STATEMENT
OF ADDITIONAL INFORMATION
Dated
June 28, 2024
AIM
Investment Securities Funds (Invesco Investment Securities Funds)
This Statement of
Additional Information (the SAI) relates to each portfolio (each a Fund,
collectively, the Funds) of AIM Investment Securities Funds (Invesco Investment
Securities Funds) (the Trust) listed below. Each Fund offers separate
classes of shares as follows:
|
Fund |
A |
A2 |
AX |
C |
CX |
R |
Y |
Invesco
Cash
Reserve |
Class
R5 |
Class
R6 |
Investor |
Prospectus
Date |
|
Invesco
Corporate Bond Fund |
ACCBX |
N/A |
N/A |
ACCEX |
N/A |
ACCZX |
ACCHX |
N/A |
ACCWX |
ICBFX |
N/A |
June 28,
2024 |
|
Invesco
Global Real Estate Fund |
AGREX |
N/A |
N/A |
CGREX |
N/A |
RGREX |
ARGYX |
N/A |
IGREX |
FGREX |
N/A |
June 28,
2024 |
|
Invesco
Government Money Market Fund |
ADAXX |
N/A |
ACZXX |
ACNXX |
ACXXX |
AIRXX |
AIYXX |
AIMXX |
N/A |
INVXX |
INAXX |
June 28,
2024 |
|
Invesco
High Yield Fund |
AMHYX |
N/A |
N/A |
AHYCX |
N/A |
N/A |
AHHYX |
N/A |
AHIYX |
HYIFX |
HYINX |
June 28,
2024 |
|
Invesco
Income Fund |
AGOVX |
N/A |
N/A |
AGVCX |
N/A |
AGVRX |
AGVYX |
N/A |
AGOIX |
AGVSX |
AGIVX |
June 28,
2024 |
|
Invesco
Intermediate Bond Factor Fund |
OFIAX |
N/A |
N/A |
OFICX |
N/A |
OFINX |
OFIYX |
N/A |
IOTEX |
OFIIX |
N/A |
June 28,
2024 |
|
Invesco
Real Estate Fund |
IARAX |
N/A |
N/A |
IARCX |
N/A |
IARRX |
IARYX |
N/A |
IARIX |
IARFX |
REINX |
June 28,
2024 |
|
Invesco
Short Duration Inflation Protected
Fund |
LMTAX |
SHTIX |
N/A |
N/A |
N/A |
N/A |
LMTYX |
N/A |
ALMIX |
SDPSX |
N/A |
June 28,
2024 |
|
Invesco
Short Term Bond Fund |
STBAX |
N/A |
N/A |
STBCX |
N/A |
STBRX |
STBYX |
N/A |
ISTBX |
ISTFX |
N/A |
June 28,
2024 |
|
Invesco
U.S. Government Money Portfolio |
N/A |
N/A |
N/A |
GMCXX |
N/A |
GMLXX |
OMBXX |
GMQXX |
N/A |
GMRXX |
N/A |
June 28,
2024 |
This SAI is not a
Prospectus, and it should be read in conjunction with the Prospectuses for the
Funds listed above. Invesco Intermediate Bond Factor Fund and Invesco U.S.
Government Money Portfolio were organized on May 24, 2019 for the purpose of
acquiring the assets and liabilities of corresponding predecessor funds (as
defined below). Portions of each Fund's financial statements are incorporated
into this SAI by reference to each Fund’s most recent shareholder report for its
fiscal year ended February
29, 2024.
You may obtain,
without charge, a copy of any Prospectus and/or shareholder report for any Fund
listed above from an authorized dealer or by writing to:
Invesco
Investment Services, Inc.
P.O. Box 219078
Kansas City, MO 64121-9078
P.O. Box 219078
Kansas City, MO 64121-9078
or by calling (800)
959-4246
or on the Internet:
http://www.invesco.com/us
Any reference to
the term “Fund” or “Funds” throughout this SAI refers to each Fund named above
unless otherwise indicated.
AIS-SOAI-1
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A-1 | |
B-1 | |
|
C-1 | |
D-1 | |
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ii
GENERAL
INFORMATION ABOUT THE TRUST
Fund
History
AIM
Investment Securities Funds (Invesco Investment Securities Funds) (the Trust) is
a Delaware statutory trust
registered under the Investment Company Act of 1940, as amended (the 1940 Act),
as an open-end series management investment company. The Trust was originally
organized as a Maryland corporation on November 4, 1988 and re-organized as a
Delaware statutory trust on May
5,
1993. Under the Trust’s Agreement and Declaration of Trust, as amended, (the
Trust Agreement), the Board of Trustees of the Trust (the Board) is authorized
to create new series of shares without the necessity of a vote of shareholders
of the Trust.
Prior
to April 30, 2010, the Trust was known as AIM Investment Securities
Funds.
The
following table shows each Fund’s current name and Fund history:
|
Fund
Name |
Fund
History |
|
Invesco
Corporate Bond Fund |
Prior
to September 24, 2012, Invesco Corporate Bond Fund was known as Invesco
Van
Kampen
Corporate Bond Fund.
On
June 1, 2010, Invesco Corporate Bond Fund assumed the assets and
liabilities of its
predecessor
fund Van Kampen Corporate Bond Fund. |
|
Invesco
Global Real Estate Fund |
Prior
to April 30, 2010, Invesco Global Real Estate Fund was known as AIM Global
Real Estate
Fund. |
|
Invesco
Government Money Market
Fund |
Prior
to June 28, 2016, Invesco Government Money Market Fund was known as
Invesco Money
Market
Fund.
Prior
to April 30, 2010, Invesco Money Market Fund was known as AIM Money Market
Fund. |
|
Invesco
High Yield Fund |
Prior
to April 30, 2010, Invesco High Yield Fund was known as AIM High Yield
Fund. |
|
Invesco
Income Fund |
Prior
to July 26, 2018, Invesco Income Fund was known as Invesco U.S. Government
Fund.
Prior
to April 30, 2010, Invesco U.S. Government Fund was known as AIM U.S.
Government
Fund. |
|
Invesco
Intermediate Bond Factor
Fund |
Prior
to February 28, 2020, Invesco Intermediate Bond Factor Fund was known as
Invesco
Oppenheimer
Intermediate Income Fund.
On
May 24, 2019, Invesco Oppenheimer Intermediate Income Fund assumed the
assets and
liabilities
of its predecessor fund Oppenheimer Intermediate Income
Fund. |
|
Invesco
Real Estate Fund |
Prior
to April 30, 2010, Invesco Real Estate Fund was known as AIM Real Estate
Fund. |
|
Invesco
Short Duration Inflation
Protected
Fund |
Prior
to December 31, 2015, Invesco Short Duration Inflation Protected Fund was
known as
Invesco
Limited Maturity Treasury Fund.
Prior
to April 30, 2010, Invesco Limited Maturity Treasury Fund was known as AIM
Limited
Maturity
Treasury Fund. |
|
Invesco
Short Term Bond Fund |
Prior
to April 30, 2010, Invesco Short Term Bond Fund was known as AIM Short
Term Bond. |
|
Invesco
U.S. Government Money
Portfolio |
Prior
to September 30, 2020, Invesco U.S. Government Money Portfolio was known
as Invesco
Oppenheimer
Government Money Market Fund.
On
May 24, 2019, Invesco Oppenheimer Government Money Market Fund assumed the
assets
and
liabilities of its predecessor fund Oppenheimer Government Money Market
Fund. |
Shares
of Beneficial Interest
Shares
of beneficial interest of the Trust are redeemable at their net asset value at
the option of the shareholder or at
the option of the Trust, in accordance with any applicable provisions of the
Trust Agreement and applicable law, subject in certain circumstances to a
contingent deferred sales charge, if applicable.
The
Trust allocates cash and property it receives from the issue or sale of shares,
together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds thereof, to the appropriate Fund, subject only to the rights of
creditors of that Fund. These assets constitute the assets belonging to each
Fund, are segregated on the Trust’s books, and are charged with the liabilities
and expenses of such Fund and its respective classes. The Trust allocates any
general liabilities and expenses of the Trust not readily identifiable as
belonging to a particular Fund primarily on the basis of relative net assets or
other relevant factors, subject to oversight by the Board.
1
Each
share of each Fund represents an equal pro rata interest in that Fund with each
other share and is entitled to
dividends and other distributions with respect to the Fund, which may be from
income, capital gains, capital or distributions in kind, as declared by the
Board.
Each
class of shares of a Fund represents a proportionate undivided interest in the
net assets belonging to that Fund.
Differing sales charges and expenses will result in differing net asset values
and dividends and distributions. Upon any liquidation of the Trust,
shareholders of each class are entitled to share pro rata in the net assets
belonging to the applicable Fund allocable to such class available for
distribution after satisfaction of, or reasonable provision for, the outstanding
liabilities of the Fund allocable to such class.
The
Trust Agreement provides that each shareholder, by virtue of having become a
shareholder of the Trust, is bound by
terms of the Trust Agreement and the Trust’s Bylaws. Ownership of shares does
not make shareholders third party beneficiaries of any contract entered into by
the Trust.
The
Trust is not required to hold annual or regular meetings of shareholders.
Meetings of shareholders of a Fund or class
will be held for any purpose determined by the Board, including from time to
time to consider matters requiring a vote of such shareholders in accordance
with the requirements of the 1940 Act, state law or the provisions of the Trust
Agreement. It is not expected that shareholder meetings will be held
annually.
The
Trust Agreement provides that the Board may authorize (i) a merger,
consolidation or sale of assets (including, but not
limited to, mergers, consolidations or sales of assets between two Funds, or
between a Fund and a series of any other registered investment company), and
(ii) the combination of two or more classes of shares of a Fund into a single
class, each without shareholder approval but subject to applicable requirements
under the 1940 Act and state law.
Each
share of a Fund generally has the same voting, dividend, liquidation and other
rights; however, each class of shares of
a Fund is subject to different sales loads, conversion features, exchange
privileges and class-specific expenses, as applicable.
Except
as specifically noted above, shareholders of each Fund are entitled to one vote
per share (with proportionate
voting for fractional shares), irrespective of the relative net asset value of
the shares of the Fund. However, on matters affecting an individual Fund or
class of shares, a separate vote of shareholders of that Fund or class is
required. Shareholders of a Fund or class are not entitled to vote on any matter
which does not affect that Fund or class but that requires a separate vote of
another Fund or class. An example of a matter that would be voted on separately
by shareholders of each Fund is the approval of the advisory agreement with
Invesco Advisers, Inc. (the Adviser or Invesco).
When
issued, shares of each Fund are fully paid and nonassessable, have no preemptive
or subscription rights, and are
freely transferable. Shares do not have cumulative voting rights in connection
with the election of Trustees or on any other matter.
Under
Delaware law, shareholders of a Delaware statutory trust shall be entitled to
the same limitation of personal liability
extended to shareholders of private for-profit corporations organized under
Delaware law. There is a remote possibility, however, that shareholders could,
under certain circumstances, be held liable for the obligations of the Trust to
the extent the courts of another state, which does not recognize such limited
liability, were to apply the laws of such state to a controversy involving such
obligations. The Trust Agreement disclaims shareholder personal liability for
the debts, liabilities, obligations and expenses of the Trust and requires that
every undertaking of the Trust or the Board relating to the Trust or any Fund
include a recitation limiting such obligation to the Trust and its assets or to
one or more of the Funds and the assets belonging thereto. The Trust Agreement
provides for indemnification out of the property of a Fund (or class, as
applicable) for all losses and expenses of any shareholder of such Fund held
personally liable solely on account of being or having been a
shareholder.
The
trustees and officers of the Trust will not be liable for any act, omission or
obligation of the Trust or any trustee or
officer; however, a trustee or officer is not protected against any liability to
the Trust or to the shareholders to which a trustee or officer would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office
with the
2
Trust
or applicable Fund (Disabling Conduct). The Trust’s Bylaws generally provide for
indemnification by the Trust of the trustees, officers and employees or agents
of the Trust, provided that such persons have not engaged in Disabling Conduct.
Indemnification does not extend to judgments or amounts paid in settlement in
any actions by or in the right of the Trust. The Trust Agreement also authorizes
the purchase of liability insurance on behalf of trustees and officers with Fund
assets. The Trust’s Bylaws provide for the advancement of payments of expenses
to current and former trustees, officers and employees or agents of the Trust,
or anyone serving at their request, in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding, for which
such person would be entitled to indemnification; provided that any advancement
of expenses would be reimbursed unless it is ultimately determined that such
person is entitled to
indemnification for such expenses.
The
Trust Agreement provides that any Trustee who serves as chair of the Board, a
member or chair of a committee of the
Board, lead independent Trustee, or an expert on any topic or in any area
(including an audit committee financial expert), or in any other special
appointment will not be subject to any greater standard of care or liability
because of such position.
The
Trust Agreement provides a detailed process for the bringing of derivative
actions by shareholders. A shareholder may
only bring a derivative action on behalf of the Trust if certain conditions are
met. Among other things, such conditions: (i) require shareholder(s) to make a
pre-suit demand on the Trustees (unless such effort is not likely to succeed
because a majority of the Board or the committee established to consider the
merits of such action are not independent Trustees under Delaware law); (ii)
require 10% of the beneficial owners to join in the pre-suit demand, or if a
pre-suit demand is not required, require 10% of beneficial owners to join in the
demand for the Board to commence such action; and (iii) afford the Trustees a
reasonable amount of time to consider the request and investigate the basis of
the claims (including designating a committee to consider the demand and hiring
counsel or other advisers). These conditions generally are intended to provide
the Trustees with the ability to pursue a claim if they believe doing so would
be in the best interests of the Trust and its shareholders and to preclude the
pursuit of claims that the Trustees determine to be without merit or otherwise
not in the Trust’s best interest to pursue. Insofar as the federal securities
laws supersede state law, these provisions do not apply to shareholder
derivative claims that arise under the federal securities laws.
The
Trust Agreement also generally requires that actions by shareholders in
connection with or against the Trust or a Fund
be brought only in certain Delaware courts, provided that actions arising under
the U.S. federal securities laws are required to be brought in the United States
District Court for the Southern District of New York and that the right to jury
trial be waived to the fullest extent permitted by law. These provisions may
result in increased shareholder costs in pursuing a shareholder derivative claim
and/or may limit a shareholder's ability to bring a claim in a different
forum.
Share
Certificates
Shareholders
of the Funds do not have the right to demand or require the Trust to issue share
certificates and share
certificates are not issued. Any certificate previously issued with respect to
any shares is deemed to be cancelled without any requirement for surrender to
the Trust.
DESCRIPTION
OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
Classification
The
Trust is an open-end management investment company. Each of the Funds is
classified as "diversified" for
purposes of the 1940 Act.
Investment
Strategies and Risks
Set
forth below are detailed descriptions of the various types of securities and
investment techniques that Invesco and/or the
Sub-Advisers (as defined herein) may use in managing the Funds, as well as the
risks associated with those types of securities and investment techniques. The
descriptions of the types of securities and investment techniques below
supplement the discussion of principal investment strategies and
3
risks
contained in each Fund's Prospectus. Where a particular type of security or
investment technique is not discussed in a Fund’s Prospectus, that security or
investment technique is not a principal investment strategy.
A
Fund may invest in all of the following types of investments (unless otherwise
indicated). A Fund might not invest in all
of these types of securities or use all of these techniques at any one time.
Invesco and/or the Sub-Advisers may invest in other types of securities and may
use other investment techniques in managing the Funds,
including those
described below for Funds not specifically mentioned as investing in the
security or using the investment technique as well as securities and techniques
not described. A Fund’s transactions in a particular type of security or use of
a particular technique are subject to limitations imposed by a Fund’s investment
objective, policies and restrictions described in that Fund’s Prospectus and/or
this SAI, as well as the federal securities laws. Incidental to their investment
activities, Funds that have a principal investment strategy of primarily
investing in fixed income securities, may acquire equity securities (including
common stocks, preferred stocks, convertible securities, warrants and rights) or
other investments that the Fund ordinarily would not purchase, in connection
with a bankruptcy, restructuring, workout or other extraordinary event
concerning a particular portfolio investment. To the extent a Fund acquires
equity securities or investments as described above, it may also purchase
additional equity securities or investments of those issuers.
Unless
a Fund’s prospectus or this SAI states that a percentage limitation or
fundamental or non-fundamental restriction
applies on an ongoing basis, it applies only at the time a Fund makes an
investment. That means a Fund is not required to sell securities to meet the
percentage limits or investment restrictions if the value of the investment
increases in proportion to the size of a Fund. Percentage limits on borrowing
and illiquid investments apply on an ongoing basis.
The
Funds' investment objectives, policies, strategies and practices described below
are non-fundamental and may be changed
without approval of the holders of the Funds’ voting securities, unless
otherwise indicated.
Invesco
Government Money Market Fund and Invesco U.S. Government Money Portfolio are
managed in accordance with
Rule 2a-7 and will only invest in debt investments that meet the portfolio
requirements of Rule 2a-7 discussed in this SAI, including those related to
maturity, quality, diversification, and liquidity.
Equity
Investments
Common
Stock.
Common stock is issued by a company principally to raise cash for business
purposes and represents an equity or ownership interest in the issuing company.
Common stockholders are typically entitled to vote on important matters of the
issuing company, including the selection of directors, and may receive dividends
on their holdings. A Fund participates in the success or failure of any company
in which it holds common stock. In the event a company is liquidated or declares
bankruptcy, the claims of bondholders, other debt holders, owners of preferred
stock and general creditors take precedence over the claims of those who own
common stock.
The
prices of common stocks change in response to many factors including the
historical and prospective earnings of the
issuing company, the value of its assets, general economic conditions, interest
rates, investor perceptions and market liquidity.
Over-the-Counter
Securities. Securities of
small- and mid-capitalization issuers may be traded on securities exchanges or
in the over-the-counter market. The over-the-counter markets, both in the U.S.
and abroad, may have less liquidity than securities exchanges. That lack of
liquidity can affect the price the Fund is able to obtain when it wants to sell
a security, because if there are fewer buyers and less demand for a particular
security, the Fund might not be able to sell it at an acceptable price or might
have to reduce the price in writing in order to dispose of the security. There
are a number of over-the-counter markets in the U.S., as well as those abroad,
as long as a dealer is willing to make a market in a particular
security.
Preferred
Stock. Preferred stock,
unlike common stock, often offers a specified dividend rate payable from a
company’s earnings. Preferred stock also generally has a preference over common
stock on the
4
distribution
of a company’s assets in the event the company is liquidated or declares
bankruptcy; however, the rights of preferred stockholders on the distribution of
a company’s assets in the event of a liquidation or bankruptcy are generally
subordinate to the rights of the company’s debt holders and general creditors.
If interest rates rise, the fixed dividend on preferred stocks may be less
attractive, causing the price of preferred stocks to
decline.
Some
fixed rate preferred stock may have mandatory sinking fund provisions which
provide for the stock to be retired or
redeemed on a predetermined schedule, as well as call/redemption provisions
prior to maturity, which can limit the benefit of any decline in interest rates
that might positively affect the price of preferred stocks. Preferred stock
dividends may be “cumulative,” requiring all or a portion of prior unpaid
dividends to be paid before dividends are paid on the issuer’s common stock.
Preferred stock may be “participating,” which means that it may be entitled to a
dividend exceeding the stated dividend in certain cases. In some cases an issuer
may offer auction rate preferred stock, which means that the interest to be paid
is set by auction and will often be reset at stated
intervals.
Small-
and Mid-Capitalization Companies.
Small-capitalization (small-cap) companies may be either established or newer
companies, including “unseasoned” companies that have typically been in
operation for less than three years. Mid-capitalization (mid-cap) companies are
generally companies that have completed their initial start-up cycle, and in
many cases have established markets and developed seasoned market teams.
While smaller companies might offer greater opportunities for gain than larger
companies, they also involve greater risk of loss. They may be more sensitive to
changes in a company’s earnings expectations and may experience more abrupt and
erratic price movements. Small- and mid-cap companies’ securities often trade in
lower volumes and in many instances, are traded over-the-counter or on a
regional securities exchange, where the frequency and volume of trading is
substantially less than is typical for securities of larger companies traded on
national securities exchanges. Therefore, the securities of smaller companies
may be subject to wider price fluctuations and it might be harder for the Fund
to dispose of its holdings at an acceptable price when it wants to sell them.
Small- and mid-cap companies may not have established markets for their products
or services and may have fewer customers and product lines. They may have more
limited access to financial resources and may not have the financial strength to
sustain them through business downturns or adverse market conditions. Since
small- and mid-cap companies typically reinvest a high proportion of their
earnings in their business, they may not pay dividends for some time,
particularly if they are newer companies. Small- and mid-cap companies may have
unseasoned management or less depth in management skill than larger, more
established companies. They may be more reliant on the efforts of particular
members of their management team and management changes may pose a greater risk
to the success of the business. Securities of small, unseasoned companies may be
particularly volatile, especially in the short-term, and may have very limited
liquidity in a declining market. It may take a substantial period of time to
realize a gain on an investment in a small- or mid-cap company, if any gain is
realized at all.
When
the Fund invests in smaller company securities that might trade infrequently,
investors might seek to trade Fund
shares based on their knowledge or understanding of the value of those
securities (this is sometimes referred to as “price arbitrage”). If such price
arbitrage were successful, it might interfere with the efficient management of
the Fund’s portfolio and the Fund may be required to sell securities at
disadvantageous times or prices to satisfy the liquidity requirements created by
that activity. Successful price arbitrage might also dilute the value of fund
shares held by other shareholders.
Equity-Linked
Securities. Equity-linked
securities are instruments whose value is based upon the value of one or more
underlying equity securities, a reference rate or an index. Equity-linked
securities come in many forms and may include features, among others, such as
the following: (i) may be issued by the issuer of the underlying equity security
or by a company other than the one to which the instrument is linked (usually an
investment bank), (ii) may convert into equity securities, such as common stock,
within a stated period from the issue date or may be redeemed for cash or some
combination of cash and the linked security at a value based upon the value of
the underlying equity security within a stated period from the issue date, (iii)
may have various conversion features prior to maturity at the option of the
holder or the issuer or both, (iv) may limit the appreciation value with caps or
collars of the value of the underlying equity security and (v) may have fixed,
variable or no interest payments during the life of the security which reflect
the actual or a structured
5
return
relative to the underlying dividends of the linked equity security. Investments
in equity-linked securities may subject a Fund to additional risks not
ordinarily associated with investments in other equity securities. Because
equity-linked securities are sometimes issued by a third party other than the
issuer of the linked security, a Fund is subject to risks if the underlying
equity security, reference rate or index underperforms or if the issuer defaults
on the payment of the dividend or the common stock at maturity. In addition, the
trading market for particular equity-linked securities may be less liquid,
making it difficult for a Fund to dispose of a particular security when
necessary and reduced liquidity in the secondary market for any such securities
may make it more
difficult to obtain market quotations for valuing the Fund’s
portfolio.
Convertible
Securities. Convertible
securities are generally bonds, debentures, notes, preferred stocks or other
securities or investments that may be converted or exchanged (by the holder or
by the issuer) into shares of the underlying common stock (or cash or securities
of equivalent value) at a stated exchange ratio or predetermined price (the
conversion price). A convertible security is designed to provide current income
and also the potential for capital appreciation through the conversion feature,
which enables the holder to benefit from increases in the market price of the
underlying common stock. A convertible security may be called for redemption or
conversion by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible security
held by a Fund is called for redemption or conversion, the Fund could be
required to tender it for redemption, convert it into the underlying common
stock, or sell it to a third party, which may have an adverse effect on the
Fund’s ability to achieve its investment objectives. Convertible securities have
general characteristics similar to both debt and equity securities.
A
convertible security generally entitles the holder to receive interest paid or
accrued until the convertible security matures or
is redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to non-convertible debt obligations and are
designed to provide for a stable stream of income with generally higher yields
than common stocks. However, there can be no assurance of current income because
the issuers of the convertible securities may default on their obligations.
Convertible securities rank senior to common stock in a corporation’s capital
structure and, therefore, generally entail less risk than the corporation’s
common stock. Convertible securities are subordinate in rank to any senior debt
obligations of the issuer, and, therefore, an issuer’s convertible securities
entail more risk than its debt obligations. Moreover, convertible securities are
often rated below investment grade or not rated because they fall below debt
obligations and just above common stock in order of preference or priority on an
issuer’s balance sheet. To the extent that a Fund invests in convertible
securities with credit ratings below investment grade, such securities may have
a higher likelihood of default, although this may be somewhat offset by the
convertibility feature.
Convertible
securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar credit
quality because of the potential for capital appreciation. The common stock
underlying convertible securities may be issued by a different entity than the
issuer of the convertible securities.
The
value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its “investment value.” The
investment value of the convertible security typically will fluctuate based on
the credit quality of the issuer and will fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its “conversion value,” which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock, and will therefore be subject to risks relating to the activities
of the issuer and general market and economic conditions. Depending upon the
relationship of the conversion price to the market value of the underlying
security, a convertible security may trade more like an equity security than a
debt instrument.
Invesco
Global Real Estate Fund, Invesco High Yield Fund and Invesco Real Estate Fund
will invest in convertible
securities based primarily on the characteristics of the equity security into
which it converts, and without regard to the credit rating of the convertible
security (even if the credit rating is below investment
6
grade).
To the extent that a Fund invests in convertible securities with credit ratings
below investment grade, such securities may have a higher likelihood of default,
although this may be somewhat offset by the convertibility feature. See also
"Debt Investments - Non-Investment Grade Debt Obligations (Junk Bonds)"
below.
If,
because of a low price of the common stock, the conversion value is
substantially below the investment value of the
convertible security, the price of the convertible security is governed
principally by its investment value. Generally, if the conversion value of a
convertible security increases to a point that approximates or exceeds its
investment value, the value of the security will be principally influenced by
its conversion value. A convertible security will sell at a premium over its
conversion value to the extent investors place value on the right to acquire the
underlying common stock while holding an income-producing security.
While
a Fund uses the same criteria to rate a convertible debt security that it uses
to rate a more conventional debt
security, a convertible preferred stock is treated like a preferred stock for
the Fund’s financial reporting, credit rating and investment limitation
purposes.
Contingent
Convertible Securities (CoCos). CoCos (also
referred to as contingent capital securities) are a form of hybrid fixed income
security typically issued by non-U.S. banks that may either convert into common
stock of the issuer or undergo a principal write-down by a predetermined
percentage upon the occurrence of a “trigger” event, such as if (a) the issuer’s
capital ratio falls below a specified level or (b) certain regulatory events,
such as a change in regulatory capital requirements, affect the issuer’s
continued viability. Unlike traditional convertible securities, the conversion
is not voluntary and the equity conversion or principal write-down features are
tailored to the issuing banking institution and its regulatory requirements. In
certain circumstances, CoCos may be automatically written down to zero, thereby
cancelling the securities, and investors (including a Fund) could lose the
entire value of their investment even as the issuer remains in business. If such
an event occurs, an investor may not have any rights to repayment of the
principal amount of the securities that has not become due. Additionally, an
investor may not be able to collect interest payments or dividends on such
securities.
CoCos
are subject to credit, interest rate and market risks associated with fixed
income and equity securities
generally, along with risks typically applicable to convertible securities.
CoCos are also subject to loss absorption risk because coupon payments can
potentially be cancelled or deferred at the issuer’s discretion or at the
request of the relevant regulatory authority in order to help the bank absorb
losses. Additionally, certain call provisions permit an issuer to repurchase
CoCos if the regulatory environment or tax treatment of the security (e.g., tax
deductibility of interest payments) changes. This may result in a potential loss
to the Fund if the price at which the issuer calls or repurchases the CoCos is
lower than the initial purchase price by the Fund.
CoCos
are subordinate in rank to traditional convertible securities and other debt
obligations of an issuer in the issuer’s
capital structure, and therefore, CoCos entail more risk than an issuer’s other
debt obligations.
CoCos
are generally speculative and their market value may fluctuate based on a number
of unpredictable
factors, including, but not limited to, the creditworthiness of the issuer
and/or fluctuations in the issuer’s capital ratios, supply and demand for CoCos,
general market conditions and available liquidity, and economic, financial and
political events affecting the particular issuer or markets in
general.
Enhanced
Convertible Securities. “Enhanced”
convertible securities are equity-linked hybrid securities that automatically
convert to equity securities on a specified date. Enhanced convertibles have
been designed with a variety of payoff structures, and are known by a variety of
different names. Three features common to enhanced convertible securities are
(i) conversion to equity securities at the maturity of the convertible (as
opposed to conversion at the option of the security holder in the case of
ordinary convertibles); (ii) capped or limited appreciation potential relative
to the underlying common stock; and (iii) dividend yields that are typically
higher than that on the underlying common stock. Thus, enhanced convertible
securities offer holders the opportunity to obtain higher current income than
would be available from a traditional equity security issued by the same company
in return for reduced participation in the appreciation potential of the
underlying common stock. Other forms of enhanced convertible securities may
involve arrangements with no interest or
7
dividend
payments made until maturity of the security or an enhanced principal amount
received at maturity based on the yield
and value of the underlying equity security during the security’s term or at
maturity.
Synthetic
Convertible Securities. A synthetic
convertible security is a derivative position composed of two or more distinct
securities whose investment characteristics, taken together, resemble those of
traditional convertible securities, i.e., fixed income and the right to acquire
the underlying equity security. For example, a Fund may purchase a
non-convertible debt security and a warrant or option, which enables a Fund to
have a convertible-like position with respect to a security or
index.
Synthetic
convertibles are typically offered by financial institutions in private
placement transactions and are typically sold
back to the offering institution. Upon conversion, the holder generally receives
from the offering institution an amount in cash equal to the difference between
the conversion price and the then-current value of the underlying security.
Synthetic convertible securities differ from true convertible securities in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Purchasing a synthetic convertible security
may provide greater flexibility than purchasing a traditional convertible
security, including the ability to combine components representing distinct
issuers, or to combine a fixed income security with a call option on a stock
index, when the Adviser determines that such a combination would better further
a Fund’s investment goals. In addition, the component parts of a synthetic
convertible security may be purchased simultaneously or separately.
The
holder of a synthetic convertible faces the risk that the price of the stock or
the level of the market index underlying
the convertibility component will decline. In addition, in purchasing a
synthetic convertible security, a Fund may have counterparty risk with respect
to the financial institution or investment bank that offers the
instrument.
Alternative
Entity Securities. Alternative entity
securities are the securities of entities that are formed as limited
partnerships, limited liability companies, business trusts or other
non-corporate entities that are similar to common or preferred stock of
corporations.
Initial
Public Offerings. Initial public
offerings (IPOs) of securities issued by unseasoned companies with little or no
operating history are risky and their prices are highly volatile, but they can
result in very large gains in their initial trading. Attractive IPOs are often
oversubscribed and may not be available to a Fund, or only in very limited
quantities. Thus, when a Fund’s size is smaller, any gains from IPOs will have
an exaggerated impact on the Fund’s reported performance than when the Fund is
larger. A Fund may engage in short-term trading in connection with its IPO
investments, which could produce higher trading costs and adverse tax
consequences. There can be no assurance that a Fund will have favorable IPO
investment opportunities.
Special
Purpose Acquisition Companies. Special purpose
acquisition companies (“SPACs”) are investment entities, acquired through
stocks, warrants and other securities, that pool funds to seek potential
acquisition or merger opportunities. A SPAC is a publicly traded company that
raises funds through an initial public offering (“IPO”) for the purpose of
acquiring or merging with another company to be identified subsequent to the
SPAC’s IPO. The securities of a SPAC are often issued in “units” that include
one share of common stock and one right or warrant (or partial right or warrant)
conveying the right to purchase additional common shares or partial shares of
the SPAC. In some cases, the rights and warrants may be separated from the
common stock at the election of the holder, after which they may become freely
tradeable. If a Fund purchases shares of a SPAC in an IPO it will generally bear
a sales commission, which may be significant.
Unless
and until a business combination transaction is completed, a SPAC generally
invests its assets (which are
constituted solely by the proceeds of the IPO), less a portion retained to cover
expenses, in U.S. government securities, money market funds and similar
investments whose returns or yields may be significantly lower than those of a
Fund’s other investments. If an acquisition or merger that meets the
requirements for the SPAC is not completed within a pre-established period of
time, the invested funds are returned to the SPAC’s shareholders, less certain
permitted expenses, and any rights or warrants issued by the SPAC will expire
worthless. Under any circumstances in which a Fund receives a refund of all or a
portion
8
of
its original investment in a SPAC, the returns on that investment may be
negligible, and a Fund may be subject to opportunity costs to the extent that
alternative investments would have produced higher returns. Further, a Fund may
be delayed in receiving any redemption or liquidation proceeds from a SPAC to
which it is
entitled.
Because
SPACs are in essence “blank check” companies without operating histories or
ongoing business operations (other
than identifying and pursuing acquisition or merger opportunities), the
potential for the long term capital appreciation of their securities is
dependent on the ability of the SPAC’s sponsor to identify and complete a
profitable business combination. There is no guarantee that the SPACs in which a
Fund invests will complete a business combination or that any transaction
completed by the SPACs in which a Fund invests will be profitable. Even if a
SPAC in which a Fund has invested identifies a desirable acquisition or merger
target and reaches agreement with that company as to the terms of the business
combination, there can be no guarantee that the transaction will ultimately be
consummated because, among other conditions that must be satisfied, a requisite
number of shareholders of the SPAC or of the target company do not vote in favor
of the transaction. The values of investments in SPACs may be highly volatile
and may depreciate significantly over time. Some SPACs may pursue acquisitions
or mergers only within certain industries or regions, which may ultimately lead
to an increase in the volatility of their prices following completion of a
business combination. In addition, some of these securities may be considered
illiquid and/or subject to restrictions on resale, leaving a Fund unable to sell
its interest in a SPAC or able to sell its interest only at a price below what
that Fund believes is the SPAC interest’s intrinsic value. Additionally, an
investment in a SPAC may be diluted by additional later offerings of interests
in the SPAC or by other investors exercising their warrants to purchase shares
of the SPAC.
Due
to the risk of the loss of sponsors’ and other initial investors’ capital if an
acquisition or merger is not consummated,
sponsors of SPACs may be incentivized to consummate business combinations at
less attractive valuations at the expense of SPAC shareholders. In addition, as
the number of SPACs grows, there is greater competition among SPACs and
traditional purchasers of companies, which further increases the likelihood that
SPAC sponsors may be incentivized to consummate acquisitions or mergers at less
attractive valuations, as well as the risk that SPACs cannot successfully
complete business combinations. In addition, recent regulations promulgated by
the SEC impose additional disclosure obligations and other requirements on SPACs
and may impact the ability of a SPAC to conduct its
operations.
Equity-Linked
Notes (ELNs). ELNs are hybrid
derivative-type instruments, in a single note form, that are specially designed
to combine the characteristics of one or more reference securities (such as a
single stock, exchange-traded fund, exchange-traded note, or an index or basket
of securities (underlying securities)) and a related equity derivative, such as
a put or call option. Generally, when purchasing an ELN, a Fund pays the
counterparty the current value of the underlying securities plus a commission.
Upon the maturity of the note, the Fund generally receives the par value of the
note plus a return based on the appreciation of the underlying securities. A
Fund may or may not hold an ELN until its maturity. If the underlying securities
have depreciated in value or if their price fluctuates outside of a preset
range, depending on the type of ELN, the Fund may receive only the principal
amount of the note, or may lose the entire principal invested in the ELN. ELNs
are available with an assortment of features, including periodic coupon
payments; limitations on participation in the appreciation of the underlying
securities; and different protection levels on the Fund’s principal investment.
A Fund will only invest in ELNs for which the underlying security is a
permissible investment for the Fund in accordance with its investment policies
and restrictions. ELNs are generally in two types: (1) those that provide for
protection of a Fund’s principal in exchange for limited participation in the
appreciation of the underlying securities, and (2) those that do not provide for
such protection and subject a Fund to the risk of loss of its principal
investment.
Investments
in ELNs possess the risks associated with the underlying securities, such as
management risk, market risk
and, as applicable, foreign securities and currency risks. In addition, as a
note, ELNs are also subject to certain debt securities risks, such as interest
rate and credit risk. An investment in an ELN also bears the risk that the ELN
issuer will default or become bankrupt. In such an event, the Fund may have
difficulty being repaid, or fail to be repaid, the principal amount of, or
income from, its investment. ELNs may be structured to be subordinated or
unsubordinated to other classes of debt holders' right of payment. A
9
downgrade
or impairment to the credit rating of the issuer may also negatively impact the
price of the ELN. The Fund may also experience liquidity issues when investing
in ELNs, as ELN transactions generally take place in the over-the-counter
institutional investment market as well as in privately negotiated transactions
with ELN issuers. The secondary market for ELNs may be limited, and the lack of
liquidity may make ELNs difficult to sell at a desirable time and price and
value. ELNs may be subject
to resale restrictions such as those
contained in Rule 144A promulgated under the Securities Act of 1933, as amended
(the 1933 Act). The price
of an ELN may not correlate with the price of the underlying securities or a
fixed-income investment. As the holder of an ELN, the Fund generally has no
rights to the underlying securities, including no voting rights or rights to
receive dividends. The Adviser’s ability to accurately forecast movements in the
underlying securities will determine the success of the Fund’s ELNs investments.
Should the prices of the underlying securities move in an unexpected manner, the
Fund may not achieve the anticipated benefits of its ELN investments, and it may
realize losses, which could be significant and could include the Fund’s entire
principal investment.
Foreign
Investments
Foreign
Securities. Foreign securities
are equity or debt securities issued by issuers outside the United States, and
include securities in the form of American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
securities representing underlying securities of foreign issuers (foreign
securities). ADRs are receipts, issued by U.S. banks, for the shares of foreign
corporations, held by the bank issuing the receipt. ADRs are typically issued in
registered form, denominated in U.S. dollars and designed for use in the U.S.
securities markets. GDRs are bank certificates issued in more than one country
for shares in a foreign company. The shares are held by a foreign branch of an
international bank. GDRs trade as domestic shares but are offered for sale
globally through the various bank branches. GDRs are typically used by private
markets to raise capital and are denominated in either U.S. dollars or foreign
currencies. EDRs are similar to ADRs and GDRs, except they are typically issued
by European banks or trust companies, denominated in foreign currencies and
designed for use outside the U.S. securities markets. ADRs, EDRs and GDRs
entitle the holder to all dividends and capital gains on the underlying foreign
securities, less any fees paid to the bank. Purchasing ADRs, EDRs or GDRs gives
a Fund the ability to purchase the functional equivalent of foreign securities
without going to the foreign securities markets to do so. ADRs, EDRs or GDRs
that are “sponsored” are those where the foreign corporation whose shares are
represented by the ADR, EDR or GDR is actively involved in the issuance of the
ADR, EDR or GDR and generally provides material information about the
corporation to the U.S. market. An “unsponsored” ADR, EDR or GDR program is one
where the foreign corporation whose shares are held by the bank is not obligated
to disclose material information in the United States, and, therefore, the
market value of the ADR, EDR or GDR may not reflect important facts known only
to the foreign company.
Foreign
debt securities include corporate debt securities of foreign issuers, certain
foreign bank obligations (see
“Bank Instruments”) and U.S. dollar or foreign currency denominated obligations
of foreign governments or their subdivisions, agencies and instrumentalities
(see “Foreign Government Obligations”), international agencies and supranational
entities.
The
Funds consider various factors when determining whether a company is in a
particular country or in a particular
region/continent, including whether (1) it is organized under the laws of a
country or in a country in a particular region/continent; (2) it has a principal
office in a country or in a country in a particular region/continent; (3) it
derives 50% or more of its total revenues from businesses in a country or in a
country in a particular region/continent; (4) its securities are traded
principally on a security exchange, or in an over-the-counter (OTC) market, in a
particular country or in a country in a particular region/continent; and/or (5)
its “country of risk" as determined by a third party service provider such as
Bloomberg. The issuer's “country of risk” is determined based on a number of
criteria, including its country of domicile, the primary stock exchange on which
it trades, the location from which the majority of its revenue comes, and its
reporting currency.
Investments
by a Fund in foreign securities, including ADRs, EDRs and GDRs, whether
denominated in U.S. dollars or
foreign currencies, may entail all of the risks set forth below in addition to
those accompanying an investment in issuers in the United States.
10
Invesco
Government Money Market Fund and Invesco U.S. Government Money
Portfolio may only invest in foreign
securities denominated in U.S. dollars.
Currency
Risk.
The value in U.S. dollars of a Fund’s non-dollar-denominated foreign investments
will be affected by changes in currency exchange rates. The U.S. dollar value of
a foreign security decreases when the value of the U.S. dollar rises against the
foreign currency in which the security is denominated and increases when the
value of the U.S. dollar falls against such currency.
Political
and Economic Risk. The economies of
many countries may not be as developed as that of the United States’ economy and
may be subject to significantly different forces. Political, economic or social
instability and development, expropriation or confiscatory taxation, and
limitations on the removal of funds or other assets could also adversely affect
the value of portfolio investments. Certain foreign companies may be subject to
sanctions, embargoes, or other governmental actions that may impair or otherwise
limit the ability to invest in, receive, hold or sell the securities of such
companies. These factors may affect the value of investments in those companies.
Certain companies may operate in, or have dealings with, countries that the U.S.
government has identified as state sponsors of terrorism. As a result, such
companies may be subject to specific constraints or regulations under U.S. law
and, additionally, may be subject to negative investor perception, either of
which could adversely affect such companies' performance. Further, war and
military conflict between countries or in a region, for example the current
conflicts in the Ukraine and Middle East, may have an impact on the value of
portfolio investments.
Regulatory
Risk.
Foreign companies may not be registered with the SEC and are generally not
subject to the regulatory controls and disclosure requirements imposed on U.S.
issuers and, as a consequence, there is generally less publicly available
information about foreign securities than is available about domestic
securities. Foreign companies may not be subject to uniform accounting, auditing
and financial reporting standards, corporate governance practices and
requirements comparable to those applicable to domestic companies. Therefore,
financial information about foreign companies may be incomplete, or may not be
comparable to the information available on U.S. companies. Income from foreign
securities owned by the Funds may be reduced by a withholding tax at the source,
which tax would reduce dividend income payable to Fund shareholders.
There
is generally less government supervision and regulation of securities exchanges,
brokers, dealers, and listed
companies in foreign countries than in the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Foreign markets may also have different clearance and
settlement procedures. If a Fund experiences settlement problems, it may result
in temporary periods when a portion of that Fund’s assets are uninvested and
could cause it to miss attractive investment opportunities or create a potential
liability to that Fund arising out of its inability to fulfill a contract to
sell such securities.
Market
Risk.
Investing in foreign markets generally involves certain risks not typically
associated with investing in the United States. The securities markets in many
foreign countries will have substantially lower trading volume than the U.S.
markets. As a result, the securities of some foreign companies may be less
liquid and experience more price volatility than comparable domestic securities.
Obtaining and/or enforcing judgments in foreign countries may be more difficult,
and there is generally less government regulation and supervision of foreign
stock exchanges, brokers and issuers, each of which may make it more difficult
to enforce contractual obligations. Increased custodian costs as well as
administrative costs (such as the need to use foreign custodians) may also be
associated with the maintenance of assets in foreign jurisdictions. In addition,
transaction costs in foreign securities markets are likely to be higher, since
brokerage commission rates in foreign countries are likely to be higher than in
the United States.
Risks
of Developing/Emerging Market Countries. Each Fund (except
Invesco Government Money Market Fund, Invesco Short Duration Inflation Protected
Fund and Invesco U.S. Government Money Portfolio) may invest in securities of
companies located in developing and emerging markets countries subject to limits
included in each Fund's prospectus.
Unless
a Fund’s prospectus includes a different definition, the Fund considers
developing and emerging
11
market
countries to be those countries that are (i) generally recognized to be an
emerging market country by the international financial community, including the
World Bank, (ii) determined by the Adviser to be an emerging market country or
(iii) its “country of risk” is an emerging market country as determined by a
third party service provider such as Bloomberg. As of the date of this SAI, the
Adviser considers “emerging market countries” to generally include every country
in the world except those countries included in the MSCI World Index. The
Adviser has broad discretion to identify countries that it considers to be
emerging market countries and may consider various factors in determining
whether to classify a country as an emerging market country, including a
country’s relative interest rates, inflation rates, exchange rates, monetary and
fiscal policies, trade and current account balances, legal and political
developments and any other specific factors the Adviser believes to be relevant.
Because emerging market equity and emerging market debt are distinct asset
classes, a country may be deemed an emerging market country with respect to its
equity only, its debt only, both its equity and
debt, or neither.
Investments
in developing and emerging market countries present risks in addition to, or
greater than, those presented by
investments in foreign issuers generally, and may include the following
risks:
i. Restriction, to
varying degrees, on foreign investment in stocks;
ii. Repatriation of
investment income, capital, and the proceeds of sales in foreign countries may
require foreign governmental registration and/or approval;
iii. Greater risk
of fluctuation in the value of foreign investments due to changes in currency
exchange rates, currency control regulations or currency devaluation. In
addition, there may be higher rates of inflation and more rapid and extreme
fluctuations in inflation rates and greater sensitivity to interest rate
changes;
iv. Inflation and
rapid fluctuations in inflation rates may have negative effects on the economies
and securities markets of certain developing and emerging market
countries;
v. Many of the
developing and emerging market countries’ securities markets are relatively
small or less diverse, have low trading volumes, suffer periods of relative
illiquidity, and are characterized by significant price volatility;
vi. There is a risk
in developing and emerging market countries that a future economic or political
crisis could lead to price controls, forced mergers of companies, expropriation
or confiscatory taxation, seizure, nationalization, or creation of government
monopolies;
vii. Investments in
such securities markets may be subject to unexpected market
closures;
viii. The taxation
systems at the federal, regional and local levels in developing or emerging
market countries may be less transparent and inconsistently enforced, and
subject to sudden change. Developing or emerging market countries may also have
a higher degree of corruption and fraud than developed market countries, as well
as counterparties and financial institutions with less financial sophistication,
creditworthiness and/or resources;
ix. Less developed
legal systems allowing for enforcement of private property rights and/or redress
for injuries to private property, such as bankruptcy. The ability to bring and
enforce actions in developing or emerging market countries, or to obtain
information needed to pursue or enforce such actions, may be limited and
shareholder claims may be difficult or impossible to pursue; and
x. Less stringent
regulatory, disclosure, financial reporting, accounting, auditing and
recordkeeping standards than companies in more developed countries and, as a
result, the nature and quality of such information may vary. Information about
such companies may be less available and reliable and, therefore, the ability to
conduct adequate due diligence in developing or emerging markets may be limited
which can impede the Fund's ability to evaluate such companies. In addition,
certain developing or emerging market countries may impose material limitations
on Public Company Accounting Oversight Board (“PCAOB”) inspection, investigation
and enforcement capabilities which can hinder the PCAOB’s ability to engage in
independent oversight or inspection of accounting firms located in or operating
in
12
certain developing
or emerging markets. There is no guarantee that the quality of financial
reporting or the audits conducted by audit firms of developing or emerging
market issuers meet PCAOB standards.
Frontier
Markets. The risks
associated with investments in frontier market countries include all the risks
associated with investments in developing and emerging markets. These risks are
magnified for frontier market countries because frontier markets countries
generally have smaller economies, even less developed capital markets, and are
traditionally less accessible than traditional emerging and developing markets.
As a result, investments in companies in frontier markets countries are
generally subject to a higher risk of loss than investments in companies in
traditional emerging and developing market countries due to less developed
securities markets, different settlement procedures, greater price volatility,
less developed governments and economies, more government restrictions, and the
limited ability of foreign entities to participate in certain privatization
programs. Investments in companies operating in frontier market countries are
highly speculative in nature.
Investing
in Greater China Risk. Investments in
companies located or operating in Greater China involve risks not associated
with investments in Western nations, such as nationalization, expropriation, or
confiscation of property; lack of willingness or ability of the Chinese
government to support the economies and markets of the Greater China region;
difficulty in obtaining and/or enforcing judgments; lack of publicly available
information; alteration or discontinuation of economic reforms; military
conflicts and the risk of war, either internal or with other countries; public
health emergencies resulting in market closures, travel restrictions,
quarantines or other interventions; inflation, currency fluctuations and
fluctuations in inflation and interest rates that may have negative effects on
the economy and securities markets of Greater China; and Greater China’s
dependency on the economies of other Asian countries, many of which are
developing countries. Events in any one country within Greater China may impact
the other countries in the region or Greater China as a whole. For example,
changes to their political and economic relationships with the mainland China
could adversely impact the Fund’s investments in Taiwan and Hong
Kong.
Certain
securities issued by companies located or operating in Greater China, such as
China A-shares, are subject to
trading restrictions, quota limitations, and clearing and settlement risks.
Significant portions of the Chinese securities markets may become rapidly
illiquid, as Chinese issuers have the ability to suspend the trading of their
equity securities, and have shown a willingness to exercise that option in
response to market volatility and other events. The liquidity of Chinese
securities may shrink or disappear suddenly and without warning as a result of
adverse economic, market or political events, or adverse investor perceptions,
whether or not accurate.
Export
growth continues to be a major driver of China’s rapid economic growth. As a
result, a reduction in spending on Chinese
products and services, the institution of tariffs,
sanctions, capital
controls, embargoes, trade wars, or other trade barriers, or a downturn in any
of the economies of China’s key trading partners may have an adverse impact on
the Chinese economy. The current political climate has intensified concerns
about a potential trade war between China and the United States, as each country
has recently imposed tariffs on the other country’s products. These actions may
trigger a significant reduction in international trade, the oversupply of
certain manufactured goods, substantial price reductions of goods and possible
failure of individual companies and/or large segments of China’s export
industry, which could have a negative impact on the Fund’s performance. Events
such as these and their consequences are difficult to predict and it is unclear
whether further tariffs may be imposed or other escalating actions may be taken
in the future. In addition, actions by the U.S. government, such as delisting of
certain Chinese companies from U.S. securities exchanges or otherwise
restricting their operations in the United States, may negatively impact the
value of such securities held by the Fund. Further, from time to time, certain
companies in which the Fund invests may operate in, or have dealings with,
countries subject to sanctions or embargoes imposed by the U.S. government and
the United Nations and/or in countries the U.S. government identified as state
sponsors of terrorism. One or more of these companies may be subject to
constraints under U.S. law or regulations that could negatively affect the
company’s performance.
Additionally,
developing countries, such as those in Greater China, may subject the Fund’s
investments to a number of tax
rules, and the application of many of those rules may be uncertain. Moreover,
China has
13
implemented
a number of tax reforms in recent years, and may amend or revise its existing
tax laws and/or procedures in the future, possibly with retroactive effect.
Changes in applicable Chinese tax law could reduce the after-tax profits of the
Fund, directly or indirectly, including by reducing the after-tax profits of
companies in China in which the Fund invests. Chinese taxes that may apply to
the Fund’s investments include income tax or withholding tax on dividends,
interest or gains earned by the Fund, business tax and stamp duty. Uncertainties
in Chinese tax rules could result in unexpected tax liabilities for the Fund.
Additionally, any difficulties of the PCAOB to inspect audit work papers and
practices of PCAOB-registered accounting firms in China with respect to their
audit work of U.S. reporting companies may impose significant additional risks
associated with
investments in China.
Risks
of Investing in Chinese Variable Interest Entities. Many Chinese
companies have created a special structure, which is based in China, known as a
variable interest entity (“VIE”) as a means to circumvent limits on direct
foreign ownership of equity in Chinese operating companies in certain sectors,
such as internet, media, education and telecommunications, imposed by the
Chinese government. Typically in such an arrangement, a China-based operating
company establishes an offshore “holding” company in another jurisdiction that
likely does not have the same disclosure, reporting, and governance requirements
as the United States. The holding company issues shares, i.e., is “listed”, on a
foreign exchange such as the New York Stock Exchange or the Hong Kong Stock
Exchange. The listed holding company enters into service and other contracts
with the China-based operating company, typically through the China-based VIE.
The VIE must be owned by Chinese nationals (and/or other Chinese companies),
which often are the VIE’s founders, in order to obtain the licenses and/or
assets required to operate in the restricted or prohibited sector in China. The
operations and financial position of the VIE are included in consolidated
financial statements of the listed holding company. Foreign investors, including
mutual funds and ETFs (such as the Fund), hold stock in the listed holding
company rather than directly in the China-based operating company.
The
VIE structure allows foreign shareholders to exert a degree of control and
obtain economic benefits arising from the
operating company but without formal legal ownership because the listed holding
company’s control over the operating company is predicated entirely on contracts
with the VIE. The listed holding company is distinct from the underlying
operating company, and an investment in the listed holding company represents
exposure to a company that maintains service contracts with the operating
company, not equity ownership.
Investments
in companies that use VIEs may pose additional risks because the investment is
made through the listed
holding company’s service and other contractual arrangements with the underlying
Chinese operating company. As a result, such investment may limit the rights of
an investor with respect to the underlying Chinese operating company. The
contractual arrangements between the VIE and the operating company may not be as
effective in providing operational control as direct equity ownership. The
Chinese government could determine at any time and without notice that the
underlying contractual arrangements on which control of the VIE is based violate
Chinese law. While VIEs are a longstanding industry practice, well known to
Chinese officials and regulators, VIEs historically have not been formally
recognized under Chinese law. The owners of the VIE could decide to breach the
contractual arrangements with the listed holding company and it is uncertain
whether the contractual arrangements, which may be subject to conflicts of
interest between the legal owners of the VIE and foreign investors, would be
enforced by Chinese courts or arbitration bodies. Prohibitions of these
structures by the Chinese government, or the inability to enforce such
contracts, from which the shell company derives its value, would likely cause
the VIE-structured holding(s) to suffer significant, detrimental, and possibly
permanent loss, and in turn, adversely affect the Fund’s returns and net asset
value.
The
Chinese government previously placed restrictions on China-based companies
raising capital offshore in certain
sectors, including through VIEs, and investors face uncertainty about future
actions by the Chinese government that could significantly affect the operating
company’s financial performance and the enforceability of the contractual
arrangements underlying the VIE structure. It is uncertain whether Chinese
officials or regulators will withdraw their acceptance of the VIE structure,
generally, or with respect to certain industries, or whether any new laws, rules
or regulations relating to VIE structures will be adopted and what impact such
laws may have on foreign investors. There is a risk that China might prohibit
the existence of
14
VIEs
or sever their ability to transmit economic and governance rights to foreign
individuals and entities; if so, the market value of any associated portfolio
holdings would likely suffer substantial, detrimental, and possibly permanent
loss.
Chinese
companies, including those listed on U.S. exchanges, are generally not subject
to the same degree of
regulatory requirements, accounting standards or auditor oversight as companies
in more developed countries. As a result, information about VIEs may be less
reliable or complete. Foreign companies with securities listed on U.S.
exchanges, including those that utilize VIEs, may be delisted if they do not
meet the requirements of the listing exchange, the Public Company Accounting
Oversight Board (“PCAOB”) and the U.S. government, which could significantly
decrease the liquidity and value of such securities. Actions by the U.S.
government, such as delisting of certain Chinese companies from U.S. securities
exchanges or otherwise restricting their operations in the U.S., may negatively
impact the liquidity and value of such securities.
Risks
of Investments in China A-shares through the Stock Connect Program. The Shanghai-Hong
Kong Stock Connect program and the Shenzhen-Hong Kong Stock Connect program
(both programs collectively referred to as the Stock Connect Program) are
securities trading and clearing programs through which the Funds can trade
eligible listed China A-shares. The Stock Connect Program is subject to quota
limitations, which may restrict or preclude a fund's ability to invest in Stock
Connect securities.
Foreign
investors,
individually and in
the aggregate,
are
subject to ownership
limitations from
Shanghai or Shenzhen listed companies,
including those
purchased through the Stock Connect Program.
Once
the daily quota is reached, orders to purchase additional China A-shares through
the Stock Connect Program will be rejected. Only certain China A-shares are
eligible to be accessed through the Stock Connect Program. Such securities may
lose their eligibility at any time, in which case they could be sold but could
no longer be purchased through the Stock Connect Program. Because the Stock
Connect Program is still relatively in its early stages, the actual effect on
the market for trading China A-shares with the introduction of large numbers of
foreign investors is currently unknown. The Stock Connect Program is subject to
regulations promulgated by regulatory authorities for the Shanghai Stock
Exchange, the Stock Exchange of Hong Kong Limited, and the Shenzhen Stock
Exchange, and further regulations or restrictions, such as limitations on
redemptions or suspension of trading, may adversely impact the Stock Connect
Program, if the authorities believe it necessary to assure orderly markets or
for other reasons. There is no guarantee that all three exchanges will continue
to support the Stock Connect Program in the future and no assurance that further
regulations will not adversely affect the availability of securities under Stock
Connect or other operational arrangements.
Investments
in China A-shares may not be covered by the securities investor protection
programs of the exchanges and,
without the protection of such programs, will be subject to the risk of default
by the broker. In the event that the depository of the Shanghai Stock Exchange
and the Shenzhen Stock Exchange defaulted, a Fund may not be able to recover
fully its losses from the depository or may be delayed in receiving proceeds as
part of any recovery process. In addition, because all trades on the Stock
Connect Program in respect of eligible China A-shares must be settled in
Renminbi (RMB), the Chinese currency, the Funds investing through the Stock
Connect Program must have timely access to a reliable supply of offshore RMB,
which cannot be guaranteed. The existence of a liquid trading market for China
A-shares may depend on whether there is supply of, and demand for, such China
A-shares. Market volatility and settlement difficulties in the China A-shares
markets may also result in significant fluctuations in the prices of the
securities traded on such markets.
China
A-shares purchased through the Stock Connect
Program are held in nominee name and not the Fund’s name as the beneficial
owner. It is possible, therefore, that a Fund’s ability to exercise its rights
as a shareholder and to pursue claims against the issuer of China A-shares may
be limited because the nominee structure has not been tested in Chinese courts,
as Chinese courts generally have limited experience in applying the concept of
beneficial ownership and the law in that area continues to evolve. In addition,
a Fund may not be able to participate in corporate actions affecting China
A-shares held through the Stock Connect Program due to time constraints or for
other operational reasons.
15
Trades
on the Stock Connect
Program are subject to certain requirements prior to trading. If these
requirements are not completed prior to the market opening, a Fund cannot sell
the shares on that trading day. In addition, these requirements may limit the
number of brokers that a Fund may use to execute trades. Additionally, there are
foreign ownership limitations that may result in limitations on
investment
or the
return of profits if a fund purchases and sells shares of an issuer in which it
owns above a certain threshold determined by China's securities rules. As a
result, a Fund may not be able to execute
trading freely in
accordance with its investment strategy and the profits that the Fund derives
from such
investments
may be
limited.
Risks
of Investments in the China Interbank Bond Market through the Bond Connect
Program.
Certain Funds may
invest in China onshore bonds traded on the China Interbank Bond Market (“CIBM”)
through the China – Hong Kong Bond Connect Program (“Bond Connect”). In China,
the Hong Kong Monetary Authority Central Moneymarkets Unit holds Bond Connect
securities on behalf of ultimate investors (such as the Funds) in accounts
maintained with a China-based custodian (either the China Central Depository
& Clearing Co. or the Shanghai Clearing House). This recordkeeping system
subjects a Fund to various risks, including the risks of settlement delays and
counterparty default of the China custodian and Hong Kong custody agent. In
addition, the Fund may have a limited ability to enforce rights as a bondholder
because enforcing the ownership rights of a beneficial holder of Bond Connect
securities is untested and courts in China have limited experience in applying
the concept of beneficial ownership.
Bond
Connect uses the trading infrastructure of both Hong Kong and China and is not
available on trading holidays in
Hong Kong. As a result, prices of securities purchased through Bond Connect may
fluctuate at times when the Fund is unable to add to or exit its position.
Securities offered through Bond Connect may lose their eligibility for trading
through Bond Connect at any time. If Bond Connect securities lose their
eligibility for trading through Bond Connect, they may be sold but can no longer
be purchased through Bond Connect.
Because
Bond Connect trades are settled in RMB, the Funds investing through Bond Connect
must have timely access to a
reliable supply of offshore RMB, which cannot be guaranteed.
Market
volatility and potential lack of liquidity due to low trading volume of certain
bonds on the CIBM may result in prices of
such bonds fluctuating significantly, exposing a Fund to liquidity and
volatility risks. The bid-ask spreads of the prices of such securities may be
large, and a Fund may therefore incur significant costs and may suffer losses
when selling such investments. Bonds traded on the CIBM may be difficult or
impossible to sell, which may impact a Fund’s ability to acquire or dispose of
such securities at their expected prices.
Bond
Connect is relatively new and its effects on the Chinese interbank bond market
are uncertain. Trading through
Bond Connect is performed through newly developed trading platforms and
operational systems, and in the event of systems malfunctions or extreme market
conditions, trading via Bond Connect could be disrupted. There can be no
assurance as to Bond Connect’s continued existence or whether future
developments regarding Bond Connect (including further interpretation and
guidance provided by regulators in Hong Kong and China) may restrict or
adversely affect the Fund’s investments or returns. Finally, uncertainties in
China tax rules governing taxation of income and gains from investments via Bond
Connect could result in unexpected tax liabilities for a
Fund.
Risks
Related to Armed Conflict. As a result of
increasingly interconnected global economies and financial markets, armed
conflict between countries or in a geographic region, for example the current
conflicts between Russia and Ukraine in Europe and Hamas and Israel in the
Middle East, has the potential to adversely impact Fund investments. Such
conflicts, and other corresponding events, have had, and could continue to have,
severe negative effects on regional and global economic and financial markets,
including increased volatility, reduced liquidity, and overall uncertainty. The
negative impacts may be particularly acute in certain sectors. The timing and
duration of such conflicts, resulting sanctions, related events and other
implications cannot be predicted. The foregoing may result in a negative impact
on Fund performance and the value of an investment in the Fund, even beyond any
direct investment exposure the Fund may have to issuers located in or with
significant exposure to an impacted country or geographic region.
16
Risks
Related to Russian Invasion of Ukraine. In late February
2022, Russian military forces invaded Ukraine, significantly amplifying already
existing geopolitical tensions among Russia, Ukraine, Europe, the North Atlantic
Treaty Organization (NATO), and the West. Russia’s invasion, the responses of
countries and political bodies to Russia’s actions, and the potential for wider
conflict may increase financial market volatility and could have severe adverse
effects on regional and global economic markets, including the markets for
certain securities and commodities such as oil and natural gas.
Following
Russia’s actions, various countries, including the U.S., Canada, the United
Kingdom, Germany, and
France, among others, as well as the European Union, issued broad-ranging
economic sanctions against Russia. The sanctions freeze certain Russian assets
and prohibit trading by individuals and entities in certain Russian securities,
engaging in certain private transactions, and doing business with certain
Russian corporate entities, large financial institutions, officials and
oligarchs. The sanctions include a commitment by certain countries and the
European Union to remove selected Russian banks from the Society for Worldwide
Interbank Financial Telecommunications, commonly called “SWIFT,” the electronic
network that connects banks globally, and imposed restrictive measures to
prevent the Russian Central Bank from undermining the impact of the sanctions. A
number of large corporations have since withdrawn from Russia or suspended or
curtailed their Russia-based operations.
The
imposition of these current sanctions (and the potential for further sanctions
in response to Russia’s continued
military activity) and other actions undertaken by countries and businesses may
adversely impact various sectors of the Russian economy, including, but not
limited to, the financials, energy, metals and mining, engineering, and defense
and defense-related materials sectors. Such actions also may result in the
decline of the value and liquidity of Russian securities, a weakening of the
ruble, and could impair the ability of a Fund to buy, sell, receive, or deliver
those securities. Moreover, the measures could adversely affect global financial
and energy markets and thereby negatively affect the value of a Fund’s
investments beyond any direct exposure to Russian issuers or those of adjoining
geographic regions.
In
response to sanctions, the Russian Central Bank raised its interest rates and
banned sales of local securities by
foreigners. Russia also prevented the export of certain goods and payments to
foreign shareholders of Russian securities. Russia may take additional
countermeasures or retaliatory actions, which may further impair the value and
liquidity of Russian securities and Fund investments. Such actions could, for
example, include restricting gas exports to other countries, the seizure of U.S.
and European residents’ assets, or undertaking or provoking other military
conflict elsewhere in Europe, any of which could exacerbate negative
consequences on global financial markets and the economy. The actions discussed
above could have a negative effect on the performance of Funds that have
exposure to Russia. While diplomatic efforts have been ongoing, the conflict
between Russia and Ukraine is unpredictable and has the potential to result in
broader military actions. The duration of the ongoing conflict and corresponding
sanctions and related events cannot be predicted and may result in a negative
impact on Fund performance and the value of Fund investments, particularly as it
relates to Russian exposure.
Passive
Foreign Investment Companies. Under U.S. tax
laws, passive foreign investment companies (PFICs) are those foreign
corporations which generate primarily “passive” income. Passive income is
defined as any income that is considered foreign personal holding company income
under the Internal Revenue Code of 1986, as amended (Code). For federal tax
purposes, a foreign corporation is deemed to be a PFIC if 75% or more of its
gross income during a taxable year is passive income or if 50% or more of its
assets during a taxable year are assets that produce, or are held to produce,
passive income.
Foreign
mutual funds are generally deemed to be PFICs, since nearly all of the income of
a mutual fund is passive income.
Foreign mutual funds investments may be used to gain exposure to the securities
of companies in countries that limit or prohibit direct foreign investment;
however, investments in foreign mutual funds by a Fund are subject to limits
under the Investment Company Act.
17
Other
types of foreign corporations may also be considered PFICs if their percentage
of passive income or passive assets
exceeds the limits described above. A determination as to whether a foreign
corporation is considered a PFIC is based on an interpretation of complex
provisions of the tax law. Accordingly, there can be no assurance that a
conclusion regarding a corporation's status as a PFIC will not be challenged by
the Internal Revenue Service (IRS) and conclusions as to a corporation's PFIC
status may vary depending on who is doing the analysis. Unless a Fund makes an
election with respect to its investment in a PFIC, which election may not always
be possible, income from the disposition of a PFIC investment and from certain
PFIC distributions may be subject to adverse tax treatment. The application of
the PFIC rules may affect, among other things, the character of gains, the
amount of gain or loss and the timing of the recognition of income with respect
to PFIC shares, and may subject a Fund to tax on certain income from PFIC
shares. Federal tax laws impose severe tax penalties for failure to properly
report investment income from PFICs. Although every effort is made to ensure
compliance with federal tax reporting requirements for these investments,
foreign corporations that are PFICs for federal tax purposes may not always be
recognized as such or may not provide a Fund with all information required to
report, or make an election with respect to, such investment.
A
foreign issuer will not be treated as a PFIC with respect to a shareholder if
such issuer is a controlled foreign corporation
for U.S. federal income tax purposes (CFC) and the shareholder holds (directly,
indirectly, or constructively) 10% or more of the voting interests in or total
value of such issuer. In such a case, the shareholder generally would be
required to include in gross income each year, as ordinary income, its share of
certain amounts of a CFC’s income, whether or not the CFC distributes such
shareholder’s share of such amounts to it. Under proposed regulations, such
income will be considered “qualifying income” for purposes of a shareholder’s
qualification as a regulated investment company only to the extent such income
is timely distributed to that shareholder.
Additional
risks of investing in other investment companies are described under “Other
Investment Companies.”
Foreign
Government Obligations. Each Fund other
than Invesco Short Duration Inflation Protected Fund may invest in debt
securities of foreign governments. Debt securities issued by foreign governments
are often, but not always, supported by the full faith and credit of the foreign
governments, or their subdivisions, agencies or instrumentalities, that issue
them. These securities involve the risks discussed above under “Foreign
Securities”. Additionally, the issuer of the debt or the governmental
authorities that control repayment of the debt may be unwilling or unable to pay
interest or repay principal when due. Political or economic changes or the
balance of trade may affect a country’s willingness or ability to service its
debt obligations. Periods of economic uncertainty may result in the volatility
of market prices of sovereign debt obligations, especially debt obligations
issued by the governments of developing countries. Foreign government
obligations of developing countries, and some structures of emerging market debt
securities, both of which are generally below investment grade, are sometimes
referred to as “Brady Bonds.” The failure of a sovereign debtor to implement
economic reforms, achieve specified levels of economic performance, or repay
principal or interest when due may result in the cancellation of third-party
commitments to lend funds to the sovereign debtor, which may impair the debtor’s
ability or willingness to service its debts.
Foreign
Exchange Transactions. Each Fund (except
Invesco Government Money Market Fund and Invesco U.S. Government Money
Portfolio) may invest in foreign currency-denominated securities and has the
authority to purchase and sell put and call options on foreign currencies
(foreign currency options), foreign currency futures contracts and related
options, and currency-related swaps, and may engage in foreign currency
transactions either on a spot (i.e., for prompt delivery and settlement) basis
at the rate prevailing in the currency exchange market at the time or through
forward foreign currency contracts (see “Forward Foreign Currency Contracts”).
The use of these instruments may result in a loss to a Fund if the counterparty
to the transaction (particularly with respect to OTC derivatives, as discussed
further below) does not perform as promised, including because of such
counterparty’s bankruptcy or insolvency.
The
Funds will incur costs in converting assets from one currency to another.
Foreign exchange dealers may charge a fee
for conversion. In addition, dealers may realize a profit based on the
difference between the prices at which they buy and sell various currencies in
the spot and forward markets.
18
A
Fund will generally engage in these foreign exchange transactions in order to
complete a purchase or sale of foreign
currency denominated securities. The Funds may also use foreign currency
options, forward foreign currency contracts, foreign currency futures contracts
and currency-related swap contracts to increase or reduce exposure to a foreign
currency, to shift exposure from one foreign currency to another in a cross
currency hedge or to enhance returns. These transactions are intended to
minimize the risk of loss due to a decline in the value of the hedged
currencies; however, at the same time, they tend to limit any potential gain
which might result should the value of such currencies increase.
A
Fund may purchase and sell foreign currency futures contracts and purchase and
write foreign currency options to increase
or decrease its exposure to different foreign currencies. A Fund may also
purchase and write foreign currency options in connection with foreign currency
futures contracts or forward foreign currency contracts. Foreign currency
futures contracts are traded on exchanges and have standard contract sizes and
delivery dates. Most foreign currency futures contracts call for payment or
delivery in U.S. dollars. The uses and risks of foreign currency futures
contracts are similar to those of futures contracts relating to securities or
indices (see “Futures Contracts”). Foreign currency futures contracts’ values
can be expected to correlate with exchange rates but may not reflect other
factors that affect the value of the Fund’s investments.
Whether
or not any hedging strategy will be successful is highly uncertain, and use of
hedging strategies may leave a Fund in
a less advantageous position than if a hedge had not been established. Moreover,
it is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward foreign currency contract.
Accordingly, a Fund may be required to buy or sell additional currency on the
spot market (and bear the expense of such transaction) if Invesco’s or the
Sub-Advisers’ predictions regarding the movement of foreign currency or
securities markets prove inaccurate.
Certain
Funds may hold a portion of their assets in bank deposits denominated in foreign
currencies, so as to facilitate
investment in foreign securities as well as protect against currency
fluctuations and the need to convert such assets into U.S. dollars (thereby also
reducing transaction costs). To the extent these monies are converted back into
U.S. dollars, the value of the assets so maintained will be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations. Foreign exchange transactions may involve some of the risks
of investments in foreign securities. For a discussion of tax considerations
relating to foreign currency transactions, see “Dividends, Distributions and Tax
Matters — Tax Matters — Tax Treatment of Portfolio Transactions — Foreign
currency transactions.”
Under
definitions adopted by the Commodity Futures Trading Commission (CFTC) and the
U.S. Securities and
Exchange Commission (SEC), non-deliverable foreign exchange forwards and OTC
foreign exchange options are considered “swaps.” These instruments are therefore
included in the definition of “commodity interests” for purposes of determining
whether fund service providers qualify for certain exemptions and exclusions
from regulation by the CFTC. Although non-deliverable forward foreign currency
contracts have historically been traded in the OTC market, as swaps they may in
the future be regulated to be centrally cleared and traded on public execution
facilities. For more information, see “Forward Foreign Currency Contracts” and
“Swaps.”
Floating
Rate Corporate Loans and Corporate Debt Securities of Non-U.S.
Borrowers. Floating rate
loans and debt securities made to and issued by non-U.S. borrowers in which the
Funds invest will be U.S. dollar-denominated or otherwise provide for payment in
U.S. dollars, and the borrower will meet the credit quality standards
established by Invesco and the Sub-Advisers for U.S. borrowers. The Funds
similarly may invest in floating rate loans and floating rate debt securities
made to and issued by U.S. borrowers with significant non-U.S.
dollar-denominated revenues; provided that the loans are U.S. dollar-denominated
or otherwise provide for payment to the Funds in U.S. dollars. In all cases
where the floating rate loans or floating rate debt securities are not
denominated in U.S. dollars, provisions will be made for payments to the
lenders, including the Funds, in U.S. dollars pursuant to foreign currency
swaps.
Foreign
Bank Obligations. Foreign bank
obligations include certificates of deposit, banker’s acceptances and fixed time
deposits and other obligations (a) denominated in U.S. dollars and issued by a
foreign branch of a domestic bank (Eurodollar Obligations), (b) denominated in
U.S. dollars and issued by a
19
domestic
branch of a foreign bank (Yankee Dollar Obligations), or (c) issued by foreign
branches of foreign banks. Foreign banks are not generally subject to
examination by any U.S. government agency or instrumentality.
Foreign
Currency Warrants. Foreign currency
warrants entitle the holder to receive from the issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt offerings by
major corporate issuers in an attempt to reduce the foreign currency exchange
risk which, from the point of view of prospective purchasers of the securities,
is inherent in the international fixed income marketplace.
Foreign
currency warrants may attempt to reduce the foreign exchange risk assumed by
purchasers of a security by, for
example, providing for a supplemental payment in the event that the U.S. dollar
depreciates against the value of a major foreign currency such as the Japanese
Yen or the euro. The formula used to determine the amount payable upon exercise
of a foreign currency warrant may make the warrant worthless unless the
applicable foreign currency exchange rate moves in a particular direction (i.e.,
unless the U.S. dollar appreciates or depreciates against the particular foreign
currency to which the warrant is linked or indexed). Foreign currency warrants
are severable from the debt obligations with which they may be offered, and may
be listed on exchanges.
Foreign
currency warrants may be exercisable only in certain minimum amounts, and an
investor wishing to exercise
warrants who possesses less than the minimum number required for exercise may be
required either to sell the warrants or to purchase additional warrants, thereby
incurring additional transaction costs. In the case of any exercise of warrants,
there may be a time delay between the time a holder of warrants gives
instructions to exercise and the time the exchange rate relating to exercise is
determined, during which time the exchange rate could change significantly,
thereby affecting both the market and cash settlement values of the warrants
being exercised. The expiration date of the warrants may be accelerated if the
warrants should be delisted from an exchange or if their trading should be
suspended permanently, which would result in the loss of any remaining “time
value” of the warrants (i.e., the difference between the current market value
and the exercise value of the warrants), and, in the case where the warrants
were “out-of-the-money,” in a total loss of the purchase price of the
warrants.
Foreign
currency warrants generally are unsecured obligations of their issuers and are
not standardized foreign currency
options issued by the Options Cleaning Corporation (OCC). Unlike foreign
currency options issued by the OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions
affecting exchange rates or in the event of the imposition of other regulatory
controls affecting the international currency markets. The initial public
offering price of foreign currency warrants is generally considerably in excess
of the price that a commercial user of foreign currencies might pay in the
interbank market for a comparable option involving significantly larger amounts
of foreign currencies. Foreign currency warrants are subject to complex
political or economic factors.
Performance
Indexed Paper. Performance
indexed paper is U.S. dollar-denominated commercial paper the yield of which is
linked to certain foreign exchange rate movements. The yield to the investor on
performance indexed paper is between the U.S. dollar and a designated currency
as of or about that time (generally, the index maturity two days prior to
maturity). The yield to the investor will be within a range stipulated at the
time of purchase of the obligation, generally with a guaranteed minimum rate of
return that is below, and a potential maximum rate of return that is above,
market yields on U.S. dollar-denominated commercial paper, with both the minimum
and maximum rates of return on the investment corresponding to the minimum and
maximum values of the spot exchange rate two business days prior to
maturity.
Exchange-Traded
Funds
Exchange-Traded
Funds (ETFs). Each Fund
except Invesco Government Money Market Fund and Invesco U.S. Government
Money Portfolio may purchase shares of ETFs. Most ETFs are registered under
the
20
1940
Act as investment companies, although others may not be registered as investment
companies and are registered as commodity pools. Therefore, a Fund’s purchase of
shares of an ETF may be subject to the restrictions on investments in other
investment companies discussed under “Other Investment Companies.” ETFs have
management fees, which increase their cost. The Fund may invest in ETFs advised
by unaffiliated advisers as well as ETFs advised by Invesco Capital Management
LLC (Invesco Capital). Invesco, the Sub-Advisers and Invesco Capital are
affiliates of each other as they are all indirect wholly-owned subsidiaries of
Invesco
Ltd.
Generally,
ETFs hold portfolios of securities, commodities and/or currencies that are
designed to replicate, as
closely as possible before expenses, the performance of a specified market
index. The performance results of ETFs will not replicate exactly the
performance of the pertinent index due to transaction and other expenses,
including fees to service providers, borne by ETFs. Furthermore, there can be no
assurance that the portfolio of securities, commodities and/or currencies
purchased by an ETF will replicate a particular index. Some ETFs are actively
managed and instead of replicating a particular index they seek to outperform
it, or outperform a basket of securities or price of a commodity or
currency.
Only
Authorized Participants (APs) may engage in creation or redemption transactions
directly with ETFs. ETF shares are sold
to and redeemed by APs at net asset value only in large blocks called creation
units and redemption units, respectively. Such market makers have no obligation
to submit creation or redemption orders; consequently, there is no assurance
that market makers will establish or maintain an active trading market for ETF
shares. In addition, to the extent that APs exit the business or are unable to
proceed with creation and/or redemption orders with respect to an ETF and no
other AP is able to step forward to create or redeem units of an ETF, an ETF’s
shares may be more likely to trade at a premium or discount to net asset value
and possibly face trading halts and/or delisting. ETF shares may be purchased
and sold by all other investors in secondary market trading on national
securities exchanges, which allows investors to purchase and sell ETF shares at
their market price throughout the day.
Investments
in ETFs generally present the same primary risks as an investment in a
conventional mutual fund that has the
same investment objective, strategy and policies. Investments in ETFs further
involve the same risks associated with a direct investment in the types of
securities, commodities and/or currencies included in the indices the ETFs are
designed to replicate. In addition, shares of an ETF may trade at a market price
that is higher or lower than their net asset value and an active trading market
in such shares may not develop or continue. Moreover, trading of an ETF’s shares
may be halted if the listing exchange’s officials deem such action to be
appropriate, the shares are de-listed from the exchange, or the activation of
market-wide “circuit breakers” (which are tied to large decreases in stock
prices) halts stock trading generally.
Exchange-Traded
Notes
Exchange-Traded
Notes (ETNs). ETNs are senior,
unsecured, unsubordinated debt securities whose returns are linked to the
performance of a particular market benchmark or strategy, minus applicable fees.
ETNs are traded on an exchange (e.g., the New York Stock Exchange) during normal
trading hours; however, investors can also hold the ETN until maturity. At
maturity, the issuer pays to the investor a cash amount equal to the principal
amount, subject to the day’s market benchmark or strategy factor. ETNs do not
make periodic coupon payments or provide principal protection. ETNs are subject
to credit risk, including the credit risk of the issuer, and the value of the
ETN may drop due to a downgrade in the issuer’s credit rating, despite the
underlying market benchmark or strategy remaining unchanged. The value of an ETN
may also be influenced by time to maturity, level of supply and demand for the
ETN, volatility and lack of liquidity in underlying assets, changes in the
applicable interest rates, changes in the issuer’s credit rating, and economic,
legal, political, or geographic events that affect the referenced underlying
asset. When a Fund invests in ETNs it will bear its proportionate share of any
fees and expenses borne by the ETN. A decision to sell ETN holdings may be
limited by the availability of a secondary market. In addition, although an ETN
may be listed on an exchange, the issuer may not be required to maintain the
listing, and there can be no assurance that a secondary market will exist for an
ETN.
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ETNs
are also subject to tax risk. No assurance can be given that the Internal
Revenue Service (IRS) will accept, or a court
will uphold, how ETNs are characterized or treated for tax purposes. Further,
the IRS and Congress are considering proposals that would change the timing and
character of income and gains from ETNs.
An
ETN that is tied to a specific market benchmark or strategy may not be able to
replicate and maintain exactly the
composition and relative weighting of securities, commodities or other
components in the applicable market benchmark or strategy. Some ETNs that use
leverage can, at times, be relatively illiquid, and thus they may be difficult
to purchase or sell at a fair price. Leveraged ETNs are subject to the same risk
as other instruments that use leverage in any form.
The
market value of ETNs may differ from their market benchmark or strategy. This
difference in price may be due to the
fact that the supply and demand in the market for ETNs at any point in time is
not always identical to the supply and demand in the market for the securities,
commodities or other components underlying the market benchmark or strategy that
the ETN seeks to track. As a result, there may be times when an ETN trades at a
premium or discount to its market benchmark or strategy.
Debt
Investments
U.S.
Government Obligations. U.S. government
obligations are obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities, including bills, notes and bonds issued by the
U.S. Treasury, as well as “stripped” or “zero coupon” U.S. Treasury
obligations.
U.S.
government obligations may be, (i) supported by the full faith and credit of the
U.S. Treasury, (ii) supported by the
right of the issuer to borrow from the U.S. Treasury, (iii) supported by the
discretionary authority of the U.S. government to purchase the agency’s
obligations, or (iv) supported only by the credit of the instrumentality. There
is a risk that the U.S. government may choose not to provide financial support
to U.S. government-sponsored agencies or instrumentalities if it is not legally
obligated to do so. In that case, if the issuer were to default, a Fund holding
securities of such issuer might not be able to recover its investment from the
U.S. government. For example, while the U.S. government has provided financial
support to Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC), no assurance can be given that the U.S. government
will always do so, since the U.S. government is not so obligated by law. There
also is no guarantee that the government would support Federal Home Loan Banks.
Accordingly, securities of FNMA, FHLMC and Federal Home Loan Banks, and other
agencies, may involve a risk of non-payment of principal and interest. Any
downgrade of the credit rating of the securities issued by the U.S. government
may result in a downgrade of securities issued by its agencies or
instrumentalities, including government-sponsored entities. Additionally, from
time to time uncertainty regarding the status of negotiations in the U.S.
government to increase the statutory debt limit, commonly called the “debt
ceiling,” could increase the risk that the U.S. government may default on
payments on certain U.S. government securities, cause the credit rating of the
U.S. government to be downgraded, increase volatility in the stock and bond
markets, result in higher interest rates, reduce prices of U.S. Treasury
securities, and/or increase the costs of various kinds of debt. If a U.S.
government-sponsored entity is negatively impacted by legislative or regulatory
action, is unable to meet its obligations, or its creditworthiness declines, the
performance of a Fund that holds securities of that entity will be adversely
impacted.
Inflation-Indexed
Bonds.
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Two structures are
common. The U.S. Treasury and some other issuers use a structure that accrues
inflation into the principal value of the bond. Most other issuers pay out the
Consumer Price Index (CPI) accruals as part of a semiannual coupon.
Inflation-indexed
securities issued by the U.S. Treasury have maturities of five, ten or thirty
years, although it is
possible that securities with other maturities will be issued in the future. The
U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed
percentage of the inflation-adjusted principal amount. For example, if a fund
purchased an inflation-indexed bond with a par value of $1,000 and a 3% real
rate of return coupon (payable 1.5% semi-annually), and inflation over the first
six months was 1%, the mid-year par value of the bond would be $1,010 and the
first semi-annual interest payment would be $15.15
22
($1,010
times 1.5%). If inflation during the second half of the year resulted in the
whole years’ inflation equaling 3%, the end-of-year par value of the bond would
be $1,030 and the second semiannual interest payment would be
$15.45 ($1,030 times 1.5%).
If
the periodic adjustment rate measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted
downward, and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment of the
original bond principal upon maturity (as adjusted for inflation) is guaranteed
in the case of U.S. Treasury inflation-indexed bonds, even during a period of
deflation. However, the current market value of the bonds is not guaranteed, and
will fluctuate. The Fund may also invest in other inflation related bonds which
may or may not provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal.
The
value of inflation-indexed bonds is expected to change in response to changes in
real interest rates. Real interest rates
in turn are tied to the relationship between nominal interest rates and the rate
of inflation. Therefore, if inflation were to rise at a faster rate than nominal
interest rates, real interest rates might decline, leading to an increase in
value of inflation-indexed bonds. In contrast, if nominal interest rates
increased at a faster rate than inflation, real interest rates might rise,
leading to a decrease in value of inflation-indexed bonds.
While
these securities are expected to be protected from long-term inflationary
trends, short-term increases in
inflation may lead to a decline in value. If interest rates rise due to reasons
other than inflation (for example, due to changes in currency exchange rates),
investors in these securities may not be protected to the extent that the
increase is not reflected in the bond’s inflation measure.
The
periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer
Price Index for Urban Consumers (CPI-U),
which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is
a measurement of changes in the cost of living, made up of components such as
housing, food, transportation and energy. Inflation-indexed bonds issued by a
foreign government are generally adjusted to reflect a comparable inflation
index, calculated by that government. There can be no assurance that the CPI-U
or any foreign inflation index will accurately measure the real rate of
inflation in the prices of goods and services. Moreover, there can be no
assurance that the rate of inflation in a foreign country will be correlated to
the rate of inflation in the United States.
Any
increase in the principal amount of an inflation-indexed bond will be considered
taxable ordinary income, even though
investors do not receive their principal until maturity.
Temporary
Investments. Each Fund except
Invesco Government Money Market Fund and Invesco U.S. Government Money Portfolio
may invest a portion of its respective assets in affiliated money market funds
or in other types of money market instruments in which those funds would invest
or other short-term U.S. government securities for cash management purposes.
Each Fund except Invesco Government Money Market Fund and Invesco U.S.
Government Money Portfolio may invest up to 100% of its assets in investments
that may be inconsistent with the Fund's principal investment strategies for
temporary defensive purposes in anticipation of or in response to adverse
market, economic, political or other conditions, or atypical circumstances such
as unusually large cash inflows or redemptions. Invesco Government Money Market
Fund and Invesco U.S. Government Money Portfolio may, from time to time, take
temporary defensive positions by holding cash, shortening the Fund’s
dollar-weighted average portfolio maturity or investing in other securities that
are Eligible Securities for purchase by money market funds as described below,
in anticipation of or in response to adverse market, economic, political or
other market conditions, or atypical circumstances such as unusually large cash
inflows or redemptions. As a result, a Fund may not achieve its investment
objective.
Invesco
Government Money Market Fund and Invesco U.S. Government Money Portfolio may
experience situations where it
is unable to invest money that it has received overnight such as when it
receives cash inflows after the overnight repurchase markets have closed. The
Funds are permitted to leave balances in
23
their
accounts with the Bank of New York Mellon (BNY Mellon), their custodian bank. To
compensate the Funds for such
activity, the Funds may receive compensation from BNY Mellon at an agreed upon
rate.
Changing
Interest Rates. In a low or
negative interest rate environment, debt securities may trade at, or be issued
with, negative yields, which means the purchaser of the security may receive at
maturity less than the total amount invested. In addition, in a negative
interest rate environment, if a bank charges negative interest, instead of
receiving interest on deposits, a depositor must pay the bank fees to keep money
with the bank. To the extent a Fund holds a negatively-yielding debt security or
has a bank deposit with a negative interest rate, the Fund would generate a
negative return on that investment. Cash positions may also subject a Fund to
increased counterparty risk to the Fund's bank. Debt market conditions are
highly unpredictable and some parts of the market are subject to dislocations.
In the past, the U.S. government and certain foreign central banks have taken
steps to stabilize markets by, among other things, reducing interest rates. To
the extent such actions are pursued, they present heightened risks to debt
securities, and such risks could be even further heightened if these actions are
unexpectedly or suddenly reversed or are ineffective in achieving their desired
outcomes. In recent years, the U.S. government began implementing increases to
the federal funds interest rate and there may be further rate increases. As
interest rates rise, there is risk that rates across the financial system also
may rise. To the extent rates increase substantially and/or rapidly, the Funds
may be subject to significant losses.
In
a low or negative interest rate environment, some investors may seek to
reallocate assets to other income-producing
assets. This may cause the price of such higher yielding instruments to rise,
could further reduce the value of instruments with a negative yield, and may
limit a Fund's ability to locate fixed income instruments containing the desired
risk/return profile. Changing interest rates, including, rates that fall below
zero, could have unpredictable effects on the markets and may expose fixed
income markets to heightened volatility, increased redemptions, and potential
illiquidity.
With
respect to a money market fund, which seeks to maintain a stable $1.00 price per
share, a low or negative interest
rate environment could impact the money market fund’s ability to maintain a
stable $1.00 share price. During a negative interest rate environment causing a
money market fund to have a negative gross yield, the money market fund may
reduce the number of shares outstanding on a pro rata basis through reverse
distribution mechanisms
or
other mechanisms to seek to maintain a stable $1.00 price per share, subject to
approval of the board of trustees of the money market fund and to the extent
permissible by applicable law and its organizational documents. A money market
fund that implements share cancellation would continue to maintain a stable
$1.00 share price by use of the amortized cost method of valuation and/or penny
rounding method but the value of an investor’s investment would decline if the
fund reduces the number of shares held by the investor. Alternatively, the money
market fund may discontinue using the amortized cost method of valuation to
maintain a stable $1.00 price per share and establish a fluctuating NAV per
share rounded to four decimal places by using available market quotations or
equivalents. A money market fund that floats its NAV would no longer maintain a
stable $1.00 share price and instead have a share price that fluctuates. An
investor in a money market fund that floats its NAV would lose money if the
investor sells their shares when they are worth less than what the investor
originally paid for them.
Mortgage-Backed
and Asset-Backed Securities. Mortgage-backed
and asset-backed securities include commercial mortgage-backed securities (CMBS)
and residential mortgage-backed securities (RMBS). Mortgage-backed securities
are mortgage-related securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, or issued by non-government entities, such as
commercial banks and other private lenders. Mortgage-related securities
represent ownership in pools of mortgage loans assembled for sale to investors
by various government agencies such as the Government National Mortgage
Association (GNMA) and government-related organizations such as the FNMA and the
FHLMC, as well as by non-government issuers such as commercial banks, savings
and loan institutions, mortgage bankers and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. These securities differ from
conventional bonds in that the principal is paid back to the investor as
payments are made on the underlying mortgages in the pool. Accordingly, a Fund
receives monthly scheduled payments of principal and interest along with any
unscheduled principal prepayments on the underlying mortgages.
24
Because
these scheduled and unscheduled principal payments must be reinvested at
prevailing interest rates,
mortgage-backed securities do not provide an effective means of locking in
long-term interest rates for the investor. Although the value of a
mortgage-backed security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the mortgages
and loans underlying the securities are prone to prepayment, thereby shortening
the average life of the security and shortening the period of time over which
income at the higher rate is received. When interest rates are rising, the rate
of prepayment tends to decrease, thereby lengthening the period of time over
which income at the lower rate is received. For these and other reasons, a
mortgage-backed security's average maturity may be shortened or lengthened as a
result of interest rate fluctuations and, therefore, it is not possible to
predict accurately the security's return.
There
are a
number of important differences among the agencies and instrumentalities of the
U.S. government that issue mortgage-related securities and among the securities
they issue. Mortgage-related securities issued by GNMA include GNMA Mortgage
Pass-Through Certificates (also known as Ginnie Maes) which are guaranteed as to
the timely payment of principal and interest. That guarantee is backed by the
full faith and credit of the U.S. Treasury. GNMA is a corporation wholly-owned
by the U.S. government within the Department of Housing and Urban Development.
Mortgage-related securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as Fannie Maes) and are guaranteed as to
payment of principal and interest by FNMA itself and backed by a line of credit
with the U.S. Treasury. FNMA is a government-sponsored entity (GSE) wholly-owned
by public stockholders. Mortgage-related securities issued by FHLMC include
FHLMC Mortgage Participation Certificates (also known as Freddie Macs) and are
guaranteed as to payment of principal and interest by FHLMC itself and backed by
a line of credit with the U.S. Treasury. FHLMC is a GSE wholly-owned by public
stockholders.
Another
type of mortgage-related security issued by GSEs, such as FNMA and FHLMC, is
credit risk transfer
securities. GSE credit risk transfer securities are unguaranteed and unsecured
fixed or floating rate general obligations issued by GSEs, which are typically
issued at par and have stated final maturities. In addition, GSE credit risk
transfer securities are structured so that: (i) interest is paid directly by the
issuing GSE; and (ii) principal is paid by the issuing GSE in accordance with
the principal payments and default performance of a pool of residential mortgage
loans acquired by the GSE. The issuing GSE selects the pool of mortgage loans
based on that GSE’s eligibility criteria, and the performance of the credit risk
transfer securities will be directly affected by the selection of such
underlying mortgage loans.
GSE
credit risk transfer securities are not directly linked to or backed by the
underlying mortgage loans. Thus, although the
payment of principal and interest on such securities is tied to the performance
of the pool of underlying mortgage loans, in no circumstances will the actual
cash flow from the underlying mortgage loans be paid or otherwise made available
to the holders of the securities and the holders of the securities will have no
interest in the underlying mortgage loans. As a result, in the event that a GSE
fails to pay principal or interest on its credit risk transfer securities or
goes through a bankruptcy, insolvency or similar proceeding, holders of such
credit risk transfer securities will have no direct recourse to the underlying
mortgage loans. Such holders will receive recovery on par with other unsecured
note holders (agency debentures) in such a scenario.
GSE
credit risk transfer securities are issued in multiple tranches, which are
allocated certain principal repayments and
credit losses corresponding to the seniority of the particular tranche. Each
tranche will have credit exposure to the underlying mortgage loans and the yield
to maturity will be directly related to the amount and timing of certain defined
credit events on the underlying mortgage loans, any prepayments by borrowers and
any removals of a mortgage loan from the pool. Because credit risk exposure is
allocated in accordance with the seniority of the particular tranche, principal
losses will be first allocated to the most junior or subordinate tranches, thus
making the most subordinate tranches subject to increased sensitivity to
dramatic housing downturns. In addition, many credit risk transfer securities
have collateral performance triggers (such as those based on credit enhancement,
delinquencies or defaults) that could shut off principal payments to subordinate
tranches.
25
The
risks associated with an investment in GSE credit risk transfer securities will
be different than the risks associated
with an investment in mortgage-backed securities issued by GSEs, because some or
all of the mortgage default or credit risk associated with the underlying
mortgage loans in credit risk transfer securities is transferred to investors,
such as the Fund. As a result, investors in GSE credit risk transfer securities
could lose some or all of their investment in these securities if the underlying
mortgage loans default.
The
Funds may also invest in credit risk transfer securities issued by private
entities, such as banks or other financial
institutions. Credit risk transfer securities issued by private entities are
structured similarly to those issued by GSEs, and are generally subject to the
same types of risks, including credit, prepayment, extension, interest rate and
market risks.
On
September 7, 2008, FNMA and FHLMC were placed under the conservatorship of the
Federal Housing Finance
Agency (FHFA) to provide stability in the financial markets, mortgage
availability and taxpayer protection by preserving FNMA and FHLMC’s assets and
property and putting FNMA and FHLMC in a sound and solvent position.
Since
2009, both FNMA and FHLMC have received significant capital support through U.S.
Treasury preferred stock
purchases and Federal Reserve purchases of the entities’ mortgage-backed
securities.
In
February 2011, the Obama Administration produced a report to Congress outlining
proposals to wind down FNMA and FHLMC
and reduce the government’s role in the mortgage market. Discussions among
policymakers continue
as to
whether FNMA and FHLMC should be nationalized, privatized, restructured, or
eliminated altogether. Such discussions create uncertainty as to
FNMA’s
future
including how long FNMA will continue to exist in its current form, the extent
of its role in the market, how long it will be in conservatorship, what form it
will have and what ownership interest, if any, current common and preferred
stockholders will hold after the conservatorship is terminated, and whether FNMA
will continue to exist following conservatorship. FHLMC faces similar
uncertainty about its future. If FNMA and FHLMC are taken out of
conservatorship, it is unclear how the capital structure of FNMA and FHLMC would
be constructed and what effects, if any, there may be on FNMA’s and FHLMC’s
creditworthiness and guarantees of certain mortgage-backed securities. It is
also unclear whether the U.S. Treasury would continue to enforce its rights or
perform its obligations related to senior preferred stock. Should FNMA’s and
FHLMC’s conservatorship end, there could be an adverse impact on the value of
their securities, which could cause Fund losses.
Asset-backed
securities are structured like mortgage-backed securities, but instead of
mortgage loans or interests in
mortgage loans, the underlying assets may include such items as motor vehicle
installment sales contracts or installment loan contracts, leases of various
types of real and personal property, and receivables from credit card agreements
and from sales of personal property. Regular payments received on
asset-backed securities include both interest and principal. Asset-backed
securities typically have no U.S. government backing. Additionally, the
ability of an issuer of asset-backed securities to enforce its security interest
in the underlying assets may be limited.
If
a Fund purchases a mortgage-backed or other asset-backed security at a premium,
the premium may be lost if there is
a decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying collateral. As with other
interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. Like mortgage-backed securities, the
varied effects of fluctuating interest rates on asset-backed security values
make it impossible to accurately predict
the
security’s return. In addition, while the trading market for short-term
mortgages and asset-backed securities is ordinarily quite liquid, in times of
financial stress the trading market for these securities may become
restricted.
CMBS
and RMBS generally offer a higher rate of interest than government and
government-related mortgage-backed
securities because there are no direct or indirect government or government
agency guarantees of payment. The risk of loss due to default on CMBS and RMBS
is historically higher because neither the U.S. government nor an agency or
instrumentality have guaranteed them. CMBS and RMBS whose underlying assets are
neither U.S. government securities nor U.S. government insured mortgages, to
26
the
extent that real properties securing such assets may be located in the same
geographical region, may also be subject to a greater risk of default than other
comparable securities in the event of adverse economic, political or business
developments that may affect such region and, ultimately, the ability of
property owners to make payments of principal and interest on the underlying
mortgages. Non-government mortgage-backed securities are generally subject to
greater price volatility than those issued, guaranteed or sponsored by
government entities because of the greater risk of default in adverse market
conditions. Where a guarantee is provided by a private guarantor, the Fund is
subject to the credit risk of such guarantor, especially when the guarantor doubles
as the originator.
Collateralized
Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. A CMO is a
type of mortgage-backed security that creates separate classes with varying
maturities and interest rates, called tranches. Similar to a bond, interest and
prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs
are structured into multiple classes, each bearing a different fixed or floating
interest rate and stated maturity.
Actual maturity and average life will depend upon the prepayment experience of
the collateral. CMOs provide for a modified form of call protection through a de
facto breakdown of the underlying pool of mortgages according to how quickly the
loans are repaid. Monthly payment of principal received from the pool of
underlying mortgages, including prepayments, is first returned to investors
holding the shortest maturity class. Investors holding the longer maturity
classes receive principal only after the first class has been retired. An
investor is partially guarded against a sooner than desired return of principal
because of the sequential payments.
In
a typical CMO transaction, a corporation (issuer) issues multiple series (i.e.,
Series A, B, C and Z) of CMO bonds (Bonds).
Proceeds of the Bond offering are used to purchase mortgages or mortgage
pass-through certificates (Collateral). The Collateral is pledged to a third
party trustee as security for the Bonds. Principal and interest payments from
the Collateral are used to pay principal on the Bonds in the following order:
Series A, B, C and Z. The Series A, B, and C Bonds all bear current interest.
Interest on a Series Z Bond is accrued and added to principal and a like amount
is paid as principal on the Series A, B, or C Bond is currently being paid off.
Only after the Series A, B, and C Bonds are paid in full does the Series Z Bond
begin to receive payment. With some CMOs, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations) to
borrow against their loan portfolios.
CMOs
that are issued or guaranteed by the U.S. government or by any of its agencies
or instrumentalities will be considered
U.S. government securities by the Funds, while other CMOs, even if
collateralized by U.S. government securities, will have the same status as other
privately issued securities for purposes of applying the Funds' diversification
tests.
FHLMC
CMOs are debt obligations of FHLMC issued in multiple classes having different
maturity dates which are secured
by the pledge of a pool of conventional mortgage loans purchased by FHLMC.
Payments of principal and interest on the FHLMC CMOs are made semiannually. The
amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC’s mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the FHLMC CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC’s minimum sinking fund obligation for any payment
date are paid to the holders of the FHLMC CMOs as additional sinking fund
payments. Because of the “pass-through” nature of all principal payments
received on the collateral pool in excess of FHLMC’s minimum sinking fund
requirement, the rate at which principal of the FHLMC CMOs is actually repaid is
likely to be such that each class of bonds will be retired in advance of its
scheduled maturity date. If collection of principal (including prepayments) on
the mortgage loans during any semiannual payment period is not sufficient to
meet the FHLMC CMO’s minimum sinking fund obligation on the next sinking fund
payment date, FHLMC agrees to make up the deficiency from its general
funds.
27
Classes
of CMOs may also include interest only securities (IOs) and principal only
securities (POs). IOs and POs are
stripped mortgage-backed securities representing interests in a pool of
mortgages the cash flow from which has been separated into interest and
principal components. IOs receive the interest portion of the cash flow while
POs receive the principal portion. IOs and POs can be extremely volatile in
response to changes in interest rates. As interest rates rise and fall, the
value of IOs tends to move in the same direction as interest rates. POs perform
best when prepayments on the underlying mortgages rise since this increases the
rate at which the investment is returned and the yield to maturity on the PO.
When payments on mortgages underlying a PO are slow, the life of the PO is
lengthened and the yield to maturity is reduced.
CMOs
are generally subject to the same risks as mortgage-backed securities. In
addition, CMOs may be subject to credit
risk because the issuer or credit enhancer has defaulted on its obligations and
a Fund may not receive all or part of its principal. Obligations issued by U.S.
government-related entities are guaranteed as to the payment of principal and
interest, but are not backed by the full faith and credit of the U.S.
government. The performance of private label mortgage-backed securities, issued
by private institutions, is based on the financial health of those institutions.
Although GNMA guarantees timely payment of GNMA certificates even if homeowners
delay or default, tracking the “pass-through” payments may, at times, be
difficult.
Collateralized
Debt Obligations (CDOs). A CDO is a
security backed by a pool of bonds, loans and other debt obligations. CDOs are
not limited to investing in one type of debt and accordingly, a CDO may own
corporate bonds, commercial loans, asset-backed securities, residential
mortgage-backed securities, commercial mortgage-backed securities, and emerging
market debt. The CDO’s securities are typically divided into several classes, or
bond tranches, that have differing levels of investment grade or credit
tolerances. Most CDO issues are structured in a way that enables the senior bond
classes and mezzanine classes to receive investment-grade credit ratings. Credit
risk is shifted to the most junior class of securities. If any defaults occur in
the assets backing a CDO, the senior bond classes are first in line to receive
principal and interest payments, followed by the mezzanine classes and finally
by the lowest rated (or non-rated) class, which is known as the equity tranche.
Similar in structure to a collateralized mortgage obligation (described above)
CDOs are unique in that they represent different types of debt and credit
risk.
Collateralized
Loan Obligations (CLOs). CLOs are debt
instruments backed solely by a pool of other debt securities. The risks of an
investment in a CLO depend largely on the type of the collateral securities and
the class of the CLO in which a Fund invests. Some CLOs have credit ratings, but
are typically issued in various classes with various priorities. Normally, CLOs
are privately offered and sold (that is, they are not registered under the
securities laws) and may be characterized by a Fund as illiquid investments;
however, an active dealer market may exist for CLOs that qualify for Rule 144A
transactions. In addition to the normal interest rate, default and other risks
of fixed income securities, CLOs carry additional risks, including the
possibility that distributions from collateral securities will not be adequate
to make interest or other payments, the quality of the collateral may decline in
value or default a Fund may invest in CLOs that are subordinate to other
classes, values may be volatile, and disputes with the issuer may produce
unexpected investment results.
Credit
Linked Notes (CLNs). Each Fund except
Invesco Government Money Market Fund and Invesco U.S. Government Money
Portfolio may invest in CLNs. A CLN is a security structured and issued by
an issuer, which may be a bank, broker or special purpose vehicle. If a CLN is
issued by a special purpose vehicle, the special purpose vehicle will typically
be collateralized by AAA-rated securities, but some CLNs are not collateralized.
The performance and payment of principal and interest is tied to that of a
reference obligation which may be a particular security, basket of securities,
credit default swap, basket of credit default swaps, or index. The reference
obligation may be denominated in foreign currencies. Risks of CLNs include those
risks associated with the underlying reference obligation including, but not
limited to, market risk, interest rate risk, credit risk, default risk and
foreign currency risk. In the case of a CLN created with credit default swaps,
the structure will be “funded” such that the par amount of the security will
represent the maximum loss that could be incurred on the investment and no
leverage is introduced. An investor in a CLN also bears counterparty risk or the
risk that the issuer of the CLN will default or become bankrupt and not make
timely payments of principal and interest on the structured security. Should the
issuer default or declare bankruptcy, the CLN
28
holder
may not receive any compensation. In return for these risks, the CLN holder
receives a higher yield. As with most
derivative instruments, valuation of a CLN may be difficult due to the
complexity of the security.
Event-Linked
Bonds.
Event-linked bonds, including “catastrophe” bonds and other insurance-linked
securities, are fixed income securities for which the return of principal and
payment of interest is contingent on the non-occurrence of a specific trigger
event, such as a hurricane, earthquake, or other occurrence that leads to
physical or economic loss. In some cases, the trigger event will not be deemed
to have occurred unless the event is of a certain magnitude (based on, for
example, scientific readings) or causes a certain measurable amount of loss to
the issuer, a particular industry group or a reference index. If the trigger
event occurs prior to maturity, a Fund may lose all or a portion of its
principal and additional interest. A Fund may also invest in similar bonds where
the Fund may lose all or a portion of its principal and additional interest if
the mortality rate in a geographic area exceeds a stated threshold prior to
maturity whether or not a particular catastrophic event has occurred.
Event-linked bonds include the universe of insurance-linked securities,
including privately-placed event-linked securities including sidecards,
collateralized reinsurance and industry loss warranties. Some of these
investments are illiquid but they are event-linked in that they default as a
result of an event or series of events.
Event-linked
bonds may be issued by government agencies, insurance companies, reinsurers, and
financial
institutions, among other issuers, or special purpose vehicles associated with
the foregoing. Often event-links bonds provide for extensions of maturity in
order to process and audit loss claims in those cases when a trigger event has
occurred or is likely to have occurred. An extension of maturity may increase a
bond’s volatility.
Event-linked
bonds may expose a Fund to certain other risks, including issuer default,
adverse regulatory or jurisdictional
interpretations, liquidity risk and adverse tax consequences. Lack of a liquid
market may result in higher transaction costs and the possibility that a Fund
may be forced to liquidate positions when it would not be advantageous to do so.
Event-linked bonds are typically rated by one or more nationally recognized
statistical rating organizations and a Fund will only invest in event-linked
bonds that meet the credit quality requirements for the Fund.
The
issuers of the event-linked bonds in which a Fund will invest are generally
treated as PFICs for U.S. income tax
purposes. For more information about PFICs, see “Passive Foreign Investment
Companies.”
Bank
Instruments. Bank instruments
are unsecured interest bearing bank deposits. Bank instruments include, but are
not limited to, certificates of deposit, time deposits, and banker’s acceptances
from U.S. or foreign banks, as well as Eurodollar certificates of deposit
(Eurodollar CDs) and Eurodollar time deposits of foreign branches of domestic
banks. Some certificates of deposit are negotiable interest-bearing instruments
with a specific maturity issued by banks and savings and loan institutions in
exchange for the deposit of funds, and can typically be traded in the secondary
market prior to maturity. Other certificates of deposit, like time deposits, are
non-negotiable receipts issued by a bank in exchange for the deposit of funds
which earns a specified rate of interest over a definite period of time;
however, it cannot be traded in the secondary market. A banker’s acceptance is a
bill of exchange or time draft drawn on and accepted by a commercial
bank.
An
investment in Eurodollar CDs or Eurodollar time deposits may involve some of the
same risks that are described for
Foreign Securities.
Commercial
Instruments. Commercial
instruments include commercial paper, master notes and other short-term
corporate instruments, that are denominated in U.S. dollars or foreign
currencies.
Commercial
instruments are a type of instrument issued by large banks and corporations to
raise money to meet their
short-term debt obligations, and are only backed by the issuing bank or
corporation’s promise to pay the face amount on the maturity date specified on
the note. Commercial paper consists of short-term promissory notes issued by
corporations. Commercial paper may be traded in the secondary market after its
issuance. Master notes are demand notes that permit the investment of
fluctuating amounts of money at varying rates of interest pursuant to
arrangements with issuers who meet certain credit quality criteria. The interest
rate on a master note may fluctuate based on changes in specified interest rates
or may be reset
29
periodically
according to a prescribed formula or may be a set rate. Although there is no
secondary market in master demand notes, if such notes have a demand feature,
the payee may demand payment of the principal amount of the note upon relatively
short notice. Master notes are generally illiquid and therefore typically
subject to the Funds' percentage limitations for investments in illiquid
investments. Commercial instruments may not be
registered with the SEC.
Synthetic
Municipal Instruments. Synthetic
municipal instruments are instruments, the value of and return on which are
derived from underlying securities. Synthetic municipal instruments in
which the Funds may invest include tender option bonds, and fixed or variable
rate trust certificates. These types of instruments involve the deposit into a
trust or custodial account of one or more long-term tax-exempt bonds or notes
(Underlying Bonds), and the sale of certificates evidencing interests in the
trust or custodial account to investors such as the Funds. The trustee or
custodian receives the long-term fixed rate interest payments on the Underlying
Bonds, and pays certificate holders fixed rates or short-term floating or
variable interest rates which are reset periodically. A “tender option bond”
provides a certificate holder with the conditional right to sell its certificate
to the sponsor or some designated third party at specified intervals and receive
the par value of the certificate plus accrued interest (a demand feature). A
"fixed rate trust certificate" evidences an interest in a trust entitling a
certificate holder to fixed future interest and/or principal payments on the
Underlying Bonds. A “variable rate trust certificate” evidences an interest in a
trust entitling the certificate holder to receive variable rate interest based
on prevailing short-term interest rates and also typically provides the
certificate holder with the conditional demand feature (the right to tender its
certificate at par value plus accrued interest under certain
conditions).
All
synthetic municipal instruments must meet the minimum quality standards for the
Funds' investments and must present
minimal credit risks. In selecting synthetic municipal instruments for the
Funds, Invesco considers the creditworthiness of the issuer of the Underlying
Bond, the sponsor and the party providing certificate holders with a conditional
right to sell their certificates at stated times and prices (a demand
feature).
Typically,
a certificate holder cannot exercise the demand feature until the occurrence of
certain conditions, such as
where the issuer of the Underlying Bond defaults on interest payments. Moreover,
because synthetic municipal instruments involve a trust or custodial account and
a third party conditional demand feature, they involve complexities and
potential risks that may not be present where a municipal security is owned
directly.
The
tax-exempt character of the interest paid to certificate holders is based on the
assumption that the holders have an
ownership interest in the Underlying Bonds; however, the IRS has not issued a
ruling addressing this issue. In the event the IRS issues an adverse ruling or
successfully litigates this issue, it is possible that the interest paid to the
Funds on certain synthetic municipal instruments would be deemed to be taxable.
The Funds rely on opinions of special tax counsel on this ownership question and
opinions of bond counsel regarding the tax-exempt character of interest paid on
the Underlying Bonds.
Municipal
Securities. Municipal
Securities are typically debt obligations of states, territories or possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest on which, in the
opinion of bond counsel or other counsel to the issuers of such securities, is,
at the time of issuance, exempt from federal income tax. The issuers of
municipal securities obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, highways,
bridges, schools, hospitals, housing, mass transportation, streets and water and
sewer works. Other public purposes for which municipal securities may be issued
include refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to other public institutions and
facilities.
Certain
types of municipal securities are issued to obtain funding for privately
operated facilities. The credit and quality
of private activity debt securities are dependent on the private facility or
user, who is responsible for the interest payment and principal
repayment.
30
The
two major classifications of Municipal Securities are bonds and notes. Municipal
bonds are municipal debt obligations in
which the issuer is obligated to repay the original (or “principal”) payment
amount on a certain maturity date along with interest. A municipal bond’s
maturity date (the date when the issuer of the bond repays the principal) may be
years in the future. Short-term bonds mature in one to three years, while
long-term bonds usually do not mature for more than a decade. Notes are
short-term instruments which usually mature in less than two years. Most notes
are general obligations of the issuing municipalities or agencies and are sold
in anticipation of a bond sale, collection of taxes or receipt of other
revenues. Municipal notes also include tax, revenue notes and revenue and bond
anticipation notes (discussed more fully below) of short maturity, generally
less than three years, which are issued to obtain temporary funds for various
public purposes.
Municipal
debt securities may also be classified as general obligation or revenue
obligations (or "special delegation
securities"). General obligation securities are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and
interest.
Revenue
debt obligations, such as revenue bonds and revenue notes, are usually payable
only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source but not from
the general taxing power. The principal and interest payments for industrial
development bonds or pollution control bonds are often the sole responsibility
of the industrial user and therefore may not be backed by the taxing power of
the issuing municipality. The interest paid on such bonds may be exempt from
federal income tax, although current federal tax laws place substantial
limitations on the purposes and size of such issues. Such obligations are
considered to be Municipal Securities provided that the interest paid thereon,
in the opinion of bond counsel, qualifies as exempt from federal income tax.
However, interest on municipal securities may give rise to a federal alternative
minimum tax (AMT) liability and may have other collateral federal income tax
consequences. There is a risk that some or all of the interest received by the
Fund from tax-exempt municipal securities might become taxable as a result of
tax law changes or determinations of the IRS.
Another
type of revenue obligations is pre-refunded bonds, which are typically issued to
refinance debt. In other words,
pre-refunded bonds result from the advance refunding of bonds that are not
currently redeemable. The proceeds from the issue of the lower yield and/or
longer maturing pre-refunding bond will usually be used to purchase U.S.
government obligations, such as U.S. Treasury securities, which are held in an
escrow account and used to pay interest and principal payments until the
scheduled call date of the original bond issue occurs. Like other fixed income
securities, pre-refunded bonds are subject to interest rate, market, credit, and
reinvestment risks. However, because pre-refunded bonds are generally
collateralized with U.S. government obligations, such pre-refunded bonds have
essentially the same risks of default as a AAA-rated security. The Fund will
treat such pre-refunded securities as investment-grade securities,
notwithstanding the fact that the issuer of such securities may have a lower
rating (such as a below-investment-grade rating) from one or more rating
agencies.
Within
these principal classifications of municipal securities, there are a variety of
types of municipal securities,
including but not limited to, fixed and variable rate securities, variable rate
demand notes, municipal leases, custodial receipts, participation certificates,
inverse floating rate securities, and derivative municipal
securities.
After
purchase by a Fund, an issue of Municipal Securities may cease to be rated by
Moody's Investors Service, Inc.
(Moody's) or S&P Global Ratings (S&P), or another nationally recognized
statistical rating organization (NRSRO), or the rating of such a security may be
reduced below the minimum credit quality rating required for purchase by the
Fund. Neither event would require a Fund to dispose of the security. To the
extent that the ratings applied by Moody’s, S&P or another NRSRO to
Municipal Securities may change as a result of changes in these rating systems,
a Fund will attempt to use comparable credit quality ratings as standards for
its investments in Municipal Securities.
The
yields on Municipal Securities are dependent on a variety of factors, including
general economic and monetary
conditions, money market factors, conditions of the Municipal Securities market,
size of a particular offering, and maturity and rating of the obligation.
Because many Municipal Securities are issued to finance
31
similar
projects, especially those related to education, health care, transportation and
various utilities, conditions in those sectors and the financial condition of an
individual municipal issuer can affect the overall municipal market. The market
values of the Municipal Securities held by a Fund will be affected by changes in
the yields available on similar securities. If yields increase following the
purchase of a Municipal Security, the market value of such Municipal Security
will generally decrease. Conversely, if yields decrease, the market value of a
Municipal Security will generally increase. The ratings of S&P and Moody’s
represent their opinions of the quality of the municipal securities they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal securities
with the same maturity, coupon and rating may have different yields while
municipal securities of the same maturity and coupon with
different ratings may have the same yield.
Certain
of the municipal securities in which the Funds may invest represent relatively
recent innovations in the municipal
securities markets and the markets for such securities may be less developed
than the market for conventional fixed rate municipal securities.
Under
normal market conditions, longer-term municipal securities generally provide a
higher yield than shorter-term
municipal securities. The Funds have no limitation as to the maturity of
municipal securities in which they may invest. The Adviser may adjust the
average maturity of a Fund’s portfolio from time to time depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates.
The
net asset value of a Fund will change with changes in the value of its portfolio
securities. With fixed income municipal
securities, the net asset value of a Fund can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. The prices of longer
term municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.
Municipal
Securities, like other debt obligations, are subject to the credit risk of
nonpayment. The ability of issuers of
municipal securities to make timely payments of interest and principal may be
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such nonpayment would result in a reduction of income to a
Fund, and could result in a reduction in the value of the municipal securities
experiencing nonpayment and a potential decrease in the net asset value of the
Fund. In addition, a Fund may incur expenses to work out or restructure a
distressed or defaulted security.
The
Funds may invest in Municipal Securities with credit enhancements such as
letters of credit and municipal bond
insurance. The Funds may invest in Municipal Securities that are insured by
financial insurance companies. Since a limited number of entities provide such
insurance, a Fund may invest more than 25% of its assets in securities insured
by the same insurance company. If a Fund invests in Municipal Securities backed
by insurance companies and other financial institutions, changes in the
financial condition of these institutions could cause losses to the Fund and
affect share price. Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying Municipal Bond should default. These credit
enhancements do not guarantee payments or repayments on the Municipal Securities
and a downgrade in the credit enhancer could affect the value of the Municipal
Security.
If
the IRS determines that an issuer of a Municipal Security has not complied with
applicable tax requirements,
interest from the security could be treated as taxable, which could result in a
decline in the security’s value. In addition, there could be changes in
applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on Municipal Securities or otherwise adversely
affect the current federal or state tax status of Municipal Securities. For
example, 2017 legislation commonly known as the Tax Cuts and Jobs Act repeals
the exclusion from gross income for interest on pre-refunded municipal
securities effective for such bonds issued after December 31, 2017.
32
Taxable
municipal securities are debt securities issued by or on behalf of states and
their political subdivisions, the
District of Columbia, and possessions of the United States, the interest on
which is not exempt from federal income tax. Taxable investments include, for
example, hedging instruments, repurchase agreements, and many of the types of
securities the Fund would buy for temporary defensive purposes.
At
times, in connection with the restructuring of a municipal bond issuer either
outside of bankruptcy court in a negotiated
workout or in the context of bankruptcy proceedings, the Fund may determine or
be required to accept equity or taxable debt securities, or the underlying
collateral (which may include real estate or loans) from the issuer in exchange
for all or a portion of the Fund’s holdings in the municipal security. Although
the Adviser will attempt to sell those assets as soon as reasonably practicable
in most cases, depending upon, among other things, the Adviser’s valuation of
the potential value of such assets in relation to the price that could be
obtained by the Fund at any given time upon sale thereof, the Fund may determine
to hold such securities or assets in its portfolio for limited period of time in
order to liquidate the assets in a manner that maximizes their value to the
Fund.
Municipal
Securities also include,
but
are not limited to, the following securities:
●
Bond Anticipation
Notes usually are general obligations of state and local governmental issuers
which are sold to obtain interim financing for projects that will eventually be
funded through the sale of long-term debt obligations or bonds.
●
Revenue
Anticipation Debt Securities, including bonds, notes, and certificates, are
issued by governments or governmental bodies with the expectation that future
revenues from a designated source will be used to repay the securities. In
general, they also constitute general obligations of the issuer.
●
Tax Anticipation
Notes are issued by state and local governments to finance the current
operations of such governments. Repayment is generally to be derived from
specific future tax revenues.
●
Tax-Exempt
Commercial Paper (Municipal Paper) is similar to taxable commercial paper,
except that tax-exempt commercial paper is issued by states, municipalities and
their agencies.
●
Tax-Exempt
Mandatory Paydown Securities (TEMPS) are fixed rate term bonds carrying a
short-term maturity, usually three to four years beyond the expected redemption.
TEMPS are structured as bullet repayments, with required optional redemptions as
entrance fees are collected.
●
Zero Coupon and
Pay-in-Kind Securities do not immediately produce cash income. These securities
are issued at an original issue discount, with the full value, including accrued
interest, paid at maturity. Interest income may be reportable annually, even
though no annual payments are made. Market prices of zero coupon bonds tend to
be more volatile than bonds that pay interest regularly. Pay-in-kind securities
are securities that have interest payable by delivery of additional securities.
Upon maturity, the holder is entitled to receive the aggregate par value of the
securities. Zero coupon and pay-in-kind securities may be subject to greater
fluctuation in value and less liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer’s financial condition, fluctuation in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative. Special tax
considerations are associated with investing in certain lower-grade securities,
such as zero coupon or pay-in-kind securities.
●
Capital
Appreciation Bonds are municipal securities in which the investment return on
the initial principal payment is reinvested at a compounded rate until the bond
matures. The principal and interest are due on maturity. Thus, like zero coupon
securities, investors must wait until maturity to receive interest and
principal, which increases the interest rate and credit risks.
●
Payments in lieu of
taxes (also known as PILOTs) are voluntary payments by, for instance the U.S.
government or nonprofits, to local governments that help offset losses in or
otherwise serve as a substitute for property taxes.
33
●
Converted Auction
Rate Securities (CARS) are a structure that combines the debt service deferral
feature of Capital Appreciation Bonds (CABS) with Auction Rate Securities. The
CARS pay no debt service until a specific date, then they incrementally convert
to conventional Auction Rate Securities. At each conversion date the issuer has
the ability to call and pay down any amount of the CARS.
Some
bonds may be “callable,” allowing the issuer to redeem them before their
maturity date. To protect
bondholders, callable bonds may be issued with provisions that prevent them from
being called for a period of time. Typically, that is 5 to 10 years from the
issuance date. When interest rates decline, if the call protection on a bond has
expired, it is more likely that the issuer may call the bond. If that occurs,
the Fund might have to reinvest the proceeds of the called bond in investments
that pay a lower rate of return, which could reduce the Fund’s
yield.
Inverse
Floating Rate Interests. Inverse floating
rate interests (Inverse Floaters) are issued in connection with municipal tender
option bond (TOB) financing transactions to generate leverage for the Fund. Such
instruments are created by a special purpose trust (a TOB Trust) that holds
long-term fixed rate bonds sold to it by the Fund (the underlying security), and
issues two classes of beneficial interests: short-term floating rate interests
(Floaters), which are sold to other investors, and Inverse Floaters, which are
purchased by the Fund. The Floaters have first priority on the cash flow from
the underlying security held by the TOB Trust, have a tender option feature that
allows holders to tender the Floaters back to the TOB Trust for their par amount
and accrued interest at specified intervals and bear interest at prevailing
short-term interest rates. Tendered Floaters are remarketed for sale to other
investors for their par amount and accrued interest by a remarketing agent to
the TOB Trust and are ultimately supported by a liquidity facility provided by a
bank, upon which the TOB Trust can draw funds to pay such amount to holders of
Tendered Floaters that cannot be remarketed. The Fund, as holder of the Inverse
Floaters, is paid the residual cash flow from the underlying security.
Accordingly, the Inverse Floaters provide the Fund with leveraged exposure to
the underlying security. When short-term interest rates rise or fall, the
interest payable on the Floaters issued by a TOB Trust will, respectively, rise
or fall, leaving less or more, respectively, residual interest cash flow from
the underlying security available for payment on the Inverse Floaters. Thus, as
short-term interest rates rise, Inverse Floaters produce less income for the
Fund, and as short-term interest rates decline, Inverse Floaters produce more
income for the Fund. The price of Inverse Floaters is expected to decline when
interest rates rise and increase when interest rates decline, in either case
generally more so than the price of a bond with a similar maturity, because of
the effect of leverage. As a result, the price of Inverse Floaters is typically
more volatile than the price of bonds with similar maturities, especially if the
relevant TOB Trust is structured to provide the holder of the Inverse Floaters
relatively greater leveraged exposure to the underlying security (e.g., if the
par amount of the Floaters, as a percentage of the par amount of the underlying
security, is relatively greater). Upon the occurrence of certain adverse events
(including a credit ratings downgrade of the underlying security or a
substantial decrease in the market value of the underlying security), a TOB
Trust may be collapsed by the remarketing agent or liquidity provider and the
underlying security liquidated, and the Fund could lose the entire amount of its
investment in the Inverse Floater and may, in some cases, be contractually
required to pay the shortfall, if any, between the liquidation value of the
underlying security and the principal amount of the Floaters. Consequently, in a
rising interest rate environment, the Fund’s investments in Inverse Floaters
could negatively impact the Fund’s performance and yield, especially when those
Inverse Floaters provide the Fund with relatively greater leveraged exposure to
the underlying securities held by the relevant TOB Trusts.
Final
rules implementing section 619 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Volcker Rule)
prohibit banking entities and their affiliates from sponsoring and/or providing
certain services to TOB Trusts, which constitute “covered funds” under the
Volcker Rule. As a result of the Volcker Rule, the Fund, as holder of Inverse
Floaters, is required to perform certain duties in connection with TOB financing
transactions previously performed by banking entities. These duties may
alternatively be performed by a non-bank third-party service provider. A Fund’s
expanded role in TOB financing transactions as a result of the Volcker Rule may
increase its operational and regulatory risk.
Further,
the SEC and various banking agencies have adopted rules implementing credit risk
retention requirements for
asset-backed securities (the Risk Retention Rules), which apply to TOB financing
34
transactions
and TOB Trusts. The Risk Retention Rules require the sponsor of a TOB Trust,
which is deemed to be the Fund (as holder of the related Inverse Floaters), to
retain at least 5% of the credit risk of the underlying security held by the TOB
Trust. As applicable, the Fund has adopted policies and procedures intended to
comply with the Risk Retention Rules. The Risk Retention Rules may adversely
affect the Fund’s ability to engage in TOB financing transactions or increase
the costs of such transactions in certain circumstances.
There
can be no assurances that TOB financing transactions will continue to be a
viable or cost-effective form of leverage.
The unavailability of TOB financing transactions or an increase in the cost of
financing provided by TOB transactions may adversely affect the Fund’s net asset
value, distribution rate and ability to achieve its investment
objective.
Municipal
Lease Obligations. Municipal lease
obligations are issued by state and local governments or authorities to finance
the acquisition of land, equipment and facilities, such as state and municipal
vehicles, telecommunications and computer equipment, and other capital assets.
Municipal lease obligations, which are a type of Municipal Security, may take
the form of a lease, an installment purchase contract or a conditional sales
contract. Interest payments on qualifying municipal lease obligations are
generally exempt from federal income taxes.
Municipal
lease obligations are generally subject to greater risks than general obligation
or revenue bonds. State laws
set forth requirements that states or municipalities must meet in order to issue
municipal obligations, and such obligations may contain a covenant by the issuer
to budget for, appropriate, and make payments due under the obligation. However,
certain municipal lease obligations may contain "non-appropriation" clauses
which provide that the issuer is not obligated to make payments on the
obligation in future years unless funds have been appropriated for this purpose
each year. If not enough money is appropriated to make the lease payments, the
leased property may be repossessed as security for holders of the municipal
lease obligation. In such an event, there is no assurance that the property's
private sector or re-leasing value will be enough to make all outstanding
payments on the municipal lease obligation or that the payments will continue to
be tax-free. Additionally, it may be difficult to dispose of the underlying
capital asset in the event of non-appropriation or other default. Direct
investments by the Fund in municipal lease obligations may be deemed illiquid
and therefore subject to the Funds' percentage limitations for illiquid
investments and the risks of holding illiquid investments.
Municipal
Forward Contracts. A municipal
forward contract is an agreement by a Fund to purchase a Municipal Security on a
when-issued basis with a longer-than-standard settlement period, in some cases
with the settlement date taking place up to five years from the date of
purchase. Municipal forward contracts typically carry a substantial yield
premium to compensate the buyer for the risks associated with a long when-issued
period, including shifts in market interest rates that could materially impact
the principal value of the bond, deterioration in the credit quality of the
issuer, loss of alternative investment options during the when-issued period and
failure of the issuer to complete various steps required to issue the
bonds.
Municipal
Market Data Rate Locks. A Municipal Market
Data Rate Lock (MMD Rate Lock) permits a Fund to lock in a specified municipal
interest rate for a portion of its portfolio to preserve a return on a
particular investment or a portion of its portfolio as a duration management
technique or to protect against any increase in the price of securities to be
purchased at a later date. MMD Rate Locks may be used for hedging purposes. An
MMD Rate Lock is an agreement between two parties, a Fund and an MMD Rate Lock
provider, pursuant to which the parties agree to make payments to each other on
a notional amount, contingent upon whether the Municipal Market Data AAA General
Obligation Scale is above or below a specified level on the expiration date of
the contract.
MMD
Rate Locks involve the risk that municipal yields will move in the direction
opposite than the direction
anticipated by a Fund. The risk of loss with respect to MMD Rate Locks is
limited to the amount of payments a Fund is contractually obligated to make. If
the other party to an MMD Rate Lock defaults, a Fund's risk of loss consists of
the amount of payments that the Fund contractually is entitled to receive. If
there is a default by the counterparty, a Fund may have contractual remedies
pursuant to the agreements related to the transaction, but they could be
difficult to enforce.
35
Investment
Grade Debt Obligations. Each Fund may
invest in U.S. dollar-denominated debt obligations issued or guaranteed by U.S.
corporations and U.S. commercial banks, U.S. dollar-denominated obligations of
foreign issuers or debt obligations of foreign issuers denominated in foreign
currencies.
The
Adviser considers investment grade securities to include: (i) securities rated
BBB- or higher by S&P or Baa3 or higher
by Moody’s or an equivalent rating by another NRSRO, (ii) short-term securities
with comparable NRSRO ratings, or (iii) unrated securities determined by the
Adviser to be of comparable quality, each at the time of purchase. The Adviser
may rely to some extent on credit ratings by NRSROs in evaluating the credit
risk of securities selected for the Fund’s portfolio. Credit ratings evaluate
the expectation that scheduled interest and principal payments will be made in a
timely manner. They do not reflect any judgment of market risk. Ratings and
market value may change from time to time, positively or negatively, to reflect
new developments regarding the issuer. Rating organizations might not change
their credit rating of an issuer in a timely manner to reflect events that could
affect the issuer’s ability to make timely payments on its obligations. The
Fund’s Adviser internally assigns ratings to unrated securities, after assessing
their credit quality and other factors, in investment-grade or
below-investment-grade categories similar to those of NRSROs. There can be no
assurance, nor is it intended, that the Fund’s Adviser’s credit analysis process
is consistent or comparable with the credit analysis process used by a NRSRO.
The descriptions of debt securities ratings are found in Appendix A.
In
choosing corporate debt securities on behalf of a Fund, portfolio managers may
consider:
i.
general economic
and financial conditions;
ii.
the specific
issuer’s (a) business and management, (b) cash flow, (c) earnings coverage of
interest and dividends, (d) ability to operate under adverse economic
conditions, (e) fair market value of assets, and (f) in the case of foreign
issuers, unique political, economic or social conditions applicable to such
issuer’s country; and,
iii.
other
considerations deemed appropriate.
Debt
securities are subject to a variety of risks, such as interest rate risk, income
risk, prepayment risk, inflation risk,
credit risk, currency risk and default risk.
Non-Investment
Grade Debt Obligations (Junk Bonds). Bonds rated below
or determined to be below investment grade (as defined above in “Investment
Grade Debt Obligations”) are commonly referred to as “junk bonds.” Analysis of
the creditworthiness of junk bond issuers is more complex than that of
investment-grade issuers and the success of the Adviser in managing these
decisions is more dependent upon its own credit analysis than is the case with
investment-grade bonds. Descriptions of debt securities ratings are found in
Appendix A.
The
capacity of junk bonds to pay interest and repay principal is considered
speculative. While junk bonds may provide an
opportunity for greater income and gains, they are subject to greater risks than
higher-rated debt securities. The prices of and yields on junk bonds may
fluctuate to a greater extent than those of higher-rated debt securities. Junk
bonds are generally more sensitive to individual issuer developments, economic
conditions and regulatory changes than higher-rated bonds. Issuers of junk bonds
are often smaller, less-seasoned companies or companies that are highly
leveraged with more traditional methods of financing unavailable to them. Junk
bonds are generally at a higher risk of default because such issues are often
unsecured or otherwise subordinated to claims of the issuer’s other creditors.
If a junk bond issuer defaults, a Fund may incur additional expenses to seek
recovery. The secondary markets in which junk bonds are traded may be thin and
less liquid than the market for higher-rated debt securities and a Fund may have
difficulty selling certain junk bonds at the desired time and price. Less
liquidity in secondary trading markets could adversely affect the price at which
a Fund could sell a particular junk bond, and could cause large fluctuations in
the net asset value of that Fund’s shares. The lack of a liquid secondary market
may also make it more difficult for a Fund to obtain accurate market quotations
in valuing junk bond assets and elements of judgment may play a greater role in
the valuation.
36
Distressed
Debt Securities. Distressed debt
securities are securities that are the subject of bankruptcy proceedings or
otherwise in default or in risk of being in default as to the repayment of
principal and/or interest at the time of acquisition by a Fund or that are rated
in the lower rating categories by one or more nationally recognized statistical
rating organizations (for example, Ca or lower by Moody’s and CC or lower by
S&P or Fitch) or, if unrated, are in the judgment of the Adviser or
Sub-Adviser of equivalent quality (“Distressed Securities”). Investment in
Distressed Securities is speculative and involves significant risks. Each Fund
will generally make such investments only when the Adviser or Sub-Adviser
believes it is reasonably likely that the issuer of the Distressed Securities
will make an exchange offer or will be the subject of a plan of reorganization
pursuant to which a Fund will receive new securities in return for the
Distressed Securities. However, there can be no assurance that such an exchange
offer will be made or that such a plan of reorganization will be adopted.
Additionally, a significant period of time may pass between the time at which a
Fund makes its investment in Distressed Securities and the time that any such
exchange offer or plan of reorganization is completed, if at all. During this
period, it is unlikely that a Fund would receive any interest payments on the
Distressed Securities, a Fund will be subject to significant uncertainty as to
whether or not the exchange offer or plan of reorganization will be completed
and a Fund may be required to bear certain extraordinary expenses to protect and
recover its investment. Therefore, a Fund’s ability to achieve current income
for its shareholders may be diminished. Each Fund also will be subject to
significant uncertainty as to when and in what manner and for what value the
obligations evidenced by the distressed securities will eventually be satisfied
(e.g., through a liquidation of the obligor’s assets, an exchange offer or plan
of reorganization involving the distressed securities or a payment of some
amount in satisfaction of the obligation). Even if an exchange offer is made or
plan of reorganization is adopted with respect to Distressed Securities held by
a Fund, there can be no assurance that the securities or other assets received
by the Fund in connection with such exchange offer or plan of reorganization
will not have a lower value or income potential than may have been anticipated
when the investment was made or no value. Moreover, any securities received by a
Fund upon completion of an exchange offer or plan of reorganization may be
restricted as to resale. Similarly, if a Fund participates in negotiations with
respect to any exchange offer or plan of reorganization with respect to an
issuer of Distressed Securities, a Fund may be restricted from disposing of such
securities. To the extent that a Fund becomes involved in such proceedings, the
Fund may have a more active participation in the affairs of the issuer than that
assumed generally by an investor. Each Fund, however, will not make investments
for the purpose of exercising day-to-day management of any issuer’s
affairs.
Structured
Notes and Indexed Securities. Each Fund, except
for Invesco Government Money Market Fund and Invesco U.S. Government Money
Portfolio, may invest in structured notes or other indexed securities.
Structured notes are derivative debt instruments, the interest rate or principal
of which is linked to currencies, interest rates, commodities, indices or other
financial indicators (reference instruments). Indexed securities may include
structured notes and other securities wherein the interest rate or principal is
determined by a reference instrument.
Most
structured notes and indexed securities are fixed income securities that have
maturities of three years or less. The
interest rate or the principal amount payable at maturity of an indexed security
may vary based on changes in one or more specified reference instruments, such
as a floating interest rate compared with a fixed interest rate. The reference
instrument need not be related to the terms of the indexed security. Structured
notes and indexed securities may be positively or negatively indexed (i.e.,
their principal value or interest rates may increase or decrease if the
underlying reference instrument appreciates), and may have return
characteristics similar to direct investments in the underlying reference
instrument or to one or more options on the underlying reference
instrument.
Structured
notes and indexed securities may entail a greater degree of market risk than
other types of debt securities
because the investor bears the risk of the reference instrument. Structured
notes or indexed securities also may be more volatile, less liquid, and more
difficult to accurately price than less complex securities and instruments or
more traditional debt securities. In addition to the credit risk of the
structured note or indexed security’s issuer and the normal risks of price
changes in response to changes in interest rates, the principal amount of
structured notes or indexed securities may decrease as a result of changes in
37
the
value of the underlying reference instruments. Further, in the case of certain
structured notes or indexed securities in which the interest rate, or exchange
rate in the case of currency, is linked to a reference instrument, the rate may
be increased or decreased or the terms may provide that, under certain
circumstances, the principal amount payable on maturity may be reduced to zero
resulting in a loss to the Fund.
U.S.
Corporate Debt Obligations. Corporate debt
obligations are debt obligations issued or guaranteed by corporations that are
denominated in U.S. dollars. Such investments may include, among others,
commercial paper, bonds, notes, debentures, variable rate demand notes, master
notes, funding agreements and other short-term corporate instruments. Commercial
paper consists of short-term promissory notes issued by corporations. Commercial
paper may be traded in the secondary market after its issuance. Variable rate
demand notes are securities with a variable interest which is readjusted on
pre-established dates. Variable rate demand notes are subject to payment of
principal and accrued interest (usually within seven days) on a Fund’s demand.
Master notes are negotiated notes that permit the investment of fluctuating
amounts of money at varying rates of interest pursuant to arrangements with
issuers who meet the credit quality criteria of the Fund. The interest rate on a
master note may fluctuate based upon changes in specified interest rates or be
reset periodically according to a prescribed formula or may be a set rate.
Although there is no secondary market in master notes, if such notes have a
demand feature, the payee may demand payment of the principal amount of the note
upon relatively short notice. Funding agreements are agreements between an
insurance company and a Fund covering underlying demand notes. Although there is
no secondary market in funding agreements, if the underlying notes have a demand
feature, the payee may demand payment of the principal amount of the note upon
relatively short notice. Master notes and funding agreements are generally
illiquid and therefore subject to the Funds' percentage limitation for illiquid
investments.
Duration
and Maturity of the Fund’s Portfolio. Duration is a
measure of the expected life of a security on a current-value basis expressed in
years, using calculations that consider the security’s yield, coupon interest
payments, final maturity and call features.
While
a debt security’s maturity can be used to measure the sensitivity of the
security’s price to changes in interest rates,
the term to maturity of a security does not take into account the pattern (or
expected pattern) of the security’s payments of interest or principal prior to
maturity. Duration, on the other hand, measures the length of the time interval
from the present to the time when the interest and principal payments are
scheduled to be received (or, in the case of a mortgage-related security, when
the interest and principal payments are expected to be received). Duration
calculations weigh the present value of each such payment by the time in years
until such payment is expected to be received. If the interest payments on a
debt security occur prior to the repayment of principal, the duration of the
security is less than its stated maturity. For zero-coupon securities, duration
and term to maturity are equal. Absent other factors, the lower the stated or
coupon rate of interest on a debt security or the longer the maturity or the
lower the yield-to-maturity of the debt security, the longer the duration of the
security. Conversely, the higher the stated or coupon rate of interest, the
shorter the maturity or the higher the yield-to-maturity of a debt security, the
shorter the duration of the security.
Futures,
options and options on futures in general have durations that are closely
related to the duration of the securities
that underlie them. Holding long futures positions or call option positions
(backed by liquid assets) will tend to lengthen the portfolio’s
duration.
In
some cases the standard effective 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 exposure to interest rate
changes corresponds to the frequency of the times at which their interest coupon
rate is reset. In the case of mortgage pass-through securities, the stated final
maturity of the security is typically 30 years, but current rates of prepayments
are more important to determine the security’s interest rate exposure. In these
and other similar situations, the investment adviser will use other analytical
techniques that consider the economic life of the security as well as relevant
macroeconomic factors (such as historical prepayment rates) in determining the
Fund’s effective duration.
38
Rule
2a-7 Requirements (for Invesco Government Money Market Fund and Invesco
U.S. Government Money Portfolio).
As
permitted by Rule 2a-7 under the 1940 Act, Invesco Government Money Market Fund
and Invesco U.S. Government
Money Portfolio seek to maintain a stable price of $1.00 per share by using the
amortized cost method to value portfolio securities and rounding the share value
to the nearest cent. Rule 2a-7 imposes requirements as to the diversification of
the Funds, quality of portfolio securities, maturity of the Funds and of
individual securities and liquidity of the Funds. The discussion of
investments in this SAI is qualified by Rule 2a-7 limitations with respect
to Invesco Government Money Market Fund and Invesco U.S. Government Money
Portfolio. In July 2023, the SEC adopted amendments to the rules that
govern registered money market funds, such as the Funds. These amendments, among
other changes: (i) modify the existing liquidity fee framework for
non-government money market funds; (ii) increase required weekly liquid asset
and daily liquid asset minimums; (iii) require institutional prime and
institutional tax-exempt money market funds to impose a mandatory liquidity fee
when daily net redemptions exceed certain levels unless the amount of the fee
determined by the fund is less than 0.01% of the value of the shares redeemed,
effective October 2, 2024; and (iv) allow government money market funds and
retail money market funds to engage in certain practices in order to maintain a
stable net asset value in a negative interest rate environment. Such amendments
could impact the Funds' operations, performance, yields and operating
expenses.
As
a “Government Money Market Fund” under Rule 2a-7, Invesco Government Money
Market Fund and Invesco U.S.
Government Money Portfolio (1) are permitted to use the amortized cost method of
valuation to seek to maintain a stable $1.00 share price, (2) must invest at
least 99.5% of their total assets in cash, government securities and/or
repurchase agreements that are “collateralized fully” (i.e., backed by cash or
government securities) and (3) are not subject to discretionary liquidity fees
on fund redemptions which might apply to other types of funds. (In conformance
with Rule 2a-7, the Board has reserved its ability to change this policy with
respect to discretionary liquidity fees, but such change would only become
effective after shareholders were provided with specific advance notice of a
change in the Fund’s policy and have the opportunity to redeem their shares in
accordance with Rule 2a-7 before the policy change became effective.)
Investments in other government money market funds may be included in the 99.5%
policy described above for Invesco Government Money Market Fund and Invesco U.S.
Government Money Portfolio.
Diversification. In summary, Rule
2a-7 requires that a money market fund may not invest in the securities of any
issuer if, as a result, more than 5% of the Fund’s total assets would be
invested in that issuer; provided that, each Fund may invest up to 25% of its
total assets in securities of a single issuer for up to three business days
after acquisition. Certain securities are not subject to this diversification
requirement. These include: government securities; certain repurchase
agreements; and shares of certain money market funds. Rule 2a-7 imposes a
separate diversification test upon the acquisition of a guarantee or demand
feature. (A demand feature is, in summary, a right to sell a security at a price
equal to its approximate amortized cost plus accrued interest). Government
security generally means any security issued or guaranteed as to principal or
interest by the U.S. government or certain of its agencies or instrumentalities;
or any certificate of deposit for any of the foregoing.
For
purposes of these diversification requirements with respect to issuers of
Municipal Securities (defined under the caption
Municipal Securities), each state (including the District of Columbia and Puerto
Rico), territory and possession of the United States (U.S.), each political
subdivision, agency, instrumentality, and authority thereof, and each
multi-state agency of which a state is a member is a separate “issuer.” When the
assets and revenues of an agency, authority, instrumentality, or other political
subdivision are separate from the government creating the subdivision and the
security is backed only by assets and revenues of the subdivision, such
subdivision would be deemed to be the sole issuer. Similarly, in the case of an
industrial development bond or private activity bond, if such bond is backed
only by the assets and revenues of the non-governmental user, then such
non-governmental user would be deemed to be the sole issuer.
Quality. Invesco Government
Money Market Fund and Invesco U.S. Government Money Portfolio may invest
only in U.S. dollar denominated securities that are "Eligible Securities" at the
time of acquisition as defined in Rule 2a-7. Rule 2a-7 defines an Eligible
Security, in summary, as a security (i) with a remaining
39
maturity
of 397 calendar days or less that the Funds’ investment adviser (subject to
oversight and pursuant to guidelines established by the Board) determines
present minimal credit risk to the Fund, (ii) that is a government security, or
(iii) issued by a registered investment company that is a money market fund. The
eligibility of a security with a guarantee may be determined based on whether
the guarantee is an Eligible Security.
The
Funds will limit investments to those which are Eligible Securities as defined
by applicable regulations at the
time of purchase.
Maturity. Under Rule 2a-7,
Invesco Government Money Market and Invesco U.S. Government Money
Portfolio may invest only in securities having remaining maturities of 397
calendar days or less. The Funds maintain a dollar-weighted average
portfolio maturity of no more than 60 calendar days, and a dollar-weighted
average life to maturity as determined without exceptions regarding certain
interest rate adjustments under Rule 2a-7 of no more than 120 calendar days. The
maturity of a security is determined in compliance with Rule 2a-7, which for
purposes of the dollar-weighted average portfolio maturity permits, among other
things, certain securities bearing adjustable interest rates to be deemed to
have a maturity shorter than their stated maturity.
Liquidity. The Funds will
hold securities that are sufficiently liquid to meet reasonably foreseeable
shareholder redemptions in light of the Funds’ obligations under section 22(e)
of the 1940 Act (which forbids the suspension of the right of redemption, or
postponement of the date of payment or satisfaction upon redemption for more
than seven days after the tender of such security for redemption, subject to
specified exemptions) and any commitments the Funds have made to shareholders.
In addition, the Funds shall not acquire an illiquid security if, immediately
after the acquisition, the Fund would have invested more than 5% of its total
assets in illiquid securities. A Fund may not acquire any security other than a
Daily Liquid Asset (cash, direct obligations of the U.S. government, and other
securities that will mature or are subject to a demand feature that is
exercisable and payable within one business day and amounts receivable and
unconditionally due within one business day on pending sales of portfolio
securities) if, immediately after the acquisition, the Fund would have invested
less than 25% of its total assets in Daily Liquid Assets. The Funds shall not
acquire any security other than a Weekly Liquid Asset (cash, direct obligations
of the U.S. government, government securities issued by a person controlled or
supervised by and acting as an instrumentality of the U.S. government pursuant
to authority granted by the Congress that are issued at a discount to the
principal amount to be repaid at maturity and have a remaining maturity of 60
days or less, securities that will mature or are subject to a demand feature
that is exercisable and payable within 5 business days and amounts receivable
and unconditionally due within 5 business days on pending sales of portfolio
securities) if, immediately after the acquisition, the Fund would have invested
less than 50% of its total assets in Weekly Liquid Assets.
Cash
Positions Risk. As government
money market funds, a portion of Invesco Government Money Market Fund's assets
and Invesco U.S. Government Money Portfolio's assets will likely be held in
cash, which may negatively affect their performance. Maintaining cash positions
may also subject those funds to additional risks, such as increased counterparty
risk exposure to the custodian bank holding the assets held in
cash.
Loans,
Loan Participations and Assignments.
How
a Fund Invests in Loans. A Fund may invest in loans in one or more of three
ways: a Fund may invest directly in
a loan by acting as an original lender; a Fund may invest directly in a loan by
purchasing a loan by an assignment from an agent or other lender; or a Fund may
invest indirectly in a loan by purchasing a participation interest in a loan
from an agent or other lender. A Fund may also gain exposure to loans indirectly
using certain derivative instruments, which is discussed elsewhere in this
SAI.
●
Original
Lender. A Fund can invest in loans, generally “at par” (a price for the
loan equal approximately to 100% of a funded principal amount of the loan, minus
any original issue discount) as an original lender. When a Fund is an original
lender (including as one of a group of original lenders), it is entitled to
40
receive a return at
the full interest rate for the loan. When a Fund is an original lender, it may
participate in structuring the loan and have a direct contractual relationship
with the borrower, may enforce compliance by the borrower with the terms of the
loan agreement and may have rights with respect to any funds acquired by other
lenders through set-offs.
●
Assignments. A Fund may also
purchase a loan by assignment. When a Fund purchases a loan by assignment, it
typically succeeds to whatever rights and obligations the assigning lender had
under the loan agreement and becomes a “lender” under the loan agreement,
entitled to the same rights (including, but not limited to, enforcement or
set-off rights) that are available to lenders generally. However, because
assignments are arranged through private negotiations between potential
assignees and potential assignors, the rights and obligations acquired by a Fund
as the purchaser of an assignment may differ from, and be more limited than,
those held by the assigning lender. In addition, if the loan is foreclosed, a
Fund could be part owner of any collateral and could bear the costs and
liabilities of owning and disposing of the collateral.
●
Participation
Interests. These investments represent an undivided, indirect interest
in a loan obligation of a borrower. They are typically purchased from banks or
dealers that have made the loan or are members of the loan syndicate. The
participation seller remains as lender of record, and continues to face the
borrower, the agent, and the other parties to the loan agreement, while a Fund
generally acquires beneficial ownership of the loan. When the Fund buys a
participation interest, it assumes the credit risk of the borrower and the
counterparty risk of the lender selling the participation interest (and, in
certain circumstances, such lender’s credit risk), and the terms of the
participation may not entitle the Fund to all rights of a direct lender under
the loan (for example, with respect to consent, voting or enforcement rights).
Therefore, the Fund’s rights under a participation interest for a particular
loan may be more limited than the rights of the original lender or an investor
who acquires an assignment of that loan.
Floating
Rate Corporate Loans and Corporate Debt Securities. Floating rate
loans consist generally of obligations of companies and other entities
(collectively, borrowers) incurred for the purpose of reorganizing the assets
and liabilities of a borrower; acquiring another company; taking over control of
a company (leveraged buyout); temporary refinancing; or financing internal
growth or other general business purposes. Floating rate loans are often
obligations of borrowers who have incurred a significant percentage of debt
compared to equity issued and thus are highly leveraged.
41
Floating
rate loans may include both term loans, which are generally fully funded at the
time of a Fund’s investment, and
revolving loans, which may require a Fund to make additional investments in the
loans as required under the terms of the loan agreement. A revolving credit loan
agreement may require a Fund to increase its investment in a loan at a time when
a Fund might not otherwise have done so, even if the borrower’s condition makes
it unlikely that the loan will be repaid.
A
floating rate loan is generally offered as part of a lending syndicate to banks
and other financial institutions and is
administered in accordance with the terms of the loan agreement by an agent bank
who is responsible for collection of principal and interest and fee payments
from the borrower and apportioning those payments to all lenders who are parties
to the agreement. Typically, the agent is given broad discretion to enforce the
loan agreement and is compensated by the borrower for its services.
Floating
rate loans may be acquired by direct investment as a lender at the inception of
the loan or by assignment of a
portion of a floating rate loan previously made to a different lender or by
purchase of a participation interest. If a Fund makes a direct investment in a
loan as one of the lenders, it generally acquires the loan at par. This means a
Fund receives a return at the full interest rate for the loan. If a Fund
acquires its interest in loans in the secondary market or acquires a
participation interest, the loans may be purchased or sold above, at, or below
par, which can result in a yield that is below, equal to, or above the stated
interest rate of the loan. At times, a Fund may be able to invest in floating
rate loans only through assignments or participations.
Historically,
floating rate loans have not been registered with the SEC or any state
securities commission or listed on any
securities exchange. As a result, the amount of public information available
about a specific floating rate loan has been historically less extensive than if
the floating rate loan were registered or exchange
traded.
Floating
rate debt securities are typically in the form of notes or bonds issued in
public or private placements in the
securities markets. Floating rate debt securities will typically have
substantially similar terms to floating rate loans, but will not be in the form
of participations or assignments.
The
floating rate loans and debt securities in which a Fund invests will, in most
instances, be secured and senior to other
indebtedness of the borrower. Each floating rate loan and debt security will
generally be secured by collateral. The value of collateral may decline after a
Fund’s investment, and collateral may be difficult to sell in the event of
default. Consequently, the Fund may not receive all the payments to which it is
entitled. A Fund’s assets may be invested in unsecured floating rate loans and
debt securities or subordinated floating rate loans and debt securities, which
may or may not be secured. If the borrower defaults on an unsecured loan or
security, there is no specific collateral on which the lender can foreclose. If
the borrower defaults on a subordinated loan or security, the collateral may not
be sufficient to cover both the senior and subordinated loans and
securities.
Most
borrowers pay their debts from cash flow generated by their businesses. If a
borrower’s cash flow is insufficient to pay
its debts, it may attempt to restructure its debts rather than sell col