third-party service
providers or trading counterparties. Although a Fund attempts to minimize such
failures through controls and oversight,
it is not possible to identify all of the operational risks that may affect the
Fund or to develop processes and controls
that completely eliminate or mitigate the occurrence of such failures. A Fund
and its shareholders could be negatively
impacted as a result.
Options.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless
of the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates
to each of the particular types of options discussed in greater detail
below.
A
put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation
to buy, the underlying security, commodity, index, currency or other instrument
at the exercise price or the right
to a cash settlement payment. For instance, a Fund’s purchase of a put option on
a security might be designed to protect
its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the
market value by giving the Fund the right to sell such instrument at the option
exercise price or the right to a cash
Additional
Information on Portfolio Instruments and Investment Policies 55
settlement
payment. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the
seller the obligation to sell, the underlying instrument at the exercise price.
A Fund’s purchase of a call option on a security,
financial future, index, currency or other instrument might be intended to
protect the Fund against an increase in the
price of the underlying instrument that it intends to purchase in the future by
fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. A Fund is authorized
to purchase and sell exchange listed options and OTC options. Exchange listed
options are issued by a regulated
intermediary such as the Options Clearing Corporation (“OCC”), which guarantees
the performance of the obligations
of the parties to such options. The discussion below uses the OCC as an example,
but is also applicable to other
financial intermediaries.
With
certain exceptions, OCC-issued and exchange listed options generally settle by
physical delivery of the underlying
security or currency, although in the future cash settlement may become
available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
“in-the-money” (i.e., where the value
of the underlying instrument exceeds, in the case of a call option, or is less
than, in the case of a put option, the exercise
price of the option) at the time the option is exercised. Frequently, rather
than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase
or sale transactions that do not result in ownership of the new
option.
A
Fund’s ability to close out its position as a purchaser or seller of an OCC or
exchange listed put or call option is dependent,
in part, upon the liquidity of the option market. Among the possible reasons for
the absence of a liquid option market
on an exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options
or underlying securities including reaching daily price limits; (iv)
interruption of the normal operations of the OCC or
an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision
by one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which
event the relevant market for that option on that exchange would cease to exist,
although outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.
The
hours of trading for listed options may not coincide with the hours during which
the underlying financial instruments
are traded. To the extent that the option markets close before the markets for
the underlying financial instruments,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the
option markets.
OTC
options are purchased from or sold to securities dealers, financial institutions
or other parties (“Counterparties”) through
direct bilateral agreement with the Counterparty. In contrast to exchange listed
options, which generally have standardized
terms and performance mechanics, all the terms of an OTC option, including such
terms as method of settlement,
term, exercise price, premium, guarantees and security, are set by negotiation
of the parties. A Fund expects generally
to enter into OTC options that have cash settlement provisions, although it is
not required to do so.
Unless
the parties provide for it, there is no central clearing or guaranty function in
an OTC option. As a result, if the Counterparty
fails to make or take delivery of the security, currency or other instrument
underlying an OTC option it has entered
into with a Fund or fails to make a cash settlement payment due in accordance
with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser
must assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty’s
credit to determine the likelihood that the terms of the OTC option will be
satisfied.
If
a Fund sells a call option, the premium that it receives may serve as a partial
hedge, to the extent of the option premium,
against a decrease in the value of the underlying securities or instruments in
its portfolio or will increase the Fund’s
income. The sale of put options can also provide income.
A
Fund may purchase and sell call options on securities including U.S. Treasury
and agency securities, mortgage-backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities)
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the OTC markets, and
on securities indices, currencies and futures contracts. In accordance with
current federal securities laws, rules, and staff
positions, all calls sold by a Fund must be “covered” (i.e., the Fund must own
the securities or futures contract subject to
the call). Even though a Fund will receive the option premium to help protect it
against loss, a call sold by the Fund exposes
the Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of
the underlying security or instrument and may require the Fund to hold a
security or instrument which it might otherwise
have sold.
A
Fund may purchase and sell put options on securities including U.S. Treasury and
agency securities, mortgage-backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices,
currencies and futures contracts other than futures on individual corporate debt
and individual equity securities. A
Fund will not sell put options if, as a result, more than 50% of the Fund’s
total assets would be required to be segregated
56 Additional
Information on Portfolio Instruments and Investment Policies
in
accordance with current federal securities laws, rules, and staff positions to
cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that a Fund may
be required to buy the underlying security at a disadvantageous price above the
market price.
Options
Transactions.
A Fund may write (sell) options to generate current income or as a hedge to
reduce investment
risk. A Fund will not write any call option or put option unless the option is
covered and immediately thereafter the
aggregate market value of all portfolio securities or currencies required to
cover such options written by a Fund in accordance
with current federal securities laws, rules, and staff positions would not
exceed 25% of its net assets at the time
of purchase. A Fund realizes fees (referred to as “premiums”) for granting the
rights evidenced by the call options it has
written. A Fund may write straddles (combinations of put and call options on the
same underlying security), which are
generally a non-hedging technique used for purposes such as seeking to enhance
return. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and unwind
than individual options contracts. The straddle rules of the Internal Revenue
Code require deferral of certain losses
realized on positions of a straddle to the extent that a Fund has unrealized
gains in offsetting positions at year end. The
holding period of the securities comprising the straddle will be suspended until
the straddle is terminated.
Options on Swaps
(“Swaptions”).
The purchase and sale of put and call options on swap agreements are commonly
referred
to as swaptions. Swaptions are highly specialized investments and are not traded
on or regulated by any securities
exchange or regulated by the SEC or the CFTC. A Fund may enter into different
types of swaptions, such as swaptions
on credit derivatives or on credit indices for hedging purposes or to seek to
increase total return.
The
buyer of a swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to
enter into an underlying swap on agreed-upon terms. The seller of a swaption, in
exchange for the premium, becomes obligated
(if the option is exercised) to enter into an underlying swap on agreed-upon
terms.
As
with other options on securities, indices, or futures contracts, the price of
any swaption will reflect both an intrinsic value
component, which may be zero, and a time premium component. The intrinsic value
component represents what the
value of the swaption would be if it were immediately exercisable into the
underlying interest rate swap. The intrinsic value
component measures the degree to which an option is in-the-money, if at all. The
time premium represents the difference
between the actual price of the swaption and the intrinsic value.
The
pricing and valuation terms of swaptions are not standardized and there is no
clearinghouse whereby a party to the
agreement can enter into an offsetting position to close out a contract.
Swaptions must thus be regarded as inherently
illiquid.
The
use of swaptions, as the foregoing discussion suggests, is subject to risks and
complexities beyond what might be
encountered with investing directly in the securities and other traditional
investments that are the referenced asset for the
swap or other standardized, exchange traded options and futures contracts. Such
risks include operational risks, valuation
risks, credit risks, and/or counterparty risk (i.e., the risk that the
counterparty cannot or will not perform its obligations
under the agreement). In addition, at the time the swaption reaches its
scheduled termination date, there is a risk
that the Fund will not be able to obtain a replacement transaction or that the
terms of the replacement will not be as favorable
as on the expiring transaction. If this occurs, it could have a negative impact
on the performance of the Fund.
While
a Fund may utilize swaptions for hedging purposes or to seek to increase total
return, their use might result in poorer
overall performance for the Fund than if it had not engaged in any such
transactions. If, for example, a Fund had insufficient
cash, it might have to sell or pledge a portion of its underlying portfolio of
securities in order to meet daily mark-to-market
collateralization requirements at a time when it might be disadvantageous to do
so. There may be an imperfect
correlation between a Fund’s portfolio holdings and swaptions entered into by
the Fund, which may prevent the
Fund from achieving the intended hedge or expose the Fund to risk of loss.
Further, a Fund’s use of swaptions to reduce
risk involves costs and will be subject to the Adviser’s ability to predict
correctly changes in interest rate relationships
or other factors. No assurance can be given that the Adviser’s judgment in this
respect will be correct.
Options on Futures
Contracts.
There are several risks relating to options on futures contracts. The ability to
establish and
close out positions on such options will be subject to the existence of a liquid
market. In addition, the purchase of put or
call options will be based upon predictions as to anticipated trends in interest
rates, commodities and securities markets
by a Fund’s Adviser, which could prove to be incorrect. Even if those
expectations were correct, there may be an imperfect
correlation between the change in the value of the options and of the portfolio
securities hedged.
As
contrasted with the direct investment in such a contract, an option on a futures
contract gives the purchaser the right,
in return for the premium paid, to assume a position in a fixed income or equity
security futures contract at a specified
exercise price at any time prior to the expiration date of the option. The
potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option, plus
transaction costs. Because the value of the
option is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the NAV of the Funds.
Options on Interest Rate Futures
Contracts.
A Fund may purchase and write put and call options on interest rate futures
contracts that are traded on a U.S. or foreign exchange or board of trade. These
transactions may be used as a hedge
against changes in interest rates and market conditions. A Fund may enter into
closing transactions with respect to
such options to terminate existing positions. There is no guarantee that such
closing transactions can be effected.
Additional
Information on Portfolio Instruments and Investment Policies 57
Options on Foreign Currency Futures
Contracts.
A Fund may purchase and write put and call options on foreign currency
futures contracts that are traded on a U.S. exchange or board of trade. These
transactions may be used as a hedge
against changes in currency exchange rates and market conditions. A Fund may
enter into closing transactions with
respect to such options to terminate existing positions. There is no guarantee
that such closing transactions can be effected.
New
regulations governing certain OTC derivatives may also increase the costs of
using these types of instruments or
make them less effective, as described under “Strategic Transactions,
Derivatives and Synthetic Investments – Risks of Strategic
Transactions Inside the U.S.”
See
“Regulation of Commodity Interests” for additional information about the Funds’
use of derivatives in connection with
CFTC exclusions.
Pay-In-Kind Bonds (“PIK Bonds”) and Deferred
Payment Securities.
PIK Bonds pay all or a portion of their interest in the form
of debt or equity securities. Deferred payment securities are securities that
remain zero coupon securities until a predetermined
date, at which time the stated coupon rate becomes effective and interest
becomes payable at regular intervals.
Deferred payment securities are often sold at substantial discounts from their
maturity value.
PIK
Bonds and deferred payment securities tend to be subject to greater price
fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
PIK Bonds and deferred payment securities
may be issued by a wide variety of corporate and governmental issuers. Although
these instruments are generally
not traded on a national securities exchange, they are widely traded by brokers
and dealers and, to such extent,
will not be considered illiquid for the purposes of a Fund’s limitation on
investments in illiquid securities.
Preferred Stock.
Preferred stocks, like some debt obligations, are generally fixed income
securities. Shareholders of preferred
stocks normally have the right to receive dividends at a fixed rate when and as
declared by the issuer’s board of directors,
but do not participate in other amounts available for distribution by the
issuing corporation. Dividends on the preferred
stock may be cumulative, and all cumulative dividends usually must be paid prior
to common shareholders of common
stock receiving any dividends. Because preferred stock dividends must be paid
before common stock dividends,
preferred stocks generally entail less risk than common stocks. Upon
liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the par or
stated value, and are senior in right of payment
to common stock. Preferred stocks are, however, equity securities in the sense
that they do not represent a liability
of the issuer and, therefore, do not offer as great a degree of protection of
capital or assurance of continued income
as investments in corporate debt securities. Preferred stocks are generally
subordinated in right of payment to all debt
obligations and creditors of the issuer, to
the extent proceeds are available after paying any more senior creditors,
and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer.
Private Placements and Other Restricted
Securities Risk.
Private placement and other restricted securities include securities
that have been privately placed and are not registered under the Securities Act,
such as unregistered securities eligible
for resale without registration pursuant to Rule 144A (“Rule 144A Securities”)
and privately placed securities of U.S. and
non-U.S. issuers offered outside of the U.S. without registration with the
SEC
pursuant to Regulation S (“Regulation S Securities”).
Private
placements may offer attractive opportunities for investment not otherwise
available on the open market.
Private
placements securities typically may be sold only to qualified institutional
buyers (or, in the case of the initial sale
of certain securities, such as those issued in collateralized debt obligations
or collateralized loan obligations, to accredited
investors (as defined in Rule 501(a) under the Securities Act)), or in a
privately negotiated transaction or to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions
are met pursuant to an exemption from registration. Rule 144A Securities and
Regulation S Securities may be freely
traded among certain qualified institutional investors, such as the Funds, but
their resale in the U.S. is permitted only in
limited circumstances.
Issuers
of restricted securities may not be subject to the disclosure and other investor
protection requirements that would
be applicable if their securities were publicly traded. Where a registration
statement is required for the resale of restricted
securities, a Fund may be required to bear all or part of the registration
expenses. A Fund may be deemed to be
an “underwriter” for purposes of the Securities Act when selling restricted
securities to the public and, in such event, the
Fund may be liable to purchasers of such securities if the registration
statement prepared by the issuer is materially inaccurate
or misleading. Private placements typically are subject to restrictions on
resale as a matter of contract or under
federal securities laws. Because there may be relatively few potential
purchasers for such securities, especially under
adverse market or economic conditions or in the event of adverse changes in the
financial condition of the issuer, a
Fund could find it more difficult to sell such securities when it may be
advisable to do so or it may be able to sell such securities
only at prices lower than if such securities were more widely held. At times, it
also may be more difficult to determine
the fair value of such securities for purposes of computing a Fund’s
NAV
due to the absence of a trading market.
58 Additional
Information on Portfolio Instruments and Investment Policies
Private
placements and restricted securities may be considered illiquid securities,
which could have the effect of increasing
the level of a Fund’s illiquidity. Additionally, a restricted security that was
liquid at the time of purchase may subsequently
become illiquid. Restricted securities that are determined to be illiquid may
not exceed a Fund’s limit on investments
in illiquid securities.
Disposing
of illiquid investments may involve time-consuming negotiation and legal
expenses, and it may be difficult or
impossible for a Fund to sell them promptly at an acceptable price. A Fund may
have to bear the extra expense of registering
the securities for resale and the risk of substantial delay in effecting the
registration. In addition, market quotations
typically are less readily available for these securities.
Put Bonds.
“Put” bonds are securities (including securities with variable interest rates)
that may be sold back to the issuer
of the security at face value at the option of the holder prior to their stated
maturity. The Adviser intends to purchase
only those put bonds for which the put option is an integral part of the
security as originally issued. The option to “put”
the bond back to the issuer prior to the stated final maturity can cushion the
price decline of the bond in a rising interest
rate environment. However, the premium paid, if any, for an option to put will
have the effect of reducing the yield otherwise
payable on the underlying security.
Additional
Information on Portfolio Instruments and Investment Policies 59
Real Estate Investment
Trusts.
REITs are pooled investment vehicles which invest primarily in income-producing
real estate
or real estate related loans or interests. REITs are sometimes informally
characterized as equity REITs, mortgage REITs
and hybrid REITs. 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
properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest
payments. Hybrid REITs combine the investment strategies of equity REITs and
mortgage REITs.
Investment
in REITs may subject a Fund to risks associated with the direct ownership of
real estate, such as decreases
in real estate values, overbuilding, increased competition and other risks
related to local or general economic conditions,
increases in operating costs and property taxes, changes in zoning laws,
casualty or condemnation losses, possible
environmental liabilities, regulatory limitations on rent and fluctuations in
rental income. Equity REITs generally experience
these risks directly through fee or leasehold interests, whereas mortgage REITs
generally experience these risks
indirectly through mortgage interests, unless the mortgage REIT forecloses on
the underlying real estate. Changes in interest
rates may also affect the value of a Fund’s investment in REITs. For instance,
changes
in interest rates may hurt real
estate values or the values of underlying mortgage loans, therefore make REIT
shares less attractive, more volatile and
less liquid than other income producing investments
Certain
REITs have relatively small market capitalizations, which may tend to increase
the volatility of the market price
of their securities. Furthermore, REITs are dependent upon specialized
management skills, have limited diversification
and are, therefore, subject to risks inherent in operating and financing a
limited number of projects. Like regulated
investment companies such as the Funds, REITs are not taxed on income
distributed to shareholders provided that
they comply with certain requirements under the Internal Revenue Code. Each Fund
will indirectly bear its proportionate
share of any expenses paid by REITs in which it invests in addition to the
expenses paid by the Fund. REITs are
dependent upon management skills, are not diversified (except to the extent the
Code requires), and are subject to the
risks of financing projects and illiquid markets. REITs are also subject to
heavy cash flow dependency, defaults by borrowers
and the possibility of failing to qualify for tax-free pass-through of income
under the Code, and to maintain exemption
from the registration requirements of the 1940 Act. By investing in REITs
indirectly through a Fund, a shareholder
will bear not only his or her proportionate share of the expenses of the Fund,
but also, indirectly, similar expenses
of the REITs. In addition, REITs depend generally on their ability to generate
cash flow to make distributions to
60 Additional
Information on Portfolio Instruments and Investment Policies
shareholders.
The management of a REIT may be subject to conflicts of interest with respect to
the operation of the business
of the REIT and may be involved in real estate activities competitive with the
REIT. REITs may own properties through
joint ventures or in other circumstances in which the REIT may not have control
over its investments. REITs may incur
significant amounts of leverage.
Real Estate Securities
Risk.
Although a Fund may not invest directly in real estate, a Fund may invest in
securities
of issuers that
are principally engaged in the real estate industry. The value of the shares of
a Fund investing in such issuers will be affected
by factors affecting the value of real estate and the earnings of companies
engaged in the real estate industry. These
factors include, among others: (1) changes in general economic and market
conditions; (2) changes in the value of
real estate properties; (3) risks related to local economic conditions,
overbuilding and increased competition; (4) increases
in property taxes and operating expenses; (5) changes in zoning laws; (6)
casualty and condemnation losses; (7)
variations in rental income, neighborhood values or the appeal of property to
tenants; (8)
changes in interest rates;
and
(9) changes in demographic trends and occupancy rates.
Many real estate companies utilize leverage, which increases
investment risk and could adversely affect a company’s operations and market
value in periods of rising interest
rates. The value of securities of companies in the real estate industry may go
through cycles of relative under performance
and out performance in comparison to equity securities markets in
general.
There
are also special risks associated with particular sectors of real estate
investments:
Retail
Properties.
Retail properties are affected by the overall health of the economy and may be
adversely affected by,
among other things, the growth of alternative forms of retailing, bankruptcy,
departure or cessation of operations of a tenant,
a shift in consumer demand due to demographic changes, changes in spending
patterns and lease terminations.
Office
Properties.
Office properties are affected by the overall health of the economy, and other
factors such as a downturn
in the businesses operated by their tenants, obsolescence and
non-competitiveness.
Hotel
Properties.
The risks of hotel properties include, among other things, the necessity of a
high level of continuing capital
expenditures, competition, increases in operating costs which may not be offset
by increases in revenues, dependence
on business and commercial travelers and tourism, increases in fuel costs and
other expenses of travel, and adverse
effects of general and local economic conditions. Hotel properties tend to be
more sensitive to adverse economic
conditions and competition than many other commercial properties.
Healthcare
Properties.
Healthcare properties and healthcare providers are affected by several
significant factors, including
federal, state and local laws governing licenses, certification, adequacy of
care, pharmaceutical distribution, rates,
equipment, personnel and other factors regarding operations, continued
availability of revenue from government reimbursement
programs and competition on a local and regional basis. The failure of any
healthcare operator to comply
with governmental laws and regulations may affect its ability to operate its
facility or receive government reimbursements.
Multifamily
Properties.
The value and successful operation of a multifamily property may be affected by
a number of
factors such as the location of the property, the ability of the management
team, the level of mortgage rates, the presence
of competing properties, adverse economic conditions in the locale, oversupply
and rent control laws or other laws
affecting such properties.
Community
Centers.
Community center properties are dependent upon the successful operations and
financial condition
of their tenants, particularly certain of their major tenants, and could be
adversely affected by bankruptcy of those
tenants. In some cases a tenant may lease a significant portion of the space in
one center, and the filing of bankruptcy
could cause significant revenue loss. Like others in the commercial real estate
industry, community centers are
subject to environmental risks and interest rate risk. They also face the need
to enter into new leases or renew leases on
favorable terms to generate rental revenues. Community center properties could
be adversely affected by changes in the
local markets where their properties are located, as well as by adverse changes
in national economic and market conditions.
Self-Storage
Properties.
The value and successful operation of a self-storage property may be affected by
a number
of factors, such as the ability of the management team, the location of the
property, the presence of competing properties,
changes in traffic patterns and effects of general and local economic conditions
with respect to rental rates and
occupancy levels.
Other
factors may contribute to the risk of real estate investments:
Development
Issues.
Certain real estate companies may engage in the development or construction of
real estate properties.
These companies in which a Fund invests (“portfolio companies”) are exposed to a
variety of risks inherent in real
estate development and construction, such as the risk that there will be
insufficient tenant demand to occupy newly developed
properties, and the risk that prices of construction materials or construction
labor may rise materially during the
development.
Additional
Information on Portfolio Instruments and Investment Policies 61
Lack of
Insurance.
Certain of the portfolio companies may fail to carry comprehensive liability,
fire, flood, earthquake
extended coverage and rental loss insurance, or insurance in place may be
subject to various policy specifications,
limits and deductibles. Should any type of uninsured loss occur, the portfolio
company could lose its investment
in, and anticipated profits and cash flows from, a number of properties and, as
a result, adversely affect a Fund’s
investment performance.
Financial
Leverage.
Global real estate companies may be highly leveraged and financial covenants may
affect the ability
of global real estate companies to operate effectively.
Environmental
Issues.
In connection with the ownership (direct or indirect), operation, management and
development
of real properties that may contain hazardous or toxic substances, a portfolio
company may be considered
an owner, operator or responsible party of such properties and, therefore, may
be potentially liable for removal
or remediation costs, as well as certain other costs, including governmental
fines and liabilities for injuries to persons
and property. The existence of any such material environmental liability could
have a material adverse effect on the
results of operations and cash flow of any such portfolio company and, as a
result, the amount available to make distributions
on shares of the Fund could be reduced.
Recent Events.
The value of real estate is particularly susceptible to acts of terrorism and
other changes in foreign and
domestic conditions.
REIT Issues.
REITs are subject to a highly technical and complex set of provisions in the
Code. It is possible that the Fund
may invest in a real estate company which purports to be a REIT but which fails
to qualify as a REIT. In the event of any
such unexpected failure to qualify as a REIT, the purported REIT would be
subject to corporate level taxation, significantly
reducing the return to the Fund on their investment in such
company.
Financing
Issues.
Financial institutions in which the Fund may invest are subject to extensive
government regulation. This
regulation may limit both the amount and types of loans and other financial
commitments a financial institution can make,
and the interest rates and fees it can charge. In addition, interest and
investment rates are highly sensitive and are determined
by many factors beyond a financial institution’s control, including general and
local economic conditions (such
as inflation, recession, money supply and unemployment) and the monetary and
fiscal policies of various governmental
agencies such as the Federal Reserve Board. These limitations may have a
significant impact on the profitability
of a financial institution since profitability is attributable, at least in
part, to the institution’s ability to make financial
commitments such as loans. Profitability of a financial institution is largely
dependent upon the availability and cost
of the institution’s funds, and can fluctuate significantly when interest rates
change.
Repurchase
Agreements.
In a repurchase agreement, a Fund acquires ownership of a security and
simultaneously commits
to resell that security to the seller, typically a bank or
broker/dealer.
A
repurchase agreement provides a means for a Fund to earn income on funds for
periods as short as overnight. It is an
arrangement under which the purchaser (i.e., a Fund) acquires a security
(“Obligation”) and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price. Repurchase
agreements are considered by the staff
of the SEC to be loans by a Fund. The repurchase price may be higher than the
purchase price, the difference being income
to a Fund, or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the Fund together
with the repurchase price upon repurchase. In either case, the income to a Fund
is unrelated to the interest rate on
the Obligation itself. Obligations will be held by the custodian or in the
Federal Reserve Book Entry System.
It
is not clear whether a court would consider the Obligation purchased by a Fund
subject to a repurchase agreement
as being owned by the Fund or as being collateral for a loan by the Fund to the
seller. In the event of the commencement
of bankruptcy or insolvency proceedings with respect to the seller of the
Obligation before repurchase of
the Obligation under a repurchase agreement, a Fund may encounter delay and
incur costs before being able to sell the
security. Delays may involve loss of interest or decline in price of the
Obligation. If the court characterizes the transaction
as a loan and a Fund has not perfected a security interest in the Obligation,
the Fund may be required to return
the Obligation to the seller’s estate and be treated as an unsecured creditor of
the seller. As an unsecured creditor, a
Fund would be at risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured
debt Obligation purchased for a Fund, the Adviser seeks to reduce the risk of
loss through repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the Obligation, in which
case a Fund may incur a loss if the proceeds to the Fund of the sale to a
third-party are less than the repurchase price.
However, if the market value of the Obligation subject to the repurchase
agreement becomes less than the repurchase
price (including interest), a Fund will direct the seller of the Obligation to
deliver additional securities so that the
market value (including interest) of all securities subject to the repurchase
agreement will equal or exceed the repurchase
price.
Reverse Repurchase
Agreements.
Reverse repurchase agreements are repurchase agreements in which a Fund, as
the
seller of the securities, agrees to repurchase them at an agreed upon time and
price. A Fund generally retains the right
to interest and principal payments on the security. Since a Fund receives cash
upon entering into a reverse repurchase
agreement, it may be considered a borrowing (see “Borrowing”). Reverse
repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale may
decline below the price of the securities a Fund
62 Additional
Information on Portfolio Instruments and Investment Policies
has
sold but is obligated to repurchase. In the event the buyer of securities under
a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether
to enforce a Fund’s obligation to repurchase the securities, and the Fund’s use
of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such determination. Reverse
repurchase agreements are considered
to be borrowings under the 1940 Act. A Fund will enter into reverse repurchase
agreements only when the Adviser
believes that the interest income to be earned from the investment of the
proceeds of the transaction will be greater
than the interest expense of the transaction. Such transactions may increase
fluctuation in the market value of Fund
assets and their yields.
Rights Issues and
Warrants.
Rights Issues give the right, to existing shareholders, to buy a proportional
number of additional
securities at a given price (generally at a discount) within a fixed period
(generally on a short term period) and are
offered at the company’s discretion.
Warrants
are securities that give the holder the right, but not the obligation, to
subscribe for newly created equity issues
(consisting of common and preferred stock, convertible preferred stock and
warrants that themselves are only convertible
into common, preferred or convertible preferred stock) of the issuing company or
a related company at a fixed
price either on a certain date or during a set period. Warrants are speculative
and have no value if they are not exercised
before the expiration date.
The
equity issue underlying an equity warrant is outstanding at the time the equity
warrant is issued or is issued together
with the warrant. At the time a Fund acquires an equity warrant convertible into
a warrant, the terms and conditions
under which the warrant received upon conversion can be exercised will have been
determined; the warrant received
upon conversion will only be convertible into a common, preferred or convertible
preferred stock. Equity warrants
are generally issued in conjunction with an issue of bonds or shares, although
they also may be issued as part of a
rights issue or scrip issue. When issued with bonds or shares, they usually
trade separately from the bonds or shares after
issuance.
OTC
equity warrants are usually traded only by financial institutions that have the
ability to settle and clear these instruments.
OTC warrants are instruments between the Fund and its counterparty (usually a
securities dealer or bank) with
no clearing organization guarantee. Thus, when the Fund purchases an OTC
warrant, the Fund relies on the counterparty
to fulfill its obligations to the Fund if the Fund decides to exercise the
warrant.
Index
warrants are rights created by an issuer, typically a financial institution,
entitling the holder to purchase, in the case
of a call, or sell, in the case of a put, an equity index at a certain level
over a fixed period of time. Index warrant transactions
settle in cash.
Covered
warrants are rights created by an issuer, typically a financial institution,
ordinarily entitling the holder to purchase
from the issuer of the covered warrant outstanding securities of another company
(or in some cases a basket of
securities), which issuance may or may not have been authorized by the issuer or
issuers of the securities underlying the
covered warrants. In most cases, the holder of the covered warrant is entitled
on its exercise to delivery of the underlying
security, but in some cases the entitlement of the holder is to be paid in cash
the difference between the value of
the underlying security on the date of exercise and the strike price. The
securities in respect of which covered warrants are
issued are usually common stock, although they may entitle the holder to acquire
warrants to acquire common stock.
Covered warrants may be fully covered or partially covered. In the case of a
fully covered warrant, the issuer of the warrant
will beneficially own all of the underlying securities or will itself own
warrants (which are typically issued by the issuer
of the underlying securities in a separate transaction) to acquire the
securities. The underlying securities or warrants
are, in some cases, held by another member of the issuer’s group or by a
custodian or other fiduciary for the holders
of the covered warrants.
Interest
rate warrants are rights that are created by an issuer, typically a financial
institution, entitling the holder to purchase,
in the case of a call, or sell, in the case of a put, a specific bond issue or
an interest rate index (Bond Index) at a certain
level over a fixed time period. Interest rate warrants can typically be
exercised in the underlying instrument or settle
in cash.
Long
term options operate much like covered warrants. Like covered warrants, long
term options are call options created
by an issuer, typically a financial institution, entitling the holder to
purchase from the issuer outstanding securities of
another issuer. Long-term options have an initial period of one year or more,
but generally have terms between three and
five years. Unlike U.S. options, long term European options do not settle
through a clearing corporation that guarantees
the performance of the counterparty. Instead, they are traded on an exchange and
subject to the exchange’s
trading regulations. A Fund may only acquire covered warrants, index warrants,
interest rate warrants and long
term options that are issued by entities deemed to be creditworthy by the
Adviser. Investment in these instruments involves
the risk that the issuer of the instrument may default on its obligation to
deliver the underlying security or warrants
to acquire the underlying security (or cash in lieu thereof).
Additional
Information on Portfolio Instruments and Investment Policies 63
Secondary
Offerings.
A Fund may invest a portion of its assets in shares secondary offerings. A
secondary offering is a
registered offering of a large block of a security that has been previously
issued to the public. A secondary offering can occur
when an investor sells to the public a large block of stock or other securities
it has been holding in its portfolio. In a sale
of this kind, all of the profits go to the seller rather than the issuer.
Secondary offerings can also originate when the issuer
issues new shares of its stock over and above those sold in its IPO, usually in
order to raise additional capital.
However,
because an increase in the number of shares devalues those that have already
been issued, many companies
make a secondary offering only if their stock prices are high or they are in
need of capital. Secondary offerings
may have a magnified impact on the performance of a Fund with a small asset
base. Secondary offering shares
frequently are volatile in price. Therefore, a Fund may hold secondary offering
shares for a very short period of time.
This may increase the portfolio turnover rate of a Fund and may lead to
increased expenses for the Fund, such as commissions
and transaction costs. In addition, secondary offering shares can experience an
immediate drop in value if the
demand for the securities does not continue to support the offering
price.
Securities Backed by
Guarantees.
Securities backed by guarantees are securities backed by guarantees from banks,
insurance
companies and other financial institutions. Changes in the credit quality of
these institutions could have an adverse
impact on securities they have guaranteed or backed, which could cause losses to
a Fund.
Securities
Lending.
A Fund may lend its portfolio securities to brokers, dealers and other financial
institutions, provided it
receives collateral, with respect to each loan of U.S. and non-U.S. securities,
equal to at least 100% of the value of the portfolio
securities loaned. Typically, a Fund will receive collateral, with respect to
each loan of U.S. securities, equal to at least
102% of the value of the portfolio securities loaned, and, with respect to each
loan of non-U.S. securities, collateral of at
least 105% of the value of the portfolio securities loaned. At all times
thereafter, the borrower shall be required to mark to
market such collateral on a daily basis so that the market value of such
collateral does not fall below 100% of the market
value of the portfolio securities so loaned. By lending its portfolio
securities, a Fund can increase its income through
the investment of the collateral. For the purposes of this policy, a Fund
considers collateral consisting of cash, U.S. Government
securities or letters of credit issued by banks whose securities meet the
standards for investment by the Fund
to be the equivalent of cash. From time to time, a Fund may return to the
borrower or a third-party which is unaffiliated
with it, and which is acting as a “placing broker,” a part of the interest
earned from the investment of collateral received
for securities loaned.
The
SEC currently requires that the following conditions must be met whenever
portfolio securities are loaned: (1) the
fund must receive from the borrower collateral equal to at least 100% of the
value of the portfolio securities loaned; (2)
the borrower must increase such collateral whenever the market value of the
securities loaned rises above the level of
such collateral; (3) the fund must be able to terminate the loan at any time;
(4) the fund must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions payable
on the loaned securities, and any increase
in market value; (5) the fund may pay only reasonable custodian fees in
connection with the loan; and (6) while any
voting rights on the loaned securities may pass to the borrower, the fund’s
board of directors/trustees must be able to
terminate the loan and regain the right to vote the securities if a material
event adversely affecting the investment occurs.
These conditions may be subject to future modifications.
Loan
agreements involve certain risks in the event of default or insolvency of the
other party including possible delays
or restrictions upon a Fund’s ability to recover the loaned securities or
dispose of the collateral for the loan. In addition,
there is the possibility of losses resulting from the investment of collateral
where the market value of the collateral
falls below 100%. Such losses may include, but are not limited to, losses
associated with deterioration in the credit
of the investments of collateral. These losses generally would be borne by the
Fund lending its portfolio securities, which
would have a negative impact on the lending Fund’s performance.
Cash
received as collateral through loan transactions may be invested in other
securities eligible for purchase by the Fund.
The investment of cash collateral subjects that investment, as well as the
securities loaned, to market appreciation or
depreciation. The Fund is obligated to return the collateral to the borrower at
the termination of the loan. A Fund could suffer
a loss in the event the Fund must return the cash collateral and there are
losses on investments made with cash collateral.
A Fund’s securities lending program may be temporarily suspended if the Board
and/or the Adviser determine it
to be in the best interests of a Fund’s shareholders.
The
collateral received from a borrower as a result of a Fund’s securities lending
activities will be used to purchase both
fixed income securities and other securities with debt-like characteristics that
are rated A1 or P1 (except as noted below)
on a fixed rate or floating rate basis, including but not limited to: (a) bank
obligations, such as bank bills, bank notes,
certificates of deposit, commercial paper, deposit notes, loan participations,
medium term notes, mortgage backed
securities, structured liquidity notes, and time deposits; (b) corporate
obligations, such as commercial paper, corporate
bonds, investment agreements, funding agreements, or guaranteed investment
contracts entered into with, or guaranteed
by, an insurance company, loan participations, master notes, medium term notes,
and second tier commercial
paper (which must have a minimum rating of two of the following: A-2, P-2 and
F-2); (c) sovereigns, such as commercial
paper, U.S. Government securities (including securities issued or guaranteed as
to principal and interest by the
U.S. Government, its agencies, instrumentalities, establishments or the like),
sovereign obligations of non-U.S. countries that
are members of the Organization for Economic Co-operation and Development of the
European Union (including securities
issued or guaranteed as to principal and interest by the sovereign, its
agencies, instrumentalities,
64 Additional
Information on Portfolio Instruments and Investment Policies
establishments
or the like) and supranational issuers; and (d) repurchase agreements, including
reverse repurchase agreements
(which permitted collateral, in most cases, must have an investment grade rating
from at least two NRSROs).
Except for the investment agreements, funding agreements or guaranteed
investment contracts guaranteed by
an insurance company, master notes, and medium term notes (which are described
below), these types of investments
are described elsewhere in the SAI. Collateral may also be invested in a money
market mutual fund or short-term
collective investment trust.
Investment
agreements, funding agreements, or guaranteed investment contracts entered into
with, or guaranteed by,
an insurance company are agreements where an insurance company either provides
for the investment of a Fund’s assets
or provides for a minimum guaranteed rate of return to the
investor.
Master
notes are promissory notes issued usually with large, creditworthy
broker-dealers on either a fixed rate or floating
rate basis. Master notes may or may not be collateralized by underlying
securities. If the master note is issued by an
unrated subsidiary of a broker-dealer, then an unconditional guarantee is
provided by the issuer’s parent.
Medium
term notes are unsecured, continuously offered corporate debt obligations.
Although medium term notes may
be offered with a maturity from one to ten years, in the context of securities
lending collateral the maturity of the medium
term note will not generally exceed two years.
Securities of Investment
Companies.
To the extent permitted by the 1940 Act, a Fund may generally invest up to 10%
of
its total assets, calculated at the time of investment, in the securities of
other investment companies. No more than 5% of
a Fund’s total assets may be invested in the securities of any one investment
company nor may it acquire more than 3%
of the voting securities of any other investment company. For purposes of these
limitations, a Fund would aggregate its
investments in any private placements with its investment company holdings,
which would include ETF holdings unless an
exemption applies (as described in “Exchange-Traded Funds” above). Rule 12d1-4
under the 1940 Act permits registered
investment companies to acquire securities of another investment company in
excess of these amounts, subject
to certain conditions.
To
the extent a Fund invests in another investment company, the Fund indirectly
will bear its proportionate share of any
management fees paid by an investment company in which it invests in addition to
the advisory fee paid by the Fund. Some
of the countries in which a Fund may invest may not permit direct investment by
outside investors. Investments in such
countries may only be permitted through foreign government-approved or
government-authorized investment vehicles,
which may include other investment companies. Each Fund may not acquire
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.
See
also “Exchange-Traded
Funds” above.
Short Sales.
In a short sale of securities, a Fund sells a security that it does not own,
making delivery with securities “borrowed”
from a broker. A Fund is then obligated to replace the security borrowed by
purchasing it at the market price at
the time of replacement. This price may or may not be less than the price at
which the security was sold by a Fund. Until
the security is replaced, a Fund is required to pay the lender any dividends or
interest which accrue during the period of
the loan. In order to borrow the security, a Fund may also have to pay a premium
and/or interest which would increase the
cost of the security sold. The proceeds of the short sale will be retained by
the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. In addition, the broker
may require the deposit of collateral (generally,
up to 50% of the value of the securities sold short).
A
Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale
and the date on which the Fund replaces the borrowed security. A Fund will
realize a gain if the security declines in price
between those two dates. The amount of any gain will be decreased and the amount
of any loss will be increased by
any premium or interest a Fund may be required to pay in connection with the
short sale. When a cash dividend is declared
on a security for which a Fund has a short position, the Fund incurs the
obligation to pay an amount equal to that
dividend to the lender of the shorted security. However, any such dividend on a
security sold short generally reduces the
market value of the shorted security, thus increasing a Fund’s unrealized gain
or reducing a Fund’s unrealized loss on its
short-sale transaction. Whether a Fund will be successful in utilizing a short
sale will depend, in part, on the Adviser’s or Subadviser’s
ability to correctly predict whether the price of a security it borrows to sell
short will decrease.
In
a short sale, the seller does not immediately deliver the securities sold and is
said to have a short position in those securities
until delivery occurs. In accordance with current federal securities laws,
rules, and staff positions, a Fund must segregate
or earmark an amount of cash or other liquid assets equal to the difference
between (a) the market value of securities
sold short at the time that they were sold short and (b) the value of the
collateral deposited with the broker to meet
margin requirements in connection with the short sale (not including the
proceeds from the short sale).
A
Fund also may engage in short sales if at the time of the short sale the Fund
owns or has the right to obtain without additional
cost an equal amount of the security being sold short. This investment technique
is known as a short sale “against
the box.” The Funds do not intend to engage in short sales against the box for
investment purposes. A Fund may, however,
make a short sale as a hedge, when it believes that the price of a security may
decline, causing a decline in the value
of a security owned by the Fund (or a security convertible or exchangeable for
such security), or when the Fund wants
to sell the security at an attractive current price. In such case, any future
losses in a Fund’s long position should be
Additional
Information on Portfolio Instruments and Investment Policies 65
offset
by a gain in the short position and, conversely, any gain in the long position
should be reduced by a loss in the short position.
The extent to which such gains or losses are reduced will depend upon the amount
of the security sold short relative
to the amount a Fund owns. There will be certain additional transaction costs
associated with short sales against the
box. For tax purposes a Fund that enters into a short sale “against the box” may
be treated as having made a constructive
sale of an “appreciated financial position” causing the Fund to realize a gain
(but not a loss).
“Special Situations” Companies
Risk.
“Special situations” with respect to a portfolio company include a change in
management
or management policies, the acquisition of a significant equity position in the
company by others, a merger
or reorganization, or the sale or spin-off of a division or subsidiary which, if
resolved favorably, would improve the value
of the company’s stock. If the actual or prospective situation does not
materialize as anticipated, the market price of
the securities of a special situation company may decline significantly. There
can be no assurance that a special situation
that exists at the time of its investment will be consummated under the terms
and within the time period contemplated.
Investments in “special situations” companies can present greater risks than
investments in companies not
experiencing special situations.
Standby Commitment
Agreements.
Standby commitment agreements commit a Fund, for a stated period of time, to
purchase
a stated amount of fixed income securities that may be issued and sold to the
Fund at the option of the issuer. The
price and coupon of the security is fixed at the time of the commitment. At the
time of entering into the agreement a Fund
is paid a commitment fee, regardless of whether or not the security is
ultimately issued. A Fund enters into such agreements
for the purpose of investing in the security underlying the commitment at a
yield and price that is considered
advantageous to the Fund.
Strategic Transactions, Derivatives and
Synthetic Investments.
A Fund may, but is not required to, utilize various other investment
strategies as described below for a variety of purposes, such as hedging various
market risks, managing the effective
maturity or duration of the fixed income securities in the Fund’s portfolio or
enhancing potential gain. These strategies
may be executed through the use of derivative contracts. In certain
circumstances, a Fund may wish to obtain the
price performance of a security without actually purchasing the security in
circumstances where, for example, the security
is illiquid, or is unavailable for direct investment or available only on less
attractive terms. In such circumstances, a Fund
may invest in synthetic or derivative alternative investments (“Synthetic
Investments”) that are based upon or otherwise
relate to the economic performance of the underlying securities. Synthetic
Investments may include swap transactions,
notes or units with variable redemption amounts, and other similar instruments
and contracts. Synthetic Investments
typically do not represent beneficial ownership of the underlying security,
usually are not collateralized or otherwise
secured by the counterparty and may or may not have any credit enhancements
attached to them.
In
the course of pursuing these investment strategies, a Fund may purchase and sell
exchange-listed and OTC put and
call options on securities, equity and fixed income indices and other
instruments, purchase and sell futures contracts and
options thereon, enter into various transactions such as swaps, caps, floors,
collars, currency forward contracts, currency
futures contracts, currency swaps or options on currencies, or currency futures
and various other currency transactions
(collectively, all the above are called “Strategic Transactions”). In addition,
strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions
may be used subject to certain limits imposed by the 1940 Act to attempt to
protect against possible changes
in the market value of securities held in or to be purchased for a Fund’s
portfolio resulting from securities markets
or currency exchange rate fluctuations, to protect a Fund’s unrealized gains in
the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of a Fund’s portfolio,
or to establish a position in the derivatives markets as a substitute for
purchasing or selling particular securities. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy
that dictates the use of one technique rather than another, as use of any
Strategic Transaction is a function of numerous
variables including market conditions. The ability of a Fund to utilize these
Strategic Transactions successfully will
depend on the Adviser’s ability to predict pertinent market movements, which
cannot be assured. A Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions
will not be used to alter fundamental investment purposes and characteristics of
a Fund, and, in accordance
with current federal securities laws, rules, and staff positions, a Fund will
segregate assets (or enter into certain
offsetting positions) to cover its obligations under options, futures and swaps
to limit leveraging of the Fund.
Strategic
Transactions, including derivative contracts and Synthetic Investments, have
risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the Adviser’s view as to certain market
movements is incorrect, the risk that the use of such Strategic Transactions
could result in losses greater than if they
had not been used. Synthetic Investments also involve exposure to the
creditworthiness of the issuer of the underlying
security, changes in exchange rates and future governmental actions taken by the
jurisdiction in which the underlying
security is issued, and counterparties involved. Use of put and call options may
result in losses to a Fund, force the
sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower
than (in the case of call options) current market values, limit the amount of
appreciation a Fund can realize on its investments
or cause a Fund to hold a security it might otherwise sell. The use of currency
transactions can result in a Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements,
or the inability to deliver or receive a specified currency. The use of options
and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and
66 Additional
Information on Portfolio Instruments and Investment Policies
price
movements in the related portfolio position of a Fund creates the possibility
that losses on the hedging instrument may
be greater than gains in the value of the Fund’s position. In addition, futures
and options markets may not be liquid in all
circumstances and certain OTC options may have no markets. As a result, in
certain markets, a Fund might not be able to
close out a transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation
margin requirements for futures contracts and short options positions would
create a greater ongoing potential financial
risk than would purchases of options (i.e., long options positions, when the
exposure is limited to the cost of the initial
premium). Losses resulting from the use of Strategic Transactions would reduce
NAV, and possibly income, and such
losses can be greater than if the Strategic Transactions had not been
utilized.
Risks of Strategic Transactions Inside the
U.S.
It is possible that government regulation of various types of derivative
instruments,
such as the currency and interest rate transactions, credit default swaps and
options described herein, may limit
or prevent a Fund from using such instruments as part of its investment
strategy, which could negatively impact a Fund.
For example, it is possible that developments in the derivatives market,
including new regulatory requirements, could
limit or prevent a Fund’s ability to utilize derivatives as part of its
investment strategy, terminate existing derivatives or
realize amounts to be received under such derivatives, which could negatively
affect the Fund. Some derivatives currently
are, and more in the future will be, required to be centrally cleared, which
affects how derivatives are transacted.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21,
2010 (the “Dodd-Frank Act”), resulted
in a comprehensive regulatory regime for derivatives that qualify as “swaps”,
which are generally regulated by the
CFTC, and “security-based swaps”, which are generally regulated by the SEC.
Foreign exchange forwards and spot foreign
exchange are generally exempt from this regulation. The Dodd-Frank Act created a
new clearing and exchange-trading
requirements for OTC derivatives that are swaps or security-based swaps. The
Dodd-Frank Act also requires
the CFTC, SEC and banking or prudential regulators, to establish capital
requirements for certain regulated counterparties
(such as swap dealers), as well as requirements for such regulated
counterparties to collect margin from and
post margin to counterparties, such as the Funds, to uncleared derivatives and
to impose clearing and central trading
requirements, that also require margin posting by the Funds. The CFTC and
banking or prudential regulators have adopted
margin rules for uncleared swaps and, in the case of prudential regulators,
security-based swaps as well. Variation
margin requirements have been implemented by the CFTC and prudential regulators
(and
in some cases initial margin).
The SEC has also adopted a set of regulations that apply to security-based
swaps, including dealer registration, central
clearing, business conduct and margin requirements that are expected to go into
effect in the near future. The Funds
may incur additional costs in complying with the SEC rules because many of those
rules differ from the rules adopted
for swaps by the CFTC and the prudential regulators.
If
a swap entered into by a Fund is required to be centrally cleared, Dodd-Frank
and the CFTC’s regulations may also require
that the swap be executed on a regulated market facility such as a “swap
execution facility” or “SEF”. Similar regulatory
requirements also
apply to security-based swaps that are subject to the jurisdiction of the
SEC.
While
some provisions of the Dodd-Frank Act have either already been implemented
through rulemaking by the CFTC
and/or the SEC, or by the banking or prudential regulators in the case of
capital requirements and margin requirements
for uncleared swaps with respect to certain regulated counterparties, or must be
implemented through future
rulemaking by those and other federal agencies, and any regulatory or
legislative activity may not necessarily have
a direct, immediate effect upon the Fund, it is possible that, when compliance
with these rules is required, they could potentially
limit or completely restrict the ability of a Fund to use certain derivatives as
a part of its investment strategy, increase
the cost of entering into derivatives transactions or require more assets of the
Fund to be used for collateral in support
of those derivatives than is currently the case. Limits or restrictions
applicable to the counterparties with which a Fund
engages in derivative transactions also could prevent the Fund from using
derivatives or affect the pricing or other factors
relating to these transactions, or may change the availability of certain
derivatives.
The
CFTC and the SEC continue to review the proposed and current regulatory
requirements applicable to derivatives,
including swaps and security-based swaps. It is not certain at this time how the
regulators may change these requirements
and such proposals may create barriers to the Fund’s use of certain types of
investments.
As
described above, the Fund may also trade in currency forward contracts. There is
less protection against defaults in
the forward trading of currencies since such contracts are currently not
guaranteed by any clearing house. The Dodd- Frank
Act includes in the definition of “swaps” that are regulated by the CFTC most
types of currency derivatives including cash-settled
or non-deliverable foreign currency forwards. Such currency derivatives may, in
the future, be required to be
cleared by a clearinghouse and traded on a regulated exchange, and are now
generally subject to the final swap regulations
adopted by the CFTC in connection with its authority under the Dodd-Frank Act. A
limited category of currency
derivatives, namely physically-settled or deliverable foreign currency forwards
and swaps, however, are excluded
from certain of the Dodd-Frank Act regulations as a result of a determination
issued by the Secretary of the Treasury.
These foreign currency derivatives are not subject to the mandatory clearing or
exchange-trading requirements
of the Dodd-Frank Act.
Additional
Information on Portfolio Instruments and Investment Policies 67
Risks of Strategic Transactions Outside the
U.S.
When conducted outside the U.S., Strategic Transactions may not be regulated
as rigorously as in the U.S. (which may depend on whether the Fund is executing
trades with a CFTC or SEC registered
dealer), may not involve a clearing mechanism and related guarantees, and are
subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of
such positions also could be adversely affected by: (i) other complex foreign
political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in a Fund’s ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise
and settlement terms and procedures and margin requirements than in the U.S.,
and (v) lower trading volume and
liquidity.
Combined
Transactions.
A Fund may enter into multiple transactions, including multiple options
transactions, multiple
futures transactions, multiple currency transactions (including forward currency
contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions (“component” transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the
Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
are normally entered into based on the
Adviser’s judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the
portfolio management objective.
Close-out Risk for Qualified Financial
Contracts.
Regulations adopted by the prudential regulators require counterparties
of the banks and other financial intermediaries that are part of U.S. or foreign
global systemically important
banking organizations to include contractual restrictions on close-out and
cross-default in agreements relating
to qualified financial contracts. Qualified financial contracts include
agreements relating to swaps, currency forwards
and other derivatives as well as repurchase agreements and securities lending
agreements. The restrictions prevent
a Fund from closing out a qualified financial contract during a specified time
period if the counterparty is subject to
resolution proceedings and prohibit the Fund from exercising default rights due
to a receivership or similar proceeding of
an affiliate of the counterparty. These requirements may increase credit and
other risks to the Funds.
Structured
Notes.
Structured notes are specially-designed derivative debt instruments in which the
terms may be structured
by the purchaser and the issuer of the note. The amount of principal repayments
and/or interest payments is based
upon the movement of one or more “factors.” These factors include, but are not
limited to, currency and currency baskets,
interest rates (such as the prime lending rate),
a single security, basket of securities, indices (such as the Standard
& Poor’s 500 Index) and precious metal-related instruments and other
commodities. In some cases, the impact of
the movements of these factors may increase or decrease through the use of
multipliers or deflators. Structured notes may
be designed to have particular quality and maturity characteristics and may vary
from money market quality to below
investment grade. Depending on the factor used and use of multipliers or
deflators, however, changes in interest rates
and movement of the factor may cause significant price fluctuations or may cause
particular structured notes to become
illiquid.
Structured
Securities.
A structured investment is a security whose value or performance is linked to an
underlying index
or other security or asset class. Structured investments involve the transfer of
specified financial assets to a special purpose
entity, generally a corporation or trust, or the deposit of financial assets
with a custodian; and the issuance of securities
or depository receipts backed by, or representing interests in those
assets.
Some
structured investments are individually negotiated agreements or are traded OTC.
Structured investments may
be organized and operated to restructure the investment characteristics of the
underlying security. The cash flow on
the underlying instruments may be apportioned among the newly issued structured
securities to create securities with
different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the
extent of such payments made with respect to structured securities is dependent
on the extent of the cash flow on the
underlying instruments. Investments in structured securities generally involve a
class of structured securities that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured securities typically
have higher yields and present greater risks than unsubordinated structured
securities. Structured securities are also
subject to such risks as the inability or unwillingness of the issuers of the
underlying securities to repay principal and interest,
and requests by the issuers of the underlying securities to reschedule or
restructure outstanding debt and to extend
additional loan amounts.
Supranational
Entities.
Supranational entities are international organizations designated or supported
by governmental
entities to promote economic reconstruction or development and international
banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank),
the European Coal and Steel Community, The Asian Development Bank and the
InterAmerican Development Bank.
Obligations of supranational entities are backed by the guarantee of one or more
foreign governmental parties which
sponsor the entity. Supranational entities have no taxing authority and are
dependent on their members for payments
of interest and principal. If one or more members of a supranational entity
fails to make necessary contributions,
the entity may be unable to pay interest or repay principal on its debt
securities. Political changes in principal
donor nations may unexpectedly disrupt the finances of supranational
entities.
68 Additional
Information on Portfolio Instruments and Investment Policies
Sustainable Investing
Risk.
A Fund’s “Sustainable Investing” strategies could cause it to perform
differently compared to
funds that do not have such strategies. The criteria related to a Fund’s
“Sustainable Investing” strategy, including the exclusion
of securities of companies in certain business activities, may result in a Fund
forgoing opportunities to buy certain
securities when it might otherwise be advantageous to do so, or selling
securities for ESG reasons when it might be
otherwise disadvantageous for it to do so. In addition, there is a risk that the
companies identified as sustainable leaders
by the Adviser do not operate as expected when addressing ESG issues. There are
significant differences in interpretations
of what it means for a company to have positive ESG characteristics. While the
Adviser believes its definitions
are reasonable, the portfolio decisions it makes may differ with other
investors’ or advisers’ views. Successful application
of a Fund’s sustainable investment strategy will depend on the Adviser’s skill
in identifying and analyzing material
ESG issues as well as the information available for each issuer, which may not
always be complete.
Data inputs for
ESG purposes may include information self-reported by issuers or from third
party data providers, which may be incomplete
or inaccurate to certain extent. U.S. and foreign laws and regulations governing
sustainable investing, including,
but not limited to, the definition and/or the application of sustainability
criteria, are continuously evolving, which may
have an adverse effect on a Fund’s ability to invest in accordance with its
sustainable investing strategy.
Swaps, Caps, Floors and
Collars.
To the extent used by a Fund, total return equity, interest rate, credit
default, currency,
index and other swaps and the purchase or sale of related caps, floors and
collars are expected to be used primarily
to preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations,
as a duration management technique or to protect against any increase in the
price of securities the Fund anticipates
purchasing at a later date. A Fund will not sell interest rate caps or floors
where it does not own securities or other
instruments providing the income stream the Fund may be obligated to
pay.
A
Fund will usually enter into swaps on a net basis, i.e., the two payment streams
are netted out in a cash settlement on
the payment date or dates specified in the instrument, with the Fund receiving
or paying, as the case may be, only the net
amount of the two payments. Rule 18f-4 under the 1940 Act has eliminated the
general asset segregation requirement
in connection with certain derivatives transactions, in light of the rule’s
requirements for funds to establish and
maintain derivatives risk management programs that comply with certain
risk-based limits. A Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the Counterparty meets the Adviser’s
current creditworthiness standards. If there is a default by the Counterparty, a
Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years
with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are
less liquid than swaps.
Total Return
Swaps.
A total return swap is a swap in which one party pays the total return of an
asset, and the other party
makes periodic interest payments. The total return is the capital gain or loss,
plus any interest or dividend payments. If
the total return is negative, then the party making periodic interest or
dividend payments pays this amount to the other party.
The parties have exposure to the return of the underlying stock or index,
without having to hold the underlying assets.
The profit or loss of the party making periodic interest or dividend payments is
the same as actually owning the underlying
asset. An equity swap is a special type of total return swap, where the
underlying asset is a stock, a basket of stocks,
or a stock index. One party to an equity swap agrees to make periodic payments
based on the change in market value
of a specified equity security, basket of equity securities or equity index in
return for periodic payments from the other
party based on a fixed or variable interest rate or the change in market value
of a different equity security, basket of equity
securities or equity index. The parties to an equity swap do not make an initial
payment and do not have any voting or
other rights of a stockholder. An index swap is an agreement to swap cash flows
on a notional amount based on changes
in the values of the reference indices.
Interest Rate
Swaps.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments with respect to
a notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or
more currencies based on the relative value differential among them and an index
swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive
payments on a notional principal amount from the party selling such floor to the
extent that a specified index falls below
a predetermined interest rate or amount. A collar is a combination of a cap and
a floor that preserves a certain return
within a predetermined range of interest rates or values.
Credit Default
Swaps.
A credit default swap is a credit derivative contract between two
counterparties. The buyer makes
periodic payments to the seller, and in return receives protection if an
underlying financial instrument defaults. A Fund
might use credit default swap contracts to limit or to reduce risk exposure of
the Fund to defaults of corporate and sovereign
issuers (i.e., to reduce risk when the Fund owns or has exposure to such
issuers). A Fund also might use credit default
swap contracts to create direct or synthetic short or long exposure to domestic
or foreign corporate debt securities
or certain sovereign debt securities to which the Fund is not otherwise
exposed.
Additional
Information on Portfolio Instruments and Investment Policies 69
As
the seller in a credit default swap contract, a Fund would be required to pay
the par (or other agreed-upon) value of
a referenced debt obligation to the counterparty in the event of a default (or
similar event) by a third-party, such as a U.S.
or foreign issuer, on the debt obligation. In return, a Fund would receive from
the counterparty a periodic stream of payments
over the term of the contract, provided that no event of default (or similar
event) occurs. If no event of default (or
similar event) occurs, a Fund would keep the stream of payments and would have
no payment of obligations. As the seller
in a credit default swap contract, a Fund effectively would add economic
leverage to its portfolio because, in addition
to its total net assets, the Fund would be subject to investment exposure on the
notional amount of the swap.
As
the purchaser in a credit default swap contract, a Fund would function as the
counterparty referenced in the preceding
paragraph. This would involve the risk that the investment might expire
worthless. It also would involve credit risk,
which means that the seller may fail to satisfy its payment obligations to the
Fund in the event of a default (or similar event).
As the purchaser in a credit default swap contract, a Fund’s investment would
generate income only in the event of
an actual default (or similar event) by the issuer of the underlying
obligation.
Currency Swaps.
A currency swap is a foreign-exchange agreement between two institutions to
exchange aspects (namely
the principal and/or interest payments) of a loan in one currency for equivalent
aspects of an equal in net present
value loan in another currency.
Index Swap.
An index swap is a swap of a market index for some other asset, such as a
stock-for-stock or debt-for-stock
swap.
New
regulations governing certain OTC derivatives may also increase the costs of
using these types of instruments or
make them less effective, as described under “Strategic Transactions,
Derivatives and Synthetic Investments – Risks of Strategic
Transactions Inside the U.S.”
See
“Regulation of Commodity Interests” for additional information about the Funds’
use of derivatives in connection with
CFTC exclusions.
Tax Reclaim
Risk.
Funds managed by the adviser may be entitled to tax reclaims related to
portfolio holdings in certain
jurisdictions. Dividend and interest income from non-U.S. portfolio holdings
received by a Fund are generally subject
to non-U.S. withholding taxes and are recorded on ex-dividend date. The Fund
generally files for tax reclaims for the
refund of such withholding taxes according to tax treaties. Tax reclaims that
are deemed collectible are booked as a tax
reclaim receivable for the Fund. The actual receipt and timing of receipt of a
tax reclaim varies depending on the foreign
jurisdiction and receipt of reclaims in certain jurisdictions may be
significantly delayed.
Temporary
Investments.
Generally each Fund will be fully invested in accordance with its investment
objective and strategies.
However, pending investment of cash balances or for other cash management
purposes, or if the Adviser believes
that business, economic, political or financial conditions warrant, a Fund may
invest, without limit, in cash or cash equivalents,
including: (1) foreign money market instruments (such as bankers’ acceptances,
certificates of deposit, commercial
paper, short-term government and corporate obligations, and repurchase
agreements); (2) obligations issued
or guaranteed by the U.S. Government its agencies and instrumentalities; (3)
certificates of deposit, bankers’ acceptances,
and interest-bearing savings deposits of commercial banks; (4) prime quality
commercial paper; (5) repurchase
agreements covering any of the securities in which the Fund may invest directly;
(6) money market instruments;
and (7) high quality debt securities without equity features. Should this occur,
a Fund will not be pursuing and may
not achieve its investment objective or may miss potential market
upswings.
In
addition, pending the investment of cash balances or for other cash management
purposes, a Fund may invest without
limit in other instruments, including but not limited to derivatives that
provide exposure to markets or companies in
which a Fund may invest and in shares of other investment companies that invest
in securities in which the Fund may invest,
subject to the limits of the 1940 Act.
Transactions Leverage
Risk.
Certain transactions may give rise to a form of leverage. Such transactions may
include, among
others, loans of securities, and the use of when-issued, delayed delivery or
forward commitment transactions. The
use of derivatives may also create leveraging risk. Leverage may cause a Fund to
be more volatile than if a Fund had not
been leveraged. This is because leverage tends to exaggerate the effect of any
increase or decrease in the value of a Fund’s
securities. Rule 18f-4 under the 1940 Act, which became fully effective in
August 2022, generally has eliminated the
requirement to maintain “segregated accounts” for funds that engage in these
types of transactions, provided that the
fund complies with the rule’s risk-based limits on leverage and other
conditions.
Trust Preferred
Securities.
Trust Preferred Securities are hybrid instruments issued by a special purpose
trust (the “Special
Trust”), the entire equity interest of which is owned by a single issuer. The
proceeds of the issuance to a Fund of Trust
Preferred Securities are typically used to purchase a junior subordinated
debenture, and distributions from the Special
Trust are funded by the payments of principal and interest on the subordinated
debenture.
If
payments on the underlying junior subordinated debentures held by the Special
Trust are deferred by the debenture
issuer, the debentures would be treated as original issue discount (“OID”)
obligations for the remainder of their term.
As a result, holders of Trust Preferred Securities, such as the Funds, would be
required to accrue daily for federal income
tax purposes their share of the stated interest and the de minimis OID on the
debentures (regardless of whether the
Fund receives any cash distributions from the Special Trust), and the value of
Trust Preferred Securities would likely be
70 Additional
Information on Portfolio Instruments and Investment Policies
negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if
dividends are suspended on both common and preferred stock of the issuer. The
underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer,
but rank below other subordinated debentures and debt securities. Trust
Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile
than those of conventional debt securities. Trust Preferred Securities may be
issued in reliance on Rule 144A under the
Securities Act, and, unless and until registered, are restricted securities;
there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Funds to sell their holdings.
U.S. Government
Securities.
There are two broad categories of U.S. Government-related debt instruments: (a)
direct obligations
of the U.S. Treasury, and (b) securities issued or guaranteed by U.S. Government
agencies.
Examples
of direct obligations of the U.S. Treasury are Treasury Bills, Notes, Bonds and
other debt securities issued by the
U.S. Treasury. These instruments are backed by the “full faith and credit” of
the United States. They differ primarily in interest
rates, the length of maturities and the dates of issuance. Treasury bills have
original maturities of one year or less. Treasury
notes have original maturities of one to ten years and Treasury bonds generally
have original maturities of greater
than ten years.
Some
agency securities are backed by the full faith and credit of the United States
(such as Maritime Administration Title
XI Ship Financing Bonds and Agency for International Development Housing
Guarantee Program Bonds) and others are
backed only by the rights of the issuer to borrow from the U.S. Treasury (such
as Federal Home Loan Bank Bonds and Fannie
Mae Bonds), while still others, such as the securities of the Federal Farm
Credit Bank, are supported only by the credit
of the issuer. With respect to securities supported only by the credit of the
issuing agency or by an additional line of credit
with the U.S. Treasury, there is no guarantee that the U.S. Government will
provide support to such agencies and such
securities may involve risk of loss of principal and interest. U.S. Government
Securities may include “zero coupon” securities
that have been stripped by the U.S. Government of their unmatured interest
coupons and collateralized obligations
issued or guaranteed by a U.S. Government agency or
instrumentality.
Interest
rates on U.S. Government obligations may be fixed or variable. Interest rates on
variable rate obligations are adjusted
at regular intervals, at least annually, according to a formula reflecting then
current specified standard rates, such
as 91-day U.S. Treasury bill rates. These adjustments generally tend to reduce
fluctuations in the market value of the securities.
The
government guarantee of the U.S. Government Securities in a Fund’s portfolio
does not guarantee the NAV of the
shares of the Fund. There are market risks inherent in all investments in
securities and the value of an investment in a Fund
will fluctuate over time. Normally, the value of investments in U.S. Government
Securities varies inversely with changes
in interest rates. For example, as interest rates rise the value of investments
in U.S. Government Securities will tend
to decline, and as interest rates fall the value of a Fund’s investments will
tend to increase. In addition, the potential for
appreciation in the event of a decline in interest rates may be limited or
negated by increased principal prepayments with
respect to certain mortgage-backed securities, such as Government National
Mortgage Association Certificates. Prepayments
of high interest rate mortgage-backed securities during times of declining
interest rates will tend to lower the
return of a Fund and may even result in losses to the Fund if some securities
were acquired at a premium. Moreover, during
periods of rising interest rates, prepayments of mortgage-backed securities may
decline, resulting in the extension
of a Fund’s average portfolio maturity. As a result, a Fund’s portfolio may
experience greater volatility during periods
of rising interest rates than under normal market conditions.
TIPS Bonds.
Treasury Inflation-Protected Securities (“TIPS”) are fixed income securities
issued by the U.S. Treasury whose
principal value is periodically adjusted according to the rate of inflation. The
U.S. Treasury uses a structure that accrues
inflation into the principal value of the bond. 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. TIPS
bonds typically pay interest on a semi-annual basis, equal to a fixed percentage
of the inflation-adjusted amount. For
example, if a Fund purchased an inflation-indexed bond with a par value of
$1,000 and a 3% real rate of return coupon
(payable 1.5% semi-annually), and inflation over the first six months was 1%,
the mid-year par value of the bond would
be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010
times 1.5%). If inflation during the second
half of the year resulted in the whole year’s inflation equaling 3%, the
end-of-year par value of the bond would be $1,030
and the second semi-annual 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
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.
Additional
Information on Portfolio Instruments and Investment Policies 71
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. There can be no assurance that
the CPI-U will accurately measure the real rate of inflation in the prices of
goods and services.
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.
When-Issued Securities and
Delayed-Delivery.
A Fund may purchase equity and debt securities on a “when-issued,” “delayed
delivery” or “forward delivery” basis. The price of such securities, which may
be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment for the
securities takes place at a later date. During
the period between purchase and settlement, no payment is made by a Fund to the
issuer and no interest accrues
to the Fund. When a Fund purchases such securities, it immediately assumes the
risks of ownership, including the
risk of price fluctuation. Failure to deliver a security purchased on this basis
may result in a loss or missed opportunity to
make an alternative investment.
To
the extent that assets of a Fund are held in cash pending the settlement of a
purchase of securities, the Fund would
earn no income. While such securities may be sold prior to the settlement date,
each Fund intends to purchase them
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time a Fund
makes the commitment to purchase a security on this basis, it will record the
transaction and reflect the value of the security
in determining its NAV. The market value of the securities may be more or less
than the purchase price. In accordance
with current federal securities laws, rules, and staff positions, a Fund will
establish a segregated account in which
it will maintain cash and liquid assets equal in value to commitments for such
securities.
When
a Fund engages in when-issued or delayed-delivery transactions, it relies on the
other party to consummate the
trade. Failure of the seller to do so may result in a Fund incurring a loss or
missing an opportunity to obtain a price considered
to be advantageous.
When
a Fund enters into a delayed delivery transaction, a when-issued transaction or
a forward transaction, the Fund
may be required to provide collateral to cover potential losses of the
counterparty, due to changes in the value of the
security, in the event that the event that the transaction is unable to settle
(e.g., in the event of a default on the Fund). Similarly,
the counterparty may be required to provide collateral to cover the potential
losses of the Fund, due to changes in
the value of the security, in the event that the transaction is unable to settle
(e.g., the seller fails to deliver the security). A Fund
may reduce the amount of liquid assets it will segregate to the extent it
provides such collateral.
Rule
18f-4 under the 1940 Act, which became fully effective in August 2022, provides
that funds may invest in securities
on a when-issued or forward-settling basis, or with a non-standard settlement
cycle. These transactions are not
deemed
to involve a senior security, and thus generally do
not require the Fund to maintain a “segregated account” when engaging
in these types of transactions, subject to certain conditions and any other
restrictions that the Fund has adopted.
There
can be no assurance that the securities subject to a standby commitment will be
issued and the value of the security,
if issued, on the delivery date may be more or less than its purchase price.
Since the issuance of the security underlying
the commitment is at the option of the issuer, the Fund may bear the risk of a
decline in the value of such security
and may not benefit from appreciation in the value of the security during the
commitment period if the security is
not ultimately issued.
The
purchase of a security subject to a standby commitment agreement and the related
commitment fee will be recorded
on the date on which the security can reasonably be expected to be issued, and
the value of the security will thereafter
be reflected in the calculation of the Fund’s NAV. The cost basis of the
security will be adjusted by the amount of
the commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration
date of the standby commitment.
Zero Coupon, Discount and Payment-In-Kind
Securities.
A Fund may also invest in zero coupon U.S. Treasury securities and
in zero coupon securities issued by financial institutions, which represent a
proportionate interest in underlying U.S. Treasury
securities. A zero coupon bond is a security that makes no fixed interest
payments but instead is sold at a discount
from its face value. The bond is redeemed at its face value on the specified
maturity date. Zero coupon bonds may
be issued as such, or they may be created by a broker who strips the coupons
from a bond and separately sells the rights
to receive principal and interest. The prices of zero coupon bonds tend to
fluctuate more in response to changes in market
interest rates than do the prices of interest-paying debt securities with
similar maturities. A Fund investing in zero coupon
bonds generally accrues income on such securities prior to the receipt of cash
payments. Since a Fund must distribute
substantially all of its income to shareholders to qualify as a regulated
investment company under federal income
tax law, to the extent that the Fund invests in zero coupon bonds, it may have
to dispose of other securities,
72 Additional
Information on Portfolio Instruments and Investment Policies
including
at times when it may be disadvantageous to do so, to generate the cash necessary
for the distribution of income
attributable to its zero coupon bonds. The market values of zero coupon
securities generally are more volatile than
the market prices of securities that pay interest periodically.
Payment-in-kind
securities allow the lender, at its option, to make current interest payments on
such securities either
in cash or in additional securities. Accordingly, such securities usually are
issued and traded at a deep discount from
their face or par value and generally are subject to greater fluctuations of
market value in response to changing interest
rates than securities of comparable maturities and credit quality that pay cash
interest (or dividends in the case of
preferred stock) on a current basis.
Portfolio
Turnover
The
portfolio turnover rate for a Fund is calculated by dividing the lesser of
purchases and sales of portfolio securities for
the year by the monthly average value of the portfolio securities, excluding
securities whose maturities at the time of purchase
were one year or less. Portfolio turnover may involve the payment by a Fund of
brokerage and other transaction
costs, on the sale of securities, as well as on the investment of the proceeds
in other securities. The greater the
portfolio turnover, the greater transaction costs to the Fund, which could have
an adverse effect on the Fund’s total rate
of return. In addition, funds with high portfolio turnover rates may be more
likely than low turnover funds to generate capital
gains that must be distributed to shareholders as taxable income.
The
table below shows the Funds’ portfolio turnover rates for the fiscal years ended
October 31, 2023
and 2022.
|
| |
Fund
|
2023 |
2022 |
China
A Fund |
36.32% |
23.60% |
Dynamic
Dividend Fund |
62.85% |
78.51% |
Emerging
Markets Dividend Fund |
23.45% |
38.19% |
Emerging
Markets ex-China Fund(1)
|
36.00% |
129.38% |
Emerging
Markets Fund |
30.01% |
36.82% |
Emerging
Markets Sustainable Leaders Fund |
27.11% |
29.36% |
Focused
U.S. Small Cap Equity Fund |
16.83% |
55.89% |
Global
Equity Impact Fund |
30.88% |
36.90% |
Global
Infrastructure Fund |
20.33% |
23.33% |
High
Income Opportunities Fund |
74.58% |
96.73% |
Infrastructure
Debt Fund |
140.60% |
180.82% |
Intermediate
Municipal Income Fund |
79.85% |
20.98% |
International
Small Cap Fund |
35.89% |
46.90% |
Realty
Income & Growth Fund |
23.77% |
23.36% |
Short
Duration High Yield Municipal Fund |
57.71% |
57.98% |
Ultra
Short Municipal Income Fund |
231.34% |
320.87% |
U.S.
Small Cap Equity Fund |
29.74% |
59.08% |
U.S.
Sustainable Leaders Fund |
31.62% |
44.12% |
(1) |
The
Fund’s portfolio turnover was higher during the fiscal year ended October
31, 2022 due to the change in the Fund’s strategy that took place during
the
fiscal year. |
Additional
Information on Portfolio Instruments and Investment Policies 73
Investment
Restrictions
Fundamental
Investment Restrictions:
The
following are fundamental investment restrictions of each Fund which cannot be
changed without the vote of the
majority of the outstanding shares of the Fund for which a change is proposed.
The vote of the majority of the outstanding
shares means the vote of (A) 67% or more of the voting securities present at a
meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (B) a majority of the outstanding
voting securities, whichever is less.
China
A Fund, Emerging Markets Dividend
Fund,
Emerging Markets ex-China Fund, Emerging Markets Fund,
Emerging Markets
Sustainable
Leaders Fund, Global
Equity Impact Fund, High
Income Opportunities
Fund,
Infrastructure
Debt Fund, Intermediate
Municipal Income Fund, International Small Cap Fund, U.S.
Small Cap Equity Fund, Focused
U.S.
Small
Cap Equity
Fund
and U.S. Sustainable Leaders Fund:
● |
May
not (except the Emerging Markets ex-China Fund)(1)
purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities,
if, immediately after such purchase, more
than 5% of the Fund’s total assets would be invested in such issuer or the
Fund would hold more than 10% of the outstanding
voting securities of the issuer, except that 25% or less of the Fund’s
total assets may be invested without regard
to such limitations. There is no limit to the percentage of assets that
may be invested in U.S. Treasury bills, notes, or
other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. |
● |
May
not borrow money or issue senior securities, except that each Fund may
sell securities short, enter into reverse repurchase
agreements and may otherwise borrow money and issue senior securities as
and to the extent permitted by
the 1940 Act or any rule, order or interpretation
thereunder. |
● |
May
not act as an underwriter of another issuer’s securities, except to the
extent that the Fund may be deemed an underwriter
within the meaning of the Securities Act in connection with the purchase
and sale of portfolio securities. |
● |
May
not purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus
or SAI of the Fund. |
● |
May
not purchase the securities of any issuer if, as a result, 25% or more
(taken at current value) of the Fund’s total assets
would be invested in the securities of issuers, the principal activities
of which are in the same industry. This limitation
does not apply to securities issued by the U.S. Government or its agencies
or instrumentalities or securities of other
investment companies. For each Fund except the Emerging Markets Fund,
Infrastructure
Debt
Fund and U.S. Sustainable
Leaders Fund, the following industries are considered separate industries
for purposes of this investment restriction:
electric, natural gas distribution, natural gas pipeline, combined
electric and natural gas, and telephone utilities,
captive borrowing conduit, commercial mortgage, residential mortgage,
equipment finance, premium finance,
leasing finance, consumer finance and other finance; commercial mortgage
and residential mortgage are not
considered separate industries. For the Intermediate Municipal Income
Fund, this limitation does not apply to tax-exempt
obligations issued by state, county or municipal
governments. |
● |
May
not lend any security or make any other loan, except that each Fund may in
accordance with its investment objective
and policies (i) lend portfolio securities, (ii) purchase and hold debt
securities or other debt instruments, including
but not limited to loan participations and subparticipations, assignments,
and structured securities, (iii) make loans
secured by mortgages on real property, (iv) enter into repurchase
agreements, and (v) make time deposits with financial
institutions and invest in instruments issued by financial institutions,
and enter into any other lending arrangement
as and to the extent permitted by the 1940 Act or any rule, order or
interpretation thereunder. |
● |
May
not purchase or sell real estate, except that each Fund may (i) acquire
real estate through ownership of securities or
instruments and sell any real estate acquired thereby, (ii) purchase or
sell instruments secured by real estate (including
interests therein), and (iii) purchase or sell securities issued by
entities or investment vehicles that own or deal
in real estate (including interests
therein). |
For
purposes of the fundamental policy restricting investments in an issuer if, as a
result, 25% or more of the Fund’s total assets
would be invested in the securities of issuers, the principal activities of
which are in the same industry, each of the Funds
will, as a non-fundamental policy, consider commercial mortgage and residential
mortgage to be a single industry (notwithstanding
the statement defining separate industries contained in the policy). In
addition, notwithstanding the statement
defining separate industries contained in the policy, each of the Funds may
elect to consider certain of such industries
as part of the same industry to be consistent with a third-party industry
classification system (e.g., BICS, GICS or
Barclays Live), and may otherwise define industries consistent with applicable
law and SEC guidance. Further, each of the
Funds will endeavor to consider the concentration policy of underlying
investment companies when determining the Fund’s
compliance with its concentration policy.
(1) |
Emerging
Markets ex-China Fund was previously non-diversified, but is now a
diversified fund and complies with this
restriction. |
Short
Duration High Yield Municipal Fund and Ultra Short Municipal Income
Fund
● |
With
respect to 75% of its total assets, each of the Short Duration High Yield
Municipal Fund and Ultra Short Municipal Income
Fund may not purchase a security, other than securities issued or
guaranteed by the U.S. Government, its agencies
or instrumentalities, if as a result of such purchase, more than 5% of
each Fund’s total assets would be |
74 Investment
Restrictions
|
invested
in the securities of any one issuer, or each Fund would own more than 10%
of the voting securities of any one issuer;The
SEC has taken the position that, for purposes of the restrictions
applicable to a fund’s diversification, investments
in securities of other investment companies, including in exchange-traded
funds, are considered investments
in the portfolio securities of such investment
companies. |
● |
May
not purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any
of its agencies or instrumentalities) if, as a result, more than 25% of
each of the Fund’s total assets would be invested
in the securities of companies whose principal business activities are in
the same industry; and further provided
that, notwithstanding any other fundamental investment policy or
limitation, each Fund may invest all of its investable
assets in a single open-end management investment company that has the
same investment objective and
substantially the same investment policies as the
Fund; |
● |
May
not issue senior securities as defined by the 1940 Act, or borrow money,
except that each Fund may borrow from banks
for temporary, extraordinary or emergency purposes (but not for investment
for Ultra Short Municipal Income Fund)
in an amount up to one-third of the value of each Fund’s respective total
assets (calculated at the time of the borrowing).
Each Fund may not make additional investments while it has any borrowings
outstanding. This restriction shall
not be deemed to prohibit each Fund from purchasing or selling securities
on a when-issued or delayed delivery basis,
or entering into repurchase agreements; |
● |
The
Ultra Short Municipal Income Fund may not purchase or sell commodities or
commodity contracts, and may not purchase
or sell real estate or interests in real estate (including limited
partnership interests), except that the Fund, to the
extent not prohibited by other investment policies, may purchase and sell
securities of issuers that deal in real estate
or are engaged in the real estate business, including real estate
investment trusts, and may purchase and sell securities
secured by real estate or interests therein; the Short Duration High Yield
Municipal Fund may purchase or sell commodities
or contracts related to commodities and real estate to the extent
permitted by (i) the 1940 Act or interpretations
or modifications by the SEC, SEC staff or other authority with appropriate
jurisdiction, or (ii) exemptive or
other relief or permission from the SEC, SEC staff or other
authority; Because
most swaps are now considered interests under the Commodity Exchange Act
of 1936 and related rules, each
Fund’s fundamental investment restriction related to investing in
commodity interests is being interpreted to permit
each Fund to engage in transactions in swaps and options on swaps related
to financial instruments, such as securities
indexes, currencies and other financial instruments, but not to engage in
transactions in swaps related to physical
commodities, such as oil or metals. |
● |
The
Short Duration High Yield Municipal Fund may not underwrite the securities
of other issuers, except to the extent that,
in connection with the disposition of securities, each Fund may be deemed
to be an underwriter under the Securities
Act; the Ultra Short Municipal Income Fund may not underwrite the
securities of other issuers, except to the extent
that, in connection with the disposition of securities, the Fund may be
deemed to be an underwriter under the Securities
Act; |
● |
May
not make loans of money or securities, except through the purchase of
permitted investments, including repurchase
agreements; |
● |
May
not make short sales of securities or purchase securities on margin,
except for such short-term credits as may be necessary
for the clearance of transactions; and |
● |
May
not pledge, hypothecate, mortgage or otherwise encumber each Fund’s
assets, except as may be necessary to secure
permitted borrowings. Collateral and other arrangements incident to
permissible investment practices are not deemed
to be subject to this restriction. |
● |
The
80% investment policy for each Fund is fundamental and may not be changed
without a shareholder vote. |
Dynamic
Dividend Fund, Global Infrastructure Fund and Realty Income & Growth
Fund
● |
With
respect to 75% of its total assets, each Fund (except the Realty Income
& Growth Fund) may not purchase a security,
other than securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, if as a result
of such purchase, more than 5% of that Fund’s total assets would be
invested in the securities of any one issuer, or
that Fund would own more than 10% of the voting securities of any one
issuer; The
SEC has taken the position that, for purposes of the restrictions
applicable to a fund’s diversification, investments in
securities of other investment companies, including in exchange-traded
funds, are considered investments in the portfolio
securities of such investment
companies. |
● |
Will
not (except the Realty Income & Growth Fund) underwrite any issue of
securities except as it may be deemed an underwriter
under the Securities Act in connection with the sale of securities in
accordance with its investment objectives,
policies and limitations; |
● |
May
not purchase, sell or invest in interests in oil, gas or other mineral
exploration or development programs; |
|
For
the avoidance of doubt, the policies above prohibiting investing in oil,
gas or other mineral leases, rights, royalty contracts,
or exploration or development programs do not prohibit investments in
securities of companies that deal in
oil, gas or other mineral leases, rights, royalty contracts, or
exploration or development programs. |
Investment
Restrictions 75
● |
May
not (except the Global Infrastructure Fund and Realty Income & Growth
Fund) invest more than 25% of its total assets
in the securities in any single industry, provided that there shall be no
limitation on the purchase of U.S. Government
securities; |
● |
May
effect short sales of securities subject to the limitation that a Fund may
not sell a security short if, as a result of such
sale, the current value of securities sold short by the Fund would exceed
10% of the Fund’s net assets; provided, however,
if the Fund owns or has the right to obtain securities equivalent in kind
and amount to the securities sold short (i.e.,
short sales “against the box”), this limitation is not
applicable; |
● |
May
not make loans of money or securities, except to the extent that a Fund
may lend money through the purchase of permitted
investments, including repurchase
agreements; |
● |
May
not lend their portfolio securities, unless the borrower is a
broker-dealer or financial institution that pledges and maintains
collateral with the Fund consisting of cash or securities issued or
guaranteed by the U.S. government having a
value at all times not less than 100% of the current market-value of the
loaned securities, including accrued interest, provided
that the aggregate amount of such loans shall not exceed 30% of the Fund’s
net assets; |
● |
May
not purchase, sell or invest in commodities, provided that this
restriction shall not prohibit a Fund from purchasing and
selling securities or other instruments backed by commodities or financial
futures contracts and related options, including
but not limited to, currency futures contracts and stock index
futures; |
● |
Because
most swaps are now considered interests under the Commodity Exchange Act
and its rules, the Funds’ fundamental
investment restriction related to investing in commodity interests is
being interpreted to permit a Fund to engage
in transactions in swaps and options on swaps related to financial
instruments, such as securities indexes, currencies
and other financial instruments, but not to engage in transactions in
swaps related to physical commodities,
such as oil or metals. |
● |
May
not (except the Global Infrastructure Fund) purchase, sell or invest in
real estate, but may invest in securities of companies
that deal in real estate or are engaged in the real estate business,
including real estate investment trusts, and
securities secured by real estate or interests therein and may hold and
sell real estate acquired through default, liquidation
or other distributions of an interest in real estate as a result of a
Fund’s ownership of such securities; |
● |
May
not issue senior securities as defined by the 1940 Act, except that a Fund
may borrow money from banks and enter
into reverse repurchase agreements (i) in the aggregate amount of up to
10% of its total assets to increase its holdings
of portfolio securities and (ii) for temporary extraordinary or emergency
purposes, subject to the overall limitation
that total borrowings by that Fund (including borrowing through reverse
repurchase agreements) may not exceed
33⅓% of the value of a Fund’s total assets (measured in each case at the
time of borrowing); |
● |
May
not pledge, mortgage, hypothecate or otherwise encumber their assets,
except to secure permitted borrowings and
to implement collateral and similar arrangements incident to permitted
investment practices; |
● |
The
investment objective(s) for each Fund is/are fundamental and may not be
changed without the approval of a majority
of the outstanding voting securities of that
Fund. |
Additional
Fundamental Restrictions of the Global Infrastructure Fund
● |
May
not purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any
of its agencies or instrumentalities) if, as a result, more than 25% of
the Fund’s total assets would be invested in the securities
of companies whose principal business activities are in the same industry,
except that the Fund will concentrate
its investments in infrastructure-related issuers;
and |
● |
May
not purchase or invest in real estate or interests in real estate
(although each may purchase securities secured by real
estate or interests therein or issued by companies or investment trusts
which invest in real estate or interests therein). |
Additional
Fundamental Restrictions of the Realty Income & Growth Fund
● |
May
not invest more than 5% of its total assets, at the time of the investment
in question, in the securities of any one issuer
other than the U.S. government and its agencies or instrumentalities,
except that up to 50% of its total assets may be
invested without regard to such 5%
limitation; |
● |
The
SEC has taken the position that, for purposes of the restrictions
applicable to a fund’s diversification, investments in
securities of other investment companies, including in exchange-traded
funds, are considered investments in the portfolio
securities of such investment
companies. |
● |
May
not engage in the business of underwriting securities of other issuers;
and |
● |
May
not purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any
of its agencies or instrumentalities) if, as a result, more than 25% of
the Fund’s total assets would be invested in the securities
of companies whose principal business activities are in the same industry,
except that the Fund will concentrate
its investments in the securities of companies engaged principally in the
real estate industry and may invest
all of its assets in such securities; however, the Fund may temporarily
invest less than 25% of its assets in such securities
during periods of adverse economic conditions in the real estate
industry. |
76 Investment
Restrictions
For
purposes of its policies and limitations, each of the Dynamic Dividend Fund,
Global Infrastructure Fund, Realty Income &
Growth Fund, Short Duration High Yield Municipal Fund and Ultra Short Municipal
Income Fund consider certificates of deposit
and demand and time deposits issued by a U.S. branch of a domestic bank or
savings and loan association having
capital, surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be “cash items.” For the
purposes of determining compliance with the Funds’ policies on concentrating in
any one industry, each Fund will endeavor
to consider the concentration policy of underlying investment companies when
determining a Fund’s compliance
with its concentration policy.
The Following are the Non-Fundamental
Operating Policies of the Funds Listed Below Which May Be Changed by the
Board of Trustees of the Trust Without
Shareholder Approval:
As
a matter of non-fundamental policy, each Fund except the Emerging
Markets Dividend
Fund, Global Equity Impact Fund
and High
Income Opportunities
Fund,
may not:
● |
acquire
any illiquid investment if, immediately after the acquisition, the Fund
would have invested more than 15% of its net
assets in illiquid investments that are assets (that is, investments that
the Fund reasonably expects cannot be sold in
current market conditions in seven calendar days without significantly
changing the market value of the investments). |
As
a matter of non-fundamental policy, each of the China A Fund, Emerging Markets
Fund, Emerging Markets ex-China Fund,
Emerging Markets Sustainable Leaders Fund, Infrastructure
Debt
Fund, Intermediate Municipal Income Fund, International
Small Cap Fund, U.S. Small Cap Equity Fund, Focused
U.S.
Small
Cap Equity
Fund and U.S. Sustainable Leaders
Fund
will not:
● |
acquire
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. |
As
a matter of non-fundamental policy, each of the Infrastructure
Debt
Fund and International Small Cap Fund (unless noted
below) currently does not intend to:
● |
borrow
money in an amount greater than 5% of its total assets except (i) for
temporary or emergency purposes and (ii)
by engaging in reverse repurchase agreements, dollar rolls, or other
investments or transactions described in the Fund’s
registration statement which may be deemed to be
borrowings; |
● |
purchase
securities on margin or make short sales, except (i) short sales against
the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall not be
deemed to constitute selling securities short,
and (v) that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions; |
● |
purchase
options, unless the aggregate premiums paid on all such options held by
the Fund at any time do not exceed 20%
of its total assets; or sell put options, if as a result, the aggregate
value of the obligations underlying such put options
would exceed 50% of its total assets; |
● |
purchase
warrants if as a result, such securities, taken at the lower of cost or
market value, would represent more than 5%
of the value of the Fund’s total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed
to have no value); |
● |
lend
portfolio securities in an amount greater than 33⅓% of its total
assets; |
● |
pledge,
mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the
extent related to the deposit of assets in escrow in connection with
purchase of securities on a forward commitment
or delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency
transactions, options, futures contracts, and options on futures
contracts; and |
● |
make
additional investments (including roll-overs) if the Fund’s borrowings
exceed 5% of its net assets. |
Each
of the China A Fund, Emerging Markets Sustainable Leaders Fund, Emerging Markets
ex-China Fund, Intermediate Municipal
Income Fund, U.S. Small Cap Equity Fund, Focused
U.S.
Small
Cap Equity
Fund and U.S. Sustainable Leaders Fund
may not:
● |
Sell
securities short (except for the U.S. Sustainable Leaders Fund and
Focused
U.S. Small Cap Equity
Fund), unless the Fund
owns or has the right to obtain securities equivalent in kind and amount
to the securities sold short or unless it covers
such short sales as required by the current rules and positions of the SEC
or its staff, and provided that short positions
in forward currency contracts, options, futures contracts, options on
futures contracts, or other derivative instruments
are not deemed to constitute selling securities short. The U.S.
Sustainable Leaders Fund and Focused
U.S. Small
Cap Equity
Fund may only sell securities short in accordance with the description
contained in its Prospectus or in
this SAI. |
● |
Purchase
securities on margin, except that the Funds may use margin to the extent
necessary to engage in short sales and
may obtain such short-term credits as are necessary for the clearance of
transactions; and provided that margin deposits
in connection with options, futures contracts, options on futures
contracts, transactions in currencies or other derivative
instruments shall not constitute purchasing securities on
margin. |
Investment
Restrictions 77
● |
Purchase
or otherwise acquire any security if, as a result, more than 15% of its
net assets would be invested in securities
that are illiquid. |
● |
Pledge,
mortgage or hypothecate any assets owned by the Fund except as may be
necessary in connection with permissible
borrowings or investments and then such pledging, mortgaging or
hypothecating may not exceed 33⅓% of
the Fund’s total assets at the time of such pledging, mortgaging or
hypothecating. |
Each
of the China A Fund, Emerging Markets Sustainable Leaders Fund, Emerging Markets
ex-China Fund, Intermediate Municipal
Income Fund, U.S. Small Cap Equity Fund, Focused
U.S.
Small
Cap Equity
Fund and U.S. Sustainable Leaders Fund
may not:
● |
Purchase
securities of other investment companies except (a) in connection with a
merger, consolidation, acquisition, reorganization
or offer of exchange, or (b) to the extent permitted by the 1940 Act or
any rules or regulations thereunder
or pursuant to any exemptions therefrom, however, the Funds may not
acquire 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. |
As
a matter of non-fundamental policy, the Emerging
Markets Dividend
Fund may not:
● |
Make
short sales of securities or maintain a short position, except that the
Fund may maintain short positions in forward
currency contracts, options and futures contracts and make short sales
“against the box.” |
● |
Purchase,
write or sell puts, calls, straddles, spreads or combinations thereof,
except that the Fund may (a) purchase or
write options on securities, indices, commodities and currencies and (b)
purchase or write options on futures contracts. |
● |
Purchase
securities of other investment companies except in connection with a
merger, consolidation, acquisition, reorganization
or offer of exchange, or as otherwise permitted under the 1940
Act. |
● |
Purchase
securities on margin, except that the Fund may obtain any short-term
credits necessary for the clearance of purchases
and sales of securities. For purposes of this restriction, the maintenance
of margin in connection with options,
forward contracts and futures contracts or related options will not be
deemed to be a purchase of securities on
margin. |
● |
Invest
more than 15% of the value of the Fund’s total assets in securities, which
may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily
available market quotations. For purposes of
this limitation, (a) repurchase agreements with maturities greater than
seven days and (b) time deposits maturing in
more than seven calendar days shall be considered
illiquid. |
As
a matter of non-fundamental policy, the Global Equity Impact Fund may
not:
● |
Make
short sales of securities or maintain a short position, except that the
Fund may maintain short positions in forward
currency contracts, options and futures contracts and make short sales
“against the box.” |
● |
Purchase
securities of other investment companies except in connection with a
merger, consolidation, acquisition, reorganization
or offer of exchange, or as otherwise permitted under the 1940
Act. |
● |
Purchase
securities on margin, except that the Fund may obtain any short-term
credits necessary for the clearance of purchases
and sales of securities. For purposes of this restriction, the maintenance
of margin in connection with options,
forward contracts and futures contracts or related options will not be
deemed to be a purchase of securities on
margin. |
● |
Invest
more than 15% of the value of the Fund’s total assets in securities, which
may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily
available market quotations. For purposes of
this limitation, (a) repurchase agreements with maturities greater than
seven days and (b) time deposits maturing in
more than seven calendar days shall be considered
illiquid. |
As
a matter of non-fundamental policy, the High
Income Opportunities
Fund
may not:
● |
Invest
more than 15% of the value of the Fund’s total assets in securities, which
may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily
available market quotations. For purposes of
this limitation, (a) repurchase agreements with maturities greater than
seven days and (b) time deposits maturing in
more than seven calendar days shall be considered
illiquid. |
With
respect to all Funds:
If
any percentage restriction or requirement described above is satisfied at the
time of investment, a later increase or
decrease in such percentage resulting from a change in NAV will not constitute a
violation of such restriction or requirement.
However, should a change in NAV or other external events cause a Fund’s
investments in illiquid securities including
repurchase agreements with maturities in excess of seven days, to exceed the
limit set forth above for such Fund’s
investment in illiquid securities, a Fund will act to cause the aggregate amount
of such securities to come within such
limit as soon as reasonably practicable. In such event, however, such Fund would
not be required to liquidate any portfolio
securities where a Fund would suffer a loss on the sale of such
securities.
78 Investment
Restrictions
The
investment objective of each Fund, except for the Dynamic Dividend Fund, Global
Infrastructure Fund and Realty
Income & Growth Fund, is not fundamental and may be changed by the Board of
Trustees without shareholder approval.
Internal
Revenue Code Restrictions
In
addition to the investment restrictions above, each Fund must be diversified
according to Code requirements. Specifically,
at each tax quarter end, each Fund’s holdings must be diversified so that (a) at
least 50% of the market value of
its total assets is represented by cash, cash items (including receivables),
U.S. Government securities, securities of other U.S.
regulated investment companies, and other securities, such other securities
limited so that no one issuer has a value greater
than 5% of the value of the Fund’s total assets and that the Fund holds no more
than 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of the Fund’s
assets is invested in the securities (other
than those of the U.S. Government or other U.S. regulated investment companies)
of any one issuer or of two or more
issuers of which the Fund holds 20% or more of the voting stock and which are
engaged in the same, similar, or related
trades or businesses or the securities of one or more qualified publicly traded
partnerships (defined as a partnership
whose interests are traded on an established securities market or are readily
tradable on a secondary market,
unless 90% or more of such partnership’s gross income is derived from its
business of investing in stock, securities or
currencies).
Investment
Restrictions 79
Disclosure
of Portfolio Holdings
The
Board of Trustees has adopted a policy on selective disclosure of portfolio
holdings in accordance with regulations
that seek to ensure that disclosure of information about portfolio securities is
in the best interest of Fund shareholders
and to address the conflicts between the interests of Fund shareholders and its
service providers. The policy provides
that divulging non-public portfolio holdings information to selected parties is
permissible only when a Fund has legitimate
business purposes for doing so and the recipients are subject to a duty of
confidentiality, including a duty not to trade
on the non-public information. In addition, the disclosure of a Fund’s portfolio
securities is permitted only where it is consistent
with the anti-fraud provisions of the federal securities laws and the Trust’s or
the Adviser’s or a Subadviser’s fiduciary
duties. The Trust, the Adviser, Subadvisers or any agent, or any employee
thereof (a “Fund Representative”) may not
disclose a Fund’s portfolio holdings information to any person other than in
accordance with the policy. For purposes of
the policy, “portfolio holdings information” means a Fund’s actual portfolio
holdings, as well as non-public information about
its trading strategies or pending transactions. Neither a Fund nor a Fund
Representative may solicit or accept any compensation
or other consideration in connection with the disclosure of portfolio holdings
information. A Fund Representative
may provide portfolio holdings information to third parties if such information
has been included in the Fund’s
public filings with the SEC or is disclosed on the Funds’ publicly accessible
website. The parties receiving such information
may include ratings agencies, individual or institutional investors, or
intermediaries that sell shares of a Fund.
Each
Fund posts onto the Trust’s internet site its securities holdings and its top
ten portfolio holdings as of the end of each
month. Such portfolio holdings are available no earlier than 7 business days
after the end of the previous month for equity
funds and no
earlier than 15 business days after the end of the previous month for fixed
income funds. Each Fund’s complete schedule
of portfolio holdings for the second and fourth quarters of each fiscal year are
included in the Fund’s semi-annual
and annual reports to shareholders. Each Fund files its complete schedule of
portfolio holdings with the SEC quarterly.
Each Fund’s full portfolio holdings as of its first and third fiscal quarters
will be made publicly available 60 days after
the end of each quarter on www.sec.gov.
If
a Fund Representative seeks to disclose portfolio holdings information that is
not publicly available to specific recipients
pursuant to circumstances not specifically addressed by the policy, the Fund
Representative must obtain approval
from the Trust’s Chief Compliance Officer prior to such disclosure. Exceptions
to the portfolio holdings release policy
described above can only be authorized by the Trust’s Chief Compliance Officer
and will be made only when:
● |
A
Fund has a legitimate business purpose and it is in the best interest of
the Fund to release portfolio holdings information
in advance of release to all shareholders or the general public;
and |
● |
The
recipient of the information provides written assurances that the
non-public portfolio holdings information will remain
confidential and that persons with access to the information will be
prohibited from trading based on the information. |
In
connection with providing services to the Funds, the Funds’ service providers
may receive portfolio holdings information
in advance of general release on an as needed basis. The service providers that
may receive portfolio holdings
information include:
80 Disclosure
of Portfolio Holdings
|
| |
Service
Provider |
Service |
Holdings
Access |
abrdn
Inc. |
Investment
management and administrator |
Complete
list on intraday basis with no lag |
abrdn Investments
Limited and abrdn Asia
Limited |
Investment
management |
Holdings
under Sub-adviser’s management on
intraday basis with no lag |
KPMG
LLP |
Independent
registered public accounting firm |
Complete
list on annual basis with no lag |
State
Street Bank and Trust Company |
Custodian,
fund accountant, sub-administrator |
Complete
list on intraday basis with no lag |
Charles
River Development |
Order
and execution management system |
Complete
list on intraday basis with no lag |
Citibank
NA and its affiliates |
Providers
of certain middle-and back-office services
to the Adviser and Sub-advisers |
Complete
list on monthly basis with no lag |
Lipper
Inc. |
Performance
and portfolio analytics reporting
for the Adviser and Sub-advisers |
Complete
list on monthly basis with no lag |
Morningstar,
Inc. |
Performance
and portfolio analytics reporting
for the Adviser and Sub-advisers |
Complete
list on monthly basis with no lag |
Bloomberg,
L.P. |
Performance
and portfolio analytics reporting
for the Adviser and Sub-advisers |
Complete
list on monthly basis with no lag |
FactSet
Research Systems, Inc. |
Performance
and portfolio analytics reporting
for the Adviser and Sub-advisers |
Complete
list on monthly basis with no lag |
Morgan
Stanley Capital International, Inc. |
Stock
index provider |
Complete
list on daily basis with one day lag |
ICE
Data Services |
Valuation
services |
Complete
list on monthly basis with no lag |
ISS
Governance |
Proxy
voting service |
Complete
list on annual basis with no lag |
In
addition, certain third parties are provided with nonpublic holdings information
by the Adviser or another service provider
on an ad hoc basis. These third parties may include: broker-dealers, borrowers
of the Funds’ portfolio securities, tax
agent services, pricing services and legal counsel.
The
service providers are subject to express or implied duties to keep all portfolio
holdings information that is not publicly
available confidential and not to trade on such information. In addition,
non-public portfolio holdings information may
be provided to mutual fund rating or ranking services or portfolio analytics
services prior to such information becoming
publicly available so long as (i) such disclosure is subject to confidentiality
agreement and trading restrictions or
(ii) the entity to which portfolio holdings information will be provided (a) has
adopted policies and/or procedures that seek
to ensure that such information will remain confidential and restrict the entity
and its employees from trading on the information
and (b) prior to disclosure, the Trust’s Chief Compliance Officer receives in
writing a copy of such policies and/or
procedures and determines they are acceptable.
The
Trust’s Chief Compliance Officer conducts periodic reviews of compliance with
the policy and provides annually a
report to the Board of Trustees regarding the operation of the policy,
exceptions and waivers granted under the policy and
any material changes recommended as a result of such review. Additionally, the
Trust’s Chief Compliance Officer will
provide quarterly reports to the Board of Trustees listing persons or entities
with whom the Trust or the Adviser has entered
into Confidentiality Agreements with respect to Trust business during the
quarter. The policy also provides that in the
event of a violation of the policy, the Board will receive a report at its next
quarterly meeting about any disclosures that
were made concerning the Trust’s portfolio holdings which will describe to whom
and under what circumstances such
disclosure was made.
Disclosure
of Portfolio Holdings 81
Board
of Trustees and Officers of the Trust
|
|
|
| |
TRUSTEES
WHO ARE NOT INTERESTED PERSONS (AS DEFINED IN THE 1940 ACT) OF THE TRUST
(“INDEPENDENT TRUSTEES”) |
NAME,
ADDRESS, AND YEAR OF
BIRTH |
POSITION(S)
HELD, LENGTH OF
TIME SERVED AND TERM OF
OFFICE* |
PRINCIPAL
OCCUPATION DURING PAST 5 YEARS |
NUMBER
OF PORTFOLIOS IN
FUND COMPLEX OVERSEEN
BY TRUSTEE** |
OTHER
DIRECTORSHIPS HELD BY TRUSTEE
DURING PAST 5 YEARS*** |
Radhika
Ajmera****
Year
of Birth: 1964 |
Trustee
since 2020 |
Ms.
Ajmera was appointed Chair of abrdn
Japan Equity Fund Inc in 2017, having
served as a director since 2014. She
has been an independent nonexecutive
director of abrdn Asia-Pacific
Income Fund VCC since 2015.
She is also an independent non-executive
director of abrdn Funds since
2020 and abrdn Global Income Fund
Inc, abrdn Asia-Pacific Income Fund
Inc and abrdn Australia Equity Fund
Inc since 2021. She has over 20 years’
experience in fund management,
predominantly in emerging
markets. She has also held a number
of UK closed end fund non-executive
directorships. Ms. Ajmera
is a graduate of the London School
of Economics. |
5
RICs consisting of 23
Portfolios |
None. |
P.
Gerald Malone****
Year
of Birth: 1950 |
Trustee
since December
2007
Chairman
of the Board |
Mr.
Malone is, by profession, a lawyer of
over 40 years. Currently, he is a nonexecutive
director of a number of U.S.
companies, including Medality Medical
(medical technology company)
since 2018. He is also Chairman
of many of the open and closed
end funds in the Fund Complex. He
previously served as a non-executive
director of U.S. healthcare
company Bionik Laboratories
Corp. (2018 - July 2022), as
Independent Chairman of UK companies
Crescent OTC Ltd (pharmaceutical
services) until February
2018; and fluidOil Ltd. (oil services)
until June 2018; U.S. company
Rejuvenan llc (wellbeing services)
until September 2017 and as chairman
of UK company Ultrasis plc (healthcare
software services company)
until October 2014. Mr. Malone
was previously a Member of Parliament
in the U.K. from 1983 to 1997
and served as Minister of State for
Health in the U.K. government from 1994
to 1997. |
9
RICs consisting of 27
Portfolios |
None. |
Rahn
K. Porter****
Year
of Birth: 1954 |
Trustee
since September
2016 |
Mr.
Porter is the Principal at RPSS Enterprises
(consulting and advisory) since
2019. He was the Chief Financial and
Administrative Officer of The Colorado
Health Foundation from 2013
to 2021. Mr. Porter was formerly the
CFO of Telenet, Inc. and Nupremis, Inc.
He also served as Treasurer of Qwest
Communications, Inc. and MediaOne
Group. Mr. Porter was previously
a board member and audit chair
for BlackRidge Financial Inc. and Community
First Bancshares, Inc. |
2
RICs consisting of 20
Portfolios |
Director
of Century Link Investment
Management
Company
since 2006, Director
of BlackRidge Financial
Inc. from 2004 to
2019. |
82 Board
of Trustees and Officers of the Trust
|
|
|
| |
TRUSTEES
WHO ARE NOT INTERESTED PERSONS (AS DEFINED IN THE 1940 ACT) OF THE TRUST
(“INDEPENDENT TRUSTEES”) |
NAME,
ADDRESS, AND YEAR OF
BIRTH |
POSITION(S)
HELD, LENGTH OF
TIME SERVED AND TERM OF
OFFICE* |
PRINCIPAL
OCCUPATION DURING PAST 5 YEARS |
NUMBER
OF PORTFOLIOS IN
FUND COMPLEX OVERSEEN
BY TRUSTEE** |
OTHER
DIRECTORSHIPS HELD BY TRUSTEE
DURING PAST 5 YEARS*** |
Warren
C. Smith****
Year
of Birth: 1955 |
Trustee
since December
2007 |
Mr.
Smith has been a founding partner of
MRB Partners Inc. (independent investment
research and consultancy firm)
since 2010. He has been a Director
of abrdn Asia-Pacific Income Fund
VCC (Canadian investment fund)
since 1993. |
1
RIC consisting of 19
Portfolios |
None. |
|
|
|
| |
TRUSTEES
WHO ARE INTERESTED PERSONS (AS DEFINED IN THE 1940 ACT) OF THE TRUST
(“INDEPENDENT TRUSTEES”) |
NAME,
ADDRESS, AND YEAR OF
BIRTH |
POSITION(S)
HELD, LENGTH OF
TIME SERVED AND TERM OF
OFFICE* |
PRINCIPAL
OCCUPATION DURING PAST 5 YEARS |
NUMBER
OF PORTFOLIOS IN
FUND COMPLEX OVERSEEN
BY TRUSTEE** |
OTHER
DIRECTORSHIPS HELD BY TRUSTEE
DURING PAST 5 YEARS*** |
Stephen
Bird****,†
Year
of Birth: 1967 |
Trustee
since June 2021 |
Mr.
Bird joined the Board of abrdn plc in
July 2020 as Chief Executive- Designate,
and was formally appointed
Chief Executive Officer in September
2020. Previously, Mr. Bird served
as chief executive officer of global
consumer banking at Citigroup from
2015, retiring from the role in November
2019. His responsibilities encompassed
all consumer and commercial
banking businesses in 19 countries,
including retail banking and wealth
management, credit cards, mortgages,
and operations and technology
supporting these businesses.
Prior to this, Mr. Bird was chief
executive for all of Citigroup’s Asia
Pacific business lines across 17 markets
in the region, including India and
China. Mr. Bird joined Citigroup in 1998,
and during his 21 years with the company
he held a number of leadership
roles in banking, operations and
technology across its Asian and Latin
American businesses. Before this, he
held management positions in the UK
at GE Capital – where he was director
of UK operations from 1996 to 1998
– and at British Steel. |
15
RICs consisting of
33 Portfolios |
None. |
* |
Each
Trustee holds office for an indefinite term until his successor is elected
and qualified. |
** |
The
abrdn Fund Complex consists of the Trust, which currently consists of 19
portfolios, abrdn Asia-Pacific Income Fund, Inc., abrdn Global Income
Fund,
Inc., abrdn Australia Equity Fund, Inc., abrdn Emerging Markets Equity
Income Fund, Inc., The India Fund, Inc., abrdn Japan Equity Fund, Inc.,
abrdn Income
Credit Strategies Fund, abrdn Global Dynamic Dividend Fund, abrdn Global
Premier Properties Fund, abrdn Total Dynamic Dividend Fund,
abrdn
Global Infrastructure Income Fund, abrdn National Municipal Income Fund,
abrdn Healthcare Investors, abrdn Life Sciences Investors, abrdn
Healthcare
Opportunities Fund, abrdn World Healthcare Fund
and abrdn ETFs (consisting of 3 Portfolios). |
*** |
Directorships
held in (1) any other investment companies registered under the 1940 Act,
(2) any company with a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) or (3) any company subject to the requirements of
Section
15(d) of the Exchange Act. |
**** |
Each
Trustee may be contacted by writing to the Trustee c/o abrdn Inc., 1900
Market Street, Suite 200, Philadelphia, Pennsylvania 19103, Attn: Megan
Kennedy. |
† |
Mr.
Bird is considered to be an “interested person” of the Trust as defined in
the 1940 Act because of his affiliation with the
Adviser. |
Board
of Trustees and Officers of the Trust 83
|
| |
OFFICERS
OF THE TRUST |
NAME,
ADDRESS, AND YEAR OF BIRTH |
POSITION(S)
HELD, LENGTH OF TIME SERVED AND TERM
OF OFFICE* |
PRINCIPAL
OCCUPATION DURING PAST 5 YEARS |
Alan
Goodson**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1974 |
President
and Chief Executive Officer
(Since
2022) |
Currently,
Executive Director, Product & Client Solutions
– Americas for abrdn Inc., overseeing Product
Management & Governance, Product Development
and Client Solutions for registered and
unregistered investment companies in the U.S., Brazil
and Canada. Mr. Goodson is Director and Vice
President of abrdn Inc. and joined abrdn Inc. in 2000. |
Joseph
Andolina**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1978 |
Vice
President and Chief Compliance Officer
(Since
2017) |
Currently,
Chief Risk Officer – Americas for abrdn Inc.
and serves as the Chief Compliance Officer for abrdn
Inc. Prior to joining the Risk and Compliance Department,
he was a member of abrdn Inc.’s Legal
Department, where he served as US Counsel since
2012. |
Michael
Marsico**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1980 |
Treasurer,
Chief Financial Officer and Principal
Accounting Officer
(Since
2023) |
Currently,
Senior Product Manager for abrdn Inc. Mr.
Marsico joined abrdn Inc. as a Fund Administrator
in 2014. |
Megan
Kennedy**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1974 |
Secretary
and Vice President
(Since
2009) |
Currently,
Senior Director, Product Governance for abrdn
Inc. Ms. Kennedy joined abrdn Inc. in 2005. |
Lucia
Sitar**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1971 |
Vice
President
(Since
2008) |
Currently,
Vice President and Head of Product Management
and Governance for abrdn Inc. since 2020.
Previously, Ms. Sitar was Managing U.S. Counsel
for abrdn Inc. She joined abrdn Inc. as U.S. Counsel
in July 2007. |
Ben
Moser**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1979 |
Vice
President
(Since
2018) |
Currently,
Head of Commercial Operations, Americas
for abrdn Inc. Mr. Moser joined abrdn Inc. in
July 2008. |
Katie
Gebauer**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1986 |
Vice
President
(Since
2023) |
Currently,
Chief Compliance Officer – ETFs and serves
as the Chief Compliance Officer for abrdn ETFs
Advisors LLC. Ms. Gebauer joined abrdn Inc. in 2014. |
Sharon
Ferrari**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1977 |
Vice
President
(Since
2022) |
Currently,
Director, Product Management for abrdn
Inc. Prior to that she was a Senior Fund Administration
Manager for abrdn Inc. Ms. Ferrari joined
the company in June 2008. |
84 Board
of Trustees and Officers of the Trust
|
| |
OFFICERS
OF THE TRUST |
NAME,
ADDRESS, AND YEAR OF BIRTH |
POSITION(S)
HELD, LENGTH OF TIME SERVED AND TERM
OF OFFICE* |
PRINCIPAL
OCCUPATION DURING PAST 5 YEARS |
Heather
Hasson**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1982 |
Vice
President
(Since
2022) |
Currently,
Senior Product Solutions and Implementation
Manager for abrdn Inc. Ms. Hasson joined
the company in November 2006. |
Brian
Kordeck**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1978 |
Vice
President
(Since
2022) |
Currently,
Senior Product Manager for abrdn Inc. Mr.
Kordeck joined abrdn Inc. as a Senior Fund Administrator
in 2013. |
Katherine
Corey**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1985 |
Vice
President
(Since
2023) |
Currently,
Senior Legal Counsel - Product Governance
for abrdn Inc. Prior to joining abrdn Inc.
in 2013, Ms. Corey was an associate at Faegre Drinker
Biddle & Reath LLP in Philadelphia. |
Andrew
Kim**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1983 |
Vice
President
(Since
2022) |
Currently,
Senior Product Governance Manager for
abrdn Inc. Mr. Kim joined abrdn Inc. as a Product Manager
in 2013. |
Robert
Hepp**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1986 |
Vice
President
(Since
2022) |
Currently,
Senior Product Governance Manager for
abrdn Inc. Mr. Hepp joined abrdn Inc. as a Senior Paralegal
in 2016. |
Matt
Kence**
abrdn
Inc. 28
State Street 17th
floor Boston,
MA 02109
Year
of Birth: 1974 |
Vice
President
(Since
2022) |
Currently,
Investment Director for abrdn Inc. |
George
Westervelt**
abrdn
Inc. 28
State Street 17th
floor Boston,
MA 02109
Year
of Birth: 1977 |
Vice
President
(Since
2022) |
Currently,
Head of Global High Yield and Head of U.S.
High Yield Research for abrdn Inc. |
Ben
Ritchie**
abrdn
Investments Limited 280
Bishopsgate London,
E2M 4AG
Year
of Birth: 1980 |
Vice
President
(Since
2022) |
Currently
Head of the Developed Markets Equity team
at abrdn. |
Board
of Trustees and Officers of the Trust 85
|
| |
OFFICERS
OF THE TRUST |
NAME,
ADDRESS, AND YEAR OF BIRTH |
POSITION(S)
HELD, LENGTH OF TIME SERVED AND TERM
OF OFFICE* |
PRINCIPAL
OCCUPATION DURING PAST 5 YEARS |
Svitlana
Gubriy**
abrdn
Inc. 1
George Street Edinburgh EH2
2LL
Year
of Birth: 1972 |
Vice
President
(Since
2022) |
Currently
Head of Indirect Real Assets at abrdn. |
Josh
Duitz**
abrdn
Inc. 875
Third Ave 4th
Floor, Suite 403 New
York, NY 10022
Year
of Birth: 1970 |
Vice
President
(Since
2022) |
Currently,
Head of Global Income at abrdn, Inc. Mr. Duitz
joined abrdn Inc. In 2018 from Alpine Woods Capital
Investors LLC where he was a Portfolio Manager. |
Jonathan
Mondillo**
abrdn
Inc. 875
Third Ave 4th
Floor, Suite 403 New
York, NY 10022
Year
of Birth: 1983 |
Vice
President
(Since
2022) |
Currently,
Head of U.S. Fixed Income. He joined the firm
in 2018. Previously he managed mutual funds at
Alpine Woods Capital Investors, LLC. |
Devan
Kaloo**
abrdn
Investments Limited 280
Bishopsgate London,
E2M 4AG
Year
of Birth: 1972 |
Vice
President
(Since
2022) |
Currently,
Global Head of Public Markets, Equities for
abrdn. Mr. Kaloo joined abrdn in 2000 as part of the
Asian equities team in Singapore. |
Chris
Colarik**
abrdn
Inc. 1900
Market Street Suite
200 Philadelphia,
PA 19103
Year
of Birth: 1972 |
Vice
President
(Since
2022) |
Currently
Head of U.S. Smaller Companies at abrdn Inc.
He joined the firm in March 2023. Previously, he was
a portfolio manager at Glenmede Investment Management. |
Nick
Robinson**
abrdn
Investments Limited 280
Bishopsgate London,
E2M 4AG
Year
of Birth: 1978 |
Vice
President
(Since
2022) |
Currently,
Senior Investment Director on the Global Emerging
Markets Equity team at abrdn since 2016.
Previously, Mr. Robinson was a Director and Head
of Brazilian Equities of abrdn’s operations in Sao
Paulo, Brazil from 2009 to 2016. Currently, Senior
Investment Director on the Global Emerging Markets
Equity team at abrdn since 2016. Previously,
Mr. Robinson was a Director and Head of
Brazilian Equities of abrdn’s operations in Sao Paulo,
Brazil from 2009 to 2016. |
* |
Each
officer holds office for an indefinite term at the pleasure of the Board
of Trustees and until his or her successor is elected and
qualified. |
** |
Ms.
Kennedy, Mr. Goodson, Mr. Andolina, Ms. Sitar, Mr. Moser, Ms. Gebauer,
Ms. Ferrari,
Ms. Hasson, Mr. Kordeck, Mr. Marsico, Ms. Corey, Mr. Kim,
Mr. Hepp,
Mr. Kence, Mr. Westervelt, Mr. Ritchie, Ms. Gubriy, Mr. Duitz, Mr. Kaloo,
Mr. Colarik
and Mr. Robinson
hold officer position(s) in one or more of the following:
abrdn Asia-Pacific Income Fund, Inc., abrdn Australia Equity Fund, Inc.,
abrdn Global Income Fund, Inc., abrdn Emerging Markets Equity Income
Fund, Inc., The India Fund, Inc., abrdn Japan Equity Fund, Inc., abrdn
Income Credit Strategies Fund, abrdn Global Dynamic Dividend Fund,
abrdn
Global Premier Properties Fund, abrdn Total Dynamic Dividend
Fund,
abrdn Global Infrastructure Income Fund, abrdn National Municipal
Income
Fund, abrdn Healthcare Investors, abrdn Life Sciences Investors, abrdn
Healthcare Opportunities Fund, abrdn World Healthcare Fund
and abrdn
ETFs (consisting of 3 portfolios), each of which may also be deemed to be
a part of the same “Fund Complex” as the Trust. |
Responsibilities
of the Board of Trustees
The
business and affairs of the Trust are managed under the direction of its Board
of Trustees subject to the laws of the
State of Delaware and the Trust’s Amended and Restated Agreement and Declaration
of Trust. The Board of Trustees sets
and reviews policies regarding the operation of the Trust, and directs the
officers to perform the daily functions of the Trust.
Additional
Information about the Board of Trustees
The
Board believes that each Trustee’s experience, qualifications, attributes or
skills on an individual basis and in combination
with those of the other Trustees lead to the conclusion that the Trustee
possesses the requisite experience, qualifications,
attributes and skills to serve on the Board. The Board believes that the
Trustees’ ability to review critically,
86 Board
of Trustees and Officers of the Trust
evaluate,
question and discuss information provided to them; to interact effectively with
the Adviser, Sub-advisers,
other service
providers, counsel and independent auditor; and to exercise effective business
judgment in the performance of their
duties, support this conclusion. The Board has also considered the contributions
that each Trustee can make to the Board
and the Funds. A Trustee’s ability to perform his duties effectively may have
been attained through the Trustee’s executive,
business, consulting, and/or legal positions; experience from service as a
Trustee of the Trust and other funds/portfolios
in the abrdn fund complex, other investment funds, public companies, or
non-profit entities or other organizations;
educational background or professional training or practice; and/or other life
experiences. In this regard, the
following specific experience, qualifications, attributes and/or skills apply as
to each Trustee in addition to the information
set forth in the table above: Ms. Ajmera, financial services, investment
management and executive experience
and board experience with investment management and fund companies; Mr. Bird,
investment management
experience as the Chief Executive Officer of abrdn plc and executive experience
with other financial services
and banking companies; Mr. Malone, legal background and public service
leadership experience, board experience
with other public and private companies, and executive and business consulting
experience; Mr. Porter, financial,
accounting and executive experience with other companies and board experience
with investment management
and fund companies; and
Mr. Smith, experience as managing editor and director of a financial
publications
firm.
The
Board believes that the significance of each Trustee’s experience,
qualifications, attributes or skills is an individual
matter (meaning that experience important for one Trustee may not have the same
value for another) and that
these factors are best evaluated at the Board level, with no single Trustee, or
particular factor, being indicative of Board
effectiveness. In its periodic self-assessment of the effectiveness of the
Board, the Board considers the complementary
individual skills and experience of the individual Trustees in the broader
context of the Board’s overall composition
so that the Board, as a body, possesses the appropriate (and appropriately
diverse) skills and experience to oversee
the business of the Trust. References to the qualifications, attributes and
skills of Trustees are pursuant to requirements
of the SEC, do not constitute holding out the Board or any Trustee as having any
special expertise or experience,
and shall not impose any greater responsibility or liability on any such person
or on the Board by reason thereof.
Board
and Committee Structure
The
Board of Trustees is composed of four
Independent Trustees and one Interested Trustee, Stephen Bird. The Board
has appointed Mr. Malone, an Independent Trustee, as Chairman. The Chairman
presides at meetings of the Trustees,
participates in the preparation of the agenda for meetings of the Board, and
acts as a liaison between the Independent
Trustees and the Trust’s management between Board meetings. Except for any
duties specified herein, the designation
of the Chairman does not impose on such 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 holds regular quarterly meetings each year to consider and address matters
involving the Trust and its Funds.
The Board also may hold special meetings to address matters arising between
regular meetings. The Independent
Trustees also meet outside the presence of management in executive session at
least quarterly and have engaged
separate, independent legal counsel to assist them in performing their oversight
responsibilities.
The
Board has established a committee structure that includes an Audit Committee
and Nominating and Corporate Governance
Committee (each discussed in more detail below) to assist the Board in the
oversight and direction of the business
affairs of the Funds, and from time to time may establish informal ad hoc
committees or working groups to review
and address the practices of the Funds with respect to specific matters. The
Committee system facilitates the timely
and efficient consideration of matters by the Trustees, and facilitates
effective oversight of compliance with legal and
regulatory requirements and of the Funds’ activities and associated risks. The
standing Committees currently conduct
an annual review of their charters, which includes a review of their
responsibilities and operations. The Nominating
and Corporate Governance Committee and the Board as a whole also conduct an
annual evaluation of the performance
of the Board, including consideration of the effectiveness of the Board’s
committee structure. Each Committee
is comprised entirely of Independent Trustees. The Board reviews its structure
regularly and believes that its leadership
structure, including having a super-majority of Independent Trustees, coupled
with an Independent Trustee as Chairman,
is appropriate because it allows the Board to exercise informed and independent
judgment over the matters under
its purview and it allocates areas of responsibility among the Committees and
the full Board in a manner that enhances
efficient and effective oversight.
The
Audit Committee
is comprised of Ms. Ajmera and Messrs. Malone, Porter
and Smith. Mr. Porter serves as Chair of the
Audit Committee
as well as the Audit Committee
Financial Expert. The purposes of the Audit Committee
are to: (a) annually
select, retain or terminate,
and recommend to the Trustees for their ratification, the selection, retention
or termination
of the
Trust’s independent auditor and, in connection therewith, to evaluate the terms
of the engagement (including
compensation of the independent auditor) and
the qualifications and independence of the independent auditor;
(b) review in advance, and consider approval of, any and all proposals by
Management
or the Adviser that the Trust,
the
Adviser
or their affiliated persons, employ the independent auditor to render
permissible non-audit services to the
Trust and to consider whether such services are consistent with the independent
auditor’s independence; (c) meet periodically
with the Trust’s independent auditor and
Management, including private meetings, as necessary (i) to review the
arrangements for and scope of the annual audit and any special audits, and the
fees proposed to be charged in
Board
of Trustees and Officers of the Trust 87
connection
with such services, (ii) review and discuss
the Trust’s annual audited financial statements,
(iii) to discuss
any matters
of concern relating to the Trust’s financial statements,
including any adjustments to such statements recommended
by
the independent auditor,
or the results of said audit(s), including matters required to be discussed by
PCAOB
Auditing Standard 1301, and Management’s response to such matters,
(iv) to
consider the
independent auditor’s comments
with
respect to
the Trust’s financial policies, procedures and internal accounting controls and
Management’s
responses
thereto, (v) to review the form of opinion the independent auditor proposes to
render to the Board and shareholders,
and (vi) to review the performance of the independent auditor;
(d) review and discuss policies with respect to
risk assessment and risk management
with respect to the Funds;
(e) set
clear hiring policies when the Trust considers hiring
employees or former employees of the independent auditor; (f) report its
activities to the full Board on a regular basis
and to make such recommendations with respect to the above and other matters as
the Committee may deem necessary
or appropriate; (g) review
annually with management and with
the
independent auditors
their separate evaluations
of the adequacy and effectiveness of the Trust’s system of internal controls;
and
(h) consider the independent
auditor’s comments with respect to the Trust’s financial policies, procedures
and
internal accounting controls
and Management’s responses thereto. The function of the Audit Committee is
oversight; it is the responsibility of the
Trust’s management and to the extent delegated to the Adviser and Administrator,
such Adviser and Administrator
to maintain
appropriate systems for accounting and internal controls.
It is the responsibility of the Trust’s independent auditor
to plan and carry out a proper audit. The independent auditor is directly
accountable to the Audit
Committee and must
report directly to the Audit Committee.
Each of the members is
able to understand basic financial statements, including
the Fund’s balance sheet, income statement and statement of cash
flows
and are not interested persons of the Trust,
as defined in the 1940 Act.
The Audit Committee met 4 times during the fiscal year ended October 31,
2023.
The
Nominating and Corporate Governance Committee (“Nominating Committee”) is
comprised of Ms. Ajmera and
Messrs. Malone, Porter and Smith. Mr. Malone serves as Chair of the Nominating
Committee.
The Nominating Committee
has the following responsibilities: (1) to select and nominate all persons for
election or appointment as Trustees
of the Trust (provided that nominees for independent Trustee are recommended for
selection and approval by all
of the incumbent independent Trustees then serving on the Board); (2) to review,
discuss, and make recommendations
to the Board, relating to those issues that pertain to the effectiveness of the
Board in carrying out its responsibilities
in governing the Fund and overseeing the management of the Fund, including: (a)
composition of the Board,
including size, areas of expertise represented, tenure of the directors,
including term limits and/or age limits, (b) committee
assignments, (c) the role of the Board’s committees, including the scope of each
committee’s responsibilities, and
(d) the role of the Independent Directors, including periodic review of
governance policies adopted by the Board; and
(3) to implement (or cause to be implemented) an annual evaluation of the
performance of the Board and the organization
and effectiveness of its committees. The Nominating Committee reports to the
full Board with recommendations
of any appropriate changes to the Board.
The
Nominating Committee will consider nominees recommended by shareholders. When
considering whether to add
additional or substitute Trustees to the Board of Trustees of the Trust, the
Trustees take into account any proposals for candidates
that are properly submitted to the Trust’s Secretary. Shareholders wishing to
present one or more candidates for
Trustee for consideration may do so by submitting a signed written request to
the Trust’s Secretary at attn: Secretary, abrdn
Funds, 1900 Market Street, Suite 200, Philadelphia, Pennsylvania 19103, which
includes the following information: (i) name
and address of shareholder and, if applicable, name of broker or record holder;
(ii) number of shares owned; (iii) name
of Fund(s) in which shares are owned; (iv) whether the proposed candidate(s)
consent to being identified in any proxy
statement utilized in connection with the election of Trustees; (v) the name and
background information of the proposed
candidates and (vi) a representation that the candidate or candidates are
willing to provide additional information
about themselves, including assurances as to their independence. The Nominating
Committee met 2 times during
the fiscal year ended October 31, 2023.
The
Funds are subject to a number of risks, including, among others, investment,
compliance, operational and valuation
risks. Risk oversight forms part of the Board’s general oversight of the Funds
and is addressed as part of various Board
and Committee activities. The Board has adopted, and periodically reviews,
policies and procedures designed to address
these risks. Different processes, procedures and controls are employed with
respect to different types of risks. Day-to-day
risk management functions are subsumed within the responsibilities of the
Adviser, who carries out the Trust’s
investment management and business affairs, and also by the Funds’ Subadvisers,
as applicable, and other service
providers in connection with the services they provide to the Funds. Each of the
Adviser, Subadvisers and other service
providers have their own, independent interest in risk management, and their
policies and methods of risk management
will depend on their functions and business models. As part of its regular
oversight of the Trust, the Board, directly
and/or through a Committee, interacts with and reviews reports from, among
others, the Adviser, Subadvisers, and
the Trust’s other service providers (including the Trust’s distributor and
transfer agent), the Trust’s Chief Compliance Officer,
the Trust’s independent registered public accounting firm, legal counsel to the
Trust, and internal auditors, as appropriate,
relating to the operations of the Trust. The Board also requires the Adviser to
report to the Board on other matters
relating to risk management on a regular and as-needed basis. The Board
recognizes that it may not be possible to
identify all of the risks that may affect the Trust or to develop processes and
controls to eliminate or mitigate their occurrence
or effects. The Board may, at any time and in its discretion, change the manner
in which it conducts risk oversight.
88 Board
of Trustees and Officers of the Trust
Ownership
of Shares of abrdn Funds
As
of December 31, 2023,
the Trustees held shares of the Funds and of the abrdn Family of Investment
Companies as
indicated below.
|
| |
INDEPENDENT
TRUSTEES |
Name
|
Fund/Dollar
Range of Fund Shares Owned |
Aggregate
Dollar Range of Shares Owned
in Registered Investment Companies
Overseen by Trustee in the
Family of Investment Companies* |
Radhika
Ajmera |
abrdn
Emerging Markets Fund - $10,001-$50,000 |
$10,001
- $50,000 |
P.
Gerald Malone |
abrdn
Emerging Markets Fund - $1-$10,000 |
$50,001-$100,000 |
|
abrdn
Emerging Markets Sustainable Leaders Fund - $1-$10,000 |
|
Rahn
K. Porter |
abrdn
Emerging Markets Fund - $10,001-$50,000 |
$50,001-$100,000 |
Warren
C. Smith |
abrdn
Emerging Markets Fund - $10,001-$50,000 |
$10,001
- $50,000 |
|
| |
INTERESTED
TRUSTEE |
Name
|
Fund/Dollar
Range of Fund Shares Owned |
Aggregate
Dollar Range of Shares Owned
in Registered Investment Companies
Overseen by Trustee in the Family
of Investment Companies* |
Stephen
Bird |
None |
$50,001-$100,000 |
* |
As
of December 31, 2023,
the Family of Investment Companies consisted of the Trust, which contained
19
portfolios and abrdn ETFs (consisting of 3 portfolios);
however, each Trustee did not serve on the Board of every fund in such
Family of Investment Companies. Ownership information is provided
with respect to only those funds that each Trustee oversaw as of December
31, 2023. |
As
of January 31, 2024,
the Officers and Trustees, as a group, owned of record and beneficially less
than 1% of each Fund’s
shares.
Compensation
of Trustees
The
Compensation Table below sets forth the total compensation that each Trustee
received from the Trust and the Fund
Complex (as defined below) for the fiscal year ended October 31, 2023.
|
|
|
| |
INDEPENDENT
TRUSTEES |
Name
of Trustee |
Aggregate
Compensation
from the
Trust |
Pension
Retirement Benefits
Accrued as Part
of Trust Expenses |
Estimated
Annual Benefits
Upon Retirement |
Total
Compensation from
the Fund Complex* |
Radhika
Ajmera |
$114,211 |
None |
None |
$336,421 |
P.
Gerald Malone |
$135,045 |
None |
None |
$613,816 |
Rahn
K. Porter |
$133,221 |
None |
None |
$191,096 |
Steven
N. Rappaport(1)
|
$107,413 |
None |
None |
$182,926 |
Warren
C. Smith |
$120,721 |
None |
None |
$149,601 |
(1) |
Mr.
Rappaport retired from the Board effective September 8,
2023. |
|
|
|
| |
INTERESTED
TRUSTEE |
Name
|
Aggregate
Compensation
from the
Trust |
Pension
Retirement Benefits
Accrued as Part
of Trust Expenses |
Estimated
Annual Benefits
Upon Retirement |
Total
Compensation from
the Fund Complex* |
Stephen
Bird |
None |
None |
None |
None |
* |
As
of October 31, 2023,
the abrdn Fund Complex consisted of the Trust, which contained
19
portfolios, as well as abrdn Asia-Pacific Income Fund, Inc., abrdn
Global Income Fund, Inc., abrdn Australia
Equity Fund, Inc., abrdn Emerging Markets Equity Income Fund, Inc., The
India Fund, Inc., abrdn Japan Equity
Fund, Inc., abrdn Income
Credit Strategies Fund, abrdn Global
Dynamic Dividend Fund, abrdn Global
Premier Properties Fund, abrdn Total Dynamic
Dividend Fund,
abrdn Global Infrastructure Income Fund, abrdn National Municipal Income
Fund, abrdn Healthcare Investors, abrdn Life Sciences
Investors, abrdn Healthcare Opportunities Fund, abrdn World Healthcare
Fund
and abrdn ETFs (consisting of 3 portfolios). |
The
Trust does not maintain any pension or retirement plans for the Officers or
Trustees of the Trust.
Board
of Trustees and Officers of the Trust 89
Sales
Loads
Class
A and Class A1 shares
may be sold at NAV without payment of any sales charge to Trustees and retired
Trustees of the Trust and
to directors, officers and employees (including retired directors, officers and
employees and immediate family members
of abrdn and its affiliates). The sales load waivers are due to the nature of
the investors and the reduced sales effort
and expenses that are needed to obtain such investment. See “Waiver of Class A
and Class A1 Sales
Charges” for more information.
Code
of Ethics
Federal
law requires the Trust, the Adviser and Subadvisers and its principal
underwriter to adopt codes of ethics which
govern the personal securities transactions of their respective personnel.
Accordingly, each such entity has adopted
a Code of Ethics pursuant to which their respective personnel may invest in
securities for their personal accounts
(including securities that may be purchased or held by the Trust). Copies of
these Codes of Ethics are on file with
the SEC and are available to the public.
Proxy
Voting Policies and Procedures
Regulations
under the federal securities laws require the Trust, the Adviser and Subadvisers
to adopt procedures for voting
proxies (“Proxy Voting Policies and Procedures”) and to provide a summary of
those Proxy Voting Policies and Procedures
used to vote the securities held by the Funds. The Trust has adopted proxy
voting policies and procedures that
delegate the responsibility for proxy voting to the Adviser and Subadvisers, as
applicable. The Adviser and Subadvisers
have adopted proxy voting policies and procedures, which have been reviewed and
approved by the Funds’ Board,
to ensure the proper and timely voting of the proxies on behalf of the Funds.
Moreover, the Adviser will assist the Funds
in the preparation of the Funds’ complete proxy voting record on Form N-PX for
the twelve-month period ended June
30, which must be filed with the SEC by no later than August 31 of each year.
Any material changes to the proxy voting
policies and procedures of the Funds or the Adviser and Subadvisers will be
submitted to the Board for approval or review,
as the case may be. For additional information, also attached hereto in Appendix
C is the Adviser’s and Subadvisers’
Listed Company Stewardship Guidelines, which among other things, expands upon
how the Adviser and Sub-advisers
approach environmental, social and governance issues when engaging with company
management and voting
proxies. Adviser’s and Subadvisers’ proxy voting policies and procedures
attached hereto as Appendix C.
Information
about how the Funds voted proxies relating to portfolio securities during the
most recent 12 month period
ended June 30 is available after August 31 of the relevant year (1) without
charge, upon request, by calling 866-667-9231
and (2) on the SEC’s website at http://www.sec.gov.
90 Board
of Trustees and Officers of the Trust
Investment
Advisory and Other Services
Trust
Expenses
The
Trust pays the compensation of the Trustees who are not employees of abrdn, or
its affiliates, and all expenses (other
than those assumed by the Adviser), including governmental fees, interest
charges, taxes, membership dues in the Investment
Company Institute allocable to the Trust; investment advisory fees and any Rule
12b-1 fees; fees under the Trust’s
Fund Administration and Transfer Agency Agreements, which includes the expenses
of calculating the Funds’ NAVs;
fees and expenses of independent certified public accountants and legal counsel
to the Trust and to the Independent
Trustees; expenses of preparing, printing, and mailing shareholder reports,
notices, proxy statements, and reports
to governmental offices and commissions; expenses connected with the execution,
recording, and settlement of portfolio
security transactions; short sale dividend expenses; insurance premiums;
administrative services fees under an Administrative
Services Plan; fees and expenses of the custodian for all services to the Trust;
expenses of shareholder meetings;
and expenses relating to the issuance, registration, and qualification of shares
of the Trust. The Adviser may, from
time to time, agree to voluntarily or contractually waive advisory fees, and if
necessary reimburse expenses, in order to
limit total operating expenses for each Fund and/or classes, as described
below.
Investment
Adviser and Subadvisers
Under
the Investment Advisory Agreement with the Trust, abrdn manages the Funds in
accordance with the policies and
procedures established by the Trustees.
Except
as described below, the Adviser manages the day-to-day investments of the assets
of the Funds. For certain Funds,
the Adviser also provides investment management evaluation services in initially
selecting and monitoring on an ongoing
basis the performance of one or more Subadvisers who manage the investment
portfolio of a particular Fund. The
Adviser is also authorized to select and place portfolio investments on behalf
of such subadvised Funds; however, the Adviser
does not intend to do so as a routine matter at this time.
Certain
of the Funds are subadvised by abrdn Investments Limited (“aIL”)
and abrdn Asia Limited (“aAL”),
affiliates of the
Adviser. The Adviser and Subadvisers are each wholly-owned subsidiaries of abrdn
(Holdings) PLC. abrdn (Holdings) PLC
is a wholly-owned subsidiary of abrdn plc. abrdn plc, its affiliates and
subsidiaries are referred to herein as the “abrdn”.
abrdn, combined with its subsidiaries and affiliates, manages approximately
$467.4
billion in
assets as of December
31, 2023.
abrdn provides asset management and investment solutions for clients and
customers worldwide and
also has a strong position in the pensions and savings market.
In
rendering investment advisory services, the Adviser, aAL
and aIL
may use the resources of investment adviser subsidiaries
of abrdn plc. These affiliates have entered into a memorandum of
understanding/personnel sharing procedures
pursuant to which investment professionals from each affiliate may render
portfolio management and research
services to U.S. clients of the abrdn plc affiliates, including the Funds, as
associated persons of the Adviser or Subadvisers.
No remuneration is paid by the Funds with respect to the memorandum of
understanding/personnel sharing
arrangements.
The
following Funds are subadvised:
abrdn
China A Fund
abrdn
Dynamic Dividend Fund
abrdn
Emerging Markets Dividend Fund
abrdn
Emerging Markets ex-China Fund
abrdn
Emerging Markets Fund
abrdn
Emerging Markets Sustainable Leaders Fund
abrdn
Global Equity Impact Fund
abrdn
Global Infrastructure Fund
abrdn
Infrastructure Debt Fund
abrdn
International Small Cap Fund
abrdn
Realty Income & Growth Fund
abrdn
Inc.
abrdn
pays the compensation of the officers of the Trust employed by abrdn. abrdn also
furnishes, at its own expense,
all necessary administrative services, office space, equipment, and clerical
personnel for servicing the investments
of the Trust and maintaining its investment advisory facilities, and executive
and supervisory personnel for managing
the investments and effecting the portfolio transactions of the Trust. In
addition, abrdn pays, out of its legitimate
profits, broker-dealers, trust companies, transfer agents and other financial
institutions in exchange for their selling
of shares of the Trust’s series or for recordkeeping or other shareholder
related services.
The
Investment Advisory Agreement also specifically provides that abrdn, including
its directors, officers, and employees,
shall not be liable for any error of judgment, or mistake of law, or for any
loss arising out of any investment, or for
any act or omission in the execution and management of the Trust, except for
willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or by reason of reckless disregard of its
obligations and duties under the
Investment
Advisory and Other Services 91
Agreement.
The Agreement continues in effect for an initial period of no more than two
years, and thereafter shall continue
automatically for successive annual periods provided such continuance is
specifically approved at least annually
by the Trustees, or by vote of a majority of the outstanding voting securities
of the Trust, and, in either case, by a majority
of the Trustees who are not parties to the Agreement or interested persons of
any such party. The Agreement terminates
automatically in the event of its “assignment,” as defined under the 1940 Act.
It may be terminated as to a Fund
without penalty by vote of a majority of the outstanding voting securities of
that Fund, or by either party, on not less than
60 days’ written notice. The Agreement further provides that abrdn may render
similar services to others.
abrdn
Inc., located at 1900 Market Street, Suite 200, Philadelphia, Pennsylvania
19103, is indirectly owned by abrdn plc.
Stephen Bird, Trustee of the Trust, is the CEO of abrdn plc.
For
services provided under the Investment Advisory Agreement, abrdn receives an
annual fee paid monthly based on
average daily net assets of the applicable Fund according to the following
schedule:
|
| |
Fund
|
Asset |
Investment
Advisory
Fee |
abrdn
China A Share Equity Fund |
$0
up to $500 million |
0.85% |
|
$500
million up to $2 billion |
0.80% |
|
$2
billion and more |
0.75% |
abrdn
Dynamic Dividend Fund |
$0
up to $250 million |
1.00% |
|
$250
million and more |
0.95% |
abrdn
Emerging Markets Dividend Fund |
$0
up to $500 million |
0.75% |
|
$500
million up to $2 billion |
0.73% |
|
$2
billion and more |
0.70% |
abrdn
Emerging Markets ex-China Fund |
$0
up to $500 million |
0.80% |
|
$500
million up to $2 billion |
0.75% |
|
$2
billion and more |
0.70% |
abrdn
Emerging Markets Fund |
All
Assets |
0.90% |
abrdn
Emerging Markets Sustainable Leaders Fund |
All
Assets |
0.80% |
abrdn
Global Equity Impact Fund |
$0
up to $500 million |
0.75% |
|
$500
million up to $2 billion |
0.73% |
|
$2
billion and more |
0.70% |
abrdn
Global Infrastructure Fund |
$0
up to $250 million |
0.75% |
|
$250
million up to $750 million |
0.70% |
|
$750
million up to $1 billion |
0.65% |
|
$1
billion and more |
0.55% |
abrdn
High Income Opportunities Fund |
$0
up to $500 million |
0.55% |
|
$500
million up to $1 billion |
0.525% |
|
$1
billion and more |
0.50% |
abrdn
Infrastructure Debt Fund |
$0
up to $500 million |
0.50% |
|
$500
million up to $1 billion |
0.475% |
|
$1
billion and more |
0.45% |
abrdn
Intermediate Municipal Income Fund |
$0
up to $250 million |
0.425% |
|
$250
million up to $1 billion |
0.375% |
|
$1
billion and more |
0.355% |
abrdn
International Small Cap Fund |
$0
up to $100 million |
0.85% |
|
$100
million and more |
0.75% |
abrdn
Realty Income & Growth Fund |
All
Assets |
0.80% |
abrdn
Short Duration High Yield Municipal Fund |
$0
up to $250 million |
0.55% |
|
$250
million and more |
0.50% |
abrdn
Ultra Short Municipal Income Fund |
All
Assets |
0.40% |
abrdn
U.S. Small Cap Equity Fund |
$0
up to $100 million |
0.95% |
|
$100
million or more |
0.80% |
92 Investment
Advisory and Other Services
|
| |
Fund
|
Asset |
Investment
Advisory
Fee |
abrdn
Focused U.S. Small Cap Equity Fund |
$0
up to $500 million |
0.75% |
|
$500
million up to $2 billion |
0.70% |
|
$2
billion and more |
0.65% |
abrdn
U.S. Sustainable Leaders Fund |
$0
up to $500 million |
0.70% |
|
$500
million up to $2 billion |
0.65% |
|
$2
billion and more |
0.60% |
Limitation
of Fund Expenses
In
the interest of limiting the expenses of the Funds, abrdn may from time to time
waive some or all of its investment advisory
fee or reimburse other fees for any of the Funds. In this regard, abrdn has
entered into written expense limitation agreements
with the Trust on behalf of the Funds. Pursuant to the expense limitation
agreements, abrdn has agreed to waive
or limit its fees and to assume other expenses to the extent necessary, subject
to certain exclusions, to limit the total annual
operating expenses of each Class of each such Fund to the limits described
below. With respect to the Dynamic Dividend
Fund, Global Infrastructure Fund, Realty Income & Growth Fund, Short
Duration High Yield Municipal Fund and Ultra
Short Municipal Income Fund, this limit excludes interest, brokerage
commissions, Acquired Fund Fees and Expenses and
extraordinary expenses. With
respect to the Emerging Markets Dividend Fund, Global Equity Impact Fund and
High Income
Opportunities Fund,
this limit excludes certain Fund expenses, including any taxes, interest,
brokerage fees, short sale
dividend expenses, Acquired Fund Fees and Expenses, and
12b-1
fees
for Class A shares
and
extraordinary expenses
for a Fund. For
all other Funds of the Trust,
this limit excludes certain Fund expenses, including any taxes, interest,
brokerage fees, short sale dividend expenses, Acquired Fund Fees and Expenses,
12b-1
fees,
administrative services
fees, transfer agent out-of-pocket expenses
for Class A shares,
Class R shares and Institutional Service Class shares
and
extraordinary expenses for a Fund. Please note that the waiver of fees will
cause the total return and yield of a Fund
to be higher than they would otherwise be in the absence of such a
waiver.
abrdn
may request and receive reimbursement from a Fund of the advisory fees waived
and other expenses reimbursed
pursuant to the expense limitation agreements at a later date not to exceed
three years from the fiscal year in
which the corresponding reimbursement to the Fund was made. No reimbursement
will be made unless: (i) the total annual
expense ratio of the class making such reimbursement is less than the limit set
forth below; and (ii) the payment of
such reimbursement is approved by the Board of Trustees on a quarterly basis
(the “Reimbursement Requirements”). If the
Board approves any changes in the waiver terms or limitations, reimbursements
are only permitted to the extent that the
terms of the expense limitation agreement that were in effect at the time of the
waiver are met at the time that reimbursement
is approved. Except as provided for in the expense limitation agreement,
reimbursement of amounts previously
waived or assumed by abrdn is not permitted.
abrdn
has agreed contractually to waive, through February 28,
2025,
advisory fees and, if necessary, reimburse expenses
in order to limit total annual fund operating expenses of the Trust, excluding
certain expenses as described above,
as follows:
| |
Name
of Fund/Class |
2024
Expense Limitation* |
abrdn
China A Share Equity Fund |
0.99% |
abrdn
Dynamic Dividend Fund |
|
Institutional
Class |
1.25% |
Class
A |
1.50% |
abrdn
Emerging Markets Fund |
1.10% |
abrdn
Emerging Markets ex-China Fund |
0.99% |
abrdn
Emerging Markets Sustainable Leaders Fund |
1.10% |
abrdn
Infrastructure Debt Fund |
0.65% |
abrdn
Global Equity Impact Fund |
0.90% |
abrdn
High Income Opportunities Fund |
0.70% |
abrdn
Global Infrastructure Fund |
|
Institutional
Class |
0.99% |
Class
A |
1.24% |
abrdn
Intermediate Municipal Income Fund |
0.50% |
abrdn
International Small Cap Fund |
0.99% |
abrdn
Emerging Markets Dividend Fund |
0.90% |
Investment
Advisory and Other Services 93
| |
Name
of Fund/Class |
2024
Expense Limitation* |
abrdn
Realty Income & Growth Fund |
|
Institutional
Class |
0.99% |
Class
A |
1.24% |
abrdn
Short Duration High Yield Municipal Fund |
|
Institutional
Class |
0.65% |
Class
A |
0.90% |
Class
C |
1.65% |
abrdn
Ultra Short Municipal Income Fund |
|
Institutional
Class |
0.45% |
Class
A |
0.70% |
Class
A1 |
0.70% |
abrdn
U.S. Small Cap Equity Fund |
0.99% |
abrdn
U.S. Sustainable Leaders Fund |
0.90% |
abrdn
Focused U.S. Small Cap Equity Fund |
0.90% |
* |
The
Expense Limitation is effective as of February 29,
2024,
and may not be terminated before February 28,
2025
without the approval of the Independent
Trustees. |
Predecessor
Adviser
As
explained in the “General Information” section of this SAI, the Funds in this
SAI were created as part of the reorganizations
of the Aberdeen Investment Funds Predecessor Funds into newly created series of
the Trust. Prior to the reorganizations,
investment advisory services for the Aberdeen Investment Funds Predecessor Funds
were provided by the
Adviser (the “Predecessor Adviser”), which is the same as each Fund’s current
Adviser. The Aberdeen Investment Funds
Predecessor Funds were obligated to pay a monthly fee based on average daily net
assets of the applicable Aberdeen
Investment Funds Predecessor Fund. The contractual advisory fees paid by each
Aberdeen Investment Fund Predecessor
Fund to the Predecessor Adviser are shown in the following
schedule:
|
| |
Fund
|
Asset |
Investment
Advisory
Fee |
abrdn
Emerging Markets Dividend Fund |
The
first $500 million in average daily net assets; |
0.80% |
|
The
next $1.5 billion in average daily net assets; and |
0.78% |
|
Daily
net assets over $2 billion |
0.75% |
abrdn
Global Equity Impact Fund |
The
first $500 million in average daily net assets; |
0.80% |
|
The
next $1.5 billion in average daily net assets; and |
0.78% |
|
Daily
net assets over $2 billion |
0.75% |
abrdn
High Income Opportunities Fund |
The
first $5.0 billion in average daily net assets; |
0.65% |
|
The
next $2.5 billion in average daily net assets; |
0.63% |
|
The
next $2.5 billion in average daily net assets; and |
0.60% |
|
Daily
net assets over $10 billion |
0.59% |
The
amounts paid by the Aberdeen Investment Funds Predecessor Funds to the
Predecessor Adviser for the applicable
fiscal years ended October 31 is set forth in the table below.
Investment
Advisory Fees
The
table below shows the investment advisory fees paid by each Fund to the Adviser
(which includes amounts paid by
the Adviser to the affiliated Subadviser(s), as applicable) and the advisory
fees waived and additional fund expenses reimbursed,
if any, by the Adviser for the fiscal years ended October 31, 2023,
2022 and 2021
(or for the life of the Fund if shorter).
Advisory fee information for the Emerging
Markets Dividend
Fund, Global Equity Impact Fund and High
Income Opportunities
Fund
for the periods prior to December 3, 2021 reflects fees paid by the Aberdeen
Investment Funds Predecessor
Funds to the Adviser for the past three fiscal years ended October 31 is set
forth in the table below.
94 Investment
Advisory and Other Services
|
|
|
|
|
|
|
|
| |
|
Year
Ended October 31, 2023 |
|
Year
Ended October 31, 2022 |
|
Year
Ended October 31, 2021 |
|
Fund
|
Fees
Paid |
Fees
Waived/Reimbursed |
Recoupment of
Prior Fees Waived |
Fees
Paid |
Fees
Waived/Reimbursed |
Recoupment of
Prior Fees Waived |
Fees
Paid |
Fees
Waived/Reimbursed |
Recoupment of
Prior Fees Waived |
China
A Fund |
$305,374 |
$158,769 |
$0 |
$514,523 |
$299,918 |
$0 |
$667,889 |
$244,894 |
$0 |
Dynamic
Dividend Fund |
$1,037,433 |
$119,893 |
$0 |
$1,155,648 |
$104,327 |
$0 |
$1,256,000 |
$180,278 |
$0 |
Emerging
Markets ex-China
Fund |
$283,908 |
$296,060 |
$0 |
$236,354 |
$183,875 |
$0 |
$267,569 |
$191,740 |
$0 |
Emerging
Markets Fund
|
$19,673,914 |
$1,294,758 |
$0 |
$31,331,992 |
$3,610,371 |
$7,853 |
$47,131,314 |
$1,800,053 |
$0 |
Emerging
Markets Sustainable
Leaders Fund
|
$654,746 |
$186,614 |
$0 |
$1,214,612 |
$262,777 |
$0 |
$1,799,302 |
$38,869 |
$0 |
Infrastructure
Debt Fund(1)
|
$198,039 |
$201,396 |
$0 |
$343,462 |
$507,424 |
$0 |
$163,090 |
$540,814 |
$0 |
Global
Equity Impact
Fund(2),(3)
|
$368,958 |
$202,030 |
$0 |
$425,395 |
$300,067 |
$0 |
$1,128,359 |
$331,787 |
$0 |
High
Income Opportunities
Fund(2),(4)
|
$600,912 |
$310,592 |
$0 |
$736,148 |
$439,426 |
$0 |
$579,749 |
$243,745 |
$0 |
Global
Infrastructure
Fund |
$410,904 |
$166,135 |
$0 |
$461,041 |
$181,503 |
$0 |
$447,783 |
$207,420 |
$0 |
Intermediate
Municipal
Income Fund |
$198,661 |
$215,294 |
$0 |
$229,083 |
$206,321 |
$0 |
$271,702 |
$233,143 |
$0 |
International
Small Cap
Fund |
$1,365,477 |
$361,392 |
$0 |
$2,036,968 |
$386,527 |
$0 |
$1,727,393 |
$261,986 |
$0 |
Emerging
Markets Dividend
Fund(2),(5)
|
$624,188 |
$260,483 |
$0 |
$795,934 |
$426,614 |
$0 |
$985,628 |
$570,392 |
$0 |
Realty
Income & Growth
Fund |
$402,310 |
$186,600 |
$0 |
$512,380 |
$214,703 |
$0 |
$530,610 |
$245,459 |
$0 |
Short
Duration High Yield
Municipal Fund |
$941,197 |
$448,911 |
$0 |
$2,183,044 |
$760,410 |
$0 |
$2,247,203 |
$812,551 |
$0 |
Ultra
Short Municipal Income
Fund |
$3,196,687 |
$1,869,917 |
$0 |
$4,045,200 |
$2,289,342 |
$0 |
$5,541,935 |
$3,286,759 |
$0 |
U.S.
Small Cap Equity
Fund |
$4,794,673 |
$674,100 |
$0 |
$7,495,875 |
$573,835 |
$0 |
$8,327,634 |
$604,829 |
$0 |
U.S.
Sustainable Leaders
Fund |
$2,581,429 |
$290,346 |
$0 |
$3,101,261 |
$209,581 |
$0 |
$3,487,972 |
$216,967 |
$0 |
Focused
U.S. Small Cap
Equity Fund |
$106,214 |
$159,457 |
$0 |
$139,684 |
$213,043 |
$0 |
$122,196 |
$202,597 |
$0 |
(1) |
Prior
to the change in the Fund’s name, strategy and fee structure on August 18,
2023, the management fee rate for the Fund was 0.60% on assets up
to
$500 million, 0.55% on assets of $500 million up to $1 billion and 0.50%
on assets of $1 billion and more. |
(2) |
As
explained in the “General Information” section of this SAI, this
Fund was
created as part of the reorganization
of an
Aberdeen Investment Funds Predecessor
Fund
into a
newly
created series of the Trust. Prior to the reorganization,
investment advisory services for the Aberdeen Investment Funds
Predecessor
Fund
were provided by the Adviser. |
(3) |
The
fees paid for the fiscal year ended October 31, 2021 reflect the
management fee rate that was in effect for the Predecessor Fund. The
management
fee rate for the Predecessor Fund was 0.80% on assets up to $500 million,
0.78% on assets of $500 million up to $2 billion and 0.75% on assets
of $2 billion and more and the expense limitation in effect with respect
to the Fund was 1.10% for Institutional Class and 1.35% for Class
A. |
(4) |
Prior
to the change in the Fund’s name, strategy and fee structure on August 18,
2023, the management fee rate for the Fund was 0.65% on assets up
to
$5 billion, 0.63% on assets of $5 billion up to $7.5 billion, 0.60% on
assets of $7.5 billion up to $10 billion and 0.59% on assets of $10
billion and more and the
expense limitation in effect with respect to the Fund was 0.75%. Effective
August 18, 2023, the Fund’s expense limitation was lowered to
0.70%. |
(5) |
The
fees paid for the fiscal year ended October 31, 2021 reflect the
management fee rate that was in effect for the Predecessor Fund. The
management
fee rate for the Predecessor Fund was 0.80% on assets up to $500 million,
0.78% on assets of $500 million up to $2 billion and 0.75% on assets
of $2 billion and more and the expense limitation in effect with respect
to the Fund was 1.10% for Institutional Class and 1.35% for Class
A. |
Investment
Advisory and Other Services 95
Subadvisers
The
Subadvisers for certain of the Funds advised by the Adviser are as
follows:
| |
FUND
|
SUBADVISER |
abrdn
China A Share Equity Fund |
abrdn
Asia Limited (“aAL”) |
abrdn
Dynamic Dividend Fund |
abrdn
Investments Limited (“aIL”) |
abrdn
Emerging Markets Fund |
aIL
and aAL |
abrdn
Emerging Markets ex-China Fund |
aIL |
abrdn
Emerging Markets Sustainable Leaders Fund |
aIL |
abrdn
Infrastructure Debt Fund |
aIL |
abrdn
Global Equity Impact Fund |
aIL |
abrdn
Global Infrastructure Fund |
aIL |
abrdn
International Small Cap Fund |
aIL |
abrdn
Emerging Markets Dividend Fund |
aIL |
abrdn
Realty Income & Growth Fund |
aIL |
aIL,
a Scottish Company, and aAL,
a Singapore corporation, each serve as Subadviser to the Funds listed in the
chart above.
aIL
and aAL
are both affiliates of the Adviser. aIL’s
registered office is located at 10 Queen’s Terrace, Aberdeen, Scotland
AB10 1YG. aAL
is located at 21 Church Street, #01-01 Capital Square Two, Singapore
049480.
Under
the subadvisory agreements among the Trust, the Adviser and each Subadviser, and
subject to the supervision
of the Adviser and the Trustees, each of the Subadvisers manages the assets of
the Fund listed above in accordance
with the Fund’s investment objectives and policies. Each Subadviser makes
investment decisions for the Fund
and in connection with such investment decisions places purchase and sell orders
for securities.
Subadvisory
Fees
The
subadvisory fees for subadvised Funds are paid by the Adviser from the
management fee it receives. For the investment
management services they provide to the Funds, the Subadvisers are entitled to
the percentage of the advisory
fee received after fee waivers and expense reimbursements, if any, by the
Adviser as detailed below:
|
| |
|
SUBADVISORY
FEE |
FUND
|
aAL |
aIL |
China
A Fund |
90% |
N/A |
Dynamic
Dividend Fund |
N/A |
90% |
Emerging
Markets Fund |
45% |
45% |
Emerging
Markets ex-China Fund |
N/A |
90% |
Emerging
Markets Sustainable Leaders Fund |
N/A |
90% |
Infrastructure
Debt Fund |
N/A |
90% |
Global
Equity Impact Fund |
N/A |
90% |
Global
Infrastructure Fund |
N/A |
90% |
International
Small Cap Fund |
N/A |
90% |
Emerging
Markets Dividend Fund |
N/A |
90% |
Realty
Income & Growth Fund |
N/A |
10% |
Multi-Manager
Structure
On
September 22, 2008, the Adviser and the Trust received an exemptive order from
the SEC for a multi-manager structure
which allows the Adviser, subject to the approval of the Board of Trustees, to
hire, replace or terminate unaffiliated
subadvisers without the approval of shareholders. The order also allows the
Adviser to revise a subadvisory agreement
with an unaffiliated subadviser without shareholder approval. If a new
unaffiliated subadviser is hired, the change
would be communicated to shareholders within 90 days of such change, and all
changes would be approved by the
Trust’s Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser.
The multi-manager structure is intended to facilitate the efficient operation of
the Funds and afford the Trust increased
management flexibility.
The
Adviser provides investment management evaluation services to the Funds
principally by performing initial due diligence
on prospective subadvisers for the Fund and thereafter monitoring the
performance of the subadviser through quantitative
and qualitative analysis as well as periodic in-person, telephonic and written
consultations with the subadviser.
The Adviser has responsibility for communicating performance expectations and
evaluations to the
96 Investment
Advisory and Other Services
subadviser
and ultimately recommending to the Trust’s Board of Trustees whether the
subadviser’s contract should be renewed,
modified or terminated; however, the Adviser does not expect to recommend
frequent changes of subadvisers.
The Adviser will regularly provide written reports to the Trust’s Board of
Trustees regarding the results of its evaluation
and monitoring functions. Although the Adviser will monitor the performance of
the subadvisers, there is no certainty
that the subadviser or the Funds will obtain favorable results at any given
time. The Adviser does not currently rely
on the manager of managers order with respect to its management of the
Funds.
Portfolio
Managers
Appendix
A contains the following information regarding the portfolio managers identified
in the Funds’ Prospectus: (i)
a description of the portfolio manager’s compensation structure and (ii)
information regarding other accounts managed
by the portfolio manager and potential conflicts of interest that might arise
from the management of multiple accounts.
Information relating to each portfolio manager’s ownership in the Funds
contained in this SAI that he or she manages,
as part of the team, as of October 31, 2023,
is set forth in the chart below.
Investment
Advisory and Other Services 97
|
| |
Portfolio
Manager |
Portfolio
Managed |
Dollar
Range of Portfolio Shares
Owned |
Chris
Haimendorf |
U.S.
Sustainable Leaders Fund |
None |
Christopher
Colarik |
U.S.
Small Cap Equity Focused
U.S. Small Cap Equity Fund |
None None |
Scott
Eun |
Focused
U.S. Small Cap Equity Fund U.S.
Small Cap Equity Fund |
None None |
Joanna
McIntyre |
U.S.
Sustainable Leaders Fund |
None |
Jamie
Mills O’Brien |
U.S.
Sustainable Leaders Fund |
None |
Kirsty
Desson |
International
Small Cap Fund |
None |
Liam
Patel |
International
Small Cap Fund |
None |
Matt
Williams |
Emerging
Markets Dividend Fund |
None |
Gabriel
Sacks |
Emerging
Markets Dividend Fund |
None |
Dominic
Byrne |
Global
Equity Impact Fund U.S.
Sustainable Leaders Fund |
None |
Martin
Connaghan |
Dynamic
Dividend Fund |
None |
Josh
Duitz |
Dynamic
Dividend Fund Global
Infrastructure Fund |
$10,001-$50,000 $100,001
- $500,000 |
Ruairidh
Finlayson |
Dynamic
Dividend Fund |
None |
Sarah
Norris |
Global
Equity Impact Fund |
None |
Donal
Reynolds |
Global
Infrastructure Fund |
None |
Pruksa
Iamthongthong |
China
A Fund |
None |
Jim
Jiang |
China
A Fund |
None |
Elizabeth
Kwik |
China
A Fund |
None |
Nicholas
Yeo |
China
A Fund |
None |
Kristy
Fong |
Emerging
Markets Fund Emerging
Markets ex-China Fund Emerging
Markets Sustainable Leaders Fund |
None None None |
Joanne
Irvine |
Emerging
Markets Fund |
None |
Devan
Kaloo |
Emerging
Markets Fund |
None |
Nick
Robinson |
Emerging
Markets Fund Emerging
Markets ex-China Fund Emerging
Markets Sustainable Leaders Fund |
None None None |
Nina
Petry |
Emerging
Markets Sustainable Leaders Fund |
None |
Miguel
Laranjeiro |
Intermediate
Municipal Income Fund Short
Duration High Yield Municipal Fund Ultra
Short Municipal Income Fund |
None None None |
Jonathan
Mondillo |
Intermediate
Municipal Income Fund Short
Duration High Yield Municipal Fund Ultra
Short Municipal Income Fund Infrastructure
Debt Fund |
None None None None |
Ben
Pakenham |
High
Income Opportunities Fund |
None |
George
Westervelt |
High
Income Opportunities Fund |
None |
Matthew
Kence |
High
Income Opportunities Fund Infrastructure
Debt Fund |
None None |
Adam
Tabor |
High
Income Opportunities Fund |
None |
Jay
Carlington |
Realty
Income & Growth Fund |
None |
Svitlana
Gubriy |
Realty
Income & Growth Fund |
None |
Bill
Pekowitz |
Realty
Income & Growth Fund |
None |
Distributor
The
Trust and Aberdeen Fund Distributors LLC (the “distributor” or “AFD”) have
entered into a distribution agreement whereby
AFD will act as principal underwriter for the Trust’s shares. The principal
business address of AFD is 1900 Market Street,
Suite 200, Philadelphia, Pennsylvania 19103. AFD is affiliated with the Funds’
Adviser.
98 Investment
Advisory and Other Services
Under
the distribution agreement, the distributor must use reasonable efforts,
consistent with its other business, in connection
with the continuous offering of shares of the Trust.
The
distributor has no obligation to sell any specific quantity of Fund shares.
Unless otherwise terminated, the distribution
agreement has an initial term of two years and thereafter will remain in effect
from year to year for successive
annual periods if approved at least annually by (i) the Trust’s Board of
Trustees or by the vote of a majority of the
outstanding shares of that Fund, and (ii) the vote of a majority of the Trustees
of the Trust who are not parties to the distribution
agreement or interested persons (as defined in the 1940 Act) of any party to the
distribution agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
distribution agreement may be terminated in
the event of any assignment, as defined in the 1940 Act.
The
distributor may enter into arrangements with various financial institutions
through which a shareholder may purchase
or redeem shares. The distributor may enter into agreements with selected
broker-dealers, banks or other financial
institutions for distribution of shares of the Funds. If applicable to a class
of the Trust’s Shares as described below, the
distributor may receive distribution fees from certain of the Funds as
authorized by the Distribution and Service Plan described
below.
The
distributor also receives the proceeds of contingent deferred sales charges
imposed on certain redemptions of Class
C shares (and certain Class A shares).
The
distributor reallows to Financial Industry Regulatory Authority registered
dealers: 5.00% of sales charges on Class A
shares of the Funds that have a maximum front-end sales charge of 5.75%; 2.50%
of sales charges on Class A shares of the
Infrastructure
Debt
Fund and High
Income Opportunities
Fund;
2.00% of sales charges on Class A shares of the Intermediate
Municipal Income Fund and Short Duration High Yield Municipal Fund; 0.50% of
sales charges on Class A1 shares
of the Ultra Short Municipal Income Fund; and 1.00% on Class C shares of the
Funds.
Predecessor
Distributor
As
explained in the “General Information” section of this SAI, each of the
Emerging
Markets Dividend
Fund, Global Equity
Impact Fund and High
Income Opportunities
Fund
acquired the assets and liabilities of the Aberdeen International Sustainable
Leaders Fund, Aberdeen Global Equity Impact Fund and Aberdeen Global High Income
Fund, respectively, through
a reorganization. Prior to the reorganization date of December 3, 2021, the
Aberdeen Investment Funds Predecessor
Funds had the same distributor, AFD.
Distributor
Fees
The
information presented below for the fiscal years ended October 31, 2023,
2022 and 2021
reflects the amounts received
in underwriting commissions from a portion of the front end sales charge of
certain classes of the Funds, all of which
is retained by AFD.
|
|
| |
Fund
|
Year
Ended October
31, 2023 |
Year
Ended October
31, 2022 |
Year
Ended October
31, 2021 |
China
A Share Equity Fund |
$450 |
$5,675 |
$22,566 |
Dynamic
Dividend Fund |
$1,681 |
$619 |
$1,346 |
Emerging
Markets Dividend Fund(1)
|
$19 |
$61 |
$0 |
Emerging
Markets ex-China Fund |
$618 |
$584 |
$222 |
Emerging
Markets Fund |
$434 |
$0 |
$11,157 |
Emerging
Markets Sustainable Leaders Fund |
$36 |
$44 |
$38 |
Focused
U.S. Small Cap Equity Fund |
$70 |
$2,532 |
$239 |
Global
Equity Impact Fund(1)
|
$0 |
$21 |
$0 |
Global
Infrastructure Fund |
$1,299 |
$1,963 |
$5,762 |
High
Income Opportunities Fund(1)
|
$111 |
$2,794 |
$0 |
Infrastructure
Debt Fund |
$3 |
$49 |
$20 |
Intermediate
Municipal Income Fund |
$8 |
$9 |
$58 |
International
Small Cap Fund |
$703 |
$842 |
$3,064 |
Realty
Income & Growth Fund |
$0 |
$0 |
$1,965 |
Short
Duration High Yield Municipal Fund |
$138 |
$0 |
$46 |
U.S.
Small Cap Equity Fund |
$5,402 |
$10,873 |
$7,366 |
U.S.
Sustainable Leaders Fund |
$1,447 |
$2,478 |
$3,588 |
Ultra
Short Municipal Income Fund |
$0 |
$0 |
$0 |
Investment
Advisory and Other Services 99
(1) |
Represents
the period from the reorganization until October 31, 2022. For the period
from the beginning of the fiscal year until the reorganization, the
amounts
received in underwriting commissions from a portion of the front end sales
charge of certain classes of the Global Equity Impact Fund, High
Income
Opportunities
Fund
and Emerging
Markets Dividend
Fund, all of which is retained by AFD, were $0, $0 and $0, respectively.
The information presented
above for the fiscal years ended October 31, 2021 and 2020 reflects the
amounts received in underwriting commissions from a portion of
the
front end sales charge of certain classes of the Aberdeen Investment Funds
Predecessor Funds, all of which was retained by
AFD. |
AFD
also received the proceeds of contingent deferred sales charges imposed on
certain redemptions of Class
C shares (and certain Class A and A1 shares).
The tables below reflect contingent deferred sales charges paid to AFD on
redemptions of the Funds’ shares
for the fiscal year ended October 31, 2023.
| |
Fund
|
Year
Ended October
31, 2023 |
China
A Share Equity Fund |
$302 |
Dynamic
Dividend Fund |
$0 |
Emerging
Markets Dividend Fund |
$0 |
Emerging
Markets ex-China Fund |
$0 |
Emerging
Markets Fund |
$680 |
Emerging
Markets Sustainable Leaders Fund |
$0 |
Focused
U.S. Small Cap Equity Fund |
$0 |
Global
Equity Impact Fund |
$0 |
Global
Infrastructure Fund |
$0 |
High
Income Opportunities Fund |
$0 |
Infrastructure
Debt Fund |
$0 |
Intermediate
Municipal Income Fund |
$0 |
International
Small Cap Fund |
$0 |
Realty
Income & Growth Fund |
$0 |
Short
Duration High Yield Municipal Fund |
$1,242 |
U.S.
Small Cap Equity Fund |
$4,539 |
U.S.
Sustainable Leaders Fund |
$0 |
Ultra
Short Municipal Income Fund |
$0 |
Distribution
Plan
The
Funds have adopted a Distribution Plan (the “Plan”) under Rule 12b-1 of the 1940
Act with respect to certain classes
of shares. The Plan permits the Funds to compensate the Funds’ distributor for
expenses associated with the distribution
of certain classes of shares of the Funds. Although actual distribution expenses
may be more or less, under the
Plan the Funds pay the distributor an annual fee in an amount that will not
exceed the following amounts:
● |
0.25%
of the average daily net assets of Class A shares of each applicable Fund
(distribution or service fees); |
● |
0.25%
of the average daily net assets of Class A1 shares of each applicable Fund
(distribution or service fees); |
● |
1.00%
of the average daily net assets of Class C shares of each applicable Fund
(0.25% service fee); and |
● |
0.50%
of the average daily net assets of the Class R Shares of each applicable
Fund (0.25% of which will be a distribution
fee and 0.25% of which may be a service
fee). |
As
required by Rule 12b-1, the Plan was approved by the Board of Trustees,
including a majority of the Trustees who have
no direct or indirect financial interest in the operation of the Plan (the “Plan
Trustees”). The Plan was approved for the
Funds by the Board of Trustees, and may be amended from time to time upon
approval by vote of a majority of the Trustees,
including a majority of the Plan Trustees, cast in person at a meeting called
for that purpose. The Plan may be terminated
as to a Class of a Fund by vote of a majority of the Plan Trustees, or by vote
of a majority of the outstanding shares
of that Class. Any change in the Plan that would materially increase the
distribution cost to a Class requires shareholder
approval. The Trustees will review, quarterly, a written report of such costs
and the purposes for which such costs
have been incurred. The Plan may be amended by vote of the Trustees, including a
majority of the Plan Trustees, cast
in person at a meeting called for that purpose. For so long as the Plan is in
effect, selection and nomination of those Trustees
who are not interested persons of the Trust shall be committed to the discretion
of such disinterested persons. All agreements
with any person relating to the implementation of the Plan may be terminated at
any time on 60 days’ written
notice without payment of any penalty, by vote of a majority of the Plan
Trustees or by a vote of the majority of the outstanding
shares of the applicable Class. The Plan will continue in effect for successive
one-year periods, provided that each
such continuance is specifically approved (i) by the vote of a majority of the
Plan Trustees, and (ii) by a vote of a majority
of the entire Board of Trustees cast in person at a meeting called for that
purpose. The Board of Trustees has a
100 Investment
Advisory and Other Services
duty
to request and evaluate such information as may be reasonably necessary for them
to make an informed determination
of whether the Plan should be implemented or continued. In addition the Trustees
in approving the Plan as to
a Fund must determine that there is a reasonable likelihood that the Plan will
benefit such Fund and its shareholders.
The
Board of Trustees of the Trust believes that the Plan is in the best interests
of the Funds since it encourages Fund growth
and maintenance of Fund assets. As the Funds grow in size, certain expenses, and
therefore total expenses per share,
may be reduced and overall performance per share may be improved.
The
distributor will enter into, from time to time, agreements with selected dealers
pursuant to which such dealers will
provide certain services in connection with the distribution and shareholder
servicing of a Fund’s shares including, but not
limited to, those discussed above. The Adviser or an affiliate of the Adviser
may pay additional amounts from its own resources
to dealers or other financial intermediaries, for aid in distribution or for aid
in providing administrative services to
shareholders.
Distribution
Plan Fees
During
the fiscal year ended October 31, 2023,
AFD earned the following distribution fees under the Plan for the Funds.
|
|
|
| |
Fund
|
Class
A |
Class
A1 |
Class
C |
Class
R |
China
A Share Equity Fund |
$26,822 |
$0 |
$15,902 |
$16,632 |
Dynamic
Dividend Fund |
$10,563 |
$0 |
$0 |
$0 |
Emerging
Markets Dividend Fund |
$1,83,801 |
$0 |
$0 |
$0 |
Emerging
Markets ex-China Fund |
$53,371 |
$0 |
$1,542 |
$3,000 |
Emerging
Markets Fund |
$1,57,366 |
$0 |
$34,561 |
$5,21,502 |
Emerging
Markets Sustainable Leaders Fund |
$30,053 |
$0 |
$1,191 |
$12,966 |
Focused
U.S. Small Cap Equity Fund |
$19,357 |
$0 |
$0 |
$11,438 |
Global
Equity Impact Fund |
$72,444 |
$0 |
$0 |
$0 |
Global
Infrastructure Fund |
$28,837 |
$0 |
$0 |
$0 |
High
Income Opportunities Fund |
$1,49,866 |
$0 |
$0 |
$0 |
Infrastructure
Debt Fund |
$29,113 |
$0 |
$171 |
$0 |
Intermediate
Municipal Income Fund |
$11,592 |
$0 |
$816 |
$0 |
International
Small Cap Fund |
$1,48,802 |
$0 |
$3,683 |
$9,714 |
Realty
Income & Growth Fund |
$887 |
$0 |
$0 |
$0 |
Short
Duration High Yield Municipal Fund |
$25,216 |
$0 |
$259 |
$0 |
Ultra
Short Municipal Income Fund |
$2,76,078 |
$662 |
$0 |
$0 |
U.S.
Small Cap Equity Fund |
$2,57,570 |
$0 |
$2,14,959 |
$16,115 |
U.S.
Sustainable Leaders Fund |
$5,65,991 |
$0 |
$2,994 |
$0 |
For
the fiscal year ended October 31, 2023,
the following expenditures were made using the 12b-1 fees received by
AFD
with respect to the Funds:
Investment
Advisory and Other Services 101
|
|
|
|
| |
Fund
|
Advertising |
Prospectus
Printing
& Mailing |
Distributor
Compensation
& Costs |
Financing
Charges
with Respect
to C Shares |
Broker-Dealer
Compensation
&
Costs |
China
A Share Equity Fund |
$66 |
$0 |
$681 |
$1,721 |
$56,667 |
Dynamic
Dividend Fund |
$2 |
$0 |
$25 |
$0 |
$10,524 |
Emerging
Markets ex-China Fund |
$813 |
$0 |
$8,769 |
$215 |
$40,278 |
Emerging
Markets Dividend Fund |
$606 |
$0 |
$6,263 |
$0 |
$171,695 |
Emerging
Markets Fund |
$164 |
$0 |
$1,709 |
$1,146 |
$711,173 |
Emerging
Markets Sustainable Leaders Fund |
$93 |
$0 |
$991 |
$61 |
$42,113 |
Focused
U.S. Small Cap Equity Fund |
$183 |
$0 |
$1,963 |
$0 |
$26,929 |
Global
Equity Impact Fund |
$146 |
$0 |
$1,442 |
$0 |
$69,909 |
Global
Infrastructure Fund |
$2 |
$0 |
$20 |
$0 |
$28,775 |
High
Income Opportunities Fund |
$238 |
$0 |
$2,557 |
$0 |
$144,768 |
Infrastructure
Debt Fund |
$158 |
$0 |
$1,673 |
$0 |
$25,676 |
Intermediate
Municipal Income Fund |
$43 |
$0 |
$458 |
$35 |
$11,828 |
International
Small Cap Fund |
$1,911 |
$0 |
$20,334 |
$241 |
$121,129 |
Realty
Income & Growth Fund |
$6 |
$0 |
$68 |
$0 |
$748 |
Short
Duration High Yield Municipal Fund |
$15 |
$0 |
$158 |
$1,353 |
$24,954 |
U.S.
Small Cap Equity Fund |
$306 |
$0 |
$3,031 |
$20,300 |
$467,661 |
U.S.
Sustainable Leaders Fund |
$13,522 |
$0 |
$145,658 |
$66 |
$279,346 |
Ultra
Short Municipal Income Fund |
$27 |
$0 |
$285 |
$0 |
$276,087 |
Administrative
Services Fees/Sub-Transfer Agency Fees
The
Funds may pay and/or reimburse administrative services fees/sub-transfer agency
expenses to certain broker-dealers
and financial intermediaries who provide administrative support services to
beneficial shareholders on behalf
of the Funds (sometimes referred to as “sub-transfer agency fees”), subject to
certain limitations approved by the Board.
Sub-transfer agency fees may be in addition to the Rule 12b-1 fees described in
the Funds’ Prospectus.
Sub-transfer
agency fees generally include, but are not limited to, costs associated with
omnibus accounting, recordkeeping,
networking, sub-transfer agency or other administrative or shareholder services.
The Funds may pay and/or
reimburse sub-transfer agency fees on an average-net-assets basis or on a
per-account-per-year basis for services
to the Funds and its shareholders, including on certain non-omnibus accounts.
Because these fees are paid out of
a Fund’s assets on an ongoing basis, these fees will increase the cost of an
investment in a share class over time and may
cost more than other types of fees.
Class
A, Class A1, Class R and Institutional Service Class shares of the Fund(s) pay
for such services pursuant to an Administrative
Services Plan adopted by the Board of Trustees. Under the terms of the
Administrative Services Plan, a Fund
is permitted to enter into Servicing Agreements with servicing organizations,
such as broker-dealers and financial institutions,
who agree to provide certain administrative support services in connection with
the Class A, Class A1, Class R and
Institutional Service Class shares of the Fund(s) (as applicable). Such
administrative support services include, but are not
limited to, the following: establishing and maintaining shareholder accounts,
processing purchase and redemption transactions,
arranging for bank wires, performing shareholder sub-accounting, answering
inquiries regarding the Funds, providing
periodic statements showing the account balance for beneficial owners or for
plan participants or contract holders
of insurance company separate accounts, transmitting proxy statements, periodic
reports, updated prospectuses
and other communications to shareholders and, with respect to meetings of
shareholders, collecting, tabulating
and forwarding to the Trust executed proxies and obtaining such other
information and performing such other services
as may reasonably be required. With respect to the Class R shares, these types
of administrative support services
will be exclusively provided for retirement plans and their plan
participants.
As
authorized by the particular Administrative Services Plan for the Funds, the
Trust has entered into Servicing Agreements for the Funds pursuant to which the
contracted servicing agent for the Funds has agreed to provide certain
administrative support services in connection with the applicable Fund shares
held beneficially by its customers. In consideration for providing
administrative support services, the servicing agent with whom the Trust may
enter into Servicing Agreements will receive a fee, computed at the annual rate
of up to 0.25% for Class A, Class A1, Class R and Institutional Service Class
shares of the average daily net assets of the Class A, A1, R or Institutional
Service Class shares of each Fund (as applicable) (or under an amendment to the
Administrative Services Plan that is in effect until at least February 28,
2025, a maximum
of 0.15% for contracts with fees that are calculated as percentage of Fund
assets and a maximum of $16 per account for contracts with fees that are
calculated on a dollar per account basis).
For
the fiscal year ended October 31, 2023, the following administrative services
fees were paid from the Funds:
102 Investment
Advisory and Other Services
|
|
|
|
|
| |
Fund
|
Class
A |
Class
C |
Class
A1 |
Class
R |
Institutional Service
Class |
Institutional
Class |
China
A Fund |
$12,961 |
$1,703 |
N/A |
$4,110 |
$743 |
$23,667 |
Dynamic
Dividend Fund |
$3,798 |
N/A |
N/A |
N/A |
N/A |
$73,092 |
Emerging
Markets Fund |
$211,678 |
$5,605 |
N/A |
$169,987 |
$753,671 |
$2,517,328 |
Emerging
Markets ex-China Fund |
$21,234 |
$355 |
N/A |
$1,777 |
$270 |
$875 |
Emerging
Markets Sustainable Leaders Fund
|
$21,798 |
$616 |
N/A |
$5,932 |
$44,716 |
$33,400 |
Infrastructure
Debt Fund |
$23,372 |
$529 |
N/A |
N/A |
$7,531 |
$39,677 |
Global
Infrastructure Fund |
$9,892 |
N/A |
N/A |
N/A |
N/A |
$33,101 |
Global
Equity Impact Fund |
$42,258 |
N/A |
N/A |
N/A |
N/A |
$24,158 |
High
Income Opportunities Fund |
$88,611 |
N/A |
N/A |
N/A |
N/A |
$31,128 |
Intermediate
Municipal Income Fund |
$737 |
$92 |
N/A |
N/A |
N/A |
$4,424 |
International
Small Cap Fund |
$86,585 |
$709 |
N/A |
$3,125 |
N/A |
$192,105 |
Emerging
Markets Dividend Fund |
$124,917 |
N/A |
N/A |
N/A |
N/A |
$11,703 |
Realty
Income & Growth Fund |
$571 |
N/A |
N/A |
N/A |
N/A |
$34,940 |
Short
Duration High Yield Municipal Fund |
$11,225 |
$5 |
N/A |
N/A |
N/A |
$168,886 |
Ultra
Short Municipal Income Fund |
$89,176 |
$22 |
N/A |
N/A |
N/A |
$487,352 |
U.S.
Small Cap Equity Fund |
$162,749 |
$30,101 |
N/A |
$7,378 |
$46,271 |
$679,339 |
U.S.
Sustainable Leaders Fund |
$112,262 |
$356 |
N/A |
N/A |
$83,732 |
$6,832 |
Focused
U.S. Small Cap Equity Fund |
$8,151 |
$353 |
N/A |
$4,159 |
$525 |
$7,745 |
Class
C and Institutional Class shares may also pay for sub-transfer agency services
directly and not pursuant to an Administrative
Services Plan.
Fund
Administration
Under
the terms of a Fund Administration Agreement, abrdn provides various
administrative and accounting services,
including daily valuation of the Funds’ shares, preparation of financial
statements, tax returns, and regulatory reports,
and presentation of quarterly reports to the Board of Trustees. abrdn is located
at 1900 Market Street, Suite 200, Philadelphia,
Pennsylvania 19103. The Trust shall pay fees to abrdn, as set forth directly
below, for the provision of services to
the Funds. Fees will be computed daily and payable monthly on the first business
day of each month, or as otherwise set
forth below.
Asset-Based
Annual Fee
| |
Fund
Asset Level |
Aggregate
Fee as a Percentage of Fund Net Assets |
All
Assets |
0.08% |
The
asset-based fees are subject to an annual minimum fee equal to the number of
Funds of the Trust (excluding those
funds for which abrdn does not serve as administrator) multiplied by
$25,000.
Fund
Administration Fees
During
the fiscal years ended October 31, 2023, 2022 and 2021, the Funds paid fund
administration fees as indicated in
the table below.
Investment
Advisory and Other Services 103
|
|
| |
Fund
|
Year
Ended October
31, 2023 |
Year
Ended October
31, 2022 |
Year
Ended October
31, 2021 |
China
A Fund |
$28,741 |
$48,426 |
$62,860 |
Dynamic
Dividend Fund |
$82,995 |
$92,452 |
$100,480 |
Emerging
Markets Dividend Fund(1)
|
$66,580 |
$73,790 |
– |
Emerging
Markets ex-China Fund |
$25,236 |
$21,009 |
$23,784 |
Emerging
Markets Fund |
$1,748,792 |
$2,785,066 |
$4,189,450 |
Emerging
Markets Sustainable Leaders Fund |
$65,474 |
$121,461 |
$179,930 |
Focused
U.S. Small Cap Equity Fund |
$11,330 |
$14,900 |
$13,034 |
Global
Equity Impact Fund(1)
|
$39,355 |
$39,695 |
– |
Global
Infrastructure Fund |
$38,673 |
$43,392 |
$42,144 |
High
Income Opportunities Fund(1)
|
$76,285 |
$80,984 |
– |
Infrastructure
Debt Fund |
$27,161 |
$45,795 |
$21,745 |
Intermediate
Municipal Income Fund |
$37,395 |
$43,122 |
$51,144 |
International
Small Cap Fund |
$134,984 |
$206,610 |
$173,588 |
Realty
Income & Growth Fund |
$32,185 |
$40,990 |
$42,449 |
Short
Duration High Yield Municipal Fund |
$115,840 |
$274,940 |
$282,960 |
U.S.
Small Cap Equity Fund |
$464,467 |
$734,587 |
$817,763 |
U.S.
Sustainable Leaders Fund |
$275,353 |
$330,975 |
$372,121 |
Ultra
Short Municipal Income Fund |
$511,470 |
$647,232 |
$886,710 |
(1) |
For
the year ended October 31, 2022, the administration fees were paid by the
Aberdeen Investment Fund Predecessor Fund to abrdn Inc. for the
period
from November 1, 2021 to December 3, 2021 and the administration fees were
paid by the Fund to abrdn Inc. for the period from December 6,
2021
to October 31, 2022. |
Aberdeen
Investment Funds Predecessor Fund Administrator and Custodian
State
Street Bank and Trust Company, One Iron Street, Boston, MA 02210, acted as each
Aberdeen Investment Funds
Predecessor Fund’s administrator and custodian and assisted in the supervision
of all aspects of the operations of the
Aberdeen Investment Funds Predecessor Funds
(except those performed by the Aberdeen Investment Funds Predecessor
Funds’ adviser); preparing certain period reports; assisting in the preparation
of tax returns; and preparing materials
for use in connection with meetings of Trustees and shareholders.
The
administration and custody fees paid by the Aberdeen Investment Funds
Predecessor Funds
for the
period from November
1, 2021 to December 3, 2021 and the fiscal
year
ended October 31, 2021 were
as follows:
|
| |
Fund
|
Period
from November 1, 2021 to December
3, 2021 |
Year
Ended October 31, 2021 |
Emerging
Markets Dividend Fund |
$17,158 |
$215,263 |
Global
Equity Impact Fund |
$13,487 |
$159,291 |
High
Income Opportunities Fund |
$15,632 |
$187,245 |
Transfer
Agent
The
Trust has entered into a Transfer Agency and Service Agreement with SS&C
GIDS, Inc. (”SS&C”),
333 West 11th Street,
Kansas City, Missouri 64105, whereby SS&C provides transfer agent and
dividend disbursement agent services.
Sub-Administrator,
Custodian and Fund Accountant
The
Trust has entered into an Amended and Restated Master Custodian Agreement (the
“Custody Agreement”) with State
Street, which is located at 1 Heritage Drive, 3rd Floor, North Quincy, MA 02171,
whereby State Street provides custody
and fund accounting services for the Funds. abrdn has entered into a
Sub-Administration Agreement with State Street
whereby State Street will provide certain administration services to the Funds.
For the administration services provided
by State Street to the Funds, abrdn pays State Street an asset-based fee that is
calculated based on the assets of
certain registered and unregistered funds and segregated accounts advised by the
Adviser and its affiliates, plus certain
out-of-pocket expenses, subject to a minimum fee.
Securities
Lending Activity
Pursuant
to a Securities Lending Authorization Agreement with the Trust, on behalf of the
Funds,
Securities Finance Trust
Company (“eSecLending”),
acts as securities lending agent for the Funds. During the most recent fiscal
year ended October
31, 2023,
the services
eSecLending may
provide to the Funds, pursuant to the agreement, primarily included the
following:
104 Investment
Advisory and Other Services
1. |
selecting
borrowers from an approved list of borrowers; |
2. |
negotiating
the terms of securities loans, including the amount of fees, and executing
a securities lending agreement
as agent on behalf of the Funds with each such
borrower; |
3. |
monitoring
the daily value of the loaned securities and directing the payment of
additional collateral or the return of excess
collateral, as necessary; |
4. |
investing
cash collateral received in connection with any loaned
securities; |
5. |
arranging
for the collection of any interest, dividends or other distributions or
other payments of any kind on loaned securities
and payment of the same to the Funds; |
6. |
maintaining
separate records for securities loaned; |
7. |
in
the event of default by a borrower with respect to any securities loan,
using the collateral or the proceeds of the liquidation
of collateral to purchase replacement securities of the same issuer,
class, quantity and denomination as the
loaned securities; and |
8. |
terminating
securities loans and arranging for the return of loaned securities to the
Funds at loan termination. |
The
following tables show the dollar amounts of income and fees/compensation related
to the securities lending activities
of each Fund that received or incurred such income and fees/compensation for the
fiscal year ended October 31,
2023.
|
| |
Fund
|
Emerging Markets Fund |
High
Income Opportunities
Fund |
Gross
income from securities lending activities |
$40,408 |
$6,836 |
Fees
and/or compensation for securities lending activities and related
services |
|
|
Fees
paid to eSecLending from a “revenue split” (i.e., share of revenue
generated by the securities lending program
paid to eSecLending) |
$4,401 |
$684 |
Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral
reinvestment vehicle) that are not included in revenue split
|
$0 |
$0 |
Administrative
fees not included in revenue split |
$0 |
$0 |
Indemnification
fee not included in revenue split |
$0 |
$0 |
Rebates
(paid to borrowers) |
$0 |
$0 |
Other
fees not included in revenue split |
$0 |
$0 |
Aggregate
fees/compensation for securities lending activities |
$4,401 |
$684 |
Net
income from securities lending activities |
$36,367 |
$6,152 |
Legal
Counsel
Dechert,
LLP, 1900 K Street, NW, Washington, DC 20006-1110, serves as the Trust’s legal
counsel. Faegre Drinker Biddle
& Reath LLP, One Logan Square, Philadelphia, Pennsylvania 19103, serves as
legal counsel to the Independent Trustees.
Independent
Registered Public Accounting Firm
KPMG
LLP
serves
as the independent registered public accounting firm for the
Trust.
Investment
Advisory and Other Services 105
Brokerage
Allocation
The
Adviser (or a Subadviser) is responsible for decisions to buy and sell
securities and other investments for the Funds,
the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any.
In transactions on stock and commodity exchanges in the United States, these
commissions are negotiated, whereas
on foreign stock and commodity exchanges these commissions are generally fixed
and are generally higher than
brokerage commissions in the United States. In the case of securities traded on
the OTC markets or for securities traded
on a principal basis, there is generally no commission, but the price includes a
spread between the dealer’s purchase
and sale price. This spread is the dealer’s profit. In underwritten offerings,
the price includes a disclosed, fixed commission
or discount. Most short term obligations are normally traded on a “principal”
rather than agency basis. This may
be done through a dealer (e.g., a securities firm or bank) who buys or sells for
its own account rather than as an agent
for another client, or directly with the issuer.
Except
as described below, the primary consideration in portfolio security transactions
is best execution of the transaction
(i.e., execution at a favorable price and in the most effective manner
possible). “Best execution” encompasses
many factors affecting the overall benefit obtained by the client account in the
transaction including, but not
necessarily limited to, the price paid or received for a security, the
commission charged, the promptness, available liquidity
and reliability of execution, the confidentiality and placement accorded the
order, and customer service. Therefore,
“best execution” does not necessarily mean obtaining the best price alone but is
evaluated in the context of all the
execution services provided. Both the Adviser and the Subadvisers (if
applicable) have complete freedom as to the markets
in and the broker-dealers through which they seek this result.
Subject
to the primary consideration of seeking best execution and as discussed below,
securities may be bought or sold
through broker-dealers who have furnished statistical, research, corporate
access, and other information or services to
the Adviser or a Subadviser (if applicable). SEC regulations provide a “safe
harbor” that allows an investment adviser to pay
for research and brokerage services with commission dollars generated by client
transactions. On September 12, 2017,
abrdn announced a change to the payment for research model, such that abrdn
would absorb all research costs directly
(i.e., pays for research from its profits and losses) to coincide with the new
MiFID II legislation which went into effect
on January 3, 2018. As a result, abrdn does not use soft dollars and has been
paying “execution only” commission rates
since the start of 2017, paying for research for equities out of its
assets.
There
may be occasions when portfolio transactions for a Fund are executed as part of
concurrent authorizations to purchase
or sell the same security for trusts or other accounts (including other mutual
funds) served by the Adviser or a Subadviser
(if applicable) or by an affiliated company thereof. Although such concurrent
authorizations potentially could be
either advantageous or disadvantageous to a Fund, they are affected only when
the Adviser or the Subadviser (if applicable)
believes that to do so is in the interest of the Fund. When such concurrent
authorizations occur, the executions
will be allocated in an equitable manner.
In
purchasing and selling investments for the Funds, it is the policy of the
Adviser and the Subadvisers (if applicable) to
seek best execution through responsible broker-dealers. The determination of
what may constitute best execution in a securities
transaction by a broker involves a number of considerations, including the
overall direct net economic result to the
Fund (involving both price paid or received and any commissions and other costs
paid), the efficiency with which the transaction
is effected, the ability to effect the transaction at all when a large block is
involved, the availability of the broker
to stand ready to execute possibly difficult transactions in the future, the
professionalism of the broker, and the financial
strength and stability of the broker. These considerations are judgmental and
are weighed by the Adviser and the
Subadvisers (if applicable) in determining the overall reasonableness of
securities executions and commissions paid. In
selecting broker-dealers, the Adviser and the Subadvisers (if applicable) will
consider various relevant factors, including,
but not limited to, the size and type of the transaction; the nature and
character of the markets for the security or
asset to be purchased or sold; the execution efficiency, settlement capability,
and financial condition of the broker dealer’s
firm; the broker-dealer’s execution services, rendered on a continuing basis;
and the reasonableness of any commissions.
As
discussed under “General Information about the Funds’ Portfolio Instruments and
Investment Policies – Foreign Currencies”
above, with respect to FX transactions, different considerations or
circumstances may apply, particularly with
respect to Restricted Market FX. FX transactions executed for the Funds are
divided into two main categories: (1) Restricted
Market FX and (2) Unrestricted Market FX. Restricted Market FX are required to
be executed by a local bank in the
applicable market. Unrestricted Market FX are not required to be executed by a
local bank. The Adviser, Subadvisers (if
applicable) or third-party agent execute Unrestricted Market FX relating to
trading decisions. The Funds’ custodian executes
all Restricted Market FX because it has local banks or relationships with local
banks in each of the restricted markets
where custodial client accounts hold securities. Unrestricted Market FX relating
to the repatriation of dividends and/or
income/expense items not directly relating to trading may be executed by the
Adviser or Subadvisers or by the Funds’
custodian due to the small currency amount and lower volume of such
transactions. The Funds, the Adviser and the
Subadvisers (if applicable) have limited ability to negotiate prices at which
certain FX transactions are customarily executed
by the Funds’ custodian, i.e., transactions in Restricted Market FX and
repatriation transactions.
The
Adviser and each Subadviser (if applicable) may cause a Fund to pay a
broker-dealer a commission that is in excess
of the commission another broker-dealer would have received for executing the
transaction if it is determined to be
consistent with the Adviser’s or Subadviser’s (if applicable) obligation to seek
best-execution pursuant to the standards
described above.
Under
the 1940 Act, “affiliated persons” of a Fund are prohibited from dealing with it
as a principal in the purchase and
sale of securities unless an exemptive order allowing such transactions is
obtained from the SEC. However, each Fund
may purchase securities from underwriting syndicates of which a Subadviser (if
applicable) or any of its affiliates, as
defined in the 1940 Act, is a member under certain conditions, in accordance
with Rule 10f-3 under the 1940 Act.
Each
of the Funds contemplate that, consistent with the policy of seeking to obtain
best execution, brokerage transactions
may be conducted through “affiliated brokers or dealers,” as defined in rules
under the 1940 Act. Under the 1940
Act, commissions paid by a Fund to an “affiliated broker or dealer” in
connection with a purchase or sale of securities offered
on a securities exchange may not exceed the usual and customary broker’s
commission. Accordingly, it is the Funds’
policy that the commissions to be paid to an affiliated broker-dealer must, in
the judgment of the Adviser or the appropriate
Subadviser (if applicable), be (1) at least as favorable as those that would be
charged by other brokers having
comparable execution capability and (2) at least as favorable as commissions
contemporaneously charged by such
broker or dealer on comparable transactions for the broker’s or dealer’s
unaffiliated customers. The Adviser and the Subadvisers
(if applicable) do not necessarily deem it practicable or in the Funds’ best
interests to solicit competitive bids for
commissions on each transaction. However, consideration regularly is given to
information concerning the prevailing level
of commissions charged on comparable transactions by other brokers during
comparable periods of time.
Neither
the Funds nor the Adviser has an agreement or understanding with a
broker-dealer, or other arrangements to
direct the Funds’ brokerage transactions to a broker-dealer because of the
research services such broker provides to a Fund
or the Adviser. While the Adviser does not have arrangements with any
broker-dealers to direct such brokerage transactions
to them because of research services provided, the Adviser may receive research
services from such broker-dealers.
The dollar amount of transactions and related commissions for transactions paid
to a broker from which the
Adviser and Subadvisers
also received research services for the fiscal year ended October 31,
2023
are summarized in the
table below:
|
| |
Fund
|
Total
Dollar Amount of Transactions^ |
Total
Commissions Paid on Such Transactions^ |
China
A Fund |
$28,270,512 |
$21,389 |
Dynamic
Dividend Fund |
$191,455,032 |
$51,081 |
Emerging
Markets Dividend Fund |
$91,437,522 |
$24,197 |
Emerging
Markets ex-China Fund |
$40,112,895 |
$20,705 |
Emerging
Markets Fund |
$1,945,692,590 |
$1,127,610 |
Emerging
Markets Sustainable Leaders Fund |
$96,922,150 |
$48,384 |
Focused
U.S. Small Cap Equity Fund |
$8,299,760 |
$2,826 |
Global
Equity Impact Fund |
$42,944,548 |
$17,281 |
Global
Infrastructure Fund |
$32,137,800 |
$11,311 |
International
Small Cap Fund |
$246,877,293 |
$104,286 |
Realty
Income & Growth Fund |
$22,596,828 |
$10,305 |
U.S.
Small Cap Equity Fund |
$694,159,153 |
$224,360 |
U.S.
Sustainable Leaders Fund |
$249,745,483 |
$118,639 |
During
the fiscal years ended October 31, 2023,
2022 and 2021,
the following brokerage commissions were paid by the
Funds:
|
|
| |
|
Year
ended October 31, |
Fund
|
2023* |
2022* |
2021* |
China
A Fund |
$21,389 |
$48,554 |
$120,927 |
Dynamic
Dividend Fund |
$51,075 |
$67,421 |
$59,893 |
Emerging
Markets Dividend Fund |
$24,197 |
$49,683 |
$77,078 |
Emerging
Markets ex-China Fund |
$20,694 |
$24,714 |
$7,291 |
Emerging
Markets Fund |
$1,127,818 |
$2,145,595 |
$2,322,425 |
Emerging
Markets Sustainable Leaders Fund |
$48,383 |
$76,985 |
$184,906 |
Focused
U.S. Small Cap Equity Fund |
$2,823 |
$8,794 |
$15,302 |
Global
Equity Impact Fund |
$17,281 |
$26,843 |
$60,911 |
Global
Infrastructure Fund |
$11,311 |
$13,287 |
$17,502 |
High
Income Opportunities Fund |
$4,924 |
$15,754 |
$29,159 |
Infrastructure
Debt Fund |
$5,704 |
$7,172 |
$8,457 |
Intermediate
Municipal Income Fund |
$0 |
$0 |
$0 |
International
Small Cap Fund |
$104,282 |
$162,143 |
$131,417 |
Realty
Income & Growth Fund |
$10,283 |
$13,163 |
$18,621 |
Short
Duration High Yield Municipal Fund |
$0 |
$0 |
$0 |
U.S.
Small Cap Equity Fund |
$224,358 |
$481,020 |
$619,008 |
U.S.
Sustainable Leaders Fund |
$118,639 |
$189,326 |
$334,270 |
Ultra
Short Municipal Income Fund |
$0 |
$0 |
$0 |
* |
Any
material differences between the commissions paid during the past fiscal
year and the two preceding fiscal years are due to a variety of factors
including,
primarily, cash flows into and out of the
Funds. |
During
the fiscal year ended October 31, 2023,
the following
Funds
held investments in securities of its
regular broker-dealers (as
defined in Rule 10b-1 under the 1940 Act) as follows:
|
| |
Fund
|
Approximate
Aggregate Value
of Issuer’s Securities Owned
by the Fund as of Fiscal
Year Ended October 31,
2023 |
Name
of Broker or Dealer |
abrdn
Dynamic Dividend Fund |
$1,092,996 |
Golman
Sachs & Co. LLC |
abrdn
Dynamic Dividend Fund |
$1,112,480 |
J.P.
Morgan Securities LLC |
abrdn
Emerging Markets ex-China Fund |
$2,161,442 |
Samsung
Securities Co., Ltd |
abrdn
Emerging Markets Fund |
$118,291,678 |
Samsung
Securities Co., Ltd |
abrdn
Emerging Markets Sustainable Leaders Fund |
$4,809,130 |
Samsung
Securities Co., Ltd |
abrdn
High Income Opportunities Fund |
$412,308 |
Deutsche
Bank Securities Inc. |
Additional
Information on Purchases and Sales
Shares
of the Funds have not been registered for sale outside of the United States and
its territories. However, the Funds
may accept investments from non-U.S. affiliates of the Adviser.
Class A and Class A1 Sales
Charges
The
charts below show the Class A and Class A1 sales charges, which decrease as the
amount of your investment increases.
Class
A Shares of the Funds (other than the Infrastructure
Debt
Fund, High
Income Opportunities
Fund,
Intermediate Municipal
Income Fund, Short Duration High Yield Municipal Fund and Ultra Short Municipal
Income Fund)
|
|
| |
AMOUNT
OF PURCHASE |
SALES
CHARGE AS %
OF OFFERING PRICE |
SALES
CHARGE AS %
OF AMOUNT INVESTED |
DEALER
COMMISSION
AS A %
O FOFFERING PRICE |
less
than $50,000 |
5.75% |
6.10% |
5.00% |
$50,000
up to $100,000 |
4.75 |
4.99 |
4.00 |
$100,000
up to $250,000 |
3.50 |
3.63 |
3.00 |
$250,000
up to $500,000 |
2.50 |
2.56 |
2.00 |
$500,000
up to $1 million |
2.00 |
2.04 |
1.75 |
$1
million or more |
None |
None |
None |
Class
A Shares of the Infrastructure
Debt
Fund and High
Income Opportunities
Fund
|
|
| |
AMOUNT
OF PURCHASE |
SALES
CHARGE AS %
OF OFFERING PRICE |
SALES
CHARGE AS %
OF AMOUNT INVESTED |
DEALER
COMMISSION
AS A %
OF OFFERING PRICE |
less
than $100,000 |
3.00% |
3.10% |
2.50% |
$100,000
up to $250,000 |
2.50 |
2.56 |
2.00 |
$250,000
up to $1 million |
2.00 |
2.04 |
1.75 |
$1
million or more |
None |
None |
None |
Class
A Shares of the Intermediate Municipal Income Fund and Short Duration High Yield
Municipal Fund
|
|
| |
AMOUNT
OF PURCHASE |
SALES
CHARGE AS %
OF OFFERING PRICE |
SALES
CHARGE AS %
OF AMOUNT INVESTED |
DEALER
COMMISSIONAS
A %
OF OFFERING PRICE |
less
than $100,000 |
2.50% |
2.56% |
2.00% |
$100,000
up to $250,000 |
2.00% |
2.04 |
1.75 |
$250,000
or more |
None |
None |
None |
Class
A1 Shares of the Ultra Short Municipal Income Fund
|
|
| |
AMOUNT
OF PURCHASE |
SALES
CHARGE AS %
OF OFFERING PRICE |
SALES
CHARGE AS %
OF AMOUNT INVESTED |
DEALER
COMMISSIONAS
A %
OF OFFERING PRICE |
less
than $250,000 |
0.50% |
0.50% |
0.50% |
$250,000
or more |
None |
None |
None |
Using
the NAV per share as of October 31, 2023,
the maximum offering price of each Fund’s Class A or Class A1 shares
would be as follows:
Additional
Information on Purchases and Sales 109
|
|
| |
Fund
Name |
Net
Asset Value |
Maximum
Sales Charge |
Offering
Price to Public |
China
A Fund |
$37.76 |
5.75% |
$40.06 |
Dynamic
Dividend Fund |
$4.74 |
5.75% |
$5.03 |
Emerging
Markets Fund |
$20.15 |
5.75% |
$21.38 |
Emerging
Markets ex-China Fund |
$18.17 |
5.75% |
$19.28 |
Emerging
Markets Sustainable Leaders Fund |
$18.83 |
5.75% |
$19.98 |
Infrastructure
Debt Fund |
$10.29 |
3.00% |
$10.61 |
Global
Equity Impact Fund |
$18.45 |
5.75% |
$19.58 |
High
Income Opportunities Fund |
$8.84 |
3.00% |
$9.11 |
Global
Infrastructure Fund |
$24.18 |
5.75% |
$25.66 |
Intermediate
Municipal Income Fund |
$9.83 |
2.50% |
$10.08 |
International
Small Cap Fund |
$42.73 |
5.75% |
$45.34 |
Emerging
Markets Dividend Fund |
$34.93 |
5.75% |
$37.06 |
Realty
Income & Growth Fund |
$15.68 |
5.75% |
$16.64 |
Short
Duration High Yield Municipal Fund |
$10.26 |
2.50% |
$10.52 |
Ultra
Short Municipal Income Fund |
$10.10 |
0.50% |
$10.15 |
U.S.
Small Cap Equity Fund |
$49.57 |
5.75% |
$52.59 |
U.S.
Sustainable Leaders Fund |
$17.32 |
5.75% |
$18.38 |
Focused
U.S. Small Cap Equity Fund |
$11.09 |
5.75% |
$11.77 |
Waiver
of Class A and Class A1 Sales Charges
You
may qualify for a reduced Class A and Class A1 sales charge if you own or are
purchasing shares of the Funds. You
may also qualify for a waiver of the Class A and Class A1 sales charges. To
receive the reduced or waived sales charge,
you must inform Customer Service or your broker or other financial intermediary
at the time of your purchase that
you qualify for such a reduction or waiver. If you do not inform Customer
Service or your financial intermediary that you
are eligible for a reduced or waived sales charge, you may not receive the
discount or waiver that you are entitled to. You
may have to produce evidence that you qualify for a reduced sales charge or
waiver before you will receive it.
The
sales charge applicable to Class A and Class A1 shares may be waived for shares
sold to financial intermediaries
who have entered into an agreement with a Fund’s distributor to offer shares to
self-directed investment brokerage
accounts that may or may not charge a transaction fee to its customers. Certain
waivers and fee reductions may
be available to customers of certain financial intermediaries, as described
under “Broker-Defined Sales Charge Waiver
Policies” in the Prospectus.
The
sales charge applicable to Class A and Class A1 shares may be waived for the
following purchases:
1. |
shares
sold to other registered investment companies affiliated with
abrdn; |
2. |
shares
sold to: a)
any pension, profit sharing, or other employee benefit plan for the
employees of abrdn, any of its affiliated companies,
or investment advisory clients and their affiliates;
b)
401(a) plans, 401(k) plans, SIMPLE 401(k) plans, 457 plans,
employer-sponsored 403(b) plans, profit-sharing and money
purchase pension plans, defined benefit plans, non-qualified deferred
compensation plans, employer sponsored
benefit plans (including health savings accounts), other similar
employer-sponsored retirement and benefit
plans.
(Individual
retirement vehicles, such as traditional and Roth IRAs, Coverdell
education savings accounts, individual 401(k)
plans, individual 403(b)(7) custodial accounts, one person Keogh plans,
SEPs, SARSEPs, SIMPLE IRAs or similar accounts
do not qualify for the waiver.)
c)
any life insurance company separate account registered as a unit
investment trust;
d)
Trustees and retired Trustees of the Trust;
e)
directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees,
and sales representatives, their spouses (including domestic partners),
children or immediate relatives (immediate
relatives include mother, father, brothers, sisters, grandparents,
grandchildren (“Immediate Relatives”)), and
Immediate Relatives of deceased employees of any member of abrdn, or any
investment advisory clients of the Adviser
and its affiliates; |
110 Additional
Information on Purchases and Sales
| f)
directors, officers, and full-time employees, their spouses (including
domestic partners), children or Immediate Relatives
and Immediate Relatives of deceased employees of any sponsor group which
may be affiliated with abrdn;
g)
any directors, officers, full-time employees, sales representatives and
their employees, their spouses (including domestic
partners), children or Immediate Relatives of a broker-dealer having a
dealer/selling agreement with the distributor;
h)
investors purchasing on a periodic fee, asset-based fee or no transaction
fee basis through a broker-dealer sponsored
mutual fund purchase program; and
i)
financial institutions as shareholders of record on behalf of investment
advisers or financial planners for their clients,
and who charge a separate fee for their
services. |
Reduction
of Sales Charges
Reduction
of Class A and Class A1 Sales Charges
Shareholders
can reduce or eliminate Class A and Class A1 shares’ initial sales charge
through one or more of the discounts
described below:
● |
A Larger
Investment.
The sales charge decreases as the amount of your investment
increases. |
● |
Rights of
Accumulation.
You and members of your family who live at the same address can add the
current value of your
Class A, Class A1 and Class C investments in the abrdn Funds that you
currently own or are currently purchasing to
the value of your abrdn Funds Class A and Class A1 purchase, possibly
reducing the sales charge. |
● |
No Sales Charge on a
Repurchase.
If you sell Fund shares from your account, we allow you a one-time
privilege to reinvest
some or all of the proceeds in shares of the same class. You will not pay
a sales charge on Class A and Class A1
shares that you buy within 30 days of selling Class A and Class A1 shares
of an equal or greater amount if you have already
paid a sales charge. Remember, if you realize a gain or a loss on your
sale of shares, the transaction is taxable and
reinvestment will not affect the amount of capital gains tax that is due.
If you realize a loss on your sale and you reinvest,
some or all of the loss may not be allowed as a tax deduction depending on
the amount you reinvest. |
● |
Letter of Intent
Discount.
State in writing that during a 13-month period you or a group of family
members who live at the
same address will purchase or hold at least $50,000 in Class A shares (at
least $100,000 in Class A shares of the Infrastructure
Debt
Fund, Intermediate Municipal Income Fund and Short Duration High Yield
Municipal Fund and at least
$250,000 in Class A1 shares of the Ultra Short Municipal Income Fund) and
your sales charge will be based on the total
amount you intend to invest. You can also combine your purchase of Class
A, Class A1 and Class C Shares in the abrdn
Funds to fulfill your Letter of Intent. Your Letter of Intent is not a
binding obligation to buy shares of the Fund; it is merely
a statement of intent. You are not legally required to complete the
purchases indicated in your Letter of Intent. However,
if you do not fulfill your Letter of Intent, additional sales charges may
be due and shares in your account would
be liquidated to cover those sales
charges. |
Class
A and Class A1 Finder’s Fee and Corresponding CDSC
There
are no front-end sales charges for purchases of Class A and Class A1 shares of
the Funds of $1 million or more (or
$250,000 or more of Class A shares of the Intermediate Municipal Income Fund and
Short Duration High Yield Municipal
Fund or $250,000 or more of Class A1 shares of the Ultra Short Municipal Income
Fund). There are no front-end sales
charges for purchases of Class A shares of the Ultra Short Municipal Income
Fund. An investor may purchase $1 million
or more (or $250,000 or more) of Class A or Class A1 shares in one or more of
the abrdn Funds and avoid the front-end
sales charge. However, unless an investor is otherwise eligible to purchase
Class A or Class A1 shares without a sales
charge, the investor will pay a CDSC (on all Funds except the Intermediate
Municipal Income Fund, Short Duration High
Yield Municipal Fund and Ultra Short Municipal Income Fund) if he or she redeems
such Class A and Class A1 shares within
18 months of the date of purchase (within 12 months of the date of purchase for
the Intermediate Municipal Income
Fund, Short Duration High Yield Municipal Fund and Ultra Short Municipal Income
Fund). With respect to such purchases,
the distributor or the Funds’ Adviser may pay dealers a finders’ fee (as
described below) on investments made
in Class A and Class A1 shares with no initial sales charge. The CDSC covers the
finder’s fee paid by the distributor or
the Adviser to the selling dealer. For the selling dealer to be eligible for the
finders’ fee, the following requirements apply:
● |
The
purchase can be made in any combination of the Funds of the Trust. The
amount of the finder’s fee will be determined
based on the particular combination of the Funds purchased. The applicable
finder’s fee will be determined
on a pro rata basis to the purchase of each particular
Fund. |
● |
The
shareholder will be subject to a CDSC for shares redeemed in any
redemption within the first 18 months of purchase
(within the first 12 months of purchase for the Intermediate Municipal
Income Fund, Short Duration High Yield Municipal
Fund and Ultra Short Municipal Income
Fund). |
Additional
Information on Purchases and Sales 111
The
CDSC will equal the amount of the finder’s fee paid out to the dealer as
described in the chart below. The applicable
CDSC will be determined on a pro rata basis according to the amount of the
redemption from each particular Fund.
The Class A and Class A1 CDSC will not exceed the aggregate amount of the
finder’s fee the distributor or Adviser paid
to the selling dealer on all purchases of Class A shares of all Funds an
investor made that were subject to the Class A or
Class A1 CDSC.
Amount
of Finder’s Fee/Contingent Deferred Sales Charge
Class
A Shares of the Funds (other than the Intermediate Municipal Income Fund, Short
Duration High Yield Municipal Fund
and Ultra Short Municipal Income Fund)
|
|
| |
|
|
Amount
of Purchase |
|
Funds
Purchased |
$1
million up to $4 million |
$4
million up to $25 million |
$25
million or more |
China
A Fund, Dynamic Dividend Fund, Emerging Markets Fund, Emerging Markets
ex-China
Fund, Emerging Markets Sustainable Leaders Fund, Infrastructure Debt
Fund,
Global Equity Impact Fund, High Income Opportunities Fund, Global
Infrastructure
Fund, International Small Cap Fund, Emerging Markets Dividend Fund,
Realty
Income & Growth Fund, U.S. Small Cap Equity Fund, U.S. Sustainable
Leaders Fund
and Focused U.S. Small Cap Equity Fund |
1.00% |
0.50% |
0.25% |
Class
A Shares of the Intermediate Municipal Income Fund and Short Duration High Yield
Municipal Fund
|
| |
Amount
of Purchase |
$250,000
up to $4 million |
$4
million up to $25 million |
$25
million or more |
0.75%
|
0.50% |
0.25% |
Class
A1 Shares of the Ultra Short Municipal Income Fund
|
Amount
of Purchase |
$250,000
or more |
0.25%
|
CDSC
for Class C Shares
You
will pay a CDSC of 1.00% if you sell your Class C shares within the first year
after you purchased the shares; however,
the CDSC shall not apply to redemptions of Class C shares that were purchased
through a financial intermediary
that was not paid a commission by the Fund’s distributor or Adviser at the time
of purchase. The distributor or
the Funds’ Adviser compensates broker-dealers and financial intermediaries for
sales of Class C shares from its own resources
at the rate of 1.00% of sales of Class C shares of the Funds. The CDSC is never
imposed on dividends, whether paid
in cash or reinvested, or on appreciation over the initial purchase price. The
CDSC applies only to the lesser of the original
investment or current market value.
Other
Dealer Compensation
In
addition to the dealer commissions and payments under its 12b-1 Plan, from time
to time, the Adviser and/or its affiliates
may make payments for distribution and/or shareholder servicing activities out
of their past profits and other of their
own resources. The Adviser may also pay and/or reimburse sub-transfer agency
expenses to certain broker-dealers
and financial intermediaries who provide administrative support services to
beneficial shareholders on behalf
of the Funds, subject to certain limitations approved by the Board. Sub-transfer
agency expenses generally include,
but are not limited to, costs associated with recordkeeping, networking or other
administrative services. The Adviser
and/or its affiliates may make payments for marketing, promotional, or related
services provided by dealers and other
financial intermediaries, and may be in exchange for factors that include,
without limitation, differing levels or types of
services provided by the intermediary, the expected level of assets or sales of
shares, the placing of some or all of the Funds
of the Trust on a preferred or recommended list, access to an intermediary’s
personnel, and other factors. The amount
of these payments is determined by the Adviser.
In
addition to these payments described above, the Adviser or its affiliates may
offer other sales incentives in the form
of sponsorship of educational or client seminars relating to current products
and issues, assistance in training and educating
the intermediary’s personnel, and/or entertainment or meals. These payments also
may include, at the direction
of a retirement plan’s named fiduciary, amounts to intermediaries for certain
plan expenses or otherwise for the benefit
of plan participants and beneficiaries. As permitted by applicable law, the
Adviser or its affiliates may pay or allow other
incentives or payments to intermediaries.
The
payments described above are often referred to as “revenue sharing payments.”
The recipients of such payments
may include:
● |
the
distributor and other affiliates of the
Adviser, |
112 Additional
Information on Purchases and Sales
● |
financial
institutions, and |
● |
other
financial intermediaries through which investors may purchase shares of a
Fund. |
Payments
may be based on current or past sales; current or historical assets; one-time
ticket charges or a flat fee for
specific services provided. In some circumstances, such payments may create an
incentive for an intermediary or its employees
or associated persons to recommend or sell shares of a Fund to you instead of
shares of funds offered by competing
fund families.
Class
R Shares
Class
R shares generally are available only to 401(a) plans, 401(k) plans, 457 plans,
403(b) plans, profit sharing and money
purchase pension plans, defined benefit plans, non-qualified deferred
compensation plans and other retirement accounts
(collectively, “retirement plans”) whereby the retirement plan or the retirement
plan’s financial service firm has an
agreement with the Funds’ distributor to utilize Class R shares in certain
investment products or programs. Class R shares
are generally available to small and mid-sized retirement plans having at least
$1 million in assets. In addition, Class
R shares also are generally available only to retirement plans where Class R
shares are held on the books of the Funds
through omnibus accounts (either at the plan level or at the level of the
financial services firm) and where the plans
are introduced by an intermediary, such as a broker, third-party administrator,
registered investment adviser or other
retirement plan service provider. Class R shares are not available to retail or
institutional non-retirement accounts, traditional
and Roth IRAs, Coverdell Education Savings Accounts, SEPs, SAR-SEPs, one person
Keogh plans, SIMPLE IRAs, individual
403(b) plans, or through 529 Plan accounts.
A
retirement plan’s intermediaries can help determine which class is appropriate
for that retirement plan. If a retirement
plan qualifies to purchase other shares of a Fund, one of these other classes
may be more appropriate than Class
R shares. Specifically, if a retirement plan eligible to purchase Class R shares
is otherwise qualified to purchase Class A
shares at NAV or at a reduced sales charge or to purchase Institutional Service
Class or Institutional Class shares, one of these
classes may be selected where the retirement plan does not require the
distribution and administrative support services
typically required by Class R share investors and/or the retirement plan’s
intermediaries have elected to forgo the
level of compensation that Class R shares provide. Plan fiduciaries should
consider their obligations under ERISA in determining
which class is an appropriate investment for a retirement plan. A retirement
plan’s intermediaries may receive
different compensation depending upon which class is chosen.
Redemptions
Generally,
a Fund will pay you for shares that redeem one day after your redemption request
is received, however, a Fund
may take three days in certain circumstances. A Fund may delay forwarding
redemption proceeds for up to seven days
(i) if the investor redeeming shares is engaged in excessive trading, or (ii) if
the amount of the redemption request otherwise
would be disruptive to efficient portfolio management or would adversely affect
the Fund.
In-Kind
Redemptions
The
Funds generally plan to redeem their shares for cash with the following
exceptions. As described in the Prospectus,
each Fund reserves the right, in circumstances where in its sole discretion it
determines that cash redemption payments
would be undesirable, taking into account the best interests of all Fund
shareholders, to honor any redemption request
by transferring some of the securities held by the Fund directly to you (an
“in-kind redemption”). The Funds may process
a shareholder’s redemption request with an in-kind distribution at any time,
subject to the conditions outlined below,
but may be more likely to do so under stressed conditions where a Fund is unable
to distribute cash, or for redemptions
to large institutional investors that are equipped to receive the in-kind
distribution in a way that does not adversely
affect either such shareholder, the Fund or the remaining
shareholders.
The
Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the Trust is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the specific Fund’s
NAV during any 90-day period for any
one shareholder.
The
Trust’s Board of Trustees has adopted procedures for redemptions in-kind by a
shareholder including affiliated and
unaffiliated persons of a Fund. Affiliated persons of a Fund include
shareholders who are affiliates of the Adviser and shareholders
of a Fund owning 5% or more of the outstanding shares of that Fund. These
procedures provide that a redemption
in-kind shall be effected at approximately the shareholder’s proportionate share
of the distributing Fund’s current
net assets, so that redemptions will not result in the dilution of interests of
the remaining shareholders. The procedures
also require that the distributed securities be valued in the same manner as
they are valued for purposes of computing
the distributing Fund’s NAV and that any redemption in-kind made by an
affiliated party does not favor such affiliate
to the detriment of any other shareholder. Use of the redemption in-kind
procedures will allow a Fund to avoid having
to sell significant portfolio assets to raise cash to meet the shareholder’s
redemption request - thus limiting the potential
adverse effect on the distributing Fund’s NAV.
Medallion
Signature Guarantee
A
medallion signature guarantee is required if: (1) the redemption check is made
payable to anyone other than the registered
shareholder; (2) the redemption proceeds are mailed to an address other than the
address of record; (3) your account
address has changed within the past 15 calendar days; (4) the redemption
proceeds are being wired or sent by
Additional
Information on Purchases and Sales 113
ACH
to a bank for which instructions are currently not on your account; (5) the
redemption proceeds are being wired or sent
by ACH to a bank account that has been added or changed within the past 15
calendar days; or (6) ownership is being
changed on your account. The distributor reserves the right to require a
medallion signature guarantee in other circumstances,
without notice. Based on the circumstances of each transaction, the distributor
reserves the right to require
that your signature be guaranteed by an authorized agent of an “eligible
guarantor institution,” which includes, but
is not limited to, certain banks, credit unions, savings associations, and
member firms of national securities exchanges.
A medallion signature guarantee is designed to protect the shareholder by
helping to prevent an unauthorized
person from redeeming shares and obtaining the proceeds. A notary public is not
an acceptable guarantor.
In certain special cases (such as corporate or fiduciary registrations),
additional legal documents may be required
to ensure proper authorizations. If the distributor decides to require signature
guarantees in all circumstances, shareholders
will be notified in writing prior to implementation of the policy. The
distributor, at its discretion, may waive the
requirement for a signature guarantee.
Accounts
With Low Balances
If
the value of your account falls below $1,000 for any reason, including market
fluctuation, you are generally subject to
a $5 quarterly fee (with an annual maximum of $20 per account), which is
deposited into the applicable Fund to offset the
expenses of small accounts. We will sell shares from your account quarterly to
cover the fee.
Listed
below are certain cases in which the Funds have elected, in their discretion,
not to assess the Minimum Balance
Fee. These exceptions are subject to change:
● |
Accounts
of shareholders that are held by intermediaries under the NSCC Fund/SERV
system in Networking Level 0 (Trust)
and Level 3 accounts; |
● |
Individual
Retirement Accounts; |
● |
Retirement
Plans including but not limited to 401(k) plans, 457 plans, 403(b) plans,
profit sharing and money purchase pension
plans, defined benefit plans, nonqualified deferred compensation
plans; |
● |
Coverdell
Educational Savings Accounts; and |
● |
Class
A share accounts established pursuant to the Class C to Class A conversion
feature |
We
reserve the right to sell the rest of your shares and close your account if you
make a sale that reduces the value of
your account to less than $1,000. Before the account is closed, we will give you
notice and allow you 60 days to purchase
additional shares to avoid this action. We do this because of the high cost of
maintaining small accounts.
114 Additional
Information on Purchases and Sales
Valuation
of Shares
Under
normal circumstances, the NAV per share for each Fund is determined as of the
close of regular trading on the
New York Stock Exchange (the “Exchange”) (usually 4 p.m. Eastern Time) on each
day that the Exchange is open (a
“Business
Day”) and on such other days as the Board of Trustees determines (together, the
“Valuation Time”). However,
to the extent that a Fund’s investments are traded in markets that are open when
the Exchange is closed, the value
of the Fund’s investments may change on days when shares cannot be purchased or
redeemed.
The
Funds will not compute NAV on customary business holidays, including New Year’s
Day, Martin Luther King, Jr. Day,
Presidents’ Day, Good Friday, Memorial Day, Juneteenth National Independence
Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, or the days when such holidays are observed
and other days when the Exchange
is regularly closed. Fixed income Fund shares may be priced on days that the
Exchange is closed if the Securities
Industry and Financial Markets Association (“SIFMA”) recommends that the bond
markets remain open for all
or part of the day. On any business day when the SIFMA recommends that the bond
markets close early, a fixed income
Fund reserves the right to close at or prior to the SIFMA recommended closing
time. If a fixed income Fund does so,
it will cease granting same business day credit for purchase and redemption
orders received after the Fund’s closing time
and credit will be given to the next business day.
Each
Fund reserves the right not to determine its NAV when: (i) a Fund has not
received any orders to purchase, sell or
exchange shares and (ii) changes in the value of that Fund’s portfolio do not
affect that Fund’s NAV.
Under
normal circumstances, the offering price for orders received in good form before
the close of the Exchange, on
each business day the Exchange is open for trading, will be based upon
calculation of the NAV at the close of regular trading
on the Exchange. For orders received in good form after the close of regular
trading on the Exchange, or on a
day on which the Exchange is not open for trading, the offering price is based
upon NAV at the close of the Exchange on
the next day thereafter on which the Exchange is open for trading. The NAV of a
share of a Fund on which offering and redemption
prices are based is the Total Net Assets (“TNA”) of the Fund, divided by the
number of shares outstanding, with
the result adjusted to the nearer cent. The TNA of the Funds is determined by
subtracting the liabilities of the Funds from
the value of its assets (chiefly composed of investment securities). The NAV per
share of a class is computed by adding
the value of all securities and other assets in a Fund’s portfolio allocable to
such class, deducting any liabilities allocable
to such class and any other liabilities charged directly to that class and
dividing by the number of shares outstanding
in such class.
The
Funds value their securities at current market value or fair value, consistent
with regulatory requirements. “Fair value”
is defined in the Funds’ Valuation and Liquidity Procedures as the price that
could be received to sell an asset or paid
to transfer a liability in an orderly transaction between willing market
participants without a compulsion to transact at
the measurement date. Pursuant to Rule 2a-5 under the 1940 Act, the Board of
Trustees (the “Board”) designated the Adviser
as the valuation designee (“Valuation Designee”) for the Funds to perform the
fair value determinations relating to Fund
investments for which market quotations are not readily available or deemed
unreliable.
Equity
securities that are traded on an exchange are valued at the last quoted sale
price or
the official close price on
the
principal exchange on which the security is traded at the “Valuation
Time”
subject to application, when appropriate, of
the valuation factors described in the paragraph below. Under
normal circumstances, the
Valuation Time is as of the close
of regular trading on the New York Stock Exchange (”NYSE”)
(usually
4:00 p.m. Eastern Time). In the absence of a sale
price, the security is valued at the mean of the bid/ask price
quoted
at the close on the principal exchange on which the
security is traded. Securities traded on NASDAQ are valued at the NASDAQ
official closing price. Open-end mutual funds
are valued at the respective NAV
as reported by such company. The prospectuses for the registered open-end
management
investment companies in which a Fund invests explain the circumstances under
which those companies will
use fair value pricing and the effects of using fair value pricing. Closed-end
funds and ETFs are valued at the market price
of the security at the Valuation Time.
Foreign
equity securities that are traded on foreign exchanges that close prior to the
Valuation Time are valued by applying
valuation factors to the last sale price or the mean price as noted above.
Valuation factors are provided by an independent
pricing service provider. These valuation factors are used when pricing a Fund’s
portfolio holdings to estimate
market movements between the time foreign markets close and the time a Fund
values such foreign securities. These
valuation factors are based on inputs such as depositary receipts, indices,
futures, sector indices/ETFs, exchange
rates, and local exchange opening and closing prices of each security. When
prices with the application of valuation
factors
are
utilized, the value assigned to the foreign securities may not be the same as
quoted or published prices
of the securities on their primary markets. Valuation factors are not utilized
if the independent pricing service provider
is unable to provide a valuation factor or if the valuation factor falls below a
predetermined threshold.
Long-term
debt
and other fixed
income securities are valued at the last quoted or evaluated bid price on the
valuation
date provided by an independent pricing service provider.
If there are no current day bids, the security is valued at
the previously applied bid. Pricing services generally price debt securities
assuming orderly transactions of an institutional
“round lot” size, and the strategies employed by the Adviser as
Valuation Designee generally
trade in round lot sizes.
In certain circumstances, fixed income securities may be held or transactions
may be conducted in smaller, “odd lot”
sizes. Odd lots may trade at lower or occasionally higher prices than
institutional round lot trades. Short-term debt
securities
(such as commercial paper and U.S. treasury bills) having a remaining maturity
of 60 days or less are valued at the
last quoted or evaluated bid price on the valuation date provided by an
independent pricing service, or on the basis of amortized
cost if it represents the best approximation for fair value.
Derivative instruments are generally valued according
to the following procedures.
Derivative
instruments are generally valued according to the following procedures. Forward
currency exchange contracts
are generally valued based on the current spot exchange rates and the forward
exchange rate points (ex. 1-month,
3-month) that are obtained from an approved pricing agent. Based on the actual
settlement dates of the forward
contracts held, an interpolated value of the forward points is combined with the
spot exchange rate to derive the valuation.
Futures contracts are generally valued at the most recent settlement price as of
NAV determination. Swap agreements
are generally valued by an approved pricing agent based on the terms of the swap
agreement (including future
cash flows). When market quotations or exchange rates are not readily available,
or if the Adviser as
Valuation Designee
concludes
that such market quotations do not accurately reflect fair value, the fair value
of a Fund’s assets are determined
in good faith in accordance with the Valuation Procedures.
The
time at which transactions and Fund shares are priced and the time by which
orders must be received may be changed
in case of an emergency or if regular trading on the Exchange and/or the bond
markets are stopped at a time other
than their regularly scheduled closing time. In the event the Exchange and/or
the bond markets do not open for
business, the Trust may, but is not required to, open one or more Funds for
purchase, redemption and exchange transactions
if the Federal Reserve wire payment system is open.
The
Trust may suspend the right of redemption for such periods as are permitted
under the 1940 Act and under the following
unusual circumstances: (a) when the New York Stock Exchange is closed (other
than weekends and holidays) or
trading is restricted; (b) when an emergency exists, making disposal of
portfolio securities or the valuation of net assets
not reasonably practicable; or (c) during any period when the SEC has by order
permitted a suspension of redemption
for the protection of shareholders.
Systematic
Investment Strategies
Depending
on the policies and procedures of your financial intermediary, some or all of
the systematic investment strategies
described below may not be available to you. Please contact your financial
intermediary for more information.
Automatic Investment
Plan
- This is a systematic investment strategy which combines automatic monthly
transfers from
your personal checking account to your mutual fund account with the concept of
Dollar Cost Averaging. With this strategy,
you invest a fixed amount monthly over an extended period of time, during both
market highs and lows. Dollar Cost
Averaging can allow you to achieve a favorable average share cost over time
since your fixed monthly investment buys
more shares when share prices fall during low markets, and fewer shares at
higher prices during market highs. However,
no formula can assure a profit or protect against loss in a declining market.
Once you have opened an account with
at least $1,000, you can contribute to an Automatic Investment Plan for as
little as $50 a month in a Fund.
Systematic Exchange Plan and Dividend
Moves
- This plan allows you to transfer $50 or more to one Fund from another
Fund systematically, monthly or quarterly. Accounts participating in a
systematic exchange plan have a minimum
balance requirement of $5,000. The money is transferred on the 25th day of the
month as selected or on the preceding
business day. Dividends of any amount can be moved automatically from one Fund
to another at the time they
are paid. This strategy can provide investors with the benefits of Dollar Cost
Averaging through an opportunity to achieve
a favorable average share cost over time. With this plan, your fixed monthly or
quarterly transfer from the Fund to
any other Fund you select buys more shares when share prices fall during low
markets and fewer shares at higher prices
during market highs. However, no formula can assure a profit or protect against
loss in a declining market.
Systematic Withdrawal Plan (“SWP”) ($50 or
More)
- You may have checks for any fixed amount of $50 or more automatically
sent bi-monthly, monthly, quarterly, semi-annually or annually, to you (or
anyone you designate) from your account.
Complete the appropriate section of the New Account Form or contact your
financial intermediary or the Fund. Your
account value must meet the minimum initial investment amount at the time the
program is established. This program
may reduce and eventually deplete your account. Generally, it is not advisable
to continue to purchase Class A, Class
A1 or Class C shares subject to a sales charge while simultaneously redeeming
shares under the program. The $50 minimum
is waived for required minimum distributions from individual retirement
accounts.
NOTE:
If you are withdrawing more shares than your account receives in dividends, you
will be decreasing your total shares
owned, which will reduce your future dividend potential.
Systematic
Investment Strategies 117
Investor
Privileges
The
Funds offer the following privileges to shareholders. Additional information may
be obtained by calling toll–free 866-667-9231.
However, the following privileges may not be permitted by the policies and
procedures of a financial intermediary
through which you may purchase shares of the Funds. Please contact your
financial intermediary for more information.
No Sales Charge On
Reinvestments
- All dividends and capital gains will be automatically reinvested free of
charge in the
form of additional shares within the same Fund and class or another specifically
requested Fund (but the same class) unless
you have chosen to receive them in cash on your application. Unless requested in
writing by the shareholder, the Trust
will not mail checks for dividends and capital gains of less than $5 but instead
they will automatically be reinvested in the
form of additional shares.
Exchange Privilege
-
With respect to other Classes of the Funds, the exchange privilege is a
convenient way to exchange
shares from one Fund to another Fund in order to respond to changes in your
goals or in market conditions. The
registration of the account to which you are making an exchange must be exactly
the same as that of the Fund account
from which the exchange is made, and the amount you exchange must meet the
applicable minimum investment
of the Fund being purchased. The exchange privilege may be limited due to
excessive trading or market timing
of Fund shares.
Exchanges Among Funds
-
Exchanges may be made among any of the funds of the Trust within the same class
of shares
(except for any other Fund not currently accepting purchase orders), so long as
both accounts have the same registration,
and your first purchase in the new Fund meets the new Fund’s minimum investment
requirement.
Because
Class R shares of the Funds are held within retirement plans, exchange
privileges with other Class R shares of the abrdn Funds may not be available
unless the Class R shares of the other abrdn Funds are also available within a
plan. Please contact your retirement plan administrator for information on how
to exchange your Class R shares within your retirement plan.
Generally,
you may exchange all or part of your shares for shares of the same class of
another abrdn Fund without paying
a front-end sales charge or CDSC at the time of the exchange. If you exchange
your Class A shares of a Fund that are
subject to a CDSC into another abrdn Fund and then redeem those Class A shares
within 18 months of the original purchase
(within 12 months of the original purchase of the Intermediate Municipal Income
Fund, Short Duration High Yield Municipal Fund and Ultra Short Municipal Income
Fund),
the applicable CDSC will be the CDSC for the original Fund.
If
you wish to purchase shares of a Fund or class for which the exchange privilege
does not apply, you will pay any applicable
CDSC at the time you redeem your shares and pay any applicable front-end load on
the new Fund you are purchasing
unless a sales charge waiver otherwise applies.
Exchanges
May Be Made in the Following Ways:
By
Telephone
Automated
Voice Response System -
You can automatically process exchanges for the Funds by calling 866-667-
9231,
24 hours a day, seven days a week. However, if you declined the option on the
application, you will not have this automatic
exchange privilege. This system also gives you quick, easy access to mutual fund
information. Select from a menu
of choices to conduct transactions and hear fund price information, mailing and
wiring instructions as well as other mutual
fund information. You must call our toll-free number by the Valuation Time to
receive that day’s closing share price.
The Valuation Time is the close of regular trading of the Exchange, which is
usually 4:00 p.m. Eastern Time.
Customer
Service Line -
By calling 866-667-9231, you may exchange shares by telephone. Requests may be
made only
by the account owner(s). You must call our toll-free number by the Valuation
Time to receive that day’s closing share price.
The
Funds may record all instructions to exchange shares. The Funds reserve the
right at any time without prior notice
to suspend, limit or terminate the telephone exchange privilege or its use in
any manner by any person or class.
The
Funds will employ the same procedure described under “Buying, Selling and
Exchanging Fund Shares” in the Prospectus
to confirm that the instructions are genuine.
The
Funds will not be liable for any loss, injury, damage, or expense as a result of
acting upon instructions communicated
by telephone reasonably believed to be genuine, and the Funds will be held
harmless from any loss, claims
or liability arising from its compliance with such instructions. These options
are subject to the terms and conditions set
forth in the Prospectus and all telephone transaction calls may be recorded. The
Funds reserve the right to revoke this privilege
at any time without notice to shareholders and request the redemption in
writing, signed by all shareholders.
By
Mail or Fax
- Write by regular mail to abrdn Funds, P.O. Box 219534, Kansas City MO
64121-9534 or by overnight mail
to abrdn Funds c/o SS&C GIDS, Inc., 430 W. 7th Street, Ste. 219534, Kansas
City, MO 64105-1407 02021or fax to 866-923-4269.
Please be sure that your letter or facsimile is signed exactly as your account
is registered and that your account
number and the Fund from which you wish to make the exchange are included. For
example, if your account is registered
“John Doe and Mary Doe,” “Joint Tenants With Right of Survivorship,” then both
John Doe and Mary Doe must sign
the exchange request. The exchange will be processed effective the date the
signed letter or fax is received. Fax requests
received after the Valuation Time will be processed as of the next business day.
The Funds reserve the right to require
the original document if you use the fax method.
By
Online Access -
Log on to our website, https://www.abrdn.com/us-online-access,
24 hours a day, seven days a week,
for easy access to your mutual fund accounts. Once you have reached the website,
you will be instructed on how to
select a password and perform transactions. You can choose to receive
information on all Funds as well as your own personal
accounts. You may also perform transactions, such as purchases, redemptions and
exchanges. The Funds may terminate
the ability to buy Fund shares on its website at any time, in which case you may
continue to exchange shares by
mail, wire or telephone pursuant to the Prospectus.
Investor
Services
Automated Voice Response
System
– Our toll-free number 866-667-9231 will connect you 24 hours a day, seven
days
a week to the system. Through a selection of menu options, you can conduct
transactions, hear fund price information,
mailing and wiring instructions and other mutual fund information.
Toll Free Information and Assistance
-
Customer service representatives are available to answer questions regarding
the
Funds and your account(s) between the hours of 8 a.m. and 6 p.m. Eastern Time
(Monday through Friday).
Retirement
Plans (Not available with the Intermediate Municipal Income Fund and Ultra Short
Municipal Income Fund) – Shares of
the Funds may be purchased for Self-Employed Retirement Plans, Individual
Retirement Accounts (IRAs), Roth IRAs, Coverdell Education Savings Accounts,
IRAs, Simplified Employee Pension Plans, Corporate Pension Plans, Profit Sharing
Plans and Money Purchase Plans.
Shareholder Confirmations
-
You will receive a confirmation statement each time a requested transaction is
processed.
However, no confirmations are mailed on certain pre-authorized, systematic
transactions, or IRAs. Instead, these
will appear on your next consolidated statement.
Consolidated Statements
-
Shareholders of the Funds receive quarterly statements as of the end of March,
June, September
and December. Please review your statement carefully and notify us immediately
if there is a discrepancy or error
in your account.
For
shareholders with multiple accounts, your consolidated statement will reflect
all your current holdings in the Funds.
Your accounts are consolidated by social security number and zip code. Accounts
in your household under other social
security numbers may be added to your statement at your request. Only
transactions during the reporting period will
be reflected on the statements. An annual summary statement reflecting all
calendar-year transactions in all your Funds
will be sent after year-end.
Average Cost Statement
-
This statement may aid you in preparing your tax return and in reporting capital
gains and losses
to the IRS. If you redeemed any shares during the calendar year, a statement
reflecting your taxable gain or loss for the
calendar year (based on the average cost you paid for the redeemed shares) will
be mailed to you following each year-end.
Average cost can only be calculated on accounts opened on or after January 1,
1984. Fiduciary accounts and accounts
with shares acquired by gift, inheritance, transfer, or by any means other than
a purchase cannot be calculated.
Average
cost is one of the IRS approved methods available to compute gains or losses.
You may wish to consult a tax advisor
on the other methods available.
Shareholder Reports
-
All shareholders will receive reports semi-annually detailing the financial
operations of the Funds.
Summary Prospectus
-
An updated summary prospectus will be mailed to you at least
annually.
Undeliverable Mail
-
If mail from the Funds to a shareholder is returned as undeliverable on two or
more consecutive occasions,
the Funds will not send any future mail to the shareholder unless it receives
notification of a correct mailing address
for the shareholder. With respect to any redemption checks or dividend/capital
gains distribution checks that are
returned as undeliverable or not presented for payment within six months, the
Trust reserves the right to reinvest the check
proceeds and any future distributions in shares of the particular Fund at the
then-current NAV of such Fund until the
Funds receive further instructions from the shareholder.
Additional
Information
Description
of Shares
The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares of beneficial interest
of each Fund and to divide or combine such shares into a greater or lesser
number of shares without thereby exchanging
the proportionate beneficial interests in the Trust. Each share of a Fund
represents an equal proportionate interest
in that Fund with each other share. The Trust reserves the right to create and
issue a number of different funds. Shares
of each Fund would participate equally in the earnings, dividends, and assets of
that particular fund. Upon liquidation
of a Fund, shareholders are entitled to share pro rata in the net assets of such
Fund available for distribution to shareholders.
The
Trust presently consists of the following 19 series of shares of beneficial
interest, without par value and with the various
classes listed:
| |
FUND
|
SHARE
CLASS |
abrdn
China A Share Equity Fund |
Class
A, Class C, Class R, Institutional Service Class, Institutional
Class |
abrdn
Dynamic Dividend Fund |
Class
A, Institutional Class |
abrdn
EM SMA Completion Fund |
Institutional
Class |
abrdn
Emerging Markets Dividend Fund |
Class
A, Institutional Class |
abrdn
Emerging Markets Fund |
Class
A, Class C, Class R, Institutional Service Class, Institutional
Class |
abrdn
Emerging Markets ex-China Fund |
Class
A, Class C, Class R, Institutional Service Class, Institutional
Class |
abrdn
Emerging Markets Sustainable Leaders Fund |
Class
A, Class C, Class R, Institutional Service Class, Institutional
Class |
abrdn
Focused U.S. Small Cap Equity Fund |
Class
A, Class R, Institutional Service Class, Institutional
Class |
abrdn
Global Equity Impact Fund |
Class
A, Institutional Class |
abrdn
Global Infrastructure Fund |
Class
A, Institutional Class |
abrdn
High Income Opportunities Fund |
Class
A, Institutional Class |
abrdn
Infrastructure Debt Fund |
Class
A, Institutional Service Class, Institutional Class |
abrdn
Intermediate Municipal Income Fund |
Class
A, Institutional Service Class, Institutional Class |
abrdn
International Small Cap Fund |
Class
A, Class C, Class R, Institutional Class |
abrdn
Realty Income & Growth Fund |
Class
A, Institutional Class |
abrdn
Short Duration High Yield Municipal Fund |
Class
A, Class C, Institutional Class |
abrdn
Ultra Short Municipal Income Fund |
Class
A, Class A1, Institutional Class |
abrdn
U.S. Small Cap Equity Fund |
Class
A, Class C, Class R, Institutional Service Class, Institutional
Class |
abrdn
U.S. Sustainable Leaders Fund |
Class
A, Class C, Institutional Service Class, Institutional
Class |
You
have an interest only in the assets of the Fund whose shares you own. Shares of
a particular class are equal in all respects
to other shares of that class. In the event of liquidation of a Fund, shares of
the same class will share pro rata in the
distribution of the net assets of the Fund with all other shares of that class.
All shares are without par value and when issued
and paid for, are fully paid and nonassessable by the Trust. Shares may be
exchanged or converted as described in
this Statement of Additional Information and in the Prospectus but will have no
other preference, conversion, exchange or
preemptive rights.
Voting
Rights
Shareholders
of each class of shares have one vote for each share held and a proportionate
fractional vote for any fractional
share held. An annual or special meeting of shareholders to conduct necessary
business is not required by the Declaration
of Trust, the 1940 Act or other authority except, under certain circumstances,
to amend the Declaration of Trust,
the Investment Advisory Agreement, fundamental investment objectives,
fundamental investment policies and fundamental
investment restrictions, to elect and remove Trustees, to reorganize the Trust
or any series or class thereof and
to act upon certain other business matters. In regard to sale of assets; the
change of fundamental investment objectives,
policies and restrictions; the approval of an Investment Advisory Agreement; or
any other matter for which a shareholder
vote is sought, the right to vote is limited to the holders of shares of the
particular Fund affected by the proposal.
In addition, holders of shares subject to a Rule 12b-1 fee will vote as a class
and not with holders of any other class
with respect to the approval of the Distribution Plan.
To
the extent that such a meeting is not required, the Trust does not intend to
have an annual or special meeting of shareholders.
Additional
Information 121
Additional
General Tax Information for all Funds
The
information discussed in this section applies generally to all of the Funds that
are described in this SAI, but is supplemented
or modified in additional separate sections that are provided below for abrdn
Intermediate Municipal Income
Fund, abrdn Short Duration High Yield Municipal Fund and abrdn Ultra Short
Municipal Income Fund.
Buying
a Dividend
If
you are a taxable investor and invest in a Fund shortly before the record date
of a taxable distribution, the distribution
will lower the value of the Fund’s shares by the amount of the distribution, and
you will in effect receive some of
your investment back, but in the form of a taxable distribution.
Dividends
from Taxable Income
The
Fund may earn taxable income from many sources, including income from temporary
investments, discount from
stripped obligations or their coupons, income from securities loans or other
taxable transactions, and ordinary income
from the sale of market discount bonds. If you are a taxable investor, any
distributions by the Fund from this income
will be taxable to you as ordinary income, whether you receive them in cash or
in additional shares.
Distribution
of Net Investment Income
Each
Fund receives income generally in the form of dividends and interest on its
investments. This income, less expenses
incurred in the operation of a Fund, constitutes its net investment income from
which dividends may be paid to you.
If you are a taxable investor, any distributions by a Fund from such income
(other than qualified dividend income received
by individuals) will be taxable to you at ordinary income tax rates, whether you
receive them in cash or in additional
shares. Distributions from qualified dividend income will be taxable to
individuals at long-term capital gain rates,
provided certain holding period requirements are met by you and the Fund. See
the discussion below under the heading,
“Qualified Dividend Income for Individuals.”
Distributions
of Capital Gains
A
Fund may realize a capital gain or loss in connection with sales or other
dispositions of its portfolio securities. Distributions
derived from the excess of net short-term capital gain over net long-term
capital loss will be taxable to you as
ordinary income. Distributions paid from the excess of net long-term capital
gain over net short-term capital loss will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in a Fund. Any net short-term
or long-term capital gain realized by a Fund (net of any capital loss
carryovers) generally will be distributed once
each year, and may be distributed more frequently, if necessary, in order to
reduce or eliminate federal excise or income
taxes on the Fund.
For
U.S. federal income tax purposes, each Fund is generally permitted to carry
forward a net capital loss in any taxable
year to offset its own capital gains. These amounts are available to be carried
forward to offset future capital gains
to extent permitted by the Code and applicable tax regulations. Any such loss
carryforwards will retain their character
as short-term or long-term. In the event that the Fund were to experience an
ownership change as defined for federal
income tax purposes, the Fund’s loss carryforwards may be subject to
limitation.
As
of October 31, 2023,
for U.S. federal income tax purposes, the following Funds have capital loss
carryforwards available
to offset capital gains, if any, to the extent provided by the Treasury
regulations, which do not expire:
122 Additional
General Tax Information for all Funds
Fund |
Amount |
Expires |
China
A Share Equity Fund |
$2,040,441 |
Unlimited
(Short-Term) |
China
A Share Equity Fund |
$15,075,782 |
Unlimited
(Long-Term) |
Dynamic
Dividend Fund |
$883,587 |
Unlimited
(Short-Term) |
Emerging
Markets Dividend Fund |
$8,439,399 |
Unlimited
(Short-Term) |
Emerging
Markets Dividend Fund |
$393,886,133 |
Unlimited
(Long-Term) |
Emerging
Markets ex-China Fund |
$298,533 |
Unlimited
(Short-Term) |
Emerging
Markets ex-China Fund |
$3,343,209 |
Unlimited
(Long-Term) |
Emerging
Markets Fund |
$29,644,707 |
Unlimited
(Short-Term) |
Emerging
Markets Sustainable Leaders Fund |
$7,686,508 |
Unlimited
(Short-Term) |
Emerging
Markets Sustainable Leaders Fund |
$24,603,388 |
Unlimited
(Long-Term) |
Focused
U.S. Small Cap Equity Fund |
$726,410 |
Unlimited
(Short-Term) |
Focused
U.S. Small Cap Equity Fund |
$1,165,621 |
Unlimited
(Long-Term) |
Global
Equity Impact Fund |
$1,176,930 |
Unlimited
(Short-Term) |
Global
Equity Impact Fund |
$10,425,345 |
Unlimited
(Long-Term) |
International
Small Cap Fund |
$26,718,013 |
Unlimited
(Short-Term) |
International
Small Cap Fund |
$22,106,105 |
Unlimited
(Long-Term) |
U.S.
Small Cap Equity Fund |
$14,683,852 |
Unlimited
(Short-Term) |
U.S.
Small Cap Equity Fund |
$48,802,658 |
Unlimited
(Long-Term) |
U.S.
Sustainable Leaders Fund |
$7,416,855 |
Unlimited
(Short-Term) |
U.S.
Sustainable Leaders Fund |
$24,472,895 |
Unlimited
(Long-Term) |
Post-October
Losses
In
determining its net capital gain, including also in connection with determining
the amount available to support a capital gain
dividend, its taxable income and its earnings and profits, a Fund generally may
also elect to treat part or all of any post-October
capital loss (defined as any net capital loss attributable to the portion, if
any, of the taxable year after October
31 or, if there is no such loss, the net long-term capital loss or net
short-term capital loss attributable to any such portion
of the taxable year) or late-year ordinary loss (generally, the sum of its (i)
net ordinary loss, if any, from the sale, exchange
or other taxable disposition of property, attributable to the portion, if any,
of the taxable year after October 31, and
its (ii) other net ordinary loss, if any, attributable to the portion, if any,
of the taxable year after December 31) as if incurred
in the succeeding taxable year.
Medicare
Contribution Tax
A
3.8 percent Medicare contribution tax will be imposed on net investment income,
among other things, including interest,
dividends, and net gain from investments, of U.S. individuals with income
exceeding $200,000 (or $250,000 if married
filing jointly), and of estates and trusts.
Returns
of Capital
If
a Fund’s distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the
distributions made in the same taxable year may be recharacterized as a return
of capital to shareholders. A return of
capital distribution generally will not be taxable, but will reduce each
shareholder’s cost basis in a Fund and result in a higher
reported capital gain or lower reported capital loss when those shares on which
the distribution was received are sold.
Any return of capital in excess of your basis, however, is taxable as a capital
gain.
Investments
in Foreign Securities
The
next three paragraphs describe tax considerations that are applicable to Funds
that invest in foreign securities.
Effect of foreign withholding
taxes.
A Fund may be subject to foreign withholding taxes on income from certain
foreign
securities. This, in turn, could reduce a Fund’s distributions paid to you. Tax
conventions between certain countries and
the United States may reduce or eliminate those foreign taxes in some
cases.
Effect of foreign debt investments on
distributions.
Realized gains and losses from the sale of debt securities are treated
as ordinary income or loss for federal income tax purposes by a Fund, to the
extent attributable to foreign exchange
gains or losses. These gains when distributed are taxable to you as ordinary
income, and any losses reduce a Fund’s
ordinary income otherwise available for distribution to you. This treatment
could increase or decrease a Fund’s ordinary
income distributions to you and may cause some or all of a Fund’s previously
distributed income to be classified as
a return of capital.
Pass-through of foreign tax
credits.
If more than 50% of a Fund’s total assets at the end of a fiscal year is
invested in foreign
securities or, at the close of each quarter, is at least 50% invested in other
regulated investment companies, the Fund
may elect to pass through to you your pro rata share of foreign taxes paid by
the Fund. If this election is made, a
Additional
General Tax Information for all Funds 123
Fund
may report more taxable income to you than it actually distributes. You will
then be entitled either to deduct your share
of these taxes in computing your taxable income (if you itemize your income tax
deductions) or to claim a foreign tax
credit for these taxes against your U.S. federal income tax (subject to
limitations for certain shareholders). A Fund will provide
you with the information necessary to complete your personal income tax return
if it makes this election. The amount
of any foreign tax credits available to you (as a result of the pass-through to
you of your pro rata share of foreign taxes
paid by a Fund) will be reduced if you receive foreign dividends from a Fund
reported as qualified dividend income
subject to taxation at long-term capital gain rates. Shareholders in these
circumstances should talk with their personal
tax advisors about their foreign tax credits and the procedures that they should
follow to claim these credits on their
personal income tax returns. A Fund engaging in securities lending with respect
to a security paying income subject to
foreign taxes may not be able to pass through to its shareholders the ability to
take a foreign tax credit for those taxes. In
addition, a shareholder of a Fund may lose the ability to use foreign tax
credits passed through by the Fund if the Fund shares
are loaned pursuant to a securities lending agreement.
PFIC securities.
A Fund may invest in securities of foreign entities that could be deemed for tax
purposes to be passive
foreign investment companies (“PFICs”). In general, a PFIC is any foreign
corporation if 75% or more of its gross income
for its taxable year is passive income, or 50% or more of its average assets (by
value) are held for the production of
passive income. When investing in PFIC securities, each Fund intends to
mark-to-market these securities and recognize
any unrealized gains as ordinary income at the end of the Fund’s fiscal and
excise (described below) tax years.
Deductions for losses are allowable only to the extent of any current or
previously recognized gains. These gains (reduced
by allowable losses) are treated as ordinary income that a Fund is required to
distribute, even though it has not sold
or received dividends from these securities. You should also be aware that the
designation of a foreign security as a PFIC
security would cause its income dividends to fall outside of the definition of
qualified foreign corporation dividends. These
dividends generally will not qualify for the reduced rate of taxation on
qualified dividends for individuals when distributed
to you by a Fund. In addition, if a Fund is unable to identify an investment as
a PFIC and thus does not make a mark-to-market
election, the Fund may be subject to U.S. federal income tax (the effect of
which could be mitigated by making
a mark-to-market election in a year prior to the sale) on a portion of any
“excess distribution” or gain from the disposition
of such shares even if such income is distributed as a taxable dividend by the
Fund to its shareholders. Additional
charges in the nature of interest may be imposed on a Fund in respect of
deferred taxes arising from such distributions
or gains.
Information
on the Amount and Tax Character of Distributions
Each
Fund will inform you of the amount of your ordinary income and capital gain
dividends at the time they are paid
and will advise you of their tax status for federal income tax purposes shortly
after the end of each calendar year, including
the portion of the distributions that on average are comprised of
exempt-interest income, taxable income and the
portion of exempt-interest income that is a tax preference item when determining
the alternative minimum tax. If you have
not held Fund shares for a full year, a Fund may report and distribute to you,
as exempt-interest income, taxable income,
or capital gains a percentage of income that may not be equal to the actual
amount of this type of income earned
during the period of your investment in the Fund. Taxable distributions declared
by a Fund in October, November or December to shareholders
of record in such a month but paid in January are taxable to you as if they were
paid in December.
Election
to be Taxed as a Regulated Investment Company
Each
Fund intends to elect or has elected to be treated as a regulated investment
company under Subchapter M of the
Code. Each Fund has qualified as a regulated investment company for its most
recent fiscal year and intends to continue
to qualify during the current fiscal year. As a regulated investment company, a
Fund generally is not subject to entity-level
federal income tax on the income and gains it distributes to you. The Board of
Trustees reserves the right not to
distribute a Fund’s net long-term capital gain or not to maintain the
qualification of a Fund as a regulated investment company
if it determines such a course of action to be beneficial to shareholders. If
net long-term capital gain is retained, a
Fund would be taxed on the gain at the highest corporate tax rate, and the
shareholders of the Fund would be notified that
they are entitled to a credit or refund for the tax paid by the Fund. If a Fund
fails to qualify as a regulated investment company,
the Fund would be subject to federal and possibly state corporate taxes on its
taxable income and gain, and distributions
to you would be taxed as dividend income to the extent of the Fund’s earnings
and profits.
In
order to qualify as a regulated investment company for federal income tax
purposes, each Fund must meet certain
asset diversification, income, and distribution specific requirements,
including:
1. |
a
Fund must derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of stock
or securities or foreign currencies, other
income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its
business of investing in such stock, securities or currencies and net
income derived from interests in “qualified publicly
traded partnerships” (i.e., partnerships that are traded on an established
securities market or tradable on a secondary
market, other than partnerships that derive 90% of their income from
interest, dividends, capital gains, and
other traditionally permitted mutual fund
income); |
2. |
a
Fund must diversify its holdings so that, at the end of each quarter of
the Fund’s taxable year, (a) at least 50% of the
market value of the Fund’s assets is represented by cash, securities of
other regulated investment companies, U.S.
Government securities and other securities, with such other securities
limited, in respect of any one issuer, to an |
124 Additional
General Tax Information for all Funds
| amount
not greater than 5% of the Fund’s assets and not greater than 10% of the
outstanding voting securities of such
issuer and (b) not more than 25% of the value of its assets is invested in
the securities (other than U.S. Government
securities or securities of other regulated investment companies) of any
one issuer, any two or more issuers
of which 20% or more of the voting stock is held by the Fund and that are
determined to be engaged in the same
or similar trades or businesses or related trades or businesses or in the
securities of one or more qualified publicly
traded partnerships; and |
3. |
a
Fund must distribute to its shareholders at least the sum of (i) 90% of
its “investment company taxable income” (i.e.,
income other than its net realized long-term capital gain over its net
realized short-term capital loss), plus or minus
certain adjustments, and (ii) 90% of its net tax-exempt income for the
taxable year. The Fund will be subject to
income tax at regular corporation rates on any taxable income or gains
that it does not distribute to its shareholders. |
Excise
Tax Distribution Requirements
To
avoid a 4% federal excise tax, the Code requires a Fund to distribute to you by
December 31 of each year, at a minimum,
the following amounts: 98% of its taxable ordinary income earned during the
calendar year; 98.2% of its capital gain
net income earned during the twelve-month period ending October 31; and 100% of
any undistributed amounts from
the prior year. Each Fund intends to declare and pay these distributions in
December (or to pay them in January, in which
case you must treat them as received in December) but can give no assurances
that its distributions will be sufficient
to eliminate all taxes.
Sales,
Exchanges and Redemption of Fund Shares
Sales,
exchanges, and redemptions (including redemptions in kind) of Fund shares are
taxable transactions for federal
and state income tax purposes. If you sell your Fund shares, whether you receive
cash or exchange them for shares
of a different Fund, the IRS requires you to report any gain or loss on your
sale or exchange. If you owned your shares
as a capital asset, any gain or loss that you realize generally is a capital
gain or loss, and is long-term or short-term,
depending on how long you owned your shares. Any redemption/exchange fees you
incur on shares redeemed
or exchanged within 90 days after the date they were purchased will decrease the
amount of any capital gain
(or increase any capital loss) you realize on the sale or exchange.
Redemption at a Loss Within Six Months of
Purchase.
Any loss incurred on the sale or exchange of Fund shares owned
for six months or less will be disallowed to the extent of any exempt-interest
dividends paid to you with respect to your
Fund shares, and any remaining loss will be treated as a long-term capital loss
to the extent of any long-term capital gains
distributed to you by the Fund on those shares.
Wash Sales.
All or a portion of any loss that you realize on the sale of your Fund shares is
disallowed to the extent that you
buy other shares in the Fund (through reinvestment of dividends or otherwise)
within 30 days before or after your sale.
Any loss disallowed under these rules is added to your tax basis in the new
shares.
Deferral of Basis
– Class A shares only. In reporting gain or loss on the sale of your Fund
shares, you may be required to
adjust your basis in the shares you sell under the following
circumstances:
If:
● |
In
your original purchase of Fund shares, you received a reinvestment right
(the right to reinvest your sales proceeds at a
reduced or with no sales charge), and |
● |
You
sell some or all of your original shares within 90 days of their purchase,
and |
● |
You
reinvest the sales proceeds in the Fund or in another Fund on or before
January 31 of the following year, and the sales
charge that would otherwise apply is reduced or
eliminated; |
Then:
In
reporting any gain or loss on your sale, all or a portion of the sales charge
that you paid for your original shares is excluded
from your tax basis in the shares sold and added to your tax basis in the new
shares.
Cost Basis
Reporting.
A Fund’s administrative agent will be required to provide you with cost basis
information on the sale
of any of your shares in a Fund, subject to certain exceptions.
This
cost basis reporting requirement is effective for shares purchased in a Fund on
or after January 1, 2012.
U.S.
Government Securities
The
income earned on certain U.S. Government securities is exempt from state and
local personal income taxes if earned
directly by you. States also grant tax-free status to dividends paid to you from
interest earned on these securities, subject
in some states to minimum investment or reporting requirements that must be met
by a Fund. The income on Fund
investments in certain securities, such as repurchase agreements collateralized
by U.S. Government obligations, commercial
paper and federal agency-backed obligations (e.g., Ginnie Mae or Fannie Mae
securities), generally does not
qualify for tax-free treatment. The rules on exclusion of this income are
different for corporations.
Additional
General Tax Information for all Funds 125
Qualified
Dividend Income for Individuals
For
individual shareholders, a portion of the dividends paid by a Fund may be
qualified dividends eligible for taxation at
long-term capital gain rates. This reduced rate generally is available for
dividends paid by a Fund out of dividends earned
on the Fund’s investment in stocks of domestic corporations and qualified
foreign corporations. Dividends from PFICs
are not eligible to be treated as qualified dividend income. Either none or only
a nominal portion of the dividends paid
by certain Funds will be qualified dividend income because they invest primarily
in non-qualified foreign securities. Income
dividends earned by the Funds on non-qualified foreign securities will continue
to be taxed at the higher ordinary income
tax rate. A Fund’s entry into securities lending transactions may cause the
replacement income earned on the loaned
securities to fall outside the definition of qualified dividend income. In
addition, if a Fund’s shares are loaned pursuant
to a securities lending arrangement, dividends paid while the shares are held by
the borrower may not be qualified
dividend income.
Both
a Fund and the investor must meet certain holding period requirements to qualify
Fund dividends for this treatment.
Specifically, a Fund must hold the stock for at least 61 days during the 121-day
period beginning 60 days before
the stock becomes ex-dividend (or, in the case of certain preferred stock, for
at least 91 days during the 181-day period beginning 90 days before the stock
becomes ex-dividend). Similarly, investors must hold their Fund shares for at
least 61 days during the 121-day
period beginning 60 days before the Fund distribution goes ex-dividend (or, in
the case of certain preferred stock dividends paid by the Fund, for at least 91
days during the 181-day period beginning 90 days before the stock becomes
ex-dividend). The ex-dividend date is the first date following
the declaration of a dividend on which the purchaser of stock is not entitled to
receive the dividend payment. When
counting the number of days you held your Fund shares, include the day you sold
your shares but not the day you acquired
these shares.
While
the income received in the form of a qualified dividend is taxed at the same
rates as long-term capital gains, such
income will not be considered as a long-term capital gain for other federal
income tax purposes. For example, you will
not be allowed to offset your long-term capital losses against qualified
dividend income on your federal income tax return.
Any qualified dividend income that you elect to be taxed at these reduced rates
also cannot be used as investment
income in determining your allowable investment interest expense. For other
limitations on the amount of or use
of qualified dividend income on your income tax return, please contact your
personal tax advisor.
After
the close of its fiscal year, a Fund will report the portion of its ordinary
dividend income that meets the definition of
qualified dividend income taxable at reduced rates. If 95% or more of a Fund’s
income is from qualified sources, it will be
allowed to report 100% of its ordinary income distributions as qualified
dividend income.
Dividends-Received
Deduction for Corporations
For
corporate shareholders, a portion of the dividends paid by a Fund may qualify
for the dividends-received deduction.
The portion of dividends paid by a Fund that qualifies for the corporate
dividends-received deduction will be reported
each year in a notice mailed to the Fund’s shareholders, and cannot exceed the
gross amount of dividends received
by the Fund from domestic (U.S.) corporations that would have qualified for the
dividends-received deduction in the
hands of the Fund if the Fund was a regular corporation. Either none or only a
nominal portion of the dividends paid by
certain Funds will be eligible for the corporate dividends-received deduction
because they invest primarily in foreign securities.
A Fund’s entry into securities lending transactions may cause the replacement
income earned on the loaned securities
to fail to qualify for the dividends received deduction.
In
addition, if a Fund’s shares are loaned pursuant to a securities lending
arrangement, dividends paid while the shares
are held by the borrower may not qualify for the dividends received deduction.
The availability of the dividends-received
deduction is subject to certain holding period and debt financing restrictions
imposed under the Code
on the corporation claiming the deduction. The amount that a Fund may report as
eligible for the dividends-received
deduction will be reduced or eliminated if the shares on which the dividends
earned by the Fund were
debt-financed or held by the Fund for less than a minimum period of time,
generally 46 days during a 91-day period
beginning 45 days before the stock becomes ex-dividend (or, in the case of
certain preferred stock, for at least 91 days during the 181-day period
beginning 90 days before the stock becomes ex-dividend). Similarly, if your Fund
shares are debt-financed or held by
you for less than a 46-day period (or, in the case of certain preferred stock
dividend paid by the Fund, a 91-days period) then the dividends-received
deduction for Fund dividends on your shares may also be
reduced or eliminated.
Section
199A Dividends for Individuals
For
tax years beginning before January 1, 2026, a Fund may report “section 199A
dividends” eligible for a 20% “qualified
business income” deduction for non-corporate US shareholders to the extent the
Fund’s income is derived from ordinary
REIT dividends, reduced by allocable Fund expenses. In order for a Fund’s
dividends to be eligible for the qualified business
income deduction, the Fund must meet certain holding period requirements with
respect to the shares on which the
Fund received the eligible dividends, and the shareholder must meet certain
holding period requirements with respect
to the Fund shares.
163(j)
Interest Dividends
Certain
distributions reported by a Fund as Section 163(j) interest dividends may be
treated as interest income by shareholders
for purposes of the tax rules applicable to interest expense limitations under
Code section 163(j). Such treatment
by the shareholder is generally subject to holding period requirements and other
potential limitations, although the
holding period requirements are generally not applicable to dividends declared
by money market funds and certain other
funds that declare dividends daily and pay such dividends on a monthly or more
frequent basis. The amount that a
126 Additional
General Tax Information for all Funds
Fund
is eligible to report as a Section 163(j) dividend for a tax year is generally
limited to the excess of the Fund’s business interest
income over the sum of the Fund’s (i) business interest expense and (ii) other
deductions properly allocable to the
Fund’s business interest income.
Alternative
Minimum Tax
Interest
on certain private activity bonds, while exempt from regular U.S. federal income
tax, is a preference item for you
when determining your alternative minimum tax under the Code and under the
income tax provisions of several states.
Private activity bond interest could subject you to or increase your liability
under the federal and state alternative minimum
taxes, depending on your personal or corporate tax position. If you are a person
defined in the Code as a substantial
user (or person related to a user) of a facility financed by private activity
bonds, you should consult with your tax
adviser before buying shares of the Fund.
Treatment
of Interest on Debt Incurred to Hold Fund Shares
Interest
on debt you incur to buy or hold Fund shares may not be deductible for U.S.
federal income tax purposes. Indebtedness
may be allocated to shares of a Fund even though not directly traceable to the
purchase of such shares.
Loss
of Status of Securities as Tax-Exempt
Failure
of the issuer of a tax-exempt security to comply with certain legal or
contractual requirements relating to the security
could cause interest on the security, as well as Fund distributions derived from
this interest, to become taxable, perhaps
retroactively to the date the security was issued. In such a case, the Fund may
be required to report to the IRS and
send to shareholders amended Forms 1099 for a prior taxable year in order to
report additional taxable income. This, in
turn, could require shareholders to file amended federal and state income tax
returns for such prior year to report and pay
tax and interest on their pro rata share of the additional amount of taxable
income.
Investment
in Complex Securities
Each
Fund may invest in complex securities (e.g., futures, options, forward currency
contracts, short-sales, PFICs, etc.)
that may be subject to numerous special and complex tax rules. These rules could
affect whether gain or loss recognized
by a Fund is treated as ordinary or capital, or as interest or dividend income.
These rules could also accelerate
the recognition of income to a Fund (possibly causing the Fund to sell
securities to raise the cash for necessary
distributions). These rules could defer a Fund’s ability to recognize a loss,
and, in limited cases, subject a Fund to
U.S. federal income tax on income from certain foreign securities. These rules
could, therefore, affect the amount, timing,
or character of the income distributed to you by a Fund. For
example:
Derivatives.
A Fund may be permitted to invest in certain options, futures or forward
currency contracts to hedge a Fund’s
portfolio or for any other permissible purposes consistent with that Fund’s
investment objective. If a Fund makes these
investments, it could be required to mark-to-market these contracts and realize
any unrealized gains and losses at its
fiscal year end even though it continues to hold the contracts. Under these
rules, gains or losses on the contracts generally
would be treated as 60% long-term and 40% short-term gains or losses, but gains
or losses on certain foreign currency
contracts would be treated as ordinary income or losses. In determining its net
income for excise tax purposes, a
Fund also would be required to mark-to-market these contracts annually as of
October 31 (for capital gain net income and
ordinary income arising from certain foreign currency contracts), and to realize
and distribute any resulting income and
gains.
Tax straddles.
A Fund’s investment in options, futures, forwards, or foreign currency contracts
(or in substantially similar
or related property) in connection with certain hedging transactions could cause
it to hold offsetting positions in securities.
If a Fund’s risk of loss with respect to specific securities in its portfolio is
substantially diminished by the fact that it
holds other securities, the Fund could be deemed to have entered into a tax
“straddle” or to hold a “successor position” that
would require any loss realized by it to be deferred for tax
purposes.
Short sales and securities lending
transactions.
A Fund’s entry into a short sale transaction or an option or other contract
could be treated as the “constructive sale” of an “appreciated financial
position,” causing it to realize gain, but not
loss, on the position. Additionally, a Fund’s entry into securities lending
transactions may cause the replacement income
earned on the loaned securities to fall outside of the definition of qualified
dividend income and to fail to qualify for
the dividends received deduction. This replacement income generally will not be
eligible for reduced rates of taxation on
qualified dividend income, and, to the extent that debt securities are loaned,
will generally not qualify as qualified interest
income for foreign withholding tax purposes.
Convertible debt.
Convertible debt is ordinarily treated as a “single property” consisting of a
pure debt interest until conversion,
after which the investment becomes an equity interest. If the security is issued
at a premium (i.e., for cash in excess
of the face amount payable on retirement), the creditor-holder may amortize the
premium over the life of the bond.
If the security is issued for cash at a price below its face amount, the
creditor-holder must accrue original issue discount
in income over the life of the debt.
Additional
General Tax Information for all Funds 127
Securities purchased at
discount.
Certain Funds may be permitted to invest in securities issued or purchased at a
discount
such as zero coupon, deferred interest or payment-in-kind (PIK) bonds that could
require it to accrue and distribute
income not yet received. Similar requirements may apply to securities purchased
with market discount. If it invests
in these securities, a Fund could be required to sell securities in its
portfolio that it otherwise might have continued to
hold in order to generate sufficient cash to make these
distributions.
Credit default swap
agreements.
A Fund may be permitted to enter into credit default swap agreements. The rules
governing
the tax aspects of swap agreements that provide for contingent nonperiodic
payments of this type are in a developing
stage and are not entirely clear in certain aspects. Accordingly, while a Fund
intends to account for such transactions
in a manner deemed to be appropriate, the IRS might not accept such treatment.
The Funds intend to monitor
developments in this area. Certain requirements that must be met under the Code
in order for a Fund to qualify as
a regulated investment company may limit the extent to which a Fund will be able
to engage in credit default swap agreements.
Investment in taxable mortgage pools (excess
inclusion income).
The Funds may invest in U.S.-REITs that hold residual
interests in real estate mortgage investment conduits (REMICs) or which are, or
have certain wholly-owned subsidiaries
that are, “taxable mortgage pools.” A portion of a Fund’s income from a
U.S.-REIT that is attributable to the REIT’s
residual interest in a REMIC or equity interests in a taxable mortgage pool
(referred to in the Code as an excess inclusion)
will be subject to federal income tax in all events. The excess inclusion income
of a regulated investment company,
such as a Fund, will be allocated to shareholders of the regulated investment
company in proportion to the dividends
received by such shareholders, with the same consequences as if the shareholders
held the related REMIC residual
interest or, if applicable, taxable mortgage pool directly. In general, excess
inclusion income allocated to shareholders
(i) cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will
constitute unrelated business taxable income (“UBTI”) to entities (including a
qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on UBTI, thereby potentially requiring
such an entity that is allocated excess inclusion income, and otherwise might
not be required to file a tax return, to
file a tax return and pay tax on such income, and (iii) in the case of a
non-U.S. shareholder, will not qualify for any reduction
in U.S. federal withholding tax. In addition, if at any time during any taxable
year a “disqualified organization” (which
generally includes certain cooperatives, governmental entities and tax-exempt
organizations that are not subject to
tax on UBTI) is a record holder of a share in a regulated investment company,
then the regulated investment company will
be subject to a tax equal to that portion of its excess inclusion income for the
taxable year that is allocable to the disqualified
organization, multiplied by the highest federal income tax rate imposed on
corporations.
The
rules concerning excess inclusion income are complex and unduly burdensome in
their current form, and the Funds
are awaiting further guidance from the IRS on how these rules are to be
implemented. Shareholders should talk to their
tax advisors about whether an investment in a Fund is a suitable investment
given the potential tax consequences of the
Fund’s receipt and distribution of excess inclusion income.
Investments in securities of uncertain tax
character.
A Fund may invest in securities the U.S. federal income tax treatment
of which may not be clear or may be subject to recharacterization by the IRS. To
the extent the tax treatment of
such securities or the income from such securities differs from the tax
treatment expected by a Fund, it could affect the
timing or character of income recognized by the Fund, requiring the Fund to
purchase or sell securities, or otherwise change
its portfolio, in order to comply with the tax rules applicable to regulated
investment companies under the Code.
Backup
Withholding
By
law, each Fund must withhold 24% of your taxable distributions and redemption
proceeds unless you provide your
correct social security or taxpayer identification number, certify that this
number is correct, certify that you are not subject
to backup withholding and certify that you are a U.S. person (including a U.S.
resident alien). A Fund also must withhold
if the IRS instructs it to do so. The special U.S. tax certification
requirements applicable to non-U.S. investors are described
under the “Non-U.S. Investors” heading below.
Non-U.S.
Investors
Non-U.S.
investors (shareholders who, as to the United States, are nonresident alien
individuals, foreign trusts or estates,
foreign corporations, or foreign partnerships) may be subject to U.S.
withholding and estate tax and are subject to
special U.S. tax certification requirements. Non-U.S. investors should consult
their tax advisors about the applicability of U.S.
tax withholding and the use of the appropriate forms to certify their status. In
addition, non-U.S. investors may also be subject
to U.S. federal withholding tax on deemed income resulting from any election by
a Fund to treat qualified foreign taxes
it pays as passed through to shareholders (as described above), but may not be
able to claim a U.S. tax credit or deduction
with respect to such taxes.
In general.
The United States imposes a flat 30% withholding tax (or a withholding tax at a
lower treaty rate) on U.S. source
dividends, including on income dividends paid to you by a Fund, but not on
capital gain dividends. However, notwithstanding
such exemptions from U.S. withholding at the source, any dividends and
distributions of income and capital
gains, including the proceeds from the sale of your Fund shares, will be subject
to backup withholding if you fail to properly
certify that you are not a U.S. person.
128 Additional
General Tax Information for all Funds
Exempt-interest
dividends.
In general, exempt-interest dividends reported by the Fund and paid from net
tax-exempt
income are not subject to U.S. withholding tax.
Capital gain
dividends.
In general, a capital gain dividend reported by a Fund and paid from its net
long-term capital gains,
other than long- or short-term capital gains realized on disposition of U.S.
real property interests (see the discussion below),
are not subject to U.S. withholding tax unless you are a nonresident alien
individual present in the United States for a
period or periods aggregating 183 days or more during the calendar
year.
Investment in U.S. real
property.
A Fund may invest in equity securities of corporations that invest in U.S. real
property, including
U.S. Real Estate Investment Trusts (“U.S.-REITs”). The sale of a U.S. real
property interest (“USRPI”) by a Fund, or by a
U.S.-REIT in which the Fund invests, may trigger special tax consequences to the
Fund’s non-U.S. shareholders.
In
general, U.S. federal withholding tax will not apply to any gain or income
realized by a non-U.S. shareholder in respect
of any distributions of net long-term capital gains over net short-term capital
losses, exempt-interest dividends, or
upon the sale or other disposition of Fund shares.
Distributions
that a Fund reports as “short-term capital gain dividends” or “long-term capital
gain dividends” will not be
treated as such to a recipient foreign shareholder if the distribution is
attributable to gain received from the sale or exchange
of U.S. real property or an interest in a U.S. real property holding corporation
and a Fund’s direct or indirect interests
in U.S. real property exceeded certain levels. Instead, if the foreign
shareholder has not owned more than 5% of the
outstanding shares of a Fund at any time during the one year period ending on
the date of distribution, such distributions
will be subject to 30% withholding by a Fund and will be treated as ordinary
dividends to the foreign shareholder;
if the foreign shareholder owned more than 5% of the outstanding shares of a
Fund at any time during the one
year period ending on the date of the distribution, such distribution will be
treated as real property gain subject to 21%
withholding tax and could subject the foreign shareholder to U.S. filing
requirements. Additionally, if a Fund’s direct or indirect
interests in U.S. real property were to exceed certain levels, a foreign
shareholder realizing gains upon redemption from
a Fund could be subject to the 21% withholding tax and U.S. filing requirements
unless more than 50% of a Fund’s shares
were owned by U.S. persons at such time or unless the foreign person had not
held more than 5% of a Fund’s outstanding
shares throughout either such person’s holding period for the redeemed shares
or, if shorter, the previous five
years.
In
addition, the same rules apply with respect to distributions to a foreign
shareholder from a Fund and redemptions of
a foreign shareholder’s interest in a Fund attributable to gain from the sale or
exchange of U.S. real property or an interest
in a U.S. real property holding corporation, if a Fund’s direct or indirect
interests in U.S. real property were to exceed
certain levels.
The
rules laid out in the previous two paragraphs, other than the withholding rules,
will apply notwithstanding a Fund’s
participation in a wash sale transaction or its payment of a substitute
dividend.
Provided
that 50% or more of the value of a Fund’s stock is held by U.S. shareholders,
distributions in kind of U.S. real property
interests (including securities in a U.S. real property holding corporation,
unless such corporation is regularly traded
on an established securities market and the Fund has held 5% or less of the
outstanding shares of the corporation during
the five-year period ending on the date of distribution), in redemption of a
foreign shareholder’s shares of the Fund will
cause the Fund to recognize gain. If the Fund is required to recognize gain, the
amount of gain recognized will equal to
the fair market value of such interests over the Fund’s adjusted bases to the
extent of the greatest foreign ownership percentage
of the Fund during the five-year period ending on the date of
redemption.
Shares
of a Fund held by a non-U.S. shareholder at death will be considered situated
within the United States and subject
to the U.S. estate tax, if applicable.
Because
each Fund expects to invest less than 50% of its assets at all times, directly
or indirectly, in U.S. real property interests,
the Funds expect that neither gain on the sale or redemption of Fund shares nor
Fund dividends and distributions
would be subject to the reporting and tax withholding rules described
above.
U.S tax certification
rules.
Special U.S. tax certification requirements apply to non-U.S. shareholders both
to avoid U.S. backup
withholding and to obtain the benefits of any treaty between the United States
and the shareholder’s country of residence.
In general, a non-U.S. shareholder must provide a Form W-8BEN (or other
applicable Form W-8) to establish that
you are not a U.S. person, to claim that you are the beneficial owner of the
income and, if applicable, to claim a reduced
rate of, or exemption from, withholding as a resident of a country with which
the United States has an income tax treaty.
A Form W-8BEN provided without a U.S. taxpayer identification number will remain
in effect for a period beginning on
the date signed and ending on the last day of the third succeeding calendar year
unless an earlier change of circumstances
makes the information on the form incorrect.
Withholding.
A 30% withholding tax is currently imposed on dividends and certain other types
of income paid to (i) foreign
financial institutions including non-U.S. investment funds unless they agree to
collect and disclose to the IRS information
regarding their direct and indirect U.S. account holders and (ii) certain other
foreign entities, unless they certify
certain information regarding their direct and indirect U.S. owners. To avoid
withholding, foreign financial institutions
will need to (i) enter into agreements with the IRS that state that they will
provide the IRS information, including the
names, addresses and taxpayer identification numbers of direct and indirect U.S.
account holders, comply with due
Additional
General Tax Information for all Funds 129
diligence
procedures with respect to the identification of U.S. accounts, report to the
IRS certain information with respect to
U.S. accounts maintained, agree to withhold tax on certain payments made to
non-compliant foreign financial institutions
or to account holders who fail to provide the required information, and
determine certain other information as to
their account holders, or (ii) in the event that an intergovernmental agreement
and implementing legislation is adopted,
provide local revenue authorities with similar account holder information. Other
foreign entities will need to either
provide the name, address, and taxpayer identification number of each
substantial U.S. owner or certifications of no
substantial U.S. ownership unless certain exceptions apply.
The
tax consequences to a non-U.S. shareholder entitled to claim the benefits of an
applicable tax treaty may be different
from those described herein. Non-U.S. shareholders are urged to consult their
own tax advisors with respect to the
particular tax consequences to them of an investment in a Fund, including the
applicability of foreign tax.
Reporting
If
a shareholder recognizes a loss with respect to the Fund’s shares of $2 million
or more for an individual shareholder or
$10 million or more for a corporate shareholder, the shareholder must file with
the IRS a disclosure statement on Form 8886.
Direct owners of portfolio securities are in many cases exempted from this
reporting requirement, but under current
guidance, shareholders of a regulated investment company are not exempted. The
fact that a loss is reportable under
these regulations does not affect the legal determination of whether the
taxpayer’s treatment of the loss is proper. Shareholders
should consult their tax advisors to determine the applicability of these
regulations in light of their individual circumstances.
Effect
of Future Legislation; Local Tax Considerations
The
foregoing general discussion of U.S. federal income tax consequences is based on
the Code and the regulations issued
thereunder as in effect on the date of this Statement of Additional Information.
In addition, future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes
or decisions may have a retroactive effect with respect to the transactions
contemplated herein. Rules of state and
local taxation of ordinary income, qualified dividend income and capital gain
dividends may differ from the rules for U.S.
federal income taxation described above. Distributions may also be subject to
additional state, local and foreign taxes depending
on each shareholder’s particular situation. Non-U.S. shareholders may be subject
to U.S. tax rules that differ significantly
from those summarized above. Shareholders are urged to consult their tax
advisors as to the consequences of
these and other state and local tax rules affecting investment in a Fund.
This
discussion of “ADDITIONAL GENERAL TAX INFORMATION FOR THE FUNDS” is not intended
or written to be used as tax advice and does not purport to deal with all U.S.
federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. You should consult your own tax advisor
regarding your particular circumstances before making an investment in a
Fund.
Additional
Tax Information with respect to Intermediate Municipal Income Fund, Short
Duration High Yield Municipal Fund and Ultra Short Municipal Income
Fund
The
tax information described in “Additional General Tax Information for All Funds”
above applies to the Intermediate Municipal Income Fund, the Short Duration High
Yield Municipal Fund and the Ultra Short Municipal Income Fund, except as noted
in this section.
Exempt-Interest
Dividends
By
meeting certain requirements of the Code, each Fund qualifies to pay
exempt-interest dividends to you. These dividends
are derived from interest income exempt from regular federal income tax and are
not subject to regular U.S. federal
income tax when they are paid to you. Exempt-interest dividends that are
excluded from federal taxable income may
still be subject to the federal alternative minimum tax. See the discussion
below under the heading “Alternative Minimum
Tax.”
In
addition, to the extent that exempt-interest dividends are derived from interest
on obligations of a state or its political
subdivisions, or from interest on qualifying U.S. territorial obligations
(including qualifying obligations of Puerto Rico,
the U.S. Virgin Islands and Guam), they also may be exempt from that state’s
personal income taxes. Most states, however,
do not grant tax-free treatment to interest on state and municipal securities of
other states. Because of these tax
exemptions, a tax-free fund may not be a suitable investment for retirement
plans and other tax-exempt investors. Corporate
shareholders should note that these dividends may be fully taxable in states
that impose corporate franchise taxes,
and they should consult with their tax advisors about the taxability of this
income before investing in a Fund. Derivatives
on municipal securities generally produce taxable income or taxable loss, with
certain exceptions.
Exempt-interest
dividends are taken into account when determining the taxable portion of your
social security or railroad
retirement benefits. A Fund may invest a portion of its assets in private
activity bonds. The income from private activity
bonds is a tax preference item when determining your U.S. federal alternative
minimum tax. From time to time, legislation
may be introduced or litigation may arise that may restrict or eliminate the
federal income tax exemption for interest
on debt obligations issued by states and their political
subdivisions.
As
a result of entering into swap contracts, a Fund may make or receive net
periodic payments. The Fund may also
make or receive a net periodic payment when a swap is terminated prior to
maturity through an assignment of the swap
or other closing transaction. Periodic net payments received by the Fund will
generally constitute taxable ordinary income
or deductions, while termination of a swap will generally result in capital gain
or loss (which will be a long-term capital
gain or loss if the Fund has been a party to the swap for more than one year).
With respect to certain types of swaps,
the Fund may be required to currently recognize income or loss with respect to
future payments on such swaps or
may elect under certain circumstances to mark such swaps to market annually for
tax purposes as ordinary income or
loss. Periodic net payments paid by the Fund that would otherwise constitute
ordinary deductions but are allocable under
the Code to exempt interest income will not be allowed as a deduction but
instead will reduce net tax-exempt income.
130 Additional
General Tax Information for all Funds
Dividends
from Taxable Income
A
Fund may earn taxable income from many sources, including income from temporary
investments, discount from
stripped obligations or their coupons, income from securities loans or other
taxable transactions, and ordinary income
from the sale of market discount bonds. If you are a taxable investor, any
distributions by the Fund from this income
will be taxable to you as ordinary income, whether you receive them in cash or
in additional shares.
Distributions
of Capital Gains and Gain or Loss on Sale or Exchange of Your Fund
Shares
A
Fund may realize a capital gain or loss on sale of portfolio securities.
Distributions of capital gains are taxable to you.
Distributions from net short-term capital gain will be taxable to you as
ordinary income. Distributions from net long-term
capital gain will be taxable to you as long-term capital gain, regardless of how
long you have held your shares in
the Fund.
When
you sell your shares in a Fund, you may realize a capital gain or loss, which is
subject to federal income tax. For
tax purposes, an exchange of your Fund shares for shares of a different abrdn
Fund is the same as a sale.
For
federal income tax purposes, each Fund is generally permitted to carry forward a
net capital loss in any taxable year
to offset its own capital gains. These amounts are available to be carried
forward to offset future capital gains to extent
permitted by the Code and applicable tax regulations. Any such loss
carryforwards will retain their character as short-term
or long-term. In the event that a Fund were to experience an ownership change as
defined for federal income
tax purposes, the Fund’s loss carryforwards may be subject to
limitation.
Information
on the Amount and Tax Character of Distributions
Each
Fund will inform you of the amount of your taxable ordinary income and capital
gain dividends at the time they are
paid, and will advise you of their tax status for U.S. federal income tax
purposes shortly after the end of each calendar year,
including the portion of the distributions that on average are comprised of
exempt-interest income, taxable income and
the portion of exempt-interest income that is a tax preference item when
determining the alternative minimum tax. If you
have not held Fund shares for a full year, the Fund may report and distribute to
you, as exempt-interest income, taxable
income, or capital gains, and in the case of non-U.S. shareholders, the Fund may
further report and distribute as interest-related
dividends and short-term capital gain dividends, a percentage of income that may
not be equal to the actual
amount of this type of income earned during the period of your investment in the
Fund. Taxable distributions declared
by the Fund in December to shareholders of record in such month but paid in
January are taxed to you as if made
in December.
Redemption
at a Loss Within Six Months of Purchase
Any
loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of
any exempt-interest dividends paid to you with respect to your Fund shares, and
any remaining loss will be treated as a long-term
capital loss to the extent of any long-term capital gain distributed to you by
the Fund on those shares.
Qualified
Dividend Income for Individuals
Because
each Fund’s income is derived primarily from interest rather than dividends,
none of its distributions are expected
to be qualified dividends eligible for taxation by individuals at long-term
capital gain rates.
Dividends-Received
Deduction for Corporations
Because
each Fund’s income is derived primarily from interest rather than dividends,
none of its distributions are expected
to qualify for the corporate dividends-received deduction.
Section
199A Dividends for Individuals
Because
each Fund’s income is derived primarily from interest rather than dividends,
none of its distributions are expected
to be section 199A dividends, eligible for a 20% qualified business income
deduction.
Alternative
Minimum Tax
Interest
on certain private activity bonds, while exempt from regular U.S. federal income
tax, is a preference item for you
when determining your alternative minimum tax under the Code and under the
income tax provisions of several states.
Private activity bond interest could subject you to or increase your liability
under the federal and state alternative minimum
taxes, depending on your personal or corporate tax position. If you are a person
defined in the Code as a substantial
user (or person related to a user) of a facility financed by private activity
bonds, you should consult with your tax
adviser before buying shares of a Fund.
Treatment
of Interest on Debt Incurred to Hold Fund Shares
Interest
on debt you incur to buy or hold Fund shares may not be deductible for U.S.
federal income tax purposes. Indebtedness
may be allocated to shares of a Fund even though not directly traceable to the
purchase of such shares.
Loss
of Status of Securities as Tax-Exempt
Failure
of the issuer of a tax-exempt security to comply with certain legal or
contractual requirements relating to the security
could cause interest on the security, as well as Fund distributions derived from
this interest, to become taxable, perhaps
retroactively to the date the security was issued. In such a case, a Fund may be
required to report to the IRS
Additional
General Tax Information for all Funds 131
and
send to shareholders amended Forms 1099 for a prior taxable year in order to
report additional taxable income. This, in
turn, could require shareholders to file amended federal and state income tax
returns for such prior year to report and pay
tax and interest on their pro rata share of the additional amount of taxable
income.
Non-U.S.
Investors
In
general, exempt-interest dividends reported by a Fund and paid from net
tax-exempt income are not subject to U.S.
withholding tax.
This
discussion of “Additional General Tax Information” is not intended or written to
be used as tax advice and does not purport
to deal with all U.S. federal tax consequences applicable to all categories of
investors, some of which may be subject to
special rules. You should consult your own tax advisor regarding your particular
circumstances before making an investment
in any of the Funds.
132 Additional
General Tax Information for all Funds
Major
Shareholders
Persons
or organizations beneficially owning more than 25% of the outstanding shares of
a Fund are presumed to “control”
the Fund within the meaning of the 1940 Act. As a result, those persons or
organizations could have the ability to take
action with respect to a Fund without the consent or approval of other
shareholders. As of January 31, 2024, the following
shareholders were shown in the Trust’s records as owning more than 25% of each
Fund’s shares. The Trust does not
know of any other person who owns beneficially more than 25% of each Fund’s
shares except as set forth below.
|
|
|
|
|
| |
Fund
|
Shareholder |
Percent
of the Fund
Total Assets
Held by
the Shareholder |
abrdn
Emerging Markets Dividend
Fund |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
BENEFIT OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO
CA
94105-1901 |
52.25% |
abrdn
Intermediate Municipal
Income Fund |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
45.87% |
abrdn
China A Share Equity
Fund |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ
FL 12 |
NEW
YORK NY 10004-1965 |
|
32.97% |
abrdn
International Small Cap
Fund |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO
CA
94105-1901 |
32.38% |
abrdn
Realty Income & Growth
Fund |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUST ACCOUNT
FOR BENEFIT
OF CUSTOMERS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
29.65% |
abrdn
Emerging Markets Fund |
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
26.28% |
As
of January 31, 2024,
the following shareholders were shown in the Trust’s records as owning 5% or
more of any class
of each Fund’s shares. The Trust does not know of any other person who owns of
record or beneficially 5% or more of
any class of each Fund’s shares except as set forth below.
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
China A Share
Equity Fund
Class A |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
14.88% |
abrdn
China A Share
Equity Fund
Class A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
9.92% |
abrdn
China A Share
Equity Fund
Class A |
MLPFS |
FOR
SOLE BENEFIT
OF ITS CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
9.58% |
abrdn
China A Share
Equity Fund
Class A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
7.93% |
abrdn
China A Share
Equity Fund
Class A |
VANGUARD
BROKERAGE
SERVICES |
100
VANGUARD BLVD |
MALVERN
PA 19355-2331 |
|
|
5.17% |
abrdn
China A Share
Equity Fund
Class C |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
80.76% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
China A Share
Equity Fund
Class C |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
13.50% |
abrdn
China A Share
Equity Fund
Class R |
SAMMONS
FINANCIAL
NETWORK
LLC |
4546
CORPORATE
DR STE
100 |
WDM
IA 50266-5911 |
|
|
83.55% |
abrdn
China A Share
Equity Fund
Class R |
ASCENSUS
TRUST
COMPANY
FBO |
P.O.
BOX 10758 |
FARGO
ND 58106-0758 |
|
|
6.70% |
abrdn
China A Share
Equity Fund
Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
65.03% |
abrdn
China A Share
Equity Fund
Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
|
|
5.97% |
abrdn
China A Share
Equity Fund
Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
5.32% |
abrdn
China A Share
Equity Fund
Institutional
Class
|
RBC
CAPITAL MARKETS
LLC |
1216
OLD GULPH
RD |
ROSEMONT
PA 19010-1650 |
|
|
5.05% |
abrdn
China A Share
Equity Fund
Institutional
Service
Class |
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
73.37% |
abrdn
China A Share
Equity Fund
Institutional
Service
Class |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
11.60% |
abrdn
China A Share
Equity Fund
Institutional
Service
Class |
ASCENSUS
TRUST
COMPANY
FBO |
PO
BOX 10758 |
FARGO
ND 58106-0758 |
|
|
5.04% |
abrdn
Dynamic
Dividend
Fund Class
A |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
35.04% |
abrdn
Dynamic
Dividend
Fund Class
A |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
10.94% |
abrdn
Dynamic
Dividend
Fund Class
A |
UBS
WM USA |
OMNI
ACCOUNT M/F
SPEC CDY A/C |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
10.74% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Dynamic
Dividend
Fund Class
A |
MERRILL
LYNCH PIERCE
FENNER &
SMITH |
FOR
SOLE BENEFIT
OF IT CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
8.11% |
abrdn
Dynamic
Dividend
Fund Class
A |
NATIONAL
FINANCIAL
SERVICES
LLC |
499
WASHINGTON
BLVD |
JERSEY
CITY NJ 07310-1995 |
|
|
7.42% |
abrdn
Dynamic
Dividend
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SEPCIAL
CUST ACCOUNT
FOR BENEFIT
OF CUSTOMER |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
6.00% |
abrdn
Dynamic
Dividend
Fund Class
A |
RAYMOND
JAMES
OMNIBUS |
FOR
MUTUAL FUNDS
HOUSE |
880
CARILLON PKWY |
ST
PETERSBURG FL
33716-1100 |
|
5.21% |
abrdn
Dynamic
Dividend
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUST ACCOUNT
FOR BENEFIT
OF CUSTOMERS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
21.88% |
abrdn
Dynamic
Dividend
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
9.72% |
abrdn
Dynamic
Dividend
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
8.29% |
abrdn
Dynamic
Dividend
Fund Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
5.94% |
abrdn
Emerging
Markets
ex-China
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
28.66% |
abrdn
Emerging
Markets
ex-China
Fund Class
A |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
6.70% |
abrdn
Emerging
Markets
ex-China
Fund Class
C |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
37.35% |
abrdn
Emerging
Markets
ex-China
Fund Class
C |
RAYMOND
JAMES
OMNIBUS |
FOR
MUTUAL FUNDS
HOUSE |
880
CARILLON PKWY |
ST
PETERSBURG FL
33716-1100 |
|
29.69% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Emerging
Markets
ex-China
Fund Class
C |
NATIONAL
FINANCIAL
SERVICES
LLC |
499
WASHINGTON
BLVD |
JERSEY
CITY NJ 07310-1995 |
|
|
6.47% |
abrdn
Emerging
Markets
ex-China
Fund Class
C |
NATIONAL
FINANCIAL
SERVICES
LLC |
499
WASHINGTON
BLVD |
JERSEY
CITY NJ 07310-1995 |
|
|
6.13% |
abrdn
Emerging
Markets
ex-China
Fund Class
C |
LPL
FINANCIAL |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
|
|
5.28% |
abrdn
Emerging
Markets
ex-China
Fund Class
R |
SAMMONS
FINANCIAL
NETWORK
LLC |
4546
CORPORATE
DR STE
100 |
WDM
IA 50266-5911 |
|
|
59.06% |
abrdn
Emerging
Markets
ex-China
Fund Class
R |
ASCENSUS
TRUST
COMPANY
FBO |
P.O.
BOX 10758 |
FARGO
ND 58106-0758 |
|
|
8.54% |
abrdn
Emerging
Markets
ex-China
Fund Class
R |
EMPOWER
TRUST
FBO |
8515
E ORCHARD
RD 2T2 |
GREENWOOD
VILLAGE
CO 80111-5002 |
|
|
7.96% |
abrdn
Emerging
Markets
ex-China
Fund Class
R |
ASCENSUS
TRUST
COMPANY
FBO |
P.O.
BOX 10758 |
FARGO
ND 58106-0758 |
|
|
6.46% |
abrdn
Emerging
Markets
ex-China
Fund Class
R |
MATRIX
TRUST COMPANY |
AS
AGENT FOR ADVISOR
TRUST, INC. |
717
17TH ST STE 1300 |
DENVER
CO 80202-3304 |
|
6.08% |
abrdn
Emerging
Markets
ex-China
Fund Institutional
Class
|
LPL
FINANCIAL |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
|
|
40.87% |
abrdn
Emerging
Markets
ex-China
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
20.67% |
abrdn
Emerging
Markets
ex-China
Fund Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
16.82% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Emerging
Markets
ex-China
Fund Institutional
Class
|
RAYMOND
JAMES
OMNIBUS |
FOR
MUTUAL FUNDS
HOUSE |
880
CARILLON PKWY |
ST
PETERSBURG FL
33716-1100 |
|
12.72% |
abrdn
Emerging
Markets
ex-China
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
5.06% |
abrdn
Emerging
Markets
ex-China
Fund Institutional
Service
Class |
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ATTN
MUTUAL FUNDS
DEPARTMENT |
499
WASHINGTONBLVD
FL
4 |
JERSEY
CITY NJ 07310-2010 |
90.44% |
abrdn
Emerging
Markets
ex-China
Fund Institutional
Service
Class |
ASCENSUS
TRUST
COMPANY
FBO |
ASCENSUS
TRUST
COMPANY |
PO
BOX 10577 |
FARGO
ND 58106-0577 |
|
7.81% |
abrdn
Emerging
Markets
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
|
27.72% |
abrdn
Emerging
Markets
Fund Class
A |
MLPFS
INC |
FOR
THE SOLE BENEFIT
OF ITS CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
12.95% |
abrdn
Emerging
Markets
Fund Class
A |
EMPOWER
TRUST
FBO |
8515
E ORCHARD
RD 2T2 |
GREENWOOD
VILLAGE
CO 80111-5002 |
|
|
12.39% |
abrdn
Emerging
Markets
Fund Class
A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL12 |
NEW
YORK NY 10004-1965 |
|
10.37% |
abrdn
Emerging
Markets
Fund Class
A |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
5.36% |
abrdn
Emerging
Markets
Fund Class
C |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
49.82% |
abrdn
Emerging
Markets
Fund Class
C |
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
26.23% |
abrdn
Emerging
Markets
Fund Class
C |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
9.20% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Emerging
Markets
Fund Class
R |
SAMMONS
FINANCIAL
NETWORK
LLC |
4546
CORPORATE
DR STE
100 |
WDM
IA 50266-5911 |
|
|
93.31% |
abrdn
Emerging
Markets
Fund Class
R |
VOYA
INSTITUTIONAL
TRUST
COMPANY |
ONE
ORANGE WAY |
WINDSOR
CT 06095-4773 |
|
|
5.51% |
abrdn
Emerging
Markets
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
21.18% |
abrdn
Emerging
Markets
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
13.53% |
abrdn
Emerging
Markets
Fund Institutional
Class
|
WELLS
FARGO BANK
NA FBO |
OMNIBUS
ACCOUNT
CASH/CASH |
PO
BOX 1533 |
MINNEAPOLIS
MN
55480-1533 |
|
11.64% |
abrdn
Emerging
Markets
Fund Institutional
Class
|
MERRILL
LYNCH PIERCE
FENNER & |
SMITH
INC FOR THE
SOLE BENEFIT
OF ITS CUSTOMERS |
4800
DEER LAKE DRIVE
EAST |
JACKSONVILLE
FL
32246-6484 |
|
10.10% |
abrdn
Emerging
Markets
Fund Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
9.36% |
abrdn
Emerging
Markets
Fund Institutional
Service
Class |
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
95.62% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
24.50% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
A |
MLPF
& S |
THE
SOLE BENEFIT
OF ITS CUSTOMER |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
10.41% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
7.88% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
A |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
7.68% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
A |
STATE
STREET BANK
& TRUST |
AS
TRUSTEE AND/OR
CUSTODIAN |
1
LINCOLN ST |
BOSTON
MA 02111-2901 |
|
7.06% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
A |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
6.99% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
C |
RAYMOND
JAMES
OMNIBUS |
FOR
MUTUAL FUNDS
HOUSE |
880
CARILLON PKWY |
ST
PETERSBURG FL
33716-1100 |
|
53.02% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
C |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
21.33% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
C |
UMB
BANK NA |
CUST
IRA FBO |
16564
THUNDERHEAD
CANYON
CT |
WILDWOOD
MO 63011-1853 |
|
12.46% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
C |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
|
9.42% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
R |
PIMS/PRUDENTIAL
RETIREMENT |
AS
NOMINEE FOR
THE TTEE/CUST |
204
E 23RD ST - 3RD
FL |
NEW
YORK NY 10010-4628 |
|
41.75% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Class
R |
SAMMONS
FINANCIAL
NETWORK
LLC |
4546
CORPORATE
DR STE
100 |
WDM
IA 50266-5911 |
|
|
35.40% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
20.04% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMERS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
|
14.08% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
12.62% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
7.72% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
CITIBANK
PBG |
1
COURT SQ |
LONG
IS CITY NY 11101 |
|
|
6.59% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
UBS
WM USA |
OMNI
ACCOUNT M/F |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
5.86% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
NATIONWIDE
TRUST
COMPANY
FSB |
PO
BOX 182029 |
COLUMBUS
OH 43218-2029 |
|
|
5.76% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
5.21% |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Service
Class |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
21.67% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Emerging
Markets
Sustainable
Leaders
Fund Institutional
Service
Class |
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
11.93% |
abrdn
Global Equity
Impact Fund
Class A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
BENEFIT OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
31.15% |
abrdn
Global Equity
Impact Fund
Class A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
5.77% |
abrdn
Global Equity
Impact Fund
Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMERS |
2801
MARKET ST |
SAINT
LOUIS MO 63103-2523 |
|
16.13% |
abrdn
Global Equity
Impact Fund
Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FEBO
OUR CUSTOMERS |
499
WASHINGTON
BLVD
FL 5 |
JERSEY
CITY NJ 07310-2010 |
|
13.35% |
abrdn
Global Equity
Impact Fund
Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
BENEFIT OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
12.73% |
abrdn
Global Equity
Impact Fund
Institutional
Class
|
J
P MORGAN SECURITIES
LLC OMNIBUS |
A/C
EXCLUSIVE BENEFIT
OF CUSTOMERS |
4
CHASE METROTECH
CTR
3RD FL MFD |
BROOKLYN
NY 11245-0003 |
|
11.75% |
abrdn
Global Equity
Impact Fund
Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
11.35% |
abrdn
Global Equity
Impact Fund
Institutional
Class
|
RELIANCE
TRUST CO
FBO |
PO
BOX 78446 |
ATLANTA
GA 30357 |
|
|
7.18% |
abrdn
Global Equity
Impact Fund
Institutional
Class
|
LPL
FINANCIAL |
OMNIBUS
CUSTOMER
ACCOUNT |
ATTN
MUTUAL FUND
TRADING |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
7.12% |
abrdn
Global Infrastructure
Fund
Class A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
24.27% |
abrdn
Global Infrastructure
Fund
Class A |
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
20.48% |
abrdn
Global Infrastructure
Fund
Class A |
MERRILL
LYNCH PIERCE
FENNER &
SMITH |
FOR
SOLE BENEFIT
OF IT CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
11.59% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Global Infrastructure
Fund
Class A |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
7.95% |
abrdn
Global Infrastructure
Fund
Class A |
CHARLES
SCHWAB
& CO INC |
SEPCIAL
CUST ACCOUNT
FOR BENEFIT
OF CUSTOMER |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
7.16% |
abrdn
Global Infrastructure
Fund
Class A |
LPL
FINANCIAL |
OMNIBUS
CUSTOMER
ACCOUNT |
ATTN
MUTUAL FUND
TRADING |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
5.90% |
abrdn
Global Infrastructure
Fund
Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
20.45% |
abrdn
Global Infrastructure
Fund
Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
18.92% |
abrdn
Global Infrastructure
Fund
Institutional
Class
|
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
18.16% |
abrdn
Global Infrastructure
Fund
Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUST ACCOUNT
FOR BENEFIT
OF CUSTOMERS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
13.03% |
abrdn
High Income
Opportunities
Fund
Class A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
BENEFIT OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
20.23% |
abrdn
High Income
Opportunities
Fund
Class A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
17.73% |
abrdn
High Income
Opportunities
Fund
Institutional
Class
|
NABANK
& CO. |
PO
BOX 2180 |
TULSA
OK 74101-2180 |
|
|
37.18% |
abrdn
High Income
Opportunities
Fund
Institutional
Class
|
LPL
FINANCIAL |
OMNIBUS
CUSTOMER
ACCOUNT |
ATTN
MUTUAL FUND
TRADING |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
12.77% |
abrdn
High Income
Opportunities
Fund
Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FEBO
OUR CUSTOMERS |
499
WASHINGTON
BLVD
FL 5 |
JERSEY
CITY NJ 07310-2010 |
|
11.99% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
High Income
Opportunities
Fund
Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
BENEFIT OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
8.84% |
abrdn
High Income
Opportunities
Fund
Institutional
Class
|
MLPF
& S |
FOR
THE SOLE BENEFIT
OF ITS CUSTOMERS |
4800
DEER LAKE DR
E FL 97HC3 |
JACKSONVILLE
FL
32246-6484 |
|
5.71% |
abrdn
Infrastructure
Debt
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
17.97% |
abrdn
Infrastructure
Debt
Fund Class
A |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
8.49% |
abrdn
Infrastructure
Debt
Fund Class
A |
KENNETH
KAROLS
& MARGRIETA
KAROLS
JTWROS |
1903
E LA RUA ST |
PENSACOLA
FL 32501-3544 |
|
|
6.08% |
abrdn
Infrastructure
Debt
Fund Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
29.30% |
abrdn
Infrastructure
Debt
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
18.21% |
abrdn
Infrastructure
Debt
Fund Institutional
Class
|
LPL
FINANCIAL |
FBO
CUSTOMER ACCOUNTS |
PO
BOX 509046 |
SAN
DIEGO CA 92150-9046 |
|
10.77% |
abrdn
Infrastructure
Debt
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ATTN
MUTUAL FUNDS
DEPARTM 4TH
FLOOR |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
10.26% |
abrdn
Infrastructure
Debt
Fund Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
6.63% |
abrdn
Infrastructure
Debt
Fund Institutional
Service
Class |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
43.69% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Infrastructure
Debt
Fund Institutional
Service
Class |
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
17.65% |
abrdn
Infrastructure
Debt
Fund Institutional
Service
Class |
NATIONWIDE
LIFE
INSURANCE COMPANY |
NATIONWIDE
VARIABLE
ACCOUNT |
C
O IPO PROTFOLIO
ACCOUNTING |
PO
BOX 182029 |
COLUMBUS
OH 43218-2029 |
7.46% |
abrdn
Intermediate
Municipal
Income
Fund Class
A |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
63.77% |
abrdn
Intermediate
Municipal
Income
Fund Class
A |
RUTH
ANN HALLOW |
4925
S ROUTE 44 HWY |
JERSEY
SHORE PA
17740-9022 |
|
|
5.49% |
abrdn
Intermediate
Municipal
Income
Fund Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
50.67% |
abrdn
Intermediate
Municipal
Income
Fund Institutional
Service
Class |
ABRDN
INC |
SEED
ACCOUNT |
1900
MARKET ST FL
2 |
PHILADELPHIA
PA
19103-3510 |
|
60.83% |
abrdn
Intermediate
Municipal
Income
Fund Institutional
Service
Class |
UMB
BANK NA |
2117
N 10TH ST |
TERRE
HAUTE IN 47804-2306 |
|
|
39.17% |
abrdn
International
Small
Cap Fund
Class A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
37.97% |
abrdn
International
Small
Cap Fund
Class A |
NATIONAL
FINANCIAL
SERVICES
LLC |
499
WASHINGTON
BLVD |
JERSEY
CITY NJ 07310-1995 |
|
|
9.24% |
abrdn
International
Small
Cap Fund
Class C |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
43.95% |
abrdn
International
Small
Cap Fund
Class C |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
32.21% |
abrdn
International
Small
Cap Fund
Class C |
LPL
FINANCIAL |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
|
|
9.02% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
International
Small
Cap Fund
Class C |
SEI
PRIVATE TRUST
COMPANY |
ONE
FREEDOM VALLEY
DRIVE |
OAKS
PA 19456-9989 |
|
|
9.01% |
abrdn
International
Small
Cap Fund
Class R |
SAMMONS
FINANCIAL
NETWORK
LLC |
4546
CORPORATE
DR STE
100 |
WDM
IA 50266-5911 |
|
|
69.74% |
abrdn
International
Small
Cap Fund
Class R |
EMPOWER
TRUST
FBO |
8515
E ORCHARD
RD 2T2 |
GREENWOOD
VILLAGE
CO 80111-5002 |
|
|
5.34% |
abrdn
International
Small
Cap Fund
Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
56.91% |
abrdn
International
Small
Cap Fund
Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
15.13% |
abrdn
Emerging
Markets Dividend Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
BENEFIT OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
58.24% |
abrdn
Emerging
Markets Dividend Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
BENEFIT OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
25.69% |
abrdn
Emerging
Markets Dividend Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FEBO
OUR CUSTOMERS |
499
WASHINGTON
BLVD
FL 5 |
JERSEY
CITY NJ 07310-2010 |
|
21.22% |
abrdn
Emerging
Markets Dividend Fund Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMERS |
2801
MARKET ST |
SAINT
LOUIS MO 63103-2523 |
|
14.75% |
abrdn
Emerging
Markets Dividend Fund Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0002 |
|
|
5.06% |
abrdn
Realty Income
& Growth
Fund Class
A |
MERRILL
LYNCH PIERCE
FENNER &
SMITH |
FOR
SOLE BENEFIT
OF IT CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
23.15% |
abrdn
Realty Income
& Growth
Fund Class
A |
RAYMOND
JAMES
OMNIBUS FOR
MUTUAL |
880
CARILLON PKWY |
ST
PETERSBURG FL
33716-1100 |
|
|
16.26% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Realty Income
& Growth
Fund Class
A |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
15.60% |
abrdn
Realty Income
& Growth
Fund Class
A |
MID
ATLANTIC TRUST
COMPANY
FBO |
1251
WATERFRONT
PL STE
525 |
PITTSBURGH
PA 15222-4228 |
|
|
8.39% |
abrdn
Realty Income
& Growth
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
8.35% |
abrdn
Realty Income
& Growth
Fund Class
A |
JOYCE
K PERRY |
4410
GREGG TEX
RD |
LONGVIEW
TX 75604-9476 |
|
|
6.89% |
abrdn
Realty Income
& Growth
Fund Class
A |
SHOTA
T FLETCHER |
1392
BONITA AVE |
MOUNTAIN
VIEW CA
94040-3141 |
|
|
6.58% |
abrdn
Realty Income
& Growth
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUST ACCOUNT
FOR BENEFIT
OF CUSTOMERS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
29.92% |
abrdn
Realty Income
& Growth
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
23.56% |
abrdn
Realty Income
& Growth
Fund Institutional
Class
|
RELIANCE
TRUST CO
FBO |
PO
BOX 570788 |
ATLANTA
GA 30357-3114 |
|
|
5.40% |
abrdn
Short Duration
High Yield
Municipal Fund
Class A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
60.34% |
abrdn
Short Duration
High Yield
Municipal Fund
Class A |
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
21.40% |
abrdn
Short Duration
High Yield
Municipal Fund
Class A |
CHARLES
SCHWAB
& CO INC |
ATTN
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
7.11% |
abrdn
Short Duration
High Yield
Municipal Fund
Class C |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
56.27% |
abrdn
Short Duration
High Yield
Municipal Fund
Class C |
ABRDN
INC |
SEED
ACCOUNT |
1900
MARKET ST FL
2 |
PHILADELPHIA
PA
19103-3510 |
|
43.73% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Short Duration
High Yield
Municipal Fund
Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
15.09% |
abrdn
Short Duration
High Yield
Municipal Fund
Institutional
Class
|
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
15.02% |
abrdn
Short Duration
High Yield
Municipal Fund
Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
ATTN
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
8.86% |
abrdn
Short Duration
High Yield
Municipal Fund
Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
7.39% |
abrdn
U.S. Small
Cap Equity
Fund Class
A |
MLPF
& SMITH INC |
FOR
THE SOLE BENEFIT
OF ITS CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
15.86% |
abrdn
U.S. Small
Cap Equity
Fund Class
A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
12.42% |
abrdn
U.S. Small
Cap Equity
Fund Class
A |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
10.09% |
abrdn
U.S. Small
Cap Equity
Fund Class
A |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
7.28% |
abrdn
U.S. Small
Cap Equity
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
7.27% |
abrdn
U.S. Small
Cap Equity
Fund Class
C |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
24.62% |
abrdn
U.S. Small
Cap Equity
Fund Class
C |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
|
16.73% |
abrdn
U.S. Small
Cap Equity
Fund Class
C |
AMERICAN
ENTERPRISE
INVESTMENT
SVC |
707
2ND AVE S |
MINNEAPOLIS
MN
55402-2405 |
|
|
10.12% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
U.S. Small
Cap Equity
Fund Class
C |
RAYMOND
JAMES
OMNIBUS |
FOR
MUTUAL FUNDS
HOUSE |
880
CARILLON PKWY |
ST
PETERSBURG FL
33716-1100 |
|
8.90% |
abrdn
U.S. Small
Cap Equity
Fund Class
C |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
6.72% |
abrdn
U.S. Small
Cap Equity
Fund Class
C |
LPL
FINANCIAL |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
|
|
6.02% |
abrdn
U.S. Small
Cap Equity
Fund Class
R |
MATRIX
TRUST COMPANY |
AS
AGENT FOR ADVISOR
TRUST, INC. |
717
17TH STREET,
SUITE 1300 |
DENVER
CO 80202-3304 |
|
7.07% |
abrdn
U.S. Small
Cap Equity
Fund Class
R |
ASCENSUS
TRUST
COMPANY
FBO |
P.O.
BOX 10758 |
FARGO
ND 58106-0758 |
|
|
6.34% |
abrdn
U.S. Small
Cap Equity
Fund Class
R |
MLPF&S |
THE
SOLE BENEFIT
OF ITS CUSTOMER |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
5.44% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
19.02% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
14.52% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
11.02% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
SEI
PRIVATE TRUST
COMPANY |
ONE
FREEDOM VALLEY
DRIVE |
OAKS
PA 19456-9989 |
|
|
8.24% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
7.75% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
MLPFS
INC FOR |
THE
SOLE BENEFIT
OF ITS CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
6.83% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
LPL
FINANCIAL |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
|
|
5.96% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Class
|
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
5.34% |
abrdn
U.S. Small
Cap Equity
Fund Institutional
Service
Class |
EMPOWER
TRUST
FBO |
8515
E ORCHARD
RD 2T2 |
GREENWOOD
VILLAGE
CO 80111-5002 |
|
|
80.80% |
abrdn
U.S. Sustainable
Leaders
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCOUNT
FOR THE
EXCLUSIVE BENEFIT
OF CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
9.25% |
abrdn
U.S. Sustainable
Leaders
Fund Class
C |
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
53.90% |
abrdn
U.S. Sustainable
Leaders
Fund Class
C |
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
19.45% |
abrdn
U.S. Sustainable
Leaders
Fund Class
C |
NATIONAL
FINANCIAL
SERVICES
LLC |
499
WASHINGTON
BLVD |
JERSEY
CITY NJ 07310-1995 |
|
|
9.20% |
abrdn
U.S. Sustainable
Leaders
Fund Class
C |
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
8.34% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Class
|
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
19.53% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Class
|
NATIONWIDE
TRUST
COMPANY
FSB |
PO
BOX 182029 |
COLUMBUS
OH 43218-2029 |
|
|
12.20% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
11.70% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Class
|
LPL
FINANCIAL |
FBO
CUSTOMER ACCOUNTS |
ATTN
MUTUAL FUND
OPERATIONS |
PO
BOX 509046 |
SAN
DIEGO CA 92150-9046 |
9.24% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
|
9.18% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
7.96% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMER |
ATTN:
MUTUAL FUNDS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
7.74% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Service
Class |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCOUNT
FOR THE
EXCLUSIVE BENEFIT
OF CUSTOMERS |
ATTN:
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
23.68% |
abrdn
U.S. Sustainable
Leaders
Fund Institutional
Service
Class |
NAT’L
FINANCIAL SVCS
CORP |
FBO
CUSTOMERS |
499
WASHINGTON
BLVD
FL 5 |
JERSEY
CITY NJ 07310-2010 |
|
10.86% |
abrdn
Focused
U.S. Small Cap Equity Fund
Class A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
20.68% |
abrdn
Focused
U.S. Small Cap Equity Fund
Class A |
MLPFS |
FOR
THE SOLE BENEFIT
OF ITS CUST |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
7.30% |
abrdn
Focused
U.S. Small Cap Equity Fund
Class A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
6.05% |
abrdn
Focused
U.S. Small Cap Equity Fund
Class R |
SAMMONS
FINANCIAL
NETWORK
LLC |
4546
CORPORATE
DR STE
100 |
WDM
IA 50266-5911 |
|
|
60.89% |
abrdn
Focused
U.S. Small Cap Equity Fund
Class R |
VOYA
INSTITUTIONAL
TRUST
COMPANY |
ONE
ORANGE WAY |
WINDSOR
CT 06095-4773 |
|
|
37.25% |
abrdn
Focused
U.S. Small Cap Equity Fund
Institutional
Class
|
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
33.78% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Focused
U.S. Small Cap Equity Fund
Institutional
Class
|
PERSHING
LLC |
1
PERSHING PLZ |
JERSEY
CITY NJ 07399-0001 |
|
|
14.82% |
abrdn
Focused
U.S. Small Cap Equity Fund
Institutional
Class
|
DCGT
AS TTEE AND/OR
CUST |
FBO
PLIC VARIOUS
RETIREMENT
PLANS
OMNIBUS |
ATTN
NPIO TRADE
DESK |
711
HIGH ST |
DES
MOINES IA 50392-0001 |
12.51% |
abrdn
Focused
U.S. Small Cap Equity Fund
Institutional
Class
|
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
10.32% |
abrdn
Focused
U.S. Small Cap Equity Fund
Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
ACCT FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
8.81% |
abrdn
Focused
U.S. Small Cap Equity Fund
Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
5.23% |
abrdn
Focused
U.S. Small Cap Equity Fund
Institutional
Service
Class |
NATIONAL
FINANCIAL
SERVICES
LLC |
FOR
THE EXCLUSIVE
BENEFIT
OF OUR CUSTOMERS |
ONE
WORLD FINANCIAL
CENTER |
499
WASHINGTON
BLVD
FL 5 FL 4 |
JERSEY
CITY NJ 07310-1995 |
99.13% |
abrdn
Ultra Short
Municipal
Income
Fund Class
A |
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
42.55% |
abrdn
Ultra Short
Municipal
Income
Fund Class
A |
J
P MORGAN SECURITIES
LLC OMNIBUS |
A/C
EXCLUSIVE BENEFIT
OF CUSTOMERS |
4
CHASE METROTECH
CTR
3RD FL MFD |
BROOKLYN
NY 11245-0003 |
|
17.89% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Ultra Short
Municipal
Income
Fund Class
A |
RAYMOND
JAMES
OMNIBUS |
FOR
MUTUAL FUNDS
HOUSE |
880
CARILLON PKWY |
ST
PETERSBURG FL
33716-1100 |
|
10.28% |
abrdn
Ultra Short
Municipal
Income
Fund Class
A |
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
9.25% |
abrdn
Ultra Short
Municipal
Income
Fund Class
A |
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUSTODY
A/C FBO
CUSTOMERS |
ATTN
MUTUAL FUNDS |
211
MAIN STREET |
SAN
FRANCISCO CA
94105-1901 |
7.10% |
abrdn
Ultra Short
Municipal
Income
Fund Class
A1 |
WELLS
FARGO CLEARRING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET ST |
SAINT
LOUIS MO 63103-2523 |
|
96.09% |
abrdn
Ultra Short
Municipal
Income
Fund Institutional
Class
|
J
P MORGAN SECURITIES
LLC OMNIBUS |
A/C
EXCLUSIVE BENEFIT
OF CUSTOMERS |
4
CHASE METROTECH
CTR
3RD FL MFD |
BROOKLYN
NY 11245-0003 |
|
20.85% |
abrdn
Ultra Short
Municipal
Income
Fund Institutional
Class
|
MORGAN
STANLEY
SMITH BARNEY
LLC |
FOR
THE EXCLUSIVE
BENE OF
ITS CUST |
1
NEW YORK PLZ FL
12 |
NEW
YORK NY 10004-1965 |
|
17.60% |
abrdn
Ultra Short
Municipal
Income
Fund Institutional
Class
|
CHARLES
SCHWAB
& CO INC |
SPECIAL
CUST ACCOUNT
FOR BENEFIT
OF CUSTOMERS |
211
MAIN ST |
SAN
FRANCISCO CA
94105-1901 |
|
16.96% |
abrdn
Ultra Short
Municipal
Income
Fund Institutional
Class
|
MERRILL
LYNCH PIERCE
FENNER &
SMITH |
FOR
SOLE BENEFIT
OF IT CUSTOMERS |
4800
DEER LAKE DR
E |
JACKSONVILLE
FL
32246-6484 |
|
10.66% |
abrdn
Ultra Short
Municipal
Income
Fund Institutional
Class
|
UBS
WM USA |
1000
HARBOR BLVD |
WEEHAWKEN
NJ 07086-6761 |
|
|
9.33% |
abrdn
Ultra Short
Municipal
Income
Fund Institutional
Class
|
LPL
FINANCIAL |
OMNIBUS
CUSTOMER
ACCOUNT |
ATTN
MUTUAL FUND
TRADING |
4707
EXECUTIVE DR |
SAN
DIEGO CA 92121-3091 |
7.49% |
|
|
|
|
|
| |
Fund/Class
|
Shareholder |
Percent
of the Class
Total Assets
Held by
the Shareholder |
abrdn
Ultra Short
Municipal
Income
Fund Institutional
Class
|
WELLS
FARGO CLEARING
SERVICES
LLC |
SPECIAL
CUSTODY
ACCT FOR
THE |
EXCLUSIVE
BENEFIT
OF CUSTOMER |
2801
MARKET STREET |
ST
LOUIS MO 63103-2523 |
5.15% |
Financial
Statements
KPMG
is
the Funds’ independent registered public accounting firm. KPMG audits the Funds’
annual financial statements.
The audited financial statements and financial highlights of the Funds for their
fiscal year ended October 31, 2023,
as set forth in the Funds’ annual report to
shareholders,
including the report of KPMG, are incorporated by reference
into this SAI. No other parts of the annual report are incorporated by reference
herein. A copy of the annual reports
may be obtained upon request and without charge by writing to abrdn Funds c/o
SS&C GIDS, Inc. at 430 W. 7th Street,
Ste. 219534, Kansas City, MO 64105-1407 or by calling
866-667-9231.
Appendix
A - Portfolio Managers
DESCRIPTION
OF COMPENSATION STRUCTURE
As
used in this Appendix, abrdn Inc. (“Adviser”), abrdn Investments Limited (“aIL”)
and abrdn Asia Limited (“aAL”) (collectively
referred to as “abrdn”)
abrdn’s
remuneration policies are designed to support its business strategy as a leading
international asset manager.
The objective is to attract, retain and reward talented individuals for the
delivery of sustained, superior returns for
abrdn’s clients and shareholders. abrdn operates in a highly competitive
international employment market, and aims to
maintain its strong track record of success in developing and retaining
talent.
abrdn’s
policy is to recognize corporate and individual achievements each year through
an appropriate annual bonus
scheme. The bonus is a single, fully discretionary variable pay award. The
aggregate value of awards in any year is dependent
on the group’s overall performance and profitability. Consideration is also
given to the levels of bonuses paid in
the market. Individual awards, which are payable to all members of staff, are
determined by a rigorous assessment of achievement
against defined objectives.
The
variable pay award comprises a mixture of cash and a deferred award based on the
size of the award. Deferred awards
are by default abrdn plc shares, with an option to put up to 50% of deferral
into funds. Overall compensation packages
are designed to be competitive relative to the investment management
industry.
Base
Salary
abrdn’s
policy is to pay a fair salary commensurate with the individual’s role,
responsibilities and experience, and having
regard to the market rates being offered for similar roles in the asset
management sector and other comparable companies.
Any increase is generally to reflect inflation and is applied in a manner
consistent with other abrdn employees;
any other increases must be justified by reference to promotion or changes in
responsibilities.
Annual
Bonus
The
Remuneration Committee determines the key performance indicators that will be
applied in considering the overall
size of the bonus pool. In line with practices amongst other asset management
companies, individual bonuses are not
subject to an absolute cap. However, the aggregate size of the bonus pool is
dependent on the group’s overall performance
and profitability. Consideration is also given to the levels of bonuses paid in
the market. Individual awards are
determined by a rigorous assessment of achievement against defined objectives,
and are reviewed and approved by the
Remuneration Committee.
abrdn
has a deferral policy which is intended to assist in the retention of talent and
to create additional alignment of executives’
interests with abrdn’s sustained performance and, in respect of the deferral
into funds, managed by abrdn, to align
the interest of asset managers with our clients.
Staff
performance is reviewed formally at least once a year. The review process
evaluates the various aspects that the
individual has contributed to abrdn, and specifically, in the case of portfolio
managers, to the relevant investment team.
Discretionary bonuses are based on client service, asset growth and the
performance of the respective portfolio manager.
Overall participation in team meetings, generation of original research ideas
and contribution to presenting the
team externally are also evaluated.
In
the calculation of a portfolio management team’s bonus, abrdn takes into
consideration investment matters (which
include the performance of funds, adherence to the company investment process,
and quality of company meetings)
as well as more subjective issues such as team participation and effectiveness
at client presentations through KPI
scorecards. To the extent performance is factored in, such performance is not
judged against any specific benchmark
and is evaluated over the period of a year - January to December. The pre- or
after-tax performance of an individual
account is not considered in the determination of a portfolio manager’s
discretionary bonus; rather the review process
evaluates the overall performance of the team for all of the accounts the team
manages.
Portfolio
manager performance on investment matters is judged over all of the accounts the
portfolio manager contributes
to and is documented in the appraisal process. A combination of the team’s and
individual’s performance is considered
and evaluated.
Although
performance is not a substantial portion of a portfolio manager’s compensation,
abrdn also recognizes that
fund performance can often be driven by factors outside one’s control, such as
(irrational) markets, and as such pays
attention to the effort by portfolio managers to ensure integrity of our core
process by sticking to disciplines and processes
set, regardless of momentum and ‘hot’ themes. Short-terming is thus discouraged
and trading-oriented managers
will thus find it difficult to thrive in the abrdn environment. Additionally, if
any of the aforementioned undue risks were
to be taken by a portfolio manager, such trend would be identified via abrdn’s
dynamic compliance monitoring system.
Appendix
A - Portfolio Managers 155
In
rendering investment management services, the Adviser may use the resources of
additional investment adviser subsidiaries
of abrdn plc. These affiliates have entered into a memorandum of understanding
(“MOU”) pursuant to which investment
professionals from each affiliate may render portfolio management, research or
trading services to abrdn clients.
Each investment professional who renders portfolio management, research or
trading services under a MOU or personnel
sharing arrangement (“Participating Affiliate”) must comply with the provisions
of the Advisers Act, the 1940 Act,
the Securities Act, the Exchange Act, and the Employee Retirement Income
Security Act of 1974, and the laws of states
or countries in which the Adviser does business or has clients. No remuneration
is paid by the Fund with respect to the
MOU/personnel sharing arrangements.
OTHER
MANAGED ACCOUNTS
The
following chart summarizes the “Other Accounts Managed” by each portfolio
manager. “Other Accounts Managed”
represents the accounts managed by the teams of which the portfolio manager is a
member. Accounts are grouped
into the following three categories: (1) registered investment companies; (2)
other pooled investment vehicles; and
(3) other accounts. To the extent that any of these accounts pay advisory fees
that are based on account performance
(“performance-based fees”), information on those accounts is provided
separately. The figures in the chart below
for the category of “registered investment companies” include the Funds listed
under each portfolio manager’s name
in the opposite column.
The “Other Accounts Managed” represents the accounts managed by the teams of
which the
portfolio manager is a member.
| |
Name
of Portfolio Manager |
Number
of Other Accounts Managed by Each Portfolio Manager and
Total Assets (in millions) by Category (as of October 31,
2023) |
Chris
Colarik |
Registered
Investment Companies: 4 accounts, $721.90 total assets |
Focused
U.S. Small Cap Equity Fund |
Other
Pooled Investment Vehicles: 10 accounts, $2,829.60 total
assets |
U.S.
Small Cap Equity Fund |
Other
Accounts: 9 accounts, $12,468.47 total assets |
Scott
Eun |
Registered
Investment Companies: 4 accounts, $721.90 total assets |
Focused
U.S. Small Cap Equity Fund |
Other
Pooled Investment Vehicles: 10 accounts, $2,829.60 total
assets |
U.S.
Small Cap Equity Fund |
Other
Accounts: 9 accounts, $12,468.47 total assets |
Chris
Haimendorf |
Registered
Investment Companies: 4 accounts, $721.90 total assets |
U.S.
Sustainable Leaders Fund |
Other
Pooled Investment Vehicles: 10 accounts, $2,829.60 total
assets |
|
Other
Accounts: 9 accounts, $12,468.47 total assets |
Joanna
McIntyre |
Registered
Investment Companies: 4 accounts, $721.90 total assets |
U.S.
Sustainable Leaders Fund |
Other
Pooled Investment Vehicles: 10 accounts, $2,829.60 total
assets |
|
Other
Accounts: 9 accounts, $12,468.47 total assets |
Jamie
Mills O’Brien |
Registered
Investment Companies: 4 accounts, $721.90 total assets |
U.S.
Sustainable Leaders Fund |
Other
Pooled Investment Vehicles: 10 accounts, $2,829.60 total
assets |
|
Other
Accounts: 9 accounts, $12,468.47 total assets |
Pruksa
Iamthongthong |
Registered
Investment Companies: 4 accounts, $740.29 total assets |
China
A Fund |
Other
Pooled Investment Vehicles: 43 accounts, $14,722.17 total
assets |
|
Other
Accounts: 39 accounts, $11,126.91 total assets |
Jim
Jiang |
Registered
Investment Companies: 4 accounts, $740.29 total assets |
China
A Fund |
Other
Pooled Investment Vehicles: 43 accounts, $14,722.17 total
assets |
|
Other
Accounts: 39 accounts, $11,126.91 total assets |
Elizabeth
Kwik |
Registered
Investment Companies: 4 accounts, $740.29 total assets |
China
A Fund |
Other
Pooled Investment Vehicles: 43 accounts, $14,722.17 total
assets |
|
Other
Accounts: 39 accounts, $11,126.91 total assets |
Nicholas
Yeo |
Registered
Investment Companies: 4 accounts, $740.29 total assets |
China
A Fund |
Other
Pooled Investment Vehicles: 43 accounts, $14,722.17 total
assets |
|
Other
Accounts: 39 accounts, $11,126.91 total assets |
Kristy
Fong |
Registered
Investment Companies: 8 accounts, $3,894.26 total
assets |
Emerging
Markets Fund |
Other
Pooled Investment Vehicles: 16 accounts, $6,021.32 total
assets |
Emerging
Markets ex-China Fund |
Other
Accounts: 16 accounts, $5,492.72 total assets |
Emerging
Markets Sustainable Leaders Fund |
|
Devan
Kaloo |
Registered
Investment Companies: 8 accounts, $3,894.26 total
assets |
Emerging
Markets Fund |
Other
Pooled Investment Vehicles: 16 accounts, $6,021.32 total
assets |
156 Appendix
A - Portfolio Managers
| |
Name
of Portfolio Manager |
Number
of Other Accounts Managed by Each Portfolio Manager and
Total Assets (in millions) by Category (as of October 31,
2023) |
|
Other
Accounts: 16 accounts, $5,492.72 total assets |
Joanne
Irvine |
Registered
Investment Companies: 8 accounts, $3,894.26 total
assets |
Emerging
Markets Fund |
Other
Pooled Investment Vehicles: 16 accounts, $6,021.32 total
assets |
|
Other
Accounts: 16 accounts, $5,492.72 total assets |
Nick
Robinson |
Registered
Investment Companies: 8 accounts, $3,894.26 total
assets |
Emerging
Markets ex-China Fund |
Other
Pooled Investment Vehicles: 16 accounts, $6,021.32 total
assets |
Emerging
Markets Fund |
Other
Accounts: 16 accounts, $5,492.72 total assets |
Emerging
Markets Sustainable Leaders Fund |
|
Matt
Williams |
Registered
Investment Companies: 8 accounts, $3,894.26 total
assets |
Emerging
Markets Dividend Fund |
Other
Pooled Investment Vehicles: 16 accounts, $6,021.32 total
assets |
|
Other
Accounts: 16 accounts, $5,492.72 total assets |
Gabriel
Sacks |
Registered
Investment Companies: 8 accounts, $3,894.26 total
assets |
Emerging
Markets Dividend Fund |
Other
Pooled Investment Vehicles: 16 accounts, $6,021.32 total
assets |
|
Other
Accounts: 16 accounts, $5,492.72 total assets |
Nina
Petry |
Registered
Investment Companies: 8 accounts, $3,894.26 total
assets |
Emerging
Markets Sustainable Leaders Fund |
Other
Pooled Investment Vehicles: 16 accounts, $6,021.32 total
assets |
|
Other
Accounts: 16 accounts, $5,492.72 total assets |
Kirsty
Desson |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
International
Small Cap Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
|
Other
Accounts: 9 accounts, $2,706.72 total assets |
Liam
Patel |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
International
Small Cap Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
|
Other
Accounts: 9 accounts, $2,706.72 total assets |
Dominic
Byrne |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
Global
Equity Impact Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
U.S.
Sustainable Leaders Fund |
Other
Accounts: 9 accounts, $2,706.72 total assets |
Martin
Connaghan |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
Dynamic
Dividend Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
|
Other
Accounts: 9 accounts, $2,706.72 total assets |
Josh
Duitz |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
Dynamic
Dividend Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
Global
Infrastructure Fund |
Other
Accounts: 9 accounts, $2,706.72 total assets |
Ruairidh
Finlayson |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
Dynamic
Dividend Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
International
Sustainable Leaders Fund |
Other
Accounts: 9 accounts, $2,706.72 total assets |
Sarah
Norris |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
Global
Equity Impact Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
|
Other
Accounts: 9 accounts, $2,706.72 total assets |
Donal
Reynolds |
Registered
Investment Companies: 5 accounts, $1,398.40 total
assets |
Global
Infrastructure Fund |
Other
Pooled Investment Vehicles: 24 accounts, $4,445.49 total
assets |
|
Other
Accounts: 9 accounts, $2,706.72 total assets |
Miguel
Laranjeiro |
Registered
Investment Companies: 3 accounts, $789.27 total assets |
Intermediate
Municipal Income Fund |
Other
Pooled Investment Vehicles: 1 account, $67.09 total
assets |
Short
Duration High Yield Municipal Fund |
Other
Accounts: 6 accounts, $1,248.38 total assets |
Ultra
Short Municipal Income Fund |
|
Jonathan
Mondillo |
Registered
Investment Companies: 4 accounts, $815.45 total assets |
Infrastructure
Debt Fund |
Other
Pooled Investment Vehicles: 1 account, $67.09 total
assets |
Intermediate
Municipal Income Fund |
Other
Accounts: 6 accounts, $1,248.38 total
assets |
Appendix
A - Portfolio Managers 157
| |
Name
of Portfolio Manager |
Number
of Other Accounts Managed by Each Portfolio Manager and
Total Assets (in millions) by Category (as of October 31,
2023) |
Short
Duration High Yield Municipal Fund |
|
Ultra
Short Municipal Income Fund |
|
Ben
Pakenham |
Registered
Investment Companies: 2 accounts, $559.12 total assets |
High
Income Opportunities Fund |
Other
Pooled Investment Vehicles: 1 account, $357.36 total
assets |
|
Other
Accounts: 2 accounts, $141.75 total assets |
George
Westervelt |
Registered
Investment Companies: 2 accounts, $559.12 total assets |
High
Income Opportunities Fund |
Other
Pooled Investment Vehicles: 1 account, $357.36 total
assets |
|
Other
Accounts: 2 accounts, $141.75 total assets |
Matthew
Kence |
Registered
Investment Companies: 3 accounts, $585.30 total assets |
High
Income Opportunities Fund |
Other
Pooled Investment Vehicles: 1 account, $357.36 total
assets |
Infrastructure
Debt Fund |
Other
Accounts: 2 accounts, $141.75 total assets |
Adam
Tabor |
Registered
Investment Companies: 2 accounts, $559.12 total assets |
High
Income Opportunities Fund |
Other
Pooled Investment Vehicles: 1 account, $357.36 total
assets |
|
Other
Accounts: 2 accounts, $141.75 total assets |
Jay
Carlington |
Registered
Investment Companies: 2 accounts, $414.52 total assets |
Realty
Income & Growth Fund |
Other
Pooled Investment Vehicles: 4 accounts, $1,111.69 total assets (1
account,
$156.94 total assets of which the advisory fee is based on performance) |
|
Other
Accounts: 1 account, $3,121.64 total assets |
Svitlana
Gubriy |
Registered
Investment Companies: 2 accounts, $414.52 total assets |
Realty
Income & Growth Fund |
Other
Pooled Investment Vehicles: 4 accounts, $1,111.69 total assets (1
account,
$156.94 total assets of which the advisory fee is based on performance) |
|
Other
Accounts: 1 account, $3,121.64 total assets |
Bill
Pekowitz |
Registered
Investment Companies: 2 accounts, $414.52 total assets |
Realty
Income & Growth Fund |
Other
Pooled Investment Vehicles: 4 accounts, $1,111.69 total assets (1
account,
$156.94 total assets of which the advisory fee is based on performance) |
|
Other
Accounts: 1 account, $3,121.64 total
assets |
POTENTIAL
CONFLICTS OF INTEREST
abrdn
(abrdn Inc., abrdn
Investments
Limited and abrdn Asia Limited)
The
portfolio managers’ management of “other accounts” may give rise to potential
conflicts of interest in connection
with their management of a Fund’s investments, on the one hand, and the
investments of the other accounts, on
the other. The other accounts may have the same investment objective as the
Fund. Therefore, a potential conflict of interest
may arise as a result of the identical investment objectives, whereby the
portfolio manager could favor one account
over another. However, the Adviser believes that these risks are mitigated by
the fact that: (i) accounts with like investment
strategies managed by a particular portfolio manager are generally managed in a
similar fashion, subject to exceptions
to account for particular investment restrictions or policies applicable only to
certain accounts, differences in cash
flows and account sizes, and similar factors; and (ii) portfolio manager
personal trading is monitored to avoid potential
conflicts. In addition, the Adviser has adopted trade allocation procedures that
require equitable allocation of trade
orders for a particular security among participating accounts.
In
some cases, another account managed by the same portfolio manager may compensate
abrdn based on the performance
of the portfolio held by that account. The existence of such a performance-based
fee may create additional
conflicts of interest for the portfolio manager in the allocation of management
time, resources and investment opportunities.
Another
potential conflict could include instances in which securities considered as
investments for the Fund also may
be appropriate for other investment accounts managed by the Adviser or its
affiliates. Whenever decisions are made
to buy or sell securities by the Fund and one or more of the other accounts
simultaneously, the Adviser may aggregate
the purchases and sales of the securities and will allocate the securities
transactions in a manner that it believes
to be equitable under the circumstances. As a result of the allocations, there
may be instances where the Fund will
not participate in a transaction that is allocated among other accounts. While
these aggregation and allocation policies
could have a detrimental effect on the price or amount of the securities
available to the Fund from time to time, it is
the opinion of the Adviser that the benefits from the policies outweigh any
disadvantage that may arise from exposure
158 Appendix
A - Portfolio Managers
to
simultaneous transactions. The Trust has adopted policies that are designed to
eliminate or minimize conflicts of interest,
although there is no guarantee that procedures adopted under such policies will
detect each and every situation in
which a conflict arises.
With
respect to non-discretionary model delivery accounts and discretionary SMA
acounts, abrdn will utilize a third-party
service provider to deliver model portfolio recommendations and model changes to
the Sponsors. abrdn seeks
to treat clients fairly and equitably over time, by delivering model changes to
our service provider and investment instructions
for our other discretionary accounts to our trading desk, where possible,
simultaneously or approximately at the
same time. For certain strategies, delivery to our service provider will occur
at end of day. The service provider will then
deliver the model changes to each Sponsor on a when-traded, randomized full
rotation schedule. All Sponsors will be
included in the rotation schedule, including SMA and UMA.
While
UMA accounts are invested in the same strategies as, and may perform similarly
to, SMA accounts, there are expected to be performance differences between them.
There will
be performance dispersions between UMAs and other types of accounts because
abrdn does not have discretion over
trading and there may be client specific restrictions for SMA accounts.
Certain
operational differences in the trade execution process and timing of cash flows
for mutual funds may result in
abrdn having already commenced trading for its discretionary client accounts
before the model delivery and SMA accounts
have executed abrdn’s recommendations. In this event, trades placed for the
model delivery and SMA clients may
be subject to price movements, particularly with large orders or where
securities are thinly traded, that may result in model
delivery and SMA clients receiving less favorable prices than our other
discretionary clients. abrdn has no discretion
over transactions executed by model delivery clients and is unable to control
the market impact of those transactions.
These timing
delays or other operational factors associated with the implementation of trades
may result in non-discretionary
and model delivery and
SMA clients
receiving materially different prices relative to other client accounts.
In
addition, the constitution and weights of stocks within model portfolios may not
always be exactly aligned with
similar discretionary accounts. This
may create performance dispersions within accounts with the same or similar
investment
mandate.
Appendix
A - Portfolio Managers 159
Appendix
B – Debt Ratings
Standard
& Poor’s Global Ratings Debt Ratings
A.
Issue Credit Ratings
An
Standard & Poor’s Global Ratings issue credit rating is a forward-looking
opinion about the creditworthiness of an obligor
with respect to a specific financial obligation, a specific class of financial
obligations, or a specific financial program
(including ratings on medium-term note programs and commercial paper programs).
It takes into consideration
the creditworthiness of guarantors, insurers, or other forms of credit
enhancement on the obligation and takes
into account the currency in which the obligation is denominated. The opinion
reflects Standard & Poor’s Global Ratings’
view of the obligor’s capacity and willingness to meet its financial commitments
as they come due, and this opinion
may assess terms, such as collateral security and subordination, which could
affect ultimate payment in the event
of default.
Issue
credit ratings can be either long-term or short-term. Short-term ratings are
generally assigned to those obligations
considered short-term in the relevant market. Short-term ratings are also used
to indicate the creditworthiness
of an obligor with respect to put features on long-term obligations. Medium-term
notes are assigned long-term
ratings.
1.
Long-Term Issue Credit Ratings
Issue
credit ratings are based, in varying degrees, on Standard & Poor’s Global
Ratings’ analysis of the following considerations:
● |
The
likelihood of payment--the capacity and willingness of the obligor to meet
its financial commitments on an obligation
in accordance with the terms of the
obligation; |
● |
The
nature and provisions of the financial obligation, and the promise we
impute; and |
● |
The
protection afforded by, and relative position of, the financial obligation
in the event of a bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors’ rights. |
Issue
ratings are an assessment of default risk but may incorporate an assessment of
relative seniority or ultimate recovery
in the event of default. Junior obligations are typically rated lower than
senior obligations, to reflect the lower priority
in bankruptcy, as noted above. (Such differentiation may apply when an entity
has both senior and subordinated obligations,
secured and unsecured obligations, or operating company and holding company
obligations.)
Long-Term
Issue Credit Ratings*
AAA
- An obligor rated ‘AAA’ has extremely strong capacity to meet its financial
commitments. ‘AAA’ is the highest issuer
credit rating assigned by Standard & Poor’s Global Ratings.
AA
- An obligor rated ‘AA’ has very strong capacity to meet its financial
commitments. It differs from the highest
rated
obligors only to a small degree.
A
- An obligor rated ‘A’ has strong capacity to meet its financial commitments but
is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligors in higher-rated categories.
BBB
- An obligor rated ‘BBB’ has adequate capacity to meet its financial
commitments. However, adverse economic conditions
or changing circumstances are more likely to weaken the obligor’s capacity to
meet its financial commitments.
Obligors
rated ‘BB’, ‘B’, ‘CCC’, and ‘CC’ are regarded as having significant speculative
characteristics. ‘BB’ indicates the
least degree of speculation and ‘CC’ the highest. While such obligors will
likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major exposure to adverse
conditions.
BB
- An obligor rated ‘BB’ is less vulnerable in the near term than other
lower-rated obligors. However, it faces major ongoing
uncertainties and exposure to adverse business, financial, or economic
conditions that could lead to the obligor’s
inadequate capacity to meet its financial commitments.
B
- An obligor rated ‘B’ is more vulnerable than the obligors rated ‘BB’, but the
obligor currently has the capacity to meet
its financial commitments. Adverse business, financial, or economic conditions
will likely impair the obligor’s capacity
or willingness to meet its financial commitments.
CCC
- An obligor rated ‘CCC’ is currently vulnerable and is dependent upon favorable
business, financial, and economic
conditions to meet its financial commitments.
CC
- An obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The
‘CC’ rating is used when a default has
not yet occurred but Standard & Poor’s Global Ratings expects default to be
a virtual certainty, regardless of the anticipated
time to default.
160 Appendix
B - Debt Ratings
SD
and D - An obligor is rated ‘SD’ (selective default) or ‘D’ if Standard &
Poor’s Global Ratings considers there to be a default
on one or more of its financial obligations, whether long- or short-term,
including rated and unrated obligations but
excluding hybrid instruments classified as regulatory capital or in nonpayment
according to terms. A ‘D’ rating is assigned
when Standard & Poor’s Global Ratings believes that the default will be a
general default and that the obligor will
fail to pay all or substantially all of its obligations as they come due. An
‘SD’ rating is assigned when Standard & Poor’s Global
Ratings believes that the obligor has selectively defaulted on a specific issue
or class of obligations but it will continue
to meet its payment obligations on other issues or classes of obligations in a
timely manner. A rating on an obligor
is lowered to ‘D’ or ‘SD’ if it is conducting a distressed debt
restructuring.
* |
The
ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the major rating
categories. |
2.
Short-Term Issue Credit Ratings
Short-Term
Issue Credit Ratings
A-1
- An obligor rated ‘A-1’ has strong capacity to meet its financial commitments.
It is rated in the highest category by
Standard & Poor’s Global Ratings. Within this category, certain obligors are
designated with a plus sign (+). This indicates
that the obligor’s capacity to meet its financial commitments is extremely
strong.
A-2
- An obligor rated ‘A-2’ has satisfactory capacity to meet its financial
commitments. However, it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than obligors in the highest
rating category.
A-3
- An obligor rated ‘A-3’ has adequate capacity to meet its financial
obligations. However, adverse economic conditions
or changing circumstances are more likely to weaken the obligor’s capacity to
meet its financial commitments.
B
- An obligor rated ‘B’ is regarded as vulnerable and has significant speculative
characteristics. The obligor currently has
the capacity to meet its financial commitments; however, it faces major ongoing
uncertainties that could lead to the obligor’s
inadequate capacity to meet its financial commitments.
C
- An obligor rated ‘C’ is currently vulnerable to nonpayment that would result
in an ‘SD’ or ‘D’ issuer rating and is dependent
upon favorable business, financial, and economic conditions to meet its
financial commitments.
SD
and D - An obligor is rated ‘SD’ (selective default) or ‘D’ if Standard &
Poor’s Global Ratings considers there to be a default
on one or more of its financial obligations, whether long- or short-term,
including rated and unrated obligations but
excluding hybrid instruments classified as regulatory capital or in nonpayment
according to terms. A ‘D’ rating is assigned
when Standard & Poor’s Global Ratings believes that the default will be a
general default and that the obligor will
fail to pay all or substantially all of its obligations as they come due. An
‘SD’ rating is assigned when Standard & Poor’s Global
Ratings believes that the obligor has selectively defaulted on a specific issue
or class of obligations but it will continue
to meet its payment obligations on other issues or classes of obligations in a
timely manner. A rating on an obligor
is lowered to ‘D’ or ‘SD’ if it is conducting a distressed debt
restructuring.
B.
Municipal Short-Term Note Ratings
An
Standard & Poor’s Global Ratings U.S. municipal note rating reflects
Standard & Poor’s Global Ratings’ opinion about
the liquidity factors and market access risks unique to the notes. Notes due in
three years or less will likely receive a note
rating. Notes with an original maturity of more than three years will most
likely receive a long-term debt rating. In determining
which type of rating, if any, to assign, Standard & Poor’s Global Ratings’
analysis will review the following considerations:
● |
Amortization
schedule--the larger the final maturity relative to other maturities, the
more likely it will be treated as a note;
and |
● |
Source
of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as
a note. |
Municipal
Short-Term Note Ratings
SP-1
- Strong capacity to pay principal and interest. An issue determined to possess
a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2
- Satisfactory capacity to pay principal and interest, with some vulnerability
to adverse financial and economic changes
over the term of the notes.
SP-3
- Speculative capacity to pay principal and interest.
D
- ‘D’ is assigned upon failure to pay the note when due, completion of a
distressed debt
restructuring,
or the filing of a
bankruptcy petition or the taking of similar action and where default on an
obligation is a virtual certainty, for example due
to automatic stay provisions.
MOODY’S
INVESTORS SERVICE INC. (“Moody’s”) LONG-TERM DEBT RATINGS*
Appendix
B - Debt Ratings 161
Aaa
– Obligations rated Aaa are judged to be of the highest quality, subject to the
lowest level of credit risk.
Aa
–Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk
A
– Obligations rated A are judged to be upper-medium grade and are subject to low
credit risk.
Baa
– Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess
certain speculative characteristics.
Ba
– Obligations rated Ba are judged to be speculative and are subject to
substantial credit risk.
B
– Obligations rated B are considered speculative and are subject to high credit
risk.
Caa
– Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
Ca
– Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery
of principal and interest.
C
– Obligations rated C are the lowest rated and are typically in default, with
little prospect for recovery of principal and
interest.
* |
Moody’s
appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the
lower end of that generic rating category. |
STATE
AND MUNICIPAL NOTES
Excerpts
from Moody’s description of state and municipal note ratings:
MIG
1 This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based access to the market for
refinancing.
MIG
2 This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding
group.
MIG
3 This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market
access for refinancing is likely to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins
of protection.
FITCH,
INC. BOND RATINGS
Fitch
publishes
credit ratings that
are forward looking opinions
on the relative ability of an entity or
obligation to
meet financial
commitments.
Issue level ratings are also assigned and often include an expectation of
recovery which may be notched
above or below the issuer-level rating.
Credit ratings are indications
of the likelihood of receiving repayment
in accordance
with the terms of
the issuance.
‘AAA’ ratings denote the lowest expectation of default risk. They are assigned
only
in cases of exceptionally strong capacity for payment of financial commitments.
This capacity is highly unlikely to be adversely
affected by foreseeable events. ‘AA’ ratings denote expectations of very low
default risk. They indicate very strong
capacity for payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events. ‘A’
ratings denote expectations of low default risk. The capacity for payment of
financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to adverse business or
economic conditions than is the case for
higher ratings. ‘BBB’ ratings indicate that expectations of default risk are
currently low. The capacity for payment of financial
commitments is considered adequate, but adverse business or economic conditions
are more likely to impair this
capacity. ‘BB’ ratings indicate an elevated vulnerability to default risk,
particularly in the event of adverse changes in business
or economic conditions over time; however, business or financial flexibility
exists that supports the servicing of financial
commitments. ‘B’ ratings indicate that material default risk is present, but a
limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued payment is
vulnerable to deterioration in
the business and economic environment. CCC –
Very low margin for safety.
Default is a real possibility. CC - Default of some
kind appears probable.
C
- A default or default-like process has begun, or for
a closed funding vehicle, payment capacity is irrevocably impaired.
‘RD’ ratings indicate an issuer that in Fitch’s opinion has experienced: a) an
uncured payment default or distressed
debt exchange on a bond, loan or other material financial obligation, but b) has
not entered into bankruptcy filings,
administration, receivership, liquidation, or other formal winding-up procedure,
and c) has not otherwise ceased operating.
‘D’
ratings indicate an issuer that in Fitch’s opinion has entered into bankruptcy
filings, administration, receivership, liquidation
or other formal winding-up procedure or that has otherwise ceased
business
and debt is still outstanding.
MOODY’S
162 Appendix
B - Debt Ratings
Ratings
assigned on Moody’s global long-term and short-term rating scales are
forward-looking opinions of the relative
credit risks of financial obligations issued by non-financial corporates,
financial institutions, structured finance vehicles,
project finance vehicles, and public sector entities. Long-term ratings are
assigned to issuers or obligations with an
original maturity of eleven
months
or more and reflect both on the likelihood of a default on contractually
promised payments
and the expected financial loss suffered in the event of default. Short-term
ratings are assigned to obligations with
an original maturity of thirteen months or less and reflect both on the
likelihood of a default or
impairment on contractual
financial obligations
and the expected financial loss suffered in the event of default
or impairment.
Moody’s
differentiates structured finance ratings from fundamental ratings (i.e.,
ratings on nonfinancial corporate, financial
institution, and public sector entities) on the global long-term scale by adding
(sf ) to all structured finance ratings.
The addition of (sf ) to structured finance ratings should eliminate any
presumption that such ratings and fundamental
ratings at the same letter grade level will behave the same. The (sf ) indicator
for structured finance security
ratings indicates that otherwise similarly rated structured finance and
fundamental securities may have different
risk characteristics. Through its current methodologies, however, Moody’s
aspires to achieve broad expected equivalence
in structured finance and fundamental rating performance when measured over a
long period of time.
GLOBAL
SHORT-TERM RATING SCALE
P-1
Ratings
of
Prime-1 reflect
a superior ability to repay short-term obligations.
P-2
Ratings
of
Prime-2 reflect
a strong ability to repay short-term obligations.
P-3
Ratings
of
Prime-3 reflect
an acceptable ability to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
U.S.
MUNICIPAL SHORT-TERM DEBT AND DEMAND OBLIGATION RATINGS
SHORT-TERM
OBLIGATION RATINGS
While
the global short-term ‘prime’ rating scale is applied to US municipal tax-exempt
commercial paper, these programs
are typically backed by external letters of credit or liquidity facilities and
their short-term prime ratings usually map
to the long-term rating of the enhancing bank or financial institution and not
to the municipality’s rating. Other short-term
municipal obligations, which generally have different funding sources for
repayment, are rated using two additional
short-term rating scales (i.e., the MIG and VMIG scales discussed
below).
The
Municipal Investment Grade (MIG) scale is used to rate US municipal bond
anticipation notes of up to three years
maturity. Municipal notes rated on the MIG scale may be secured by either
pledged revenues or proceeds of a take-out
financing received prior to note maturity. MIG ratings expire at the maturity of
the obligation, and the issuer’s long-term
rating is only one consideration in assigning the MIG rating. MIG ratings are
divided into three levels—MIG 1 through
MIG 3—while speculative grade short-term obligations are designated
SG.
MIG
1 This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based access to the market for
refinancing.
MIG
2 This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding
group.
MIG
3 This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market
access for refinancing is likely to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins
of protection.
FITCH’S
SHORT-TERM RATINGS
A
short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity
and relates to the capacity to meet financial obligations in accordance with the
documentation governing the relevant
obligation. Short-term deposit ratings may be adjusted for loss severity.
Short-Term Ratings are assigned to obligations
whose initial maturity is viewed as “short term” based on market
convention
(a long-term rating can also be used
to rate an issue with short maturity).
Typically, this means a
time frame of up
to 13 months for corporate, sovereign, and
structured obligations and up to 36 months for obligations in U.S. public
finance markets.
F1
- Indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to
denote any exceptionally strong credit feature.
F2
- Good intrinsic capacity for timely payment of financial
commitments.
F3
- The intrinsic capacity for timely payment of financial commitments is
adequate.
B
- Minimal capacity for timely payment of financial commitments, plus heightened
vulnerability to near term adverse
changes in financial and economic conditions.
C
– Default is a real possibility.
Appendix
B - Debt Ratings 163
RD
– Indicates an entity that has defaulted on one or more of its financial
commitments, although it continues to meet
other financial obligations. Typically applicable to entity ratings
only.
D
– Indicates a broad-based default event for an entity, or the default of a
short-term obligation.
164 Appendix
B - Debt Ratings
Appendix
C - Proxy Voting Policies and Procedures
U.S.
Registered Advisers
Summary
of Proxy Voting Guidelines
as
of October 26, 2022
Where
clients appoint abrdn Inc. to vote proxies on their behalf, policies have been
established to vote these proxies in the best
interests of our clients.
We
employ ISS as a service provider to facilitate electronic voting. We require ISS
to provide recommendations based on our
own set of parameters tailored to abrdn’s assessment and approach, but remain
conscious that all voting decisions are
our own on behalf of our clients. We consider ISS’s recommendations and those
based on our custom parameters as input
to our voting decisions. We make use of the ISS standard research and
recommendations and those based on our own
custom policy as input to our voting decisions. Where our analysts make a voting
decision that is different from the recommendations
based on our custom policy they will provide a rationale for such a decisions
which will be made publicly
available in our voting disclosures.
In
order to make proxy voting decisions, an abrdn analyst assesses the resolutions
at general meetings in our active investment
portfolios. This analysis will be based on our knowledge of the company, but
will also make use of the custom and
standard recommendations provided by ISS as described above. The product of this
analysis will be a final voting decision
instructed through ISS and applied to all funds for which abrdn have been
appointed to vote. For funds managed by
a sub-adviser, we may delegate to the sub-adviser the authority to vote proxies;
however, the sub-adviser will be required
to either follow our policies and procedures or to demonstrate that their
policies and procedures are consistent with
ours, or otherwise implemented in the best interest of clients.
There
may be certain circumstances where abrdn Inc. may take a more limited role in
voting proxies. We will not vote proxies
for client accounts in which the client contract specifies that abrdn Inc. will
not vote. We may abstain from voting a client
proxy if the voting is uneconomic or otherwise not in clients’ best interests.
For companies held only in passively managed
portfolios, abrdn Inc. custom recommendations provided by ISS will be used to
automatically apply our voting approach;
we have scope to intervene to test that this delivers appropriate results, and
will on occasions intrude to apply a
vote more fully in clients’ best interests. If voting securities are part of a
securities lending program, we may be unable to vote
while the securities are on loan. However, we have the ability to recall shares
on loan or to restrict lending when required,
in order to ensure all shares have voted. In addition, certain jurisdictions may
impose share-blocking restrictions at
various times which may prevent abrdn Inc. from exercising our voting
authority.
We
recognize that there may be situations in which we vote at a company meeting
where we encounter a conflict of interest.
Such situations include:
● |
Where
a portfolio manager owns the holding in a personal
account. |
● |
An
investee company that is also a segregated
client. |
● |
An
investee company where an Executive Director or Officer of our company or
that of abrdn plc or another affiliate is also
a Director of that company. |
● |
An
investee company where an employee of abrdn plc or an affiliate or
subsidiary is a Director of that company. |
● |
A
significant distributor of our products. |
● |
Any
other companies which may be relevant from time to
time. |
We
have adopted procedures within our proxy voting process to identify where a
conflict exists. These procedures are designed
to ensure that our voting decisions are based on our client’s best interests and
are not impacted by any conflict.
The
implementation of this policy, along with conflicts of interest, will be
reviewed periodically by the Active Ownership team.
abrdn’s Global ESG Principles & Voting Policies are published on our
website.
Clients
may obtain a free copy of abrdn Inc.’s proxy voting policies and procedures
and/or proxy voting records for their account
by contacting us at (215) 405-5700. abrdn publishes ESG Principles & Voting
Policies, which describe our approach
to investment analysis, shareholder engagement and proxy voting across companies
worldwide. There are published
on our website.
Clients
that have not granted abrdn Inc. voting authority over securities held in their
accounts will receive their proxies in accordance
with the arrangements they have made with their service providers.
Listed
Company ESG Principles & Voting Policies
February
2023
Active
Ownership and Environmental, Social & Governance (ESG) considerations are a
driver of our investment process, our
investment activity, our client journey and our corporate
influence.
Appendix
C - Proxy Voting Policies and Procedures 165
Through
engagement with the companies in which we invest, and by exercising votes on
behalf of our clients, we seek to improve
the financial resilience and performance of our clients’ investments. Where we
believe change is needed, we endeavour
to catalyse this through our stewardship capabilities.
Our
expectations
As
global investors, we are particularly aware that ESG structures and frameworks
vary across regions. Furthermore, what
we expect of the companies in which we invest varies between different stages of
business development and the underlying
history and nature of the company in question. We seek to understand each
company’s individual circumstances
and so evaluate how it can best be governed and overseen. As such, we strive to
apply the principles and policies
set out on these pages in response to the needs of that individual company at
that particular time. Our heritage as
a predominantly active fund manager helps drive this bespoke approach to
understanding good governance and risk management.
We
have a clear perception of what we consider to be best practice globally – as
set out in this document. However we will
reflect the nature of the business, our close understanding of individual
companies and regional considerations, where
appropriate, in our approach to applying these policies, which are not
exhaustive.
This
document has received approval from the Head of Public Markets and the
Investment Vector’s Chief Sustainability Officer
following consultation with various internal stakeholders.
Our
approach to stewardship
We
seek to integrate and appraise environmental, social and governance factors in
our investment process. Our aim is to generate
the best long-term outcomes for our clients and we will actively take steps as
stewards and owners to protect and
enhance the value of our clients’ assets.
Stewardship
is a reflection of this bespoke approach to good governance and risk management.
We seek to understand each
company’s specific approach to governance, how value is created through business
success and how investors’ interests
are protected through the management of risks that materially impact business
success. This requires us to play our
part in the governance process by being active stewards of companies, involved
in dialogue with management and non-executive
directors where appropriate, understanding the material risks and opportunities
– including those relating to
environmental and social factors and helping to shape the future success of the
business.
We
will:
● |
Take
into consideration, in our investment process, the policies and practices
on environmental, social and governance matters
of the companies in which we invest. |
● |
Seek
to enhance long-term shareholder value through constructive engagement
with the companies in which we invest. |
● |
Actively
engage with the companies and assets in which we invest where we believe
we can influence or gain insight. |
● |
Seek
to exercise voting
rights, where held,
in a manner consistent with our
clients’ long-term best interests. |
● |
Seek
to influence the development of high standards of corporate governance and
corporate responsibility in relation to
environmental and social factors for the benefit of our
clients. |
● |
Communicate
our Listed Company ESG Principles and Voting Policies to clients,
companies and other interested parties. |
● |
Be
accountable to clients within the constraints of professional
confidentiality and legislative and regulatory requirements. |
● |
Be
transparent in reporting our engagement and voting
activities. |
abrdn
is committed to exercising responsible ownership with a conviction that
companies adopting improving practices in
corporate governance and risk management will be more successful in their core
activities and deliver enhanced returns
to shareholders. As owners of companies, the process of stewardship is a natural
part of our investment approach
as we seek to benefit from their long-term success on our clients’
behalf.
Engagement
It
is a central tenet of our active investment approach that we strive to meet with
the management and directors of our investee
companies on a regular basis. The discussions we have cover a wide range of
topics, including: strategic, operational,
and ESG issues and consider the long-term drivers of value. Engagement with
companies on ESG risks and opportunities
is a fundamental part of our investment process. It is a process by which we can
discuss how a company identifies,
prioritises and mitigates its key risks and optimises its most significant
opportunities. As such, we regard engagement
as:
● |
Important
to understanding investee companies as a
whole. |
● |
Helpful
when conducting proper ESG analysis. |
● |
Useful
to maintaining open dialogue and solid relationships with
companies. |
166 Appendix
C - Proxy Voting Policies and Procedures
● |
An
opportunity to inflect positive change on a company’s holistic risk
management programme – be active with our holdings
rather than activist. |
Proxy
Voting
Proxy
voting is an integral part of our active stewardship approach and we seek to
exercise voting rights in a manner in line
with our clients’ best interests. We seek to ensure that voting reflects our
understanding of the companies in which we invest
on behalf of our clients. We believe that voting is a vital mechanism for
holding boards and management teams to account,
and is an important tool for escalation and shareholder action.
This
document includes our process and overarching policy guidelines which we apply
when voting at
general
meetings. These
policies are not exhaustive and we evaluate our voting on a case by case basis.
As a global investment firm we recognise
the importance of adopting a regional approach, taking into account differing
and developing market practices.
Where a policy is specific to one region this is denoted.
We
endeavour to engage with companies regarding our voting decisions to maintain a
dialogue on matters of concern.
Voting
Process
In
line with our active ownership approach, we review the majority of general
meeting agendas convened by companies which
are held in our active equity portfolios. Analysis is undertaken by a member of
our regional investment teams or our
Active Ownership team and votes instructed following consideration of our
policies, our views of the company and our
investment insights. To enhance our analysis we may engage with a company prior
to voting to understand additional
context and explanations, particularly where there is deviation from what we
believe to be best practice.
To
supplement our own analysis we make use of the benchmark research and
recommendations provided by ISS, a provider
of proxy voting services. In the UK we also make use of the Investment
Association’s (IA) Institutional Voting Information
Service. We have implemented regional voting policy guidelines with ISS which
ISS applies to all meetings in order
to produce customised vote recommendations. These custom recommendations help
identify resolutions which deviate
from our expectations. They are also used to determine votes where a company is
held only in passive funds. Within
our custom policies, however, we do specify numerous resolutions which should be
referred to us for active review. For
example we will analyse all proposals marked by ISS as environmental or social
proposals.
While
it is most common for us to vote in line with a board’s voting recommendation we
will vote our clients’ shares against
resolutions which are not consistent with their best interests. We may also vote
against resolutions which conflict with
local governance guidelines, such as the IA in the UK. Although we seek to vote
either in favour or against a resolution we
do make use of an abstain vote where this is considered appropriate. For example
we may use an abstention to acknowledge
some improvement, but as a means to reserve our position in expectation that
further improvement is needed
before we can vote in favour. Where we vote against a resolution we endeavour to
inform companies of our rationale.
In
exceptional circumstances we may attend and speak at a shareholder meeting to
reinforce our views to the company’s
board.
We
endeavour to vote all shares for which we have voting authority. We may not vote
when there are obstacles to do so, for
example those impacting liquidity, such as share- blocking, or where there is a
significant conflict of interest. We use the
voting platform of ISS to instruct our votes. Where we lend stock on behalf of
clients, and subject to the terms of client agreements,
we hold the right to recall shares where it is in clients’ interests and we take
the view that it will impact the final
vote to maintain full voting weight on a particular meeting or
resolution.
Our
votes are disclosed publicly on our website one day after a general meeting has
taken place.
Strategy
We
invest in companies to create the best outcome for our clients. Companies must
be clear about the drivers of their business
success and their strategy for maintaining and enhancing it. Investment is a
forward-looking process; we seek to understand
the opportunity for a business and its scope for future value-creation over the
long term. In order to do this, we
need clarity on past business delivery and its drivers, and on the effective
track record of management; we require honest
and open reporting to build confidence in that track record. We seek confidence
that companies and their management
can maintain their competitive positioning and operational performance and
subsequently enhance returns
for investors. A clear strategy and clarity about the drivers of operational
success provides the lens through which we
will consider most corporate issues, not least assessing performance and risk
management.
● |
We
will consider voting against executive or non-executive directors if we
have serious concerns regarding the oversight
or implementation of strategy. |
Appendix
C - Proxy Voting Policies and Procedures 167
Board
of Directors
We
believe effective board governance promotes the long-term success and value
creation of the company. The board should
be responsible for establishing the company’s purpose and strategy, overseeing
management in their implementation
of strategy and performance against objectives. The board should ensure a strong
framework of control and
risk oversight, including material ESG risks. The board should assess and
monitor culture and be engaged with the workforce,
shareholders and wider society.
Board
Composition
Effective
decision making requires a mix of skills around the table and constructive
debate between diverse and different-minded
individuals. A range of skills, experience and perspectives should be drawn
together on the board. These
include industry knowledge, experience from other sectors and relevant
geographical knowledge. Independence of
thought plays a crucial role in the ability of a board to generate the debate
and discussion that will challenge management,
help enhance business performance and improve decision-making. Board assessments
will help the board
ensure it has the necessary mix of skills, diversity and quality of individuals
to address the current risks and opportunities
the company faces. Unitary boards should comprise an appropriate combination of
executive and non- executive
directors such that no group of individuals dominates decision-making. We expect
the size of the board to reflect
the size, nature and complexity of the business. We also expect regular internal
and external board evaluations which
include an assessment of board composition and effectiveness.
Leadership
Running
businesses effectively for the long term requires effective collaboration and
cooperation, with no individual or small
group having unfettered powers. Nor should they have dominant influence over the
way a business is run or over major
decisions about its operations or future. There should be a division of
responsibility between board leadership and executive
leadership of the business. We believe that there should be a division of roles
at the top of the organisation, typically
between a Chief Executive Officer (CEO) and an independent Chair.
● |
We
will consider supporting the re-election of an existing Chair & CEO
role combination, recognising that this remains common
in certain geographies. In reviewing on a case by case basis we will take
account of the particular circumstances
of the company and consider what checks and balances are in place, such as
the presence of a strong Senior
Independent Director with a clear scope of
responsibility. |
● |
We
will generally oppose any re-combination of the roles of CEO and Chair,
unless the move is on a temporary basis due
to exceptional circumstances or other mitigating
factors. |
● |
We
will generally oppose any move of a retiring CEO to the role of
Chair. |
Independence
Companies
should be led and overseen by genuinely independent boards. When looking at
board composition we generally
expect to see a majority of independent directors, with boards identifying their
independence classifications in the
Annual Report. It is preferable to see an identified Senior Independent Director
(SID) on the board, who will lead the appraisal
of and succession planning for the Chair. We expect SIDs to meet with investors
and be a point of contact for escalating
concerns if required.
In
assessing a director’s independence we will have due regard for whether a
director:
i. |
Has
been an employee of the company within the last five
years. |
ii. |
Has
had within the last three years a material business relationship with the
company. |
iii. |
Has
received remuneration in addition to director fees or participates in the
company’s option or variable incentive schemes,
or is a member of the company’s pension scheme. |
iv. |
Has
close family ties with any of the company’s advisers, directors or senior
employees. |
v. |
Holds
cross-directorships or has significant links with other directors through
involvement in other companies or bodies. |
vi. |
Represents
a significant shareholder. |
vii. |
Has
served on the board for more than 12 years (or 9 for UK
companies). |
● |
We
will consider voting against the re-election of non-independent directors
if the board is not majority independent (excluding
employee representatives). In doing so we will have regard for whether a
company is controlled and the nature
of the non-independence – for example, we are unlikely to vote against
shareholder representatives unless their
representation is disproportionate to their
shareholding. |
Succession
Planning & Refreshment
Regular
refreshment of the non-executive portion of a board helps draw in fresh
perspectives, not least in the context of changes
to business and emerging opportunities and risks. It also helps limit the danger
of group-think. Thoughtful and proactive
succession planning is therefore needed for board continuity, to ensure that a
board is populated by individuals with
an appropriate mix of skills, experience and perspective. We expect the board to
implement a formal process for the recruitment
and appointment of new directors, and to provide transparency of this in the
Annual Report.
168 Appendix
C - Proxy Voting Policies and Procedures
● |
We
will vote against non-executive directors where there are concerns
regarding board refreshment or excessive tenure.
Where there are directors who have served for over 12 years on a board
which has seen no refreshment in 3 years
(2 in UK), we will generally vote against their re-election. If a director
has served for over 15 years we will generally
vote against their re-election. We will, however, consider the impact on
board continuity and the company’s succession
planning efforts prior to doing so. We may not apply the tenure limit to
directors who are founders or shareholder
representatives. |
Diversity
We
believe that companies that make progress in diversity and inclusion (D&I)
are better positioned for long-term sustainability
and outperformance. Diversity of thought, paired with a culture of inclusion,
can help companies to tackle increasingly
complex challenges and markets. We expect boards to report on how they promote
D&I throughout the business
and believe that setting targets is important to addressing imbalances. We
recognise the importance of adopting
a regional approach to diversity and inclusion, allowing us to press for
progress with appropriate consideration for
the starting point. We have for several years, actively encouraged progress in
gender diversity at all levels, and have expanded
our scope in relation to diversity and inclusion across geographies. In respect
of ethnic diversity, this is coming increasingly
into focus as we encourage boards to progress in ensuring that their composition
reflects their employee and
customer bases.
Our
regional specific policies are below. In determining our votes we will take
account of mitigating factors, such as the sudden
departure of a female board member. We will also consider any clear progress
being made by the company on diversity
and any assurance that diversity shortfalls will soon be addressed.
Gender
Diversity
● |
UK:
We will generally vote against the Nomination Committee Chair of FTSE 350
companies if the board is not comprised
of at least one third female directors. For smaller companies, we will
take this action if the board does not include
at least one female director. |
● |
Europe:
We will generally vote against the Nomination Committee Chair of LargeCap
companies if the supervisory board
is not comprised of at least 30% female directors, or is not in line with
the local standard if higher. For smaller companies,
we will take this action if the supervisory board does not include at
least one female director. |
● |
Australia:
We will generally vote against the Nomination Committee Chair of ASX300
companies if the board is not comprised
of at least 30% female directors. |
● |
North
America: We will generally vote against the Nomination Committee Chair of
LargeCap companies if the board is
not comprised of at least 30%
female directors. For smaller companies, we will take this action if the
board does not include
at least one female director |
Ethnic
Diversity
● |
UK:
We will generally vote against the Nomination Committee Chair at the
boards of FTSE 100 companies, if the board does
not include at least one member from an ethnic minority background. This
is in line with targets set up by the Parker
Review. |
● |
US:
We will generally vote against the Nomination Committee Chair at the
boards of S&P 1500 & Russell 3000 companies
if the board does not include at least one member from a racial or ethnic
minority background. |
Directors’
Time Commitment
Individual
directors need sufficient time to carry out their role effectively and therefore
we seek to ensure that all directors maintain
an appropriate level of overall commitments such that allows them to be properly
diligent.
● |
We
will consider opposing the election or re-election of any director where
there is a concern regarding their ability to dedicate
sufficient time to the role. In making this assessment we will have regard
for the ISS classification of ‘overboarding’. |
● |
We
will generally oppose the re-election of any director who has attended
fewer than 75% of board meetings in two consecutive
years. |
Board
Committees
Boards
should establish committees, populated by independent and appropriately skilled
non-executive directors, to oversee
(as a minimum) the nomination, audit and remuneration processes. It may also be
appropriate for additional committees
to be established, such as a risk or sustainability committee. These committees
should report openly on an annual
basis about their activities and key decisions taken.
● |
We
will consider voting against committee members if we have concerns
regarding the composition of a committee. |
Nomination
Committee
This
committee has responsibility for leading the process for orderly non-executive
and senior management succession planning
and recruitment, and for overseeing the composition of the board including
skillset, experience and diversity. We
expect the committee to be comprised of a majority of independent directors with
an independent Chair.
Appendix
C - Proxy Voting Policies and Procedures 169
● |
We
will consider voting against the re-election of the Nomination Committee
Chair if we have concerns regarding the composition
of the board or concerns regarding poor succession
planning. |
Audit
Committee
This
committee has responsibility for monitoring the integrity of the financial
statements, reviewing the company’s internal
financial controls and risk management systems, reviewing the effectiveness of
the company’s internal audit function
and appointing auditors. While we prefer the committee to be wholly independent,
at minimum we expect the committee
to be comprised of a majority of independent directors with an independent Chair
and at least one member having
recent and relevant financial experience.
● |
We
will generally vote against the re-election of the Audit Committee Chair
if at least one member of the Committee does
not have recent and relevant financial
experience. |
Remuneration
Committee
This
committee is responsible for determining the policy and setting remuneration for
executive and non-executive directors.
The committee should ensure that remuneration is aligned with strategy and
company performance and should
clearly demonstrate regard for the company’s employees, for wider society and be
cognisant of the company’s licence
to operate when considering policy and the overall level of remuneration. We
expect remuneration committees to
be robust in their approach to developing and implementing remuneration
policies, with formal and transparent procedures
for developing policies and for determining remuneration packages. Remuneration
committees should be comprised
of a majority of independent directors with an independent Chair and we expect
members to have appropriate
experience and knowledge of the business. No executive should be involved in
setting their own remuneration.
● |
Where
we have significant concerns regarding the company’s remuneration policy
or reward outcomes we may escalate
these concerns through a vote against the Chair or members of the
Remuneration Committee. |
Director
Accountability
We
expect to be able to hold boards to account through engagement and regular
director re-elections and directors should
feel that they are accountable to investors. We encourage individual, rather
than bundled, director elections. While
our preference is for directors to be subject to re-election annually, we expect
re-elections to take place at least every
three years. Lengthier board mandates, while not uncommon in some markets, risk
divorcing directors from an appropriate
sense of accountability. Directors and management should make themselves
available for discussions with major
shareholders as we expect to have open dialogue to share our perspectives and
gain confidence that the individuals
are carrying out their roles with appropriate vigour and diligence. A further
important element of director accountability
to shareholders is that investors should have the right, both formal and
informal, to propose and promote individual
directors to be considered for election to the board by all
shareholders.
● |
We
will generally oppose the re-election of non- independent NEDs who are
proposed for a term exceeding three years.
We may not apply this to directors who are shareholder
representatives. |
● |
Where
we have significant concerns regarding a board member’s performance,
actions or inaction to address issues raised
we may vote against their re-election. |
● |
We
may vote against directors who decline appropriate requests for meeting
without a clear justification. |
● |
Where
a director has held a position of responsibility at a company which has
suffered a material governance failure, we
will consider whether we are comfortable to support their re-election at
other listed companies. |
● |
We
will generally support resolutions to discharge the supervisory board or
management board members unless we have
serious concerns regarding actions taken during the year under review.
Where there is insufficient information regarding
allegations of misconduct, we may prefer to abstain. In exceptional
circumstances we may vote against the discharge
resolution to reflect serious ESG concerns if there is not another
appropriate resolution. |
● |
We
will not support the election of directors who are not personally
identified but are proposed as
corporations. |
Reporting
A
company’s board should present a fair, balanced and understandable assessment of
the company’s position and prospects
– financial and non-financial – and of how it has fulfilled its
responsibilities. We support the principle of full disclosure
of relevant and useful information, subject to issues of commercial
confidentiality and prejudice. Boilerplate disclosure
should be avoided. We encourage companies to consider using the appropriate
globally developed standards and
would particularly encourage the use of those created by the Taskforce for
Climate related Financial Disclosure (TCFD),
the International Integrated Reporting Council (IIRC), the Sustainability
Accounting Standards Board (SASB) and the
Global Reporting Initiative (GRI). Audited reporting and financial numbers
should be published ahead of any relevant shareholder
meetings. We continue to monitor the evolving reporting landscape and consider
new reporting developments
as they emerge, either voluntary or regulatory.
● |
We
may consider voting against a company’s Annual Report & Accounts if we
have concerns regarding timely provision
or disclosure. |
170 Appendix
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Political
Donations & Lobbying
Companies
should be consistent in their public statements and not undermine these in
private commentary to market participants
or to politicians and regulators. We welcome transparency from companies about
their lobbying activities and
believe that good companies have nothing to hide in this respect. Similarly we
encourage transparency of any political
donations that companies deem appropriate – and we expect a clear explanation of
why such donations are an appropriate
use of corporate funds.
Risk
& Audit
The
board is responsible for determining the company’s risk appetite, establishing
procedures to manage risk and for monitoring
the company’s internal controls. We expect boards to conduct robust assessments
of the company’s material risks
and report to shareholders on risks, controls and effectiveness. The
introduction of global accounting standards has led
to much greater investor confidence in the accounts produced by companies around
the world. It has also assisted in creating
consistency of reporting across companies, enabling fairer comparisons between
different operating businesses.
We therefore encourage companies seeking international investment to report
under International Financial Reporting
Standards (IFRS) or US GAAP. As a firm abrdn supports the continued development
of high quality global accounting
standards.
An
independent audit, delivered by a respected audit firm, is a required element
for investor confidence in reporting by companies.
We strongly favour meaningful, transparent and informative auditor reports,
giving us additional insights into the
audit process and accounting outcomes. Audit fees must be sufficient to pay for
an appropriately in-depth assurance
process. We would be concerned if a company sought to make savings in this
respect as the cost in terms of damage
to audit effectiveness and confidence in the company’s accounts would be much
more substantial.
The
independence of the auditor and the standard of their work, particularly in
challenging management, should be subject
to regular assessment that is appropriately disclosed. Even when individuals
carrying out the audit are refreshed, we
believe that the independence of the audit firm erodes over time and we will
encourage a tender process and change
of audit firm where an engagement has lasted for an extended period. In order to
demonstrate the level of independence,
companies should not have the same audit firm in place for more than 20
years.
The
relationship with the auditor should be mediated through the audit committee.
Where we are significant shareholders,
we expect to be consulted on plans to tender and replace auditors.
● |
We
will generally vote against the re-election of an auditor which has a
tenure of 20 years or over, if there are no plans for
rotation in the near term. |
● |
We
will consider voting against the auditors if we have concerns regarding
the accounts presented or the audit procedures
used. |
● |
We
will vote against the approval of auditor fees if we have concerns
regarding the level of fees or the balance of non-audit
and audit fees. |
Remuneration
Remuneration
policies and the overall levels of pay should be aligned with strategy,
attracting and retaining talent and incentivising
the decisions and behaviours needed to create long-term value. The component
parts of remuneration should
be structured so as to link rewards to corporate and individual performance and
they should be considered in the context
of the remuneration policies when taken as a whole. We recognise the benefits of
simplicity in forming the policy, which
should clearly link outcomes and expectations for those receiving the
remuneration, as well as external stakeholders.
The structure should be transparent and understandable.
A
company’s annual report should contain an informative statement of remuneration
policy which communicates clearly
to stakeholders how it has developed and evolved. This should include details of
any stress testing that may have been
undertaken to understand the policy outcomes for different business scenarios.
The remuneration committee should
provide a clear description of the application of policy and the outcomes
achieved.
Base
salary should be set at a level appropriate for the role and responsibility of
the executive. We discourage increases which
are driven by peer benchmarking, and expect increases to be aligned with the
wider workforce. Consideration should
also be given to the knock on impact to variable remuneration potential. Pension
arrangements and benefits should
be clearly disclosed. We generally expect pension structures to be aligned with
the wider workforce.
A
company should structure variable, performance- related pay to incentivise and
reward management in a manner that
is aligned with the company’s sustainable performance and risk appetite over the
long term. We expect all variable pay
to be capped, preferably as a proportion of base salary. In the UK we expect
variable pay to be capped as a proportion
of salary. In other markets, if variable pay is capped at a number of shares, we
expect the value of grants to be kept
under review annually to ensure the value remains appropriate and is not
excessive.
Appendix
C - Proxy Voting Policies and Procedures 171
Performance
metrics used to determine variable pay should be clearly disclosed and aligned
with the company’s strategy.
A significant portion of performance metrics should seek to measure significant
improvements in the underlying financial
performance of the company. We also encourage the inclusion of non-financial
metrics linked to targets which are
aligned with the company’s progress on its ESG strategy. Where possible we
expect these targets to be quantifiable and
disclosed.
Variable
pay arrangements should incentivise participants to achieve above-average
performance through the use of challenging
targets. We encourage sliding-scale performance measures and expect performance
target ranges to be disclosed
to enable shareholders to assess the level of challenge and pay for performance
alignment. We expect annual bonus
targets to be disclosed retrospectively and encourage the disclosure of long
term incentive (LTI) targets at the beginning
of the performance period, but at minimum we expect retrospective disclosure.
Where bonus or LTI targets are
not disclosed due to commercial sensitivity we expect an explanation of why the
targets continue to be considered sensitive
retrospectively and expect some detail regarding the level of achievement vs
target. Where a share price metric is
being used, we expect this to be underpinned by a challenging measure of
underlying performance.
We
encourage settlement of a portion of the annual bonus in shares which are
deferred for at least one year.
We
expect settlement of long term incentives to be in shares, with rationale
provided for any awards settled in cash. Long term
incentives should have a performance period of no less than three years. In the
UK we expect a further holding period
of two years to be applied, and we encourage this in other markets.
We
do not generally support restricted share schemes or value creation plans. We
will consider supporting the use of restricted
share plans which have been structured consistent with the guidelines of the
Investment Association.
We
expect appropriate malus and clawback provisions to be applied to variable
remuneration plans.
We
expect shareholding guidelines to be adopted for executive directors and
encourage the adoption of post- departure
shareholding guidelines.
We
expect details of any use of discretion to be disclosed and its use should be
justifiable, appropriate and clearly explained.
We would expect policies to be sufficiently robust so that discretion is only
necessary in exceptional circumstances.
We do not generally support exceptional awards, and are particularly sensitive
to such awards being granted
to reward a corporate transaction.
We
expect executive service contracts to provide for a maximum notice period of 12
months. We will consider local best practice
provisions related to severance arrangements when voting.
Non-executive
fees should reflect the role’s level of responsibility and time commitment. We
do not support NED’s participation
in option or performance-related arrangements. However we do support the payment
of fees in shares, particularly
where conservation of cash is an issue.
In
the UK our expectations of companies are aligned with the Investment
Association’s Principles of Remuneration.
Where
significant changes to remuneration arrangements are being considered, we would
expect remuneration committees
to consult with their largest shareholders prior to finalising any changes.
Where any increase to variable remuneration
is proposed, we would expect this to be accompanied by a demonstrable increase
in the stretch of the targets.
Furthermore we expect any increases to remuneration to be subject to shareholder
approval.
In
response to the issues arising from the cost of living crisis being experienced
by many people in the UK, we expect companies
to focus any additional help towards those members of the workforce who need it
most. We expect Remuneration
Committees to take into account factors arising from the cost of living crisis
when deliberating over executive
pay outcomes. We would be concerned by reputational issues arising from
decisions made in these unusual circumstances
and may make this a factor in our voting decisions at relevant
AGMs.
In
line with the expectations set out above we will generally vote against the
appropriate resolution(s) where:
● |
We
consider the overall reward potential or outcome to be
excessive. |
● |
A
significant increase to salary has been granted which is not aligned with
the workforce or is not sufficiently
justified. |
● |
A
significant increase to performance-related pay has been granted which is
not sufficiently justified, is not accompanied
by an increase in the level of stretch required for achievement or results
in the potential for excessive reward. |
● |
There
is no appropriate cap on variable incentive
schemes. |
● |
Performance
targets for annual bonus awards are not disclosed retrospectively and the
absence of disclosure is not explained. |
● |
Performance
targets for long term incentive awards are not disclosed up front and
there is no compelling explanation regarding
the absence of disclosure or a commitment to disclose
retrospectively. |
● |
Performance
targets are not considered sufficiently challenging, either at threshold,
target or maximum. |
● |
Relative
performance targets allow vesting of awards for below median
performance. |
172 Appendix
C - Proxy Voting Policies and Procedures
● |
Retesting
provisions apply. |
● |
Incentives
that have been conditionally awarded have been repriced or performance
conditions changed part way through
a performance period. |
● |
We
have concerns regarding the use of discretion or the grant of exceptional
awards. |
● |
Pension
arrangements are excessive. |
● |
Pension
arrangements are not aligned with the wider workforce
(UK). |
Investor
Rights
The
interests of minority shareholders must be protected and any major, or majority,
investor should not enjoy preferential
treatment. The structure of ownership or control should minimise the potential
for abuse of public shareholders.
Corporate
Transactions
Companies
should not make significant changes to their structure or nature without being
fully transparent to their investors.
Shareholders should have the opportunity to vote on significant corporate
activity, such as mergers and acquisitions.
Where a transaction is with a related party, only independent shareholders
should have a vote. Even in markets
where no vote is given to shareholders in these circumstances, investors need
transparent disclosure of the reasons
for any such major change. Companies should expect that shareholders may want to
discuss and debate proposed
developments
Diversification
beyond the core skills of the business needs to be justified as it is more often
than not a distraction from operational
performance. All major deals need to be clearly explained and justified in the
context of the pre- existing strategy
and be subject to shareholder approval.
We
will vote on corporate transactions on a case by case basis.
Dividends
We
will generally support the payment of dividends but will scrutinise the proposed
level where it appears excessive given
the company’s financial position.
Share
Capital
The
board carries responsibility for prudent capital management and
allocation.
Share
Issuance
We
will consider capital raises which are proposed for a specific purpose on a case
by case basis but recognise that it can
be beneficial for companies to have some general flexibility to issue shares to
raise capital. However we expect issuances
to be limited to the needs of the business and companies should not issue
significant portions of shares unless offering
these on a pro-rata basis to existing shareholders to protect against
inappropriate dilution of investments.
● |
Where
a company seeks a general authority to issue shares we generally expect
this to be limited to 25% of the company’s
share capital for pre- emptive issuances. In the UK we are aligned with
the guidance of the Investment Association
Share Capital Management Guidelines. |
● |
Where
a company seeks a general authority to issue shares we generally expect
this to be limited to 10% of the company’s
share capital for non-pre-emptive issuances. In the UK we are aligned with
the guidance of the Investment Association
Share Capital Management Guidelines and those of the Pre-Emption
Group. |
● |
We
will not generally support share issuances at investment trusts unless
there is a commitment that shares would only
be issued at a price at or above NAV. |
When
considering our votes we will, however, take account of the company’s
circumstances and any further detail regarding
proposed capital issuance authorities prior to voting.
Following
changes to the UK’s Pre-Emption Group Guidelines in November 2022, which reflect
an increase on previous limits,
we will hold the Chair of the company accountable for any perceived misuse of
the increased flexibility through a vote
against their re-election.
Buyback
We
recognise that share buybacks can be a flexible means of returning cash to
shareholders.
● |
We
will generally support buyback authorities of up to 10% of the issued
share capital. |
Related
Party Transactions
The
nature of relations – particularly any related party transactions (RPTs) – with
parent or related companies, or other major
investors, must be disclosed fully. Related party transactions must be agreed on
arm’s length terms and be made fully
transparent. Where they are material, they should be subject to the approval of
independent shareholders.
● |
We
will vote against RPTs where there is insufficient transparency of the
nature of the transaction, the rationale, the terms
or the views and assessment of directors and
advisors. |
Appendix
C - Proxy Voting Policies and Procedures 173
Article/Bylaw
amendments
While
it is standard to see proposals from companies to amend their articles of
association or bylaws, we will review these
on a case by case basis. When doing so we expect full transparency of the
proposed changes to be disclosed.
● |
We
will vote against amendments which will reduce shareholder
rights. |
Anti-Takeover
Defences
There
should be no artificial structures put in place to entrench management and
protect companies from takeover. The best
defence from hostile takeover is strong operational delivery.
● |
We
will generally vote against anti-takeover/‘poison pill’
proposals. |
Voting
Rights
We
are strong supporters of the principle of ‘one share, one vote’ and therefore
favour equal voting rights for all shareholders.
● |
We
will generally vote against proposals which seek to introduce or continue
capital structures with multiple voting rights. |
● |
We
will consider voting against proposals to raise new capital at companies
with multiple share classes and voting rights. |
General
Meetings
Shareholder
meetings provide an important opportunity to hold boards to account not only
through voting on the proposed
resolutions but also by enabling investors the opportunity to raise questions,
express views and emphasise concerns
to the entire board. We may make a statement at a company’s AGM as a means of
escalation to reinforce our views
to a company’s board.
We
welcome the opportunity to attend meetings virtually, being of the view that
this can increase participation given obstacles
such as location or meeting concentration. However we are not supportive of
companies adopting virtual-only meetings
as we believe this format reduces accountability. Our preference is for a hybrid
meeting format to balance the flexibility
of remote attendance with the accountability of an in-person
meeting.
● |
We
will generally support resolutions seeking approval to shorten the EGM
notice period to minimum 14 days, unless we
have concerns regarding previous inappropriate use of this
flexibility. |
● |
We
will generally support proposals to enable virtual meetings to take place
as long as there is confirmation that the format
will be hybrid, with physical meetings continuing to take place (unless
prohibited by law). We expect virtual attendees
to have the same rights to speak and raise questions as those attending
in-person. |
As
part of strategic planning, boards need to have oversight of, and clearly
articulate, the key opportunities and risks affecting
the sustainability of the business model. This includes having a process for,
and transparent disclosure of, potential and
emerging opportunities and risks and the actions being taken to address
them.
The
effective management of risks extends to long-term issues that are hard to
measure and whose timeframe is uncertain
and will include the management of environmental and social issues. We use the
UN Global Compact’s four areas
of focus in assessing how companies are performing in this area.
Specifically
we expect companies to be able to demonstrate how they manage their exposures
under the following headings.
The
Environment
It
is generally accepted that companies are responsible for the effects of their
operations and products on the environment.
The steps they take to assess and reduce those impacts can lead to cost savings
and reduce potential reputational
damage. Companies are responsible for their impact on the climate and they face
increased regulation from
world governments on activities that contribute to climate change.
We
expect that companies will
● |
Identify,
manage and reduce their environmental
impacts. |
● |
Understand
the impact of climate change along the company value
chain. |
● |
Develop
group-level climate policies and, where relevant, set targets to manage
the impact, report on policies, practices
and actions taken to reduce carbon and other environmental risks within
their operations. |
● |
Comply
with all environmental laws and regulations, or recognised international
best practice as a minimum. |
Where
we have serious concerns regarding a board’s actions, or inaction, in relation
to the environment we will consider taking
voting action on an appropriate resolution.
We
will use the indicators within the Carbon Disclosure Project to identify
companies which are not fulfilling their climate commitments.
Where appropriate we will take voting action to encourage better practice among
companies which we deem
to be laggards.
174 Appendix
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Labour
and employment
Companies
that respect internationally recognised labour rights and provide safe and
healthy working environments for employees
are likely to reap the benefits. This approach is likely to foster a more
committed and productive workforce, and
help reduce damage to reputation and a company’s license to operate. We expect
companies to comply with all employment
laws and regulations and adopt practices in line with the International Labour
Organization’s core labour standards.
a minimum.
In
particular, companies will:
● |
Take
affirmative steps to ensure that they uphold decent labour
standards. |
● |
Adopt
strong health and safety policies and programmes to implement such
policies. |
● |
Adopt
equal employment opportunity and diversity policies and a programme for
ensuring compliance with such policies. |
● |
Adopt
policies and programmes for investing in employee training and
development. |
● |
Adopt
initiatives to attract and retain talented employees, foster higher
productivity and quality, and encourage in their workforce
a commitment to achieving the company’s
purpose. |
● |
Ensure
policies are in place for a company’s suppliers that promote decent labour
standards, and programmes are in place
to ensure high standards of labour along supply
chains. |
● |
Report
regularly on its policy and implementation of managing human
capital. |
Where
we have serious concerns regarding a board’s actions, or inaction, in relation
to labour and employment we will consider
taking voting action on an appropriate resolution.
Human
rights
We
recognise the impact that human-rights issues can have on our investments and
the role we can play in stimulating progress.
We draw upon a number of international, legal and voluntary agreements for
guidance on human-rights responsibilities
and compliance. Our primary sources are the International Bill of Rights and the
core conventions of the International
Labour Organisation (ILO), which form the list of internationally agreed human
rights, and the UN Guiding Principles
on Business and Human Rights (UNGPs), which clarifies the roles of states and
businesses. We encourage companies
to use the UNGPs Reporting Framework and encourage disclosure in line with this
guidance.
We
expect companies to:
● |
Continually
work to understand their actual and potential impacts on human
rights. |
● |
Establish
systems that actively ensure respect for human
rights. |
● |
Take
appropriate action to remedy any infringements on human
rights. |
Where
we have serious concerns regarding a board’s actions, or inaction, in relation
to human rights we will consider taking
voting action on an appropriate resolution.
Business
ethics
As
institutions of wealth and influence, companies have a significant impact on the
prosperity of their local communities and
the wider world. Having a robust code of ethics and ensuring professional
conduct mean companies operate more effectively,
particularly when it comes to ethical principles governing decision- making. A
company’s failure to conform to internationally
recognised standards of business ethics on matters such as bribery and
corruption, can increase its risk of facing
investigation, litigation and fines. This could undermine its license to
operate, and affect its reputation and image.
We
expect companies to have policies in place to support the
following:
● |
Ethics
at the heart of the organisation’s
governance. |
● |
A
zero-tolerance policy on bribery and corruption.. How people are rewarded,
as pay can influence behaviour. |
● |
Respect
for human rights. |
● |
Ethical
training for employees. |
Where
we have serious concerns regarding a board’s actions, or inaction, related to
business ethics we will consider taking
voting action on an appropriate resolution.
We
will review any resolution at company meetings which ISS has identified as
covering environmental and social factors. The
following will detail our overarching approach and
expectations.
Our
approach to vote analysis is consistent across active and quantitative
investment strategies
Review
the resolution, proponent and board statements, existing disclosures, and
external research.
Engage
with the company, proponents, and other stakeholders as required.
Involve
thematic experts, regional specialists, and investment analysts in
decision-making to harness a wide range of expertise
and include all material factors in our analysis.
Appendix
C - Proxy Voting Policies and Procedures 175
Ensure
consistency by using our own in-house guidance to frame case-by-case
analysis.
Monitor
the outcomes of votes.
Follow-up
with on-going engagement as required.
Given
the nature of the topics covered by these resolutions we do not apply binary
voting policies. We adopt a nuanced approach
to our voting research and outcomes and will consider the specific circumstances
of the company concerned. Our
objective is not to vote in favour of all shareholder resolutions but to
determine the best outcome for the company in the
context of the best outcome for our clients. There are instances where we are
supportive of the spirit of a resolution however
there may be a reason which prevents our support for the proposal. For example,
where the purpose of the resolution
is unclear, where the wording is overly prescriptive, when suggested
implementation is overly burdensome or where
the proposal strays too closely to the board’s responsibility for setting the
company’s strategy.
Management
Proposals
We
are supportive of the steps being taken by companies to provide transparent,
detailed reporting of their ESG strategies
and targets. While shareholder proposals on environmental and social topics have
been common on AGM agenda
for several years, an increasing number of companies are presenting management
proposals, such as so called ‘say
on climate’ votes, for shareholder approval. While we welcome the intention of
accountability behind these votes, we have
reservations about the potential for them to limit the scope for subsequent
investor challenge and diminish the direct
responsibility and accountability of the board and individual directors. We
believe it is the role of the board and the executive
to develop and apply strategy, including ESG strategies, and we will continue to
use existing voting items to hold boards
to account on the implementation of these strategies. As active investors we
also regularly engage with investee companies
on ESG topics and find this dialogue to be the best opportunity to provide
feedback.
We
will review the appropriateness of ‘say on climate’ votes and consider if other
voting mechanisms should be applied to
ensure both Boards and Executives apply the appropriate rigour to initiate and
deliver strategies to support the climate transition.
Shareholder
Proposals
The
number of resolutions focused on environmental and social (E&S) issues filed
by shareholders continues to grow rapidly.
The following provides an overview of some of the factors we consider when
assessing the most prevalent themes
for shareholder proposals.
Climate
Change
We
are members of the Net Zero Asset Manager Initiatives
and this is reflected in our Active Ownership approach. We encourage
the companies in which we invest to demonstrate a robust methodology
underpinning Paris aligned goals and
targets and are supportive of resolutions that will help companies to achieve
this. Once a credible climate strategy is in
place, we prioritise evidence of implementation over requests to re-draft
strategies and targets after only a year or two.
A
growing number of resolutions call on companies to increase the transparency of
their reporting on climate- related lobbying.
These proposals typically encompass direct lobbying undertaken by the company
and indirect lobbying undertaken
by trade associations and other organisations of which it is a member or
supporter. Lobbying contrary to the objectives
of the Paris Agreement is effective in creating climate policy inertia and
impeding the transition to net zero economies.
We
do not evaluate resolutions in isolation. Our approach recognises the links
between corporate governance, strategy and
climate approach. Where a company’s operational response to climate change is
inadequate, the effectiveness of board
oversight and corporate governance may also be called into
question.
We
expect and encourage companies to:
● |
Demonstrate
that a robust methodology underpins Paris aligned, net zero goals and
targets. |
● |
Set
targets for absolute emission reduction, not just carbon intensity, to
show a clear pathway to net zero. |
● |
Report
in alignment with the Taskforce for Climate-Related Financial Disclosure
framework. |
● |
Link
targets to remuneration and ensure they are reflected in capital
expenditure and R&D plans. |
● |
Carefully
manage climate-related lobbying by ensuring appropriate oversight,
transparent disclosure of activities, and alignment
of activities with the company’s strategy and publicly stated
positions. |
Diversity
& Inclusion
Diversity
& Inclusion (D&I) is an important and growing theme for shareholder
resolutions. In recent years resolutions have
focussed on racial equity audits, pay gap reporting, transparent disclosure of
D&I metrics and assessments of the efficacy
of D&I programmes.
A
racial equity audit is an independent analysis of a company’s business practices
designed to identify practices that may
have a discriminatory effect. We are supportive of racial equity audits in
relation to internal and external D&I programmes.
It is appropriate that these programmes should have KPIs and audit mechanisms in
place to measure and
176 Appendix
C - Proxy Voting Policies and Procedures
evaluate
outcomes. Some proposals request racial equity audits of provision of services.
We are aware that measuring provision
of service is challenging and gathering racial data on customers can be
difficult and inappropriate. There are also
multiple different factors that can influence service provision and which could
be misconstrued as being racially motivated.
We will however, support resolutions which are not unduly prescriptive and allow
companies to carry out audits
within a reasonable timeframe, at a reasonable cost, and excluding confidential
or proprietary information.
We
consider standardised gender pay gap disclosure to be an important tool for
assessing how companies are addressing
gender inequality. Reporting on gender pay gaps across global operations can
help companies to remain ahead
of the regulatory curve. It also enables them to offer better opportunities and
remuneration for women around the world.
We are therefore supportive of resolutions which are likely to deliver these
benefits. Proposals must be carefully drafted
to achieve these outcomes. For instance, in the past we have been unable to
support resolutions which called for global
median gender and racial pay gap reporting as it was unclear how this would
reveal potential pay disparities at a local
level and how it could be implemented by companies with operations in
jurisdictions where collection of racial identity
data is illegal.
In
the US market we support public disclosure of EEO-1 forms by companies. The
EEO-1 form details a comprehensive breakdown
of workforce by race and gender according to ten employment categories. The form
is submitted privately to the
US Equal Employment Opportunity Commission on an annual basis. When publicly
disclosed, it offers investors and other
stakeholders data in a standardised and comparable form. We have used our
engagement programme to ask the companies
in which we invest to disclose this form for their US operations while making it
central to our D&I voting approach
and supporting resolutions that request it.
Human
rights
As
a supporter of the UN Guiding Principles on Business and Human Rights (UNGPs),
we expect companies to demonstrate
how human rights due diligence is conducted across operations, services, product
use and the supply chain.
Companies can have a significant impact on human rights directly through
operations and provision of services, and
indirectly through product use and the supply chain. In recent years the sale
and end-use of controversial technologies,
such as facial recognition software, has emerged as a prominent
theme.
We
expect and encourage companies to:
● |
Have
robust due diligence processes to assess the actual and potential human
rights impacts of their operations, services,
product use and supply chain. |
● |
Conduct
customer and supplier vetting processes commensurate with the risk of
human rights abuse. |
● |
Publicly
disclose information about the operation of these processes and utilise
the UNGPs’ Reporting Framework. This will
improve the standard and consistency of human rights reporting and enable
more informed investment decision making. |
Corporate
Lobbying & Political Contributions
Corporate
lobbying and political contributions are a recurrent theme of shareholder
resolutions, particularly in the US. These
proposals typically encompass direct lobbying undertaken by the company and
indirect lobbying undertaken by trade
associations and other organisations of which it is a member or supporter.
Proposals may also request the disclosure
of more information regarding the process and rationale for political
contributions. We expect companies to make
transparent, consolidated disclosures of direct and indirect lobbying and
political expenditure. This disclosure should
be underpinned by a coherent policy that: explains public policy priorities and
the rationale for associated expenditure,
identifies the management positions responsible for public policy engagement,
and provides appropriate mechanisms
for board oversight. These measures should mitigate the risks associated with
corporate lobbying and political
contributions, protecting the interest of shareholders and other
stakeholders.
Nuclear
Energy
In
the Japanese market nuclear energy is a recurrent theme of shareholder
resolutions. The Japanese government is seeking
to reduce the nation’s reliance on coal and its energy strategy presents safe
nuclear power generation as an important
source of base-load power. In this context, resolutions which seek to limit or
cease the nuclear operations of an individual
company do not appear to be in the best interests of shareholders and other
stakeholders. The health & safety risks
associated with nuclear energy are high, must be managed carefully across the
industry, and are an important consideration
in our voting.
Important
Information
This
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investment recommendation,
or solicitation,
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the investments
or funds mentioned
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only coincidentally and the information
is not guaranteed as to its accuracy. Some of the information in this document
may contain projections or
Appendix
C - Proxy Voting Policies and Procedures 177
other
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These statements are only predictions and actual events or results may differ
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and which do not align with the personal
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definitions and labels regarding
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when integrating ESG and sustainability
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compare strategies within ostensibly similar
objectives and that these strategies will employ different security selection
and exclusion criteria. Consequently, the
performance profile of otherwise similar vehicles may deviate more substantially
than might otherwise be expected. Additionally,
in the absence of common or harmonized definitions and labels, a degree of
subjectivity is required and this will
mean that a product may invest in a security that another manager or an investor
would not.
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178 Appendix
C - Proxy Voting Policies and Procedures