2024-03-05VIFDiscoveryPortfolioClassI_485B_Pro_April2024
MORGAN
STANLEY VARIABLE INSURANCE FUND, INC.
Statement
of Additional Information
April
30,
2024
Morgan
Stanley Variable Insurance Fund, Inc. (the “Company”) is a no-load, open-end
management investment company with diversified
and non-diversified portfolios
(each, a “Fund” and together the “Funds”). The Company currently consists of
8
Funds offering
a broad range of investment choices. Each Fund (with the exception of the Global
Real
Estate Portfolio)
offers Class I shares. In
addition, all Funds offer Class II shares. Shares of each Fund are offered with
no sales charge or exchange or redemption fee. Following
is a list of the Funds:
|
| |
|
Share
Class and Ticker Symbol |
|
CLASS
I |
CLASS
II |
Discovery
Portfolio |
MMGPX |
MMGTX |
Emerging
Markets Debt Portfolio |
MEMNX |
MBDBX |
Emerging
Markets Equity Portfolio |
MEMEX |
MSMBX |
Global
Infrastructure Portfolio |
MBGIX |
MPIIX |
Global
Real Estate Portfolio |
— |
MGETX |
Global
Strategist Portfolio |
MIMPX |
MGTPX |
Growth
Portfolio |
MEGIX |
MEGTX |
U.S.
Real Estate Portfolio |
MUSRX |
MSRBX |
This
Statement of Additional Information (“SAI”) dated April 30,
2024,
as may be supplemented from time to time, relates to the Company’s
Class I Prospectuses: Discovery,
Emerging Markets Debt, Emerging Markets Equity, Global Infrastructure, Global
Strategist,
Growth and U.S. Real Estate Portfolios, each dated April 30,
2024,
as may be supplemented from time to time; and Class II
Prospectuses: Discovery,
Emerging Markets Debt, Emerging Markets Equity, Global Infrastructure,
Global Real Estate, Global Strategist,
Growth and U.S. Real Estate Portfolios, each dated April 30,
2024,
as may be supplemented from time to time.
Shares
of each Fund may be purchased only by insurance companies (directly and
indirectly) for the purpose of funding variable annuity
contracts and variable life insurance policies and by certain tax qualified
investors. The variable annuity contract and variable life
insurance policyholders incur fees and expenses separate from the fees and
expenses charged by the Funds. This SAI addresses Company
information applicable to each of the 8
Funds.
The
Company was incorporated under the laws of the State of Maryland on March 26,
1996. The Company filed a registration statement
with the United States Securities and Exchange Commission (the “SEC”)
registering itself as an open-end management investment
company under the Investment Company Act of 1940, as amended (the “1940 Act”),
and its shares under the Securities Act
of 1933, as amended (the “1933 Act”).
The
Funds are managed by Morgan Stanley Investment Management Inc. (the
“Adviser”).
This
SAI is not a prospectus, but should be read in conjunction with the prospectuses
for the Funds, each dated April 30,
2024,
as may
be supplemented from time to time (each, a “Prospectus” and together the
“Prospectuses”). This SAI is incorporated by reference
into the Prospectuses in its entirety. To obtain a Prospectus, please contact
the Company or your insurance company.
Certain
Funds are “non-diversified” and, as such, such Funds’ investments are not
required to meet certain diversification requirements
under federal securities law. Compared with “diversified” funds or portfolios,
each such Fund may invest a greater
percentage
of its assets in the securities of an individual corporation or governmental
entity. Thus, the Fund’s assets may be focused in
securities of fewer issuers than other funds. A decline in the value of those
investments may cause the Fund’s overall value to decline
to a greater degree. The Emerging Markets Debt, Global Infrastructure
and U.S.
Real Estate Portfolios are non-diversified funds.
INVESTMENT
POLICIES AND STRATEGIES
This
SAI provides additional information about the investment policies and operations
of the Company and each of its Funds.
“Fund”
as used herein refers to each Fund listed on the cover page of this SAI (unless
otherwise noted).
Morgan
Stanley Investment Management Inc. (“MSIM”) is the adviser (the “Adviser”) to
the Funds.
Under
the supervision of the Adviser, Morgan Stanley Investment Management Limited
(“MSIM Limited”) and Morgan Stanley Investment
Management Company (“MSIM Company”) serve as investment sub-advisers to the
Global Real Estate Portfolio, MSIM Company
serves as investment sub-adviser to the Emerging Markets Equity Portfolio and
MSIM Limited serves as investment sub-adviser
to the Emerging Markets Debt
and Global Strategist Portfolios (MSIM Limited and MSIM Company are each
referred to individually
as the “Sub-Adviser” and collectively as the “Sub-Advisers”). References to the
Adviser, when used in connection with its activities
as investment adviser, include any Sub-Adviser acting under the Adviser’s
supervision.
The
following tables summarize the permissible investments for each Fund. These
tables should be used in conjunction with the investment
summaries for each Fund contained in the Prospectus in order to provide a
complete description of such Fund’s investment
policies.
|
|
| |
U.S.
EQUITY PORTFOLIOS: |
|
Discovery
Portfolio |
Growth
Portfolio |
U.S.
Real Estate Portfolio |
Investments: |
Agencies |
X |
X |
X |
Asset-Backed
Securities |
|
|
|
Bitcoin
Exposure |
X |
X |
|
Borrowing
for Investment Purposes |
|
|
|
Brady
Bonds |
|
|
|
Cash
Equivalents |
X |
X |
X |
China
Investments |
|
|
|
Chinese
Fixed-Income Investments |
|
|
|
Combined
Transactions |
X |
X |
|
Commercial
Paper |
X |
X |
X |
Common
Stocks |
X |
X |
X |
Contracts
for Difference |
X |
X |
|
Convertible
Securities |
X |
X |
X |
Corporates |
X |
X |
X |
Depositary
Receipts |
X |
X |
X |
Emerging
Market Securities |
X |
X |
X |
Eurodollar
and Yankee Dollar Obligations |
|
X |
|
Exchange-Traded
Funds |
X |
X |
X |
Floaters |
|
|
|
Foreign
Currency Transactions |
X |
X |
X |
Foreign
Equity Securities |
X |
X |
X |
Foreign
Fixed Income Securities |
|
|
|
Forwards |
X |
X |
|
Futures
Contracts |
X |
X |
|
High
Yield Securities |
|
|
|
Illiquid
Securities |
X |
X |
X |
Inverse
Floaters |
|
|
|
Investment
Company Securities |
X |
X |
X |
Investment
Funds |
|
X |
X |
Investment
Grade Securities |
X |
X |
X |
IPOs |
X |
X |
X |
Lease
Obligations |
|
|
|
Limited
Partnership and Limited Liability Company Interests |
X |
X |
X |
Loan-Related
Investments |
|
|
|
Loans
of Portfolio Securities |
X |
X |
X |
|
|
| |
U.S.
EQUITY PORTFOLIOS: |
|
Discovery
Portfolio |
Growth
Portfolio |
U.S.
Real Estate Portfolio |
Money
Market Instruments |
X |
X |
X |
Mortgage
Related Securities |
|
|
|
Municipals |
|
|
|
Non-Publicly
Traded Securities, Private Placements and Restricted
Securities |
X |
X |
X |
Options |
X |
X |
|
Preferred
Stocks |
X |
X |
X |
Real
Estate Investing |
X |
X |
X |
Repurchase
Agreements |
X |
X |
X |
Reverse
Repurchase Agreements |
X |
|
|
Rights |
X |
X |
X |
Short
Sales |
X |
|
|
Special
Purpose Acquisition Companies |
X |
X |
|
Structured
Investments |
X |
X |
|
Swaps |
X |
X |
|
Temporary
Borrowing |
X |
X |
X |
Temporary
Investments |
X |
X |
X |
U.S.
Treasury Securities |
X |
X |
X |
Variable
Interest Entities |
|
|
|
Warrants |
X |
X |
X |
When-Issued
and Delayed Delivery Securities |
X |
X |
X |
Zero
Coupons, Pay-In-Kind Securities or Deferred Payment
Securities |
X |
X |
X |
Additional
Risks |
X |
X |
X |
Special
Risks Related to Cyber Security |
|
|
|
Regulatory
and Legal Risk |
|
|
|
Market
and Geopolitical Risk |
|
|
|
ESG
Investment Risk |
|
|
|
|
|
|
|
| |
GLOBAL
PORTFOLIOS: |
|
Emerging
Markets Debt Portfolio |
Emerging
Markets Equity Portfolio |
Global
Infrastructure Portfolio |
Global
Real Estate Portfolio |
Global
Strategist Portfolio |
Investments: |
Agencies |
X |
X |
X |
X |
X |
Asset-Backed
Securities |
X |
|
X |
|
X |
Bitcoin
Exposure |
|
|
|
|
|
Bitcoin
Futures |
|
|
|
|
X |
Borrowing
for Investment Purposes |
X |
|
|
|
|
Brady
Fixed Income Securities |
X |
X |
X |
X |
X |
Cash
Equivalents |
X |
X |
X |
X |
X |
China
Investments |
X |
X |
|
|
X |
Chinese
Fixed-Income Investments |
X |
|
|
|
X |
Combined
Transactions |
X |
X |
|
|
X |
Commodity-Linked
Investments |
|
|
|
|
X |
Common
Stocks |
X |
X |
X |
X |
X |
Contracts
for Difference |
|
X |
|
|
X |
Convertible
Securities |
X |
X |
X |
X |
X |
Corporates |
X |
X |
X |
X |
X |
Depositary
Receipts |
X |
X |
X |
X |
X |
Emerging
Market Securities |
X |
X |
X |
X |
X |
Exchange-Listed
Equities via Stock Connect Program |
|
X |
|
|
X |
Exchange-Traded
Funds |
X |
X |
X |
X |
X |
Eurodollar
and Yankee Dollar Obligations |
X |
X |
X |
X |
X |
Floaters |
X |
|
|
X |
|
Foreign
Currency Transactions |
X |
X |
X |
X |
X |
Foreign
Equity Securities |
X |
X |
X |
X |
X |
Foreign
Fixed Income Securities |
X |
X |
X |
X |
X |
Foreign
Real Estate Companies |
X |
X |
X |
X |
X |
Forwards |
X |
X |
X |
X |
X |
Futures
Contracts |
X |
X |
|
|
X |
High
Yield Securities |
X |
X |
X |
|
X |
Illiquid
Securities |
X |
X |
X |
X |
X |
Inverse
Floaters |
X |
|
|
X |
|
Investment
Company Securities |
X |
X |
X |
X |
X |
Investment
Funds |
X |
X |
X |
X |
X |
Investment
Grade Securities |
X |
X |
X |
X |
X |
IPOs |
|
X |
X |
X |
X |
Lease
Obligations |
|
|
|
|
|
Limited
Partnership and Limited Liability Company Interests |
|
X |
X |
X |
X |
Loan-Related
Investments |
X |
X |
X |
|
|
Loans
of Portfolio Securities |
X |
X |
X |
X |
X |
Money
Market Instruments |
X |
X |
X |
X |
X |
Mortgage
Related Securities |
X |
|
X |
X |
X |
–
Mortgage-Backed Securities |
X |
|
X |
X |
X |
–
Collateralized Mortgage Obligations |
X |
|
X |
X |
X |
–
Stripped Mortgage-Backed Securities |
X |
|
X |
X |
X |
–
Commercial Mortgage-Backed Securities |
X |
|
X |
|
X |
Municipals |
X |
|
X |
|
X |
Non-Publicly
Traded Securities, Private Placements and Restricted
Securities |
X |
X |
X |
X |
X |
Options |
X |
|
|
|
X |
Preferred
Stocks |
X |
X |
X |
X |
X |
Real
Estate Investing |
X |
X |
X |
X |
X |
|
|
|
|
| |
GLOBAL
PORTFOLIOS: |
|
Emerging
Markets Debt Portfolio |
Emerging
Markets Equity Portfolio |
Global
Infrastructure Portfolio |
Global
Real Estate Portfolio |
Global
Strategist Portfolio |
—Real
Estate Investment Trusts |
|
|
X |
X |
X |
—Foreign
Real Estate Companies |
X |
X |
X |
X |
X |
—Specialized
Ownership Vehicles |
|
X |
X |
X |
X |
Repurchase
Agreements |
X |
X |
X |
X |
X |
Reverse
Repurchase Agreements |
X |
|
|
|
|
Rights |
X |
X |
X |
X |
X |
Short
Sales |
X |
|
|
X |
|
Special
Purpose Acquisition Companies |
|
|
|
|
|
Structured
Investments |
X |
X |
|
|
X |
Swaps |
X |
X |
|
|
X |
Temporary
Borrowing |
X |
X |
X |
X |
X |
Temporary
Investments |
X |
X |
X |
X |
X |
Total
Return Swaps |
X |
|
|
|
X |
U.S.
Treasury Securities |
X |
X |
X |
X |
X |
Variable
Interest Entities |
|
X |
|
|
|
Warrants |
X |
X |
X |
X |
X |
When-Issued
and Delayed Delivery Securities |
X |
X |
X |
X |
X |
Zero
Coupons, Pay-In-Kind Securities or Deferred Payment
Securities |
X |
X |
X |
X |
X |
Additional
Risks |
X |
X |
X |
X |
X |
Special
Risks Related to Cyber Security |
|
|
|
|
|
Regulatory
and Legal Risk |
|
|
|
|
|
Market
and Geopolitical Risk |
|
|
|
|
|
ESG
Investment Risk |
|
|
|
|
|
Equity
Securities.
Equity securities generally represent an ownership interest in an issuer, or may
be convertible into or represent a right
to acquire an ownership interest in an issuer. While there are many types of
equity securities, prices of all equity securities will fluctuate.
Economic, political and other events may affect the prices of broad equity
markets. For example, changes in inflation or consumer
demand may affect the prices of equity securities generally in the United
States. Similar events also may affect the prices of particular
equity securities. For example, news about the success or failure of a new
product may affect the price of a particular issuer’s
equity securities.
Common
Stocks.
Common stocks are equity securities representing an ownership interest in a
corporation, entitling the stockholder to
voting rights and receipt of dividends paid based on proportionate
ownership.
Convertible
Securities.
A convertible security is a bond, debenture, note, preferred stock, right,
warrant or other security that may be
converted into or exchanged for a prescribed amount of common stock or other
security of the same or a different issuer or into cash
within a particular period of time at a specified price or formula. A
convertible security generally entitles the holder to receive interest
paid or accrued on debt securities or the dividend paid on preferred stock until
the convertible security matures or is redeemed,
converted or exchanged. Before conversion, convertible securities generally have
characteristics similar to both debt and equity
securities. The value of convertible securities tends to decline as interest
rates rise and, because of the conversion feature, tends to
vary with fluctuations in the market value of the underlying securities.
Convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities generally rank senior to common
stock in a corporation’s capital structure but are usually subordinated to
comparable nonconvertible fixed-income securities in
such capital structure. Convertible securities generally do not participate
directly in any dividend increases or decreases of the underlying
securities although the market prices of convertible securities may be affected
by any dividend changes or other changes in the
underlying securities. Certain of the convertible securities in which
the
Fund may invest are rated below investment grade or are unrated.
The prices of such securities are likely to be more sensitive to adverse
economic changes than higher-rated securities, resulting
in increased volatility of market prices of these securities during periods of
economic uncertainty, or adverse individual corporate
developments. In addition, during an economic downturn or substantial period of
rising interest rates, lower rated issuers may
experience financial stress.
Depositary
Receipts.
Depositary receipts represent an ownership interest in securities of foreign
companies (an “underlying issuer”) that
are deposited with a depositary. Depositary receipts are not necessarily
denominated in the same currency as the underlying securities.
Depositary receipts include American depositary receipts (“ADRs”), global
depositary receipts (“GDRs”) and other types of depositary
receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as “Depositary Receipts”). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution and evidence an ownership interest in a security
or pool of securities issued by a foreign issuer. ADRs are listed and traded in
the United States. ADRs also include American depositary
shares. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either
a foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market
and Depositary Receipts in bearer form are designed for use in securities
markets outside the United States.
Depositary
Receipts may be “sponsored” or “unsponsored.” Sponsored Depositary Receipts are
established jointly by a depositary and the
underlying issuer, whereas unsponsored Depositary Receipts may be established by
a depositary without participation by the underlying
issuer. Holders of unsponsored Depositary Receipts generally bear all the costs
associated with establishing unsponsored Depositary
Receipts. In addition, the issuers of the securities underlying unsponsored
Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there
may not be a correlation between such information and the market value of the
Depositary Receipts. For purposes of the
Fund’s
investment policies, the
Fund’s investments in Depositary Receipts will be deemed to be an investment in
the underlying securities,
except that ADRs may be deemed to be issued by a U.S. issuer.
Illiquid
Investments.
In accordance with Rule 22e-4 (the “Liquidity Rule”) under the 1940 Act,
the
Fund may invest up to 15% of its
net assets in “illiquid investments” that are assets. For these purposes,
“illiquid investments” are investments that the Fund
reasonably
expects cannot be sold or disposed of in current market conditions in seven
calendar days or less without the sale or disposition
significantly changing the market value of the investment. For the
Fund, each portfolio investment must be classified at least
monthly into one of four liquidity categories (illiquid, as discussed above, as
well as highly liquid, moderately liquid and less liquid),
which are defined pursuant to the Liquidity Rule and classified in accordance
with the Fund’s written
liquidity risk management
program by the program administrator designated by the Company’s Board of
Directors. Such classification is to be made
using information obtained after reasonable inquiry and taking into account
relevant market, trading and investment-specific considerations.
In making such classifications, the
Fund determines whether trading varying portions of a position in a particular
portfolio
investment or asset class, in sizes that the Fund would reasonably anticipate
trading, is reasonably expected to significantly affect
its liquidity. If so, this determination is taken into account when classifying
the liquidity of that investment. The Fund
may be assisted
in classification determinations by one or more third-party service providers.
Assets classified according to this process as “illiquid
investments” are those subject to the 15% limit on illiquid
investments.
In
the event that changes in the portfolio or other external events cause
the
Fund to exceed this limit, the Fund must take steps to bring
its illiquid investments that are assets to or below the applicable limit of its
net assets within a reasonable period of time. This requirement
would not force the
Fund to liquidate any portfolio investment.
The
SEC has recently proposed amendments to the Liquidity Rule that, if adopted,
would result in changes to the Fund’s liquidity classification
framework and could potentially increase the percentage of the Fund’s
investments classified as illiquid. In addition, the Fund’s
operations and investment strategies may be adversely impacted if the proposed
amendments are adopted.
Investment
Company Securities. Investment
company securities are equity securities and include securities of other
open-end, closed-end
and unregistered investment companies, including foreign investment companies,
hedge funds and ETFs. The Fund
may
invest
in investment company securities as may be permitted by (i) the 1940 Act; (ii)
the rules and regulations promulgated by the SEC
under the 1940 Act; or (iii) an exemption or other relief applicable to the Fund
from provisions of the 1940 Act. The 1940 Act generally
prohibits an investment company from acquiring more than 3% of the outstanding
voting shares of an investment company
and limits such investments to no more than 5% of the
Fund’s total assets in any one investment company and no more than
10% in any combination of investment companies. The 1940 Act also
prohibits the
Fund from acquiring in the aggregate more than
10% of the outstanding voting shares of any registered closed-end investment
company. The
Fund may invest in investment company
securities of investment companies managed by the Adviser or its affiliates to
the extent permitted under the 1940 Act or as otherwise
authorized by the SEC. To the extent the
Fund invests a portion of its assets in investment company securities, those
assets will
be subject to the risks of the purchased investment company’s portfolio
securities, and a shareholder in the Fund will bear not only
their proportionate share of the expenses of the Fund, but also, indirectly the
expenses of the purchased investment company.
Money
Market Funds. To
the extent permitted by applicable law,
the
Fund may invest all or some of its short term cash investments in
any money market fund advised or managed by the Adviser or its affiliates. In
connection with any such investments, the
Fund, to the
extent permitted by the 1940 Act, will pay its share of all expenses (other than
advisory and administrative fees) of a money market
fund in which it invests, which may result in the Fund bearing some additional
expenses.
The rules governing money market funds:
(1) permit certain
money market funds to impose a “liquidity fee” (up to 2%)
if the board of trustees (or its designee) determines
it is in the best interests of the fund,
and (2) require “institutional money market funds” to operate with a floating
net
asset
value per share (“NAV”)
rounded to a minimum of the fourth decimal place in the case of a fund with a
$1.0000 share price or an
equivalent or more precise level of accuracy for money market funds with a
different share price (e.g., $10.000 per share, or $100.00
per share). The
Fund may invest in money market funds that seek to maintain a stable $1.00 NAV
per share or that have a share
price that fluctuates. Although a stable share price money market fund seeks to
maintain a stable $1.00 NAV per share, it is possible
to lose money by investing in such a money market fund. With respect to a
floating share price money market fund, because the
share price will fluctuate, when the Fund sells its shares in such a fund, the
shares may be worth more or less than what the Fund originally
paid for them. The rules governing money market funds, and amendments to such
rules, may
affect the investment strategies,
performance and operating expenses of money market funds. “Government money
market funds,” as defined under Rule 2a-7
of the 1940 Act, are exempt from these requirements, though such funds may
choose to opt-in to the implementation of liquidity
fees and redemption gates.
Exchange-Traded
Funds.
Certain
Funds may invest in ETFs. Investments in ETFs are subject to a variety of risks,
including risks of a direct
investment in the underlying securities that the ETF holds. For example, the
general level of stock prices may decline, thereby adversely
affecting the value of the underlying investments of the ETF and, consequently,
the value of the ETF. In addition, the market
value of the ETF shares may differ from their NAV because the supply and demand
in the market for ETF shares at any point is
not always identical to the supply and demand in the market for the underlying
securities. Also, ETFs that track particular indices typically
will be unable to match the performance of the index exactly due to, among other
things, the ETF’s operating expenses and transaction
costs. ETFs typically incur fees that are separate from those fees incurred
directly by the Fund.
Therefore, as a shareholder in
an ETF (as with other investment companies), the
Fund would bear its ratable share of that entity’s expenses. At the same time,
the
Fund would continue to pay its own investment management fees and other
expenses. As a result, the
Fund and its shareholders, in
effect, will be absorbing duplicate levels of fees with respect to investments
in ETFs. Further,
certain of the ETFs in which a
Fund may
invest are leveraged. Leveraged ETFs seek to deliver multiples of the
performance of the index or other benchmark they track and
use derivatives in an effort to amplify the returns of the underlying index or
benchmark. While leveraged ETFs may offer the potential
for greater return, the potential for loss and the speed at which losses can be
realized also are greater. Most leveraged ETFs “reset”
daily, meaning they are designed to achieve their stated objectives on a daily
basis. Leveraged ETFs can deviate substantially from
the performance of their underlying benchmark over longer periods of time,
particularly in volatile periods. The more a
Fund invests
in such leveraged ETFs, the more this leverage will magnify any losses on those
investments.
Furthermore, disruptions in the markets
for the securities underlying ETFs purchased or sold by the Fund could result in
losses on the Fund’s investment in ETFs.
IPOs. Certain
Funds may purchase equity securities issued as part of, or a short period
after, a company’s initial public offering (“IPO”),
and may at times dispose of those securities shortly after their
acquisition. The Fund’s
purchase of securities issued in IPOs exposes
it to the risks associated with companies that have little operating history as
public companies, as well as to the risks inherent
in
those sectors of the market where these issuers operate. The market for IPO
issuers has been volatile, and share prices of newly-public
companies have fluctuated significantly over short periods of time.
Limited
Partnership and Limited Liability Company Interests.
A limited partnership interest entitles the
Fund to participate in the
investment return of the partnership’s assets as defined by the agreement among
the partners. As a limited partner, the
Fund generally
is not permitted to participate in the management of the partnership. However,
unlike a general partner whose liability is not
limited, a limited partner’s liability generally is limited to the amount of its
commitment to the partnership. The
Fund may invest
in limited liability company interests to the same extent it invests in limited
partnership interests. Limited liability company interests
have similar characteristics as limited partnership interests.
Certain
Funds may invest in master limited partnerships (“MLPs”), which are generally
organized under state law as limited partnerships
or limited liability companies and generally treated as partnerships for U.S.
federal income tax purposes. The securities issued
by many MLPs are listed and traded on a securities exchange. If publicly traded,
to be treated as a partnership for U.S. federal income
tax purposes, the entity must receive at least 90% of its income from qualifying
sources as set forth in the Internal Revenue Code
of 1986, as amended (the “Code”). These qualifying sources include interest,
dividends, real estate rents, gain from the sale or disposition
of real property, income and gain from mineral or natural resources activities,
income and gain from the transportation or storage
of certain fuels, gain from the sale or disposition of a capital asset held for
the production of income described in the foregoing,
and, in certain circumstances, income and gain from commodities or futures,
forwards and options with respect to commodities.
Preferred
Stocks.
Preferred stocks are securities that evidence ownership in a corporation and pay
a fixed or variable stream of dividends.
Preferred stocks have a preference over common stocks in the event of the
liquidation of an issuer and usually do not carry voting
rights. Preferred stocks have many of the characteristics of both equity
securities and fixed-income securities.
Real
Estate Investing.
Investments in securities of issuers engaged in the real estate industry entail
special risks and considerations. In particular,
securities of such issuers may be subject to risks associated with the direct
ownership of real estate. These risks include the cyclical
nature of real estate values, risks related to general and local economic
conditions, overbuilding and increased competition, increases
in property taxes and operating expenses, demographic trends and variations in
rental income, changes in zoning laws, casualty
or condemnation losses, environmental risks, regulatory limitations on rents,
changes in neighborhood values, changes in the appeal
of properties to tenants, increases in interest rates and other real estate
capital market influences. Generally, increases in interest
rates will increase the costs of obtaining financing, which could directly and
indirectly decrease the value of the
Fund’s investments.
Real
Estate Investment Trusts and Foreign Real Estate Companies.
Certain
Funds may invest in real estate investment trusts (“REITs”) and/or
foreign real estate companies, which are similar to entities organized and
operated as REITs in the United States. REITs and foreign
real estate companies pool investors’ funds for investment primarily in real
estate properties or real estate-related loans. REITs and
foreign real estate companies generally derive their income from rents on the
underlying properties or interest on the underlying loans,
and their value is impacted by changes in the value of the underlying property
or changes in interest rates affecting the underlying
loans owned by the REITs and/or foreign real estate companies. REITs and foreign
real estate companies are more susceptible
to risks associated with the ownership of real estate and the real estate
industry in general. These risks can include fluctuations
in the value of underlying properties; defaults by borrowers or tenants; market
saturation; changes in general and local economic
conditions; decreases in market rates for rents; increases in competition,
property taxes, capital expenditures or operating expenses;
and other economic, political or regulatory occurrences affecting the real
estate industry. In addition, REITs and foreign real
estate companies depend upon specialized management skills, may not be
diversified (which may increase the volatility of a REIT’s
and/or foreign real estate company’s value), may have less trading
volume,
may be subject to more abrupt or erratic price movements
than the overall securities market,
are dependent on heavy cash flows, subject to risks associated with default by
borrowers
or self-liquidation, and the possibility of failing to maintain their exemptions
from the 1940 Act.
Foreign real estate companies
may be subject to laws, rules and regulations governing those entities and their
failure to comply with those laws, rules and regulations
could negatively impact the performance of those entities. Operating REITs and
foreign real estate companies requires specialized
management skills and the
Fund indirectly bears REIT and foreign real estate company management expenses
along with the
direct expenses of the Fund. REITs are generally not taxed on income distributed
to shareholders provided they comply with several
requirements of the Code. REITs are subject to the risk of failing to qualify
for tax-free pass-through income under the Code.
Specialized
Ownership Vehicles.
Specialized ownership vehicles pool investors’ funds for investment primarily in
income-producing real
estate or real estate-related loans or interests. Such specialized ownership
vehicles in which the Fund may
invest include property unit
trusts, foreign real estate companies, REITs and other similar specialized
investment vehicles. Investments in such specialized ownership
vehicles may have favorable or unfavorable legal, regulatory or tax implications
for the
Fund and, to the extent such vehicles
are structured similarly to investment funds, a shareholder in the Fund will
bear not only their proportionate share of the expenses
of the Fund, but also, indirectly the expenses of the specialized ownership
vehicle.
Rights.
Rights represent the right, but not the obligation, for a fixed period of time
to purchase additional shares of an issuer’s common
stock at the time of a new issuance, usually at a price below the initial
offering price of the common stock and before the common
stock is offered to the general public. Rights are usually freely transferable.
The risk of investing in a right is that the right may
expire prior to the market value of the common stock exceeding the price fixed
by the right.
Sector
Risk. The
Fund may, from time to time, invest more heavily in companies in a particular
economic sector or sectors. Economic
or regulatory changes adversely affecting such sectors may have more of an
impact on the
Fund’s performance than if the Fund
held a broader range of investments.
Warrants.
Warrants give holders the right, but not the obligation, to buy common stock of
an issuer at a given price, usually higher than
the market price at the time of issuance, during a specified period. Warrants
are usually freely transferable. The risk of investing in
a warrant is that the warrant may expire prior to the market value of the common
stock exceeding the price fixed by the warrant.
Fixed-Income
Securities.
Fixed-income securities generally represent an issuer’s obligation to repay to
the investor (or lender) the amount
borrowed plus interest over a specified time period. A typical fixed-income
security specifies a fixed date when the amount borrowed
(principal) is due in full, known as the maturity date, and specifies dates when
periodic interest (coupon) payments will be made
over the life of the security.
Fixed-income
securities come in many varieties and may differ in the way that interest is
calculated, the amount and frequency of payments,
the type of collateral, if any, and the presence of special features (e.g.,
conversion rights). Prices of fixed-income securities fluctuate
and, in particular, are subject to several key risks including, but not limited
to, interest rate risk, credit risk, prepayment risk and
spread risk.
Interest
rate risk arises due to general changes in the level of market rates after the
purchase of a fixed-income security. Generally, the values
of fixed-income securities vary inversely with changes in interest rates. During
periods of falling interest rates, the values of most
outstanding fixed-income securities generally rise and during periods of rising
interest rates, the values of most fixed-income securities
generally decline. The Fund
may face a heightened level of interest rate risk in times of monetary
policy change and/or uncertainty,
such as when the Federal Reserve Board adjusts a quantitative easing program
and/or changes rates. A changing interest rate
environment increases certain risks, including the potential for periods of
volatility, increased redemptions, shortened durations (i.e.,
prepayment risk) and extended durations (i.e., extension risk). The
Funds are
not limited as to the maturities (when a debt security
provides its final payment) or duration (measure of interest rate sensitivity)
of the securities in which it may invest. While fixed-income
securities with longer final maturities often have higher yields than those with
shorter maturities, they usually possess greater
price sensitivity to changes in interest rates and other factors. Traditionally,
the remaining term to maturity has been used as a barometer
of a fixed-income security’s sensitivity to interest rate changes. This measure,
however, considers only the time until the final
principal payment and takes no account of the pattern or amount of principal or
interest payments prior to maturity. Duration combines
consideration of yield, coupon, interest and principal payments, final maturity
and call (prepayment) features. Duration measures
the likely percentage change in a fixed-income security’s price for a small
parallel shift in the general level of interest rates; it is
also an estimate of the weighted average life of the remaining cash flows of a
fixed-income security. In almost all cases, the duration of
a fixed-income security is shorter than its term to maturity.
Credit
risk represents the possibility that an issuer may be unable to meet scheduled
interest and principal payment obligations. It is most
often associated with corporate bonds, although it can be present in other
fixed-income securities as well.
Credit ratings and quantitative
models attempt to measure the degree of credit risk in fixed-income securities,
and provide insight as to whether prevailing
yield spreads afford sufficient compensation for such risk. Other things being
equal, fixed-income securities with high degrees
of credit risk should trade in the market at lower prices (and higher yields)
than fixed-income securities with low degrees of credit
risk.
Prepayment
risk, also known as call risk, arises due to the issuer’s ability to prepay all
or most of the fixed-income security prior to the stated
final maturity date. Prepayments generally rise in response to a decline in
interest rates as debtors take advantage of the opportunity
to refinance their obligations. This risk is often associated with mortgage
securities where the underlying mortgage loans can
be refinanced, although it can also be present in corporate or other types of
bonds with call provisions. When a prepayment occurs, the
Fund may be forced to reinvest in lower yielding fixed-income securities.
Quantitative models are designed to help assess the
degree of prepayment risk, and provide insight as to whether prevailing yield
spreads afford sufficient compensation for such risk.
Spread
risk is the potential for the value of the
Fund’s assets to fall due to the widening of spreads. Fixed-income securities
generally compensate
for greater credit risk by paying interest at a higher rate. The difference (or
“spread”) between the yield of a security and the
yield of a benchmark, such as a U.S. Treasury security with a comparable
maturity, measures the additional interest paid for credit
risk. As the spread on a security widens (or increases), the price (or value) of
the security falls. Spread widening may occur, among
other reasons, as a result of market concerns over the stability of the market,
excess supply, general credit concerns in other markets,
security- or market-specific credit concerns or general reductions in risk
tolerance.
While
assets in fixed-income markets have grown rapidly in recent years, the capacity
for traditional dealer counterparties to engage in
fixed-income trading has not kept pace and in some cases has decreased. For
example, primary dealer inventories of corporate bonds,
which provide a core indication of the ability of financial intermediaries to
“make markets,” are at or near historic lows in relation
to market size. This reduction in market-making capacity may be a persistent
change, to the extent it is resulting from broader
structural changes, such as fewer proprietary trading desks at broker-dealers
and increased regulatory capital requirements. Because
market makers provide stability to a market through their intermediary services,
the significant reduction in dealer inventories
could potentially lead to decreased liquidity and increased volatility in the
fixed-income markets. Such issues may be exacerbated
during periods of economic uncertainty.
Economic,
political and other events also may affect the prices of broad fixed-income
markets, although the risks associated with such events
are transmitted to the market via changes in the prevailing levels of interest
rates, credit risk, prepayment risk or spread risk.
From
time to time, uncertainty regarding the status of negotiations in the U.S.
government to increase the statutory debt ceiling could
impact the creditworthiness of the United States and could impact the liquidity
of the U.S. Government securities markets and ultimately
the Fund.
Certain
of the Fund’s
investments are subject to inflation risk, which is the risk that the value of
assets or income from investments will
be less in the future as inflation decreases the value of money (i.e., as
inflation increases, the values of the Fund’s assets can decline).
Inflation rates may change frequently and significantly as a result of various
factors, including unexpected shifts in the domestic
or global economy and changes in economic policies, and the
Fund’s investments may not keep pace with inflation, which may
result in losses to Fund shareholders. This risk is greater for fixed-income
instruments with longer maturities.
Agencies.
Agencies refer to fixed-income securities issued or guaranteed by federal
agencies and U.S. government sponsored instrumentalities.
They may or may not be backed by the full faith and credit of the United States.
If they are not backed by the full faith
and credit of the United States, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the obligation
for ultimate repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality
does not meet its commitment. Agencies that are backed by the full faith and
credit of the United States include the Export-Import
Bank, Farmers Home Administration, Federal Financing Bank and others. Certain
debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is backed
by U.S. Treasury zero coupon issues, while the U.S. Treasury is explicitly
required to advance funds sufficient to pay interest on
it, if needed. Certain agencies and instrumentalities, such as Government
National Mortgage Association (“Ginnie Mae”), are, in effect,
backed by the full faith and credit of the United States through provisions in
their charters that they may make “indefinite and unlimited”
drawings on the Treasury if needed to service their debt. Debt from certain
other agencies and instrumentalities, including
the Federal Home Loan Banks, the Federal National Mortgage Association (“Fannie
Mae”) and Federal
Home Loan Mortgage
Corporation (“Freddie Mac”), are not guaranteed by the United States, but those
institutions are protected by the discretionary
authority of the U.S. Treasury to purchase certain amounts of their securities
to assist them in meeting their debt obligations.
Finally, other agencies and instrumentalities, such as the Farm Credit System,
are federally chartered institutions under U.S.
Government supervision, but their debt securities are backed only by the
creditworthiness of those institutions, not the U.S. Government.
Some of the U.S. government agencies that issue or guarantee securities include
the Export-Import Bank of the United States,
Farmers Home Administration, Federal Housing Administration, Maritime
Administration, Small Business Administration and
the Tennessee Valley Authority (“TVA”).
An
instrumentality of the U.S. Government is a government agency organized under
federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Bank, Central
Bank for Cooperatives, Federal Intermediate Credit Banks and Fannie
Mae.
Asset-Backed
Securities. Certain
Funds may invest in asset-backed securities. Asset-backed securities utilize the
securitization techniques
used to develop MBS. These techniques are also applied to a broad range of other
assets. Various types of assets, primarily automobile
and credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through
structures. These types of securities are known as asset-backed
securities. The
Fund may invest in any type of asset-backed
security. Asset-backed securities have risk characteristics similar to MBS. Like
MBS, they generally decrease in value as a result of
interest rate increases, but may benefit less than other fixed-income securities
from declining interest rates, principally because of prepayments.
Also, as in the case of MBS, prepayments generally increase during a period of
declining interest rates although other factors,
such as changes in credit use and payment patterns, may also influence
prepayment rates. Asset-backed securities also involve the
risk that various federal and state consumer laws and other legal, regulatory
and economic factors may result in the collateral backing
the securities being insufficient to support payment on the
securities.
Cash
Equivalents.
Cash equivalents are short-term fixed-income securities comprising:
■ |
Time
deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers’ acceptances issued by
a commercial bank or savings and loan association. Time deposits are
non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Certificates of
deposit are negotiable short-term obligations issued
by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate
|
|
certificates
of deposit are certificates of deposit on which the interest rate is
periodically adjusted prior to their stated maturity based
upon a specified market rate. A bankers’ acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection
with an international commercial transaction (to finance the import,
export, transfer or storage of goods); |
■ |
Obligations
of U.S. banks, foreign branches of U.S. banks (Eurodollars) and U.S.
branches of foreign banks (Yankee dollars). Eurodollar
and Yankee dollar investments will involve some of the same risks of
investing in international securities that are discussed
in various foreign investing sections of this
SAI; |
■ |
Any
security issued by a commercial bank if (i) the bank has total assets of
at least $1 billion, or the equivalent in other currencies
or, in the case of domestic banks which do not have total assets of at
least $1 billion, the aggregate investment made in
any one such bank is limited to $250,000 principal amount per certificate
and the principal amount of such investment is insured
in full by the Federal Deposit Insurance Corporation (“FDIC”), (ii) in the
case of U.S. banks, it is a member of the FDIC
and (iii) in the case of foreign branches of U.S. banks, the security is
deemed by the Adviser to be of an investment quality
comparable with other debt securities which the Fund may
purchase; |
■ |
Commercial
paper rated at time of purchase by one or more nationally recognized
statistical rating organizations (“NRSROs”) in
one of their two highest categories (e.g., A-l or A-2 by S&P Global
Ratings Group, a division of S&P Global, Inc. (“S&P”),
Prime
1 or Prime 2 by Moody’s Investors Service, Inc. (“Moody’s”) or F1 or
F2 by Fitch Ratings, Inc. (“Fitch”)) or, if unrated, determined
to be of comparable quality by the
Adviser; |
■ |
Short-term
corporate obligations rated high-grade at the time of purchase by an NRSRO
(e.g., A or better by Moody’s, S&P or Fitch); |
■ |
U.S.
government obligations, including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in interest rates,
maturities and dates of issue; |
■ |
Government
agency securities issued or guaranteed by U.S. government sponsored
instrumentalities and Federal agencies. These include
securities issued by the Federal Home Loan Banks, Federal Land Bank,
Farmers Home Administration, Farm Credit Banks,
Federal Intermediate Credit Bank, Fannie Mae, Federal Financing Bank,
TVA
and others; and |
■ |
Repurchase
agreements collateralized by the securities listed
above. |
China
Investments.
Investments in securities of Chinese issuers, including A-shares, involve risks
and special considerations not typically
associated with investments in the U.S. securities markets. These risks include,
among others, (i) more frequent (and potentially
widespread) trading suspensions and government interventions with respect to
Chinese issuers, including
the risk that the U.S.
government or other governments may sanction Chinese issuers or otherwise
prohibit U.S. persons (such as the Fund) from investing
in certain Chinese issuers, resulting
in lack of liquidity and in price volatility, (ii) currency revaluations and
other currency exchange
rate fluctuations or blockage, (iii) the nature and extent of intervention by
the Chinese government in the Chinese securities
markets (including both direct and indirect market stabilization efforts, which
may affect valuations of Chinese issuers), whether
such intervention will continue and the impact of such intervention or its
discontinuation, (iv) the risk of nationalization or expropriation
of assets, (v) the risk that the Chinese government may decide not to continue
to support economic reform programs, (vi)
limitations on the use of brokers (or action by the Chinese government that
discourages brokers from serving international clients),
(vii) higher rates of inflation, (viii) greater political, economic and social
uncertainty, (ix) market volatility caused by any potential
regional or territorial conflicts (such
as military, diplomatic, or trade conflicts) or
natural disasters, (x) the risk of increased trade
tariffs, embargoes, sanctions and other trade limitations, (xi) custody risks
associated with investing via the Stock Connect program,
(xii) both interim and permanent market regulations which may affect the ability
of certain stockholders to sell Chinese securities
when it would otherwise be advisable,
(xiii) foreign ownership limits of any listed Chinese company
(xiv) different regulatory
and audit requirements related to the quality of financial statements of Chinese
issuers, (xv) limitations on the ability to inspect
the quality of audits performed in China, particularly the Public Company
Accounting Oversight Board’s (“PCAOB’s”) lack of
access to inspect PCAOB-registered accounting firms in China, (xvi) limitations
on the ability of U.S. authorities to enforce actions
against non-U.S. companies and non-U.S. persons, and (xvii) limitations on the
rights and remedies of investors as a matter of
law.
The
economy of China differs
from the U.S. economy in such respects as structure, general development,
government involvement, wealth
distribution, rate of inflation, growth rate, interest rates, allocation of
resources and capital reinvestment, among others. These
differences
may have an unfavorable impact on the Fund’s investments. The
Chinese central government has historically exercised substantial
control over virtually every sector of the Chinese economy through
administrative regulation and/or state ownership and actions
of the Chinese central and local government authorities continue to have a
substantial effect on economic conditions in China.
In addition, the Chinese government has from time to time taken actions that
influence the prices at which certain goods may be
sold, encourage companies to invest or concentrate in particular industries,
induce mergers between companies in certain industries
and induce private companies to publicly offer their securities to increase or
continue the rate of economic growth, control the
rate of inflation or otherwise regulate economic expansion. It may do so in the
future as well, potentially having a significant adverse
effect on economic conditions in China.
These and other developments, including government actions, may result in
significant
liquidity risk or forced disposition for Chinese investments.
The
Chinese securities markets are emerging markets characterized by a
relatively small number of equity issues and relatively low trading
volume, resulting in decreased liquidity, greater
price volatility,
and potentially fewer investment opportunities for the Fund.
Liquidity
risks may be more pronounced for the A-share market than for Chinese securities
markets generally because the A-share market
is subject to greater government restrictions and control. The A-share market is
volatile with a risk of suspension of trading in a
particular security or government intervention. Securities on the A-share market
may be suspended from trading without an indication
of how long the suspension will last, which may impair the liquidity of such
securities. Price fluctuations of A-shares are limited
per trading day. In addition, there is less regulation and monitoring of Chinese
securities markets and the activities of investors,
brokers and other participants than in the United States. Accounting, auditing
and financial reporting standards in China are
different from U.S. standards and, therefore, disclosure of certain material
information may not be made. In addition, less information
may be available to the Fund and other investors than would be the case if the
Fund’s investments were restricted to securities
of U.S. issuers. There is also generally less governmental regulation of the
securities industry in China, and less enforcement of
regulatory provisions relating thereto, than in the United States. Moreover, it
may be more difficult to obtain a judgment in a court
outside the United States.
The
Chinese government strictly regulates the payment of foreign currency
denominated obligations and sets monetary policy. In addition,
the Chinese economy is export-driven and highly reliant on trade. Adverse
changes to the economic conditions of its primary
trading partners, such as the United States, Japan and South Korea, would
adversely impact the Chinese economy and the Fund’s
investments. International trade tensions involving China and its trading
counterparties may arise from time to time which can
result in trade tariffs, embargoes, trade limitations, trade wars and other
negative consequences. Such actions and consequences may
ultimately result in a significant reduction in international trade, an
oversupply of certain manufactured goods, devaluations of existing
inventories and potentially the failure of individual companies and/or large
segments of China’s export industry with a potentially
severe negative impact to the Fund. Moreover, a slowdown in other significant
economies of the world, such as the United
States, the European Union and certain Asian countries, may adversely affect
economic growth in China. An economic downturn
in China would adversely impact the Fund’s investments. In addition, certain
securities are, or may in the future become restricted,
and the Fund may be forced to sell such restricted securities and incur a loss
as a result.
China’s
growing trade surplus with the United States has increased the risk of trade
disputes. For example, recent developments in relations
between the United States and China have heightened concerns of increased
tariffs and restrictions on trade between the two
countries. An increase in tariffs or trade restrictions, or even the threat of
such developments, could lead to a significant reduction
in international trade, which could have a negative impact on China’s, or other
countries’, export industry and a negative impact
on the Fund. In addition, as China’s economic and political strength has grown
in recent years, it has shown a greater willingness
to assert itself militarily in the region. Military or diplomatic moves to
resolve any issues could adversely affect the economies
in the region and, thus, the Fund’s investments.
Emerging
markets such as China can experience high rates of inflation, deflation and
currency devaluation. The value of the renminbi
(“RMB”) may be subject to a high degree of fluctuation due to, among other
things, changes in interest rates, the effects of monetary
policies issued by China, the United States, foreign governments, central banks
or supranational entities, the imposition of currency
controls or other national or global political or economic
developments.
Events
in any one country within Asia may impact other countries in the region as a
whole. For example, the actual or potential escalation
of hostility between China and Taiwan would likely have a significant adverse
impact on the value or liquidity of investments
in China. Investments
in China and Hong Kong involve risk of a total loss due to government action or
inaction. China has
committed by treaty to preserve Hong Kong’s autonomy and its economic, political
and social freedoms for 50 years from the July
1, 1997 transfer of sovereignty from Great Britain to China. However, as of July
2020, the Chinese Standing Committee of the National
People’s Congress enacted the law of the PRC on Safeguarding National Security
in the Hong Kong Special Administrative Region.
As of the same month, Hong Kong is no longer afforded preferential economic
treatment by the United States under U.S. law,
and there is uncertainty as to how the economy of Hong Kong will be affected.
Ongoing
political tension between the People’s Republic
of China and the Hong Kong Special Administrative Region will have impacts on
the economy of Hong Kong, and these impacts
remain uncertain. If
China would exert its authority so as to alter the economic, political or legal
structures or the existing social
policy of Hong Kong, investor and business confidence in Hong Kong could be
negatively affected, which in turn could negatively
affect markets and business performance. In addition, the Hong Kong dollar
trades within a fixed trading band rate to (or is
“pegged” to) the USD. This fixed exchange rate has contributed to the growth and
stability of the Hong Kong economy. However, some
market participants have questioned the continued viability of the currency peg.
It is uncertain what affect any discontinuance of
the currency peg and the establishment of an alternative exchange rate system
would have on capital markets generally and the Hong
Kong economy.
China’s
legal system is substantially different from the legal system in the United
States and may raise risks and uncertainties concerning
the intent, effect, and enforcement of its laws, rules, and regulations,
including those that restrict the inflow and outflow of
foreign capital or provide the Chinese government with significant authority to
exert influence on a China-based issuer’s ability to conduct
business or raise capital. This lack of certainty may result in the inconsistent
and unpredictable interpretation and enforcement
of laws, rules, and regulations, which may change quickly. For example,
China-based issuers face risks related to evolving
laws and regulations, which could impede their ability to obtain or maintain
permits or licenses required to conduct business
in
China. In the absence of required permits or licenses, governmental authorities
may impose material sanctions or penalties on the company.
Foreign investors like the Fund
may face difficulties in effecting service of legal process, enforcing judgments
obtained in U.S.
courts, and bringing claims against a company or its directors and
officers.
China
has often restricted U.S. regulators’ access to information and limited
regulators’ ability to investigate or pursue remedies with respect
to China-based issuers, generally citing to state secrecy and national security
laws, blocking statutes, or other laws or regulations.
In addition, according to Article 177 of the PRC Securities Law, which became
effective in March 2020, no overseas securities
regulator can directly conduct investigations or evidence collection activities
within China and no entity or individual in China
may provide documents and information relating to securities business activities
to overseas regulators without Chinese government
approval. The SEC, U.S. Department of Justice, and other U.S. authorities face
substantial challenges in bringing and enforcing
actions against China-based issuers and their officers and directors. As a
result, the
Fund may not benefit from a regulatory environment
that fosters effective enforcement of U.S. federal securities laws.
Variable
Interest Entities.
Chinese operating companies sometimes rely on variable interest entity (“VIE”)
structures to raise capital from
non-Chinese investors,
even though such arrangements are not formally recognized under Chinese
law,
because of Chinese government
limitations or prohibitions on direct foreign ownership in certain industries,
such as restrictions on foreign ownership of telecommunications
companies and prohibitions on ownership of educational institutions.
Investments
in VIEs are subject to unique risks
in addition to those generally associated with investments in China.
In
a VIE structure, a series of contractual arrangements are entered
into between a holding company domiciled outside of China and a Chinese
operating company or companies, which are intended
to mimic direct ownership in the operating company, but in many cases these
arrangements have not been tested in court and
it is not clear that the contracts are enforceable or that the structures will
otherwise work as intended. The offshore holding company,
which is not a Chinese operating company but is a holding company formed outside
of China and the U.S.,
then issues exchange-traded
shares sold to the public, including non-Chinese investors (such as a Fund).
Shares of the offshore entity purchased by
a Fund would not be equity ownership interests in the Chinese operating
company.
Through
these structures, the China-based issuer can consolidate the Chinese operating
company in its financial statements, although whether
the China-based issuer maintains legal control of the Chinese operating company
is a matter of Chinese law. Under this structure,
the Chinese operating company, in which the China-based issuer cannot hold an
equity interest, typically holds licenses and
other assets that the China-based issuer cannot hold directly.
The
China Securities Regulatory Commission (“CSRC”) released the “Trial
Administrative Measures of Overseas Securities Offering and
Listing by Domestic Companies” (the “Trial Measures”). The Trial Measures
require Chinese companies that pursue listings outside
of mainland China, including those that do so using the VIE structure, to make a
filing with the CSRC. The Trial Measures suggest
that companies already listed using an existing VIE structure will be
grandfathered. While the Trial Measures do not prohibit the
use of VIE structures, this does not serve as a formal endorsement
either.
The
offshore entity’s control over the Chinese operating company is predicated
entirely on contracts with the Chinese operating company,
not equity ownership. As a result, the VIE structure may not be as effective as
direct ownership in controlling entities organized
in China, which often hold the licenses necessary to conduct the company’s
business in China. Additionally, evolving laws and
regulations and inconsistent enforcement, application or interpretation thereof
could lead to the VIE’s failure to obtain or maintain
licenses and permits to do business in China. There is a risk that the offshore
company or the VIE (i) may be unable to receive
or maintain any required governmental permissions or approvals or (ii)
inadvertently conclude that such permissions or approvals
are not required and that applicable laws, regulations, or interpretations
change and these entities are required to obtain such
permissions or approvals in the future. The VIE structures used by Chinese
operating companies pose risks to investors that are not
present in other organizational structures. For example, exerting control
through contractual arrangements may be less effective than
direct equity ownership, and a company may incur substantial costs to enforce
the terms of the arrangements, including those relating
to the distribution of funds among the entities, because of, among other things,
legal uncertainties and jurisdictional limits. Control
over, and funds due from, the VIE may be jeopardized if the natural person or
persons that hold the equity interest in the VIE
breach the terms of the agreement. As a result, the U.S. listed offshore entity
could have limited control and lose any control over
the VIE.
A
Fund’s interest would be subject to legal, operational and other risks
associated with a Chinese operating company’s use of the VIE structure.
Although
the China Securities Regulatory Commission published its position that it does
not object to the use of VIE structures
for Chinese operating companies to raise capital from non-Chinese investors,
there is no guarantee that
the Chinese government
would
not at any time
determine that the contractual arrangements constituting part of the VIE
structure do not comply with
applicable law or regulations.
Alternatively,
these laws or regulations could change or be interpreted differently in the
future, and the
Chinese government may otherwise intervene in or exert influence over VIE
structures or the related Chinese operating companies.
Further, the Chinese government could determine that the agreements establishing
the VIE structure do not comply with Chinese
law and regulations, including those related to restrictions on foreign
ownership, which could subject a China-based issuer to penalties,
revocation of business and operating licenses, or forfeiture of ownership
interests. A China-based issuer’s control over a VIE may
also be jeopardized if a natural person who holds the equity interest in the VIE
breaches the terms of the agreements, is subject
to
legal proceedings, or if any physical instruments, such as chops and seals, are
used without the China-based issuer’s authorization to
enter into contractual arrangements in China. Additionally, Chinese tax
authorities may disregard the VIE structure, resulting in increased
tax liabilities.
If
any of these or similar risks or developments materialize, a Fund’s investment
in the offshore entity may suddenly and significantly decline
in value or become worthless because of, among other things, difficulty
enforcing (or mobility to enforce) the contractual arrangements
or materially adverse effects on the Chinese operating company’s performance. A
Fund could experience significant losses
with no recourse available in these circumstances.
Chinese
Fixed-Income Investments. The Fund
may invest in Chinese fixed-income securities traded in the China Interbank Bond
Market
(“CIBM”) through the Bond Connect program (“Bond Connect”), which allows
non-Chinese-domiciled investors (such as the
Fund) to purchase certain fixed-income investments available in China’s
interbank bond market. Bond Connect utilizes the trading
infrastructure of both Hong Kong and China. Bond Connect therefore is not
available when there are trading holidays in Hong
Kong. As a result, prices of securities purchased through Bond Connect may
fluctuate at times when the
Fund is unable to add to
or exit its position. Securities offered via Bond Connect may lose their
eligibility for trading through the program at any time, in which
case they may be sold but could no longer be purchased through Bond Connect.
Because Bond Connect is relatively new, its effects
on the Chinese interbank bond are uncertain. In addition, the trading,
settlement and information technology systems required
for non-Chinese investors in Bond Connect are relatively new and continuing to
evolve. In the event that the relevant systems
do not function properly, trading via Bond Connect could be disrupted, adversely
affecting the ability of the
Fund to acquire or
dispose of securities through Bond Connect in a timely manner, which in turn
could adversely impact the Fund’s performance.
Bond
Connect is subject to regulation by both Hong Kong and China. There can be no
assurance that further regulations will not affect
the availability of securities in the program, the frequency of redemptions or
other limitations. In China, Bond Connect securities
are held on behalf of ultimate investors (such as the
Fund) by the Hong Kong Monetary Authority Central Money Markets Unit
via accounts maintained with China’s two clearinghouses for fixed-income
securities. While Chinese regulators have affirmed that
the ultimate investors hold a beneficial interest in Bond Connect securities,
the law surrounding such rights continues to develop,
and the mechanisms that beneficial owners may use to enforce their rights are
untested and therefore pose uncertain risks, with
legal and regulatory risks potentially having retroactive effect. Further,
courts in China have limited experience in applying the concept
of beneficial ownership, and the law surrounding beneficial ownership will
continue to evolve as they do so. There is accordingly
a risk that, as the law is tested and developed, the
Fund’s ability to enforce its ownership rights may be negatively impacted,
which could expose the Fund to the risk of loss on such investments.
The
Fund may not be able to participate in corporate actions
affecting Bond Connect securities due to time constraints or for other
operational reasons, and payments of distributions could
be delayed. Market volatility and potential lack of liquidity due to low trading
volume of certain bonds may result in prices of those
bonds fluctuating significantly; in addition, the bid-ask spreads of the prices
of such securities may be large, and the
Fund may therefore
incur significant costs and suffer losses when selling such investments. More
generally, bonds traded in CIBM may be difficult
or impossible to sell, which could further impact the
Fund’s ability to acquire or dispose of such securities at their expected
prices.
Bond Connect trades are settled in Renminbi (“RMB”), the Chinese currency, and
investors must have timely access to a reliable
supply of RMB in Hong Kong, which cannot be guaranteed. Moreover, securities
purchased through Bond Connect generally
may not be sold, purchased or otherwise transferred other than through Bond
Connect in accordance with applicable rules. Finally,
uncertainties in the Chinese tax rules governing taxation of income and gains
from investments via Bond Connect could result
in unexpected tax liabilities for the
Fund. The withholding tax treatment of dividends and capital gains payable to
overseas investors
currently is unsettled.
Under
the prevailing applicable Bond Connect regulations, the
Fund participates in Bond Connect through an offshore custody agent,
registration agent or other third parties (as the case may be), who would be
responsible for making the relevant filings and account
opening with the relevant authorities. The
Fund is therefore subject to the risk of default or errors on the part of such
agents.
Commercial
Paper.
Commercial paper refers to short-term fixed-income securities with maturities
ranging from 1 to 397 days. They are
primarily issued by corporations needing to finance large amounts of
receivables, but may be issued by banks and other borrowers.
Commercial paper is issued either directly or through broker-dealers, and may be
discounted or interest bearing. Commercial
paper is unsecured. Virtually all commercial paper is rated by Moody’s, Fitch or
S&P.
Commercial
paper rated A-1 by S&P has the following characteristics: (1) liquidity
ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated “A” or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; (5) typically, the issuer’s industry is well
established and the issuer has a strong position within the industry; and (6)
the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer’s commercial paper is A-1, A-2 or A-3.
The
rating Prime-1 is the highest commercial paper rating assigned by Moody’s. Among
the factors considered by Moody’s in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer’s industry or
industries
and the appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer’s products in relation
to competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period
of ten years; (7) financial strength of a parent company and the relationships
that exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such
obligations.
With
respect to Fitch, a short-term issuer or obligation rating is based in all cases
on the short-term vulnerability to default of the rated
entity and relates to the capacity to meet financial obligations in accordance
with the documentation governing the relevant obligation.
Short-term deposit ratings may be adjusted for loss severity. Short-term ratings
are assigned to obligations whose initial maturity
is viewed as “short term” based on market convention. Typically, this means up
to 13 months for corporate, sovereign, and structured
obligations and up to 36 months for obligations in U.S. public finance markets.
An F1 rating indicates the strongest intrinsic
capacity for timely payment of financial commitments whereas an F2 rating
indicates good intrinsic capacity for timely payment
of financial commitments.
Corporates.
Corporates are fixed-income securities issued by private businesses. Holders, as
creditors, have a prior legal claim over holders
of equity securities of the issuer as to both income and assets for the
principal and interest due to the holder.
Floaters.
Floaters are fixed-income securities with a rate of interest that varies with
changes in specified market rates or indices, such as
the prime rate, or at specified intervals. Certain floating or variable rate
obligations may carry a demand feature that permits the holder
to tender them back to the issuer of the underlying instrument, or to a third
party, at par value prior to maturity. When the demand
feature of certain floating or variable rate obligations represents an
obligation of a foreign entity, the demand feature will be subject
to certain risks discussed under “Foreign Securities.”
High
Yield Securities.
High yield securities are generally considered to include fixed-income
securities rated below the four highest rating
categories at the time of purchase (e.g., Ba through C by Moody’s, or BB through
D by S&P or Fitch or the equivalent by another
nationally recognized NRSRO) and unrated fixed-income securities considered by
the Adviser to be of equivalent quality. High
yield securities are not considered investment grade and are commonly referred
to as “junk bonds” or high yield, high risk securities.
Investment grade securities that the
Fund holds may be downgraded to below investment grade by the rating agencies.
If the
Fund holds a security that is downgraded, the Fund may choose to retain the
security.
While
high yield securities offer higher yields, they also normally carry a high
degree of credit risk and are considered speculative by the
major credit rating agencies. High yield securities may be issued as a
consequence of corporate restructuring or similar events. High
yield securities are often issued by smaller, less creditworthy issuers, or by
highly leveraged (indebted) issuers, that are generally less
able than more established or less leveraged issuers to make scheduled payments
of interest and principal. In comparison to investment
grade securities, the price movement of these securities is influenced less by
changes in interest rates and more by the financial
and business position of the issuer. The values of high yield securities are
more volatile and may react with greater sensitivity to
market changes.
High
yield securities are frequently ranked junior to claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations
are generally paid off before the junior obligations, which will potentially
limit the
Fund’s ability to fully recover principal or
to receive interest payments when senior securities are in default. Thus,
investors in high yield securities have a lower degree of protection
with respect to principal and interest payments than
do investors in higher rated securities. In addition, lower-rated securities
frequently have call or redemption features that would permit an issuer to
repurchase the security from
the
Fund. If a call were
exercised by the issuer during a period of declining interest
rates, the
Fund likely would have to replace such called security with a
lower yielding security, thus decreasing the net investment income to the Fund
and any dividends to investors.
The
secondary market for high yield securities is concentrated in relatively few
market makers and is dominated by institutional investors,
including mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities
is not as liquid as, and is more volatile than, the secondary market for
higher-rated securities. Because high yield securities are
less liquid, judgment may play a greater role in valuing certain
of the Fund’s securities
than is the case with securities trading in a more
liquid market. Also, future legislation may have a possible negative impact on
the market for high yield, high risk securities.
The
credit rating of a high yield security does not necessarily address its market
value risk. Ratings and market value may change from
time to time, positively or negatively, to reflect new developments regarding
the issuer.
The
high yield securities markets may react strongly to adverse news about an issuer
or the economy, or to the perception or expectation
of adverse news, whether or not it is based on fundamental analysis.
Additionally, prices for high yield securities may be affected
by legislative and regulatory developments. These developments could adversely
affect the
Fund’s NAV and investment practices,
the secondary market for high yield securities, the financial condition of
issuers of these securities and the value and liquidity
of outstanding high yield securities, especially in a thinly traded
market.
Inverse
Floaters.
Inverse floating rate obligations are obligations which pay interest at rates
that vary inversely with changes in market
rates of interest. Because the interest rate paid to holders of such obligations
is generally determined by subtracting a variable
or
floating rate from a predetermined amount, the interest rate paid to holders of
such obligations will decrease as such variable or floating
rate increases and increase as such variable or floating rate
decreases.
Like
most other fixed-income securities, the value of inverse floaters will decrease
as interest rates increase. They are more volatile, however,
than most other fixed-income securities because the coupon rate on an inverse
floater typically changes at a multiple of the change
in the relevant index rate. Thus, any rise in the index rate (as a consequence
of an increase in interest rates) causes a correspondingly
greater drop in the coupon rate of an inverse floater while a drop in the index
rate causes a correspondingly greater increase
in the coupon of an inverse floater. Some inverse floaters may also increase or
decrease in value substantially because of changes
in the rate of prepayments.
Inverse
floating rate investments tend to underperform the market for fixed-rate bonds
in a rising interest rate environment, but tend to
outperform the market for fixed-rate bonds when interest rates decline or remain
relatively stable. Inverse floating rate investments have
varying degrees of liquidity.
Investment
Grade Securities.
Investment grade securities are fixed-income securities rated by one or more of
the rating agencies in one
of the four highest rating categories at the time of purchase (e.g., AAA, AA, A
or BBB by
S&P
or Fitch or the equivalent by another
nationally recognized NRSRO
or
Aaa, Aa, A or Baa by Moody’s) or determined to be of equivalent quality by the
Adviser. Securities
rated BBB or Baa represent the lowest of four levels of investment grade
securities and are regarded as borderline between sound
obligations and those in which speculative elements predominate. A
Fund
is permitted to hold investment grade securities or “high
grade” securities, and may hold unrated securities if the Adviser considers the
risks involved in owning that security to be equivalent
to the risks involved in holding an investment grade security. Ratings assigned
to fixed-income securities represent only the opinion
of the rating agency assigning the rating and are not dispositive of the credit
risk associated with the purchase of a particular fixed-income
security. Moreover, market risk also will affect the prices of even the highest
rated fixed-income securities so that their prices
may rise or fall even if the issuer’s capacity to repay its obligations remains
unchanged.
Lease
Obligations.
Included within the revenue bonds category in which the
Fund may invest are participations in lease obligations or
installment purchase contracts (hereinafter collectively called “lease
obligations”) of municipalities. State and local governments, agencies
or authorities issue lease obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated
with general obligation or other revenue bonds. Leases, and installment purchase
or conditional sale contracts (which may provide
for title to the leased asset to pass eventually to the issuer), have developed
as a means for governmental issuers to acquire property
and equipment without the necessity of complying with the constitutional and
statutory requirements generally applicable for
the issuance of debt. Certain lease obligations contain “non-appropriation”
clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative
body on an annual or other periodic basis. Consequently, continued lease
payments on those lease obligations containing “non-appropriation”
clauses are dependent on future legislative actions. If such legislative actions
do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
In
addition, lease obligations do not have the depth of marketability associated
with more conventional municipal obligations, and, as
a result, certain of such lease obligations may be considered illiquid
securities. The
Adviser, pursuant to procedures adopted by the Directors,
will make a determination as to the liquidity of each lease obligation purchased
by the Funds. If a lease obligation is determined
to be “liquid,” the security will not be included within the category “illiquid
securities.”
Loan-Related
Investments. Loan-related
investments may include, without limitation, bank loans, direct lending and loan
participations
and assignments. In addition to risks generally associated with debt
investments, loan-related investments are subject to other
risks. Loans in which the
Fund may invest may not be rated by a rating agency, will not be registered with
the SEC or any state securities
commission and will not be listed on any national securities exchange. Investors
in loans, such as the
Fund, may not be entitled
to rely on the anti-fraud protections of the federal securities laws, although
they may be entitled to certain contractual remedies.
The amount of public information available with respect to loans will generally
be less extensive than that available for registered
or exchange-listed securities. In evaluating the creditworthiness of borrowers,
the Adviser will consider, and may rely in part
on, analyses performed by others.
The
market for loan obligations may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods.
Because transactions in many loans are subject to extended trade settlement
periods, the
Fund may not receive the proceeds from
the sale of a loan for a period after the sale. As a result, sale proceeds
related to the sale of loans may not be available to make additional
investments or to meet the
Fund’s redemption obligations for a period after the sale of the loans, and, as
a result, the Fund may
have to hold
additional cash or sell
other investments or engage in borrowing transactions, such as borrowing from
its credit facility,
if necessary to raise cash to meet its obligations. In addition,
the
Fund may not be able to readily dispose of its loans at prices that
approximate those at which the Fund could sell such loans if they were more
widely-traded and, as a result of such illiquidity, the
Fund
may have to hold additional cash or sell other investments or engage in
borrowing transactions, such as borrowing from its credit
facility, if necessary to raise cash to meet its obligations, including
redemption obligations. To the extent a readily available
market
ceases to exist for a particular investment, such investment would be treated as
illiquid for purposes of the
Fund’s limitations on
illiquid investments.
Loans
are subject to the risk of non-payment of scheduled interest or principal. Such
non-payment would result in a reduction of income
to the
Fund, a reduction in the value of the investment and a potential decrease in the
Fund’s NAV. There can be no assurance
that the liquidation of any collateral securing a loan would satisfy a
borrower’s obligation in the event of non-payment of scheduled
interest or principal payments, or that such collateral could be readily
liquidated. In the event of bankruptcy of a borrower, the Fund
could experience delays or limitations with respect to its ability to realize
the benefits of the collateral securing a loan. The collateral
securing a loan may lose all or substantially all of its value in the event of
the bankruptcy of a borrower. Some loans are subject
to the risk that a court, pursuant to fraudulent conveyance or other similar
laws, could subordinate such loans to presently existing
or future indebtedness of the borrower or take other action detrimental to the
holders of loans including, in certain circumstances,
invalidating such loans or causing interest previously paid to be refunded to
the borrower. If interest were required to be
refunded, it could negatively affect the
Fund’s performance.
Direct
Lending.
When the
Fund acts as a direct lender, it may participate in structuring the loan. Under
these circumstances, it will have
a direct contractual relationship with the borrower, may enforce compliance by
the borrower with the terms of the loan agreement
and may have rights with respect to any funds acquired by other lenders through
set-off. Lenders also have full voting and consent
rights under the applicable loan agreement. Action subject to lender vote or
consent generally requires the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
loan. Certain decisions, such as reducing the amount
of interest on or principal of a loan, releasing collateral, changing the
maturity of a loan or a change in control of the borrower,
frequently require the unanimous vote or consent of all lenders
affected.
Loan
Participations and Assignments.
Loan participations are interests in loans or other direct debt instruments
relating to amounts owed
by a corporate, governmental or other borrower to another party. These loans may
represent amounts owed to lenders or lending
syndicates, to suppliers of goods or services (trade claims or other
receivables), or to other parties (“Lenders”) and may be fixed-rate
or floating rate. These loans also may be arranged through private negotiations
between an issuer of sovereign debt obligations
and Lenders.
The Fund’s
investments in loans may be in the form of a participation in loans
(“Participations”) and assignments of all or a portion of
loans (“Assignments”) from third parties. In the case of a
Participation, the
Fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender
of the payments from the borrower. In the event of an insolvency of the Lender
selling a Participation, the
Fund may be treated
as a general creditor of the Lender and may not benefit from any set-off between
the Lender and the borrower. Certain Participations
may be structured in a manner designed to avoid purchasers of Participations
being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
a Lender’s insolvency, the Lender’s servicing of the
Participation may be delayed and the assignability of the Participation may be
impaired. The
Fund will acquire Participations only
if the Lender interpositioned between the
Fund and the borrower is determined by the Adviser to be
creditworthy.
When the
Fund purchases Assignments from Lenders it will acquire direct rights against
the borrower on the loan. However, because Assignments
are arranged through private negotiations between potential assignees and
potential assignors, the rights and obligations acquired
by the
Fund as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.
Because there is no liquid market for Participations and Assignments, it is
likely that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities
and the
Fund’s ability to dispose of particular Assignments or Participations when
necessary to meet the
Fund’s liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary
market for Participations and Assignments also may make it more difficult
for the
Fund to assign a value to these securities for
purposes of valuing the
Fund’s securities and calculating its NAV.
Participations
and Assignments involve a risk of loss in case of default or insolvency of the
borrower. In addition, they may offer less legal
protection to the
Fund in the event of fraud or misrepresentation and may involve a risk of
insolvency of the Lender. Certain Participations
and Assignments may also include standby financing commitments that obligate the
investing Fund to supply additional
cash to the borrower on demand. Participations involving emerging market country
issuers may relate to loans as to which there
has been or currently exists an event of default or other failure to make
payment when due, and may represent amounts owed to Lenders
that are themselves subject to political and economic risks, including the risk
of currency devaluation, expropriation, or failure.
Such Participations and Assignments present additional risk of default or
loss.
Bank
loans generally are negotiated between a borrower and several financial
institutional lenders represented by one or more lenders acting
as agent of all the lenders. The agent is responsible for negotiating the loan
agreement that establishes the terms and conditions of
the loan and the rights of the borrower and the lenders, monitoring any
collateral, and collecting principal and interest on the loan.
By investing in a loan, the
Fund becomes a member of a syndicate of lenders. Investments in bank loans
entail those risks described
above, such as liquidity risk and risk of default.
Some
of the loans in which the
Fund may invest or obtain exposure to may be “covenant lite” loans. Certain
financial institutions may
define “covenant lite” loans differently. Covenant lite loans or securities,
which have varied terms and conditions, may contain fewer
or no restrictive covenants compared to other loans that might enable an
investor to proactively enforce financial covenants or prevent
undesired actions by the borrower. As a result, the
Fund may experience relatively greater difficulty or delays in enforcing its
rights
on its holdings of certain covenant lite loans and debt securities than its
holdings of loans or securities with more traditional financial
covenants, which may result in losses to the Fund.
Money
Market Instruments.
Money market instruments are high quality short-term fixed-income securities.
Money market instruments
may include obligations of governments, government agencies, banks, corporations
and special purpose entities and repurchase
agreements relating to these obligations. Certain money market instruments may
be denominated in a foreign currency.
Mortgage-Related
Securities.
Mortgage-related securities are securities that, directly or indirectly,
represent a participation in, or are secured
by and payable from, mortgage loans on real property. Mortgage-related
securities include collateralized mortgage obligations and
MBS issued or guaranteed by agencies or instrumentalities of the U.S. Government
or by private sector entities.
Mortgage-Backed
Securities.
With mortgage-backed
securities (“MBS”),
many mortgagees’ obligations to make monthly payments to their
lending institution are pooled together and the risk of the mortgagees’ payment
obligations is passed through to investors. The pools
are assembled by various governmental, government-related and private
organizations. The
Fund may invest in securities issued or
guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae, private issuers and other
government agencies. MBS issued by non-agency
issuers, whether or not such securities are subject to guarantees, may entail
greater risk, since private issuers may not be able to meet
their obligations under the policies. If there is no guarantee provided by the
issuer, the
Fund will purchase only MBS that, at the
time of purchase, are rated investment grade by one or more NRSROs or, if
unrated, are deemed by the Adviser to be of comparable
quality.
MBS
are issued or guaranteed by private sector originators of or investors in
mortgage loans and structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental
agency or instrumentality, however, they are generally structured with one or
more of the types of credit enhancement described
below. Fannie Mae and Freddie Mac obligations are not backed by the full faith
and credit of the U.S. Government as Ginnie
Mae certificates are. Freddie Mac securities are supported by Freddie Mac’s
right to borrow from the U.S. Treasury. Each of Ginnie
Mae, Fannie Mae and Freddie Mac guarantees timely distributions of interest to
certificate holders. Each of Ginnie Mae and Fannie
Mae also guarantees timely distributions of scheduled principal. Although
Freddie Mac has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan, Freddie Mac now issues
MBS (Freddie Mac Gold PCS) that also guarantee
timely payment of monthly principal reductions. Resolution Funding Corporation
obligations are backed, as to principal payments,
by zero coupon U.S. Treasury bonds and, as to interest payments, ultimately by
the U.S. Treasury.
There
are two methods of trading MBS. A specified pool transaction is a trade in which
the pool number of the security to be delivered
on the settlement date is known at the time the trade is made. This is in
contrast with the typical MBS transaction, called a to-be-announced
(“TBA”) transaction, in which the type of MBS to be delivered is specified at
the time of trade but the actual pool numbers
of the securities that will be delivered are not known at the time of the trade.
The pool numbers of the pools to be delivered at
settlement are announced shortly before settlement takes place. The terms of the
TBA trade may be made more specific if desired. Generally,
agency pass-through MBS are traded on a TBA basis. Investments in TBAs may give
rise to a form of leverage and may cause the
Fund’s portfolio turnover rate to appear higher. Leverage may
cause the
Fund to be more volatile than if the Fund had not been
leveraged.
Like
fixed-income securities in general, MBS will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages, with the result that the average life of MBS
held by the
Fund may be lengthened. As average
life extends, price volatility generally increases. This extension of average
life causes the market price of the MBS to decrease further
when interest rates rise than if their average lives were fixed. However, when
interest rates fall, mortgages may not enjoy as large
a gain in market value due to prepayment risk because additional mortgage
prepayments must be reinvested at lower interest rates.
Faster prepayment will shorten the average life and slower prepayments will
lengthen it. However, it is possible to determine what
the range of the average life movement could be and to calculate the effect that
it will have on the price of the MBS. In selecting MBS,
the Adviser looks for those that offer a higher yield to compensate for any
variation in average maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal,
the
Fund may fail to fully recoup its initial investment in
these securities, even if the security is in one of the highest rating
categories. The
Fund may invest, without limit, in MBS issued by
private issuers when the Adviser deems that the quality of the investment, the
quality of the issuer, and market conditions warrant such
investments. The
Fund will purchase securities issued by private issuers that are rated
investment grade at the time of purchase by
Moody’s, Fitch or S&P or are deemed by the Adviser to be of comparable
investment quality.
Fannie
Mae Certificates.
Fannie Mae is a federally chartered and privately owned corporation organized
and existing under the Federal National
Mortgage Association Charter Act of 1938. Each Fannie Mae certificate represents
a pro rata interest in one or more pools of
mortgage loans insured by the Federal Housing Administration under the National
Housing Act of 1934, as amended (the
“Housing
Act”), or Title V of the Housing Act of 1949 (“FHA Loans”), or guaranteed by the
Department of Veteran Affairs under the
Servicemen’s Readjustment Act of 1944, as amended (“VA Loans”), or conventional
mortgage loans (i.e., mortgage loans that are not
insured or guaranteed by any governmental agency) of the following types: (i)
fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v)
other adjustable rate mortgage loans; and (vi) fixed rate and adjustable
mortgage loans secured by multi-family projects.
Freddie
Mac Certificates.
Freddie Mac is a corporate instrumentality of the United States created pursuant
to the Emergency Home Finance
Act of 1970, as amended (the “FHLMC Act”). Freddie Mac certificates represent a
pro rata interest in a group of mortgage loans
(a “Freddie Mac Certificate group”) purchased by Freddie Mac. The mortgage loans
underlying the Freddie Mac Certificates consist
of fixed rate or adjustable rate mortgage loans with original terms to maturity
of between ten and thirty years, substantially all of
which are secured by first liens on one-to-four-family residential properties or
multi-family projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. A Freddie Mac Certificate
group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
Ginnie
Mae Certificates.
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing
and Urban Development. The Housing Act authorizes Ginnie Mae to guarantee the
timely payment of the principal and interest
on certificates that are based on and backed by a pool of FHA Loans, VA Loans or
by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States is
pledged to the payment of all amounts that may be required
to be paid under any guaranty. In order to meet its obligations under such
guaranty, Ginnie Mae is authorized to borrow from
the U.S. Treasury with no limitations as to amount.
Each
Ginnie Mae certificate represents a pro rata interest in one or more of the
following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate
mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on
multi-family residential properties under construction;
(vi) mortgage loans on completed multi-family projects; (vii) fixed rate
mortgage loans as to which escrowed funds are used
to reduce the borrower’s monthly payments during the early years of the mortgage
loans (“buydown” mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four-family housing units.
Collateralized
Mortgage Obligations. Certain
Funds may invest in collateralized mortgage obligations (“CMOs”), which
are MBS that
are collateralized by mortgage loans or mortgage pass-through securities, and
multi-class pass-through securities, which are equity interests
in a trust composed of mortgage loans or other MBS. Unless the context indicates
otherwise, the discussion of CMOs below also
applies to multi-class pass-through securities.
CMOs
may be issued by governmental or government-related entities or by private
entities, such as banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market traders. CMOs are issued in multiple
classes, often referred to as “tranches,” with each tranche having a specific
fixed or floating coupon rate and stated maturity or
final distribution date. Under the traditional CMO structure, the cash flows
generated by the mortgages or mortgage pass-through securities
in the collateral pool are used to first pay interest and then pay principal to
the holders of the CMOs. Subject to the various provisions
of individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required
to pay the stated interest) is used to retire the bonds.
The
principal and interest on the underlying collateral may be allocated among the
several tranches of a CMO in innumerable ways, including
“interest only” and “inverse interest only” tranches. In a common CMO structure,
the tranches are retired sequentially in the
order of their respective stated maturities or final distribution dates (as
opposed to the pro-rata return of principal found in traditional
pass-through obligations). The fastest-pay tranches would initially receive all
principal payments. When those tranches are retired,
the next tranches in the sequence receive all of the principal payments until
they are retired. The sequential retirement of bond
groups continues until the last tranche is retired. Accordingly, the CMO
structure allows the issuer to use cash flows of long maturity,
monthly-pay collateral to formulate securities with short, intermediate, and
long final maturities and expected average lives and
risk characteristics.
The
primary risk of CMOs is the uncertainty of the timing of cash flows that results
from the rate of prepayments on the underlying mortgages
serving as collateral and from the structure of the particular CMO transaction
(that is, the priority of the individual tranches).
An increase or decrease in prepayment rates (resulting from a decrease or
increase in mortgage interest rates) may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates and will affect the yield and price of CMOs.
In addition, if the collateral securing CMOs or any third-party guarantees are
insufficient to make payments, the
Fund could sustain
a loss. The prices of certain CMOs, depending on their structure and the rate of
prepayments, can be volatile. Some CMOs may
also not be as liquid as other types of mortgage-backed securities. As a result,
it may be difficult or impossible to sell the securities
at an advantageous time or price.
Privately
issued CMOs are arrangements in which the underlying mortgages are held by the
issuer, which then issues debt collateralized
by the underlying mortgage assets. Such securities may be backed by mortgage
insurance, letters of credit, or other credit
enhancing features. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs
may be guaranteed by the U.S. Government or its agencies and instrumentalities,
these CMOs represent obligations solely of the
private issuer and are not insured or guaranteed by the U.S. Government, its
agencies and instrumentalities or any other person or
entity. Privately issued CMOs are subject to prepayment risk due to the
possibility that prepayments on the underlying assets will alter
the cash flow. Yields on privately issued CMOs have been historically higher
than the yields on CMOs backed by mortgages guaranteed
by U.S. government agencies and instrumentalities. The risk of loss due to
default on privately issued CMOs, however, is historically
higher since the U.S. Government has not guaranteed them.
New
types of CMO tranches have evolved. These include floating rate CMOs, planned
amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal and
interest received by each tranche from the underlying
collateral. For example, an inverse interest-only class CMO entitles holders to
receive no payments of principal and to receive
interest at a rate that will vary inversely with a specified index or a multiple
thereof. Under certain of these newer structures, given
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on
the type of CMOs in which the
Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types
of MBS.
CMOs
may include real estate mortgage investment conduits (“REMICs”). REMICs, which
were authorized under the Tax Reform Act
of 1986, are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. A REMIC
is a CMO that qualifies for special tax treatment under
the Code, and invests in certain mortgages principally secured by
interests
in real property.
The Fund
may invest in, among others, parallel pay CMOs and planned amortization class
CMOs (“PAC Bonds”). Parallel pay CMOs
are structured to provide payments of principal on each payment date to more
than one tranche. These simultaneous payments
are taken into account in calculating the stated maturity date or final
distribution date of each tranche which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds are a form
of parallel pay CMO, with the required principal payment on such securities
having the highest priority after interest has been paid
to all classes. PAC Bonds generally require payments of a specified amount of
principal on each payment date.
Stripped
Mortgage-Backed Securities. Certain
Funds may invest in stripped mortgage-backed securities (“SMBS”). An SMBS is a
derivative
multi-class mortgage-backed security. SMBS usually are structured with two
classes that receive different proportions of the interest
and principal distribution on a pool of mortgage assets. In the most extreme
case, one class will receive all of the interest (the interest-only
or “IO” class), while the other class will receive all of the principal (the
principal-only or “PO” class). The yield to maturity
on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such security’s yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of
principal, the
Fund may fail to fully recoup its initial investment
in these securities. Conversely, if the underlying mortgage assets experience
less than anticipated prepayments of principal, the
yield of POs could be materially adversely affected. The market values of IOs
and POs are subject to greater risk of fluctuation in response
to changes in market rates of interest than many other types of mortgage-backed
securities. To the extent the
Fund invests in
IOs and POs, it may increase the risk of fluctuations in the NAV
of the
Fund.
Commercial
Mortgage-Backed Securities. Commercial
mortgage-backed securities (“CMBS”) are generally multi-class or
pass-through
securities issued by special purpose entities that represent an undivided
interest in a portfolio of mortgage loans backed by commercial
properties, including, but not limited to, industrial and warehouse properties,
office buildings, retail space and shopping malls,
hotels, healthcare facilities, multifamily properties and cooperative
apartments. Private lenders, such as banks or insurance companies,
originate these loans and then sell the loans directly into a CMBS trust or
other entity. The commercial mortgage loans that
underlie CMBS are generally not amortizing or not fully amortizing. That is, at
their maturity date, repayment of the remaining principal
balance or “balloon” is due and is repaid through the attainment of an
additional loan or sale of this property. An extension of
the final payment on commercial mortgages will increase the average life of the
CMBS, generally resulting in a lower yield for discount
bonds and a higher yield for premium bonds.
CMBS
are subject to credit risk and prepayment risk. Although prepayment risk is
present, it is of a lesser degree in the CMBS than in
the residential mortgage market; commercial real estate property loans often
contain provisions which substantially reduce the likelihood
that such securities will be prepaid (e.g., significant prepayment penalties on
loans and, in some cases, prohibition on principal
payments for several years following origination).
CMBS
may be less liquid and exhibit greater price volatility than other types of
mortgage- or asset-backed securities. CMBS issued by private
issuers may offer higher yields than CMBS issued by government issuers, but also
may be subject to greater volatility and credit
or default risk than CMBS issued by government issuers. In addition, at times
the commercial real estate market has experienced
substantially lower valuations combined with higher interest rates, leading to
difficulty in refinancing debt and, as a
result,
the CMBS market has experienced (and could in the future experience) greatly
reduced liquidity and valuations. CMBS held by
the Fund may be subordinated to one or more other classes of securities of the
same series for purposes of, among other things, establishing
payment priorities and offsetting losses and other shortfalls with respect to
the related underlying mortgage loans. There can
be no assurance that the subordination will be sufficient on any date to offset
all losses or expenses incurred by the underlying trust.
The
values of, and income generated by, CMBS may be adversely affected by
changing interest rates, tightening lending standards, and
other developments impacting the commercial real estate market, such as
population shifts and other demographic changes, increasing
vacancies (potentially for extended periods) and reduced demand for commercial
and office space as well as maintenance or
tenant improvement costs and costs to convert properties for other uses. These
developments could result from, among other things,
changing tastes and preferences (such as remote work arrangements) as well as
cultural, technological, global or local economic
and market developments. In addition, changing interest rate environments and
associated changes in lending standards and
higher refinancing rates may adversely affect the commercial real estate and
CMBS markets. The occurrence of any of the foregoing
developments would likely increase default risk for the properties and loans
underlying these investments as well as impact the
value of, and income generated by, these investments. These developments could
also result in reduced liquidity for CMBS.
Credit
Enhancement.
Mortgage-related securities are often backed by a pool of assets representing
the obligations of a number of parties.
To lessen the effect of failure by obligors on underlying assets to make
payments, these securities may have various types of credit
support. Credit support falls into two primary categories: (i) liquidity
protection, and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
generally refers to the provision of advances, typically
by the entity administering the pool of assets, to ensure that the pass-through
of payments due on the underlying pool occurs
in a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third-parties (referred
to herein as “third-party credit support”), through various
means of structuring the transaction or through a combination of such
approaches.
The
ratings of mortgage-related securities for which third-party credit enhancement
provides liquidity protection or protection against
losses from default are generally dependent upon the continued creditworthiness
of the provider of the credit enhancement. The
ratings of such securities could decline in the event of deterioration in the
creditworthiness of the credit enhancement provider even
in cases where the delinquency and loss experience on the underlying pool of
assets is better than expected.
Examples
of credit support arising out of the structure of the transaction include
“senior-subordinated securities” (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal and interest thereon, with defaults on the
underlying assets being borne first by the holders of the most subordinated
class), creation of “reserve funds” (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and “over-collateralization”
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each security is generally
based on historical information with respect to the level of credit risk
associated with the underlying assets. Delinquency or loss
in excess of that which is anticipated could adversely affect the return on an
investment in such a security.
Municipals.
Municipal securities include debt obligations issued
by or on behalf of
states, territories or possessions of the United States
and the District of Columbia and their political subdivisions, agencies and
instrumentalities, the income on which is generally
exempt
from regular
federal
income tax at the time of issuance, in the opinion of bond counsel or other
counsel to the issuers of such securities.
Municipals include both municipal bonds (those securities with maturities
of five years or more) and municipal notes (those
with maturities of less than five years). Municipal bonds are issued for a wide
variety of reasons: to construct public facilities, such
as airports, highways, bridges, schools, hospitals, mass transportation,
streets, water and sewer works; to obtain funds for operating
expenses; to refund outstanding municipal obligations; and to loan funds to
various public institutions and facilities. Certain
industrial development bonds are also considered municipal bonds if their
interest is exempt from regular
federal
income tax. Industrial
development bonds are issued by, or on behalf of, public authorities to obtain
funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewage works.
Industrial development bonds are ordinarily dependent on the credit quality of a
private user, not the public issuer. Private activity
bonds are another type of municipal security.
The
two principal classifications of municipal bonds are “general obligation” and
“revenue” or “special tax” bonds. General obligation
bonds are secured by the issuer’s pledge of its full faith, credit and taxing
power for the payment of principal and interest. Thus,
these bonds may be vulnerable to limits on a government’s power or ability to
raise revenue or increase taxes and its ability to maintain
a fiscally sound budget. The timely payments may also be influenced by any
unfunded pension liabilities or other post-employee
benefit plan liabilities. These bonds may also depend on legislative
appropriation and/or funding or other support from other
governmental bodies in order to make payments. Revenue or special tax bonds are
payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other tax, but not from general tax revenues.
As a result, these bonds historically have been subject to a greater risk of
default than general obligation bonds because
investors
can look only to the revenue generated by the project or other revenue source
backing the project, rather than to the general taxing
authority of the state or local government issuer of the
obligations.
Industrial
revenue bonds in most cases are revenue bonds and generally do not have the
pledge of the credit of the issuer. The payment
of the principal and interest on such industrial revenue bonds is dependent
solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such
payment. Short-term municipal obligations issued by states, cities,
municipalities or municipal agencies, include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, construction loan notes and
short-term discount notes.
Private
activity bonds may be used by municipalities to finance the development of
industrial facilities for use by private enterprise. Principal
and interest payments are to be made by the private enterprise benefitting from
the development, which means that the holder
of the bond is exposed to the risk that the private issuer may default on the
bond. The credit and quality of private activity bonds
and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and
repayment of principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
Municipal
notes are issued to meet the short-term funding requirements of local, regional
and state governments. Municipal notes include
bond anticipation notes, revenue anticipation notes and tax and revenue
anticipation notes. These are short-term debt obligations
issued by state and local governments to aid cash flows while waiting for taxes
or revenue to be collected, at which time the
debt is retired. Other types of municipal notes in which the Fund may invest are
construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes and similar instruments.
Municipal
bonds generally include debt obligations issued by states and their political
subdivisions, and duly constituted authorities and
corporations, to obtain funds to construct, repair or improve various public
facilities such as airports, bridges, highways, hospitals,
housing, schools, streets and water and sewer works. Municipal bonds may also be
issued to refinance outstanding obligations
as well as to obtain funds for general operating expenses and for loans to other
public institutions and facilities. In addition,
municipal bonds may include obligations of municipal housing authorities and
single-family mortgage revenue bonds. Weaknesses
in federal housing subsidy programs and their administration may result in a
decrease of subsidies available for payment of
principal and interest on housing authority bonds. Economic developments,
including fluctuations in interest rates and increasing construction
and operating costs, may also adversely impact revenues of housing authorities.
In the case of some housing authorities, inability
to obtain additional financing could also reduce revenues available to pay
existing obligations. Single-family mortgage revenue
bonds are subject to extraordinary mandatory redemption at par in whole or in
part from the proceeds derived from prepayments
of underlying mortgage loans and also from the unused proceeds of the issue
within a stated period which may be within
a year from the date of issue.
Note
obligations with demand or put options may have a stated maturity in excess of
one year, but permit any holder to demand payment
of principal plus accrued interest upon a specified number of days’ notice.
Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by banks. The issuer of
such notes normally has a corresponding right, after a given
period, to repay at its discretion the outstanding principal of the note plus
accrued interest upon a specific number of days’ notice
to the bondholders. The interest rate on a demand note may be based upon a known
lending rate, such as the prime lending rate,
and be adjusted when such rate changes, or the interest rate on a demand note
may be a market rate that is adjusted at specified intervals.
Each note purchased by the
Fund
will meet the quality criteria set out in the Prospectus for the Fund.
The
yields of municipal bonds depend on, among other things, general money market
conditions, conditions in the municipal bond market,
the size of a particular offering, the maturity of the obligation, and the
rating of the issue. The ratings of Moody’s Investors Service,
Inc. (“Moody’s”) and S&P Global Ratings Group, a division of S&P
Global, Inc. (“S&P”) represent their opinions of the quality
of the municipal bonds rated by them. It should be emphasized that such ratings
are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields, while municipal bonds of
the same maturity and coupon, but with different ratings, may have the same
yield. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Fund.
Municipal
bonds are sometimes purchased on a “when-issued” or “delayed-delivery” basis,
which means the Fund has committed to purchase
certain specified securities at an agreed-upon price when they are issued. The
period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From
time to time proposals have been introduced before Congress to restrict or
eliminate the regular
federal
income tax exemption for
interest on municipal bonds. Similar proposals may be introduced in the
future.
Similarly,
from time to time proposals have been introduced before state and local
legislatures to restrict or eliminate the state and local
income tax exemption for interest on municipal bonds. Similar proposals may be
introduced in the future.
The Fund
may also purchase bonds the income on which is subject to the alternative
minimum tax (“AMT bonds”). AMT bonds are tax-exempt
private activity bonds issued after August 7, 1986, the proceeds of which are
directed, at least in part, to private, for-profit organizations.
While the income from AMT bonds is exempt from regular federal income tax, it is
a tax preference item in the
calculation
of the alternative minimum tax. The alternative minimum tax is a special
separate tax that applies to some taxpayers who have
certain adjustments to income or tax preference items.
Municipal
obligations of any type, such as general obligation and revenue or special tax
bonds as well as other municipal obligations associated
with specific projects, can be negatively affected by changing demographic
trends, such as population shifts or changing tastes
and values, or increasing vacancies or declining rents resulting from legal,
cultural, technological, global or local economic developments,
as well as reduced demand for properties, revenues or goods. As a result of
various economic, market and other factors, there
could be reduced tax or other revenue available to issuers of municipal
obligations and, in turn, increased budgetary and financial
pressure on municipalities and other issuers of municipal obligations, which
could adversely impact the risks associated with municipal
obligations of such issuer. As a result, the Fund’s investments in municipal
obligations may be subject to and heightened risks
relating to the occurrence of such developments.
An
issuer of municipal securities may file for bankruptcy or otherwise seek to
reorganize its debts by extending debt maturities, reducing
the amount of principal or interest, refinancing the debt or taking other
measures, in each case which may significantly affect
the rights of creditors and the value of the municipal securities and the value
of the
Fund’s investments in such municipal securities.
In addition, changes to bankruptcy laws may adversely impact the
Fund’s investments in municipal securities, including creditor
rights, if the issuer seeks bankruptcy protection.
Build
America Bonds are taxable municipal securities on which the issuer receives
federal support of the interest paid. Assuming certain
specified conditions are satisfied, issuers of Build America Bonds may either
(i) receive reimbursement from the U.S. Treasury with
respect to a portion of its interest payments on the bonds (“direct pay” Build
America Bonds) or (ii) provide tax credits to investors
in the bonds (“tax credit” Build America Bonds). Unlike most other municipal
securities, interest received on Build America Bonds
is subject to federal and state income tax. Issuance of Build America Bonds
ceased on December 31, 2010. The number of Build
America Bonds available in the market is limited, which may negatively affect
the value of the Build America Bonds.
The
Fund
may hold municipal private placements. These securities are sold through private
negotiations, usually to institutions or mutual
funds, and generally have resale restrictions. Their yields are usually higher
than comparable public securities to compensate the
investor for their limited marketability.
Repurchase
Agreements.
Repurchase agreements are transactions in which the
Fund purchases a security or basket of securities and simultaneously
commits to resell that security or basket to the seller (a bank, broker or
dealer) at a mutually agreed-upon date and price.
The resale price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or date
of maturity of the purchased security. The term of these agreements usually
ranges from overnight to one week, and never exceeds
one year. Repurchase agreements with a term of over seven days are considered
illiquid.
In
these transactions, the
Fund receives securities that have a market value at least equal to the purchase
price (including accrued interest)
of the repurchase agreement, and this value is maintained during the term of the
agreement. These securities are held by the Custodian
or an approved third-party for the benefit of the Fund until repurchased.
Repurchase agreements permit the
Fund to remain
fully invested while retaining overnight flexibility to pursue investments of a
longer-term nature. If the seller defaults and the value
of the repurchased securities declines, the
Fund might incur a loss. If bankruptcy proceedings are commenced with respect to
the
seller, the
Fund’s realization upon the collateral may be delayed.
While
repurchase agreements involve certain risks not associated with direct
investments in debt securities, the
Fund follows procedures
approved by the Directors that are designed to minimize such risks. These
procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored
by the Adviser. In addition, as described above, the value of the collateral
underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy
by a selling financial institution, the Fund
will seek to liquidate such collateral. However, the exercising of the Fund’s
right
to liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss. Repurchase agreements involving obligations
other than U.S. government securities may be subject to special risks.
Repurchase agreements secured by obligations that are
not eligible for direct investment under
the
Fund’s investment objectives and restrictions may require the Fund to promptly
dispose
of such collateral if the seller or guarantor becomes insolvent.
The Fund
may enter into repurchase agreements on a forward commitment basis. To the
extent the
Fund does so and the counterparty
to the trade fails to effectuate the trade at the scheduled time, the
Fund may be forced to deploy its capital in a repurchase
agreement with a less favorable rate of return than it otherwise may have
achieved or may be unable to enter into a repurchase
agreement at all at the desired time.
Temporary
Defensive Investments.
When the Adviser believes that changes in market, economic, political or other
conditions make it
advisable, the
Fund may invest up to 100% of its assets in cash, cash equivalents and other
fixed-income securities for temporary defensive
purposes that may be inconsistent with the Fund’s investment strategies. These
temporary investments may consist of
obligations
of the U.S. or foreign governments, their agencies and instrumentalities; money
market instruments; and instruments issued
by international development agencies.
U.S.
Treasury Securities.
The U.S. Treasury securities that certain Funds may purchase include U.S.
Treasury bills, notes and bonds issued
by the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as a result, are backed by the full faith
and credit of the United States. They differ primarily in their interest rates,
the lengths of their maturities and the dates of their issuances.
Eurodollar
and Yankee Dollar Obligations. Certain
Funds may invest in Eurodollar and Yankee dollar obligations. Eurodollar and
Yankee
dollar obligations are fixed-income securities that include time deposits, which
are non-negotiable deposits maintained in a bank
for a specified period of time at a stated interest rate. The Eurodollar
obligations may include bonds issued and denominated in euros.
Eurodollar obligations may be issued by government and corporate issuers in
Europe. Yankee dollar obligations, which include time
deposits and certificates of deposit, are U.S. dollar-denominated obligations
issued in the U.S. capital markets by foreign banks. Eurodollar
bank obligations, which include time deposits and certificates of deposit, are
U.S. dollar-denominated obligations issued outside
the U.S. capital markets by foreign branches of U.S. banks and by foreign
banks. The Fund
may consider Yankee dollar obligations
to be domestic securities for purposes of their investment
policies.
Eurodollar
and Yankee dollar obligations are subject to the same risks as domestic issues,
notably credit risk, market risk and liquidity risk.
However, Eurodollar (and to a limited extent, Yankee dollar) obligations are
also subject to certain sovereign risks. One such risk is
the possibility that a sovereign country might prevent capital from flowing
across its borders. Other risks include adverse political and
economic developments; the extent and quality of government regulations of
financial markets and institutions; the imposition of
foreign withholding taxes; and the expropriation or nationalization of foreign
issuers.
Zero
Coupons, Pay-In-Kind Securities or Deferred Payment Securities.
Zero coupon, pay-in-kind and deferred payment securities
are all types of fixed-income securities on which the holder does not receive
periodic cash payments of interest or principal. Generally,
these securities are subject to greater price volatility and lesser liquidity in
the event of adverse market conditions than comparably
rated securities paying cash interest at regular intervals. Although the Fund
will not receive cash periodic coupon payments
on these securities, the Fund may be deemed to have received interest income, or
“phantom income” during the life of the obligation.
The Fund may have to distribute such phantom income to avoid taxes at the Fund
level, although it has not received any cash
payment.
Zero
Coupons.
Zero coupons are fixed-income securities on which the holder does not receive
periodic cash payments of interest or principal.
Instead, zero coupons are
sold at a discount from their face value. The difference between a zero coupon’s
issue or purchase price
and its face value represents the imputed interest an investor will earn if the
obligation is held until maturity. For tax purposes, a portion
of this imputed interest is deemed as income received by zero coupon bondholders
each year. The
Fund
intends to pass along such
interest as a component of the Fund’s distributions of net investment
income.
Zero
coupons may offer investors the opportunity to earn a higher yield than that
available on ordinary interest-paying obligations of similar
credit quality and maturity. However, zero coupon prices may also exhibit
greater price volatility than ordinary fixed-income securities
because of the manner in which their principal and interest are returned to the
investor.
Pay-In-Kind
Securities.
Pay-in-kind securities are securities that have interest payable by delivery of
additional securities. Upon maturity,
the holder is entitled to receive the aggregate par value of the
securities.
Deferred
Payment Securities.
Deferred payment securities are securities that remain zero coupons until a
predetermined date, at which time
the stated coupon rate becomes effective and interest becomes payable at regular
intervals.
Foreign
Securities.
Investing in foreign securities involves certain special considerations which
are not typically associated with investments
in the securities of U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting
standards and may have policies that are not comparable to those of domestic
issuers. As a result, there may be less information
available about foreign issuers than about domestic issuers. Securities of some
foreign issuers may be less liquid and more volatile
than securities of comparable domestic issuers. There is generally less
stringent investor protections and disclosure standards, and
less government supervision and regulation of stock exchanges, brokers and
listed issuers than in the United States. In addition, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or
diplomatic developments which could affect U.S. investments in those countries.
The costs of investing in foreign countries frequently
are higher than the costs of investing in the United States. Although the
Adviser endeavors to achieve the most favorable execution
costs in portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions
on U.S. exchanges. Pursuant
to regulatory changes effective in May 2024, many U.S., Canadian, and Mexican
securities transitioned
to a “T+1” (trade date plus one day) settlement cycle, while securities trading
in most other markets typically have longer settlement
cycles. As a result, there can be potential operational, settlement and other
risks for the Funds associated with differences in
settlement cycles between markets. In
addition, investments in certain foreign markets that have historically been
considered stable may
become more volatile and subject to increased risk due to ongoing developments
and changing conditions in such markets.
Moreover,
the growing interconnectivity of global economies and financial markets has
increased the probability that adverse developments
and conditions in one country or region will affect the stability of economies
and financial markets in other countries or
regions. For instance, if one or more countries leave the European Union (“EU”)
or the EU dissolves, the world’s securities markets
likely will be significantly disrupted.
Investments
in foreign markets may also be adversely affected by governmental actions such
as the imposition of capital controls, nationalization
of companies or industries, expropriation of assets or the imposition of
punitive taxes. The governments of certain countries
may prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain sectors or industries.
In addition, a foreign government may limit or cause delay in the convertibility
or repatriation of its currency which would
adversely affect the U.S. dollar value and/or liquidity of investments
denominated in that currency. Certain foreign investments
may become less liquid in response to market developments or adverse investor
perceptions, or become illiquid after purchase
by the
Fund, particularly during periods of market turmoil. When the
Fund holds illiquid investments, its portfolio may be harder
to value.
Investments
in securities of foreign issuers may be denominated in foreign currencies.
Accordingly, the value of the
Fund’s assets, as measured
in U.S. dollars, may be affected favorably or unfavorably by changes in currency
exchange rates and in exchange control regulations. The
Fund may incur costs in connection with conversions between various
currencies.
Certain
foreign markets may rely heavily on particular industries or foreign capital and
are more vulnerable to diplomatic developments,
wars,
the
imposition of economic sanctions against a particular country or countries,
organizations, companies, entities and/or
individuals, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. International
trade barriers or economic sanctions against foreign countries, organizations,
companies, entities and/or individuals, may
adversely affect the
Fund’s foreign holdings or exposures. Investments in foreign markets may also be
adversely affected by governmental
actions such as the imposition of capital controls, nationalization of companies
or industries, expropriation of assets, or the
imposition of punitive taxes. Governmental actions can have a significant effect
on the economic conditions in foreign countries, which
also may adversely affect the value and liquidity of the
Fund’s investments. For example, the governments of certain countries
may
prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain sectors or industries. In addition,
a foreign government may limit or cause delay in the convertibility or
repatriation of its currency which would adversely affect
the U.S. dollar value and/or liquidity of investments denominated in that
currency. Any of these actions could severely affect security
prices, impair the
Fund’s ability to purchase or sell foreign securities or
transfer the
Fund’s assets back into the U.S., or otherwise
adversely affect the
Fund’s operations. Certain foreign investments may become less liquid in
response to market developments
or adverse investor perceptions, or become illiquid after purchase
by the
Fund, particularly during periods of market turmoil.
Certain foreign investments may become illiquid when, for instance, there are
few, if any, interested buyers and sellers or when
dealers are unwilling to make a market for certain securities.
When the
Fund holds illiquid investments, its portfolio may be harder
to value.
The
U.S. and governments of other countries may renegotiate some or all of its
global trade relationships and may impose or threaten to
impose significant import tariffs. The imposition of tariffs, trade
restrictions, currency restrictions or similar actions (or retaliatory
measures
taken in response to such actions) could lead to price volatility and overall
declines in U.S. and global investment markets. In
addition, the Holding Foreign Companies Accountable Act (the “HFCAA”) could
cause securities of a foreign (non-U.S.) company,
including ADRs, to be delisted from U.S. stock exchanges if the company does not
allow the U.S. government to oversee the
auditing of its financial information. Although the requirements of the HFCAA
apply to securities of all foreign (non-U.S.) issuers,
the SEC has thus far limited its enforcement efforts to securities of Chinese
companies. If securities are delisted, the Fund’s ability
to transact in such securities will be impaired, and the liquidity and market
price of the securities may decline. The Fund may also
need to seek other markets in which to transact in such securities, which could
increase the Fund’s costs.
Certain
foreign governments may levy withholding or other taxes on dividend and interest
income. Although in some countries a portion
of these taxes may be recoverable, the non-recovered portion of foreign
withholding taxes will reduce the income received from
investments in such countries. Certain
Funds may be able to pass through to their shareholders a credit for U.S. tax
purposes with
respect to any such foreign taxes.
See
“Taxes — Foreign Income Taxes”, below.
Unless
otherwise noted in the Fund’s Prospectus,
the Adviser may consider an issuer to be from a particular country (including
the United
States) or geographic region if: (i) its principal securities trading market is
in that country or geographic region; (ii) alone or on
a consolidated basis it derives 50% or more of its annual revenue or profits
from goods produced, sales made or services performed in
that country or geographic region or has at least 50% of its assets,
core business operations and/or employees
in that country or geographic
region; or (iii) it is organized under the laws of, or has a principal office
in, that country or geographic region. By applying these
tests, it is possible that a particular issuer could be deemed to be from more
than one country or geographic region.
Foreign
securities may include, without limitation, foreign equity securities, which are
equity securities of a non-U.S. issuer, foreign government
fixed-income securities, which are fixed-income securities issued by a
government other than the U.S. Government or
government-related
issuer in a country other than the United States, and foreign corporate
fixed-income securities, which are fixed-income
securities issued by a private issuer in a country other than the United
States.
On
February 1, 2022, the European Union adopted a settlement discipline regime
pursuant to Central Securities Depositories Regulation
(“CSDR”) that introduced new measures for the authorization and supervision of
European Union Central Security Depositories.
CSDR aims to reduce the number of settlement fails that occur in European
Economic Area (“EEA”) central securities depositories
(“CSDs”) and address settlement fails where they occur. Under the regime, among
other things, EEA CSDs are required to
impose cash penalties on participants that cause settlement fails and distribute
these to receiving participants. The CSDR requirements
apply to transactions in transferable securities (e.g., stocks and bonds), money
market instruments, shares of funds and emission
allowances that will be settled through an EEA CSD and are admitted to trading
or traded on an EEA trading venue or cleared
by an EEA central counterparty. The Fund may bear the net effect of any
penalties and credits incurred under the CSDR in respect
of its trading, which could increase the Fund’s expenses and adversely affect
Fund performance. The Adviser may seek reimbursement
from the relevant broker, agent, or subadviser (as applicable), as determined by
the Adviser from time to time, although
there can be no assurance that the Adviser will seek such reimbursement or that
the Fund will recover or be reimbursed for any
amounts at issue.
Investments
in foreign companies and countries are subject to economic sanction and trade
laws in the United States and other jurisdictions.
These laws and related governmental actions may, from time to time, prohibit
the
Fund from investing in certain countries
and in certain companies. Investments in certain countries and companies may be,
and have in the past been, restricted as a result
of the imposition of economic sanctions. In addition, economic sanction laws in
the United States and other jurisdictions may prohibit
the
Fund from transacting with a particular country or countries, organizations,
companies, entities and/or individuals. These
types of sanctions may significantly restrict or completely prohibit investment
activities in certain jurisdictions.
Economic
sanctions and other similar governmental actions could, among other things,
effectively restrict or eliminate the
Fund’s ability
to purchase or sell securities or groups of securities, and thus may make the
Fund’s investments in such securities less liquid or more
difficult to value. In addition, as a result of economic sanctions, the Fund may
be forced to sell or otherwise dispose of investments
at inopportune times or prices, which could result in losses to the Fund and
increased transaction costs. These conditions may
be in place for a substantial period of time and enacted with limited advance
notice to the Fund.
In
addition, such economic sanctions or other government restrictions may
negatively impact the value or liquidity of the
Fund’s investments,
and could impair the Fund’s ability to meet its investment objective or invest
in accordance with its investment strategy because
the Fund may, for example, be prohibited from investing in securities issued by
companies subject to such restrictions and the
Fund could be required to freeze or divest its existing investments that the
Adviser would otherwise consider to be attractive.
The
risks posed by economic sanctions against a particular foreign country, its
nationals or industries or businesses within the country may
be heightened to the extent the
Fund invests significantly in the affected country or region or in issuers from
the affected country
that depend on global markets.
Referendum
on the UK’s EU Membership.
In an advisory referendum held in June 2016, the United Kingdom (“UK”)
electorate voted to
leave the EU, an event widely referred to as “Brexit.” On January 31, 2020, the
UK officially withdrew from the EU and on
December
30, 2020, the EU and UK signed the EU-UK Trade and Cooperation Agreement
(“TCA”), an agreement on the terms governing
certain aspects of the EU’s and the UK’s relationship.
Notwithstanding the TCA, there
is likely to be considerable uncertainty
as to the UK’s post-transition framework.
The
full
impact
on the UK and the EU and the broader global economy is still unknown but could
be significant and could result in increased
volatility and illiquidity and potentially lower economic growth. Brexit may
have a negative impact on the economy and currency
of the UK and the EU as a result of anticipated, perceived or actual changes to
the UK’s economic and political relations with
the EU. The impact of Brexit, and its ultimate implementation, on the economic,
political and regulatory environment of the UK
and the EU could have global ramifications.
The Fund
may make investments in the UK, other EU members and in non-EU countries that
are directly or indirectly affected by the
exit of the UK from the EU. Adverse legal, regulatory or economic conditions
affecting the economies of the countries in which the
Fund
conducts its
business (including making investments) and any corresponding deterioration in
global macro-economic conditions
could have a material adverse effect on the
Fund’s investment returns. Potential consequences to which the Fund may
be exposed,
directly or indirectly, as a result of the UK referendum vote include, but are
not limited to, market dislocations, economic and
financial instability in the UK and in other EU members, increased volatility
and reduced liquidity in financial markets, reduced availability
of capital, an adverse effect on investor and market sentiment, Sterling and
Euro destabilization, reduced deal flow in the
Fund’s
target markets, increased counterparty risk and regulatory, legal and compliance
uncertainties. Any of the foregoing or similar risks
could have a material adverse effect on the operations, financial condition or
investment returns of the Fund
and/or the Adviser in
general. The effects on the UK, European and global economies of the exit of the
UK (and/or other EU members during the term of
the Fund)
from the EU, or the exit of other EU members from the European monetary area
and/or the redenomination of financial
instruments from the Euro to a different currency, are difficult to predict and
to protect fully against. Many of the foregoing
risks
are outside of the control of the Fund
and the Adviser. These risks may affect the
Fund, the Adviser and other service providers given
economic, political and regulatory uncertainty created by Brexit.
Brady
Bonds.
Brady Bonds are fixed-income securities that are created through the exchange of
existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by Nicholas F. Brady when he was the
U.S. Secretary of the Treasury. They may be collateralized or uncollateralized
and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
(“OTC”) secondary market. The
Fund will invest in Brady
Bonds only if they are consistent with the Fund’s quality specifications.
Dollar-denominated, collateralized Brady Bonds may be
fixed-rate par bonds or floating rate discount bonds. Interest payments on Brady
Bonds generally are collateralized by cash or securities
in an amount that, in the case of fixed-rate bonds, is equal to at least one
year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year’s rolling interest payments
based on the applicable interest rate at that time and
is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
“value recovery payments” in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized.
Brady
Bonds are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the “residual
risk”). In the event of a default with respect to collateralized
Brady Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations
held as collateral for the payment of principal will not be distributed to
investors, nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which
will continue to be outstanding, at which time the face amount of the collateral
will equal the principal payments due on the Brady
Bonds in the normal course. However, Brady Bonds should be viewed as speculative
in light of the history of defaults with respect
to commercial bank loans by public and private entities of countries issuing
Brady Bonds.
Emerging
Market Securities. Certain
Funds may invest in emerging market securities. An emerging market security is a
security issued
by an emerging market foreign government or private issuer. An emerging market
foreign government or private issuer has one or
more of the following characteristics: (i)
its principal securities trading market is in an emerging market or developing
country; (ii)
alone
or on a consolidated basis it derives 50% or more of its annual revenue or
profits from goods produced, sales made or services performed
in an emerging market or developing country or has at least 50% of its
assets,
core business operations and/or employees
in
an emerging market or developing country; or (iii)
it is organized under the laws of, or has a principal office in, an emerging
market
or developing country. Based on these criteria it is possible for a security to
be considered issued by an issuer in more than one country.
Therefore,
it is possible for the securities of any issuer that has one or more of these
characteristics in connection with any emerging
market or developing country to be considered an emerging market security when
held in one Fund, but not considered an emerging
market security when held in another Fund if it has one or more of these
characteristics in connection with a developed country.
Emerging
market describes any country that is generally considered to be an emerging or
developing country by major organizations in
the international financial community or by the
Fund’s applicable
benchmark
index.
The
economies of individual emerging market or developing countries may differ
favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation or deflation,
currency depreciation, capital reinvestment, resource self-sufficiency
and balance of payments position. Further, the economies of developing countries
generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures. These
economies also have been, and may continue
to be, adversely affected by economic conditions in the countries with which
they trade.
Prior
governmental approval for foreign investments may be required under certain
circumstances in some emerging market or developing
countries, and the extent of foreign investment in certain fixed-income
securities and domestic companies may be subject to
limitation in other emerging market or developing countries. Foreign ownership
limitations also may be imposed by the charters of
individual companies in emerging market or developing countries to prevent,
among other concerns, violation of foreign investment
limitations. Repatriation of investment income, capital and the proceeds of
sales by foreign investors may require governmental
registration and/or approval in some emerging countries. The
Fund could be adversely affected by delays in, or a refusal
to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls
will be considered illiquid if it appears reasonably likely that this process
will take more than seven days.
Certain
emerging market countries may be subject to less stringent requirements
regarding accounting, auditing, financial reporting and
record keeping and therefore, material information related to an investment may
not be available or reliable. In addition, the
Fund
is limited in its ability to exercise its legal rights or enforce a
counterparty’s legal obligations in certain jurisdictions outside of
the
United States, in particular, in emerging markets countries.
Investment
in emerging market or developing countries may entail purchasing securities
issued by or on behalf of entities that are insolvent,
bankrupt, in default or otherwise engaged in an attempt to reorganize or
reschedule their obligations and in entities that
have
little or no proven credit rating or credit history. In any such case, the
issuer’s poor or deteriorating financial condition may increase
the likelihood that the
Fund will experience losses or diminution in available gains due to
bankruptcy, insolvency or fraud. Emerging
market or developing countries also pose the risk of nationalization,
expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies
of such countries or the value of the
Fund’s investments in those countries. In addition, it may be difficult to
obtain and enforce
a judgment in a court outside the United States.
The Fund
may also be exposed to an extra degree of custodial and/or market risk,
especially where the securities purchased are not traded
on an official exchange or where ownership records regarding the securities are
maintained by an unregulated entity (or even the
issuer itself).
Sukuk.
The Fund may invest in Sukuk, which are foreign or emerging market securities
based on Islamic principles. Sukuk are securities
with cash flows similar to conventional bonds, issued by an issuer, which is
usually a special purpose vehicle (“SPV”) incorporated
by the sovereign or corporate entity seeking financing, to obtain an upfront
payment in exchange for an income stream and
a future promise to return capital. Sukuk are designed to comply with Islamic
religious law, commonly known as Sharia and, accordingly,
do not pay interest. Instead, Sukuk securities represent a contractual
obligation of the issuer or issuing vehicle to make periodic
distributions (such as income or other periodic payments) to the investor on
pre-defined distribution dates and to return capital
on a specified date, and such contractual payment obligation is linked to the
issuer or issuing vehicle and not from interest on the
investor’s money for Sukuk. Sukuk may be linked to income streams relating to
tangible assets, but even in respect of such Sukuk, the
Fund will not have a direct interest in, or recourse to, the underlying asset or
pool of assets.
In
the event of a default or the insolvency of the issuer, the resolution process
can be expected to take longer than for conventional bonds.
Sukuk remain relatively new instruments, and evolving interpretations of Islamic
law by courts, regulators and prominent scholars
may affect liquidity, prices, free transferability and the ability and
willingness of issuers of Sukuk to make payments in ways that
cannot now be foreseen. In addition, issuers have, in the past, challenged the
Islamic compliance of certificates. If any such or analogous
events should occur, the Fund may be required to hold its Sukuk for longer than
intended, even if their value or other condition
is deteriorating. In such circumstances, the Fund may not be able to achieve
expected returns on its investment in Sukuk or any
returns at all.
Issuers
of Sukuk may include SPVs established by corporations and financial
institutions, foreign governments and agencies of foreign
governments. Underlying assets may include, without limitation, real estate
(developed and undeveloped), lease contracts, forward-sale
commodity contracts and machinery and equipment. Although the Sukuk market has
grown significantly in recent years,
there may be times when the market is illiquid and where it is difficult for the
Fund to make an investment in or dispose of Sukuk
at the desired time or price. Sukuk involve many of the same risks that
conventional bonds incur, such as credit risk and interest
rate risk, as well as the risks associated with foreign or emerging market
securities. In addition to these risks, there are certain risks
specific to Sukuk, such as those relating to their structures. Furthermore, the
global Sukuk market is significantly smaller than conventional
bond markets, which may impact liquidity and the ability for the Fund to sell
Sukuk at a desired time or price.
The
unique characteristics of Sukuk may lead to uncertainties regarding their tax
treatment within the Fund. In light of tax requirements
applicable to the Fund, it may be necessary or advisable for the Fund to sell
one or more Sukuk (or another investment) sooner
than otherwise anticipated. As a result, the Fund may incur taxable gains or
investment losses, as well as costs associated with such
transaction.
Foreign
Fixed-Income Securities.
Foreign fixed-income securities are fixed-income securities that may be
denominated in foreign currency
and traded primarily outside of the United States, which include: (1)
obligations issued or guaranteed by foreign national governments,
their agencies, instrumentalities, or political subdivisions (“sovereign debt”);
(2) debt securities issued, guaranteed or sponsored
by supranational organizations established or supported by several national
governments, the European Community, the Asian
Development Bank and others; (3) non-government foreign corporate debt
securities; and (4) foreign mortgage securities and various
other mortgages and asset-backed securities.
Certain
emerging market or developing countries are among the largest debtors to
commercial banks and foreign governments. The issuer
or governmental authority that controls the repayment of sovereign debt may not
be willing or able to repay the principal and/or
pay interest when due in accordance with the terms of such
obligations.
A
governmental entity’s willingness or ability to repay principal and pay interest
due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the government’s dependence on expected disbursements
from third-parties, the government’s policy toward the International Monetary
Fund and the political constraints to which
a government may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a debtor’s implementation of economic
reforms or economic performance and the timely service of such debtor’s
obligations. Failure to implement such reforms,
achieve
such levels of economic performance or repay principal or interest when due may
result in the cancellation of such third-parties’
commitments to lend funds to the government debtor, which may further impair
such debtor’s ability or willingness to timely
service its debts. Holders of sovereign debt may be requested to participate in
the rescheduling of such debt and to extend further
loans to governmental entities. In addition, no assurance can be given that the
holders of commercial bank debt will not contest
payments to the holders of other foreign government debt obligations in the
event of default under their commercial bank loan
agreements. The issuers of the government debt securities in
which the
Fund may invest have in the past experienced substantial difficulties
in servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments
by negotiating new or amended credit agreements or converting outstanding
principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. There can be no assurance
that the Brady Bonds and other foreign government
debt securities in which the Fund may invest will not be subject to similar
restructuring arrangements or to requests for new
credit, which may adversely affect the Fund’s holdings. (See “Brady Bonds”
above.) Furthermore, certain participants in the secondary
market for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access
to information not available to other market participants.
Foreign
Currency Transactions.
The U.S. dollar value of the assets of the Fund,
to the extent they invest in securities denominated in
foreign currencies, may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations,
and the Fund
may incur costs in connection with conversions between various currencies.
Currency exchange rates may fluctuate
significantly over short periods of time for a number of reasons, including
changes in interest rates and the overall economic health
of the issuer. Devaluation of a currency by a country’s government or banking
authority also will have a significant impact on the
value of any investments denominated in that currency. The Fund may
conduct its
foreign currency exchange transactions on a spot
(i.e., cash) basis at the then-prevailing spot rate in the foreign currency
exchange market. The Fund
also may manage its
foreign currency
transactions by entering into foreign currency forward exchange contracts to
purchase or sell foreign currencies or by using other
instruments and techniques described under “Derivatives.”
Under
normal circumstances, consideration of the prospect for changes in the values of
currency will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Adviser believes that it is important to have
the flexibility to use such derivative products when it determines that it is in
the best interests of the
Fund. It may not be practicable
to hedge foreign currency risk in all markets, particularly emerging
markets.
Principal
Exchange Rate Linked Securities.
Principal exchange rate linked securities are debt obligations the principal of
which is payable
at maturity in an amount that may vary based on the exchange rate between the
U.S. dollar and a particular foreign currency at
or about that time. The return on “standard” principal exchange rate linked
securities is enhanced if the foreign currency to which the
security is linked appreciates against the U.S. dollar, and is adversely
affected by increases in the foreign exchange value of the U.S.
dollar; “reverse” principal exchange rate linked securities are like the
“standard” securities, except that their return is enhanced by
increases in the value of the U.S. dollar and adversely impacted by increases in
the value of foreign currency. Interest payments on the
securities are generally made in U.S. dollars at rates that reflect the degree
of foreign currency risk assumed or given up by the purchaser
of the notes (i.e., at relatively higher interest rates if the purchaser has
assumed some foreign currency risk).
Investment
Funds. Some
emerging market countries have laws and regulations that currently preclude
direct investment or make it undesirable
to invest directly in the securities of their companies. However, indirect
investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain
emerging market countries through investment funds that
have been specifically authorized. The
Fund may invest in these investment funds subject to the provisions of the 1940
Act, as applicable,
and other applicable laws. The Fund
will invest in such investment funds only where appropriate given that the
Fund’s shareholders
will bear indirectly the layer of expenses of the underlying investment funds in
addition to their proportionate share of the
expenses of the Fund.
Exchange-Listed
Equities via Stock Connect Program. The
Shanghai-Hong Kong Stock Connect program and the Shenzhen-Hong
Kong Stock Connect programs (“Stock Connect”) allow non-Chinese investors (such
as the
Fund) to purchase certain listed equities
via brokers in Hong Kong. Although Stock Connect allows non-Chinese investors to
trade Chinese equities without a license,
purchases of securities through Stock Connect are subject to daily market-wide
quota limitations, which may prevent the
Fund
from purchasing Stock Connect securities when it is otherwise advantageous to do
so. An investor cannot purchase and sell the same
security on the same trading day, which may restrict the
Fund’s ability to invest in China A-shares through Stock Connect and
to
enter into or exit trades where it is advantageous to do so on the same trading
day. Because Stock Connect trades are routed through
Hong Kong brokers and the Hong Kong Stock Exchange, Stock Connect is affected by
trading holidays in either China or Hong
Kong, and there are trading days in China when Stock Connect investors will not
be able to trade. As a result, prices of securities
purchased through Stock Connect may fluctuate at times when the
Fund is unable to add to or exit its position. Only certain
China A-shares are eligible to be accessed through Stock Connect. Such
securities may lose their eligibility at any time, in which
case they could be sold but could no longer be purchased through Stock Connect.
Because Stock Connect is relatively new, its effects
on the market for trading China A-shares are uncertain. In addition, the
trading, settlement and IT systems required to
operate
Stock Connect are relatively new and continuing to evolve. In the event that the
relevant systems do not function properly, trading
through Stock Connect could be disrupted.
Stock
Connect is subject to regulation by both Hong Kong and China. There can be no
assurance that further regulations will not affect
the availability of securities in the program, the frequency of redemptions or
other limitations. For defaults by Hong Kong brokers
occurring on or after January 1, 2020, the Hong Kong Investor Compensation Fund
will cover losses incurred by investors with
a cap of HK$500,000 per investor for securities traded on a stock market
operated by the Shanghai Stock Exchange and/or Shenzhen
Stock Exchange and in respect of which an order for sale or purchase is
permitted to be routed through the northbound link
of the Stock Connect. In China, Stock Connect securities are held on behalf of
ultimate investors (such as the
Fund) by the Hong
Kong Securities Clearing Company Limited (“HKSCC”) as nominee. The
Fund may therefore depend on HKSCC’s ability or willingness
as record-holder of Stock Connect securities to enforce the Fund’s shareholder
rights. While
Chinese regulators have affirmed
that the ultimate investors hold a beneficial interest in Stock Connect
securities, the law surrounding such rights is in its early
stages and the mechanisms that beneficial owners may use to enforce their rights
are untested and therefore pose uncertain risks. Further,
courts in China have limited experience in applying the concept of beneficial
ownership and the law surrounding beneficial ownership
will continue to evolve as they do so. Accordingly, there is a risk that as the
law is tested and developed, the
Fund’s ability to
enforce its ownership rights may be negatively impacted. The
Fund may not be able to participate in corporate actions affecting Stock
Connect securities due to time constraints or for other operational reasons.
The
Fund will not be able to attend shareholders’ meetings.
Stock Connect trades are settled in RMB, the Chinese currency, and investors
must have timely access to a reliable supply of
RMB in Hong Kong, which cannot be guaranteed.
Stock
Connect trades are either subject to certain pre-trade requirements or must be
placed in special segregated accounts that allow brokers
to comply with these pre-trade requirements by confirming that the
selling shareholder has sufficient Stock Connect securities
to complete the sale. If the
Fund does not utilize a special segregated account, the Fund will not be
able to sell the shares on any
trading day where it fails to comply with the pre-trade checks. In
addition, these pre-trade requirements may, as a practical matter,
limit the number of brokers that the
Fund may use to execute trades. While the
Fund may use special segregated accounts in lieu
of the pre-trade check, some market participants have yet to fully
implement IT systems necessary to complete trades involving securities
in such accounts in a timely manner. Market practice with respect to special
segregated accounts is continuing to evolve. Investments
via Stock Connect are subject to regulation by Chinese authorities. Chinese
law may require aggregation of the
Fund’s holdings
of Stock Connect securities with securities of other clients of
the Adviser for purposes of disclosing positions held in the market,
acquiescing to trading halts that may be imposed until regulatory filings
are completed or complying with China’s short-term trading
rules.
Since
the inception of Stock Connect, foreign investors investing in China A-shares
through Stock Connect have been temporarily exempt
from Chinese corporate income tax and value-added tax on the gains on disposal
of such China A-shares. Dividends are subject
to Chinese corporate income tax on a withholding basis at 10% unless reduced
under a double tax treaty with China upon application
to and obtaining approval from the competent tax authority. Additionally,
uncertainties in permanent Chinese tax rules governing
taxation of income and gains from investments in Stock Connect China A-shares
could result in unexpected tax liabilities for
the Fund.
The
risks related to investments in China A shares through Stock Connect are
heightened to the extent that the Fund invests in China
A shares listed on the Science and Technology Innovation Board on the Shanghai
stock exchange (“STAR market”) and/or the ChiNext
market of the Shenzhen stock exchange (“ChiNext market”). Listed companies on
the STAR market and ChiNext market
are usually of an emerging nature with smaller operating scale. They are subject
to higher fluctuation in stock prices and liquidity.
China A shares listed on ChiNext market and STAR market may be overvalued and
such exceptionally high valuation may not
be sustainable. Further, stock prices may be more susceptible to manipulation
due to fewer circulating shares. It may be more common
and faster for companies listed on the STAR market and ChiNext market to delist.
In particular, ChiNext market and STAR
market have stricter criteria for delisting compared to other boards.
Investments in the ChiNext market and/or STAR market may
result in significant losses for the Fund.
OTHER
SECURITIES AND INVESTMENT STRATEGIES
Borrowing
for Investment Purposes.
Borrowing for investment purposes creates leverage which is a speculative
characteristic. Funds authorized
to borrow will do so only when the Adviser believes that borrowing will benefit
the Fund after taking into account considerations
such as the costs of borrowing and the likely investment returns on securities
purchased with borrowed funds. Borrowing
by the
Fund will create the opportunity for increased net income but, at the same time,
will involve special risk considerations.
Leverage that results from borrowing will magnify declines as well as increases
in the
Fund’s NAV and net yield. The
Fund
that engages in borrowing expects that all of its borrowing will be made on a
secured basis. The Fund will either segregate the assets
securing the borrowing for the benefit of the lenders or arrangements will be
made with a suitable sub-custodian. If assets used to
secure the borrowing decrease in value, the
Fund may be required to pledge additional collateral to the lender in the form
of cash or
securities to avoid liquidation of those assets.
Loans
of Portfolio Securities. The Fund
may lend its portfolio securities to brokers, dealers, banks and other
institutional investors. By
lending its portfolio securities, the
Fund attempts to increase its net investment income through the receipt of
interest on the cash collateral
with respect to the loan or fees received from the borrower in connection with
the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Fund. The
Fund expects to employ
an agent to implement the securities lending program and the agent receives a
fee from the
Fund
for its services. The
Fund will
not lend more than 33⅓% of the value of its total assets.
The Fund
may lend its portfolio securities so long as the terms, structure and the
aggregate amount of such loans are not inconsistent with
the 1940 Act or the rules and regulations or interpretations of the
SEC thereunder, which currently require that (i) the borrower pledge
and maintain with the Fund collateral consisting of liquid, unencumbered assets
having a value not less than 100% of the value
of the securities loaned; (ii) the borrower adds to such collateral whenever the
price of the securities loaned rises (i.e., the borrower
“marks-to-market” on a daily basis); (iii) the loan be made subject to
termination by the Fund at any time; and (iv) the Fund
receives a reasonable return on the loan (which may include the Fund investing
any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value. In addition, voting rights may pass
with the loaned securities, but the
Fund will retain the right to call any security in anticipation of a vote that
the Adviser deems material
to the security on loan.
Loans
of securities involve a risk that the borrower may fail to return the securities
or may fail to maintain the proper amount of collateral,
which may result in a loss of money by the
Fund. There may be risks of delay and costs involved in recovery of securities
or even
loss of rights in the collateral should the borrower of the securities fail
financially. These delays and costs could be greater for foreign
securities. However, loans will be made only to borrowers deemed by the Adviser
to be creditworthy and when, in the judgment
of the Adviser, the income that can be earned from such securities loans
justifies the attendant risk. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer, bank or institution, will
be considered in making decisions with respect
to the lending of securities, subject to review by the Company’s Board of
Directors. The Fund
also bears the risk that the reinvestment
of collateral will result in a principal loss. Finally, there is the risk that
the price of the securities will increase while they are
on loan and the collateral will not be adequate to cover their
value.
Non-Publicly
Traded Securities, Private Placements and Restricted Securities.
The Fund
may invest in securities that are neither listed
on a stock exchange nor traded OTC, including privately placed and
restricted securities. Such unlisted securities may involve a higher
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Fund or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. The illiquidity
of the market, as well as the lack of publicly available information regarding
these securities, may also adversely affect the ability
of the
Fund
to arrive at a fair value for certain securities at certain times and could make
it difficult for the Fund
to sell certain securities.
If such securities are required to be registered under the securities laws of
one or more jurisdictions before being sold, the
Fund
may be required to bear the expenses of registration.
The
Fund may purchase equity securities, in a private placement, that are
issued by issuers who have outstanding, publicly-traded equity
securities of the same class (“private investments in public equity” or
“PIPEs”). Shares in PIPEs generally are not registered with
the SEC until after a certain time period from the date the private sale is
completed. This restricted period can last many months.
Until the public registration process is completed, PIPEs are restricted as to
resale and the Fund cannot freely trade the securities.
Generally, such restrictions cause the PIPEs to be illiquid during this time.
PIPEs may contain provisions that the issuer will
pay specified financial penalties to the holder if the issuer does not publicly
register the restricted equity securities within a specified
period of time, but there is no assurance that the restricted equity securities
will be publicly registered, or that the registration
will remain in effect.
Reverse
Repurchase Agreements. Under
a reverse repurchase agreement, the
Fund sells a security and promises to repurchase that security
at an agreed-upon future date and price. The price paid to repurchase the
security reflects interest accrued during the term of the
agreement. Reverse repurchase agreements may be entered into for, among other
things, obtaining leverage, facilitating short-term
liquidity or when the Adviser expects that the interest income to be earned from
the investment of the transaction proceeds will be
greater than the related interest expense.
Reverse repurchase agreements may be viewed as a speculative form of borrowing
called leveraging.
Furthermore, reverse repurchase agreements involve the risks that (i) the
interest income earned in the investment of the proceeds
will be less than the interest expense, (ii) the market value of the securities
retained in lieu of sale by the
Fund may decline below
the price of the securities the Fund has sold but is obligated to repurchase,
(iii) the market value of the securities sold will decline
below the price at which the Fund is required to repurchase them and (iv) the
securities will not be returned to the Fund.
In
addition, the use of leverage may cause the
Fund to liquidate portfolio positions when it may not be advantageous to do so
to satisfy
its obligations.
Leverage, including borrowing, may cause the
Fund to be more volatile than if the Fund had not been leveraged.
This is because leverage tends to exaggerate the effect of any increase or
decrease in the value of the
Fund’s portfolio
securities.
All forms of borrowing (including reverse repurchase agreements) are limited in
the aggregate and may not exceed 33⅓% of
the Fund’s total assets, except as permitted by law or SEC
requirements.
Short
Sales.
A short sale is a transaction in which the
Fund sells securities that it owns or has the right to acquire at no added cost
(i.e.,
“against the box”) or does not own (but has borrowed) in anticipation of a
decline in the market price of the securities. To deliver
the securities to the buyer, the
Fund arranges through a broker to borrow the securities and, in so doing, the
Fund becomes obligated
to replace the securities borrowed at their market price at the time of
replacement. When selling short, the
Fund intends to replace
the securities at a lower price and therefore, profit from the difference
between the cost to replace the securities and the proceeds
received from the sale of the securities. When the
Fund makes a short sale, the proceeds it receives from the sale will be held
on
behalf of a broker until the Fund replaces the borrowed
securities. The
Fund may have to pay a premium to borrow the securities and
must pay any dividends or interest payable on the securities until they are
replaced.
The Fund’s
obligation to replace the securities borrowed in connection with a short sale
will be secured by collateral deposited with the
broker that consists of cash or other liquid securities. Short
sales by the
Fund involve certain risks and special considerations. If the
Adviser incorrectly predicts that the price of the borrowed security will
decline, the
Fund will have to replace the securities with securities
with a greater value than the amount received from the sale. As a result, losses
from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only
the total amount invested. Please see “Derivatives Agreements -- Regulatory
Matters”.
Temporary
Borrowing. The
Fund is permitted to borrow from banks for extraordinary or emergency purposes.
For example, the Fund may
borrow for temporary defensive purposes or to meet shareholder redemptions when
the Adviser believes that it would not be
in the best interests of the Fund
to liquidate portfolio holdings. Except in the case of the Emerging Markets Debt
Portfolio, the Fund
will not purchase additional securities while temporary borrowings exceed 5% of
its total assets.
The
Board of Directors of the Company has approved procedures whereby the
Fund
together with other investment companies advised
by the Adviser or its affiliates may enter into a joint line of credit
arrangement with a bank. The
Fund would be liable only for
its own temporary borrowings under the joint line of credit
arrangements.
When,
As and If Issued Securities. The
Fund may purchase securities on a “when, as and if issued” basis, under which
the issuance of
the security depends upon the occurrence of a subsequent event, such as approval
of a merger, corporate reorganization or debt restructuring.
The commitment for the purchase of any such security will not be recognized in
the portfolio of the
Fund until the Adviser
determines that issuance of the security is probable. At that
time, the
Fund will record the transaction and, in determining its NAV,
will reflect the value of the security daily.
An
increase in the percentage of the
Fund’s assets committed to the purchase of securities on a “when, as and if
issued” basis may increase
the volatility of its NAV. The
Fund may also sell securities on a “when, as and if issued” basis provided that
the issuance of the
security will result automatically from the exchange or conversion of a security
owned by the Fund at the time of sale.
When-Issued
and Delayed Delivery Securities,
TBAs
and Forward Commitments.
The
Fund may purchase or sell
securities on a when-issued
or delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When these transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of
commitment. The
Fund
may sell the securities before the settlement date if it is deemed advisable.
The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date.
In addition, the
Fund may invest in to-be-announced pass-through mortgage securities, which
settle on a delayed delivery basis (“TBAs”). In a TBA
transaction, the buyer and seller agree upon general trade parameters such as
agency, settlement date, par amount, and price at the
time the contract is entered into but the MBS are delivered in the future,
generally 30 days later. Accordingly, the Fund’s investments
in TBAs are subject to risks such as failure of the counterparty to perform its
obligation to deliver the security, the characteristics
of a security delivered to a Fund may be less favorable than expected and the
security the Fund buys will lose value prior
to its delivery.
At
the time the
Fund makes the commitment to purchase or sell securities on a when-issued,
delayed delivery or forward commitment
basis, it will record the transaction and thereafter reflect the value, each
day, of such security purchased, or if a sale, the proceeds
to be received, in determining its NAV. At the time of delivery of the
securities, their value may be more or less than the purchase
or sale price. An increase in the percentage of the
Fund’s assets committed to the purchase of securities on a when-issued,
delayed
delivery or forward commitment basis may increase the volatility of its
NAV.
Derivatives.
Certain
Funds may, but are not required to, use various derivatives and
other
similar instruments
as described below. Derivatives
may be used for a variety of purposes including hedging, risk management,
portfolio management or to earn income. Any or
all of the investment techniques described herein may be used at any time and
there is no particular strategy that dictates the use of one
technique rather than another, as the use of any derivative by the Fund
is a function of numerous variables, including market conditions.
The Fund
complies with applicable regulatory requirements when using
derivatives.
Although the Adviser seeks to use derivatives
to further the Fund’s
investment objective, no assurance can be given that the use of derivatives will
achieve this result.
Derivative
instruments used by the Fund will be counted toward the Fund’s 80% policy, if
applicable, discussed in the Prospectuses to
the extent they have economic characteristics similar to the securities included
within that policy.
General
Risks of Derivatives.
Derivatives utilized by the
Fund may involve the purchase and sale of derivative instruments. A derivative
is
a financial instrument the value of which depends upon (or derives from) the
value of another asset, security, interest rate,
index or financial
instrument.
Derivatives may relate to a wide variety of underlying instruments, including
equity and debt securities, indices, interest
rates, currencies and other assets. Certain derivative instruments
that
the
Fund may use and the risks of those instruments are described
in further detail below. The
Fund may in the future also utilize derivatives techniques, instruments and
strategies that may be
newly developed or permitted as a result of regulatory changes, consistent
with the
Fund’s investment objective and policies. Such newly
developed techniques, instruments and strategies may involve risks different
than or in addition to those described herein. No assurance
can be given that any derivatives strategy employed by the
Fund will be successful.
The
risks associated with the use of derivatives are different from, and possibly
greater than, the risks associated with investing directly
in the instruments underlying such derivatives. Derivatives are highly
specialized instruments that require investment techniques
and risk analyses different from other portfolio investments. The use of
derivative instruments requires an understanding not
only of the underlying instrument but also of the derivative itself. Certain
risk factors generally applicable to derivative transactions
are described below.
■ |
Derivatives
are subject to the risk that the market value of the derivative itself or
the market value of underlying instruments will change
in a way adverse to the
Fund’s interests. The
Fund bears the risk that the Adviser may incorrectly forecast future
market trends
and other financial or economic factors or the value of the underlying
security, index, interest rate or currency when establishing
a derivatives position for the
Fund. |
■ |
Derivatives
may be subject to pricing risk, which exists when a derivative becomes
extraordinarily expensive (or inexpensive) relative
to historical prices or corresponding instruments. Under such market
conditions, it may not be economically feasible to initiate
a transaction or liquidate a position at an advantageous time or
price. |
■ |
Many
derivatives are complex and often valued subjectively. Improper valuations
can result in increased payment requirements to
counterparties or a loss of value to the
Fund. Many derivatives may also involve operational and legal
risks. |
■ |
Using
derivatives as a hedge against a portfolio investment
subjects the
Fund to the risk that the derivative will have imperfect correlation
with the portfolio investment, which could result in the
Fund incurring substantial losses. This correlation risk may be
greater in the case of derivatives based on an index or other basket of
securities, as the portfolio securities being hedged may not
duplicate the components of the underlying index or the basket may not be
of exactly the same type of obligation as those underlying
the derivative. The use of derivatives for “cross hedging” purposes (using
a derivative based on one instrument as a hedge
on a different instrument) may also involve greater correlation
risks. |
■ |
While
using derivatives for hedging purposes can reduce the
Fund’s risk of loss, it may also limit the
Fund’s opportunity for gains
or result in losses by offsetting or limiting the
Fund’s ability to participate in favorable price movements in portfolio
investments. |
■ |
Derivatives
transactions for non-hedging purposes involve greater risks and may result
in losses which would not be offset by increases
in the value of portfolio securities or declines in the cost of securities
to be acquired. In the event that the
Fund enters into
a derivatives transaction as an alternative to purchasing or selling the
underlying instrument or in order to obtain desired exposure
to an index or market, the
Fund will be exposed to the same risks as are incurred in purchasing or
selling the underlying
instruments directly as well as the additional risks associated with
derivatives transactions. |
■ |
The
use of certain derivatives transactions, including OTC derivatives,
involves the risk of loss resulting from the insolvency or bankruptcy
of the counterparty to the contract or the failure by the counterparty to
make required payments or otherwise comply
with the terms of the contract. In the event of default by a
counterparty,
the
Fund may have contractual remedies pursuant
to the agreements related to the
transaction. |
■ |
Liquidity
risk exists when a particular derivative is difficult to purchase or sell.
If a derivative transaction is particularly large or if the
relevant market is illiquid, the
Fund may be unable to initiate a transaction or liquidate a position at an
advantageous time or
price. |
■ |
While
some derivatives are cleared through a regulated, central clearinghouse,
many derivatives transactions are not entered into or
traded on exchanges or in markets regulated by the U.S. Commodity Futures
Trading Commission (“CFTC”) or the SEC. Instead,
in some cases, certain types of bilateral OTC derivatives are entered into
directly by the
Fund and a counterparty and may
be traded only through financial institutions acting as market makers. OTC
derivatives transactions can only be entered into
with a willing counterparty that is approved by the Adviser in accordance
with guidelines established by the Board. Where no
such counterparty is available, the
Fund will be unable to enter into a desired OTC transaction. There also
may be greater risk
that no liquid secondary market in the trading of OTC derivatives will
exist, in which case the
Fund may be required to hold
such instruments until exercise, expiration or maturity. Many of the
protections afforded to participants in the cleared derivatives
markets are not available to participants in bilateral OTC derivatives
transactions. Bilateral OTC derivatives transactions
are not subject to the guarantee of a clearinghouse and, as a
result, the
Fund would bear greater risk of default by the
counterparties to such transactions. |
■ |
The Fund
may be required to make physical delivery of portfolio securities
underlying a derivative in order to close out or
to |
|
meet
margin and payment requirements and a
derivatives position or to sell portfolio securities at a time or price at
which it may be
disadvantageous to do so in order to obtain cash to close out or to
maintain a derivatives position. |
■ |
As
a result of the structure of certain derivatives, adverse changes in,
among other things, interest rates, volatility or the value of
the
underlying instrument can result in losses substantially greater than the
amount invested in the derivative itself. Certain derivatives
have the potential for unlimited loss, regardless of the size of the
initial investment. |
■ |
Certain
derivatives may be classified
as
illiquid and therefore subject to
the
Fund’s limitation on investments in illiquid investments. |
■ |
Derivatives
transactions conducted outside the United States may not be conducted in
the same manner as those entered into on
U.S. exchanges, and may be subject to different margin, exercise,
settlement or expiration procedures. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign
exchanges. Many of the risks of OTC derivatives
transactions are also applicable to derivatives transactions conducted
outside the United States. Derivatives transactions
conducted outside the United States are subject to the risk of
governmental action affecting the trading in, or the prices
of, foreign securities, currencies and other instruments. The value of
such positions could be adversely affected by foreign political
and economic factors; lesser availability of data on which to make trading
decisions; delays on the
Fund’s ability to act upon
economic events occurring in foreign markets; and less liquidity than U.S.
markets. |
■ |
Currency
derivatives are subject to additional risks. Currency derivatives
transactions may be negatively affected by government exchange
controls, blockages and manipulation. Currency exchange rates may be
influenced by factors extrinsic to a country’s economy.
There is no systematic reporting of last sale information with respect to
underlying foreign currencies. As a result, the available
information on which trading in currency derivatives will be based may not
be as complete as comparable data for other
transactions. Events could occur in the foreign currency market which will
not be reflected in currency derivatives until the
following day, making it more difficult for the
Fund to respond to such events in a timely
manner. |
Regulatory
Matters. Regulatory
developments
affecting the exchange-traded and OTC derivatives markets may
impair the
Fund’s ability
to manage or hedge its investment portfolio through the use of derivatives. In
particular, in October 2020, the SEC adopted a final
rule related to the use of derivatives, short sales, reverse repurchase
agreements and certain other transactions by registered investment
companies that rescinded
and withdrew
the guidance of the SEC and its staff regarding asset segregation and cover
transactions
previously
applicable to a Fund’s derivatives and other transactions. These requirements
may limit the ability of a Fund to
use derivatives and reverse repurchase agreements and similar financing
transactions as part of its investment strategies.
The final rule
requires Funds to trade derivatives and other transactions that create future
payment or delivery obligations subject
to a value-at-risk
(“VaR”) leverage limit, certain derivatives risk management program and
reporting requirements. Generally, these requirements apply
unless a Fund qualifies as a “limited derivatives user.”
Under the final rule, when a Fund trades reverse repurchase agreements
or
similar financing transactions, including certain tender option bonds, it needs
to aggregate the amount of indebtedness associated with
the reverse repurchase agreements or similar financing transactions with the
aggregate amount of any other senior securities representing
indebtedness when calculating the Fund’s asset coverage ratio or treat all such
transactions as derivatives transactions. Reverse
repurchase agreements or similar financing transactions aggregated with other
indebtedness do not need to be included in the calculation
of whether a Fund is a limited derivatives user, but for funds subject to the
VaR testing, reverse repurchase agreements and
similar financing transactions must be included for purposes of such testing
whether treated as derivatives transactions or not. The
SEC also provided guidance in connection with the rule
regarding use of securities lending collateral that may limit the Funds’
securities
lending activities. In
addition, under the rule, the Fund is permitted to invest in a security on a
when-issued or forward-settling
basis, or with a non-standard settlement cycle, and the transaction will be
deemed not to involve a senior security under the 1940
Act, provided that (i) the Fund intends to physically settle the transaction and
(ii) the transaction will settle within 35 days of its
trade date (the “Delayed-Settlement Securities Provision”). The Fund may
otherwise engage in such transactions that do not meet the
conditions of the Delayed-Settlement Securities Provision so long as the Fund
treats any such transaction as a “derivatives transaction”
for purposes of compliance with the rule. Furthermore, under the rule, the Fund
will be permitted to enter into an unfunded
commitment agreement, and such unfunded commitment agreement will not be subject
to the asset coverage requirements under
the 1940 Act, if the Fund reasonably believes, at the time it enters into such
agreement, that it will have sufficient cash and cash
equivalents to meet its obligations with respect to all such agreements as they
come due. These
requirements may increase the cost
of a Fund’s investments and cost of doing business, which could adversely affect
investors.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
and the rules promulgated thereunder may
limit the ability of the
Fund to enter into one or more exchange-traded or OTC derivatives
transactions.
The
Adviser is subject to registration and regulation as a “commodity pool operator”
(“CPO”) under the Commodity Exchange Act, as
amended (“CEA”), with respect to its service as investment adviser to the Global
Strategist Portfolio. As a result, the Company, on behalf
of the Global Strategist Portfolio, will be required to operate in compliance
with applicable CFTC requirements, including registration,
disclosure, reporting and other operational requirements under the CEA and
related CFTC regulations. Compliance with
these additional requirements may increase Company expenses. The Adviser and the
Global Strategist Portfolio are exempt from certain
CFTC recordkeeping, reporting and disclosure requirements under CFTC Rule 4.7
with respect to the Global Strategist Subsidiary
(as defined below).
A
Fund’s use of derivatives may also be limited by the requirements of the Code
for qualification as a regulated investment company (“RIC”)
for U.S. federal income tax purposes.
The
Adviser, with respect to each Fund except for Global Strategist Portfolio, has
filed a notice of eligibility with the National Futures
Association (“NFA”) claiming an exclusion from the definition of the term CPO
pursuant to CFTC Regulation 4.5, as promulgated
under the CEA, with respect to each Fund’s operations. In addition, the Adviser
will operate each Bitcoin Subsidiary (as defined
below) in reliance on an exemption from registration as a CPO under CFTC
Regulation 4.13(a)(3). Therefore, neither the Funds
nor the Adviser (with respect to the Funds and each Bitcoin Subsidiary), except
for Global Strategist Portfolio
and Global Strategist
Subsidiary,
is subject to registration or regulation as a commodity pool or CPO under the
CEA. If the Adviser or a Fund becomes
subject to these requirements, as well as related NFA rules, the Fund may incur
additional compliance and other expenses.
With
respect to investments in swap transactions, commodity futures, commodity
options or certain other commodity interests used for
purposes other than bona fide hedging purposes, an
investment company must meet one of the following tests under the amended
regulations in order for its investment adviser to claim an exemption from being
considered a CPO. First, the aggregate initial
margin and premiums required to establish an investment company’s positions in
such investments may not exceed five percent
(5%) of the liquidation value of the investment company’s portfolio (after
accounting for unrealized profits and unrealized losses
on any such investments). Alternatively, the aggregate net notional value of
such instruments, determined at the time of the most
recent position established, may not exceed one hundred percent (100%) of the
liquidation value of the investment company’s portfolio
(after accounting for unrealized profits and unrealized losses on any such
positions). In addition to meeting one of the foregoing
trading limitations, the investment company may not market itself as a commodity
pool or otherwise as a vehicle for trading
in the commodity futures, commodity options or swaps and derivatives
markets.
Regulations
recently adopted by federal banking regulators under the Dodd-Frank Act require
that certain qualified financial contracts
(“QFCs”) with counterparties that are part of U.S. or foreign global
systemically important banking organizations be amended
to include contractual restrictions on close-out and cross-default rights. QFCs
include, but are not limited to, securities contracts,
commodities contracts, forward contracts, repurchase agreements, securities
lending agreements and swaps agreements, as well
as related master agreements, security agreements, credit enhancements, and
reimbursement obligations. If a covered counterparty
of a Fund or certain of the covered counterparty’s affiliates were to become
subject to certain insolvency proceedings, a Fund
may be temporarily unable to exercise certain default rights, and the QFC may be
transferred to another entity. These requirements
may impact a Fund’s credit and counterparty risks.
Options.
An option is a contract that gives the holder of the option the right, but not
the obligation, to buy from (in the case of a call
option) or sell to (in the case of a put option) the buyer or seller, as
applicable, of the option (the “option writer”) the underlying instrument
at a specified fixed price (the “exercise price”) on or prior to a specified
date for American options or only at expiration for European
options (the “expiration date”). The buyer of the option pays to the option
writer the option premium, which is the purchase
price of the option.
Exchange-traded
options are issued by a regulated intermediary such as the Office
of the Comptroller of the Currency
(“OCC”), which
guarantees the performance of the obligations of the parties to such options.
OTC options are purchased from or sold to counterparties
through direct bilateral agreements between the Fund
and its counterparties. Certain options, such as options on individual
securities, are settled through physical delivery of the underlying security,
whereas other options, such as index options, may
be settled in cash in an amount based on the difference between the value of the
underlying instrument and the strike price, which
is then multiplied by a specified multiplier.
Writing
Options. Certain
Funds may write call and put options. As the writer of a call
option, the
Fund receives the premium from the
purchaser of the option and has the obligation, upon exercise of the option, to
deliver the underlying security upon payment of the
exercise price. If the option expires without being exercised the
Fund is not required to deliver the underlying security and retains the
premium received.
Certain
Funds may write
call options that are “covered.” A call option on a security is covered if
(a) the
Fund owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional
cash consideration is required, such amount is maintained by the
Fund in earmarked or segregated cash or liquid assets) upon
conversion or exchange of other securities held by the
Fund; or (b) the
Fund has purchased a call on the underlying security, the
exercise price of which is (i) equal to or less than the exercise price of the
call written, or (ii) greater than the exercise price of the call
written, provided the difference is maintained by the
Fund in earmarked or segregated cash or liquid assets.
Selling
call options involves the risk that the
Fund may be required to sell the underlying security at a disadvantageous price,
below the
market price of such security, at the time the option is exercised. As the
writer of a covered call option, the
Fund forgoes, during the
option’s life, the opportunity to profit from increases in the market
value of the underlying security covering the option above the sum
of the premium and the exercise price but retains the risk of loss should the
price of the underlying security decline.
The
Fund may
write put options. As the writer of a put option,
the
Fund receives the premium from the purchaser of the option and has
the obligation, upon exercise of the option, to pay the exercise price and
receive delivery of the underlying security. If the option expires
without being exercised,
the
Fund is not required to receive the underlying security in exchange for the
exercise price and retains
the option premium.
The
Fund
may write
put options that are “covered.” A put option on a security is covered if
(a)
the
Fund earmarks or segregates cash or
liquid assets equal to the exercise price; or (b)
the
Fund has purchased a put on the same security as the put written, the exercise
price
of which is (i) equal to or greater than the exercise price of the put written,
or (ii) less than the exercise price of the put written, provided
the difference is maintained by
the
Fund in earmarked or segregated cash or liquid assets.
Selling
put options involves the risk that
the
Fund may be required to buy the underlying security at a disadvantageous price,
above the
market price of such security, at the time the option is exercised.
While
the
Fund’s potential gain in writing a covered put option is
limited to the premium received plus the interest earned on the liquid assets
covering the put option,
the
Fund’s risk of loss is equal to
the entire value of the underlying security, offset only by the amount of the
premium received.
The Fund
may close out an options position that it has written through a closing purchase
transaction. The
Fund could execute a closing
purchase transaction with respect to a written call option by purchasing a call
option on the same underlying security that has the
same exercise price and expiration date as the call option written
by the
Fund. The
Fund could execute a closing purchase transaction
with respect to a put option written by purchasing a put option on the same
underlying security and having the same exercise
price and expiration date as the put option written by the
Fund. A closing purchase transaction may or may not result in a profit
to the
Fund. The
Fund can close out its position as an option writer only if a liquid market
exists for options on the same underlying
security that have the same exercise price and expiration date as the option
written by the
Fund. There is no assurance that
such a market will exist with respect to any particular option.
The
writer of an American option generally has no control over the time when the
option is exercised and the option writer is required
to deliver or acquire the underlying security. Once an option writer has
received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option. Thus, the use
of options may require the
Fund to buy or sell
portfolio securities at inopportune times or for prices other than the current
market values of such securities, which may limit the amount
of appreciation the
Fund can realize on an investment, or may cause the
Fund to hold a security that it might otherwise sell.
Purchasing
Options. Certain
Funds may purchase call and put options. As the buyer of a call
option, the
Fund pays the premium to the
option writer and has the right to purchase the underlying security from the
option writer at the exercise price. If the market price of
the underlying security rises above the exercise price, the
Fund could exercise the option and acquire the underlying security at a
below-market
price, which could result in a gain to the
Fund, minus the premium paid. As the buyer of a put option, the
Fund pays the
premium to the option writer and has the right to sell the underlying security
to the option writer at the exercise price. If the market
price of the underlying security declines below the exercise
price, the
Fund could exercise the option and sell the underlying security
at an above-market price, which could result in a gain to the
Fund, minus the premium paid. The
Fund may buy call and put
options whether or not it holds the underlying securities.
As
a buyer of a call or put option, the
Fund may sell put or call options that it has purchased at any time prior to
such option’s expiration
date through a closing sale transaction. The principal factors affecting the
market value of a put or a call option include supply
and demand, interest rates, the current market price of the underlying security
in relation to the exercise price of the option, the
volatility of the underlying security, the underlying security’s dividend
policy, and the time remaining until the expiration date. A closing
sale transaction may or may not result in a profit to the
Fund. The
Fund’s ability to initiate a closing sale transaction is dependent
upon the liquidity of the options market and there is no assurance that such a
market will exist with respect to any particular
option. If the
Fund does not exercise or sell an option prior to its expiration date, the
option expires and becomes worthless.
OTC
Options.
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract
size and strike price, the terms of OTC options generally are established
through negotiation between the parties to the options
contract. This type of arrangement allows the purchaser and writer greater
flexibility to tailor the option to their needs. OTC options
are available for a greater variety of securities or baskets of securities, and
in a wider range of expiration dates and exercise prices,
than exchange-traded options. However, unlike exchange-traded options, which are
issued and guaranteed by a regulated intermediary,
such as the OCC, OTC options are entered into directly with the counterparty.
Unless the counterparties provide
for it, there is no central clearing or guaranty function for an OTC option.
Therefore, OTC options are subject to the risk of default
or non-performance by the counterparty. Accordingly, the Adviser must assess the
creditworthiness of the counterparty to determine
the likelihood that the terms of the option will be satisfied. There can be no
assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. As a result,
the
Fund may be unable to enter into closing sale transactions
with respect to OTC options.
Index
Options.
Call and put options on indices operate similarly to options on securities.
Rather than the right to buy or sell a single security
at a specified price, options on an index give the holder the right to receive,
upon exercise of the option, an amount of cash
determined
by reference to the difference between the value of the underlying index and the
strike price. The underlying index may be
a broad-based index or a narrower market index. Unlike many options on
securities, all settlements are in cash. The settlement amount,
which the writer of an index option must pay to the holder of the option upon
exercise, is generally equal to the difference between
the strike price of the option and the value of the underlying index, multiplied
by a specified multiplier. The multiplier determines
the size of the investment position the option represents. Gain or loss
to the
Fund on index options transactions will depend,
in part, on price movements of the underlying index generally or in a particular
segment of the index rather than price movements
of individual components of the index. As with other options, the
Fund may close out its position in index options through
closing purchase transactions and closing sale transactions provided that a
liquid secondary market exists for such options.
Index
options written by the
Fund may
be covered in a manner similar to the covering of other types of options, by
holding an offsetting
financial position and/or earmarking or segregating cash or liquid
assets.
The
Fund may cover call options written on an index
by owning securities or other assets whose price changes, in the opinion of the
Adviser, are expected to correlate to those of the underlying
index.
Foreign
Currency Options.
Options on foreign currencies operate similarly to options on securities. Rather
than the right to buy or sell a
single security at a specified price, options on foreign currencies give the
holder the right to buy or sell foreign currency for a fixed amount
in U.S. dollars or other base currencies. Options on foreign currencies are
traded primarily in the OTC market, but may also be
traded on U.S. and foreign exchanges. The value of a foreign currency option is
dependent upon the value of the underlying foreign
currency relative to the U.S. dollar or other base currency. The price of the
option may vary with changes, among other things,
in the value of either or both currencies and has no relationship to the
investment merits of a foreign security. Options on foreign
currencies are affected by all of those factors that influence foreign exchange
rates and foreign investment generally. As with other
options, the
Fund may close out its position in foreign currency options through closing
purchase transactions and closing sale transactions
provided that a liquid market exists for such options.
Foreign
currency options written by the
Fund may
be covered in a manner similar to the covering of other types of options, by
holding
an offsetting financial position and/or earmarking or segregating cash or liquid
assets.
Options
on Futures Contracts.
Options on futures contracts are similar to options on securities except that
options on futures contracts give
the purchasers the right, in return for the premium paid, to assume a position
in a futures contract (a long position in the case of a
call option and a short position in the case of a put option) at a specified
exercise price at any time prior to the expiration of the option.
Upon exercise of the option, the parties will be subject to all of the risks
associated with futures transactions and subject to margin
requirements. As the writer of options on futures contracts, the
Fund would also be subject to initial and variation margin requirements
on the option position.
Options
on futures contracts written by the
Fund may
be covered in a manner similar to the covering of other types of options, by
holding
an offsetting financial position and/or earmarking or segregating cash or
liquid assets.
The
Fund may cover an option on a futures
contract by purchasing or selling the underlying futures contract. In such
instances the exercise of the option will serve to close
out the
Fund’s futures position.
Additional
Risks of Options Transactions.
The risks associated with options transactions are different from, and possibly
greater than, the
risks associated with investing directly in the underlying instruments. Options
are highly specialized instruments that require investment
techniques and risk analyses different from those associated with other
portfolio investments. The use of options requires an
understanding not only of the underlying instrument but also of the option
itself. Options may be subject to the risk factors generally
applicable to derivatives transactions described herein, and may also be subject
to certain additional risk factors, including:
■ |
The
exercise of options written or purchased by the
Fund could cause the
Fund to sell portfolio securities, thus increasing the
Fund’s
portfolio turnover. |
■ |
The Fund
pays brokerage commissions each time it writes or purchases an option or
buys or sells an underlying security in connection
with the exercise of an option. Such brokerage commissions could be higher
relative to the commissions for direct purchases
of sales of the underlying securities. |
■ |
The Fund’s
options transactions may be subject to limitations on options positions
established by the SEC, the CFTC or the exchanges
on which such options are traded. |
■ |
The
hours of trading for exchange-listed options may not coincide with the
hours during which the underlying securities are traded.
To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements
can take place in the underlying securities that cannot be reflected in
the options markets. |
■ |
Index
options based upon a narrow index of securities or other assets may
present greater risks than options based on broad market
indices, as narrower indices are more susceptible to rapid and extreme
fluctuations as a result of changes in the values of a
smaller number of securities or other
assets. |
■ |
The Fund
is subject to the risk of market movements between the time that an option
is exercised and the time of performance thereunder,
which could increase the extent of any losses suffered
by the
Fund in connection with options
transactions. |
Futures
Contracts.
A futures contract is a standardized agreement to buy or sell a specific
quantity of an underlying asset, reference rate
or index at a specific price at a specific future time (the “settlement date”).
Futures contracts may be based on, among other things,
a specified equity security (securities futures), a specified debt security or
reference rate (interest rate futures), the value of a specified
securities index (index futures) or the value of a foreign currency (currency
futures). While the value of a futures contract tends
to increase and decrease in tandem with the value of the underlying instrument,
differences between the futures market and the market
for the underlying asset may result in an imperfect correlation. The buyer of a
futures contract agrees to purchase the underlying
instrument on the settlement date and is said to be “long” the contract. The
seller of a futures contract agrees to sell the underlying
instrument on the settlement date and is said to be “short” the contract.
Futures contracts call for settlement only on the expiration
date and cannot be “exercised” at any other time during their term.
Depending
on the terms of the particular contract, futures contracts are settled through
either physical delivery of the underlying instrument
on the settlement date (such as in the case of futures based on a specified debt
security) or by payment of a cash settlement
amount on the settlement date (such as in the case of futures contracts relating
to broad-based securities indices). In the case
of cash-settled futures contracts, the settlement amount is equal to the
difference between the reference instrument’s price on the last
trading day of the contract and the reference instrument’s price at the time the
contract was entered into. Most futures contracts, particularly
futures contracts requiring physical delivery, are not held until the settlement
date, but instead are offset before the settlement
date through the establishment of an opposite and equal futures position (buying
a contract that had been sold, or selling a contract
that had been purchased). All futures transactions are effected through a
clearinghouse associated with the exchange on which
the futures are traded.
The
buyer and seller of a futures contract are not required to deliver or pay for
the underlying commodity unless the contract is held until
the settlement date. However, both the buyer and seller are required to deposit
“initial margin” with a futures commission merchant
(“FCM”) when the futures contract is entered into. Initial margin deposits are
typically calculated as a percentage of the contract’s
market value. If the value of either party’s position declines, the party will
be required to make additional “variation margin”
payments to settle the change in value on a daily basis. The process is known as
“marking-to-market.” Upon the closing of a futures
position through the establishment of an offsetting position, a final
determination of variation margin will be made and additional
cash will be paid by or released to the
Fund.
Additional
Risks of Futures Transactions.
The risks associated with futures contract transactions are different from, and
possibly greater than,
the risks associated with investing directly in the underlying instruments.
Futures are highly specialized instruments that require investment
techniques and risk analyses different from those associated with other
portfolio investments. The use of futures requires an
understanding not only of the underlying instrument but also of the futures
contract itself. Futures may be subject to the risk factors
generally applicable to derivatives transactions described herein, and may also
be subject to certain additional risk factors, including:
■ |
The
risk of loss in buying and selling futures contracts can be substantial.
Small price movements in the commodity, security, index,
currency or instrument underlying a futures position may result in
immediate and substantial loss (or gain) to the
Fund. |
■ |
Buying
and selling futures contracts may result in losses in excess of the amount
invested in the position in the form of initial margin.
In the event of adverse price movements in the underlying commodity,
security, index, currency or instrument, the
Fund
would be required to make daily cash payments to maintain its required
margin. The
Fund may be required to sell portfolio
securities, or make or take delivery of the underlying securities in order
to meet daily margin requirements at a time when
it may be disadvantageous to do so. The
Fund could lose margin payments deposited with an FCM if the FCM breaches
its
agreement with the
Fund, becomes insolvent or declares
bankruptcy. |
■ |
Most
exchanges limit the amount of fluctuation permitted in futures contract
prices during any single trading day. Once the daily
limit has been reached in a particular futures contract, no trades may be
made on that day at prices beyond that limit. If futures
contract prices were to move to the daily limit for several trading days
with little or no trading, the
Fund could be prevented
from prompt liquidation of a futures position and subject to substantial
losses. The daily limit governs only price movements
during a single trading day and therefore does not
limit the
Fund’s potential losses. |
■ |
Index
futures based upon a narrower index of securities may present greater
risks than futures based on broad market indices, as narrower
indices are more susceptible to rapid and extreme fluctuations as a result
of changes in value of a small number of securities. |
Contracts
for Difference. Certain
Funds may purchase contracts for difference (“CFDs”). A CFD is a privately
negotiated contract between
two parties, buyer and seller, stipulating that the seller will pay to or
receive from the buyer the difference between the nominal
value of the underlying instrument at the opening of the contract and that
instrument’s value at the end of the contract. The underlying
instrument may be a single security, stock basket or index. A CFD can be set up
to take either a short or long position on the
underlying instrument. The buyer and seller are typically both required to post
margin, which is adjusted daily. The buyer will also
pay to the seller a financing rate on the notional amount of the capital
employed by the seller less the margin deposit. A CFD is usually
terminated at the buyer’s initiative. The seller of the CFD will simply match
the exposure of the underlying instrument in the open
market and the parties will exchange whatever payment is due.
As
is the case with owning any financial instrument, there is the risk of loss
associated with buying a CFD. For example, if the Fund buys
a long CFD and the underlying security is worth less at the end of the contract,
the Fund would be required to make a payment to
the seller and would suffer a loss. Also, there may be liquidity risk if the
underlying instrument is illiquid because the liquidity of a CFD
is based on the liquidity of the underlying instrument. A further risk is that
adverse movements in the underlying security will require
the buyer to post additional margin. CFDs also carry counterparty risk, i.e.,
the risk that the counterparty to the CFD transaction
may be unable or unwilling to make payments or to otherwise honor its financial
obligations under the terms of the contract.
If the counterparty were to do so, the value of the contract, and of the
Fund’s shares, may be reduced. The Fund will not enter
into a CFD transaction that is inconsistent with its investment objective,
policies and strategies.
Currency
Forwards. A
foreign currency forward exchange contract is a negotiated agreement between two
parties to exchange specified
amounts of two or more currencies at a specified future time at a specified
rate. The rate specified by the foreign currency forward
exchange contract can be higher or lower than the spot rate between the
currencies that are the subject of the contract. The
Fund
may also invest in non-deliverable foreign currency forward exchange contracts
(“NDFs”). NDFs are similar to other foreign currency
forward exchange contracts, but do not require or permit physical delivery of
currency upon settlement. Instead, settlement is
made in cash based on the difference between the contracted exchange rate and
the spot foreign exchange rate at settlement. Currency
futures are similar to foreign currency forward exchange contracts, except that
they are traded on an exchange and standardized
as to contract size and delivery date. Most currency futures call for payment or
delivery in U.S. dollars. Unanticipated changes
in currency prices may result in losses to the
Fund and poorer overall performance for the
Fund than if it had not entered into
foreign currency forward exchange contracts. The typical use of a foreign
currency forward exchange contract is to “lock in” the price
of a security in U.S. dollars or some other foreign currency,
which the
Fund is holding in its portfolio. By entering into a foreign
currency forward exchange contract for the purchase or sale, for a fixed amount
of dollars or other currency, of the amount of foreign
currency involved in the underlying security transactions, the
Fund may be able to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar or other
currency which is being used for the security purchase
and the foreign currency in which the security is denominated during the period
between the date on which the security is purchased
or sold and the date on which payment is made or received. The Adviser also may
from time to time utilize foreign currency
forward exchange contracts for other purposes. For example, they may be used to
hedge a foreign security held in the portfolio
against a decline in value of the applicable foreign currency. They also may be
used to lock in the current exchange rate of the
currency in which those securities anticipated to be purchased are denominated.
At times, the
Fund may enter into “cross-currency”
hedging transactions involving currencies other than those in which securities
are held or proposed to be purchased are denominated.
The Fund
will not enter into foreign currency forward exchange contracts or maintain a
net exposure to these contracts where the consummation
of the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value
of the
Fund’s portfolio
securities.
The Fund
may be limited in its ability to enter into hedging transactions involving
foreign currency forward exchange contracts by Code
requirements relating to qualification as a RIC.
Foreign
currency forward exchange contracts may limit gains on portfolio securities that
could otherwise be realized had they not been
utilized and could result in losses. The contracts also may
increase the
Fund’s volatility and may involve a significant amount of risk
relative to the investment of cash.
Swaps.
An OTC swap contract is an agreement between two parties pursuant to which the
parties exchange payments at specified dates
on the basis of a specified notional amount, with the payments calculated by
reference to specified securities, indices, reference rates,
currencies or other instruments. Most swap agreements provide that when the
period payment dates for both parties are the same,
the payments are made on a net basis (i.e., the two payment streams are netted
out, with only the net amount paid by one party
to the other). The
Fund’s obligations or rights under a swap contract entered into on a net basis
will generally be equal only to the
net amount to be paid or received under the agreement, based on the relative
values of the positions held by each counterparty. Many
swap agreements are not entered into or traded on exchanges and often there is
no central clearing or guaranty function for swaps.
These OTC swaps are often subject to the risk of default or non-performance by
the counterparty. Accordingly, the Adviser must
assess the creditworthiness of the counterparty to determine the likelihood that
the terms of the swap will be satisfied.
Swap
agreements allow for a wide variety of transactions. For example, fixed-rate
payments may be exchanged for floating rate payments,
U.S. dollar-denominated payments may be exchanged for payments denominated in
foreign currencies, and payments tied to
the price of one security, index, reference rate, currency or other instrument
may be exchanged for payments tied to the price of a different
security, index, reference rate, currency or other instrument. Swap contracts
are typically individually negotiated and structured
to provide exposure to a variety of particular types of investments or market
factors. Swap contracts can take many different
forms and are known by a variety of names. To the extent consistent
with the
Fund’s investment objective and policies, the
Fund
is not limited to any particular form or variety of swap
contract. The
Fund may utilize swaps to increase or decrease its exposure
to the underlying instrument, reference rate, foreign currency, market index or
other asset. Certain Funds may also enter into
related derivative instruments including caps, floors and collars.
The Dodd-Frank
Act and related regulatory developments require the eventual clearing and
exchange-trading of many standardized OTC
derivative instruments that the CFTC and SEC defined as “swaps” and “security
based swaps,” respectively. Mandatory exchange-trading
and clearing is occurring on a phased-in basis based on the type of market
participant and CFTC approval of contracts
for central clearing and exchange-trading. In a cleared swap, the
Fund’s ultimate counterparty is a central clearinghouse rather
than a brokerage firm, bank or other financial institution. The
Fund initially will enter into cleared swaps through an executing
broker. Such transactions will then be submitted for clearing and, if cleared,
will be held at regulated FCMs that are members
of the clearinghouse that serves as the central counterparty. When the
Fund enters into a cleared swap, it must deliver to the central
counterparty (via an FCM) an amount referred to as “initial margin.” Initial
margin requirements are determined by the central
counterparty, but an FCM may require additional initial margin above the amount
required by the central counterparty. During
the term of the swap agreement, a “variation margin” amount may also be required
to be paid by the
Fund or may be received
by the
Fund in accordance with margin controls set for such accounts, depending upon
changes in the price of the underlying
reference asset subject to the swap agreement. At the conclusion of the term of
the swap agreement, if the
Fund has a loss equal
to or greater than the margin amount, the margin amount is paid to the FCM along
with any loss that is greater than such margin
amount. If the
Fund has a loss of less than the margin amount, the excess margin is returned to
the Fund. If the
Fund has a gain,
the full margin amount and the amount of the gain is paid to the
Fund.
Central
clearing is designed to reduce counterparty credit risk compared to uncleared
swaps because central clearing interposes the central
clearinghouse as the counterparty to each participant’s swap, but it does not
eliminate those risks completely. There is also a risk
of loss by the
Fund of the initial and variation margin deposits in the event of bankruptcy of
the FCM with which the Fund has an
open position in a swap contract. The assets of the
Fund may not be fully protected in the event of the bankruptcy of the FCM or
central
counterparty because the Fund might be limited to recovering only a pro rata
share of all available funds and margin segregated
on behalf of an FCM’s or central counterparty’s customers or clearing members.
If the FCM does not provide accurate reporting, the
Fund is also subject to the risk that the FCM could use the Fund’s assets, which
are held in an omnibus account with assets
belonging to the FCM’s other customers, to satisfy its own financial obligations
or the payment obligations of another customer
to the central counterparty.
As
a result of recent regulatory developments, certain standardized swaps are
currently subject to mandatory central clearing and some of
these cleared swaps must be traded on an exchange or swap execution facility
(“SEF”). An SEF is an electronic trading platform in which
multiple market participants can execute swap transactions by accepting bids and
offers made by multiple other participants on the
platform. Transactions executed on an SEF may increase market transparency and
liquidity but may cause the
Fund to incur increased
expenses to execute swaps. Central clearing should decrease counterparty risk
and increase liquidity compared to bilateral swaps
because central clearing interposes the central clearinghouse as the
counterparty to each participant’s swap. However, central clearing
does not eliminate counterparty risk or liquidity risk entirely. In addition,
depending on the size of the
Fund and other factors,
the margin required under the rules of a clearinghouse and by a clearing member
may be in excess of the collateral required to be
posted by the
Fund to support its obligations under a similar bilateral swap. However, the
CFTC and other applicable regulators have
adopted rules imposing certain margin requirements, including minimums, on
uncleared swaps which may result in the
Fund and
its counterparties posting higher margin amounts for uncleared swaps. Requiring
margin on uncleared swaps may reduce, but not
eliminate, counterparty credit risk.
In
addition, with respect to cleared swaps, the
Fund may not be able to obtain as favorable terms as it would be able to
negotiate for an
uncleared swap. In addition, an FCM may unilaterally impose position limits or
additional margin requirements for certain types of
swaps in which the
Fund may invest. Central counterparties and FCMs generally can require
termination of existing cleared swap transactions
at any time, and can also require increases in margin above the margin that is
required at the initiation of the swap agreement.
Margin requirements for cleared swaps vary on a number of factors, and the
margin required under the rules of the clearinghouse
and FCM may be in excess of the collateral required to be posted
by the
Fund to support its obligations under a similar uncleared
swap. However, as noted above, regulators have adopted rules imposing certain
margin requirements, including minimums,
on uncleared swaps, which may result in the
Fund and its counterparties posting higher margin amounts for uncleared
swaps.
Requiring margin on uncleared swaps may reduce, but not eliminate, counterparty
credit risk.
The Fund
is also subject to the risk that, after entering into a cleared swap with an
executing broker, no FCM or central counterparty is
willing or able to clear the transaction. In such an event, the central
counterparty would void the trade. Before the
Fund can enter into
a new trade, market conditions may become less favorable to the
Fund.
The
Adviser will continue to monitor developments regarding trading and execution of
cleared swaps on exchanges, particularly to the
extent regulatory changes affect the
Fund’s ability to enter into swap agreements and the costs and risks associated
with such investments.
Interest
Rate Swaps, Caps, Floors and Collars.
Interest rate swaps consist of an agreement between two parties to exchange
their respective
commitments to pay or receive interest (e.g., an exchange of floating rate
payments for fixed-rate payments). Interest rate swaps
are generally entered into on a net basis. Interest rate swaps do not involve
the delivery of securities, other underlying assets, or
principal.
Accordingly, the risk of market loss with respect to interest rate and total
rate of return swaps is typically limited to the net amount
of interest payments that the
Fund is contractually obligated to make.
Certain
Funds may also buy or sell interest rate caps, floors and collars. The
purchase of an interest rate cap entitles the purchaser, to the
extent that a specified interest rate index exceeds a predetermined level, to
receive payments of interest on a specified notional amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified
interest rate falls below a predetermined level, to receive payments of interest
on a specified notional amount from the party selling
the interest rate floor. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range
of interest rates. Caps, floors and collars may be less liquid than other types
of derivatives.
Total
Return Swaps.
Total return swaps are contracts in which one party agrees to make periodic
payments to another party based on the
change in market value of the assets underlying the contract, which may include,
but not be limited to, a specified security, basket of
securities or securities indices during the specified period, in return for
periodic payments based on a fixed or variable interest rate or
the total return from other underlying assets. Total return swaps may be used to
obtain long or short exposure to a security or market
without owning or taking physical custody of such security or investing directly
in such market. The Fund
may incur a theoretically
unlimited loss on short exposures. In comparison, the Fund may incur losses on
long exposures, but such losses are limited
by the fact that the underlying security’s price cannot fall below
zero.
Total return swaps may effectively add leverage to the
Fund’s
portfolio because, in addition to its total net assets, the
Fund would be subject to investment exposure on the notional amount
of the swap.
Total
return swaps are subject to the risk that a counterparty will default on its
payment obligations to the
Fund thereunder, and conversely,
that the
Fund will not be able to meet its obligation to the counterparty. Generally,
the
Fund will enter into total return swaps
on a net basis (i.e., the two payment streams are netted against one another
with the
Fund receiving or paying, as the case may be,
only the net amount of the two payments).
Index
Swaps.
An index swap consists of an agreement between two parties in which a party
typically exchanges a cash flow based on a notional
amount of a reference index for a cash flow based on a different index or on
another specified instrument or reference rate. Index
swaps are generally entered into on a net basis.
Inflation
Swaps.
Inflation swap agreements are contracts in which one party typically agrees to
pay the cumulative percentage increase in
a price index, such as the Consumer Price Index, over the term of the swap (with
some lag on the referenced inflation index), and the
other party pays a compounded fixed rate. Inflation swap agreements may be used
to protect the NAV of the
Fund against an unexpected
change in the rate of inflation measured by an inflation index. The value of
inflation swap agreements is expected to change
in response to changes in real interest rates. Real interest rates are tied to
the relationship between nominal interest rates and the
rate of inflation.
Currency
Swaps.
A currency swap consists of an agreement between two parties to exchange cash
flows on a notional amount of two or
more currencies based on the relative value differential among them, such as
exchanging a right to receive a payment in foreign currency
for the right to receive U.S. dollars. Currency swap agreements may be entered
into on a net basis or may involve the delivery
of the entire principal value of one designated currency in exchange for the
entire principal value of another designated currency.
In such cases, the entire principal value of a currency swap is subject to the
risk that the counterparty will default on its contractual
delivery obligations.
Credit
Default Swaps.
A credit default swap consists of an agreement between two parties in which the
“buyer” typically agrees to pay to
the “seller” a periodic stream of payments over the term of the contract and the
seller agrees to pay the buyer the par (or other agreed-upon)
value of a referenced debt obligation upon the occurrence of a credit event with
respect to the issuer of that referenced debt
obligation. Generally, a credit event means bankruptcy, failure to pay,
obligation acceleration or modified restructuring. The
Fund
may be either the buyer or seller in a credit default swap.
Where the
Fund is the buyer of a credit default swap contract, it would
typically be entitled to receive the par (or other agreed-upon) value of a
referenced debt obligation from the counterparty to the
contract only in the event of a default or similar event by the issuer of the
debt obligation. If no default occurs, the
Fund would have
paid to the counterparty a periodic stream of payments over the term of the
contract and received no benefit from the contract. The
use of credit default swaps could result in losses to the
Fund if the Adviser fails to correctly evaluate the creditworthiness
of the issuer of the referenced debt obligation.
Swaptions.
An option on a swap agreement, also called a “swaption,” is an option that gives
the buyer the right, but not the obligation,
to enter into a swap on a future date in exchange for a premium. A receiver
swaption gives the owner the right to receive the
return of a specified asset, reference rate, or index. A payer swaption gives
the owner the right to pay the return of a specified asset,
reference rate, or index. Swaptions also include options that allow an existing
swap to be terminated or extended by one of the counterparties.
General
Risks of Swaps.
The risks associated with swap transactions are different from, and possibly
greater than, the risks associated with
investing directly in the underlying instruments. Swaps are highly specialized
instruments that require investment techniques
and
risk analyses different from those associated with other portfolio investments.
The use of swaps requires an understanding not only
of the underlying instrument but also of the swap contract itself. Swap
transactions may be subject to the risk factors generally applicable
to derivatives transactions described above, and may also be subject to certain
additional risk factors, including:
■ |
OTC
swap agreements are not traded on exchanges and may be subject to
liquidity risk, which exists when a particular swap is difficult
to purchase or sell. |
■ |
In
addition to the risk of default by the counterparty, if the
creditworthiness of a counterparty to a swap agreement declines, the
value
of the swap agreement would be likely to decline, potentially resulting in
losses. |
■ |
The
swaps market is subject to extensive regulation under the Dodd-Frank Act
and certain CFTC and SEC rules promulgated thereunder.
It is possible that further developments in the swaps market, including
new and additional governmental regulation, could
result in higher Fund costs and expenses and could adversely
affect the
Fund’s ability to utilize swaps, terminate existing swap
agreements or realize amounts to be received under such
agreements. |
Structured
Investments. Certain
Funds may invest in structured investments. A structured investment is a
derivative security designed
to offer a return linked to a particular underlying security, currency,
commodity or market, for which the amount of principal
repayment and/or interest payments is based on the change in value of such
underlying security, currency, commodity or market,
including, among others, currency exchange rates, interest rates, referenced
bonds and stock indices or other financial references.
Structured investments may come in various forms, including notes, warrants and
options to purchase securities, and may be
listed and traded on an exchange or otherwise traded in the OTC
market.
The Fund
will typically use structured investments to gain exposure to a permitted
underlying security, currency, commodity or market
when direct access to such security, currency, commodity or market is limited or
inefficient from a tax, cost or regulatory standpoint.
Investments in structured investments involve risks including issuer risk,
counterparty risk and market risk. Holders of structured
investments bear risks of the underlying investment and are subject to issuer or
counterparty risk because the holders are relying
on the creditworthiness of such issuer or counterparty and have no rights with
respect to the underlying investment. Certain structured
investments may be thinly traded or have a limited trading market and may have
the effect of increasing the
Fund’s illiquidity
to the extent that the Fund, at a particular point in time, may be unable to
find qualified buyers for these investments.
A
structured investment may be linked either positively or negatively to an
underlying security, currency, commodity, index or market
and a change in interest rates, principal amount, volatility, currency values or
other factors, depending on the structured investment’s
design, may result in a gain or loss that is a multiple of the movement of such
interest rates, principal amount, volatility, currency
values or other factors. Application of a multiplier is comparable to the use of
financial leverage, a speculative technique. Leverage
magnifies the potential for gain and the risk of loss. As a result, a relatively
small decline in the value of the referenced factor could
result in a relatively large loss in the value of a structured
investment.
Other
types of structured investments include interests in entities organized and
operated for the purpose of restructuring the investment
characteristics of underlying investment interests or securities. This type of
securitization or restructuring usually involves the
deposit or purchase of an underlying security by a U.S. or foreign entity, such
as a corporation or trust of specified instruments, and
the issuance by that entity of one or more classes of securities backed by, or
representing an interest in, the underlying instruments.
The cash flow or rate of return on the underlying investments may be apportioned
among the newly issued securities to create
different investment characteristics, such as varying maturities, credit
quality, payment priorities and interest rate provisions. Structured
investments that are subordinated, for example, in payment priority often offer
higher returns, but may result in increased risks
compared to other investments.
Combined
Transactions.
Combined transactions involve entering into multiple derivatives transactions
(such as multiple options transactions,
including purchasing and writing options in combination with each other;
multiple futures transactions; and combinations
of options, futures, forward and swap transactions) instead of a single
derivatives transaction in order to customize the risk
and return characteristics of the overall position. Combined transactions
typically contain elements of risk that are present in each
of the component transactions. The
Fund may enter into a combined transaction instead of a single derivatives
transaction when,
in the opinion of the Adviser, it is in the best interest of the Fund to do so.
Because combined transactions involve multiple transactions,
they may result in higher transaction costs and may be more difficult to close
out.
Commodity-Linked
Investments.
The Global Strategist Portfolio may seek to provide exposure to the investment
returns of real assets
that trade in the commodity markets through investments in commodity-linked
derivative securities, such as structured notes, and
other similar investments (including commodity exchange-traded funds (“ETFs”) )
which are designed to provide this exposure without
direct investment in physical commodities or commodities futures contracts.
The
Global Strategist Portfolio may also seek to provide
exposure to the investment returns of real assets that trade in the commodity
markets through investments in the Fund’s wholly-owned
subsidiary (the “Global Strategist Subsidiary”). Real
assets are assets such as oil, gas, industrial and precious metals, livestock,
and agricultural or meat products, or certain other tangible items, as compared
to stocks or bonds, which are intangible financial
instruments. In choosing investments, the Adviser seeks to provide exposure to
various commodities and commodity sectors.
The value of commodity-linked derivative securities held by the Global
Strategist Portfolio and/or the Global Strategist Subsidiary
Fund may be affected by a variety of factors, including, but not limited to,
overall market movements and other factors
affecting
the value of particular industries or commodities, such as weather, disease,
embargoes, acts of war or terrorism, or political and
regulatory developments.
The
prices of commodity-linked derivative securities may move in different
directions than investments in traditional equity and debt securities
when the value of those traditional securities is declining due to adverse
economic conditions. As an example, during periods
of rising inflation, debt securities have historically tended to decline in
value due to the general increase in prevailing interest rates.
Conversely, during those same periods of rising inflation, the prices of certain
commodities, such as oil and metals, have historically
tended to increase. Of course, there cannot be any guarantee that these
investments will perform in that manner in the future,
and at certain times the price movements of commodity-linked instruments have
been parallel to those of debt or equity securities.
Commodities have historically tended to increase and decrease in value during
different parts of the business cycle than financial
assets. Nevertheless, at various times, commodities prices may move in tandem
with the prices of financial assets and thus may
not provide overall portfolio diversification benefits. Under favorable economic
conditions, the Global Strategist Portfolio’s investments
may underperform an investment in traditional securities. Over the long term,
the returns on the Global Strategist Portfolio’s
investments are expected to exhibit low or negative correlation with stocks and
bonds.
LIBOR
Discontinuance or Unavailability Risk.
The Fund’s
investments, payment obligations and financing terms may be based on
floating rates, such as the London Interbank Offered Rates (collectively,
“LIBOR”),
Euro Interbank Offered Rate,
Secured Overnight
Financing Rate (“SOFR”)
and other similar types of reference rates (each, a “Reference Rate”). These
Reference Rates are generally
intended to represent the rate at which contributing banks may obtain short-term
borrowings from each other within certain
financial markets. London
Interbank Offered Rate (“LIBOR”) was the basic rate of interest used in lending
transactions between
banks on the London interbank market and has been widely used as a reference for
setting the interest rate on loans globally. As
a result of benchmark reforms, publication of most LIBOR settings has ceased.
However, the publication of certain other LIBORs will
continue to be published on a temporary, synthetic and non-representative basis
(e.g., the 1-month, 3-month, and 6-month USD
LIBOR settings which are expected to be continued to be published
until
the end of September
2024). As these synthetic LIBOR
settings are expected to be published for a limited period of time and are
considered non-representative of the underlying market,
regulators have advised that these settings should be used only in limited
circumstances.
Various
financial industry groups have been planning for the transition from LIBOR
and certain regulators and industry groups have taken
actions to establish alternative reference rates (e.g., the SOFR, which measures
the cost of overnight borrowings through repurchase
agreement transactions collateralized with U.S. Treasury securities and is
intended to replace U.S. dollar LIBORs with certain
adjustments). It is expected that a substantial portion of future floating rate
investments will be linked to SOFR or benchmark rates
derived from SOFR (or other Alternative Reference Rates based on SOFR). There is
no assurance that the composition or characteristics
of any such alternative reference rate will be similar to or produce the same
value or economic equivalence as LIBOR or
that it will have the same volume or liquidity as did LIBOR. These relatively
new and developing rates may also behave differently than
LIBOR would have or may not match the reference rate applicable to the
underlying assets related to these investments. Investments
in structured finance investments, loans, debt instruments or other investments
tied to reference rates are also subject to operational
risk associated with the alternative reference rate, such as errors in the input
data or in the calculation of reference rates.
Additionally,
the transition away from LIBOR and certain other Reference Rates could,
among other negative consequences (i) adversely
impact the pricing, liquidity, value of, return on and trading for a broad array
of financial products, including any Reference
Rate-linked securities, loans and derivatives in which the Fund may invest; (ii)
require extensive negotiations of and/or amendments
to agreements and other documentation governing Reference Rate-linked
investments products; (iii) lead to disputes, litigation
or other actions with counterparties or portfolio companies regarding the
interpretation and enforceability of “fallback” provisions
that provide for an alternative reference rate in the event of Reference Rate
unavailability; and/or (iv) cause the Fund to incur
additional costs in relation to any of the above factors.
The
risks associated with the above factors, including decreased liquidity,
may
be
heightened with respect to investments in so-called
“tough
legacy” Reference
Rate-based products that do not include effective
fallback provisions to address
how interest rates will be determined
if LIBOR
and certain other Reference Rates stop being published. In
addition, when a Reference Rate is discontinued, the
alternative
Reference Rate may be lower than market expectations, which could have an
adverse impact on the value of preferred and
debt securities with floating or fixed-to-floating rate coupons.
These
developments could negatively impact financial markets in general and present
heightened risks, including with respect to the Fund’s
investments. As a result of the uncertainty and developments relating to the
transition process, performance, price volatility, liquidity
and value of the Fund and its assets may be adversely affected.
Bitcoin
Exposure.
The
Discovery Portfolio and Growth Portfolio
may have exposure to bitcoin indirectly through cash settled futures
or indirectly through investments in pooled
investment vehicles and exchange-traded products that invest in bitcoin
(“Bitcoin ETFs”).
In addition, the Global Strategist Portfolio may have exposure to bitcoin
indirectly through cash settled futures.
To the extent
a Fund invests in bitcoin
futures or the
Discovery Portfolio or Growth Portfolio invests in Bitcoin ETFs,
it will do so through a
wholly-owned subsidiary, which is organized as an exempted company under the
laws of the Cayman Islands (the
“Bitcoin
Subsidiary”
and together with either
the Discovery Portfolio Subsidiary or Growth Portfolio Subsidiary, referred to
as
a “Subsidiary”).
Each
Fund may at times have no exposure to bitcoin.
Although neither Fund directly invests in bitcoin, each Fund’s indirect
investments in bitcoin are exposed to risks associated with the price of
bitcoin, which is subject to numerous factors and risks.
Bitcoin
is a digital asset whose ownership and behavior are determined by participants
in an online, peer-to-peer network that connects
computers that run publicly accessible, or “open source,” software that follows
the rules and procedures governing the bitcoin
network (commonly referred to as the bitcoin protocol). The value of bitcoin,
like the value of other cryptocurrencies, is not backed
by any government, corporation, or other identified body. The value
of bitcoin is determined in part by the supply of (which is
limited), and demand for, bitcoin in the markets for exchange that have been
organized to facilitate the trading of bitcoin. The further
development of the bitcoin network, which is part of a new and rapidly changing
industry, is subject to a variety of factors that
are difficult to evaluate.
Risks
Related to Bitcoin.
Cryptocurrencies (also referred to as “virtual currencies” and “digital
currencies”) are digital assets designed to act
as a medium of exchange. Although there
are thousands of cryptocurrencies, the most well-known of which is bitcoin.
Cryptocurrency
is
an emerging asset class
with a limited history. Investments in or exposure to bitcoin are subject to
substantial risks, including
significant price volatility and fraud and manipulation, which are generally
more pronounced in the crypto asset market. In addition,
performance and value of indirect investments in bitcoin may differ
significantly from the performance or value of
bitcoin.
Cryptocurrency
facilitates decentralized, peer-to-peer financial exchange and value storage
that is used like money, without the oversight
of a central authority or banks. The value of cryptocurrency is not backed by
any government, corporation, or other identified
body. Similar to fiat currencies (i.e., a currency that is backed by a central
bank or a national, supra-national or quasi-national
organization), cryptocurrencies are susceptible to theft, loss and destruction.
For example, the bitcoin held by Bitcoin
ETFs (and
the Global Strategist Portfolio’s
indirect exposure to such bitcoin) is also susceptible to these
risks.
The
value of the
Fund’s indirect
investments
in bitcoin
is subject to significant
fluctuations
in the value of the cryptocurrency, which have
been and may in the future be highly volatile
and subject to sharp declines.
The value of cryptocurrencies is determined by the supply
and demand for cryptocurrency in the global market for the trading of
cryptocurrency, which consists primarily of transactions
on electronic exchanges. The price of bitcoin could drop precipitously
(including to zero) for a variety of reasons, including,
but not limited to, regulatory changes, a crisis of confidence, flaw or
operational issue in the bitcoin network or a change in
user preference to competing cryptocurrencies. A
Fund’s exposure to bitcoin
could result in substantial losses to the Fund.
Cryptocurrencies
trade on exchanges, which are largely unregulated and, therefore, are more
exposed to fraud,
market manipulation
and
failure than established, regulated exchanges for securities
and other traditional assets,
derivatives and other currencies. Cryptocurrency
exchanges have in the past, and may in the future, fail
or otherwise cease
operating temporarily or even permanently, resulting
in the potential loss of users’ cryptocurrency or other market
disruptions. Cryptocurrency
exchanges that
are regulated typically
must comply with minimum net capital, cybersecurity, and anti-money laundering
requirements, but are not typically required
to protect customers or their markets to the same extent that regulated
securities exchanges or futures exchanges are required to
do so. Furthermore, many cryptocurrency exchanges lack certain safeguards
established by traditional exchanges to enhance the stability
of trading on the exchange, such as measures designed to prevent sudden drops in
value of items traded on the exchange (i.e., “flash
crashes”). As a result, the prices of cryptocurrencies on exchanges may be
subject to larger and more frequent sudden declines than
assets traded on traditional exchanges. In addition, cryptocurrency exchanges
are also subject to the risk of cybersecurity threats and
have been breached, resulting in the theft and/or loss of bitcoin and other
cryptocurrencies. A cyber or other security breach or a business
failure of a cryptocurrency exchange or custodian may affect the price of a
particular cryptocurrency or cryptocurrencies generally.
A risk also exists with respect to malicious actors or previously unknown
vulnerabilities, which may adversely affect the value
of bitcoin.
Disruptions
at bitcoin exchanges and potential consequences of a bitcoin exchange’s failure
could adversely affect a Fund’s indirect investments
in bitcoin. In 2022 and early 2023, several large participants in the
cryptocurrency industry, including exchanges, lenders and
investment firms, declared bankruptcy, which has resulted in a loss of
confidence in participants of the digital asset ecosystem and
negative publicity surrounding digital assets more broadly. These events have
also contributed to financial distress among crypto asset
market participants and widespread disruption in those markets. The collateral
impacts of these types of failures, or of fraud or other
adverse developments in the crypto asset markets, is difficult to predict.
Extreme volatility in the future, including further declines
in the trading prices of the bitcoin, could have a material adverse effect on
the value of the Funds’ indirect investments in bitcoin.
Furthermore, negative perception and/or a lack of stability and standardized
regulation in the digital asset economy may reduce
confidence in the digital asset economy and may result in greater volatility in
the prices of bitcoin and other digital assets, including
a depreciation in value. Further, regulation of crypto asset markets is still
developing and federal, state or foreign governmental
authorities may restrict the development use or exchange or cryptocurrencies. In
addition, events that impact one cryptocurrency
may lead to a volatility or a decline in the value or another cryptocurrency,
such as bitcoin.
The
market for bitcoin (and bitcoin futures) depends on, among other things: the
supply and demand for bitcoin (and bitcoin futures);
the adoption of bitcoin for commercial uses; the anticipated increase of
investments in bitcoin-related investment products by
retail and institutional investors; speculative interest in bitcoin, bitcoin
futures, and bitcoin-related investment products; regulatory
or other restrictions on investors’ ability to invest in bitcoin futures; and
the potential ability to hedge against the price of bitcoin
with bitcoin futures (and vice versa). At times, there has been, and may in the
future be, significant disruption to the crypto asset
market, which could adversely impact a Fund’s indirect investments in
bitcoin.
Factors
affecting the further development of cryptocurrency include, but are not limited
to: continued worldwide growth or possible cessation
or reversal in the adoption and use of cryptocurrency and other digital assets;
government and quasi-government regulation or
restrictions on or regulation of access to and operation of digital asset
networks; changes in consumer demographics and public preferences;
maintenance and development of open-source software protocol; availability and
popularity of other forms or methods of buying
and selling goods and services; the use of the networks supporting digital
assets, such as those for developing smart contracts and
distributed applications; general economic conditions and the regulatory
environment relating to digital assets; negative consumer
or public perception; and general risks tied to the use of information
technologies, including cyber risks. A breach or failure of
one cryptocurrency may lead to a loss in confidence in, and thus decreased usage
and/or
value of, other cryptocurrencies.
Bitcoin
mining operations consume significant amounts of electricity, which may have a
negative environmental impact and give rise to
public opinion against allowing, or government regulations restricting, the use
of electricity for mining operations. Additionally, miners
may be forced to cease operations during an electricity shortage or power
outage. Given the energy-intensiveness and electricity
costs of mining, miners are restricted in where they can locate mining
operations. Any shortage of electricity supply or increase
in related costs (or if miners otherwise cease expanding processing power) will
negatively impact the viability and expected economic
return from bitcoin mining, which will affect the availability of bitcoin in the
marketplace. Today, many bitcoin mining operations
rely on fossil fuels to power their operations. Public perception of the impact
of bitcoin mining on climate change may reduce
the demand for bitcoin and increase the likelihood of government regulation.
Such events could have a negative impact on the price
of bitcoin, bitcoin futures, and a Fund’s performance. In addition, sales of
newly mined bitcoin (and sales of bitcoin by large holders)
may impact the price of bitcoin.
Currently,
there is relatively limited use of cryptocurrency in the retail and commercial
marketplace, which contributes to price volatility.
A lack of expansion by cryptocurrencies into retail and commercial markets, or a
contraction of such use, may result in increased
volatility or a reduction in the value of cryptocurrencies, either of which
could adversely impact a Fund’s indirect
investment
in bitcoin.
In addition, to the extent market participants develop a preference for one
cryptocurrency over another, the value
of the less preferred cryptocurrency would likely be adversely
affected.
Cryptocurrency
is a new technological innovation with a limited history; it is a highly
speculative asset and future U.S.
or foreign government
or regulatory
actions or policies may limit, perhaps to a materially adverse extent, the value
of a Fund’s indirect investment
in bitcoin
and the ability to exchange a cryptocurrency or utilize it for
payments.
Many
significant aspects of the tax treatment of investments in cryptocurrency are
uncertain, and a direct or indirect investment in cryptocurrency
may produce income that if directly earned by a RIC, like each
Fund, would be treated as non-qualifying income for purposes
of the income test applicable to RICs. Accordingly, to the extent the
Global Strategist Portfolio
invests in bitcoin futures or the
Discovery Portfolio or the Growth Portfolio invest in bitcoin futures or Bitcoin
ETFs,
it will do so through its
Subsidiary.
In
2014, the Internal Revenue Service (“IRS”) released a notice (the “Notice”)
discussing certain aspects of “convertible virtual currency”
(that is, digital assets that have an equivalent value in fiat currency or that
act as a substitute for fiat currency) for U.S. federal
income tax purposes and, in particular, stating that such a digital asset (i) is
“property,” (ii) is not “currency” for purposes of the
rules relating to foreign currency gain or loss and (iii) may be held as a
capital asset. In 2019, the IRS released a revenue ruling and
a set of “Frequently Asked Questions” (the “Ruling & FAQs”) that provide
some additional guidance. However, the Notice and the
Ruling & FAQs do not address other significant aspects of the U.S. federal
income tax treatment of digital assets. Moreover, although
the Ruling & FAQs address the treatment of hard forks, there continues to be
uncertainty with respect to the income and withholding
taxation of incidental rights received through a fork in the blockchain,
airdrops offered to bitcoin holders and other similar
events, including situations where such rights are disclaimed, as is expected
with respect to a
Bitcoin ETF’s
intended treatment
of such events.
The
taxing authorities of certain states (i) have announced that they will follow
the Notice with respect to the treatment of digital assets
for state income tax purposes and/or (ii) have issued guidance exempting the
purchase and/or sale of digital assets for fiat currency
from state sales tax. It is unclear what further guidance on the treatment of
digital assets for state tax purposes may be issued in
the future.
It
is unclear what additional guidance on the treatment of digital assets for U.S.
federal, state and local income tax purposes may be issued
in the future. Because of the evolving nature of digital assets, it is not
possible to predict potential future developments that may
arise with respect to digital assets. Any future guidance on the treatment of
digital assets for federal, state or local tax purposes could
result in adverse tax consequences for investors in each
Fund and could have an adverse effect on the value of
bitcoin.
Bitcoin
Cash Settled Futures.
The Discovery
Portfolio or Growth
Portfolio may engage in futures contracts based on bitcoin
to obtain long
exposure to bitcoin. The Global Strategist Portfolio may engage in futures
contracts based on bitcoin
to obtain long or short exposure
to bitcoin. A long exposure reflects an investment contemplating an increase in
the value of the underlying asset whereas a short
exposure contemplates a decrease in value
of the underlying asset.
The
only bitcoin futures in which each Fund may invest are cash settled bitcoin
futures traded on futures exchanges registered with the
CFTC. The value of bitcoin futures is determined by reference to the CME CF
Bitcoin Reference Rate, which provides an indication
of the price of bitcoin across certain cash bitcoin exchanges.
Bitcoin
futures expose a
Fund
to all of the risks related to bitcoin discussed above
and also expose a
Fund to risks related to futures, and
specifically risks related
to bitcoin futures. The
price of bitcoin futures is based on a variety of factors. For example,
regulatory
changes
or actions may alter the nature of an investment in bitcoin futures or restrict
the use of bitcoin or the operations of the bitcoin
network or exchanges on which bitcoin trades in a manner that adversely affects
the price of bitcoin futures, which could adversely
impact a
Fund
and necessitate the payment of large daily variation margin payments to settle
a
Fund’s
losses.
The
market
for bitcoin futures is still developing and a Fund’s
investment in bitcoin futures may involve illiquidity risk, as bitcoin
futures
are not as heavily traded as other futures given that the bitcoin futures market
is relatively new,
which means a Fund may be unable
to purchase or sell a futures contract at a desired price or time.
In addition, bitcoin
futures markets may be more volatile than traditional
futures markets and exchanges
on which bitcoin futures are traded and their related clearinghouses and
a
Fund’s
FCMs generally
require the Fund
to maintain relatively high levels of initial margin at the clearinghouse and
FCM in connection with bitcoin
futures. Initial
margin requirements
will increase if a
Fund’s
bitcoin futures investments increase
in value. Bitcoin
futures are subject
to collateral requirements and daily limits that may limit the Fund’s ability to
achieve the desired exposure.
Exchanges
on which bitcoin is traded (which are the source of the price(s) used to
determine the cash settlement amount for a
Fund’s
bitcoin
futures) have experienced, and may in the future experience, technical and
operational issues, making bitcoin prices unavailable
at times. In addition, the cash market in bitcoin has been the target of fraud
and manipulation, which could affect the pricing
of bitcoin futures contracts.
The
contractual obligations of a buyer or seller holding a futures contract to
expiration may be satisfied by settling in cash as provided by
the terms of such contract. However, neither
Fund intends
to hold bitcoin futures through expiration. Instead, each
Fund intends to
“roll” futures positions. “Rolling” refers to a process whereby futures
contracts nearing expiration are closed out and replaced with new
futures contracts with a later expiration date. Accordingly, the Fund is subject
to risks related to rolling.
In addition, the costs associated
with rolling bitcoin futures typically are substantially higher than the costs
associated with other futures contracts and may have
a significant adverse impact on the performance of a Fund’s investments in
bitcoin futures.
When
the market for certain futures contracts is such that the prices are higher in
the more distant delivery months than in the nearer delivery
months, the sale during the “rolling process” of the bitcoin futures with closer
delivery dates would take place at a price that is
lower than the price of the bitcoin futures with more distant delivery dates.
This pattern of higher futures prices for longer expiration
bitcoin futures is often referred to as “contango.” Alternatively, when the
market for certain bitcoin futures is such that the prices
are higher in the nearer months than in the more distant months, the sale during
the rolling process of the more nearby bitcoin futures
would take place at a price that is higher than the price of the more distant
bitcoin futures. This pattern of higher future prices
for shorter expiration bitcoin futures is referred to as “backwardation.” There
have been extended periods in which contango or backwardation
has existed in certain futures markets in general. Such periods could occur in
the future for bitcoin futures and may cause
significant and sustained losses. Additionally, because of the frequency with
which a
Fund may roll futures contracts, the impact
of contango or backwardation on Fund performance may be greater than it would
have been if the Fund rolled futures contracts
less frequently.
In
addition, bitcoin and bitcoin futures have generally exhibited significant price
volatility relative to traditional asset classes. Bitcoin futures
may also experience significant price volatility as a result of the market fraud
and manipulation noted above.
Futures
contracts providing short exposure to bitcoin are also subject to additional
risks, including potentially unlimited losses. The Global
Strategist Portfolio’s short exposure would reflect the portfolio management
team’s view that the value of the underlying asset will
decrease. If the Adviser fails to accurately predict the movement in the value
of the underlying asset, the Global Strategist Portfolio
may incur a theoretically unlimited loss on short exposures (whereas losses from
long exposures can equal only the full value of
the underlying asset).
Futures
contracts based on bitcoin are also subject to the risks otherwise applicable to
derivatives, in particular those described in “Futures
Contracts.”
Bitcoin
ETFs.
The Discovery Portfolio or Growth Portfolio may obtain investment exposure to
bitcoin indirectly through investing in
Bitcoin ETFs. The amount of the respective Fund’s investment in Bitcoin ETFs
will be subject to certain limits at the time of investment.
The risks of investing in Bitcoin ETFs are similar to the risks of investing in
cryptocurrencies generally. Investments in a
Bitcoin
ETF expose a Fund to all of the risks related to bitcoin discussed above and
also expose the Fund to risks specific to such Bitcoin
ETF.
Shares
of Bitcoin ETFs (including, for purposes of this and the following paragraph, as
applicable, pooled investment vehicles other than
ETFs providing Bitcoin exposure) have historically traded, and may continue to
trade, at a significant discount or premium to NAV.
To the extent a Bitcoin ETF trades at a discount to NAV, the value of the Fund’s
investment in the Bitcoin ETF would typically
decrease, even if the value of the Bitcoin ETF’s underlying holdings in bitcoin
does not decrease. In addition, there is no guarantee
that an active trading market for a Bitcoin ETF will exist at any time. The
Fund’s investment in a Bitcoin ETF will be subject
to the operating expenses associated with such Bitcoin ETF. In addition, Bitcoin
ETFs are susceptible to theft of its bitcoin holdings,
which would negatively affect an investment by the Fund in such
products.
The
Discovery Portfolio’s and Growth Portfolio’s investments in Bitcoin ETFs are
also subject to the risks associated with private funds
generally, including liquidity risk, authorized participant concentration risk,
cash transactions risk and trading risk. The securities
of such private funds are generally not registered under the 1940 Act, and
therefore the Discovery Portfolio’s and Growth Portfolio’s
investments in Bitcoin ETFs will not benefit from the protections and
restrictions of such laws and the regulations thereunder.
Investment
by the Bitcoin Subsidiary in Bitcoin ETFs will generally be treated for tax
purposes as a direct investment by the Bitcoin Subsidiary
in bitcoin and will be subject to the tax risks related to investment in
bitcoin.
Special
Risks Related to the Cayman Islands Subsidiary.
Each of the Discovery Portfolio, Global Strategist Portfolio and Growth
Portfolio
may, consistent with its principal investment strategies, invest up to 25% of
its total assets in a wholly-owned subsidiary of the
Fund organized as a company under the laws of the Cayman Islands. Each Bitcoin
Subsidiary may invest in Bitcoin
ETFs,
cash-settled
bitcoin futures and other investments. Investments in each Bitcoin Subsidiary
are expected to provide the Discovery Portfolio and
Growth Portfolio with exposure to bitcoin within the limitations of Subchapter M
of the Code and IRS
revenue rulings, as discussed
below under “Taxes.” The Global Strategist Subsidiary may invest, directly or
indirectly through the use of derivatives, in securities,
commodities, commodity-related instruments and other investments, primarily
futures, swaps and notes. The Global Strategist
Subsidiary may also invest in cash-settled bitcoin futures. Investments in the
Global Strategist Subsidiary are expected to provide
the Global Strategist Portfolio with exposure to bitcoin and the commodity
markets within the limitations of Subchapter M of
the Code and IRS
revenue rulings, as discussed below under “Taxes.”
Each
Subsidiary is a company organized under the laws of the Cayman Islands and is
overseen by its own board of directors. Each Fund
is the sole shareholder of its respective Subsidiary, and it is not currently
expected that shares of any Subsidiary will be sold or offered
to other investors. To the extent that a Fund invests in a Subsidiary, the Fund
may be subject to the risks associated with such commodity-related
instruments, bitcoin and other bitcoin related investments.
While
each Subsidiary may be considered similar to investment companies, it is not
registered under the 1940 Act and, unless otherwise
noted in the Prospectus and this SAI, is not subject to all of the investor
protections of the 1940 Act and other U.S. regulations.
Changes in the laws of the United States and/or the Cayman Islands could result
in the inability of a Fund and/or the Subsidiary
to operate as described in the applicable Prospectus and this SAI and could
eliminate or severely limit the Fund’s ability to invest
in the Subsidiary which may adversely affect the Fund and its
shareholders.
Special
Purpose Acquisition Companies. The Fund
may invest in stock, warrants, rights and other securities of special purpose
acquisition
companies (“SPAC”), which typically are publicly traded companies that raise
investment capital for the purpose of acquiring
or merging with an existing company that is identified subsequent to the SPAC’s
initial public offering (“IPO”), or similar special
purpose entities. Typically, the acquisition target is an existing privately
held company that wants to trade publicly, which it accomplishes
through a combination with a SPAC rather than by conducting a traditional IPO.
SPACs and similar entities are blank check
companies and do not have any operating history or ongoing business other than
seeking acquisitions. The long term value of a SPAC’s
securities is particularly dependent on the ability of the SPAC’s management to
identify a merger target and complete an attractive
acquisition. Some SPACs pursue acquisitions only within certain sectors,
industries or regions, which may increase the time horizon
for an acquisition as well as other risks associated with these investments,
including price volatility. Conversely, other SPACs may
invest without such limitations, in which case the SPAC’s management may have
limited experience or knowledge of the market sector,
industry or region in which the transaction is contemplated. In addition,
certain securities issued by a SPAC, particularly in private
placements conducted by the SPAC after its IPO, may be classified as illiquid
and/or be subject to restrictions on resale, which
restrictions may be imposed for at least a year or possibly a more extended
time, and may potentially be traded only in the over-the-counter
market.
Until
an acquisition or merger is completed, a SPAC generally invests its assets, less
a portion retained to cover expenses, in U.S. government
securities, money market securities and cash and does not typically pay
dividends in respect of its common stock. To the extent
a SPAC is invested in these securities or cash, the SPAC may not perform similar
to other equity securities and this may impact
the Fund’s ability to meet its investment objective. SPAC shareholders may not
approve any proposed acquisition or merger, or
an acquisition or merger, once effected, may prove unsuccessful. If an
acquisition or merger that meets the requirements of the
SPAC
is not completed within a pre-established period of time (typically, two years),
the funds invested in the SPAC plus any interest paid
on such funds while held in trust (less any permitted expenses and any losses
experienced by the SPAC) are returned to its shareholders
unless the shareholders approve alternative options.
As a result, the
Fund may be subject to opportunity costs to the extent
that alternative investments would have produced higher returns. Any warrants or
other rights with respect to a SPAC held by the
Fund may expire worthless or may be repurchased or retired by the SPAC at an
unfavorable price.
In
connection with a proposed acquisition, a SPAC may raise additional funds in
order to fund the acquisition, post-acquisition working
capital, redemptions or some combination of those purposes. This additional
fundraising may be in the form of a private placement
of a class of equity securities or debt. The debt could be secured by the assets
of the SPAC or the operating company existing
after the acquisition or it could be unsecured. The debt may also be investment
grade debt or below investment grade debt.
The Fund
may invest in stock, warrants, rights and other securities of SPACs or similar
special purpose entities in a private placement transaction
or as part of a public offering. If the Fund purchases securities in the SPAC’s
IPO, typically it will receive publicly-traded securities
called “units” that include one share of common stock and one right or warrant
(or partial right or warrant) conveying the right
to purchase additional shares of common stock. At a specified time, the rights
and warrants may be separated from the common stock
at the election of the holder, after which each security typically is freely
tradeable. An investment in the IPO securities of a SPAC
may be diluted by additional, later offerings of securities by the SPAC or by
other investors exercising existing rights to purchase
securities of the SPAC. If the Fund invests in equity securities issued in a
private placement after the IPO, those shares will not
be publicly tradable unless and until there is a registration statement filed by
the SPAC and approved by the SEC or if an exemption
from registration is available, which exemptions typically become available at
least a year after the date of the business combination.
Equity investments in the SPAC made in connection with a proposed business
combination will be diluted by the acquisition
itself and further fundraising by the ongoing operating business.
If
there is no market for the shares of the SPAC or only a thinly traded market for
shares or interests in the SPAC develops, the
Fund may
not be able to sell its interest in a SPAC or it may only sell its interest at a
price below what the Fund believes is the SPAC interest’s
value. If not subject to a restriction on resale, the
Fund may sell its investments in a SPAC at any time, including before, at
or
after the time of an acquisition or merger. Generally, SPACs provide the
opportunity for common shareholders who hold publicly traded
shares to have some or all of their shares redeemed by the SPAC at or around the
time of a proposed acquisition or merger. However,
there is often a limit to the number of shares that can be redeemed in
connection with a business combination. If the
Fund holds
shares of publicly traded SPAC stock, this means that the
Fund may not be able to redeem those shares prior to an acquisition and
may have to hold those shares until after the completion of the acquisition. If
the
Fund purchases shares in a private placement, those
shares will not be redeemable in connection with a transaction. In addition,
the
Fund may elect not to participate in a proposed SPAC
transaction or may be required to divest its interests in the SPAC due to
regulatory or other considerations.
An
investment in a SPAC
is subject to the risks that any proposed acquisition or merger may not obtain
the requisite approval of SPAC
shareholders, may require governmental or other approvals that it fails to
obtain or that an acquisition or merger, once effected,
may prove unsuccessful and lose value. In addition, among other conflicts of
interest, the economic interests of the management,
directors, officers and related parties of a SPAC can differ from the economic
interests of public shareholders, which may
lead to conflicts as they evaluate, negotiate and recommend business combination
transactions to shareholders. For example, because
the sponsor, directors and officers of a SPAC may directly or indirectly own
interests in a SPAC, the sponsor, directors and officers
may have a conflict of interest in determining whether a particular target
business is an appropriate business with which to effectuate
a business combination. SPAC sponsors generally purchase equity in the SPAC at
more favorable terms than investors in the
IPO or subsequent investors on the open market. As a result, although most of
the SPAC’s capital has been provided by IPO investors,
the sponsors and potentially other initial investors will benefit more than
investors from the SPAC’s completion of an initial
business combination and may have an incentive to complete a transaction on
terms that may be less favorable to other investors.
This risk may become more acute as the deadline for the completion of a business
combination nears or in the event that attractive
acquisition or merger targets become scarce. In addition, the requirement that a
SPAC complete a business combination within
a prescribed time frame may give potential target businesses leverage over the
SPAC in negotiating a business combination and may
limit the time the SPAC has in which to conduct due diligence on potential
business combination targets, which could undermine
the SPAC’s ability to complete a business combination on terms that would
produce value for its shareholders. An investment
in a SPAC is also subject to the risk that a significant portion of the funds
raised by the SPAC may be expended during the
search for a target acquisition or merger. The value of investments in SPACs may
be highly volatile and may depreciate over time.
In
addition, investments in SPACs may be subject to the same risks as investing in
any initial public offering, including the risks associated
with companies that have little operating history as public companies, including
unseasoned trading, small number of shares
available for trading and limited information about the issuer. In addition, the
market for IPO issuers may be volatile, and share
prices of newly-public companies have fluctuated significantly over short
periods of time. Although some IPOs may produce high
returns, such returns are not typical and may not be sustainable. Certain
investments in SPACs are privately placed securities and
are also subject to the risks of such securities.
Additional
Risks.
Special
Risks Related to Cyber Security.
The Company and its service providers are susceptible to cyber security
risks that include, among
other things, theft, unauthorized monitoring, release, misuse, loss, destruction
or corruption of confidential and highly restricted
data; denial of service attacks; unauthorized access to relevant systems;
compromises to networks or devices that the Company
and its service providers use to service the Company’s operations; or
operational disruption or failures in the physical infrastructure
or operating systems that support the Company and its service providers.
Cyber attacks against or security breakdowns of
the Company or its service providers may adversely impact the Company and
its shareholders, potentially resulting in, among other
things, financial losses; the inability of Fund shareholders to transact
business and the Fund to process transactions; inability to
calculate the
Fund’s NAV; violations of applicable privacy and other laws; regulatory fines,
penalties, reputational damage, reimbursement
or other compensation costs; and/or additional compliance costs.
The Company may incur additional costs for cyber security
risk management and remediation purposes. In addition, cyber security risks may
also impact issuers of securities in which the
Fund invests, which may cause the Fund’s investment in such issuers to
lose value. There can be no assurance that the Company
or its service providers will not suffer losses relating to cyber attacks or
other information security breaches in the future.
Regulatory
and Legal Risk.
U.S.
and non-U.S. governmental agencies and other regulators regularly implement
additional regulations and
legislators pass new laws that affect the investments held by the Fund, the
strategies used by the Fund or the level of regulation or taxation
applying to the Fund (such as regulations related to investments in derivatives
and other transactions). These regulations and laws
impact the investment strategies, performance, costs and operations of the Fund
or taxation of shareholders. For example, the SEC
recently adopted amendments to rules related to fund names and related
strategies, which could result in costs to some Funds in amending
their names and/or strategies accordingly. In addition, a rapidly expanding or
otherwise more aggressive regulatory environment
may impose greater costs on all sectors and on financial services companies in
particular.
Market
and Geopolitical Risk.
The value of your investment in the Fund is based on the values of the Fund’s
investments. These values
change daily due to economic and other events that affect markets generally, as
well as those that affect particular regions, countries,
industries, companies or governments. Price movements, sometimes called
volatility, may be greater or less depending on the
types of securities the Fund owns and the markets in which the securities trade.
The increasing interconnectivity between global economies
and markets increases the likelihood that events or conditions in one region,
sector, industry, market or with respect to one
company may adversely impact issuers in a different country, region, sector,
industry, or market. For example, adverse developments
in the banking or financial services sector could impact companies operating in
various sectors or industries (and in turn
adversely impact the Fund’s investments) and otherwise adversely affect the Fund
and its operations. Securities in the Fund’s portfolio
may underperform due to inflation (or expectations for inflation), interest
rates, global demand for particular products or resources,
natural disasters, pandemics, epidemics, terrorism, regulatory events and
governmental or quasi-governmental actions. The occurrence
of global events similar to those in recent years, such as terrorist attacks
around the world, natural disasters, social and political
discord or debt crises and downgrades, among others, may result in market
volatility and may have long term effects on both the
U.S. and global financial markets. The occurrence of such events may be sudden
and unexpected, and it is difficult to predict when
similar events affecting the U.S. or global financial markets may occur, the
effects that such events may have and the duration of
those effects. Any such event(s) could have a significant adverse impact on the
value, liquidity and risk profile of the Fund’s portfolio,
as well as its ability to sell securities to meet redemptions. There is a risk
that you may lose money by investing in the Fund.
Social,
political, economic and other conditions and events, such as war, natural
disasters, health emergencies (e.g., epidemics and pandemics),
terrorism, conflicts, social unrest, recessions, inflation, rapid interest rate
changes and supply chain disruptions may occur
and could significantly impact issuers, industries, governments and other
systems, including the financial markets. As global systems,
economies and financial markets are increasingly interconnected, events that
once had only local impact are now more likely to
have regional or even global effects. Events that occur in one country, region
or financial market will, more frequently, adversely impact
issuers in other countries, regions or markets. These impacts can be exacerbated
by failures of governments and societies to adequately
respond to an emerging event or threat. These types of events quickly and
significantly impact markets in the U.S. and across
the globe leading to extreme market volatility and disruption. The extent and
nature of the impact on supply chains or economies
and markets from these events is unknown, particularly if a health emergency or
other similar event, such as COVID-19 (the
“Coronavirus”), persists for an extended period of time. Social, political,
economic and other conditions and events, such as natural
disasters, health emergencies (e.g., epidemics and pandemics), terrorism,
conflicts, social unrest, recessions, inflation, rapid interest
rate changes and supply chain disruption could reduce consumer demand or
economic output, result in market closures, travel
restrictions or quarantines, and generally have a significant impact on the
economies and financial markets and the Adviser’s investment
advisory activities and services of other service providers, which in turn could
adversely affect the Fund’s investments and other
operations. The value of the Fund’s investment may decrease as a result of such
events, particularly if these events adversely impact
the operations and effectiveness of the Adviser or key service providers or if
these events disrupt systems and processes necessary
or beneficial to the investment advisory or other activities on behalf the
Fund.
Many
countries have experienced outbreaks of infectious illnesses in recent decades,
including swine flu, avian influenza, SARS and the
Coronavirus, and may experience similar outbreaks in the future. For example,
the Coronavirus outbreak has resulted in numerous
deaths and the imposition of both local and more widespread “work from home” and
other quarantine measures, border
closures
and other travel restrictions, causing social unrest and commercial disruption
on a global scale and significant volatility in financial
markets.
Additionally,
health crises and geopolitical developments have in the past caused, and may in
the future cause, disruption in supply chains,
and adversely impacted a number of industries, including but not limited to
retail, transportation, hospitality and entertainment.
In addition to these or other developments having adverse consequences for
certain companies and other issuers in which
the Fund invests and the value of the Fund’s investments therein, the
operations of the Adviser (including those relating to the Fund)
could be impacted adversely, including through quarantine measures and travel
restrictions imposed on the Adviser’s or service providers’
personnel located in affected countries, regions or local areas, or any related
health issues of such personnel. Any of the foregoing
events could materially and adversely affect the Adviser’s ability to source,
manage and divest investments on behalf of the Fund
and pursue the Fund’s investment objectives and strategies. Similar consequences
could arise with respect to other infectious diseases.
Given the significant economic and financial market disruptions and general
uncertainty associated with the Coronavirus pandemic,
the valuation and performance of the Fund’s investments may be impacted
adversely.
During
periods of low interest rates, the Fund’s susceptibility to interest rate risk
(i.e., the risks associated with changes in interest rates)
may be magnified, its yield and income may be diminished and its performance may
be adversely affected (e.g., during periods of
low interest rates, the Fund may be unable to maintain positive returns). These
levels of interest rates may magnify the risks associated
with rising interest rates. Changing interest rates may have unpredictable
effects on markets, including market volatility and
reduced liquidity, and may adversely affect the Fund’s yield, income and
performance. In addition, government actions (such as changes
to interest rates) could have unintended economic and market consequences that
adversely affects the Fund’s investments.
Government
and other public debt, including municipal obligations in which the Fund may
invest, can be adversely affected by large and
sudden changes in local and global economic conditions that result in increased
debt levels. Although high levels of government and
other public debt do not necessarily indicate or cause economic problems, high
levels of debt may create certain systemic risks if sound
debt management practices are not implemented. A high debt level may increase
market pressures to meet an issuer’s funding needs,
which may increase borrowing costs and cause a government or public or municipal
entity to issue additional debt, thereby increasing
the risk of refinancing. A high debt level also raises concerns that the issuer
may be unable or unwilling to repay the principal
or interest on its debt, which may adversely impact instruments held by the Fund
that rely on such payments. Governmental
and quasi-governmental responses to certain economic or other conditions may
lead to increasing government and other
public debt, which heighten these risks. Unsustainable debt levels can lead to
declines in the value of currency, and can prevent a
government from implementing effective counter-cyclical fiscal policy during
economic downturns, can generate or contribute to an
economic downturn or cause other adverse economic or market developments, such
as increases in inflation or volatility. Increasing
government and other public debt may adversely affect issuers, obligors,
guarantors or instruments across a variety of asset classes.
ESG
Investment Risk. To
the extent that the Adviser considers environmental, social and governance
(“ESG”) criteria and application of
related analyses when selecting investments, the Fund’s performance may be
affected depending on whether such investments are in
or out of favor and relative to similar funds that do not adhere to such
criteria or apply such analyses. A company’s ESG practices or
the Adviser’s assessment of such may change over time. Additionally, the
Adviser’s adherence to its ESG criteria and application of related
analyses in connection with identifying and selecting investments may require
subjective analysis and may be difficult if data about
a particular company is limited. The Adviser’s consideration of ESG criteria may
result in the Fund buying certain securities or forgoing
opportunities to buy certain securities. The Fund’s investments in certain
companies may be susceptible to various factors that
may impact their businesses or operations, including the effects of general
economic conditions throughout the world, increased competition
from other providers of services, unfavorable tax laws or accounting policies
and high leverage.
TAXES
The
following is only a summary of certain additional federal income and excise tax
considerations generally affecting the Funds
and their
shareholders that are not described in the
Funds’ prospectuses. No attempt is made to present a detailed explanation of the
tax treatment
of the Funds
or their shareholders, and the discussion here and in the
Funds’ prospectuses is not intended as a substitute for
careful tax planning. Shareholders are urged to consult their tax advisors with
specific reference to their own tax situations, including
their state and local tax liabilities.
The
following general discussion of certain federal income and excise tax
consequences is based on the Code, and the regulations issued
thereunder as in effect on the date of this SAI. New legislation, as well as
administrative changes or court decisions, may significantly
change the conclusions expressed herein, and may have a retroactive effect with
respect to the transactions contemplated herein.
Each
Fund is
generally treated as a separate corporation for federal income tax purposes, and
thus the provisions of the Code generally
will be applied to the Fund
separately, rather than to the Company as a whole.
Federal
Income Tax Treatment of Shareholders
Shares
of the Funds
will be purchased by life insurance companies for their separate accounts under
variable annuity contracts and variable
life insurance policies and by other entities under qualified pension and
retirement plans. Under the provisions of the Code currently
in effect, net income and net realized capital gains of Funds of the Company are
not currently taxable when distributed to and
left to accumulate within a variable annuity contract or variable life insurance
policy or under a qualified pension or retirement plan.
Section
817(h) of the Code provides that the investments of a separate account
underlying a variable insurance contract (or the investments
of a mutual fund, the shares of which are owned by the variable separate
account) must be “adequately diversified” in order
for the contract to be treated as an annuity or as life insurance for federal
income tax purposes. The Treasury Department has issued
regulations explaining these diversification requirements. These
regulations generally provide that, as of the end of each calendar
quarter or within 30 days thereafter no more than 55% of the total assets of a
Portfolio may be represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and each U.S. government agency
and instrumentality is considered a separate issuer. Section 817(h) of the
Internal Revenue Code provides, as a safe harbor, that
a separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M of the Internal
Revenue Code are satisfied and no more than 55% of the value of the account’s
total assets is attributable to cash and cash items
(including receivables), U.S. government securities and securities of other
regulated investment companies. Each
Fund intends to
continue to comply with such requirements. Failure
by a Fund to satisfy these diversification requirements would generally cause
the
variable contracts to lose their favorable tax status and require a contract
holder to include as ordinary income any income accrued
under the contracts for the current and all prior taxable years.
For
information on federal income taxation of a life insurance company with respect
to its receipt of distributions from the Company and
federal income taxation of owners of the company’s variable annuity contracts or
variable life insurance policies, refer to the life insurance
company’s variable annuity contract or variable life insurance policy
prospectus.
Qualification
as a Regulated Investment Company
The
Company intends that each of its Funds elect and qualify to be treated for each
taxable year as a RIC under Subchapter M of the Code.
Qualification as a RIC requires, among other things, that (a) at least 90% of
the Fund’s gross income be derived from interest, dividends,
payments with respect to securities loans, gains from the sale or other
disposition of securities or options thereon or foreign currencies,
net income derived from an interest in a qualified publicly traded partnership,
or other income derived with respect to its business
of investing in such stock, securities, or currencies; and (b) the Fund
diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund’s assets is
represented by cash, U.S. government securities, securities
of other RICs and other securities limited, in respect of any one issuer to an
amount not greater than 5% of the Fund’s total assets
and not more than 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of the Fund’s
total assets is invested in the securities of any one issuer (other than U.S.
government securities or securities of other RICs),
or
in
two or more issuers that are controlled by the Fund and that are engaged in the
same or similar trades or businesses or related trades
or businesses. It is anticipated that any net gain realized from the closing out
of futures contracts will be considered gain from the
sale of securities and therefore be qualified income for purposes of the 90%
gross income requirement described above. Net income
derived from an interest in a “qualified publicly traded partnership,” as
defined in the Code, will be treated as qualified income
for purposes of the 90% gross income requirement. For the purposes of the
diversification requirements in clause (ii) above, the
outstanding voting securities of any issuer includes the equity securities of a
qualified publicly traded partnership. In addition, no more
than 25% of the value of a RIC’s total assets may be invested in the securities
of one or more qualified traded partnerships.
For
purposes of the 90% gross
income requirement described above, the Code expressly provides the U.S.
Treasury with authority to issue
regulations that would exclude foreign currency gains from qualifying income if
such gains are not directly related to a Fund’s business
of investing in stock or securities. While to date the U.S. Treasury has not
exercised this regulatory authority, there can be no
assurance that it will not issue regulations in the future (possibly with
retroactive application) that would treat some or all of a Fund’s
foreign currency gains as non-qualifying income. For purposes of the
diversification requirement described above, a Fund will not
be treated as in violation of such requirement as a result of a discrepancy
between the value of its various investments and the diversification
percentages described above, unless such discrepancy exists immediately
following the acquisition of any security or other
property and is wholly or partly the result of such acquisition. Moreover, even
in the event of noncompliance with the diversification
requirement as of the end of any given quarter, a Fund is permitted to cure the
violation by eliminating the discrepancy
causing such noncompliance within a period of 30 days from the close of the
relevant quarter.
Each
of the Discovery Portfolio and Growth Portfolio may seek to gain exposure to
bitcoin through investments in a Bitcoin Subsidiary.
The Global Strategist Portfolio may seek to gain exposure to bitcoin and the
commodity markets through investments in the
Global Strategist Subsidiary. Historically, the IRS has issued private letter
rulings in which the IRS specifically concluded that income
and gains from investments in a wholly-owned foreign subsidiary that invests in
commodity-linked instruments are “qualifying
income” for purposes of the 90% gross income test described above. The Funds
have not received such a private letter
ruling,
and are not able to rely on private letter rulings issued to other taxpayers.
The IRS issued
regulations
that would generally treat
a Fund’s income inclusion with respect to a Subsidiary as qualifying income
either if (i) there is a current
distribution
out of the earnings
and profits of the Subsidiary that are attributable to such income inclusion or
(ii) such inclusion is derived with respect to the
Fund’s business of investing in stock, securities or currencies. The tax
treatment of a Fund’s investments in a Subsidiary may be adversely
affected by future legislation, court decisions, Treasury Regulations and/or
guidance issued by the IRS that could affect whether
income derived from such investments is “qualifying income” under Subchapter M
of the Code, or otherwise affect the character,
timing and/or amount of the Fund’s taxable income or any gains and distributions
made by the Fund. No assurances can be
provided that the IRS would not be able to successfully assert that a Fund’s
income from such investments was not “qualifying income,”
in which case the Fund would fail to qualify as a RIC under Subchapter M of the
Code if over 10% of its gross income was derived
from these investments. If the Fund failed to qualify as a RIC, it would be
subject to federal and state income tax on all of its taxable
income at regular corporate tax rates with no deduction for any distributions
paid to shareholders, which would significantly adversely
affect the returns to, and could cause substantial losses for, Fund
shareholders. Additionally, the failure of a Fund to qualify as
a RIC could result in significant adverse tax consequences for the holders of
the contracts and annuities which invest in the Fund through
a separate account.
A
foreign corporation, such as a Subsidiary, will generally not be subject to U.S.
federal income taxation unless it is deemed to be engaged
in a U.S. trade or business. The rules regarding whether the Subsidiary will be
treated as engaged in a U.S. trade or business as
a result of its bitcoin related investments are not certain. It is expected that
each Subsidiary will conduct its activities in a manner so
as to meet the requirements of a safe harbor under Section 864(b)(2) of the Code
under which the Subsidiary may engage in trading
in stocks or securities or certain commodities without being deemed to be
engaged in a U.S. trade or business. However, if certain
of a Subsidiary’s activities were determined not to be of the type described in
the safe harbor, then the activities of the Subsidiary
may constitute a U.S. trade or business, or be taxed as such. In general, a
foreign corporation, such as a Subsidiary, that does
not conduct a U.S. trade or business is nonetheless subject to tax at a flat
rate of 30 percent (or lower tax treaty rate), generally payable
through withholding, on the gross amount of certain U.S.-source income that is
not effectively connected with a U.S. trade or
business. There is presently no tax treaty in force between the U.S. and the
Cayman Islands that would reduce this rate of withholding
tax. It is not expected that any Subsidiary will derive income subject to such
withholding tax.
Each
Subsidiary will be treated as a controlled foreign corporation and each Fund
will be treated as a “U.S. shareholder” of the Subsidiary.
As a result, each Fund will be required to include in gross income for U.S.
federal income tax purposes all of a Subsidiary’s
“Subpart F income,” whether or not such income is distributed by the Subsidiary.
Each Fund’s recognition of a Subsidiary’s
“Subpart F income” will increase the Fund’s tax basis in its respective
Subsidiary. Distributions by a Subsidiary to a Fund will
be tax-free, to the extent of their previously undistributed “Subpart F income,”
and will correspondingly reduce the Fund’s tax basis
in the Subsidiary. “Subpart F income” is generally treated as ordinary income,
regardless of the character of a Subsidiary’s underlying
income. If a net loss is realized by a Subsidiary, such loss is not generally
available to offset the income earned by a Fund, and
such loss cannot be carried forward to offset taxable income of the Fund or the
Subsidiary in future periods.
In
addition to the requirements described above, in order to qualify as a RIC, each
Fund must distribute an amount at least equal to the
sum of 90% of the Fund’s investment company taxable income (that generally
includes dividends, taxable interest, currency gains,
and the excess of net short-term capital gains over net long-term capital losses
less operating expenses) and 90% of its net tax-exempt
interest income, if any, to shareholders (the “Distribution Requirement”). If a
Fund meets all of the RIC requirements, it will not
be subject to federal income tax on any of its net investment income or net
realized capital gains that it distributes to shareholders.
Although each Fund intends to distribute all or substantially all of its net
investment income and may distribute its net realized
capital gains for any taxable year, a Fund will be subject to federal income
taxation to the extent any such income or gains are not
distributed.
A
Fund is generally permitted to carry forward a net capital loss in any taxable
year to offset its own capital gains, if any. These amounts
are available to be carried forward to offset future capital gains to the extent
permitted by the Code and applicable tax regulations.
Any such loss carryforwards will retain their character as short-term or
long-term.
Certain
Funds may make certain investments indirectly through one or more entities
treated as corporations for U.S. federal income tax
purposes. Such entities will generally be required to pay U.S. corporate income
tax, and possibly other taxes, on their earnings, which
ultimately will reduce the Fund’s return on income derived from such
investments.
Some
of the Funds may make investments that cause the Funds to recognize income or
gain prior to receiving cash with respect to such
investments. For example, in the event that the Funds invest in securities
that
bear “original issue discount” or “acquisition discount”
(collectively, “OID Securities”) they will be deemed to have received interest
income even though no cash payments have been
received. Accordingly, such investments may not produce sufficient current cash
receipts to match the amount of net investment
income a Fund must distribute to satisfy the Distribution Requirement. In some
cases, a Fund may have to borrow money
or dispose of other investments in order to make sufficient cash distributions
to satisfy the Distribution Requirement.
If
a Fund fails to qualify for any taxable year as a RIC, all of its taxable income
will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders.
A
Fund’s transactions in derivatives (such as futures contracts and swaps) will be
subject to special tax rules, the effect of which may be
to accelerate income to the Fund, defer losses to the Fund, cause adjustments in
the holding periods of the Fund’s securities and convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions
made by a Fund. A Fund’s use of derivatives may result in the Fund realizing
more short-term capital gains and ordinary income
subject to tax at ordinary income tax rates than it would if it did not use
derivatives.
Positions
held by a Fund in certain regulated futures contracts and foreign currency
contracts (“Section 1256 Contracts”) will generally
be marked-to-market (i.e., treated as though sold for fair market value) on the
last business day of the Fund’s taxable year and
all gain or loss associated with such transactions (except certain currency
gains covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The effect of the Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gain into short-term capital gain
or short-term capital losses into long-term capital losses within a Fund. The
acceleration of income on Section 1256 Contracts may
require a Fund to accrue taxable income without a corresponding receipt of cash.
In order to generate enough cash to satisfy the Distribution
Requirement, a Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or
to use cash flows from other sources. Any or all of these rules may, therefore,
affect the amount, character or timing of income earned
and, in turn, affect the application of the Distribution Requirement to a
particular Fund.
Short
sales engaged in by a Fund may reduce the holding period of property held by a
Fund which is substantially identical to the property
sold short. This rule may have the effect of converting capital gains recognized
by a Fund from long-term to short-term as well
as converting capital losses recognized by a Fund from short-term to
long-term.
Federal
Excise Tax
No
Fund will be subject to the 4% excise tax normally imposed on RICs that do not
distribute substantially all of their income and gains
each calendar year, because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance
companies held in connection with variable annuity accounts and/or variable life
insurance policies and certain trusts under qualified
pension and retirement plans.
Certain
Tax Information Reporting Considerations
Because
of the nature of the rules governing how REITs report their income and the
timing of REITs issuing year-end tax information,
to the extent
a Fund invests in REITs, the Fund may need to estimate the character of
distributions paid to its shareholders
from REIT distributions. In addition, after the calendar year-end, REITs may
recharacterize the nature of the distributions
paid during that year, with the result that distributions previously identified
as ordinary income are recharacterized as return
of capital and/or capital gain. As a result, the composition
of the
Fund’s distributions as reported initially may differ from the final
composition determined after calendar year-end and reported to the Fund’s
shareholders on their year-end tax information statements.
Foreign
Income Taxes
To
the extent
a Fund invests in foreign securities, the Fund may be subject to foreign
withholding taxes with respect to its dividend and
interest income from foreign countries, thus reducing the net amount available
for distribution to the Fund’s shareholders. The United
States has entered into tax treaties with many foreign countries that may
entitle the Fund to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance because the amount of the Fund’s
assets to be invested within various countries is not known.
A Fund incurring foreign taxes, if eligible, may elect to pass-through
allowable foreign tax credits. The benefits, which may be potentially material,
of this election will inure only to the insurance company
that issued the variable contract and will not be shared with the contract
holders.
Dividends
Received Deduction
A
Fund that receives dividend income from U.S. sources will annually report
certain amounts of its dividends paid as eligible for the dividends
received deduction. The benefits, which may be potentially material, of these
reports will inure only to the insurance company
that issued the variable contract and will not be shared with the contract
holders.
State
and Local Tax Considerations
Rules
of U.S. state and local taxation of dividend and capital gains distributions
from regulated investment companies often differ from
the rules for U.S. federal income taxation described above. Shareholders are
urged to consult their tax advisers as to the consequences
of these and other U.S. state and local tax rules regarding an investment in the
Fund.
PURCHASE
OF SHARES
The
purchase price of a share of the Fund
of the Company is the NAV next determined after the order is received by the
Company or
its designee. NAV for Class I and Class II shares of a Fund will differ due to
class specific expenses paid by each class, if any, and the
12b-1 fee charged to Class II shares. For the Fund
of the Company, an order received prior to the close of the New York Stock
Exchange
(the “NYSE”) (normally 4:00 p.m. Eastern time) will be executed at the price
computed on the date of receipt; and an order
received after the close of the NYSE will be executed at the price computed on
the next day the NYSE is open as long as the Company’s
transfer agent receives payment by check or in Federal Funds. Shares of
the Fund
may be purchased on any day the NYSE
is open except as noted below. If the NYSE is closed due to inclement weather,
technology problems or any other reason on a day
it would normally be open for business, or the NYSE has an unscheduled early
closing on a day it has opened for business, the
Fund
reserves the right to treat such day as a business day and accept purchase and
redemption orders until, and calculate its NAV as of,
the normally scheduled close of regular trading on the NYSE for that day, so
long as the Adviser believes there generally remains an
adequate market to obtain reliable and accurate market
quotations. The
Fund may elect to remain open and price its shares on days
when the NYSE is closed but the primary securities markets on which the Fund’s
securities trade remain open.
Shares
may, in the Company’s discretion, be purchased with investment securities (in
lieu of or in conjunction with cash) acceptable to
the Company. The securities would be acceptable by the Company at their market
value in return for Fund Shares of equal value.
The
Company may accept orders from participating insurance companies after the close
of the NYSE. In these cases, all orders received
by a participating insurance company on a business day are aggregated and the
insurance company places a net purchase or redemption
order for shares of one or more Funds later that day or the morning of the next
business day. These orders are normally executed
at the NAV that was computed at the close of the day on which the insurance
company received the order.
The Fund
reserves the right in its sole discretion to suspend the offering of its shares
and to reject purchase orders when in the judgment
of management such rejection is in the best interest of the Fund.
REDEMPTION
OF SHARES
The
Company normally makes payment for all shares redeemed within one business day
of receipt of the request, and in no event more
than seven days after receipt of a redemption request in good order. The Company
may suspend redemption privileges or postpone
the date of payment (i) during any period that the NYSE is closed, or trading on
the NYSE is restricted as determined by the
SEC, (ii) during any period when an emergency exists as defined by the rules of
the SEC as a result of which it is not reasonably practicable
for a Fund to dispose of securities owned by it, or fairly to determine the
value of its assets and (iii) for such other periods as
the SEC may permit.
If
the Adviser determines that it is in the best interest of the Company
or the
Fund not to pay redemption proceeds in cash, and subject
to applicable agreements with life insurance companies and other qualified
investors, the Company may distribute to you securities
held by the Fund from which you are redeeming. If requested, the Fund will pay a
portion of your redemption(s) in cash (during
any 90 day period) up to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such in-kind
securities may be illiquid and difficult or impossible for a shareholder to sell
at a time and at a price that a shareholder would like.
In addition, you may incur brokerage costs and a further gain or loss for income
tax purposes when you ultimately sell the securities.
INVESTMENT
LIMITATIONS
Fundamental
Limitations
Each
current Fund has adopted the following restrictions, which are fundamental
policies and may not be changed without the approval
of the lesser of: (1) at least 67% of the voting securities of the Fund present
at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (2) more than 50% of the outstanding voting securities
of the Fund. Each Fund of the Company may not:
1.
purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments; provided that this restriction
shall not prohibit the Fund from purchasing or selling options, futures
contracts and related options thereon, forward contracts,
swaps, caps, floors, collars and any other financial instruments or from
investing in securities or other instruments backed by
physical commodities or as otherwise permitted by (i) the 1940 Act, (ii) the
rules and regulations promulgated by the SEC under the
1940 Act, or (iii) an exemption or other relief applicable to the Fund from the
provisions of the 1940 Act;
2.
purchase or sell real estate, although it may purchase and sell securities of
companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
3.
make loans of money or property to any person, except (a) to the extent that
securities or interests in which the Fund may invest are
considered to be loans, (b) through the loan of portfolio securities, (c) by
engaging in repurchase agreements, or (d) as may
otherwise
be permitted by (i) the 1940 Act, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, or (iii) an exemption
or other relief applicable to the Company from the provision of the 1940
Act;
4.
except with respect to the Emerging Markets Debt, Global Infrastructure
and U.S. Real Estate Portfolios, invest in a manner inconsistent
with its classification as a “diversified company” as provided by (i) the 1940
Act, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, or (iii) an exemption or other relief applicable
to the Fund from the provisions of the 1940
Act;
5.
borrow money, except the Fund may borrow money to the extent permitted by (i)
the 1940 Act, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, or (iii) an exemption or other relief applicable
to the Company from the provisions of the
1940 Act;
6.
issue senior securities, except the Fund may issue senior securities to the
extent permitted by (i) the 1940 Act, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, or (iii) an exemption or other relief
applicable to the Fund from the provisions
of the 1940 Act;
7.
underwrite securities issued by others, except to the extent that the Fund may
be considered an underwriter within the meaning of the
1933 Act in the disposition of restricted securities; and
8.
except with respect to the Global Infrastructure Portfolio, acquire any
securities of companies within one industry if, as a result of such
acquisition, more than 25% of the value of the Fund’s total assets would be
invested in securities of companies within such industry;
provided, that (i) there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or instruments issued by U.S. banks; (ii) utility
companies will be divided according to their services, for
example, gas, gas transmission, electric and telephone will each be considered a
separate industry; (iii) financial service companies will
be classified according to the end users of their services, for example,
automobile finance, bank finance and diversified finance will
each be considered a separate industry; and (iv) asset-backed securities will be
classified according to the underlying assets securing
such securities; and provided further that the Global Real Estate Portfolio may
invest more than 25% of its total assets in the real
estate industry; and the U.S. Real Estate Portfolio may invest more than 25% of
its total assets in the U.S. real estate industry; and
9.
with respect to the Global Infrastructure Portfolio only, acquire any securities
of companies within one industry if, as a result of such
acquisition, 25% or more of the value of the Fund’s total assets would be
invested in securities of companies within such industry;
provided, that there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies
and instrumentalities or instruments issued by U.S. banks; and provided further,
that the Fund will invest 25% or more of its
total assets in the infrastructure industry.
Non-Fundamental
Limitations
In
addition, each Fund
of the Company has adopted the following non-fundamental investment limitations,
which may be changed by
the Board without shareholder approval. Each Fund
of the Company will not:
1.
invest its assets in securities of any investment company,
except as permitted
by the 1940 Act
or the rules, regulations, interpretations
or orders of the SEC and its staff thereunder;
2.
make loans except (i) by purchasing bonds, debentures or similar obligations
(including repurchase agreements, subject to the limitations
as described in the prospectus) that are publicly distributed and (ii) by
lending its portfolio securities to banks, brokers, dealers
and other financial institutions, so long as such loans are not inconsistent
with the 1940 Act or the Rules and Regulations or interpretations
of the SEC thereunder;
3.
purchase on margin except that (i) each Fund may make margin deposits in
connection with short sales of securities, derivatives and
other similar transactions; and (ii) each Fund may use short-term credit as may
be necessary for the clearance of purchases and sales
of securities; and
4.
except in the case of the Emerging Markets Debt Portfolio, borrow money, other
than temporarily or for extraordinary or emergency
purposes or purchase additional securities when borrowings exceed 5% of total
(gross) assets.
Whether
diversified or non-diversified, each Fund will diversify its holdings so that,
at the close of each quarter of its taxable year or within
30 days thereafter, (i) at least 50% of the market value of the Fund’s total
assets is represented by cash (including cash items and
receivables), U.S. Government securities and other securities, with such other
securities limited, in respect of any one issuer, for purposes
of this calculation to an amount not greater than 5% of the value of the Fund’s
total assets and 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other
than U.S. Government securities),
or in two or more issuers that are controlled by the Fund and that are engaged
in the same or
similar trades or businesses or related trades or businesses, or in one or more
qualified traded partnerships.
The
percentage limitations contained in these fundamental and non-fundamental
limitations apply at the time of purchase of securities.
A later change in percentage resulting from changes in a Fund’s assets or in
total or net assets of the Fund will not be considered
a violation of the restriction and the sale of securities will not be required.
The foregoing does not apply to borrowings. Future
Funds of the Company may adopt different limitations.
The
investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies
are subject to state insurance laws and regulations. The Company and its Funds
will, when required, comply with investment restrictions
imposed under such laws and regulations on life insurance company separate
accounts investing in the Funds.
In
addition, Section 817(h) of the Code requires that the assets of each Fund be
adequately diversified so that insurance companies, and
not variable contract owners, are considered the owners for federal income tax
purposes of the assets held in the separate accounts.
To meet the diversification requirements of regulations issued under Section
817(h), each Fund will meet the following test:
no more than 55% of the assets will be invested in any one investment; no more
than 70% of the assets will be invested in any two
investments; no more than 80% of the assets will be invested in any three
investments; and no more than 90% will be invested in any
four investments. Each Fund must meet the above diversification requirements
within 30 days of the end of each calendar quarter.
The
investment policies, limitations or practices of the Funds may not apply during
periods of unusual or adverse market, economic, political
or other conditions. Such market, economic, political or other conditions may
include periods of abnormal or heightened market
volatility, strained credit and/or liquidity conditions or increased
governmental intervention in the markets or industries. During
such periods, a Fund may not invest according to its principal investment
strategies or in the manner in which its name may suggest,
and may be subject to different and/or heightened risks. It is possible that
such unusual or adverse conditions may continue for
extended periods of time. See “Investment Policies and Strategies — Fixed-Income
Securities — Temporary Investments.”
For
purposes of policies adopted in accordance with Rule 35d-1 under the 1940 Act,
the term “assets,” as defined in Rule 35d-1 under
the 1940 Act, means net assets plus the amount of any borrowings for investment
purposes.
MANAGEMENT
OF THE COMPANY
General.
The Directors oversee the Company’s affairs under the laws governing
corporations in the State of Maryland. The Directors have
approved contracts under which certain companies provide essential management,
administrative and shareholder services to the Company.
Directors
and Officers.
The Board of the Company consists of ten
Directors. These same individuals also serve as directors or trustees
for certain of the funds advised by the Adviser and Morgan Stanley AIP GP LP.
None of the Directors have an affiliation or business
connection with the Adviser or any of its affiliated persons or own any stock or
other securities issued by the Adviser’s parent company,
Morgan Stanley. These are the “non-interested” or “Independent” Directors as
defined under the 1940 Act.
Board
Structure and Oversight Function.
The Board’s leadership structure features an Independent Director serving as
Chairperson
and the Board Committees described below. The Chairperson participates in the
preparation of the agenda for meetings of
the Board and the preparation of information to be presented to the Board with
respect to matters to be acted upon by the Board. The
Chairperson also presides at all meetings of the Board and is involved in
discussions regarding matters pertaining to the oversight of
the management of the Company between meetings.
The
Board of Directors operates using a system of committees to facilitate the
timely and efficient consideration of all matters of importance
to the Directors, the Company and Company shareholders, and to facilitate
compliance with legal and regulatory requirements
and oversight of the Company’s activities and associated risks. The Board of
Directors has established six standing committees:
(1) Audit Committee, (2) Governance Committee, (3) Compliance and Insurance
Committee, (4) Equity Investment Committee,
(5) Fixed Income, Liquidity and Alternatives Investment Committee and (6) Risk
Committee, which are each comprised exclusively
of Independent Directors. Each committee charter governs the scope of the
committee’s responsibilities with respect to the
oversight of the Company. The responsibilities of each committee, including
their oversight responsibilities, are described further under
the caption “Independent Directors and the Committees.”
The
Funds are subject to a number of risks, including investment, compliance,
operational and valuation risk, among others. The Board
of Directors oversees these risks as part of its broader oversight of the
Company’s affairs through various Board and committee activities.
The Board has adopted, and periodically reviews, policies and procedures
designed to address various risks to the Company. In
addition, appropriate personnel, including but not limited to the Company’s
Chief Compliance Officer, members of the Company’s
administration and accounting teams, representatives from the Funds’ independent
registered public accounting firm, the Company’s
Treasurer, portfolio management personnel, risk management personnel and
independent valuation and brokerage evaluation
service provider, make regular reports regarding the Company’s activities and
related risks to the Board of Directors and the
committees, as appropriate. These reports include, among others, quarterly
performance reports, quarterly risk reports and discussions
with members of the risk teams relating to each asset class. The Board’s
committee structure allows separate committees
to
focus on different aspects of risk and the potential impact of these risks on
some or all of the funds in the complex and then report back
to the full Board. In between regular meetings, Company officers also
communicate with the Directors regarding material exceptions
and items relevant to the Board’s risk oversight function. The Board recognizes
that it is not possible to identify all of the risks
that may affect the Company, and that it is not possible to develop processes
and controls to eliminate all of the risks that may affect
the Company. Moreover, the Board recognizes that it may be necessary for the
Funds to bear certain risks (such as investment risk)
to achieve their respective investment objectives.
As
needed between meetings of the Board, the Board or a specific committee receives
and reviews reports relating to the Company and
engages in discussions with appropriate parties relating to the Company’s
operations and related risks.
Directors.
The Company seeks as Directors individuals of distinction and experience in
business and finance, government service or academia.
In determining that a particular Director was and continues to be qualified to
serve as Director, the Board has considered a variety
of criteria, none of which, in isolation, was controlling. Based on a review of
the experience, qualifications, attributes or skills of
each Director, including those enumerated in the table below, the Board has
determined that each of the Directors is qualified to serve
as a Director of the Company. In addition, the Board believes that,
collectively, the Directors have balanced and diverse experience,
qualifications, attributes and skills that allow the Board to operate
effectively in governing the Company and protecting the
interests of shareholders. Information about the Company’s Governance Committee
and Board of Directors nomination process is
provided below under the caption “Independent Directors and the
Committees.”
The
Directors of the Company, their birth years, addresses, positions held, length
of time served, their principal business occupations during
the past five years and other relevant professional experience, the number of
portfolios in the Fund Complex (described herein)
overseen by each Independent Director and other directorships, if any, held by
the Directors, are shown below (as of January
1,
2024).
The Fund Complex includes all open-end and closed-end funds (including all of
their portfolios) advised by the Adviser and
any registered funds that have an adviser that is an affiliate of the Adviser
(including, but not limited to, Morgan Stanley AIP GP LP)
(the “Morgan Stanley AIP Funds”).
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Director |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Director |
Other
Directorships Held by Independent
Director During
Past 5 Years** |
Frank
L. Bowman c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1944 |
Director |
Since
August 2006 |
President,
Strategic Decisions,
LLC (consulting)
(since February
2009); Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
Chairperson of the
Compliance and Insurance
Committee (since
October 2015); formerly,
Chairperson of
the Insurance Sub-Committee
of the Compliance
and Insurance
Committee (2007-2015);
served as President
and Chief Executive
Officer of the Nuclear
Energy Institute
(policy organization)
(February 2005-November
2008); retired
as Admiral, U.S. Navy
after serving over 38
years on active duty including
8 years as Director
of the Naval Nuclear
Propulsion Program
in the Department
of the Navy
and the U.S. Department
of Energy (1996-2004);
served as Chief
of Naval Personnel
(July 1994-September
1996) and on
the Joint Staff as Director
of Political Military
Affairs (June 1992-July
1994); knighted
as Honorary Knight
Commander of the
Most Excellent Order
of the British Empire;
awarded the Officier
de l’Ordre National
du Mérite by the
French Government;
elected to the
National Academy of
Engineering (2009). |
87 |
Director
of Naval and Nuclear Technologies
LLP; Director Emeritus
of the Armed Services
YMCA; Member of the
National Security Advisory Council
of the Center for U.S. Global
Engagement and a former
member of the CNA Military
Advisory Board; Chairman
of the Board of Trustees
of Fairhaven United Methodist
Church; Member of
the Board of Advisors of the Dolphin
Scholarship Foundation;
Director of other various
nonprofit organizations;
formerly, Director
of BP, plc (November
2010-May 2019). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Director |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Director |
Other
Directorships Held by Independent
Director During
Past 5 Years** |
Frances
L. Cashman c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent
Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1961 |
Trustee |
Trustee
since March 2022 |
Chief
Executive Officer,
Asset Management
Portfolio, Delinian
Ltd. (financial information)
(May 2021-Present);
Executive
Vice President
and various other
roles, Legg Mason
& Co. (asset management)
(2010-2020);
Managing Director,
Stifel Nicolaus
(2005-2010). |
88 |
Trustee
and Investment Committee
Member, Georgia Tech
Foundation (Since June 2019);
Formerly, Trustee and Chair
of Marketing Committee,
and Member of Investment
Committee, Loyola Blakefield
(2017-2023);
Trustee, MMI Gateway
Foundation (2017-2023);
Director and Investment
Committee Member,
Catholic Community
Foundation Board
(2012–2018); Director and
Investment Committee Member,
St. Ignatius Loyola Academy
(2011-2017). |
Kathleen
A. Dennis c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1953 |
Director |
Since August 2006 |
Chairperson
of the Governance
Committee
(since January
2021), Chairperson
of the Liquidity
and Alternatives
Sub-Committee
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
President, Cedarwood
Associates (mutual
fund and investment
management
consulting)
(since July 2006);
formerly, Senior Managing
Director of Victory
Capital Management
(1993-2006);
Senior Vice President,
Chase Bank (1984-1993). |
86 |
Board
Member, University of Albany
Foundation (2012-present);
Board Member, Mutual
Funds Directors Forum
(2014-present); Director
of various non-profit organizations. |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Director |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Director |
Other
Directorships Held by Independent
Director During
Past 5 Years** |
Nancy
C. Everett c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent
Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1955 |
Director |
Since January 2015 |
Chairperson
of the Equity
Investment Committee
(since January
2021); Director
or Trustee of various
Morgan Stanley Funds
(since January 2015);
Chief Executive Officer,
Virginia Commonwealth
University
Investment Company
(since November
2015); Owner,
OBIR, LLC (institutional
investment
management
consulting)
(since June 2014);
formerly, Managing
Director, BlackRock,
Inc. (February
2011-December
2013) and Chief
Executive Officer,
General Motors
Asset Management
(a/k/a Promark
Global Advisors,
Inc.) (June 2005-May
2010). |
88 |
Formerly,
Member of Virginia Commonwealth
University School
of Business Foundation
(2005-2016); Member
of Virginia Commonwealth
University Board
of Visitors (2013-2015);
Member of Committee
on Directors for Emerging
Markets Growth Fund,
Inc. (2007-2010); Chairperson
of Performance Equity
Management, LLC (2006-2010);
and Chairperson,
GMAM Absolute
Return Strategies Fund,
LLC (2006-2010). |
Eddie
A. Grier c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent
Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1955 |
Trustee |
Trustee
since March 2022 |
Dean,
Santa Clara University
Leavey School
of Business (since
July 2021); Dean,
Virginia Commonwealth
University
School of Business
(2010-2021); President
and various other
roles, Walt Disney
Company (entertainment
and media)
(1981-2010). |
88 |
Director,
Witt/Kieffer, Inc. (executive
search) (since 2016);
Director, NuStar GP, LLC
(energy) (since August 2021);
Director, Sonida Senior
Living, Inc. (residential community
operator) (2016-2021);
Director, NVR, Inc. (homebuilding)
(2013-2020); Director,
Middleburg Trust Company
(wealth management)
(2014-2019); Director,
Colonial Williamsburg
Company (2012-2021);
Regent, University
of Massachusetts Global
(since 2021); Director and
Chair, ChildFund International
(2012-2021); Trustee,
Brandman University (2010-2021);
Director, Richmond
Forum (2012-2019). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Director |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Director |
Other
Directorships Held by Independent
Director During
Past 5 Years** |
Jakki
L. Haussler c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent
Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1957 |
Director |
Since January 2015 |
Director
or Trustee of various
Morgan Stanley Funds
(since January 2015);
Chairman, Opus
Capital Group (since
1996); formerly, Chief
Executive Officer,
Opus Capital Group
(1996-2019); Director,
Capvest Venture
Fund, LP (May
2000-December 2011);
Partner, Adena Ventures,
LP (July 1999-December
2010); Director,
The Victory Funds
(February 2005-July
2008). |
88 |
Director,
Vertiv Holdings Co. (VRT)
(since August 2022); Director
of Cincinnati Bell Inc.
and Member, Audit Committee
and Chairman, Governance
and Nominating Committee
(2008-2021); Director
of Service Corporation
International and Member,
Audit Committee and
Investment Committee; Director,
Barnes Group Inc. (since
July 2021); Member of Chase
College of Law Center for
Law and Entrepreneurship Board
of Advisors; Director of Best
Transport (2005-2019); Director
of Chase College of Law
Board of Visitors; formerly,
Member, University of
Cincinnati Foundation Investment
Committee. |
Dr.
Manuel H. Johnson c/o
Johnson Smick International,
Inc. 220
I Street, NE Suite
200 Washington,
D.C. 20002 Birth
Year: 1949 |
Director |
Since July
1991 |
Senior
Partner, Johnson Smick
International, Inc.
(consulting firm); Chairperson
of the Fixed
Income, Liquidity
and Alternatives
Investment Committee
(since January
2021), Chairperson
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since July 1991);
Co-Chairman and
a founder of the Group
of Seven Council
(G7C) (international
economic commission);
formerly, Chairperson
of the Audit
Committee (July 1991-September
2006); Vice
Chairman of the Board
of Governors of the
Federal Reserve System
and Assistant Secretary
of the U.S. Treasury. |
87 |
Director
of NVR, Inc. (home construction). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Director |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Director |
Other
Directorships Held by Independent
Director During
Past 5 Years** |
Michael
F. Klein c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent
Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1958 |
Director |
Since August 2006 |
Chairperson
of the Risk Committee
(since January
2021); Managing
Director, Aetos
Alternatives Management,
LP (since March
2000); Co-President,
Aetos Alternatives
Management,
LP (since January
2004) and Co-Chief
Executive Officer of
Aetos Alternatives Management,
LP (since August
2013); Chairperson
of the Fixed
Income Sub-Committee
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
formerly, Managing
Director, Morgan
Stanley & Co. Inc.
and Morgan Stanley
Dean Witter Investment
Management
and President,
various Morgan
Stanley Funds (June
1998-March 2000);
Principal, Morgan
Stanley & Co. Inc.
and Morgan Stanley
Dean Witter Investment
Management
(August 1997-December
1999). |
87 |
Director
of certain investment funds
managed or sponsored by
Aetos Alternatives Management,
LP; Director of Sanitized
AG and Sanitized Marketing
AG (specialty chemicals). |
|
|
|
|
| |
Name,
Address and Birth
Year of Independent
Director |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Director |
Other
Directorships Held by Independent
Director During
Past 5 Years** |
Patricia
A. Maleski c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent
Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1960 |
Director |
Since January 2017 |
Director
or Trustee of various
Morgan Stanley Funds
(since January 2017);
Managing Director,
JPMorgan Asset
Management (2004-2016);
Oversight and
Control Head of Fiduciary
and Conflicts of
Interest Program (2015-2016);
Chief Control
Officer—Global
Asset Management
(2013-2015);
President, JPMorgan
Funds (2010-2013);
Chief Administrative
Officer (2004-2013);
various other
positions including
Treasurer and
Board Liaison (since
2001). |
88 |
Formerly,
Trustee (January 2022
to March 2023), Treasurer
(January 2023 to March
2023), and Finance Committee
(January 2022 to March
2023), Nutley Family Service
Bureau, Inc. |
W.
Allen Reed c/o
Morgan, Lewis and Bockius
LLP Counsel
to the Independent
Trustees One
State Street Hartford,
CT 06103 Birth
Year: 1947 |
Chair
of the Board and Director |
Chair
of the Board since
August 2020 and Director
since August 2006 |
Chair
of the Boards of various
Morgan Stanley Funds
(since August 2020);
Director or Trustee
of various Morgan
Stanley Funds (since
August 2006); formerly,
Vice Chair of the
Boards of various Morgan
Stanley Funds (January
2020-August 2020);
President and Chief
Executive Officer of
General Motors Asset
Management; Chairman
and Chief Executive
Officer of the GM
Trust Bank and Corporate
Vice President
of General Motors
Corporation (August
1994-December
2005). |
87 |
Formerly,
Director of Legg Mason,
Inc. (2006-2019); and Director
of the Auburn University
Foundation (2010-2015). |
* |
This
is the earliest date the Director began serving the Morgan Stanley
Funds. Each Director serves an indefinite term, until his or her
successor is elected. |
** |
This
includes any directorships at public companies and registered investment
companies held by the Director at any time during the past five
years. |
The
executive officers of the Company, their birth years, addresses, positions held,
length of time served and their principal business occupations
during the past five years are shown below (as of January
1, 2024).
|
|
| |
Name,
Address and Birth Year
of Executive Officer |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s) During Past 5 Years |
John
H. Gernon 1585
Broadway New
York, NY 10036 Birth
Year: 1963 |
President
and Principal
Executive Officer |
Since
September 2013 |
President
and Principal Executive Officer of the Equity and Fixed Income Funds
and
the Morgan Stanley AIP Funds (since September 2013) and the Liquidity
Funds
and various money market funds (since May 2014) in the Fund Complex;
Managing
Director of the Adviser. |
|
|
| |
Name,
Address and Birth Year
of Executive Officer |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s) During Past 5 Years |
Deidre
A. Downes 1633
Broadway New
York, NY 10019 Birth
Year: 1977 |
Chief
Compliance Officer |
Since
November 2021 |
Managing
Director of the Adviser (since January 2024) and Chief Compliance
officer
of various Morgan Stanley Funds (since November 2021). Formerly, Vice
President
and Corporate Counsel at PGIM and Prudential Financial (October
2016
– December 2020). |
Francis
J. Smith 750
7th Ave New
York, NY 10019 Birth
Year: 1965 |
Treasurer
and Principal
Financial Officer |
Treasurer
since July 2003
and Principal Financial
Officer since September
2002 |
Managing
Director of the Adviser and various entities affiliated with the Adviser;
Treasurer
(since July 2003) and Principal Financial Officer of various Morgan
Stanley
Funds (since September 2002). |
Mary
E. Mullin 1633
Broadway New
York, NY 10019 Birth
Year: 1967 |
Secretary
and Chief Legal
Officer |
Since
June 1999 |
Managing
Director (since 2018) and Chief Legal Officer (since 2016) of the
Adviser
and various entities affiliated with the Adviser; Secretary (since 1999)
and Chief
Legal Officer (since 2016) of various Morgan Stanley
Funds. |
Michael
J. Key 1585
Broadway New
York, NY 10036 Birth
Year: 1979 |
Vice
President |
Since
June 2017 |
Vice
President of the Equity and Fixed Income Funds, Liquidity Funds, various
money
market funds and the Morgan Stanley AIP Funds in the Fund Complex
(since
June 2017); Managing Director of the Adviser; Head of Product Development
for Equity and Fixed Income Funds (since August
2013). |
* |
This
is the earliest date the Officer
began serving the Morgan Stanley Funds. Each Officer
serves a one-year term, until his or her successor is elected and has
qualified. |
In
addition, the following individuals who are officers of the Adviser or its
affiliates serve as assistant secretaries of the Company: Stefanie
Chang Yu, Nicholas Di Lorenzo, Francesca Mead and Sydney A. Walker.
It
is a policy of the Company’s Board that each Director shall invest in any
combination of the Morgan Stanley Funds that the Director
determines meets his or her own specific investment objectives, without
requiring any specific investment in any particular Fund.
For
each Director, the dollar range of equity securities beneficially owned by the
Director in the Funds
and in the Family of Investment
Companies (Family of Investment Companies includes all of the registered
investment companies advised by the Adviser and
Morgan Stanley AIP GP LP) for the calendar year ended December 31, 2023
is
set forth in the table below.
|
| |
Name
of Director |
Dollar
Range of Equity
Securities in the
Funds (as
of December 31, 2023) |
Aggregate
Dollar Range of Equity Securities
in All Registered Investment
Companies Overseen by Director
in Family of Investment Companies (as
of December 31, 2023) |
Independent: |
Frank
L. Bowman |
None |
Over
$100,000 |
Frances
L. Cashman |
None |
Over
$100,000 |
Kathleen
A. Dennis |
None |
Over
$100,000 |
Nancy
C. Everett |
None |
Over
$100,000 |
Eddie
A. Grier |
None |
Over
$100,000 |
Jakki
L. Haussler |
None |
Over
$100,000 |
Manuel
H. Johnson |
None |
Over
$100,000 |
Michael
F. Klein1
|
None |
Over
$100,000 |
Patricia
Maleski |
None |
Over
$100,000 |
W.
Allen Reed1
|
None |
Over
$100,000 |
1 |
Includes
the total amount of compensation deferred by the Director at his election
pursuant to a deferred compensation plan. Such deferred compensation is
placed
in a deferral account and deemed to be invested in one or more of the
Morgan Stanley Funds (or portfolio thereof) that are offered as investment
options under
the plan. |
As
to each Independent Director and his or her immediate family members, no person
owned beneficially or of record securities of an investment
adviser or principal underwriter of the Company, or a person (other than a
registered investment company) directly or indirectly
controlling, controlled by or under common control with an investment adviser or
principal underwriter of the Company.
As
of April 1, 2024, the Directors and officers of the Company, as a group, owned
less than 1% of any class of the outstanding shares of
beneficial interest of each Fund.
Independent
Directors and the Committees
Law
and regulation establish both general guidelines and specific duties for the
Independent Directors. The Board has six committees:
(1) Audit Committee, (2) Governance Committee, (3) Compliance and Insurance
Committee, (4) Equity Investment Committee,
(5) Fixed Income, Liquidity and Alternatives Investment Committee and (6) Risk
Committee.
The
Independent Directors are charged with recommending to the full Board approval
of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing fund performance, checking on the pricing
of portfolio securities, brokerage commissions, transfer agent costs and
performance and trading among funds in the same complex;
and approving fidelity bond and related insurance coverage and allocations, as
well as other matters that arise from time to time.
The Independent Directors are required to select and nominate individuals to
fill any Independent Director vacancy on the board
of any fund that has a Rule 12b-1 plan of distribution.
The
Board of Directors has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (the “1934 Act”). The Audit
Committee is charged with recommending to the full Board
the engagement or discharge of the Company’s independent registered public
accounting firm; directing investigations into matters
within the scope of the independent registered public accounting firm’s duties,
including the power to retain outside specialists;
reviewing with the independent registered public accounting firm the audit plan
and results of the auditing engagement; approving
professional services provided by the independent registered public accounting
firm and other accounting firms prior to the
performance of the services; reviewing the independence of the independent
registered public accounting firm; considering the range
of audit and non-audit fees; reviewing the adequacy of the Company’s system of
internal controls and reviewing the valuation process.
The Company has adopted a formal, written Audit Committee Charter.
The
members of the Audit Committee of the Company are Nancy C. Everett, Eddie A.
Grier
and
Jakki L. Haussler.
None of the members
of the Company’s Audit Committee is an “interested person,” as defined under the
1940 Act, of the Company (with such disinterested
Directors being “Independent Directors” or individually, an
“Independent
Director”). Each Independent Director is also
“independent” from the Company under the listing standards of the NYSE.
The Chairperson of the Audit Committee of the Company
is Jakki
L. Haussler.
The
Board of Directors of the Company also has a Governance Committee. The
Governance Committee identifies individuals qualified
to serve as Independent Directors on the Company’s Board and on committees of
the Board and recommends such qualified
individuals for nomination by the Company’s Independent Directors as candidates
for election as Independent Directors, advises
the Company’s Board with respect to Board composition, procedures and
committees, develops and recommends to the Company’s
Board a set of corporate governance principles applicable to the Company,
monitors and makes recommendations on corporate
governance matters and policies and procedures of the Company’s Board of
Directors and any Board committees and oversees
periodic evaluations of the Company’s Board and its committees. The members of
the Governance Committee of the Company
are Kathleen A. Dennis, Manuel H. Johnson, Michael F. Klein, Patricia A. Maleski
and W. Allen Reed, each of whom is an
Independent Director. In addition, W. Allen Reed (as Chair of the Morgan Stanley
Funds) periodically may attend other operating
Committee meetings. The Chairperson of the Governance Committee is Kathleen A.
Dennis.
The
Company does not have a separate nominating committee. While the Company’s
Governance Committee recommends qualified
candidates for nominations as Independent Directors, the Board of Directors of
the Company believes that the task of nominating
prospective Independent Directors is important enough to require the
participation of all current Independent Directors, rather
than a separate committee consisting of only certain Independent Directors.
Accordingly, all the Independent Directors participate
in the selection and nomination of candidates for election as Independent
Directors for the Company. Persons recommended
by the Company’s Governance Committee as candidates for nomination as
Independent Directors shall possess such experience,
qualifications, attributes, skills and diversity so as to enhance the Board’s
ability to manage and direct the affairs and business
of the Company, including, when applicable, to enhance the ability of committees
of the Board to fulfill their duties and/or to
satisfy any independence requirements imposed by law, regulation or any listing
requirements of the NYSE. While the Independent
Directors of the Company expect to be able to continue to identify from their
own resources an ample number of qualified
candidates for the Company’s Board as they deem appropriate, they will consider
nominations from shareholders to the Board.
Nominations from shareholders should be in writing and sent to the Independent
Directors as described below under the caption
“Shareholder Communications.”
The
Board formed the Compliance and Insurance Committee to address insurance
coverage and oversee the compliance function for the
Company and the Board. The Compliance and Insurance Committee consists of Frank
L. Bowman, Kathleen A. Dennis and Patricia
A. Maleski, each of whom is an Independent Director. The Chairperson of the
Compliance and Insurance Committee is Frank
L. Bowman.
The
Equity Investment Committee and the Fixed Income, Liquidity and Alternatives
Investment Committee
oversee the Company’s portfolio
investment process and review the performance of the Company’s investments. The
Equity Investment Committee and the Fixed
Income, Liquidity and Alternatives Investment Committee
also recommend to the Board to approve or renew the Company’s
Investment
Advisory and Administration Agreements. Each Investment Committee focuses on the
Company’s primary areas of investment,
namely equities, fixed income, liquidity and alternatives. Kathleen A. Dennis,
Nancy C. Everett, Eddie A. Grier, Jakki L. Haussler
and Michael F. Klein are members of the Equity Investment Committee. The
Chairperson of the Equity Investment Committee
is Nancy C. Everett. Frank L. Bowman, Frances L. Cashman, Manuel H.
Johnson, and
Patricia A. Maleski are members of
the Fixed Income, Liquidity and Alternatives Investment Committee. The
Chairperson of the Fixed Income, Liquidity and Alternatives
Investment Committee is Manuel H. Johnson.
The
Risk Committee assists the Board in connection with the oversight of the
Company’s risks, including investment risks, operational
risks and risks posed by the Company’s service providers as well as the
effectiveness of the guidelines, policies and processes
for monitoring and mitigating such risks. The members of the Risk Committee of
the Company are Frances L. Cashman, Manuel
H. Johnson, Michael F. Klein and W. Allen Reed, each of whom is an Independent
Director. The Chairperson of the Risk Committee
is Michael F. Klein.
During
the Company’s fiscal year ended December 31, 2023,
the Board of Directors held the following meetings:
| |
|
Number
of Meetings |
Board
of Directors/Committee |
|
Board
of Directors |
5 |
Audit
Committee |
4 |
Governance
Committee |
4 |
Compliance
and Insurance Committee |
4 |
Equity
Investment Committee |
5 |
Fixed
Income, Liquidity and Alternatives Investment Committee |
5 |
Risk
Committee |
4 |
Experience,
Qualifications and Attributes
The
Board has concluded, based on each Director’s experience, qualifications and
attributes that each Board member should serve as a
Director. Following is a brief summary of the information that led to and/or
supports this conclusion.
Mr.
Bowman has experience in a variety of business and financial matters through his
prior service as a Director or Trustee for various
funds in the Fund Complex, where he serves as Chairperson of the Compliance and
Insurance Committee (and formerly served
as Chairperson of the Insurance Sub-Committee of the Compliance and Insurance
Committee). Mr. Bowman also serves as a Director
of Naval and Nuclear Technologies LLP and Director Emeritus for the Armed
Services YMCA, and formerly served as a Director
of BP, plc. Mr. Bowman serves as a Chairman of the Board
of Trustees of the Fairhaven
United Methodist Church. Mr. Bowman
is also a member of the National Security Advisory Council of the Center for
U.S. Global Engagement, a former
member
of the
CNA Military Advisory Board and a member of the Dolphin Scholarship Foundation
Advisory Board. Mr. Bowman retired as an Admiral
in the U.S. Navy after serving over 38 years on active duty including eight
years as Director of the Naval Nuclear Propulsion Program
in the Department of the Navy and the U.S. Department of Energy (1996-2004).
Additionally, Mr. Bowman served as the U.S.
Navy’s Chief of Naval Personnel (1994-1996)
where he was responsible for the planning and programming of all manpower,
personnel,
training and education resources for the U.S. Navy,
and on the Joint Staff as Director of Political Military Affairs
(1992-1994).
In addition, Mr. Bowman served as President and Chief Executive Officer of the
Nuclear Energy Institute. Mr. Bowman has received
such distinctions as a knighthood as Honorary Knight Commander of the Most
Excellent Order of the British Empire and the
Officier de l’Orde National du Mérite from the French Government,
and was elected to the National Academy of Engineering (2009).
He is President of the consulting firm Strategic Decisions, LLC.
With
more than 30 years of experience in the financial services industry, Ms. Cashman
possesses valuable insights and expertise regarding
governance, marketing, communications, and strategy. Ms. Cashman is Chief
Executive Officer of the Asset Management Division
of Delinian Ltd. Prior to that, Ms. Cashman spent over 20 years at Legg Mason
& Co., ultimately serving as Executive Vice President
and Global Head of Marketing and Communications. She has gained valuable
experience as Director of two investment management
entities and as a distribution leader reporting to boards of other mutual funds.
In addition, Ms. Cashman also serves as Trustee
for the Georgia Tech Foundation.
Ms.
Dennis has over 25 years of business experience in the financial services
industry and related fields including serving as a Director or
Trustee of various other funds in the Fund Complex, where she serves as
Chairperson of the Governance Committee. Ms. Dennis possesses
a strong understanding of the regulatory framework under which investment
companies must operate based on her years of service
to this Board and her position as Senior Managing Director of Victory Capital
Management.
Ms.
Everett has over 35 years of experience in the financial services industry,
including roles with both registered investment companies
and registered investment advisers. Ms.
Everett serves as the Chairperson of the Equity Investment Committee.
By
serving on
the boards of other registered funds, such as GMAM Absolute Return Strategies
Fund, LLC and Emerging Markets Growth
Fund,
Inc., Ms. Everett has acquired significant experience with financial,
accounting, investment and regulatory matters. Ms. Everett
is also a Chartered Financial Analyst.
During
the course of a career spanning more than 40 years in both academia and
industry, Mr. Grier has gained substantial experience
in management, operations, finance, marketing, and oversight. Mr. Grier is the
Dean of Santa Clara University’s Leavey School
of Business. Prior to that, Mr. Grier was the Dean of the Virginia Commonwealth
University School of Business. Before joining
academia, Mr. Grier spent 29 years at the Walt Disney Company where he served in
various leadership roles, including as President
of the Disneyland Resort. Mr. Grier also gained substantial oversight experience
serving on the boards of Sonia Senior Living,
Inc. (formerly, Capital Senior Living Corporation), NVR, Inc., and Middleburg
Trust Company. In addition, Mr. Grier currently
serves as a Director of Witt/Kieffer, Inc., Director of NuStar GP, LLC, and
Regent of University of Massachusetts Global. Mr.
Grier is also a Certified Public Accountant.
With
more than 30 years of experience in the financial services industry, including
her years of entrepreneurial and managerial experience
in the development and growth of Opus Capital Group, Ms. Haussler brings a
valuable perspective to the Company’s Board,
where she serves as the Chairperson of the Audit Committee.
Through her role at Opus Capital and her service as a director of
several venture capital funds and other boards, Ms. Haussler has gained valuable
experience dealing with accounting principles and evaluating
financial results of large corporations. She is a certified public accountant
(inactive) and a licensed attorney in the State of Ohio
(inactive).
The Board has determined that Ms. Haussler is an “audit committee financial
expert” as defined by the SEC.
In
addition to his tenure as a Director or Trustee of various other funds in the
Fund Complex, where he currently
serves as the Chairperson
of the Fixed Income, Liquidity and Alternatives Investment Committee and
formerly
served as Chairperson of the Audit Committee,
Dr. Johnson has also served as an officer or a board member of numerous
companies for over 20 years. These positions included
Co-Chairman and a founder of the Group of Seven Council, Director of NVR, Inc.,
Director of Evergreen Energy and Director
of Greenwich Capital Holdings. He also has served as Vice Chairman of the Board
of Governors of the Federal Reserve System
and Assistant Secretary of the U.S. Treasury. In addition, Dr. Johnson also
served as Chairman of the Financial Accounting Foundation,
which oversees the Financial Accounting Standards Board, for seven years.
Through
his prior positions as a Managing Director of Morgan Stanley & Co. Inc. and
Morgan Stanley Dean Witter
Investment Management
and as President and a Trustee of the Morgan Stanley Institutional Funds, Mr.
Klein has experience in the management and
operation of registered investment companies, enabling him to provide management
input and investment guidance to the Board.
Mr. Klein is
the Chairperson of the Risk Committee. Mr. Klein also
has extensive experience in the investment management industry
based on his current positions as Managing Director and Co-Chief Executive and
Co-President of Aetos Alternatives Management,
LP and as a
Director
of certain investment funds managed or sponsored by Aetos Alternatives
Management, LP. In addition,
he also has experience as a member of the board of other funds in the Fund
Complex.
Ms.
Maleski has over 30 years of experience in the financial services industry and
extensive experience with registered investment companies.
Ms. Maleski began her career as a certified public accountant at Price
Waterhouse LLP (“PW”) and was a member of PW’s
Investment Company Practice. After a brief stint at the Bank of New York, Ms.
Maleski began her affiliation with the JPMorgan
Funds, at the Pierpont Group,
and then with J.P. Morgan Investment Management Inc. From 2001-2013, Ms. Maleski
held
roles with increasing responsibilities, from Vice President and Board Liaison,
Treasurer and Principal Financial Officer, Chief Administrative
Officer and finally President and Principal Executive Officer for the JPMorgan
Fund complex. Between 2013 and 2016,
Ms. Maleski served as Global Head of Oversight and Control of JPMorgan Asset
Management and then as Head of JPMorgan Chase’s
Fiduciary and Conflicts of Interest Program. Ms. Maleski has extensive
experience in the management and operation of funds in
addition to regulatory and accounting and valuation matters.
Mr.
Reed has experience on investment company boards and is experienced with
financial, accounting, investment and regulatory matters
through his prior service as a Director of iShares
Inc. and his service as Chair of the Board and as Trustee or Director of other
funds
in the Fund Complex. Mr. Reed also gained substantial experience in the
financial services industry through his prior positions as
a Director of Legg Mason, Inc. and as President and CEO of General Motors Asset
Management.
The
Directors’ principal occupations and other relevant professional experience
during the past five years or more are shown in the above
tables.
The
Board has adopted a policy that Board members are expected to retire no later
than the end of the year they reach the age of 78. The
Governance Committee has discretion to grant waivers from this retirement policy
under special circumstances, including for Board
members to continue serving in Chair or Chair-related roles beyond the
retirement age. Current Board members who reached
the
age of 75 as of January 1, 2021, are grandfathered as exceptions to the
retirement policy and may continue to serve on the Board until
the end of the year in which they turn 80 years of age.
Advantages
of Having the Same Individuals as Independent Directors for the Morgan Stanley
Funds
The
Independent Directors and the Company’s management believe that having the same
Independent Directors for each of the Morgan
Stanley Funds avoids the duplication of effort that would arise from having
different groups of individuals serving as
Independent
Directors for each of the funds or even of sub-groups of funds. They believe
that having the same individuals serve as Independent
Directors of all the Morgan Stanley Funds tends to increase their knowledge and
expertise regarding matters which affect
the Fund Complex generally and enhances their ability to negotiate on behalf of
each fund with the fund’s service providers. This
arrangement also precludes the possibility of separate groups of Independent
Directors arriving at conflicting decisions regarding operations
and management of the funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent
Directors serve on all fund boards enhances the ability of each fund to obtain,
at modest cost to each separate fund, the services
of Independent Directors of the caliber, experience and business acumen of the
individuals who serve as Independent Directors
of the Morgan Stanley Funds.
Director
and Officer Indemnification
The
Company’s Articles of Incorporation provides that no Director, officer, employee
or agent of the Company is liable to the Company
or to a shareholder, nor is any Director, officer, employee or agent liable to
any third persons in connection with the affairs of
the Company, except as such liability may arise from his/her or its own bad
faith, willful malfeasance, gross negligence or reckless disregard
of his/her or its duties. It also provides that all third persons shall look
solely to Company property for satisfaction of claims arising
in connection with the affairs of the Company. With the exceptions stated, the
Articles of Incorporation provides that a Director,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Company.
Shareholder
Communications
Shareholders
may send communications to the Company’s Board of Directors. Shareholders should
send communications intended for
the Company’s Board by addressing the communications directly to the Board (or
individual Board members) and/or otherwise clearly
indicating in the salutation that the communication is for the Board (or
individual Board members) and by sending the communication
to either the Company’s office or directly to such Board member(s) at the
address specified for each Director previously
noted. Other shareholder communications received by the Company not directly
addressed and sent to the Board will be reviewed
and generally responded to by management, and will be forwarded to the Board
only at management’s discretion based on the
matters contained therein.
COMPENSATION
Each
Director (except for the Chair of the Boards) receives an annual retainer fee of
$335,000
for serving as a Director
of the Morgan Stanley
Funds.
The
Audit Committee Chairperson receives an additional annual retainer fee of
$80,000, the Risk Committee Chairperson, the Equity
Investment Committee Chairperson, Fixed Income, Liquidity and Alternatives
Investment Committee Chairperson and Governance
Committee Chairperson each receive an additional annual retainer fee of $50,000
and the Compliance and Insurance Committee
Chairperson receives an additional annual retainer fee of $65,000. The aggregate
compensation paid to each Director is paid
by the Morgan Stanley Funds, and is allocated on a pro rata basis among each of
the operational funds of the Morgan Stanley Funds
based on the relative net assets of each of the funds. The Chair of the Boards
receives a total annual retainer fee of $630,000
($590,000
prior to January 1, 2023)
for his services and for administrative services provided to each
Board.
The
Company also reimburses such Directors for travel and other out-of-pocket
expenses incurred by them in connection with attending
such meetings. Directors of the Company who are employed by the Adviser receive
no compensation or expense reimbursement
from the Company for their services as a Director.
Effective
April 1, 2004, the Company began a Deferred Compensation Plan (the “DC Plan”),
which allows each Director to defer payment
of all, or a portion, of the fees he or she receives for serving on the Board of
Directors throughout the year. Each eligible Director
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan
Stanley Funds that are offered as investment options under the DC Plan. At the
Director’s election, distributions are either in
one lump sum payment, or in the form of equal annual installments over a period
of five years. The rights of an eligible Director and
the beneficiaries to the amounts held under the DC Plan are unsecured and such
amounts are subject to the claims of the creditors
of the Company.
Prior
to April 1, 2004, the Company maintained a similar Deferred Compensation Plan
(the “Prior DC Plan”), which also allowed each
Independent Director to defer payment of all, or a portion, of the fees he or
she received for serving on the Board of Directors throughout
the year. Generally, the DC Plan amends and supersedes the Prior DC Plan and all
amounts payable under the Prior DC Plan
are now subject to the terms of the DC Plan (except for amounts paid during the
calendar year 2004, which remain subject to the
terms of the Prior DC Plan).
The
following table shows aggregate compensation payable to each of the Company’s
Directors from the Company for the fiscal year ended
December 31, 2023
and the aggregate compensation payable to each of the Company’s Directors by the
Fund Complex (which
includes all of the Morgan Stanley Funds) for the calendar year ended December
31, 2023.
|
| |
Compensation1
|
Name |
Aggregate
Compensation
From the
Company2
|
Total
Compensation From
Company and Fund
Complex Paid to
the Directors3
|
Frank
L. Bowman |
$1,950 |
$400,000 |
Frances
L. Cashman2,3
|
1,609 |
335,000 |
Kathleen
A. Dennis |
1,877 |
385,000 |
Nancy
C. Everett |
1,875 |
385,000 |
Eddie
A. Grier |
1,631 |
335,000 |
Jakki
L. Haussler |
2,021 |
415,000 |
Manuel
H. Johnson |
1,877 |
385,000 |
Joseph
J. Kearns2,3,4
|
1,619 |
335,000 |
Michael
F. Klein2,3
|
1,877 |
385,000 |
Patricia
A. Maleski |
1,631 |
335,000 |
W.
Allen Reed3
|
3,071 |
630,000 |
1 |
Includes
all amounts paid for serving as director/trustee of the funds in the Fund
Complex, as well as serving as Chair of the Boards or a Chairperson of a
Committee. |
2 |
The
amounts shown in this column represent the aggregate compensation before
deferral with respect to the Company’s fiscal year. The following
Directors deferred
compensation from the Company during the fiscal year ended December 31,
2023:
Ms. Cashman, $816,
Mr. Kearns, $779
and Mr. Klein, $1,877. |
3 |
The
amounts shown in this column represent the aggregate compensation paid by
all of the funds in the Fund Complex as of December 31, 2023
before deferral by
the Directors under the DC Plan. As of December 31, 2023,
the value (including interest) of the deferral accounts across the Fund
Complex for Ms.
Cashman and
Messrs.
Kearns, Klein and Reed pursuant to the deferred compensation plan was
$173,673,
$1,236,375,
$3,928,291
and $4,422,691,
respectively. Because the
funds in the Fund Complex have different fiscal year ends, the amounts
shown in this column are presented on a calendar year basis.
|
4 |
Mr.
Kearns retired from the Board of Trustees on December 31,
2023. |
Prior
to December 31, 2003, 49 of the Morgan Stanley Funds (the “Adopting Funds”), not
including the Company, had adopted a retirement
program under which an Independent Director who retired after serving for at
least five years as an Independent Director of
any such fund (an “Eligible Director”) would have been entitled to retirement
payments, based on factors such as length of service, upon
reaching the eligible retirement age. On December 31, 2003, the amount of
accrued retirement benefits for each Eligible Director
was frozen, and will be payable, together with a return of 8% per annum, at or
following each such Eligible Director’s retirement
as shown in the table below.
The
following table illustrates the retirement benefits accrued to the Company’s
Independent Directors by the Adopting Funds for the
calendar year ended December 31, 2023,
and the estimated retirement benefits for the Independent Directors from the
Adopting Funds
for each calendar year following retirement. Only the Directors listed below
participated in the retirement program.
|
| |
|
Retirement
Benefits Accrued as Company
Expenses |
Estimated
Annual Benefits Upon Retirement1
|
Name
of Independent Director: |
By
all Adopting Funds |
From
all Adopting Funds |
Manuel
H. Johnson2
|
$(19,083) |
$55,816 |
1 |
Total
compensation accrued under the retirement plan, together with a return of
8% per annum, will be paid annually commencing upon retirement and
continuing
for the remainder of the Director’s life. |
2 |
Mr.
Johnson’s retirement expenses are negative due to the fact that his
retirement date has been extended and therefore his expenses have been
over-accrued. |
Code
of Ethics
Pursuant
to Rule 17j-1 under the 1940 Act, the Board of Directors has adopted a Code of
Ethics for the Company and approved Codes
of Ethics adopted by the Adviser, the Sub-Advisers and Morgan Stanley
Distribution, Inc. (the “Distributor”) (collectively the “Codes”).
The Codes are intended to ensure that the interests of shareholders and other
clients are placed ahead of any personal interest,
that no undue personal benefit is obtained from the person’s employment
activities and that actual and potential conflicts of interest
are avoided. The Codes are designed to detect and prevent improper personal
trading.
The
Codes permit personnel subject to the Codes to invest in securities, including
securities that may be purchased, sold or held by the
Company, subject to a number of restrictions and controls, including
prohibitions against purchases of securities in an initial public
offering and a pre-clearance requirement with respect to personal securities
transactions.
INVESTMENT
ADVISORY AND OTHER SERVICES
Adviser
The
Adviser is a wholly owned subsidiary of Morgan Stanley (NYSE: “MS”), a
preeminent global financial services firm engaged in securities
trading and brokerage activities, as well as providing investment banking,
research and analysis, financing and financial advisory
services. The principal offices of Morgan Stanley are located at 1585 Broadway,
New York, NY 10036 and the principal offices
of the Adviser are located at 1585
Broadway,
New York, NY 10036. As of December 31, 2023,
the Adviser, together with its affiliated
asset management companies, had approximately $1.5 trillion
in assets under management or supervision.
Pursuant
to the Investment Advisory Agreement, the Adviser is entitled to receive from
each class of shares of each Fund an annual management
fee, payable quarterly, equal to the percentage of average daily net assets set
forth in the table below. In managing the Funds,
the Adviser may use the services of associated investment personnel employed by
its affiliated institutional asset management companies.
The Adviser has agreed to a reduction in the fees payable to it and/or to
reimburse the Funds, if necessary, if such fees would
cause the total annual operating expenses of each Fund to exceed the percentage
of average daily net assets set forth in the table below.
In determining the actual amount of fee waivers and/or expense reimbursements
for a Fund, if any, the Adviser excludes from total
annual operating expenses, acquired fund fees and expenses (as applicable),
certain investment related expenses, taxes, interest and
other extraordinary expenses (including litigation) (but includes any 12b-1 fee
paid to the Distributor, as applicable). The fee waivers
and/or expense reimbursements for a Fund will continue for at least one year
from the date of the applicable Prospectus or until
such time as the Company’s Board of Directors acts to discontinue all or a
portion of such waivers and/or reimbursements when it
deems such action is appropriate. The Adviser may make additional
voluntary fee waivers and/or expense reimbursements. The Adviser
may discontinue these voluntary fee waivers and/or expense reimbursements at any
time in the future.
The
Global Strategist Portfolio may gain exposure to bitcoin and the commodities
markets by investing up to 25% of its total assets in
a wholly-owned subsidiary of the Global Strategist Portfolio organized as a
company under the laws of the Cayman Islands. Each of
the Discovery Portfolio and Growth Portfolio may gain exposure to bitcoin and
other assets by investing up to 25% of its total assets
in a wholly-owned subsidiary of the Fund organized as a company under the laws
of the Cayman Islands. Each Subsidiary has entered
into a separate contract with the Adviser whereby the Adviser provides
investment advisory and other services to that Subsidiary.
In consideration of these services, each Subsidiary will pay to the Manager at
the end of each of the Subsidiary’s fiscal quarters,
an advisory fee calculated by applying a quarterly rate, based on the annual
percentage rate of 0.05%, to the average daily net
assets of the Subsidiary for the quarter. The Adviser will waive or credit such
amounts against the fees payable to the Adviser by the
Funds.
The
Discovery Portfolio and the Growth Portfolio and each Bitcoin Subsidiary have
entered into contracts for the provision of custody
and audit services with service providers. The Global Strategist Portfolio and
the Global Strategist Subsidiary have also entered
into contracts for the provision of custody and audit services with service
providers.
Each
Bitcoin Subsidiary is managed pursuant to compliance policies and procedures
that are the same, in all material respects, as the policies
and procedures adopted by the Discovery Portfolio and the Growth Portfolio. As a
result, the Adviser, in managing a Bitcoin Subsidiary’s
portfolio, is subject to the same investment policies and restrictions that
apply to the management of the Discovery Portfolio
and the Growth Portfolio (as discussed above, the Bitcoin Subsidiary may invest
in cash settled bitcoin futures or Bitcoin
ETFs)
and, in particular, to the requirements relating to portfolio leverage,
liquidity, brokerage and the timing and method of valuation
of the Bitcoin Subsidiary’s portfolio investments and shares of the Bitcoin
Subsidiary. Certain of these policies and restrictions
are described in detail in this SAI. The Global Strategist Subsidiary is managed
pursuant to compliance policies and procedures
that are the same, in all material respects, as the policies and procedures
adopted by the Global Strategist Portfolio. As a result,
the Adviser, in managing the Global Strategist Subsidiary’s portfolio, is
subject to the same investment policies and restrictions that
apply to the management of the Global Strategist Portfolio (as discussed above,
the Global Strategist Subsidiary may invest in cash
settled bitcoin futures or commodity-related instruments) and, in particular, to
the requirements relating to portfolio leverage, liquidity,
brokerage and the timing and method of valuation of the Global Strategist
Subsidiary’s portfolio investments and shares of the
Global Strategist Subsidiary. Certain of these policies and restrictions are
described in detail in this SAI.
The
consolidated financial statements of each Bitcoin Subsidiary are included in the
Annual Report and Semi-Annual Report of the Discovery
Portfolio and the Growth Portfolio. The consolidated financial statements of the
Global Strategist Subsidiary are included in
the Annual Report and Semi-Annual Report of the Global Strategist
Portfolio.
The
following table reflects for each
Fund (i) the advisory fee paid; and (ii) the advisory fee waived and/or
affiliated rebates for each of
the past three fiscal years ended December 31, 2021,
2022 and 2023.
|
|
|
|
|
|
|
|
| |
|
Advisory
Fees Paid (After
Fee Waivers and/or Affiliated
Rebates) |
Advisory
Fees Waived |
Affiliated
Rebates |
Fund |
2021 (000) |
2022 (000) |
2023 (000) |
2021 (000) |
2022 (000) |
2023 (000) |
2021 (000) |
2022 (000) |
2023 (000) |
Discovery |
$2,494 |
$981 |
$756 |
$441 |
$361 |
$304 |
$9 |
$10 |
$12 |
Emerging
Markets Debt |
1,095 |
702 |
549 |
72 |
161 |
224 |
1 |
5 |
6 |
Emerging
Markets Equity |
2,070 |
1,377 |
1,202 |
0 |
122 |
47 |
1 |
4 |
4 |
Global
Infrastructure |
282 |
269 |
244 |
428 |
460 |
400 |
1 |
4 |
3 |
Global
Real Estate |
133 |
112 |
53 |
318 |
245 |
228 |
@ |
1 |
@ |
Global
Strategist |
131 |
0 |
0 |
668 |
659 |
607 |
5 |
16 |
16 |
Growth |
3,686 |
1,575 |
1,266 |
1,917 |
1,143 |
955 |
15 |
17 |
25 |
U.S.
Real Estate |
2,074 |
1,694 |
1,414 |
607 |
638 |
505 |
2 |
7 |
6 |
|
@
Amount is less than $500. |
The
following table reflects the contractual advisory fee and the maximum expense
ratios for each
Fund.
|
|
| |
Fund |
Contractual
Rate of Advisory Fees |
Expense
Cap Class
I |
Expense
Cap Class
II |
Discovery |
0.75%
of the portion of the daily net assets not exceeding $500 million;
0.70% of the portion of the daily net assets exceeding $500
million
but not exceeding $1 billion; and 0.65% of the portion of the
daily net assets exceeding $1 billion. |
0.95% |
1.05% |
Emerging
Markets Debt |
0.75%
of the portion of the daily net assets not exceeding $500 million;
0.70% of the portion of the daily net assets exceeding $500
million
but not exceeding $1 billion; and 0.65% of the portion of the
daily net assets exceeding $1 billion. |
1.10% |
1.15% |
Emerging
Markets Equity |
0.75%
of the portion of the daily net assets not exceeding $1 billion;
and
0.70% of the portion of the daily net assets exceeding $1 billion
but
not exceeding $2.5 billion; and 0.65% of the daily net assets
exceeding
$2.5 billion. |
1.25% |
1.30% |
Global
Infrastructure |
0.85%
of the daily net assets. |
0.87% |
1.12% |
Global
Real Estate |
0.65%
of the portion of the daily net assets not exceeding $2 billion;
and
0.60% of the portion of the daily net assets exceeding $2 billion. |
N/A |
1.10% |
Global
Strategist |
0.75%
of the portion of the daily net assets not exceeding $500 million;
0.70% of the portion of the daily net assets exceeding $500
million
but not exceeding $1 billion; and 0.65% of the portion of the
daily net assets exceeding $1 billion. |
0.90% |
1.00% |
Growth |
0.50%
of the portion of the daily net assets not exceeding $1 billion;
0.45%
of the portion of the daily net assets exceeding $1 billion but
not
exceeding $2 billion; 0.40% of the portion of the daily net assets
exceeding
$2 billion but not exceeding $3 billion; and 0.35% of the daily
net assets exceeding $3 billion. |
0.57% |
0.82% |
U.S.
Real Estate |
0.55%
of the portion of the daily net assets not exceeding $500 million;
0.50% of the portion of the daily net assets exceeding $500
million
but not exceeding $1 billion; and 0.45% of the portion of the
daily net assets exceeding $1 billion. |
0.80% |
1.05% |
Sub-Advisers
The
Adviser has entered into Sub-Advisory Agreements with Morgan Stanley Investment
Management Limited, located at 25 Cabot Square,
Canary Wharf, London, E14 4QA, England, and Morgan Stanley Investment Management
Company, located at 23 Church Street,
16-01 Capital Square, Singapore 049481. The Sub-Advisers are wholly owned
subsidiaries of Morgan Stanley and provide the Funds
listed below with investment advisory services subject to the overall
supervision of the Adviser and the Company’s officers and Directors.
The Adviser pays the Sub-Advisers on a monthly basis a portion of the net
advisory fees the Adviser receives from the relevant
Funds. The chart below identifies the Fund(s) for which each Sub-Adviser
provides investment advisory services.
| |
Sub-Adviser |
Fund(s) |
MSIM
Limited |
Emerging
Markets Debt, Global Real Estate and Global Strategist |
MSIM
Company |
Emerging
Markets Equity and Global Real Estate |
Participating
Affiliate
In
rendering investment advisory services to the Emerging Markets Equity Portfolio,
the Adviser uses the portfolio management, research
and other resources of Morgan Stanley Asia Limited (“MSAL”), a foreign
(non-U.S.) affiliate of Morgan Stanley Investment Management
(“MSIM”) that is not registered under the Investment Advisers Act of 1940, as
amended (the “Advisers Act”). One or more
MSAL employees may provide services to the Fund through a “participating
affiliate” arrangement, as that term is used in relief granted
by the staff of the SEC allowing U.S. registered investment advisers to use
portfolio management or research resources of advisory
affiliates subject to the regulatory supervision of the registered investment
adviser. Under the participating affiliate arrangement,
MSAL is considered a Participating Affiliate of MSIM, and MSAL and its employees
or
other persons associated with MSAL
that provide services to U.S. clients of MSIM are
considered “associated persons” of MSIM (as that term is defined in the
Advisers
Act) and investment professionals from MSAL may render portfolio management,
research and other services to the Fund, subject
to the supervision of MSIM.
Proxy
Voting Policy and Proxy Voting Record
The
Board of Directors believes that the voting of proxies on securities held by the
Company is an important element of the overall investment
process. As such, the Board has delegated the responsibility to vote such
proxies to MSIM and its advisory affiliates.
A
copy of MSIM’s Proxy Voting Policy (“Proxy Policy”) is attached hereto as
Appendix A. In addition, a copy of the Proxy Policy, as well
as the Company’s most recent proxy voting record for the 12-month period ended
June 30, as filed with the SEC, are available without
charge on our web site at www.morganstanley.com/im. The Company’s proxy voting
record is also available without charge on
the SEC’s web site at www.sec.gov.
Fund
Administration
The
Adviser also provides administration services to the Company pursuant to an
Amended and Restated Administration Agreement (the
“Administration Agreement”). The services provided under the Administration
Agreement are subject to the supervision of the officers
and the Board of Directors of the Company and include day-today administration
of matters related to the corporate existence
of the Company, maintenance of records, preparation of reports, supervision of
the Company’s arrangements with its custodian
and assistance in the preparation of the Company’s registration statement under
federal laws. Under the Administration Agreement,
the Adviser receives an annual fee, accrued daily and payable monthly, of 0.08%
of the Company’s average daily net assets,
and is responsible for all fees payable under any sub-administration
agreements.
For
the fiscal years ended December 31, 2021,
2022 and 2023,
the Company paid the following administrative fees (no administrative
fees were waived):
|
|
| |
Administrative
Fees Paid |
Fund |
2021 (000) |
2022 (000) |
2023 (000) |
Discovery |
$314 |
$144 |
$114 |
Emerging
Markets Debt |
125 |
93 |
83 |
Emerging
Markets Equity |
195 |
141 |
128 |
Global
Infrastructure |
67 |
69 |
61 |
Global
Real Estate |
45 |
36 |
28 |
Global
Strategist |
86 |
70 |
65 |
Growth |
910 |
438 |
359 |
U.S.
Real Estate |
307 |
267 |
223 |
Sub-Administrator.
Under an agreement between the Administrator and State Street Bank and Trust
Company (“State Street”), State Street
provides certain administrative services to the Company. For such services, the
Administrator pays State Street a portion of the administrative
fee the Administrator receives from the Company. The Administrator supervises
and monitors the administrative and accounting
services provided by State Street. Their services are also subject to the
supervision of the officers and Board of Directors of the
Company.
Custodian
State
Street, located at One Congress
Street, Boston, MA 02114,
acts as the Company’s custodian. State Street is not an affiliate of
the
Adviser or the Distributor. Any
of the Fund’s cash balances with the Custodian in excess of $250,000 are
unprotected by federal deposit
insurance. These balances may, at times, be substantial. In
maintaining custody of foreign assets held outside the United States,
State Street has contracted with various banks and depositaries in accordance
with regulations of the SEC for the purpose of providing
custodial services for such assets.
In
the selection of foreign sub-custodians, the Directors or their delegates
consider a number of factors, including, but not limited to, the
reliability and financial stability of the institution, the ability of the
institution to provide efficiently the custodial services required
for the
Funds, and the reputation of the institution in the particular country or
region.
Principal
Underwriter
Morgan
Stanley Distribution, Inc., with principal offices at 1585
Broadway,
New York, NY 10036, is an indirect wholly owned subsidiary
of Morgan Stanley and serves as principal underwriter to the Company. For
information relating to the services provided by
Morgan Stanley Distribution, Inc., see “Distribution of Shares (Applicable to
Class II Shares Only).”
Dividend
Disbursing and Transfer Agent
SS&C
Global Investor and Distribution
Solutions, Inc.
(“SS&C GIDS”), 333 W 11th Street, Kansas City, MO 64105,
provides dividend
disbursing and transfer agency services for the Company.
Co-Transfer
Agent
Eaton
Vance Management is the co-transfer agent with respect to the Funds. Eaton Vance
Management is a registered transfer agent and
operates the Funds’ call center. In connection therewith, Eaton Vance Management
performs certain transfer agency services
related
to processing and relaying purchase and redemption orders to SS&C GIDS, the
Funds’ transfer agent. The Funds will bear the
costs associated with Eaton Vance Management’s provision of these transfer
agency services.
Servicing
Fee
The
Company has agreed to pay a servicing fee of up to 0.17% of the total average
daily NAV of shares of
a Fund held in an insurance
company’s account to the extent an insurance company has entered into a
servicing agreement with the Company to provide
administrative and other contract-owner related services on behalf of such
Fund.
Securities
Lending
Pursuant
to an agreement between the Company and State Street, the Funds
may lend their securities through State Street as securities
lending agent to certain qualified borrowers. As securities lending agent of the
Company, State Street administers the
Funds’
securities lending program. These services include arranging the loans of
securities with approved borrowers and their return to
the Fund upon loan termination, negotiating the terms of such loans, selecting
the securities to be loaned and monitoring dividend activity
relating to loaned securities. State Street also marks-to-market daily the value
of loaned securities and collateral and may require
additional collateral as necessary from borrowers. State Street may also, in its
capacity as securities lending agent, invest cash received
as collateral in pre-approved investments in accordance with the Securities
Lending Authorization Agreement. State Street maintains
records of loans made and income derived therefrom and makes available such
records that the Company deems necessary to
monitor the securities lending program.
For
the fiscal year ended December 31, 2023,
the following Funds earned income and incurred the following costs and expenses
as a result
of their securities lending activities:
|
|
|
|
|
|
|
|
| |
Fund |
Gross Income1
|
Revenue Split2
|
Cash Collateral Management Fees3
|
Administrative Fees4
|
Indemnification Fees5
|
Rebates
to Borrowers |
Other Fees |
Total
Cost of
the Securities Lending Activities |
Net
Income from
the Securities Lending
Activities |
Discovery |
$139,772 |
$18,694 |
$0 |
$0 |
$0 |
$15,141 |
$0 |
$33,835 |
$105,937 |
Emerging
Markets
Debt |
1,431 |
33 |
0 |
0 |
0 |
1,212 |
0 |
1,245 |
186 |
Emerging
Markets
Equity |
19,098 |
1,967 |
0 |
0 |
0 |
5,981 |
0 |
7,948 |
11,150 |
Global
Infrastructure |
28,957 |
2,409 |
0 |
0 |
0 |
12,894 |
0 |
15,303 |
13,654 |
Global
Real Estate |
5,733 |
284 |
0 |
0 |
0 |
3,843 |
0 |
4,127 |
1,606 |
Growth |
180,309 |
21,159 |
0 |
0 |
0 |
39,245 |
0 |
60,404 |
119,905 |
1 |
Gross
income includes income from the reinvestment of cash
collateral. |
2 |
Revenue
split represents the share of revenue generated by the securities lending
program and paid to State Street. |
3 |
Cash
collateral management fees include fees deducted from a pooled cash
collateral reinvestment vehicle that are not included in the revenue
split. |
4 |
These
administrative fees are not included in the revenue
split. |
5 |
These
indemnification fees are not included in the revenue
split. |
DISTRIBUTION
OF SHARES (APPLICABLE TO CLASS II SHARES ONLY)
The
Company has adopted a Distribution Plan (the “Plan”) in accordance with the
provisions of Rule 12b-1 under the 1940 Act, which
regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution
of its shares. Under the Plan, each Fund pays the Distributor a monthly 12b-1
fee at the annual rate of up to 0.25% of the
average daily net assets of the Funds attributable to the Class II Shares. Such
amount is paid to compensate the Distributor for remittance
to insurance companies which offer the Company as an investment option. These
payments are intended to compensate insurance
companies for distribution and/or administrative related expenses incurred or
paid in connection with the distribution of Class
II shares of the Funds. Morgan Stanley Distribution may retain any portion of
the fees it does not expend in meeting its obligations
to the Company. The Distributor has agreed to waive the following amounts of the
0.25% 12b-1 fees that it is entitled to receive
from the following Funds:
| |
Class
II Fund |
Waiver |
Discovery |
0.15% |
Emerging
Markets Debt |
0.20% |
Emerging
Markets Equity |
0.20% |
| |
Class
II Fund |
Waiver |
Global
Strategist |
0.15% |
These
waivers will continue for at least one year from the date of the applicable
Prospectus or until such time as the Company’s Board
of Directors acts to discontinue all or a portion of such waivers when it deems
such action is appropriate.
Since
the 12b-1 fees associated with the Plan are paid out of the Company’s assets on
an on-going basis, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
The
following table describes the 12b-1 fees paid pursuant to the Plan (net of any
waivers) by each active Class II Fund to various insurance
companies for whose separate accounts the Funds are underlying investments for
the fiscal year ended December 31, 2023.
|
| |
Fund |
Total
Distribution (12b-1)
Fees Paid by Fund (Net
of Waivers) |
Amount
Waived |
Discovery |
$116,897 |
$175,346 |
Emerging
Markets Debt |
5,738 |
22,953 |
Emerging
Markets Equity |
24,350 |
97,398 |
Global
Infrastructure |
119,105 |
N/A |
Global
Real Estate |
88,823 |
N/A |
Global
Strategist |
13,680 |
20,521 |
Growth |
479,817 |
N/A |
U.S.
Real Estate |
354,035 |
N/A |
Continuance
of the Plan must be approved annually by a majority of the Directors of the
Company, including a majority of the Independent
Directors. All material amendments of the Plan will require approval by a
majority of the Directors of the Company, including
a majority of the Independent Directors. The Plan was approved by the Company’s
Board of Directors, including the Independent
Directors, none of whom has a direct or indirect financial interest in the
operation of a Plan or in any agreements related
thereto.
Revenue
Sharing
The
Adviser and/or the Distributor may pay compensation, out of their own funds and
not as an additional charge to the Funds, to certain
insurance companies or their affiliates in connection with Company-related
administrative services that the insurance companies
provide in connection with the issuance of their variable annuity contracts.
Such payments are in addition to any distribution
or shareholder servicing fees that may be payable by the Distributor. The
additional payments may be based on various factors,
including amount of assets invested through the insurance company’s separate
accounts, a Fund’s advisory fees, some other agreed
upon amount, or other measures as determined from time to time by the Adviser or
Distributor. The amount of these payments
may be different for different insurance companies.
The
additional payments made to certain insurance companies, which are made in
accordance with the applicable compensation structure
for each intermediary, may include an ongoing annual fee in an amount up to
0.35% of the total average daily NAV of shares
of the Funds held in such insurance companies’ applicable accounts.
The
prospect of receiving, or the receipt of, additional compensation, as described
above, by insurance companies may provide insurance
companies with an incentive to encourage variable annuity contract owners to
favor one variable annuity contract investment
option over other contract options with respect to which an intermediary does
not receive additional compensation (or receives
lower levels of additional compensation) or be a factor in an insurance
company’s decision to include the Fund as an underlying
investment option in its variable insurance products. Investors may wish to take
such payment arrangements into account when
considering and evaluating any recommendations relating to Fund shares and
should review carefully any disclosure provided by
an insurance company as to its compensation.
Other
Payments to Intermediaries
The
Adviser and/or the Distributor may also make payments, out of their own assets
and not as an expense to the
Fund, to Intermediaries
to offset certain nominal expenses of Intermediaries related to setup,
connectivity or other technological maintenance of
the Intermediary’s investment platform and/or the provision of services with
respect to the
Fund or share class on an Intermediary’s
investment platform. Investors may wish to take such payment arrangements into
account when considering an investment
in Fund shares.
Portfolio
Managers
Other
Accounts Managed by the Portfolio Managers
Because
the portfolio managers may manage assets for other investment companies, pooled
investment vehicles, and/or other accounts
(including institutional clients, pension plans and certain high net worth
individuals), there may be an incentive to favor one
client over another resulting in conflicts of interest. For instance, the
Adviser and/or Sub-Advisers may receive fees from certain accounts
that are higher than the fee it receives from the Company, or it may receive a
performance-based fee on certain accounts. In those
instances, the portfolio managers may have an incentive to favor the higher
and/or performance-based fee accounts over the Company.
In addition, a conflict of interest could exist to the extent the Adviser and/or
Sub-Advisers have proprietary investments in certain
accounts, where portfolio managers have personal investments in certain accounts
or when certain accounts are investment options
in the Adviser’s and/or Sub-Advisers’ employee benefits and/or deferred
compensation plans. The portfolio manager may
have
an incentive to favor these accounts over others. If the Adviser and/or
Sub-Advisers manage accounts that engage in short sales of
securities of the type in which the Company invests, the Adviser and/or
Sub-Advisers could be seen as harming the performance of the
Company for the benefit of the accounts engaging in short sales if the short
sales cause the market value of the securities to fall. The
Adviser and/or Sub-Advisers have adopted trade allocation and other policies and
procedures that it believes are reasonably designed
to address these and other conflicts of interest.
Portfolio
Manager Compensation Structure
Morgan
Stanley’s compensation structure is based on a total reward system of base
salary and incentive compensation, which is paid either
in the form of cash bonus, or for employees meeting the specified deferred
compensation eligibility threshold, partially as a cash
bonus and partially as mandatory deferred compensation. MSIM
compensates employees based on principles of pay-for-performance,
market competitiveness and risk management. Deferred
compensation granted to MSIM employees are generally granted
as a mix of deferred cash awards under the Investment Management Alignment Plan
(“IMAP”) and equity-based awards in the
form of stock units. The portion of incentive compensation granted in the form
of a deferred compensation award and the terms of
such awards are determined annually by the Compensation, Management Development
and Succession Committee of the Morgan Stanley
Board of Directors.
Base
salary compensation.
Generally, portfolio managers receive base salary compensation based on the
level of their position with the
Adviser.
Incentive
compensation.
In addition to base compensation, portfolio managers may receive discretionary
year-end compensation.
Incentive
compensation may include:
■ |
A
mandatory program that defers a portion of incentive compensation into
restricted stock units or other awards based on Morgan
Stanley common stock or other plans that are subject to vesting and other
conditions. |
■ |
IMAP
is a cash-based deferred compensation plan designed to increase the
alignment of participants’
interests with the interests
of the Adviser’s clients. For eligible employees, a portion of their
deferred compensation is mandatorily deferred into
IMAP on an annual basis. Awards granted under IMAP are notionally invested
in referenced funds available pursuant to
the plan, which are funds advised by MSIM
and its affiliates that are investment advisers.
Portfolio managers are required
to notionally invest a minimum of 40% of their account balance in the
designated funds that they manage and are included
in the IMAP notional investment fund
menu. |
■ |
Deferred
compensation awards are typically subject to vesting over a multi-year
period and are subject to cancellation through
the payment date for competition, cause (i.e., any act or omission that
constitutes a breach of obligation to MSIM,
including failure to comply with internal compliance, ethics or risk
management standards, and failure or refusal to perform
duties satisfactorily, including supervisory and management duties),
disclosure of proprietary information, and solicitation
of employees or clients. Awards are also subject to clawback through the
payment date if an employee’s act or omission
(including with respect to direct supervisory responsibilities) causes a
restatement of the Firm’s consolidated financial
results, constitutes a violation of the Firm’s global risk management
principles, policies and standards, or causes a loss
of revenue associated with a position on which the employee was paid and
the employee operated outside of internal control
policies. |
Eligibility
for, and the amount of any, discretionary compensation is subject to a
multi-dimensional process. Specifically, consideration
is given to one or more of the following factors, which can vary by portfolio
management team and circumstances:
■ |
Revenue
and profitability of the business and/or each fund/account managed by the
portfolio manager |
■ |
Revenue
and profitability of the Firm |
■ |
Return
on equity and risk factors of both the business units and Morgan
Stanley |
■ |
Assets
managed by the portfolio manager |
■ |
External
market conditions |
■ |
New
business development and business
sustainability |
■ |
Contribution
to client objectives |
■ |
Team,
product and/or MSIM performance |
■ |
The
pre-tax investment performance of the funds/accounts managed by the
portfolio manager (which may, in certain cases, be measured
against the applicable benchmark(s) and/or peer group(s) over one-, three-
and five-year periods) |
■ |
Individual
contribution and performance |
Further,
the Firm’s Global Incentive Compensation Discretion Policy requires compensation
managers to consider only legitimate, business
related factors when exercising discretion in determining variable incentive
compensation, including adherence to Morgan Stanley’s
core values, conduct, disciplinary actions in the current performance year, risk
management and risk outcomes.
Other
Accounts Managed by Portfolio Managers at December 31, 2023 (unless
otherwise indicated):
|
|
|
|
|
| |
|
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Fund
and Portfolio Managers |
Number of Accounts |
Total
Assets in
the Accounts |
Number of Accounts |
Total
Assets in
the Accounts |
Number of Accounts |
Total
Assets in
the Accounts |
Discovery |
|
|
|
|
|
|
Dennis
P. Lynch |
22 |
$13.0
billion |
33 |
$11.6
billion |
141
|
$4.5
billion1
|
Sam
G. Chainani |
21 |
$13.0
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
Jason
C. Yeung |
21 |
$13.0
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
Armistead
B. Nash |
21 |
$13.0
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
David
S. Cohen |
21 |
$13.0
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
Alexander
T. Norton |
21 |
$13.0
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
Emerging
Markets Debt |
|
|
|
|
|
|
Sahil
Tandon |
2 |
$513.1
million |
10 |
$6.8
billion |
4 |
$410.6
million |
Akbar
Causer |
2 |
$1.9
billion |
6 |
$1.6
billion |
2 |
$168.7
million |
Kyle
Lee |
8 |
$9.5
billion |
2 |
$288.1
million |
1 |
$137.6
million |
Federico
Sequeda |
7 |
$9.6
billion |
2 |
$288.1
million |
1 |
$137.6
million |
Emerging
Markets Equity |
|
|
|
|
|
|
Eric
Carlson |
3 |
$769.1
million |
4 |
$1.2
billion |
6 |
$2.0
billion |
Amay
Hattangadi |
6 |
$1.3
billion |
8 |
$1.5
billion |
82
|
$4.6
billion2
|
Paul
C. Psaila |
3 |
$769.1
million |
4 |
$1.2
billion |
9 |
$2.3
billion |
Global
Infrastructure |
|
|
|
|
|
|
Matthew
King |
1 |
$263.4
million |
6 |
$1.4
billion |
33
|
$425.9
million3
|
Global
Real Estate |
|
|
|
|
|
|
Laurel
Durkay |
5 |
$340.7
million |
10 |
$1.2
billion |
4 |
$128.8
million |
Desmond
Foong |
1 |
$39.3
million |
5 |
$1.1
billion |
1 |
$16.0
million |
Angeline
Ho |
1 |
$39.3
million |
5 |
$1.1
billion |
1 |
$16.0
million |
Simon
Robson Brown |
1 |
$39.3
million |
5 |
$1.1
billion |
1 |
$16.0
million |
Global
Strategist |
|
|
|
|
|
|
Mark
Bavoso |
5 |
$1.9
billion |
8 |
$1.2
billion |
84
|
$6.5
billion4
|
Cyril
Moullé-Berteaux |
5 |
$1.9
billion |
8 |
$1.2
billion |
94
|
$6.6
billion4
|
Growth |
|
|
|
|
|
|
Dennis
P. Lynch |
22 |
$12.7
billion |
33 |
$11.6
billion |
141
|
$4.5
billion1
|
Sam
G. Chainani |
21 |
$12.7
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
Jason
C. Yeung |
21 |
$12.7
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
Armistead
B. Nash |
21 |
$12.7
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
David
S. Cohen |
21 |
$12.7
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
Alexander
T. Norton |
21 |
$12.7
billion |
30 |
$11.5
billion |
131
|
$4.4
billion1
|
U.S.
Real Estate |
|
|
|
|
|
|
Laurel
Durkay |
5 |
$114.3
million |
10 |
$1.2
billion |
4 |
$128.8
million |
1 |
Of
these other accounts, two
accounts
with a total of approximately $227.2
million in assets had performance-based fees. |
2 |
Of
these other accounts, one
account
with a total of approximately $15.3
million
in assets had performance-based fees. |
3 |
Of
these other accounts, two accounts with a total of approximately $246.6
million in assets had performance-based fees. |
4 |
Of
these other accounts, two accounts with a total of approximately $3.1
billion in assets had performance-based fees. |
As
of December 31, 2023
(unless otherwise noted), the dollar range of securities beneficially owned (or
held notionally through IMAP)
by each portfolio manager in the Fund he/she manages is shown
below:
| |
Fund
and Portfolio Managers |
Portfolio
Holdings |
Discovery |
|
Dennis
P. Lynch |
None* |
Sam
G. Chainani |
None* |
Jason
C. Yeung |
None* |
Armistead
B. Nash |
None* |
David
S. Cohen |
None* |
Alexander
T. Norton |
None* |
Emerging
Markets Debt |
|
Sahil
Tandon |
None |
Akbar
Causer |
None* |
Kyle
Lee |
None* |
Federico
Sequeda |
None* |
Emerging
Markets Equity |
|
Eric
Carlson |
None* |
Amay
Hattangadi |
None |
Paul
C. Psaila |
None* |
Global
Infrastructure |
|
Matthew
King |
None* |
Global
Real Estate |
|
Laurel
Durkay |
None* |
Desmond
Foong |
None* |
Angeline
Ho |
None** |
Simon
Robson Brown |
None* |
Global
Strategist |
|
Mark
Bavoso |
None* |
Cyril
Moullé-Berteaux |
None* |
Growth |
|
Dennis
P. Lynch |
None* |
Sam
G. Chainani |
None* |
Jason
C. Yeung |
None* |
Armistead
B. Nash |
None* |
David
S. Cohen |
None* |
Alexander
T. Norton |
None* |
U.S.
Real Estate |
|
Laurel
Durkay |
None* |
* |
Not
included in the table above, the portfolio manager has made investments in
one or more other mutual funds managed by the same portfolio management
team
pursuant to a similar strategy. |
** |
Not
included in the table above, the portfolio manager has made investments in
one or more other pooled investment vehicles (i.e., funds not formed or
registered in
the United States) managed by the same portfolio management team pursuant
to a similar strategy. |
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Control
Persons
As
currently required under law, the insurance companies vote their shares of the
Funds in accordance with instructions received from
their variable annuity contract and variable life insurance policy owners.
Morgan Stanley will vote the shares of each
Fund that it
owns in the same proportions as shares of the Fund are voted by the insurance
companies. Accordingly, neither Morgan Stanley nor
the insurance companies are deemed to control the
Funds.
Principal
Holders of Securities
As
of April 1, 2024,
the following persons were beneficial owners of 5% or more of the outstanding
shares of the following Funds (Class
I and Class II shares):
|
| |
Fund |
Name
and Address |
%
of Class |
Discovery
(Class I) |
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
30.89% |
|
IDS
Life Insurance Company 222
AMPF Financial Center Minneapolis
MN 55474-0001 |
25.77% |
|
Nationwide
Life Insurance Company NWPP C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
15.61% |
|
Annuity
Investors Life Insurance Co ATTN
Variable Annuity Dept PO
Box 5420 Cincinnati
OH 45201-5420 |
9.02% |
|
Delaware
Life Insurance Company Variable
Account H 1601
Trapelo Rd Ste 30 Waltham
MA 02451-7360 |
5.26% |
|
Nationwide
Life Insurance Company NWVLI4 C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
5.13% |
Emerging
Markets Debt (Class I) |
Fidelity
Investments Life Insurance Company ATTN
Denis Vieira 100
Salem St O2N Smithfield
RI 02917-1234 |
72.38% |
|
Empire
Fidelity Investments Life Insurance Company ATTN
Denis Vieira 100 Salem
St O2N Smithfield
RI 02917-1234 |
8.02% |
Emerging
Markets Equity (Class I) |
Fidelity
Investments Life Insurance Company ATTN
Denis Vieira 100
Salem St O2N Smithfield
RI 02917-1234 |
33.99% |
|
Ameritas
Life Insurance Corp Variable
Separate Account VA2 ATTN
Variable Processing 5900
O Street Lincoln
NE 68510-2234 |
16.28% |
|
Ameritas
Life Insurance Corp Separate
Account LLVA ATTN
Variable Trades 5900
‘O‘ Street Lincoln
NE 68510-2234 |
9.08% |
|
Ameritas
Life Insurance Corp Variable
Separate Account V ATTN
Variable Processing 5900
O Street Lincoln
NE 68510-2234 |
8.55% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit Pl Topeka
KS 66636-1000 |
6.34% |
|
Empire
Fidelity Investments Life Insurance Company ATTN
Denis Vieira 100
Salem St O2N Smithfield
RI 02917-1234 |
5.09% |
Global
Infrastructure (Class I) |
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation 1
SW Security Benefit PL Topeka
KS 66636-1000 |
63.57% |
|
| |
|
Talcott
Resolution Life and Annuity Insurance Company PO
Box 5051 Hartford
CT 06102-5051 |
16.77% |
|
Members
Horizon Variable Separate Account Members
Life Insurance Company 2000
Heritage Way Waverly
IA 50677-9208 |
7.02% |
Global
Strategist (Class I) |
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
36.72% |
|
Fidelity
Investments Life Insurance Company ATTN
Denis Vieira 100
Salem St O2N Smithfield
RI 02917-1234 |
32.88% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit Place Topeka
KS 66636-1000 |
9.67% |
|
Empire
Fidelity Investments Life Insurance Company ATTN
Denis Vieira 100
Salem St O2N Smithfield
RI 02917-1234 |
5.86% |
Growth
(Class I) |
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
62.15% |
|
Talcott
Resolution Life and Annuity Insurance Company PO
Box 5051 Hartford
CT 06102-5051 |
16.01% |
U.S.
Real Estate (Class I) |
Ameritas
Life Insurance Corp Variable
Separate Account VA2 ATTN
Variable Processing 5900
O Street Lincoln
NE 68510-2234 |
34.05% |
|
NYLIAC ATTN
Ashesh Upadhyay 30
Hudson St Jersey
City NJ 07302-4804 |
18.72% |
|
Ameritas
Life Insurance Corp Variable
Separate Account V ATTN
Variable Processing 5900
O Street Lincoln
NE 68510-2234 |
8.43% |
|
Nationwide
Life Insurance Company NWPP C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
6.72% |
|
Annuity
Investors Life Insurance Co ATTN
Variable Annuity Dept PO
Box 5420 Cincinnati
OH 45201-5420 |
5.29% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
5.16% |
Discovery
(Class II) |
IDS
Life Insurance Company 222
AMPF Financial Center Minneapolis
MN 55474-0001 |
65.96% |
|
Talcott
Resolution Life and Annuity Insurance Company PO
Box 5051 Hartford
CT 06102-5051 |
10.57% |
|
| |
|
Talcott
Resolution Life & Annuity Separate Account ATTN:
UIT Operations PO
Box 5051 Hartford
CT 06102-5051 |
5.75% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
5.12% |
Emerging
Markets Debt (Class II) |
Nationwide
Life Insurance Company NWVA4 C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
53.47% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
23.45% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit Place Topeka
KS 66636-1000 |
5.95% |
|
Integrity
Life Insurance Company ATTN
VA Accounting 400
Broadway Ms 24 Cincinnati
OH 45202-3312 |
5.20% |
Emerging
Markets Equity (Class II) |
Minnesota
Life Insurance Company ATTN
A6-4105 400
Robert Street North Saint
Paul MN 55101-2099 |
56.89% |
|
Talcott
Resolution Life and Annuity Insurance Company PO
Box 5051 Hartford
CT 06102-5051 |
14.40% |
|
Security
Benefit Life Ins Co FBO Unbundled ATTN
C/O Variable Annuity Dept One
Security Benefit Place Topeka
KS 66636-1000 |
7.29% |
Global
Infrastructure (Class II) |
Nationwide
Life Insurance Company NWVA-II C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
41.58% |
|
The
Lincoln National Life Insurance Company Separate
Account N ATTN
Cammie Kline 1300
South Clinton Street Fort
Wayne IN 46802-3506 |
18.02% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation 1
SW Security Benefit PL Topeka
KS 66636-1000 |
13.94% |
|
Nationwide
Life Insurance Company NWVA4 C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
11.93% |
Global
Real Estate (Class II) |
IDS
Life Insurance Company 222
AMPF Financial Center Minneapolis
MN 55474-0001 |
50.88% |
|
Nationwide
Life Insurance Company NWVA4 C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
22.77% |
|
| |
|
Protective
Life Insurance Co Variable
Annuity Separate Account ATTN
Tom Barrett 2801
Highway 280 South Birmingham
AL 35223-2488 |
14.61% |
Global
Strategist (Class II) |
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit Place Topeka
KS 66636-1000 |
69.07% |
|
Delaware
Life Insurance Company 1601
Trapelo Rd Ste 30 Waltham
MA 02451-7360 |
17.14% |
|
Nationwide
Life Insurance Company NWVA4 C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
7.11% |
Growth
(Class II) |
Augustar
Life Insurance Co FBO
ITS Separate Accounts 1
Financial Way Cincinnati
OH 45242-5800 |
27.57% |
|
Nationwide
Life Insurance Company NWVA-II C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
19.47% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
18.92% |
|
Nationwide
Life Insurance Company NWVA4 C/O
IPO Portfolio Accounting PO
Box 182029 Columbus
OH 43218-2029 |
8.94% |
|
Talcott
Resolution Life and Annuity Insurance Company PO
Box 5051 Hartford
CT 06102-5051 |
8.72% |
U.S.
Real Estate (Class II) |
NYLIAC ATTN
Ashesh Upadhyay 30
Hudson St Jersey
City NJ 07302-4804 |
79.98% |
|
Prudential
as Administrator for Allstate Life Insurance Co C/O
Product Valuation One
Security Benefit PL Topeka
KS 66636-1000 |
8.28% |
NET
ASSET VALUE
The
NAV of each class is determined by dividing the total of the value of the Fund’s
investments and other assets attributable to such class,
less any liabilities attributable to such class, by the total number of
outstanding shares of such class. NAV for Class I and Class II
shares will differ due to class specific expenses paid by each class, if any,
and the 12b-1 fee charged to Class II shares. The NAV of each
Fund is determined as of the close of the NYSE (normally 4:00 p.m. Eastern time)
on each day that the NYSE is open for business.
Price
information on listed securities is taken from the exchange where the security
is primarily traded. Fund securities generally are valued
at their market value. In the calculation of
a Fund’s NAV: (1) an equity portfolio security listed or traded on an exchange
is valued
at its latest reported sales price (or at the exchange official closing price if
such exchange reports an official closing price), and if
there were no sales on a given day and if there is no official exchange closing
price for that day, the security is valued at the mean between
the last reported bid and asked prices if such bid and asked prices are
available on the relevant exchanges; and (2) all other equity
portfolio securities for which OTC market quotations are readily available are
valued at the latest reported sale price (or at the market
official closing price if such market reports an official closing price), and if
there was no trading in the security on a given day and
if there is no official closing price from the relevant markets for that day,
the security is valued at the mean between the last
reported
bid and asked prices if such bid and asked prices are available on the relevant
markets. Listed equity securities not traded on the
valuation date with no reported bid and asked prices available on the exchange
are valued at the mean between the current bid and
asked prices obtained from one or more reputable brokers or dealers. An unlisted
equity security that does not trade on the valuation
date and for which bid and asked prices from the relevant markets are
unavailable is valued at the mean between the current bid
and asked prices obtained from one or more reputable brokers or
dealers.
In
cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market.
When no
market
quotations are readily
available
for a security or other asset,
including circumstances under which the
Adviser
and/or Sub-Advisers
determines that a market quotation is not accurate, fair value for the security
or other asset will be
determined
in good faith using
methods approved by the Fund’s Board of Directors.
For valuation purposes, quotations of foreign portfolio
securities, other assets and liabilities and forward contracts stated in foreign
currency are translated into U.S. dollar equivalents
at the prevailing market rates prior to the close of the NYSE.
Bonds
and other fixed-income securities are valued according to the broadest and most
representative market, which will ordinarily be
the OTC market. NAV includes interest on fixed-income securities, which is
accrued daily unless collection is in doubt. In addition,
bonds and other fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to
bid or last sale prices, but take into account institutional-size trading in
similar groups of securities and any developments related to
the specific securities. Securities not priced in this manner are valued based
on the mean of bid and ask prices (or a yield equivalent thereof),
obtained from market makers or brokers or, when securities exchange valuations
are used, at the latest quoted sale price on the
day of valuation. If there is no such reported sale, the latest quoted bid price
will be used. Short-term debt securities with remaining
maturities of 60 days or less at the time of purchase may be valued at amortized
cost, unless the Adviser determines such valuation
does not reflect the securities’ market value, in which case these securities
will be valued at their fair market value as determined
by the Adviser.
Certain
of
a Fund’s securities may be valued using as an input evaluated prices provided by
an approved
outside
pricing service.
Prices obtained
from these approved sources are monitored and reviewed by the Adviser’s
Valuation Committee and if not deemed to represent
fair value, may be overridden and valued using procedures approved
by the Board. The pricing service may utilize a matrix system
or other model incorporating attributes such as security quality, maturity and
coupon as the evaluation model parameters, and/or
research evaluations by its staff, including review of broker-dealer market
price quotations in determining what it believes is the
fair valuation of the portfolio securities valued by such pricing service.
Pricing services generally value securities assuming orderly transactions
of an institutional round lot size, but
a Fund may hold or transact in such securities in smaller, odd lot sizes. Odd
lots often
trade at lower prices than institutional round lots. In certain cases where a
valuation is not available from any of the approved pricing
services, then a quote from a broker or dealer may be used.
Listed
options are valued at the last reported sales price on the exchange on which
they are listed (or at the exchange official closing price
if such exchange reports an official closing price). If an official closing
price or last reported sale price is unavailable, the listed option
should be fair valued at the mean between its latest bid and asked prices. If an
exchange closing price or bid and asked prices are
not available from the exchange, then the quotes from one or more brokers or
dealers may be used. Unlisted options and swaps are
valued by an approved
outside
pricing service or
quotes from a broker or dealer. Unlisted options and swaps cleared on a
clearinghouse
or exchange may be valued using the closing price provided by the clearinghouse
or exchange. Futures are valued at the settlement
price on the exchange on which they trade or, if a settlement price is
unavailable, then at the last sale price on the exchange.
If
the Adviser or Sub-Advisers determine that the valuation received from the
outside pricing service or broker or dealer is not reflective
of the security’s market value, such security is valued at its fair value as
determined in good faith using
methods approved by the
Fund’s Board of Directors.
Generally,
trading in foreign securities, as well as corporate bonds, U.S. Government
securities and money market instruments, is substantially
completed each day at various times prior to the close of the NYSE. The values
of such securities used in computing the NAV
of the Fund’s shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close
of the NYSE. Occasionally, events which may affect the values of such securities
and such exchange rates may occur between the times
at which they are determined and the close of the NYSE. If events that may
affect the value of such securities occur during such period,
then these securities may be valued at their fair value as determined in good
faith using
methods approved by the Fund’s Board
of Directors.
Certain
Funds may invest up to 25% of its total assets in shares of a Bitcoin
Subsidiary. The Bitcoin Subsidiary offers to redeem all or a
portion of its shares at its current NAV every regular business day. The value
of shares of the Bitcoin Subsidiary fluctuates with the value
of the Subsidiary’s portfolio investments. The Bitcoin Subsidiary prices its
portfolio investments pursuant to the same pricing and
valuation methodologies and procedures used by the Fund, which require, among
other things, that each of the Bitcoin
Subsidiary’s
portfolio investments be marked-to-market (that is, the value on the Bitcoin
Subsidiary’s books changes) each business day
to reflect changes in the market value of each investment.
In
general, fair value represents the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When there is no public market or
possibly no market at all for an asset, fair value
represents, in general, a good faith approximation of the current value of an
asset. A security that is fair valued may be valued at a
price higher or lower than actual market quotations or the value determined by
other funds using their own fair valuation procedures
or by other investors. The fair value of an asset may not be the price at which
that asset is ultimately sold.
The
proceeds received by each Fund from the issue or sale of its Shares, and all net
investment income, realized and unrealized gain and
proceeds thereof, subject only to the rights of creditors, will be specifically
allocated to the Fund and constitute the underlying assets
of each Fund. The underlying assets of a Fund will be segregated on the books of
account, and will be charged with the liabilities
in respect of a Fund and with a share of the general liabilities of the Trust.
Expenses of the Trust with respect to the Fund and
the other series of the Trust are generally allocated in proportion to the NAVs
of the respective Fund except where allocations of expenses
can otherwise be fairly made.
Each
Fund relies on various sources to calculate its NAV. The ability of the Fund to
calculate the NAV per share of the Fund is subject
to operational risks associated with processing or human errors, systems or
technology failures, cyber attacks and errors caused by
third party service providers, data sources, or trading counterparties. Such
failures may result in delays in the calculation of the Fund’s
NAV and/or the inability to calculate NAV over extended time periods. The Fund
may be unable to recover any losses associated
with such failures. In addition, if the third-party service providers and/or
data sources upon which the Fund directly or indirectly
relies to calculate its NAV or price individual securities are unavailable or
otherwise unable to calculate the NAV correctly, it
may be necessary for alternative procedures to be utilized to price the
securities at the time of determining the Fund’s NAV.
BROKERAGE
PRACTICES
Portfolio
Transactions
The
Adviser and/or Sub-Advisers are responsible for decisions to buy and sell
securities for each Fund, for broker-dealer selection and for
negotiation of commission rates. The Adviser and/or Sub-Advisers are prohibited
from directing brokerage transactions on the basis
of the referral of clients or the sale of shares of advised investment
companies. Purchases and sales of securities on a stock exchange
are effected through brokers who charge a commission for their services. In the
OTC market, securities may be traded as agency
transactions through broker-dealers or traded on a “net” basis with dealers
acting as principal for their own accounts without a stated
commission, although the price of the security usually includes profit to the
dealer. In underwritten offerings, securities are purchased
at a fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter’s concession
or discount. When securities are purchased or sold directly from or to an
issuer, no commissions or discounts are paid.
On
occasion, a Fund may purchase certain money market instruments directly from an
issuer without payment of a commission or concession.
Money market instruments are generally traded on a “net” basis with dealers
acting as principal for their own accounts without
a stated commission, although the price of the security usually includes a
profit to the dealer.
The
Company anticipates that certain of its transactions involving foreign
securities will be effected on foreign securities exchanges. There
is also generally less government supervision and regulation of foreign
securities exchanges and brokers than in the United States.
The
Adviser and/or Sub-Advisers select broker-dealers for the execution of
transactions for the Funds in accordance with their duty to seek
“best execution” (i.e., the most favorable terms of execution). In seeking best
execution, the Adviser and/or Sub-Advisers are not obligated
to choose the broker-dealer offering the lowest available commission rate if, in
the Adviser’s and/or Sub-Advisers’ reasonable
judgment, (i) the total costs or proceeds from the transaction might be less
favorable than may be obtained elsewhere; (ii) a
higher commission is justified by the brokerage and research services provided
by the broker-dealer that fall within the safe harbor of
Section 28(e) of the 1934 Act or otherwise is permitted under applicable law; or
(iii) other considerations, such as the order size, the
time required for execution, the depth and breadth of the market for the
security or minimum credit quality requirements to transact
business with a particular broker-dealer. The research services received include
services which aid the Adviser and/or Sub-Advisers
in fulfilling their investment decision-making responsibilities, including (a)
furnishing advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; and (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance
of accounts.
When
effecting transactions on behalf of the Funds, the Adviser and/or Sub-Advisers
may trade with any broker-dealer on their list of approved
broker-dealers. Approved broker-dealers have met criteria as established by the
Adviser’s Trading and Research Governance team
(“TRG”). TRG reviews and approves broker-dealers periodically to determine
whether broker-dealers on the approved list continue
to meet such criteria. The approval lists are reported quarterly to the
Adviser’s Counterparty Governance Committee. When
selecting an approved broker-dealer (including an affiliate) to execute
securities transactions, the following factors may be
considered:
(i) best available price; (ii) reliability, integrity and reputation in the
industry (which may include a review of financial information
and creditworthiness); (iii) execution capabilities, including block
positioning, speed of execution and quality and responsiveness
of its trading desk; (iv) knowledge of and access to the markets for the
securities being traded; (v) potential ability to obtain
price improvement; (vi) ability to maintain confidentiality; (vii) ability to
handle non-traditional trades; (viii) commission and commission-equivalent
rates; (ix) technology infrastructure; (x) clearance and settlement
capabilities; (xi) the size of the trade relative to
other trades in the same instrument; (xii) ability of a counterparty to commit
its capital to a Fund’s trade and its access to liquidity; (xiii)
counterparty restrictions associated with a portfolio, including regulatory
trading, documentation requirement or any specific clearing
broker-dealer requirements; (xiv) client-directed execution; (xv)
client-specific restrictions; and (xvi) such other factors as may
be appropriate.
Subject
to the duty to seek best execution, the Adviser uses a portion of the
commissions generated when executing client transactions to
acquire brokerage and research services that aid in fulfilling investment
decision-making responsibilities in accordance with Section 28(e)
and applicable law. Commissions paid to broker-dealers providing brokerage and
research services may be higher than those charged
by other broker-dealers. Subject to applicable law, the Adviser receives a
benefit when using client commissions to obtain brokerage
and research services because the Adviser does not have to produce or pay for
the brokerage research services itself. Therefore,
the Adviser has an incentive to select or recommend a broker-dealer based on its
interest in receiving brokerage and research
services, rather than solely on its clients’ interest in obtaining the best
price.
The
Adviser has adopted policies and procedures designed to help track and evaluate
the benefits received from brokerage and research
services, as well as to track how much clients pay above the amount that
broker-dealers from which the Adviser receives brokerage
and research services may have charged solely for execution of such trades. The
Adviser utilizes a voting system to assist in making
a good faith determination of the value of brokerage and research services it
receives in accordance with Section 28(e) and applicable
law. In many cases, these involve subjective judgments or approximations. The
Adviser has established a process for budgeting
research costs and allocating such costs across client accounts.
The
Adviser and certain other affiliated advisers have entered into commission
sharing arrangements (“CSAs”) with executing brokers (“CSA
Partners”) and a third-party vendor (“CSA Aggregator”). Pursuant to these
arrangements, and under the Adviser’s supervision, the
CSA Partners and CSA Aggregator track execution and research commissions
separately and pool and distribute research credits in
accordance with the policies and procedures discussed above to approved research
providers (which may include executing brokerage
firms or independent research providers (“Approved Research Providers”)) that
provide brokerage and research services. The
CSA Aggregator also reconciles research credits from trades with CSA Partners,
and pays Approved Research Providers and provides
other related administrative functions. In addition, a CSA Partner may provide
the Adviser with proprietary research it has developed
and, upon instruction, may retain research commission credits as compensation
for the provision of such proprietary research
services. The Adviser believes that these arrangements allow it to monitor the
amount of trading costs that are attributable to execution
services on the one hand and other brokerage and research services on the
other.
Transactions
that generate research credits include equity transactions executed on an agency
basis or via a riskless principal transaction
where the executing broker-dealer receives a commission. The Adviser does not
use CSAs or otherwise have arrangements to
pay for brokerage and research services with client commissions in connection
with trading fixed-income securities. Consistent with
long-standing industry practice in the fixed-income markets, however, the
Adviser, subject to applicable law, may receive brokerage
and research services and other information, including access to fixed-income
trading platforms that dealers provide for no charge
to their customers in the ordinary course of business. Fixed-income instruments
typically trade at a bid/ask spread and without an
explicit brokerage charge. While there is not a formal trading expense or
commission, clients will bear the implicit trading costs reflected
in these spreads.
The
Adviser may receive “mixed use” products and services from an Approved Research
Provider, where a portion of the product or service
assists in its investment decision-making process in accordance with Section
28(e) and a portion may be used for other purposes.
Where a product or service has a mixed use, the Adviser will make a reasonable
allocation of its cost according to its use and will
use client commissions to pay only for the portion of the product or service
that assists in its investment decision-making process. The
Adviser may have an incentive to allocate the costs to uses that assist in its
investment decision-making process because the Adviser
may pay for such costs with client commissions rather than its own resources. To
the extent the Adviser receives “mixed use” products
and services, the Adviser will allocate the anticipated costs of a mixed use
product or service in good faith and maintain records
concerning allocations in order to mitigate such conflicts.
Client
accounts that pay a greater amount of commissions relative to other accounts may
bear a greater share of the cost of brokerage and
research services than such other accounts. The Adviser may use brokerage and
research services obtained with brokerage commissions
from some clients for the benefit of other clients whose brokerage commissions
do not pay for such brokerage and research
services. The Adviser may also share brokerage and research services with its
affiliated advisers, and the clients of its affiliated advisers
may receive the benefits of such brokerage and research services. These
arrangements remain subject to the Adviser’s overall obligation
to seek best execution for client trading.
The
EU’s Markets in Financial Instruments Directive II (“MiFID II”), which became
effective January 3, 2018, requires investment advisers
regulated under MiFID II to pay for research services separately from trade
execution services, either through their own resources
or a research payment account funded by a specific charge to a client. Although
the Adviser is not directly subject to the provisions
of MiFID II, certain of its affiliated advisers are, such as Morgan Stanley
Investment Management Limited; accordingly, as applicable,
the Adviser makes a reasonable valuation and allocation of the cost of research
services as between MiFID II client accounts
and other accounts that participate in CSAs and will pay for research services
received with respect to MiFID II client accounts
from its own resources. The Adviser and affiliated advisers subject to MiFID II
may separately pay for fixed-income research from
their own resources. Following its withdrawal from the EU on January 31, 2020,
the United Kingdom has entered a transition period,
during which EU law (including MiFID II) will continue to apply in the United
Kingdom. Following the transition period, investment
managers in the United Kingdom may still be required to comply with certain
MiFID II equivalent requirements in accordance
with the handbook of rules and guidance issued by the Financial Conduct
Authority.
When
permitted under applicable law, portfolio managers generally will aggregate
orders of their clients for the same securities in a single
order so that such orders are executed simultaneously in order to facilitate
best execution and to reduce brokerage costs. The Adviser
and/or Sub-Advisers effect aggregated orders in a manner designed to ensure that
no participating client is favored over any other
client.
In
general, accounts that participate in an aggregated order will participate on a
pro rata or other objective basis. Pro rata allocation of securities
and other instruments will generally consist of allocation based on the order
size of a participating client account in proportion
to the size of the orders placed for other accounts participating in the
aggregated order. However, the Adviser and/or Sub-Advisers
may allocate such securities and other instruments using a method other than pro
rata if their supply is limited, based on differing
portfolio characteristics among accounts or to avoid odd lots or small
allocations, among other reasons. These allocations are made
in the good faith judgment of the Adviser and/or the Sub-Advisers with a goal of
seeking to ensure that fair and equitable allocation
occurs over time. There may be times that the Adviser and/or Sub-Advisers are
not able to aggregate orders because of applicable
law or other considerations when doing so might otherwise be
advantageous.
Affiliated
Brokers
Subject
to the overriding objective of obtaining the best execution of orders, a Company
may use broker-dealer affiliates of the Adviser
to effect Fund brokerage transactions, including transactions in futures
contracts and options on futures contracts, under procedures
adopted by the Company’s Board of Directors. In order to use such affiliates,
the commission rates and other remuneration
paid to the affiliates must be fair and reasonable in comparison to those of
other broker-dealers for comparable transactions
involving similar securities being purchased or sold during a comparable time
period. This standard would allow the affiliated
broker or dealer to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker.
Pursuant
to an order issued by the SEC, the Company is permitted to engage in principal
transactions in money market instruments, subject
to certain conditions, with Morgan Stanley & Co. LLC, a broker-dealer
affiliated with the Company’s Adviser.
During
the fiscal years ended December 31, 2021,
2022 and 2023 the
Company did not effect any principal transactions with Morgan
Stanley & Co. LLC.
Brokerage
Commissions Paid
During
the fiscal years ended December 31, 2021,
2022 and 2023,
the Company paid brokerage commissions of approximately $1,006,489,
$875,536
and $598,487
respectively. During the fiscal years ended December 31, 2021,
2022 and 2023,
the Company paid
in the aggregate $378,
$1,713
and $0
respectively, as brokerage commissions to Morgan Stanley & Co. LLC and/or
its affiliated broker-dealers.
During the fiscal year ended December 31, 2023,
the brokerage commissions paid to Morgan Stanley & Co. LLC and/or
its affiliated broker-dealers represented approximately 0.00%
of the total brokerage commissions paid by the Company during the
period and were paid on account of transactions having an aggregate dollar value
equal to approximately 0.00%
of the aggregate dollar
value of all portfolio transactions of the Company during the period for which
commissions were paid.
For
the fiscal year ended December 31, 2023,
each
Fund paid brokerage commissions, including brokerage commissions paid to
affiliated
broker-dealers, as follows:
|
|
|
| |
|
Brokerage
Commissions Paid During Fiscal Year Ended December
31, 2023 |
|
|
Commissions
Paid to Morgan
Stanley & Co. LLC and/or its
affiliated broker-dealers |
Fund |
Total Commissions Paid |
Total Commissions |
Percent
of Total Commissions |
Percent
of Total Brokered Transactions |
Discovery |
$85,092 |
$0 |
0.00% |
0.00% |
Emerging
Markets Debt |
10,325 |
0 |
0.00% |
0.00% |
Emerging
Markets Equity |
117,205 |
0 |
0.00% |
0.00% |
Global
Infrastructure |
31,692 |
0 |
0.00% |
0.00% |
Global
Real Estate |
31,608 |
0 |
0.00% |
0.00% |
Global
Strategist |
2,165 |
0 |
0.00% |
0.00% |
Growth |
149,904 |
0 |
0.00% |
0.00% |
U.S.
Real Estate |
170,496 |
0 |
0.00% |
0.00% |
During
the fiscal years ended December 31, 2021
and December 31, 2022, the Fund
paid brokerage commissions, including brokerage
commissions paid to affiliated broker-dealers, as follows:
|
|
|
| |
|
Brokerage
Commissions Paid During Fiscal Years Ended December
31, 2021 and 2022 |
|
Fiscal
Year Ended December
31, 2021 |
Fiscal
Year Ended December
31, 2022 |
Fund |
Total |
Morgan
Stanley & Co.
LLC and/or its affiliated
broker-dealers |
Total |
Morgan
Stanley & Co.
LLC and/or its affiliated
broker-dealers |
Discovery |
$132,744 |
$0 |
$97,136 |
$0 |
Emerging
Markets Debt |
0 |
0 |
3,020 |
0 |
Emerging
Markets Equity |
171,197 |
0 |
143,921 |
0 |
Global
Infrastructure |
34,971 |
0 |
51,752 |
0 |
Global
Real Estate |
70,509 |
0 |
46,868 |
0 |
Global
Strategist |
24,354 |
378 |
16,449 |
0 |
Growth |
122,548 |
0 |
280,328 |
1,713 |
U.S.
Real Estate |
441,311 |
0 |
229,752 |
0 |
Regular
Broker-Dealers
During
the fiscal year ended December 31, 2023,
the following Funds
purchased securities issued by the following issuers, which issuers
were among the ten brokers or ten dealers that executed transactions for or with
the Company or the Fund in the largest dollar amounts
during the period:
| |
Fund |
Issuer |
Discovery |
None |
Emerging
Markets Debt |
None |
Emerging
Markets Equity |
None |
Global
Infrastructure |
None |
Global
Real Estate |
None |
Global
Strategist |
Bank
Of America Securities LLC Barclays
Bank PLC BNP
Paribas SA Citigroup
Global Markets, INC. Goldman
Sachs & Co. JP
Morgan Chase & Co. State
Street Bank & Trust Co. UBS
AG |
Growth |
None |
U.S.
Real Estate |
None |
At
December 31, 2023,
the following Funds held securities issued by such brokers or dealers with the
following market values:
|
| |
Fund |
Issuer |
Approximate
Market Value at
12/31/23 |
Global
Strategist |
JP
Morgan Chase & Co. |
$526,000 |
|
BNP
Paribas SA |
437,000 |
|
Bank
Of America Securities LLC |
350,000 |
|
Citigroup
Global Markets, INC. |
312,000 |
|
Goldman
Sachs & Co. |
187,000 |
|
UBS
AG |
76,000 |
|
Barclays
Bank PLC |
29,000 |
|
State
Street Bank & Trust Co. |
12,000 |
Portfolio
Turnover
The
Funds
generally do not invest for short-term trading purposes; however, when
circumstances warrant, each Fund may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher
or lower portfolio turnover rate than expected and the Funds
will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with their investment objectives and policies. A
high portfolio turnover rate (100% or more) increases
a Fund’s transaction costs (including brokerage commissions or dealer costs),
which would adversely impact
a Fund’s performance.
Higher portfolio turnover may result in the realization of more short-term
capital gains than if
a Fund had lower portfolio
turnover.
PERFORMANCE
INFORMATION
The
average annual compounded rates of return for the Class I shares of the Funds
for the 1-, 5- and 10-year periods ended December
31, 2023 and
for the period from inception through December 31, 2023
are as follows:
|
|
|
|
| |
Fund |
Inception
Date |
One
Year |
Average
Annual Five
Years |
Average
Annual Ten
Years |
Average
Annual Since
Inception |
Discovery |
10/18/99 |
44.34% |
10.94% |
8.49% |
7.61% |
Emerging
Markets Debt |
06/16/97 |
11.84% |
1.43% |
2.12% |
5.39% |
Emerging
Markets Equity |
10/01/96 |
11.97% |
3.41% |
1.84% |
4.88% |
Global
Infrastructure* |
03/01/90 |
4.55% |
6.86% |
5.25% |
7.58% |
Global
Strategist |
01/02/97 |
14.07% |
6.05% |
3.93% |
4.12% |
Growth |
01/02/97 |
48.66% |
11.22% |
11.90% |
9.77% |
U.S.
Real Estate |
03/03/97 |
14.52% |
2.92% |
4.52% |
7.75% |
The
average annual compounded rates of return for the Class II shares of the Funds
for the 1- and 5- and 10-year periods ended December
31, 2023 and
for the period from inception through December 31, 2023 are
as follows:
|
|
|
|
| |
Fund |
Inception
Date |
One
Year |
Average
Annual Five
Years |
Average
Annual Ten
Years |
Average
Annual Since
Inception |
Discovery |
05/05/03 |
44.13% |
10.83% |
8.38% |
10.87% |
Emerging
Markets Debt |
12/19/02 |
11.69% |
1.38% |
2.07% |
5.66% |
Emerging
Markets Equity |
01/10/03 |
11.96% |
3.36% |
1.79% |
7.62% |
Global
Infrastructure* |
06/05/00 |
4.27% |
6.55% |
4.98% |
4.75% |
Global
Real Estate |
04/28/06 |
10.47% |
0.30% |
1.69% |
2.47% |
Global
Strategist |
03/15/11 |
13.94% |
5.94% |
3.81% |
4.86% |
Growth |
05/05/03 |
48.32% |
10.95% |
11.62% |
11.34% |
U.S.
Real Estate |
11/05/02 |
14.22% |
2.66% |
4.26% |
7.87% |
* |
Performance
shown for the Global Infrastructure’s Class I and Class II shares reflects
the performance of the Class X and Class Y shares, respectively, of
Morgan
Stanley
Variable Investment Series—Global Infrastructure
Portfolio for
periods prior to April 28, 2014. |
The
respective current yields for certain of the Company’s Class I Funds for the
30-day period ended December 31, 2023 were
as follows:
| |
Fund |
30-Day
Yield |
Emerging
Markets Debt |
7.92% |
Global
Strategist |
1.88% |
The
respective current yields for certain of the Company’s Class II Funds for the
30-day period ended December 31, 2023 were
as follows:
| |
Fund |
30-Day
Yield |
Emerging
Markets Debt |
7.88% |
Global
Strategist |
1.78% |
DISCLOSURE
OF PORTFOLIO HOLDINGS
The
Company’s Board of Directors, the Adviser and the Sub-Advisers have adopted
policies and procedures regarding disclosure of portfolio
holdings (the “Policy”). Pursuant to the Policy, the Adviser and the
Sub-Advisers may disclose information concerning Company
portfolio holdings only if such disclosure is consistent with the antifraud
provisions of the federal securities laws and the Company’s,
the Adviser’s and the Sub-Advisers’ fiduciary duties to Company shareholders. In
no instance may the Adviser and the Sub-Advisers
or the Company receive compensation or any other consideration in connection
with the disclosure of information about
the Fund securities of the Company. Consideration includes any agreement to
maintain assets in the Company or in other investment
companies or accounts managed by the Adviser, the Sub-Advisers or by any
affiliated person of the Adviser or the Sub-Advisers.
Non-public information concerning portfolio holdings may be divulged to
third-parties only when the Company has a legitimate
business purpose for doing so and the recipients of the information are subject
to a duty of confidentiality. Under no circumstances
shall current or prospective Company shareholders receive non-public portfolio
holdings information, except as described
below.
The
Company makes available on its public website the following portfolio holdings
information:
■ |
complete
portfolio holdings information monthly, at least 15 calendar days after
the end of each month (except with respect to the
Discovery
and Growth Portfolios); |
■ |
complete
portfolio holdings information quarterly, at least 45 calendar days after
the end of each quarter (with respect to the Discovery
and Growth Portfolios); and |
■ |
top
10 holdings monthly, at least 15 calendar days after the end of each
month. |
The
Company provides a complete schedule of portfolio holdings for the second and
fourth fiscal quarters in its Semi-Annual and Annual
Reports, and for the first and third fiscal quarters in its filings with the SEC
as an exhibit to Form N-PORT.
The
Company may provide publicly, portfolio holdings information more frequently if
it has a legitimate business purpose for doing so.
All
other portfolio holdings information that has not been disseminated in a manner
making it available generally as described above is
non-public information for purposes of the Policy.
The
Company may make selective disclosure of non-public portfolio holdings
information pursuant to certain exemptions set forth in
the Policy. Third-parties eligible for exemptions under the Policy and therefore
eligible to receive such disclosures currently include clients/shareholders
(such as redeeming shareholders in-kind), fund rating agencies, information
exchange subscribers, proxy voting or
advisory services, pricing services, consultants and analysts, portfolio
analytics providers, transition managers and service providers, provided
that the third-party expressly agrees to maintain the disclosed information in
confidence and not to trade portfolio securities or
related derivative securities based on the non-public information. Non-public
portfolio holdings information may not be disclosed to
a third-party pursuant to an exemption unless and until the third-party
recipient has entered into a non-disclosure agreement with the
Company and the arrangement has been reviewed and approved, as set forth in the
Policy and discussed below. In addition, persons
who owe a duty of trust or confidence to the Company or the Adviser may receive
non-public portfolio holdings information without
entering into a non-disclosure agreement. Currently, these persons include (i)
the Funds’ independent registered public accounting
firm (as of the Company’s fiscal year-end and on an as needed basis), (ii)
counsel to the Company (on an as needed basis), (iii)
counsel to the Independent Directors (on an as needed basis) and (iv) members of
the Board of Directors (on an as needed basis). Subject
to the terms and conditions of any agreement between the Adviser or the Company
and the third-party recipient, if these conditions
for disclosure are satisfied, there shall be no restriction on the frequency
with which Company non-public portfolio holdings
information is released, and no lag period shall apply (unless otherwise
indicated below).
The
Adviser and the Sub-Advisers may provide interest lists to broker-dealers who
execute securities transactions for the Company without
entering into a non-disclosure agreement with the broker-dealers, provided that
the interest list satisfies all of the following criteria:
(1) the interest list must contain only the CUSIP numbers and/or ticker symbols
of securities held in all Morgan Stanley Funds
on an aggregate, rather than a fund-by-fund basis; (2) the interest list will
not disclose portfolio holdings on a fund-by-fund basis;
(3) the interest list must not contain information about the number or value of
shares owned by a specified Morgan Stanley Fund;
(4) the interest list may identify the investment strategy, but not the
particular Morgan Stanley Funds, to which the list relates; and
(5) the interest list may not identify the portfolio manager or team members
responsible for managing the Morgan Stanley Funds.
Company
shareholders may elect in some circumstances to redeem their shares of the
Company in exchange for their pro rata share of
the securities held by the Company. Under such circumstances, Company
shareholders may receive a complete listing of the holdings
of the Company up to seven calendar days prior to making the redemption request
provided that they represent in writing that
they agree not to disclose or trade on the basis of the portfolio holdings
information.
The
Company may discuss or otherwise disclose performance attribution analyses
(i.e., mention the effects of having a particular security
in the portfolio(s)) where such discussion is not contemporaneously made public,
provided that the particular holding has been
disclosed publicly or the information that includes such holding(s) has been
made available to shareholders requesting such information.
Additionally,
any discussion of the analyses may not be more current than the date the holding
was disclosed publicly or the information
that includes such holding(s) has been made available to shareholders requesting
such information.
The
Company may disclose portfolio holdings to transition managers, provided that
the Company has entered into a non-disclosure or
confidentiality agreement with the party requesting that the information be
provided to the transition manager and the party to the
non-disclosure agreement has, in turn, entered into a non-disclosure or
confidentiality agreement with the transition manager.
Portfolio
holdings information may be provided to broker-dealers, prime brokers, futures
commission merchants, or similar providers in
connection with the Company’s portfolio trading or operational processing
activities; such entities generally need access to such information
in the performance of their duties and responsibilities to fund service
providers and are subject to a duty of confidentiality,
including a duty not to trade on material nonpublic information, imposed by law
or contract. Portfolio holdings information
may also be provided to affiliates of MSIM pursuant to regulatory requirements
for legitimate business purposes, which
may
include risk management, or may be reported by the Company’s counterparties to
certain global trade repositories pursuant to regulatory
requirements.
The
Adviser, the Sub-Advisers, the Company and/or certain Funds currently have
entered into ongoing arrangements regarding the selective
disclosure of complete portfolio holdings information with the following
parties:
|
| |
Name |
Frequency1
|
Lag
Time |
Service
Providers |
|
|
State
Street Bank and Trust Company |
Daily
basis |
Daily |
BlackRock
Financial Management Inc.2
|
Daily
basis |
3
|
KellyCo
Marketing |
Monthly
basis and Quarterly basis |
Varying
lag times after the date of the information |
R.R.
Donnelley & Sons Company |
Monthly
basis and Quarterly basis |
Varying
lag times after the date of the information |
Toppan
Merill4
|
Semi-Annual
basis |
Approximately
15 business days after month end |
Commcise
Software Limited5
|
Monthly
basis |
Approximately
three business days |
Virtu
Financial5
|
Monthly
basis |
Approximately
three business days |
Fund
Rating Agencies |
|
|
Refinitiv
Lipper |
Monthly
basis |
Approximately
six business days after month end |
Portfolio
Analytics Providers |
|
|
Bloomberg
Finance, L.P. |
Daily
basis |
Daily |
FactSet
Research Systems, Inc. |
Daily
basis |
Daily |
BestX
Ltd. |
Daily
basis |
Daily |
Abel
Noser Solutions, LLC |
Daily
basis |
Daily |
MSCI
Inc.5
|
Daily
basis |
Daily |
1 |
Dissemination
of portfolio holdings information to entities listed above may occur less
frequently than indicated (or not at all). |
2 |
With
respect to Emerging
Markets Debt Portfolio
and
Global Strategist Portfolio only. |
3 |
Information
will typically be provided on a real time basis or as soon thereafter as
possible. |
4 |
With
respect to the Discovery and Growth Portfolios,
only. |
5 |
With
respect to Discovery Portfolio, Emerging Markets Equity Portfolio, Global
Infrastructure
Portfolio, Global Real Estate Portfolio, Global Strategist Portfolio,
Growth
Portfolio, U.S. Real Estate Portfolio, only. |
All
disclosures of non-public portfolio holdings information made to third-parties
pursuant to the exemptions set forth in the Policy must
be reviewed and approved by the Adviser, which will also determine from time to
time whether such third-parties should continue
to receive portfolio holdings information.
The
Adviser and the Sub-Advisers shall report quarterly to the Board of Directors
(or a designated committee thereof) at the next regularly
scheduled meeting (i) any material information concerning all parties receiving
non-public portfolio holdings information pursuant
to an exemption; and (ii) any new non-disclosure agreements entered into during
the reporting period. Procedures to monitor
the use of such non-public portfolio holdings information include requiring
annual certifications that the recipients have utilized
such information only pursuant to the terms of the agreement between the
recipient and the Adviser and, for those recipients receiving
information electronically, acceptance of the information will constitute
reaffirmation that the third party expressly agrees to
maintain the disclosed information in confidence and not to trade portfolio
securities based on the nonpublic information.
GENERAL
INFORMATION
Company
History
The
Company was incorporated pursuant to the laws of the State of Maryland on March
26, 1996 under the name Morgan Stanley Universal
Funds, Inc. The Company filed a registration statement with the SEC registering
itself as an open-end management investment
company offering diversified and non-diversified series under the 1940 Act and
its shares under the 1933 Act and commenced
operations on September 16, 1996. On December 1, 1998, the Company changed its
name to Morgan Stanley Dean Witter
Universal Funds, Inc. Effective May 1, 2000, the Company changed its name to The
Universal Institutional Funds, Inc. Effective
May 1, 2017, the Company changed its name to Morgan Stanley Variable Insurance
Fund, Inc.
Description
of Shares and Voting Rights
The
Company’s Articles of Incorporation, as amended, permit the Directors to issue
9.5 billion shares of common stock, par value $.001
per share, from an unlimited number of classes of shares. Currently the Company
consists of shares of 8
Funds. Each Fund (with
the exception of the Global Real
Estate Portfolio)
offers Class I shares. In addition, all Funds offer Class II
shares.
The
shares of each Fund of the Company, upon issuance, are fully paid
and nonassessable,
and have no preference as to conversion, exchange,
dividends, retirement or other features. The shares of each Fund of the Company
have no pre-emptive rights. The shares of
the
Company have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election
of Directors can elect 100% of the Directors if they choose to do so. A
shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Company.
Shares
of each Fund will be voted by the insurance company or qualified plans investing
in such Fund based on instructions received from
the contract holders having a voting interest in the underlying account. Shares
for which timely instructions are not received generally
will be voted by the insurance company or qualified plans in the same proportion
as shares for which instructions have been timely
received. Therefore, as a result of this proportional voting, the vote of a
small number of contract holders could determine the outcome
of a proposal subject to a shareholder vote.
Dividends
and Capital Gains Distributions
The
Company’s policy is to distribute at least annually substantially all of each
Fund’s net investment income, if any. The Company may
also distribute any net realized capital gains in the amount and at the times
that are intended to eliminate income (including taxable
gains) taxes imposed on the distributing Fund (see discussion under “Taxes” in
this SAI). However, the Company may also choose
to retain net realized capital gains and pay taxes on such gains. The amounts of
any income dividends or capital gains distributions
cannot be predicted. Any dividend or distribution paid shortly after the
purchase of shares of
a Fund by an investor may have
the effect of reducing the per share NAV of that Fund by the per share amount of
the dividend or distribution.
Independent
Registered Public Accounting Firm
Ernst
& Young LLP, located at 200 Clarendon Street, Boston, MA 02116,
serves as the Funds’ independent registered public accounting
firm and provides audit and audit-related services, tax-related services and
assistance in connection with various SEC filings.
Legal
Matters
Dechert
LLP, located at 1095 Avenue of the Americas, New York, NY 10036,
acts as the Company’s legal counsel.
POTENTIAL
CONFLICTS OF INTEREST
As
a diversified global financial services firm, Morgan Stanley, the parent company
of the Adviser, engages in a broad spectrum of activities,
including financial advisory services, investment management activities,
lending, commercial banking, sponsoring and managing
private investment funds, engaging in broker-dealer transactions and principal
securities, commodities and foreign exchange
transactions, research publication and other activities. In the ordinary course
of its business, Morgan Stanley is a full-service investment
banking and financial services firm and therefore engages in activities where
Morgan Stanley’s interests or the interests of its
clients may conflict with the interests of a Fund. Morgan Stanley advises
clients and sponsors, manages or advises other investment funds
and investment programs, accounts and businesses (collectively, together with
the Morgan Stanley Funds, any new or successor funds,
programs, accounts or businesses (other than funds, programs, accounts or
businesses sponsored, managed, or advised by former
direct or indirect subsidiaries of Eaton Vance Corp. (“Eaton Vance Investment
Accounts”)), the ‘‘MS Investment Accounts”, and,
together with the Eaton Vance Investment Accounts, the “Affiliated Investment
Accounts’’) with a wide variety of investment objectives
that in some instances may overlap or conflict with a Fund’s investment
objectives and present conflicts of interest. In addition,
Morgan Stanley or the Adviser may also from time to time create new or successor
Affiliated Investment Accounts that may compete
with a Fund and present similar conflicts of interest. The discussion below
enumerates certain actual, apparent and potential conflicts
of interest. There is no assurance that conflicts of interest will be resolved
in favor of Fund shareholders and, in fact, they may
not be. Conflicts of interest not described below may also exist.
The
discussions below with respect to actual, apparent and potential conflicts of
interest also may be applicable to or arise from the Eaton
Vance Investment Accounts whether or not specifically identified.
Material
Non-public and Other Information.
It is expected that confidential or material non-public information regarding an
investment
or potential investment opportunity may become available to the Adviser. If such
information becomes available, the Adviser
may be precluded (including by applicable law or internal policies or
procedures) from pursuing an investment or disposition opportunity
with respect to such investment or investment opportunity. The Adviser may also
from time to time be subject to contractual
‘‘stand-still’’ obligations and/or confidentiality obligations that may restrict
its ability to trade in certain investments on a Fund’s
behalf. In addition, the Adviser may be precluded from disclosing such
information to an investment team, even in circumstances
in which the information would be beneficial if disclosed. Therefore, the
investment team may not be provided access to
material non-public information in the possession of Morgan Stanley that might
be relevant to an investment decision to be made on
behalf of a Fund, and the investment team may initiate a transaction or sell an
investment that, if such information had been known
to it, may not have been undertaken. In addition, certain members of the
investment team may be recused from certain investment-related
discussions so that such members do not receive information that would limit
their ability to perform functions of their
employment with the Adviser or its affiliates unrelated to that of a Fund.
Furthermore, access to certain parts of Morgan Stanley may
be subject to third party confidentiality obligations and to information
barriers established by Morgan Stanley in order to
manage
potential conflicts of interest and regulatory restrictions, including without
limitation joint transaction restrictions pursuant to
the 1940 Act. Accordingly, the Adviser’s ability to source investments from
other business units within Morgan Stanley may be limited
and there can be no assurance that the Adviser will be able to source any
investments from any one or more parts of the Morgan
Stanley network.
The
Adviser may restrict its investment decisions and activities on behalf of the
Funds in various circumstances, including because of applicable
regulatory requirements or information held by the Adviser or Morgan Stanley.
The Adviser might not engage in transactions
or other activities for, or enforce certain rights in favor of, a Fund due to
Morgan Stanley’s activities outside the Funds. In
instances where trading of an investment is restricted, the Adviser may not be
able to purchase or sell such investment on behalf of a
Fund, resulting in a Fund’s inability to participate in certain desirable
transactions. This inability to buy or sell an investment could have
an adverse effect on a Fund’s portfolio due to, among other things, changes in
an investment’s value during the period its trading
is restricted. Also, in situations where the Adviser is required to aggregate
its positions with those of other Morgan Stanley business
units for position limit calculations, the Adviser may have to refrain from
making investments due to the positions held by other
Morgan Stanley business units or their clients. There may be other situations
where the Adviser refrains from making an investment
due to additional disclosure obligations, regulatory requirements, policies, and
reputational risk, or the Adviser may limit purchases
or sales of securities in respect of which Morgan Stanley is engaged in an
underwriting or other distribution capacity.
Morgan
Stanley has established certain information barriers and other policies to
address the sharing of information between different businesses
within Morgan Stanley. As a result of information barriers, the Adviser
generally will not have access, or will have limited access,
to certain information and personnel in other areas of Morgan Stanley and
generally will not manage the Funds with the benefit
of the information held by such other areas. Morgan Stanley, due to its access
to and knowledge of funds, markets and securities
based on its prime brokerage and other businesses, may make decisions based on
information or take (or refrain from taking)
actions with respect to interests in investments of the kind held (directly or
indirectly) by the Funds in a manner that may be adverse
to the Fund, and will not have any obligation or other duty to share information
with the Adviser.
In
limited circumstances, however, including for purposes of managing business and
reputational risk, and subject to policies and procedures
and any applicable regulations, Morgan Stanley personnel, including personnel of
the Adviser, on one side of an information
barrier may have access to information and personnel on the other side of the
information barrier through “wall crossings.”
The Adviser faces conflicts of interest in determining whether to engage in such
wall crossings. Information obtained in connection
with such wall crossings may limit or restrict the ability of the Adviser to
engage in or otherwise effect transactions on behalf
of the Funds (including purchasing or selling securities that the Adviser may
otherwise have purchased or sold for a Fund in the
absence of a wall crossing). In managing conflicts of interest that arise
because of the foregoing, the Adviser generally will be subject
to fiduciary requirements. The Adviser may also implement internal information
barriers or ethical walls, and the conflicts described
herein with respect to information barriers and otherwise with respect to Morgan
Stanley and the Adviser will also apply internally
within the Adviser. As a result, a Fund may not be permitted to transact in
(e.g., dispose of a security in whole or in part) during
periods when it otherwise would have been able to do so, which could adversely
affect a Fund. Other investors in the security that
are not subject to such restrictions may be able to transact in the security
during such periods. There may also be circumstances in
which, as a result of information held by certain portfolio management teams in
the Adviser, the Adviser limits an activity or transaction
for a Fund, including if a Fund is managed by a portfolio management team other
than the team holding such information.
Investments
by Morgan Stanley and its Affiliated Investment Accounts.
In serving in multiple capacities to Affiliated Investment Accounts,
Morgan Stanley, including the Adviser and its investment teams, may have
obligations to other clients or investors in Affiliated
Investment Accounts, the fulfillment of which may not be in the best interests
of a Fund or its shareholders. The
Fund’s investment
objectives may overlap with the investment objectives of certain Affiliated
Investment Accounts. As a result, the members of
an investment team may face conflicts in the allocation of investment
opportunities among a Fund and other investment funds, programs,
accounts and businesses advised by or affiliated with the Adviser. Certain
Affiliated Investment Accounts may provide for higher
management or incentive fees or greater expense reimbursements or overhead
allocations, all of which may contribute to this conflict
of interest and create an incentive for the Adviser to favor such other
accounts.
Morgan
Stanley currently invests and plans to continue to invest on its own behalf and
on behalf of its Affiliated Investment Accounts
in a wide variety of investment opportunities globally. Morgan Stanley and its
Affiliated Investment Accounts, to the extent consistent
with applicable law and policies and procedures, will be permitted to invest in
investment opportunities without making such
opportunities available to a Fund beforehand. Subject to the foregoing, Morgan
Stanley may offer investments that fall into the investment
objectives of an Affiliated Investment Account to such account or make such
investment on its own behalf, even though such
investment also falls within a Fund’s investment objectives. A Fund may invest
in opportunities that Morgan Stanley and/or one or
more Affiliated Investment Accounts has declined, and vice versa. All of the
foregoing may reduce the number of investment opportunities
available to a Fund and may create conflicts of interest in allocating
investment opportunities. Investors should note that
the conflicts inherent in making such allocation decisions may not always be
resolved to a Fund’s advantage. There can be no assurance
that a Fund will have an opportunity to participate in certain opportunities
that fall within their investment objectives.
To
seek to reduce potential conflicts of interest and to attempt to allocate such
investment opportunities in a fair and equitable manner,
the Adviser has implemented allocation policies and procedures. These policies
and procedures are intended to give all clients
of the Adviser, including the Fund, fair access to investment opportunities
consistent with the requirements of organizational documents,
investment strategies, applicable laws and regulations, and the fiduciary duties
of the Adviser. Each client of the Adviser that
is subject to the allocation policies and procedures, including the
Fund, is assigned an investment team and portfolio manager(s) by
the Adviser. The investment team and portfolio managers review investment
opportunities and will decide with respect to the allocation
of each opportunity considering various factors and in accordance with the
allocation policies and procedures. The allocation
policies and procedures are subject to change. Investors should note that the
conflicts inherent in making such allocation decisions
may not always be resolved to the advantage of a Fund.
It
is possible that Morgan Stanley or an Affiliated Investment Account, including
another Morgan Stanley Fund, will invest in or advise
(in the case of Morgan Stanley) a company that is or becomes a competitor of a
company of which a Fund holds an investment.
Such investment could create a conflict between the Fund, on the one hand, and
Morgan Stanley or the Affiliated Investment
Account, on the other hand. In such a situation, Morgan Stanley may also have a
conflict in the allocation of its own resources
to the portfolio investment. Furthermore, certain Affiliated Investment Accounts
will be focused primarily on investing in other
funds which may have strategies that overlap and/or directly conflict and
compete with a
Fund.
In
addition, certain investment professionals who are involved in a Fund’s
activities remain responsible for the investment activities of other
Affiliated Investment Accounts managed by the Adviser and its affiliates, and
they will devote time to the management of such investments
and other newly created Affiliated Investment Accounts (whether in the form of
funds, separate accounts or other vehicles),
as well as their own investments. In addition, in connection with the management
of investments for other Affiliated Investment
Accounts, members of Morgan Stanley and its affiliates may serve on the boards
of directors of or advise companies which
may compete with a Fund’s portfolio investments. Moreover, these Affiliated
Investment Accounts managed by Morgan Stanley
and its affiliates may pursue investment opportunities that may also be suitable
for a Fund.
It
should be noted that Morgan Stanley may, directly or indirectly, make large
investments in certain of its Affiliated Investment Accounts,
and accordingly Morgan Stanley’s investment in a Fund may not be a determining
factor in the outcome of any of the foregoing
conflicts. Nothing herein restricts or in any way limits the activities of
Morgan Stanley, including its ability to buy or sell interests
in, or provide financing to, equity and/or debt instruments, funds or portfolio
companies, for its own accounts or for the accounts
of Affiliated Investment Accounts or other investment funds or clients in
accordance with applicable law.
Different
clients of the Adviser, including a Fund, may invest in different classes of
securities of the same issuer, depending on the respective
clients’ investment objectives and policies. As a result, the Adviser and its
affiliates, at times, will seek to satisfy fiduciary obligations
to certain clients owning one class of securities of a particular issuer by
pursuing or enforcing rights on behalf of those clients
with respect to such class of securities, and those activities may have an
adverse effect on another client which owns a different class
of securities of such issuer. For example, if one client holds debt securities
of an issuer and another client holds equity securities of
the same issuer, if the issuer experiences financial or operational challenges,
the Adviser and its affiliates may seek a liquidation of the
issuer on behalf of the client that holds the debt securities, whereas the
client holding the equity securities may benefit from a reorganization
of the issuer. Thus, in such situations, the actions taken by the Adviser or its
affiliates on behalf of one client can negatively
impact securities held by another client. These conflicts also exist as between
the Adviser’s clients, including the Fund, and the
Affiliated Investment Accounts managed by Eaton Vance.
The
Adviser and its affiliates may give advice and recommend securities to other
clients which may differ from advice given to, or securities
recommended or bought for, a Fund even though such other clients’ investment
objectives may be similar to those of the Fund.
The
Adviser and its affiliates manage long and short portfolios. The simultaneous
management of long and short portfolios creates conflicts
of interest in portfolio management and trading in that opposite directional
positions may be taken in client accounts, including
client accounts managed by the same investment team, and creates risks such as:
(i) the risk that short sale activity could adversely
affect the market value of long positions in one or more portfolios (and vice
versa) and (ii) the risks associated with the trading
desk receiving opposing orders in the same security simultaneously. The Adviser
and its affiliates have adopted policies and procedures
that are reasonably designed to mitigate these conflicts. In certain
circumstances, the Adviser invests on behalf of itself in securities
and other instruments that would be appropriate for, held by, or may fall within
the investment guidelines of its clients, including
a Fund. At times, the Adviser may give advice or take action for its own
accounts that differs from, conflicts with, or is adverse
to advice given or action taken for any client.
From
time to time, conflicts also arise due to the fact that certain securities or
instruments may be held in some client accounts, including
a Fund, but not in others, or that client accounts may have different levels of
holdings in certain securities or instruments. In
addition, due to differences in the investment strategies or restrictions among
client accounts, the Adviser may take action with respect
to one account that differs from the action taken with respect to another
account. In some cases, a client account may compensate
the Adviser based on the performance of the securities held by that account. The
existence of such a performance based
fee
may create additional conflicts of interest for the Adviser in the allocation of
management time, resources and investment opportunities.
The Adviser has adopted several policies and procedures designed to address
these potential conflicts including a code of
ethics and policies that govern the Adviser’s trading practices, including,
among other things, the aggregation and allocation of trades
among clients, brokerage allocations, cross trades and best
execution.
In
addition, at times an investment team will give advice or take action with
respect to the investments of one or more clients that is not
given or taken with respect to other clients with similar investment programs,
objectives, and strategies. Accordingly, clients with similar
strategies will not always hold the same securities or instruments or achieve
the same performance. The Adviser’s investment teams
also advise clients with conflicting programs, objectives or strategies. These
conflicts also exist as between the Adviser’s clients, including
the Fund, and the Affiliated Investment Accounts managed by Eaton
Vance.
Morgan
Stanley and its affiliates maintain separate trading desks that operate
independently of each other and do not share information
with the Adviser. The Morgan Stanley and affiliate trading desks may compete
against the Adviser trading desks when implementing
buy and sell transactions, possibly causing certain Affiliated Investment
Accounts to pay more or receive less for a security
than other Affiliated Investment Accounts.
Investments
by Separate Investment Departments.
The entities and individuals that provide investment-related services for the
Fund
and certain other MS Investment Accounts (the “MS Investment Department”) may be
different from the entities and individuals
that provide investment-related services to Eaton Vance Investment Accounts (the
“Eaton Vance Investment Department”
and, together with the MS Investment Department, the “Investment Departments”).
Although Morgan Stanley has implemented
information barriers between the Investment Departments in accordance with
internal policies and procedures, each Investment
Department may engage in discussions and share information and resources with
the other Investment Department on certain
investment-related matters. The sharing of information and resources between the
Investment Departments is designed to further
increase the knowledge and effectiveness of each Investment Department. Because
each Investment Department generally makes
investment decisions and executes trades independently of the other, the quality
and price of execution, and the performance of
investments and accounts, can be expected to vary. In addition, each Investment
Department may use different trading systems and
technology and may employ differing investment and trading strategies. As a
result, an Eaton Vance Investment Account could trade
in advance of the Fund (and vice versa), might complete trades more quickly and
efficiently than the Fund, and/or achieve different
execution than the Fund on the same or similar investments made
contemporaneously, even when the Investment Departments
shared research and viewpoints that led to that investment decision. Any sharing
of information or resources between the
Investment Department servicing the Fund and the Eaton Vance Investment
Department may result, from time to time, in the Fund
simultaneously or contemporaneously seeking to engage in the same or similar
transactions as an account serviced by the other Investment
Department and for which there are limited buyers or sellers on specific
securities, which could result in less favorable execution
for the Fund than such Affiliated Investment Account. The MS Investment
Department will not knowingly or intentionally
cause the Fund to engage in a cross trade with an account serviced by the Eaton
Vance Investment Department, however,
subject to applicable law and internal policies and procedures, the Fund may
conduct cross trades with other accounts serviced
by the MS Investment Department. Although the MS Investment Department may
aggregate the Fund’s trades with trades of
other accounts serviced by the MS Investment Department, subject to applicable
law and internal policies and procedures, there will
be no aggregation or coordination of trades with accounts serviced by the Eaton
Vance Investment Department, even when both Investment
Departments are seeking to acquire or dispose of the same investments
contemporaneously.
Payments
to Broker-Dealers and Other Financial Intermediaries.
The Adviser and/or the Distributor may pay compensation, out of
their own funds and not as an expense of the Fund, to certain Financial
Intermediaries (which may include affiliates of the Adviser and
the Distributor), including recordkeepers and administrators of various deferred
compensation plans, in connection with the sale, distribution,
marketing and retention of shares of the Fund and/or shareholder servicing. For
example, the Adviser or the Distributor may
pay additional compensation to a Financial Intermediary for, among other things,
promoting the sale and distribution of Fund shares,
providing access to various programs, mutual fund platforms or preferred or
recommended mutual fund lists that may be offered
by a Financial Intermediary, granting the Distributor access to a Financial
Intermediary’s financial advisors and consultants, providing
assistance in the ongoing education and training of a Financial Intermediary’s
financial personnel, furnishing marketing support,
maintaining share balances and/or for sub-accounting, recordkeeping,
administrative, shareholder or transaction processing services.
Such payments are in addition to any distribution fees, shareholder servicing
fees and/or transfer agency fees that may be payable
by the Fund. The additional payments may be based on various factors, including
level of sales (based on gross or net sales or some
specified minimum sales or some other similar criteria related to sales of the
Fund and/or some or all other Morgan Stanley Funds),
amount of assets invested by the Financial Intermediary’s customers (which could
include current or aged assets of the Fund and/or
some or all other Morgan Stanley Funds), the
Fund’s advisory fee, some other agreed upon amount or other measures as
determined
from time to time by the Adviser and/or the Distributor. The amount of these
payments may be different for different Financial
Intermediaries.
The
prospect of receiving, or the receipt of, additional compensation, as described
above, by Financial Intermediaries may provide such
Financial Intermediaries and their financial advisors and other salespersons
with an incentive to favor sales of shares of the Fund
over
other investment options with respect to which these Financial Intermediaries do
not receive additional compensation (or receives
lower levels of additional compensation). These payment arrangements, however,
will not change the price that an investor pays
for shares of the Fund or the amount that the Fund receives to invest on behalf
of an investor. Investors may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to Fund shares and should review
carefully any disclosures provided by Financial Intermediaries as to their
compensation.
In
addition, in certain circumstances, the Adviser restricts, limits or reduces the
amount of the Fund’s investment, or restricts the type of
governance or voting rights it acquires or exercises, where the Fund
(potentially together with Morgan Stanley) exceeds a certain ownership
interest, or possesses certain degrees of voting or control or has other
interests.
Morgan
Stanley Trading and Principal Investing Activities.
Notwithstanding anything to the contrary herein, Morgan Stanley will
generally conduct its sales and trading businesses, publish research and
analysis, and render investment advice without regard for a
Fund’s holdings, although these activities could have an adverse impact on the
value of one or more of the Fund’s investments, or could
cause Morgan Stanley to have an interest in one or more portfolio investments
that is different from, and potentially adverse to that
of a Fund. Furthermore, from time to time, the Adviser or its affiliates may
invest “seed” capital in a Fund, typically to enable the
Fund to commence investment operations and/or achieve sufficient scale. The
Adviser and its affiliates may hedge such seed capital
exposure by investing in derivatives or other instruments expected to produce
offsetting exposure. Such hedging transactions, if
any, would occur outside of a Fund.
Morgan
Stanley’s sales and trading, financing and principal investing businesses
(whether or not specifically identified as such, and including
Morgan Stanley’s trading and principal investing businesses) will not be
required to offer any investment opportunities to a Fund.
These businesses may encompass, among other things, principal trading activities
as well as principal investing.
Morgan
Stanley’s sales and trading, financing and principal investing businesses have
acquired or invested in, and in the future may acquire
or invest in, minority and/or majority control positions in equity or debt
instruments of diverse public and/or private companies.
Such activities may put Morgan Stanley in a position to exercise contractual,
voting or creditor rights, or management or other
control with respect to securities or loans of portfolio investments or other
issuers, and in these instances Morgan Stanley may, in
its discretion and subject to applicable law, act to protect its own interests
or interests of clients, and not a Fund’s interests.
Subject
to the limitations of applicable law, a Fund may purchase from or sell assets
to, or make investments in, companies in which Morgan
Stanley has or may acquire an interest, including as an owner, creditor or
counterparty.
Morgan
Stanley’s Investment Banking and Other Commercial Activities.
Morgan Stanley advises clients on a variety of mergers, acquisitions,
restructuring, bankruptcy and financing transactions. Morgan Stanley may act as
an advisor to clients, including other investment
funds that may compete with a Fund and with respect to investments that a Fund
may hold. Morgan Stanley may give advice
and take action with respect to any of its clients or proprietary accounts that
may differ from the advice given, or may involve an
action of a different timing or nature than the action taken, by a Fund. Morgan
Stanley may give advice and provide recommendations
to persons competing with a Fund and/or any of a Fund’s investments that are
contrary to the Fund’s best interests and/or
the best interests of any of its investments.
Morgan
Stanley could be engaged in financial advising, whether on the buy-side or
sell-side, or in financing or lending assignments that
could result in Morgan Stanley’s determining in its discretion or being required
to act exclusively on behalf of one or more third parties,
which could limit a Fund’s ability to transact with respect to one or more
existing or potential investments. Morgan Stanley may
have relationships with third-party funds, companies or investors who may have
invested in or may look to invest in portfolio companies,
and there could be conflicts between a Fund’s best interests, on the one hand,
and the interests of a Morgan Stanley client or
counterparty, on the other hand.
To
the extent that Morgan Stanley advises creditor or debtor companies in the
financial restructuring of companies either prior to or after
filing for protection under Chapter 11 of the U.S. Bankruptcy Code or similar
laws in other jurisdictions, the Adviser’s flexibility
in making investments in such restructurings on a Fund’s behalf may be
limited.
Morgan
Stanley could provide investment banking services to competitors of portfolio
companies, as well as to private equity and/or private
credit funds; such activities may present Morgan Stanley with a conflict of
interest vis-a-vis a Fund’s investment and may also result
in a conflict in respect of the allocation of investment banking resources to
portfolio companies.
To
the extent permitted by applicable law, Morgan Stanley may provide a broad range
of financial services to companies in which a Fund
invests, including strategic and financial advisory services, interim
acquisition financing and other lending and underwriting or placement
of securities, and Morgan Stanley generally will be paid fees (that may include
warrants or other securities) for such services.
Morgan Stanley will not share any of the foregoing interest, fees and other
compensation received by it (including, for the avoidance
of doubt, amounts received by the Adviser) with a Fund, and any advisory fees
payable will not be reduced thereby.
Morgan
Stanley may be engaged to act as a financial advisor to a company in connection
with the sale of such company, or subsidiaries
or divisions thereof, may represent potential buyers of businesses through its
mergers and acquisition activities and may
provide
lending and other related financing services in connection with such
transactions. Morgan Stanley’s compensation for such activities
is usually based upon realized consideration and is usually contingent, in
substantial part, upon the closing of the transaction.
Under these circumstances, a Fund may be precluded from participating in a
transaction with or relating to the company being
sold or participating in any financing activity related to merger or
acquisition.
The
involvement or presence of Morgan Stanley in the investment banking and other
commercial activities described above (or the financial
markets more broadly) may restrict or otherwise limit investment opportunities
that may otherwise be available to the Fund. For
example, issuers may hire and compensate Morgan Stanley to provide underwriting,
financial advisory, placement agency, brokerage
services or other services and, because of limitations imposed by applicable law
and regulation, a Fund may be prohibited from
buying or selling securities issued by those issuers or participating in related
transactions or otherwise limited in its ability to engage
in such investments.
Morgan
Stanley’s Marketing Activities.
Morgan Stanley is engaged in the business of underwriting, syndicating,
brokering, administering,
servicing, arranging and advising on the distribution of a wide variety of
securities and other investments in which a Fund
may invest. Subject to the restrictions of the 1940 Act, including Sections
10(f) and 17(e) thereof, a Fund may invest in transactions
in which Morgan Stanley acts as underwriter, placement agent, syndicator,
broker, administrative agent, servicer, advisor, arranger
or structuring agent and receives fees or other compensation from the sponsors
of such products or securities. Any fees earned
by Morgan Stanley in such capacity will not be shared with the Adviser or the
Fund. Certain conflicts of interest, in addition to
the receipt of fees or other compensation, would be inherent in these
transactions. Moreover, the interests of one of Morgan Stanley’s
clients with respect to an issuer of securities in which a Fund has an
investment may be adverse to the Adviser’s or a Fund’s best
interests. In conducting the foregoing activities, Morgan Stanley will be acting
for its other clients and will have no obligation to act
in the Adviser’s or a Fund’s best interests.
Client
Relationships.
Morgan Stanley has existing and potential relationships with a significant
number of corporations, institutions and
individuals. In providing services to its clients, Morgan Stanley may face
conflicts of interest with respect to activities recommended
to or performed for such clients, on the one hand, and a Fund, its shareholders
or the entities in which the Fund invests,
on the other hand. In addition, these client relationships may present conflicts
of interest in determining whether to offer certain
investment opportunities to a Fund.
In
acting as principal or in providing advisory and other services to its other
clients, Morgan Stanley may engage in or recommend activities
with respect to a particular matter that conflict with or are different from
activities engaged in or recommended by the Adviser
on a Fund’s behalf.
Principal
Investments.
To the extent permitted by applicable law, there may be situations in which a
Fund’s interests may conflict with
the interests of one or more general accounts of Morgan Stanley and its
affiliates or accounts managed by Morgan Stanley or its affiliates.
This may occur because these accounts hold public and private debt and equity
securities of many issuers which may be or become
portfolio companies, or from whom portfolio companies may be
acquired.
Transactions
with Portfolio Companies of Affiliated Investment Accounts.
The companies in which the
Fund may invest may be counterparties
to or participants in agreements, transactions or other arrangements with
portfolio companies or other entities of portfolio
investments of Affiliated Investment Accounts (for example, a company in which
the
Fund invests may retain a company in which
an Affiliated Investment Account invests to provide services or may acquire an
asset from such company or vice versa). Certain of
these agreements, transactions and arrangements involve fees, servicing
payments, rebates and/or other benefits to Morgan Stanley or
its affiliates. For example, portfolio entities may, including at the
encouragement of Morgan Stanley, enter into agreements regarding
group procurement and/or vendor discounts. Morgan Stanley and its affiliates may
also participate in these agreements and may
realize better pricing or discounts as a result of the participation of
portfolio entities. To the extent permitted by applicable law, certain
of these agreements may provide for commissions or similar payments and/or
discounts or rebates to be paid to a portfolio entity
of an Affiliated Investment Account, and such payments or discounts or rebates
may also be made directly to Morgan Stanley or
its affiliates. Under these arrangements, a particular portfolio company or
other entity may benefit to a greater degree than the other
participants, and the Morgan Stanley Funds, investment vehicles and accounts
(which may or may not include the
Fund) that own
an interest in such entity will receive a greater relative benefit from the
arrangements than the Morgan Stanley Funds, investment
vehicles or accounts that do not own an interest therein. Fees and compensation
received by portfolio companies of Affiliated
Investment Accounts in relation to the foregoing will not be shared with
the
Fund or offset advisory fees payable.
Investments
in Portfolio Investments of Other Funds.
To the extent permitted by applicable law, when the
Fund invests in certain companies
or other entities, other funds affiliated with the Adviser may have made or may
be making an investment in such companies
or other entities. Other funds that have been or may be managed by the Adviser
may invest in the companies or other entities
in which the
Fund has made an investment. Under such circumstances, the
Fund and such other funds may have conflicts of interest
(e.g., over the terms, exit strategies and related matters, including the
exercise of remedies of their respective investments). If the
interests held by the
Fund are different from (or take priority over) those held by such other funds,
the Adviser may be required to
make a selection at the time of conflicts between the interests held by such
other funds and the interests held by the
Fund.
Allocation
of Expenses.
Expenses may be incurred that are attributable to the
Fund and one or more other Affiliated Investment Accounts
(including in connection with issuers in which the
Fund and such other Affiliated Investment Accounts have overlapping investments).
The allocation of such expenses among such entities raises potential conflicts
of interest. The Adviser and its affiliates intend
to allocate such common expenses among the
Fund and any such other Affiliated Investment Accounts on a pro rata basis or
in
such other manner as the Adviser deems to be fair and equitable or in such other
manner as may be required by applicable law.
Temporary
Investments.
To more efficiently invest short-term cash balances held by the
Fund, the Adviser may invest such balances on
an overnight “sweep” basis in shares of one or more money market funds or other
short-term vehicles. It is anticipated that the investment
adviser to these money market funds or other short-term vehicles may be the
Adviser (or an affiliate) to the extent permitted
by applicable law, including Rule 12d1-1 under the 1940 Act. In such a case, the
affiliated investment adviser may receive asset-based
fees in respect of the
Fund’s investment (which will reduce the net return realized by the
Fund).
Transactions
with Affiliates.
The Adviser and any investment sub-adviser might purchase securities from
underwriters or placement agents
in which a Morgan Stanley affiliate is a member of a syndicate or selling group,
as a result of which an affiliate might benefit from
the purchase through receipt of a fee or otherwise. Neither the Adviser nor any
investment sub-adviser will purchase securities on
behalf of the
Fund from an affiliate that is acting as a manager of a syndicate or selling
group. Purchases by the Adviser on behalf of
the
Fund from an affiliate acting as a placement agent must meet the requirements of
applicable law. Furthermore, Morgan Stanley
may face conflicts of interest when the
Fund uses service providers affiliated with Morgan Stanley because Morgan
Stanley receives
greater overall fees when they are used.
General
Process for Potential Conflicts.
All of the transactions described above involve the potential for conflicts of
interest between
the Adviser, related persons of the Adviser and/or their clients. The Advisers
Act, the 1940 Act and ERISA impose certain requirements
designed to decrease the possibility of conflicts of interest between an
investment adviser and its clients. In some cases, transactions
may be permitted subject to fulfillment of certain conditions. Certain other
transactions may be prohibited. In addition, the
Adviser has instituted policies and procedures designed to prevent conflicts of
interest from arising and, when they do arise, to ensure
that it effects transactions for clients in a manner that is consistent with its
fiduciary duty to its clients and in accordance with applicable
law. The Adviser seeks to ensure that potential or actual conflicts of interest
are appropriately resolved taking into consideration
the overriding best interests of the client.
FINANCIAL
STATEMENTS
APPENDIX
A — MORGAN STANLEY INVESTMENT MANAGEMENT EQUITY PROXY VOTING POLICY
AND PROCEDURES
I.
GENERAL PROXY VOTING GUIDELINES
Morgan
Stanley Investment Management (“MSIM”) and its affiliates1
will vote proxies in a prudent and diligent manner and in the best
interests of clients in accordance with their fiduciary duties, including
beneficiaries of and participants in a client’s benefit plan(s) for
which MSIM manages assets, consistent with the objective of maximizing long-term
investment returns (“Client Proxy Standard”)
and this Policy.2
MSIM
has a decentralized approach towards investment management, consisting of
independent investment teams. Accordingly, this Policy
serves as guidance for MSIM investment teams addressing a broad range of
issues, and general voting parameters on proposals that
arise most frequently.
MSIM
investment teams endeavor to integrate this Policy with their investment goals
and client expectations, using their vote to encourage
portfolio companies to enhance long-term shareholder value and to provide a high
standard of transparency such that equity
markets can value corporate assets appropriately.
As
such, MSIM investment teams seek to follow the Client Proxy Standard for
each client. At times, this may result in split votes, for example
when different vehicles/products and clients have varying economic interests and
/ or priorities reflected in their mandates with
respect to the outcome of a particular voting matter.
Voting
Proxies for Certain Non-U.S. Companies
Voting
proxies
of companies located in some jurisdictions may involve several problems that can
restrict or prevent the ability to vote such
proxies or entail significant costs. These problems include, but are not limited
to: (i) proxy statements and ballots being written in
a language other than English; (ii) untimely and/or inadequate notice of
shareholder meetings; (iii) restrictions on the ability of holders
outside the issuer’s jurisdiction of organization to exercise votes; (iv)
requirements to vote proxies in person; (v) the imposition
of restrictions on the sale of the securities for a period of time in proximity
to the shareholder meeting; and (vi) requirements
to provide local agents with power of attorney to facilitate our voting
instructions. As a result, we vote clients’ non-U.S. proxies
on a best efforts basis only, after weighing the costs and benefits of voting
such proxies, consistent with the Client Proxy Standard.
Institutional
Shareholder Services (“ISS”)
has been retained to provide assistance in connection with voting non-U.S.
proxies.
Securities
Lending
MS
Funds or any other investment vehicle sponsored, managed or advised by
an MSIM affiliate may participate in a securities lending
program through a third party provider. The voting rights for shares that are
out on loan are transferred to the borrower and therefore,
the lender (i.e., an MS Fund or another investment vehicle sponsored, managed or
advised by an MSIM affiliate) is not entitled
to vote the lent shares at the company meeting.
However,
in certain circumstances a portfolio manager may seek to recall shares for the
purposes of voting. In this event, the handling
of such recall requests would be on a best efforts basis.
1 |
The
MSIM entities covered by this Equity Proxy Voting Policy and Procedures
(the “Policy”) currently include the following: Morgan Stanley AIP GP LP,
Morgan
Stanley Investment Management Inc., Morgan Stanley Investment Management
Limited, Morgan Stanley Investment Management Company, Morgan Stanley
Saudi Arabia, MSIM Fund Management (Ireland) Limited, Morgan Stanley Asia
Limited, Morgan Stanley Investment Management (Japan) Co. Limited,
Morgan
Stanley Investment Management Private Limited, Morgan Stanley Eaton Vance
CLO Manager LLC, Morgan Stanley Eaton Vance CLO CM LLC and FundLogic
SAS (each an “MSIM Affiliate” and collectively referred to as the “MSIM
Affiliates” or as “we” below). |
2 |
This
Policy does not apply to MSIM’s authority to exercise certain
decision-making rights associated with investments in loans and other
fixed-income instruments (collectively,
“Fixed Income Instruments”). Instead, MSIM’s Policy for Exercising
Consents Related to Fixed Income Instruments applies to MSIM’s exercise of
discretionary
authority or other investment management services, to the extent MSIM has
been granted authority to exercise consents for an account with respect
to
any Fixed Income Instruments held therein. |
A.
Routine Matters.
We
generally support routine management proposals. The following are examples of
routine management proposals:
■ |
Approval
of financial statements and auditor reports if delivered with an
unqualified auditor’s opinion. |
■ |
General
updating/corrective amendments to the charter, articles of association or
bylaws, unless we believe that such amendments
would diminish shareholder rights. |
■ |
Most
proposals related to the conduct of the annual meeting, with the following
exceptions. We generally oppose proposals that relate
to “the transaction of such other business which may come before the
meeting,” and open-ended requests for adjournment.
However, where management specifically states the reason for requesting an
adjournment and the requested adjournment
would facilitate passage of a proposal that would otherwise be supported
under this Policy (i.e., an uncontested corporate
transaction), the adjournment request will be supported. We do not support
proposals that allow companies to call a special
meeting with a short (generally two weeks or less) time frame for
review. |
We
generally support shareholder proposals advocating confidential voting
procedures and independent tabulation of voting results.
MSIM
is supportive of the use of technology to conduct virtual shareholder meetings
in parallel with physical meetings, for increased investor
participation. However, adoption of a ‘virtual-only’ approach would restrict
meaningful exchange between the company and shareholders.
Therefore, MSIM is generally not supportive of proposals seeking authority to
conduct virtual-only shareholder meetings.
B.
Board of Directors.
1 |
Election
of Directors:
Votes on board nominees can involve balancing a variety of considerations.
In vote decisions, we may take into
consideration whether the company has a majority voting policy in place
that we believe makes the director vote more meaningful.
In the absence of a proxy contest, we generally support the board’s
nominees for director except as follows: |
a) |
We
consider withholding support from or voting against a nominee if we
believe a direct conflict exists between the interests
of the nominee and the public shareholders, including failure to meet
fiduciary standards of care and/or loyalty. We
may oppose directors where we conclude that actions of directors are
unlawful, unethical or negligent. We consider opposing
individual board members or an entire slate if we believe the board is
entrenched and/or dealing inadequately with
performance problems; if we believe the board is acting with insufficient
independence between the board and management;
or if we believe the board has not been sufficiently forthcoming with
information on key governance or other matters
we believe could be financially material. |
b) |
We
consider withholding support from or voting against interested directors
if the company’s board does not meet market standards
for director independence, or if otherwise we believe board independence
is insufficient. We refer to prevalent market
standards as promulgated by a stock exchange or other authority within a
given market (e.g., New York Stock Exchange
or Nasdaq rules for most U.S. companies, and The Combined Code on
Corporate Governance in the United Kingdom).
Thus, for an NYSE company with no controlling shareholder, we would expect
that at a minimum a majority of
directors should be independent as defined by NYSE. Where we view market
standards as inadequate, we may withhold votes
based on stronger independence standards. Market standards
notwithstanding, we generally do not view long board tenure
alone as a basis to classify a director as
non-independent. |
i) |
At
a company with a shareholder or group that controls the company by virtue
of a majority economic interest in the company,
we have a reduced expectation for board independence, although we believe
the presence of independent directors
can be helpful, particularly in staffing the audit committee, and at times
we may withhold support from or vote
against a nominee on the view the board or its committees are not
sufficiently independent. In markets where board
independence is not the norm,
however, we consider factors including whether a board of a controlled
company
includes independent members who can be expected to look out for interests
of minority holders. |
ii) |
We
consider withholding support from or voting against a nominee if he or she
is affiliated with a major shareholder that
has representation on a board disproportionate to its economic
interest. |
c) |
Depending
on market standards, we consider withholding support from or voting
against a nominee who is interested and who
is standing for election as a member of the company’s
compensation/remuneration, nominating/governance or audit committee. |
d) |
We
consider withholding support from or voting against nominees if the term
for which they are nominated is excessive. We
consider this issue on a market-specific basis. |
e) |
We
consider withholding support from or voting against nominees if in our
view there has been insufficient board renewal (turnover),
particularly in the context of extended poor company performance. Also, if
the board has failed to consider diversity,
including but not limited to, gender and ethnicity, in its board
composition. |
f) |
We
consider withholding support from or voting against a nominee standing for
election if the board has not taken action to
implement generally accepted governance practices for which there is a
“bright line” test. For example, in the context of the
U.S. market, failure to eliminate a dead hand or slow hand poison pill
would be seen as a basis for opposing one or more
incumbent nominees. |
g) |
In
markets that encourage designated audit committee financial experts, we
consider voting against members of an audit committee
if no members are designated as such. We also consider voting against the
audit committee members if the company
has faced financial reporting issues and/or does not put the auditor up
for ratification by shareholders. |
h) |
We
believe investors should have the ability to vote on individual nominees,
and may abstain or vote against a slate of nominees
where we are not given the opportunity to vote on individual
nominees. |
i) |
We
consider withholding support from or voting against a nominee who has
failed to attend at least 75% of the nominee’s board
and board committee meetings within a given year without a reasonable
excuse. We also consider opposing nominees
if the company does not meet market standards for disclosure on
attendance. |
j) |
We
consider withholding support from or voting against a nominee who appears
overcommitted, particularly through |
| service
on an excessive number of boards. Market expectations are incorporated
into this analysis; for U.S. boards, we generally
oppose election of a nominee who serves on more than four
public company boards (excluding investment companies),
or public company CEOs that serve on more than two outside boards given
the level of time commitment required
in their primary job. |
k) |
We
consider withholding support from or voting against a nominee where we
believe executive remuneration practices are poor,
particularly if the company does not offer shareholders a separate
“say-on-pay” advisory vote on pay. |
2 |
Discharge
of Directors’
Duties:
In markets where an annual discharge of directors’ responsibility is a
routine agenda item, we generally
support such discharge. However, we may vote against discharge or abstain
from voting where there are serious findings
of fraud or other unethical behavior for which the individual bears
responsibility. The annual discharge of responsibility represents
shareholder approval of disclosed actions taken by the board during the
year and may make future shareholder action against
the board difficult to pursue. |
3 |
Board
Independence:
We generally support U.S. shareholder proposals requiring that a certain
percentage (up to 66⅔%) of the company’s
board members be independent directors, and promoting all-independent
audit, compensation and nominating/governance
committees. |
4 |
Board
Diversity:
We believe that board diversity is a potentially financially material
issue. As such we
generally support shareholder
proposals urging diversity of board membership with respect to gender,
race or other factors where we believe the board
has failed to take these factors into account. We will also consider not
supporting the re-election of the nomination committee
and/or chair (or other resolutions when the nomination chair is not up for
re- election) where we perceive limited progress
in gender diversity, with the expectation where feasible and with
consideration of any idiosyncrasies of individual markets,
that female directors represent not less than a third of the board, unless
there is evidence that the company has made significant
progress in this area. In markets where information on director ethnicity
is available, and it is legal to obtain it, and where
it is relevant, we will generally also consider not supporting the
re-election of the nomination committee chair (or other resolutions
when the nomination chair is not up for re-election) if the board lacks
ethnic diversity and has not outlined a credible
diversity strategy. |
5 |
Majority
Voting:
We generally support proposals requesting or requiring majority voting
policies in election of directors, so long as
there is a carve-out for plurality voting in the case of contested
elections. |
6 |
Proxy
Access:
We consider proposals on procedures for inclusion of shareholder nominees
and to have those nominees included in
the company’s proxy statement and on the company’s proxy ballot on a
case-by-case basis. Considerations include ownership thresholds,
holding periods, the number of directors that shareholders may nominate
and any restrictions on forming a group. |
7 |
Reimbursement
for Dissident
Nominees:
We generally support well-crafted U.S. shareholder proposals that would
provide for reimbursement
of dissident nominees elected to a board, as the cost to shareholders in
electing such nominees can be factored into
the voting decision on those nominees. |
8 |
Proposals
to Elect
Directors More Frequently:
In the U.S. public company context, we usually support shareholder and
management
proposals to elect all directors annually (to “declassify” the board),
although we make an exception to this policy where
we believe that long-term shareholder value may be harmed by this change
given particular circumstances at the company at
the time of the vote on such proposal. As indicated above, outside the
United States, we generally support greater accountability
to shareholders that comes through more frequent director elections, but
recognize that many markets embrace longer
term lengths, sometimes for valid reasons given other aspects of the legal
context in electing boards. |
9 |
Cumulative
Voting:
We generally support proposals to eliminate cumulative voting in the U.S.
market context. (Cumulative voting
provides that shareholders may concentrate their votes for one or a
handful of candidates, a system that can enable a minority
bloc to place representation on a board.) U.S. proposals to establish
cumulative voting in the election of directors generally
will not be supported. |
10 |
Separation
of Chairman and CEO Positions:
We vote on shareholder proposals to separate the Chairman and CEO
positions and/or
to appoint an independent Chairman based in part on prevailing practice in
particular markets, since the context for such
a practice varies. In many non-U.S. markets, we view separation of the
roles as a market standard practice, and support division
of the roles in that context. In the United States, we consider such
proposals on a case-by-case basis, considering, among
other things, the existing board leadership structure, company
performance, and any evidence of entrenchment or perceived
risk that power is overly concentrated in a single
individual. |
11 |
Director
Retirement
Age and Term Limits:
Proposals setting or recommending director retirement ages or director
term limits are
voted on a case-by-case basis that includes consideration of company
performance, the rate of board renewal, evidence of effective
individual director evaluation processes, and any indications of
entrenchment. |
12 |
Proposals
to Limit
Directors’ Liability
and/or Broaden
Indemnification of Officers and Directors:
Generally, we will support such
proposals provided that an individual is eligible only if he or she has
not acted in bad faith, with gross negligence or with reckless
disregard of their duties. |
C.
Statutory Auditor Boards.
The
statutory auditor board, which is separate from the main board of directors,
plays a role in corporate governance in several markets.
These boards are elected by shareholders to provide assurance on compliance with
legal and accounting standards and the company’s
articles of association. We generally vote for statutory auditor nominees if
they meet independence standards. In markets that
require disclosure on attendance by internal statutory auditors, however, we
consider voting against nominees for these positions who
failed to attend at least 75% of meetings in the previous year. We also consider
opposing nominees if the company does not meet
market standards for disclosure on attendance.
D.
Corporate Transactions and Proxy Fights.
We
examine proposals relating to mergers, acquisitions and other special corporate
transactions (i.e., takeovers, spin-offs, sales of assets,
reorganizations, restructurings and recapitalizations) on a case-by-case basis
in the interests of each fund or other account. Proposals
for mergers or other significant transactions that are friendly and approved by
the Research Providers usually are supported if
there is no portfolio manager objection. We also analyze proxy contests on a
case-by-case basis.
E.
Changes in Capital Structure.
1 |
We
generally support the following: |
■ |
Management
and shareholder proposals aimed at eliminating unequal voting rights,
assuming fair economic treatment of classes
of shares we hold. |
■ |
U.S.
management proposals to increase the authorization of existing classes of
common stock (or securities convertible into common
stock) if: (i) a clear business purpose is stated that we can support and
the number of shares requested is reasonable
in relation to the purpose for which authorization is requested; and/or
(ii) the authorization does not exceed 100%
of shares currently authorized and at least 30% of the total new
authorization will be outstanding. (We consider proposals
that do not meet these criteria on a case-by-case
basis.) |
■ |
U.S.
management proposals to create a new class of preferred stock or for
issuances of preferred stock up to 50% of issued capital,
unless we have concerns about use of the authority for anti-takeover
purposes. |
■ |
Proposals
in non-U.S. markets that in our view appropriately limit potential
dilution of existing shareholders. A major consideration
is whether existing shareholders would have preemptive rights for any
issuance under a proposal for standing share
issuance authority. We generally consider market-specific guidance in
making these decisions; for example, in the U.K.
market we usually follow Association of British Insurers’ (“ABI”)
guidance, although company-specific factors may be considered
and for example, may sometimes lead us to voting against share
authorization proposals even if they meet ABI guidance. |
■ |
Management
proposals to authorize share repurchase plans, except in some cases in
which we believe there are insufficient protections
against use of an authorization for anti-takeover
purposes. |
■ |
Management
proposals to reduce the number of authorized shares of common or preferred
stock, or to eliminate classes of preferred
stock. |
■ |
Management
proposals to effect stock splits. |
■ |
Management
proposals to effect reverse stock splits if management proportionately
reduces the authorized share amount set
forth in the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount generally
will be approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for
common stock increases. |
■ |
Management
dividend payout proposals, except where we perceive company payouts to
shareholders as inadequate. |
2 |
We
generally oppose the following (notwithstanding management
support): |
■ |
Proposals
to add classes of stock that would substantially dilute the voting
interests of existing shareholders. |
■ |
Proposals
to increase the authorized or issued number of shares of existing classes
of stock that are unreasonably dilutive, particularly
if there are no preemptive rights for existing shareholders. However,
depending on market practices, we consider
voting for proposals giving general authorization for issuance of shares
not subject to preemptive rights if the authority
is limited. |
■ |
Proposals
that authorize share issuance at a discount to market rates, except where
authority for such issuance is de minimis,
or if there is a special situation that we believe justifies such
authorization (as may be the case, for example, at a company
under severe stress and risk of
bankruptcy). |
■ |
Proposals
relating to changes in capitalization by 100% or
more. |
We
consider on a case-by-case basis shareholder proposals to increase dividend
payout ratios, in light of market practice and perceived market
weaknesses, as well as individual company payout history and current
circumstances. For example, currently we perceive low
payouts
to shareholders as a concern at some Japanese companies, but may deem a low
payout ratio as appropriate for a growth company
making good use of its cash, notwithstanding the broader market
concern.
F.
Takeover Defenses and Shareholder Rights.
1 |
Shareholder
Rights
Plans:
We generally support proposals to require shareholder approval or
ratification of shareholder rights plans
(poison pills). In voting on rights plans or similar takeover defenses, we
consider on a case-by-case basis whether the company
has demonstrated a need for the defense in the context of promoting
long-term share value; whether provisions of the defense
are in line with generally accepted governance principles in the market
(and specifically the presence of an adequate qualified
offer provision that would exempt offers meeting certain conditions from
the pill); and the specific context if the proposal
is made in the midst of a takeover bid or contest for
control. |
2 |
Supermajority Voting
Requirements:
We generally oppose requirements for supermajority votes to amend the
charter or bylaws, unless
the provisions protect minority shareholders where there is a large
shareholder. In line with this view, in the absence of a large
shareholder we support reasonable shareholder proposals to limit such
supermajority voting requirements. Also, we oppose provisions
that do not allow shareholders any right to amend the charter or
bylaws. |
3 |
Shareholders
Right
to Call a Special Meeting:
We consider proposals to enhance a shareholder’s rights to call meetings
on a case-by-case
basis. At large-cap U.S. companies, we generally support efforts to
establish the right of holders of 10% or more of shares
to call special meetings, unless the board or state law has set a policy
or law establishing such rights at a threshold that we believe
to be acceptable. |
4 |
Written
Consent
Rights:
In the U.S. context, we examine proposals for shareholder written consent
rights on a case-by-case basis. |
5 |
Reincorporation:
We consider management and shareholder proposals to reincorporate to a
different jurisdiction on a case-by-case
basis. We oppose such proposals if we believe the main purpose is to take
advantage of laws or judicial precedents that reduce
shareholder rights. |
6 |
Anti-greenmail
Provisions:
Proposals relating to the adoption of anti-greenmail provisions will be
supported, provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders (holders of at least 1% of the outstanding shares
and in certain cases, a greater amount) not made to all shareholders or
not approved by disinterested shareholders; and (iii)
contains no anti-takeover measures or other provisions restricting the
rights of shareholders. |
7 |
Bundled
Proposals:
We may consider opposing or abstaining on proposals if disparate issues
are “bundled” and presented for a single
vote. |
G.
Auditors.
We
generally support management proposals for selection or ratification of
independent auditors. However, we may consider opposing
such proposals with reference to incumbent audit firms if the company has
suffered from serious accounting irregularities and
we believe rotation of the audit firm is appropriate, or if fees paid to the
auditor for non-audit-related services are excessive. Generally,
to determine if non-audit fees are excessive, a 50% test will be applied (i.e.,
non-audit-related fees should be less than 50% of
the total fees paid to the auditor). We generally vote against proposals to
indemnify auditors.
H.
Executive and Director Remuneration.
1 |
We
generally support the following: |
■ |
Proposals
for employee equity compensation plans and other employee ownership plans,
provided that our research does not
indicate that approval of the plan would be against shareholder interest.
Such approval may be against shareholder interest
if it authorizes excessive dilution and shareholder cost, particularly in
the context of high usage (“run rate”) of equity
compensation in the recent past; or if there are objectionable plan design
and provisions. |
■ |
Proposals
relating to fees to outside directors, provided the amounts are not
excessive relative to other companies in the country
or industry, and provided that the structure is appropriate within the
market context. While stock-based compensation
to outside directors is positive if moderate and appropriately structured,
we are wary of significant stock option
awards or other performance-based awards for outside directors, as well as
provisions that could result in significant forfeiture
of value on a director’s decision to resign from a board (such forfeiture
can undercut director independence). |
■ |
Proposals
for employee stock purchase plans that permit discounts, but only for
grants that are part of a broad-based employee
plan, including all non-executive employees, and only if the discounts are
limited to a reasonable market standard
or less. |
■ |
Proposals
for the establishment of employee retirement and severance plans, provided
that our research does not indicate that
approval of the plan would be against shareholder
interest. |
2 |
We
generally oppose retirement plans and bonuses for non-executive directors
and independent statutory auditors. |
3 |
In
the U.S. context, we generally vote against shareholder proposals
requiring shareholder approval of all severance agreements, but
we generally support proposals that require shareholder approval for
agreements in excess of three times the annual compensation
(salary and bonus) or proposals that require companies to adopt a
provision requiring an executive to receive accelerated
vesting of equity awards if there is a change of control and the executive
is terminated. We generally oppose shareholder
proposals that would establish arbitrary caps on pay. We consider on a
case-by-case basis shareholder proposals that seek
to limit Supplemental Executive Retirement Plans (SERPs), but support such
shareholder proposals where we consider SERPs
excessive. |
4 |
Shareholder
proposals advocating stronger and/or particular pay-for-performance models
will be evaluated on a case-by-case basis,
with consideration of the merits of the individual proposal within the
context of the particular company and its labor markets,
and the company’s current and past practices. While we generally support
emphasis on long-term components of senior
executive pay and strong linkage of pay to performance, we consider
factors including whether a proposal may be overly prescriptive,
and the impact of the proposal, if implemented as written, on recruitment
and retention. |
5 |
We
generally support proposals advocating reasonable senior executive and
director stock ownership guidelines and holding requirements
for shares gained in executive equity compensation
programs. |
6 |
We
generally support shareholder proposals for reasonable “claw-back”
provisions that provide for company recovery of senior executive
bonuses to the extent they were based on achieving financial benchmarks
that were not actually met in light of subsequent
restatements. |
7 |
Management
proposals effectively to re-price stock options are considered on a
case-by-case basis. Considerations include the company’s
reasons and justifications for a re-pricing, the company’s competitive
position, whether senior executives and outside directors
are excluded, potential cost to shareholders, whether the re-pricing or
share exchange is on a value-for-value basis, and whether
vesting requirements are extended. |
8 |
Say-on-Pay:
We consider proposals relating to an advisory vote on remuneration on a
case-by-case basis. Considerations include a
review of the relationship between executive remuneration and performance
based on operating trends and total shareholder return
over multiple performance periods. In addition, we review remuneration
structures and potential poor pay practices, including
relative magnitude of pay, discretionary bonus awards, tax gross ups,
change-in-control features, internal pay equity and
peer group construction. As long-term investors, we support remuneration
policies that align with long-term shareholder returns. |
I.
Social and Environmental Issues.
Shareholders in the United States and certain other markets submit proposals
encouraging changes
in company disclosure and practices related to particular social and
environmental matters. Relevant
social and environmental
issues, including principal adverse sustainability impacts, may
influence long-term
risk and return. Consequently,
investment
teams may consider
how to vote on proposals related to social and environmental issues on a
case-by-case basis by determining
the extent
to which they believe the
social and environmental issues identified in the proposal could
impact
shareholder value.
In reviewing proposals on such
issues, investment teams may consider the financial materiality, including the
company’s exposure
to the risk or opportunity, the management of such issues and
a company’s current disclosures.
In assessing and prioritizing proposals,
we carefully reflect on the potential financial materiality of the issues as
well as the sector and geography in which the company
operates. We also consider the explanation companies provide where they may
depart from best practice to assess the adequacy
and appropriateness of measures that are in place. Investment teams
may
seek to balance concerns on reputational,
operational,
litigation
and other risks that lie behind a proposal against costs of implementation,
while considering appropriate shareholder
and management prerogatives. Investment
teams
may abstain from voting on proposals that do not have a readily determinable
financial impact on shareholder value and may
oppose proposals that intrude excessively on management prerogatives
and/or
board discretion. Investment
teams may
generally vote against proposals requesting reports or actions they
believe are duplicative,
related to matters not considered
by the investment team to be financially material
to the business, or that would impose unnecessary
or excessive costs. We consider proposals on these sustainability risks,
opportunities and impacts on a case-by-case basis but
generally support proposals that seek to enhance useful disclosure. We focus on
understanding the company’s business and commercial
context and recognise that there is no one size fits all that can apply to all
companies.
Environmental Issues
We
generally support proposals that, if implemented, would enhance useful
disclosure
on climate, biodiversity, and other environmental
risks,
such as disclosures aligned with SASB (Sustainability Accounting Standards
Board) and the TCFD (Task Force on
Climate-related Financial Disclosures)
for companies for which such issues may be financially material.
We also generally support proposals
that aim to ensure
companies communicate credibly on their commitments to manage reputational
risks. As such, we generally
support proposals that aim to encourage companies to use independently verified
Science Based Targets to ensure emissions are
in line with the Paris Agreement on Climate Change, which should ultimately help
companies who seek to manage long-term climate-related
risks do so in a way that remains credible.
We generally will support reasonable proposals to reduce negative environmental
impacts and ameliorate a company’s overall environmental footprint, including
any threats to biodiversity in ecologically
sensitive areas. We generally will also support proposals asking companies to
report on their environmental practices,
policies
and impacts, including environmental damage and health risks resulting from
operations, and the impact of environmental liabilities
on shareholder value.
Social Issues
We
generally support proposals that, if implemented, would enhance useful
disclosure on employee and board diversity, including gender,
race, and other factors,
for companies where such issues could be considered by the investment teams as
financially material.
We
consider proposals on other social issues on a case-by-case basis but generally
support proposals that:
■ |
Seek
to enhance useful disclosure or improvements on material issues such as
human rights risks, supply chain management, workplace
safety, human capital management and pay equity in line with local
rules. |
■ |
Encourage
policies to eliminate gender-based violence and other forms of harassment
from the workplace. |
■ |
Seek
disclosure of relevant diversity policies and meaningful workforce
diversity data, including EEO-1 data. |
We
consider proposals on other social issues on a case-by-case basis but generally
support proposals that: Seek to enhance transparency
through disclosures on supply chain management, particularly in cases where this
is a financially material risk.
We
may consider withholding support where we have material concerns in relation to
a company’s involvement/remediation of a breach
of global conventions such as UN Global Compact Principles on Human Rights,
Labour Standards, Environment and Business
Malpractice.
J.
Funds of Funds.
Certain MS Funds advised by an MSIM Affiliate invest only in other MS Funds. If
an underlying fund has a shareholder
meeting, in order to avoid any potential conflict of interest, such proposals
will be voted in the same proportion as the votes
of the other shareholders of the underlying fund, unless otherwise determined by
the Proxy Review Committee. In markets where
proportional voting is not available we will not vote at the meeting, unless
otherwise determined by the Proxy Review Committee.
Other MS Funds invest in unaffiliated funds. If an unaffiliated underlying fund
has a shareholder meeting and the MS Fund
owns more than 25% of the voting shares of the underlying fund, the MS Fund will
vote its shares in the unaffiliated underlying
fund in the same proportion as the votes of the other shareholders of the
underlying fund to the extent possible.
Voting
Conditions Triggered Under Rule 12d1-4
Rule
12d1-4 sets forth the conditions under which a registered fund (“acquiring
fund”) may invest in excess of the statutory limits of Section
12(d)(1) of the 1940 Act (for example by owning more than 3% of the total
outstanding voting stock) in another registered fund
(“acquired fund”). In the event that a Morgan Stanley “acquiring fund” invests
in an “acquired fund” in reliance on Rule 12d1-4
under the 1940 Act, and the MS Fund and its “advisory group” (as defined in Rule
12d1-4) hold more than (i) 25% of the total outstanding
voting stock of a particular open-end fund (including ETFs) or (ii) 10% of the
total outstanding voting stock of a particular
closed-end fund, the Morgan Stanley “acquiring fund” and its “advisory group”
will be required to vote all shares of the open-
or closed-end fund held by the fund and its “advisory group” in the same
proportion as the votes of the other shareholders of the
open- or closed-end fund.
Because
MSIM and Eaton Vance are generally considered part of the same “advisory
group,”
an Eaton Vance “acquiring fund” that is required
to comply with the voting conditions set forth in Rule 12d1-4 could potentially
implicate voting conditions for a MS Fund invested
in the same open- or closed-end fund as the Eaton Vance “acquiring
fund.”
The Committee will be notified by Compliance if
the conditions are triggered for a particular open- or closed-end fund holding
in an MS Fund. In the event that the voting conditions
in Rule 12d1-4 are triggered, please refer to the Morgan Stanley Funds Fund of
Funds Investment Policy for specific information
on Rule 12d1-4 voting requirements and exceptions.
II.
ADMINISTRATION OF THE POLICY
The
MSIM Proxy Review Committee (the “Committee”) has overall responsibility for the
Policy. The Committee consists of investment
professionals who represent the different investment disciplines and geographic
locations of MSIM, and is chaired by the director
of the Global Stewardship Team (“GST”). Because proxy voting is an investment
responsibility and may affect shareholder value,
and because of their knowledge of companies and markets
as well as their understanding of their clients’ objectives,
portfolio managers
and other members of investment staff play a key role in proxy voting,
individual
investment teams are responsible for determining
decisions on proxy votes
and may, where relevant, consult the GST.
The GST administers and implements the Policy, as well
as monitoring services provided by the proxy advisory firms,
third-party proxy engagements
and other research providers used in the
proxy voting process.
As noted below, certain ETFs will follow Calvert’s Proxy Voting Policy and
Procedures, which is administered
by Calvert’s Proxy Voting and Engagement Department and overseen by Calvert’s
Proxy Voting and Engagement Committee.
The GST periodically monitors Calvert’s proxy voting with respect to securities
held by the ETFs.
The
GST Director is responsible for identifying issues that require Committee
deliberation or ratification. The GST, working with advice
of investment teams,
is responsible for voting on routine items and on matters that can be addressed
in line with these Policy guidelines.
The GST has responsibility for voting case-by-case where guidelines and
precedent provide adequate guidance.
The
Committee may periodically review and may
amend, as necessary, the Policy and establish and direct voting positions
consistent with
the Client Proxy Standard
following consultation and approval from the investment teams.
GST
and members of the Committee may take into account Research Providers’
recommendations and research as well as any other relevant
information they may request or receive, including portfolio manager and/or
analyst comments and research, as applicable. Generally,
proxies related to securities held in client accounts that are managed pursuant
to quantitative, index or index-like strategies (“Index
Strategies”) will be voted in the same manner as those held in actively managed
accounts, unless economic interests or investment
guidelines of the accounts differ. Because accounts managed using Index
Strategies are passively managed accounts, research
from portfolio managers and/or analysts related to securities held in these
accounts may not be available. If the affected securities
are held only in accounts that are managed pursuant to Index Strategies, and the
proxy relates to a matter that is not described
in this Policy, the GST will consider all available information from the
Research Providers, and to the extent that the holdings
are significant, from the portfolio managers and/or analysts.
A.
Committee Procedures
The
Committee meets at least quarterly, and reviews and considers changes to the
Policy at least annually. The
Committee will review
developing issues,
as appropriate, as
requested by the
GST.
B.
Material Conflicts of Interest
In
addition to the procedures discussed above, if the GST Director determines that
an issue raises a material conflict of interest, the GST
Director may request a special committee (“Special Committee”) to review, and
recommend a course of action with respect to, the
conflict(s) in question.
A
potential material conflict of interest could exist in the following situations,
among others:
1 |
The
issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and
the vote is on a matter that materially affects the issuer. |
2 |
The
proxy relates to Morgan Stanley common stock or any other security issued
by Morgan Stanley or its affiliates except if echo voting
is used, as with MS Funds, as described herein. |
3 |
Morgan
Stanley has a material pecuniary interest in the matter submitted for a
vote (e.g., acting as a financial advisor to a party to
a merger or acquisition for which Morgan Stanley will be paid a success
fee if completed). |
4 |
One
of Morgan Stanley’s independent directors or one of MS Funds’ directors
also serves on the board of directors or is a nominee
for election to the board of directors of a company held by an MS Fund or
affiliate. |
If
the GST Director determines that an issue raises a potential material conflict
of interest, depending on the facts and circumstances, the
issue will be addressed as follows:
1 |
If
the matter relates to a topic that is discussed in this Policy, the
proposal will be voted as per the Policy. |
2 |
If
the matter is not discussed in this Policy or the Policy indicates that
the issue is to be decided case-by-case, the proposal will be
voted in a manner consistent with the Research Providers, provided that
all the Research Providers consulted have the same recommendation,
no portfolio manager objects to that vote, and the vote is consistent with
MSIM’s Client Proxy Standard. |
3 |
If
the Research Providers’ recommendations differ, the GST Director will
refer the matter to a Special Committee to vote on the
proposal, as appropriate. |
Any
Special Committee shall be comprised of the GST Director, and at least two
portfolio managers (preferably members of the Committee),
as approved by the Committee. The GST Director may request non-voting
participation by MSIM’s General Counsel or
his/her designee and the Chief Compliance Officer or his/her designee. In
addition to the research provided by Research Providers, the
Special Committee may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems appropriate.
C.
Proxy Voting Reporting
The
GST will document in writing all Committee and Special Committee decisions and
actions, which documentation will be maintained
by the GST for a period of at least six years. To the extent these decisions
relate to a security held by an MS Fund, the GST
will report the decisions to each applicable Board of Trustees/Directors of
those MS Funds (the “Board”) at each Board’s next regularly
scheduled Board meeting. The report will contain information concerning
decisions made during the most recently ended calendar
quarter immediately preceding the Board meeting.
In
addition, to the extent that Committee and Special Committee decisions and
actions relate to a security held by other pooled investment
vehicles, the GST will report the decisions to the relevant governing board of
the pooled investment vehicle.
MSIM
will promptly provide a copy of this Policy to any client requesting it. MSIM
will also, upon client request, promptly provide a
report indicating how each proxy was voted with respect to securities held in
that client’s account.
MSIM’s
Legal Department, in conjunction with GST and GST IT for MS Fund reporting and
with the AIP investment team for AIP
Closed-End 40 Act Fund reporting, is responsible for filing an annual Form N-PX
on behalf of each MS Fund and AIP Closed-End
40 Act Fund for which such filing is required, indicating how all proxies were
voted with respect to each such fund’s holdings.
Also,
MSIM maintains voting records of individual agenda items a company meetings in a
searchable database on its website on a rolling
12-month basis.
In
addition, ISS provides vote execution, reporting and recordkeeping services to
MSIM.
D.
Retention and Oversight of Proxy Advisory Firms
ISS
and Glass Lewis (together with other proxy research providers as we may retain
from time to time, the “Research Providers”) are independent
advisers that specialize in providing a variety of fiduciary-level proxy-related
services to institutional investment managers,
plan sponsors, custodians, consultants, and other institutional investors. The
services provided include in-depth research, global
issuer analysis, record retention, ballot processing and voting
recommendations.
To
facilitate proxy voting MSIM has retained Research Providers to provide
company level reports that summarize key data elements contained
within an issuer’s proxy statement. Although we are aware of the voting
recommendations included in the Research Providers’
company level reports, these recommendations are not an input into our vote nor
is any potential vote prepopulated based on
a Research Provider’s research. MSIM votes all proxies based on its own proxy
voting policies, consultation with the investment teams,
and in the best interests of each client. In addition to research, MSIM retains
ISS to provide vote execution, reporting, and recordkeeping
services.
As
part of MSIM’s ongoing oversight of the Research Providers, MSIM performs
periodic due diligence on the Research Providers. Topics
of the reviews include, but are not limited to, conflicts of interest,
methodologies for developing their policies and vote recommendations,
and resources.
III. RECORDKEEPING
Records
are retained in accordance with Morgan Stanley’s Global Information Management
Policy, which establishes general Firm-wide
standards and procedures regarding the retention, handling, and destruction of
official books and records and other information of
legal or operational significance. The Global Information Management Policy
incorporates Morgan Stanley’s Master Retention Schedule,
which lists various record classes and associated retention periods on a global
basis.
Retention
and Oversight of Outsourced Proxy Voting
Certain MSIM
exchange-traded funds (“ETFs”) will follow Calvert Research and Management’s
(“Calvert”) Proxy Voting Policies and
Procedures and the Global Proxy Voting Guidelines set forth in Appendix A of the
Calvert Proxy Voting Policies and Procedures. MSIM’s
oversight of Calvert’s proxy voting engagement is ongoing pursuant to the 40 Act
Fund Service Provider and Vendor
Oversight Policy.
Policy
Statement
The
Policy, with respect to securities held in the accounts of clients applies to
those MSIM entities that provide discretionary investment
management services and for which an MSIM entity has authority to vote
proxies. For purposes of this Policy, clients shall
include: Morgan Stanley U.S. registered investment companies, other Morgan
Stanley pooled investment vehicles, and MSIM separately
managed accounts (including accounts for Employee Retirement Income Security
(“ERISA”) clients and ERISA-equivalent clients).
This Policy is reviewed and updated as necessary to address new and evolving
proxy voting issues and standards.
Each MSIM
Affiliate will use its best efforts to vote proxies as part of its authority to
manage, acquire and dispose of account assets.
−
With respect to the U.S. registered investment companies sponsored,
managed or advised by any MSIM Affiliate (the “MS Funds”),
each MSIM Affiliate will vote proxies under this Policy pursuant to authority
granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by the Board of
Directors/Trustees of the MS Funds.
−
For other pooled investment vehicles (e.g., UCITS), each MSIM Affiliate will
vote proxies under this Policy pursuant to authority granted
under its applicable investment advisory agreement or, in the absence of such
authority, as authorized by the relevant governing
board.
−
For separately managed accounts (including ERISA and ERISA-equivalent
clients), each MSIM Affiliate will vote proxies under this
Policy pursuant to authority granted under the applicable investment advisory
agreement or investment management agreement. Where
an MSIM Affiliate has the authority to vote proxies on behalf
of ERISA and ERISA equivalent clients, the MSIM Affiliate must
do so in accordance with its fiduciary duties under ERISA (and the Internal
Revenue Code).
−
In certain situations, a client or its fiduciary may reserve the authority to
vote proxies for itself or an outside party or may provide an MSIM
Affiliate with a statement of proxy voting policy. The MSIM Affiliate will
comply with the client’s policy.
−
Certain ETFs will follow Calvert’s Global Proxy Voting Guidelines set
forth in Appendix A of Calvert’s Proxy Voting Policies and Procedures
and the proxy voting guidelines discussed below do not apply to such ETFs. See
Appendix A of Calvert’s Proxy Voting Policies
and Procedures for a general discussion of the proxy voting guidelines to which
these ETFs will be subject.
An MSIM
Affiliate will not vote proxies unless the investment management agreement,
investment advisory agreement or other authority
explicitly authorizes the MSIM Affiliate to vote proxies.
In
addition to voting proxies of portfolio companies, MSIM routinely engages
with, or, in some cases, may engage a third party to engage
with, the management or board of companies in which we invest on a range of
environmental, social and governance issues. Governance
is a window into or proxy for management and board quality. MSIM engages
with companies where we have larger positions,
voting issues are material or where we believe we can make a positive impact on
the governance structure. MSIM’s engagement
process, through private communication with companies, allows us to understand
the governance structures at investee companies
and better inform our voting decisions. In certain situations, a client or its
fiduciary may provide an MSIM Affiliate with a proxy
voting policy. In these situations, the MSIM Affiliate will comply with
the client’s policy.
Approved
by the Board September 2015, September 27–28,
2016, September 27–28,
2017,October 3–4,
2018, September 24–25,
2019,
September 30
– October
1, 2020,
March 1-2, 2022,
December 7-8, 2022, March 1-2, 2023 and March 13-14, 2024.
APPENDIX
A
Appendix
A applies to the following accounts managed by Morgan Stanley AIP GP LP (i)
closed-end funds registered under the Investment
Company Act of 1940, as amended; (ii) discretionary separate accounts; (iii)
unregistered funds; and (iv) non-discretionary
accounts offered in connection with AIP’s Custom Advisory Portfolio Solutions
service.
Generally,
AIP will follow the guidelines set forth in Section II of MSIM’s Proxy Voting
Policy and Procedures. To the extent that such
guidelines do not provide specific direction, or AIP determines that consistent
with the Client Proxy Standard, the guidelines should
not be followed, the Proxy Review Committee has delegated the voting authority
to vote securities held by accounts managed by
AIP to the Fund of Hedge Funds investment team, the Private Markets investment
team or the Portfolio Solutions team of AIP. A summary
of decisions made by the applicable investment teams will be made available to
the Proxy Review Committee for its information
at the next scheduled meeting of the Proxy Review Committee.
In
certain cases, AIP may determine to abstain from determining (or recommending)
how a proxy should be voted (and therefore abstain
from voting such proxy or recommending how such proxy should be voted), such as
where the expected cost of giving due consideration
to the proxy does not justify the potential benefits to the affected account(s)
that might result from adopting or rejecting
(as the case may be) the measure in question.
Waiver
of Voting Rights
For
regulatory reasons, AIP may either 1) invest in a class of securities of an
underlying fund (the “Fund”) that does not provide for voting
rights; or 2) waive 100% of its voting rights with respect to the
following:
1 |
Any
rights with respect to the removal or replacement of a director, general
partner, managing member or other person acting in a
similar capacity for or on behalf of the Fund (each individually a
“Designated Person,” and collectively, the “Designated Persons”),
which may include, but are not limited to, voting on the election or
removal of a Designated Person in the event of such
Designated Person’s death, disability, insolvency, bankruptcy, incapacity,
or other event requiring a vote of interest holders of
the Fund to remove or replace a Designated Person;
and |
2 |
Any
rights in connection with a determination to renew, dissolve, liquidate,
or otherwise terminate or continue the Fund, which may
include, but are not limited to, voting on the renewal, dissolution,
liquidation, termination or continuance of the Fund upon
the occurrence of an event described in the Fund’s organizational
documents; provided,
however,
that, if the Fund’s organizational
documents require the consent of the Fund’s general partner or manager, as
the case may be, for any such termination
or continuation of the Fund to be effective, then AIP may exercise its
voting rights with respect to such matter. |
APPENDIX
B — DESCRIPTION OF RATINGS
Standard
& Poor’s Ratings Services
An
S&P Global Ratings issue credit rating is a forward-looking opinion about
the creditworthiness of an obligor with respect to a specific
financial obligation, a specific class of financial obligations, or a specific
financial program (including ratings on medium-term
note programs and commercial paper programs). It takes into consideration the
creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings’ view of the obligor’s capacity and
willingness to meet its financial commitments as they come
due, and this opinion may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the
event of default.
Issue
credit ratings can be either long-term or short-term. Short-term ratings are
generally assigned to those obligations considered short-term
in the relevant market. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features
on long-term obligations. Medium-term notes are assigned long-term
ratings.
I.
S&P’s Long-Term Issue Credit Ratings
AAA:
An obligation rated ‘AAA’ has the highest rating assigned by S&P Global
Ratings. The obligor’s capacity to meet its financial commitments
on the obligation is extremely strong.
AA:
An obligation rated ‘AA’ differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial
commitments on the obligation is very strong.
A:
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor’s capacity to meet
its financial commitments on the obligation is still
strong.
BBB:
An obligation rated ‘BBB’ exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances
are more likely to weaken the obligor’s capacity to meet its financial
commitments on the obligation.
BB;
B; CCC; CC; and C:
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having
significant speculative characteristics.
‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposure to adverse conditions.
BB:
An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions that could
lead to the obligor’s inadequate capacity to meet
its financial commitments on the obligation.
B:
An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated
‘BB’, but the obligor currently has the capacity to meet
its financial commitments on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s capacity
or willingness to meet its financial commitments on the obligation.
CCC:
An obligation rated ‘CCC’ is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the obligation.
In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitments on the obligation.
CC:
An obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The ‘CC’
rating is used when a default has not yet occurred
but S&P Global Ratings expects default to be a virtual certainty, regardless
of the anticipated time to default.
C: An
obligation rated ‘C’ is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority
or lower ultimate recovery compared with obligations that are rated
higher.
D: An
obligation rated ‘D’ is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category
is used when payments on an obligation are not made on the date due, unless
S&P Global Ratings believes that such payments
will be made within five business days in the absence of a stated grace period
or within the earlier of the stated grace period or
30 calendar days. The ‘D’ rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered
to ‘D’ if it is subject to a distressed exchange offer.
NR: Indicates
that a rating has not been assigned or is no longer assigned.
Note:
Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the
rating categories.
II.
S&P’s Short-Term Issue Credit Ratings
A-1:
A short-term obligation rated ‘A-1’ is rated in the highest category by S&P
Global Ratings. The obligor’s capacity to meet its financial
commitments on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates
that the obligor’s capacity to meet its financial commitments on these
obligations is extremely strong.
A-2:
A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse
effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the obligor’s
capacity to meet its financial commitments on
the obligation is satisfactory.
A-3:
A short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to weaken an obligor’s capacity to meet its financial
commitments on the obligation.
B:
A short-term obligation rated ‘B’ is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the
capacity to meet its financial commitments; however, it faces major ongoing
uncertainties that could lead to the obligor’s inadequate
capacity to meet its financial commitments.
C:
A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the
obligation.
D:
A short-term obligation rated ‘D’ is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the ‘D’ rating
category is used when payments on an obligation are not made on the date due,
unless S&P Global Ratings believes that such payments
will be made within any stated grace period. However, any stated grace period
longer than five business days will be treated as
five business days. The ‘D’ rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered
to ‘D’ if it is subject to a distressed exchange offer.
NR:
Indicates that a rating has not been assigned or is no longer
assigned.
III.
Municipal Short-Term Note Ratings
SP-1:
Strong capacity to pay principal and interest. An issue determined to possess a
very strong capacity to pay debt service is given a plus
(+) designation.
SP-2:
Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term
of the notes.
SP-3:
Speculative capacity to pay principal and interest.
D:
‘D’ is assigned upon failure to pay the note when due, completion of a
distressed exchange offer, or the filing of a bankruptcy petition
or the taking of similar action anywhere default on an obligation is a virtual
certainty, for example, due to automatic stay provisions.
Moody’s
Investors, Inc.
Ratings
assigned on Moody’s global long-term and short-term rating scales are
forward-looking opinions of the relative credit risks of financial
obligations issued by non-financial corporates, financial institutions,
structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations
with an original maturity of one year or more and reflect
both on the likelihood of a default on contractually promised payments and the
expected financial loss suffered in the event of default.
Short-term ratings are assigned to obligations with an original maturity of
thirteen months or less and reflect both on the likelihood
of a default on contractually promised payments and the expected financial loss
suffered in the event of default.
I.
Moody’s Global Long-Term Rating Scale
Aaa:
Obligations rated Aaa are judged to be of the highest quality, subject to the
lowest level of credit risk.
Aa:
Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk.
A:
Obligations rated A are judged to be upper-medium grade and are subject to low
credit risk.
Baa:
Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative
characteristics.
Ba:
Obligations rated Ba are judged to be speculative and are subject to substantial
credit risk.
B:
Obligations rated B are considered speculative and are subject to high credit
risk.
Caa:
Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
Ca:
Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and
interest.
C:
Obligations rated C are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic rating category.
Additionally, a “(hyb)” indicator is appended to all ratings
of hybrid securities issued by banks, insurers, finance companies, and
securities firms.
II.
Moody’s Global Short-Term Rating Scale
P-1:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
P-2:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to
repay short-term obligations.
NP:
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Fitch
Ratings Inc.
Fitch
Ratings’ credit ratings relating to issuers are an opinion on the relative
ability of an entity to meet financial commitments, such as
interest, preferred dividends, repayment of principal, insurance claims or
counterparty obligations. Credit ratings relating to securities
and obligations of an issuer can include a recovery expectation. Credit ratings
are used by investors as indications of the likelihood
of receiving the money owed to them in accordance with the terms on which they
invested. The agency’s credit ratings cover
the global spectrum of corporate, sovereign financial, bank, insurance, and
public finance entities (including supranational and sub-national
entities) and the securities or other obligations they issue, as well as
structured finance securities backed by receivables or other
financial assets.
I.
Fitch’s Long-Term Issuer Credit Rating Scale
AAA:
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of default
risk. They are assigned only in cases of exceptionally
strong capacity for payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable
events.
AA:
Very high credit quality. ‘AA’ ratings denote expectations of very low default
risk. They indicate very strong capacity for payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A:
High credit quality. ‘A’ ratings denote expectations of low default risk. The
capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to adverse business
or economic conditions than is the case for higher
ratings.
BBB:
Good credit quality. ‘BBB’ ratings indicate that expectations of default risk
are currently low. The capacity for payment of financial
commitments is considered adequate, but adverse business or economic conditions
are more likely to impair this capacity.
BB:
Speculative. ‘BB’ ratings indicate an elevated vulnerability to default risk,
particularly in the event of adverse changes in business or
economic conditions over time; however, business or financial flexibility exists
that supports the servicing of financial commitments.
B:
Highly speculative. ‘B’ ratings indicate that material default risk is present,
but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is vulnerable
to deterioration in the business and economic
environment.
CCC:
Substantial credit risk. Default is a real possibility.
CC:
Very high levels of credit risk. Default of some kind appears
probable.
C: Near
default. A default or default-like process has begun, or the issuer is in
standstill, or for a closed funding vehicle, payment capacity
is irrevocably impaired. Conditions that are indicative of a ‘C’ category rating
for an issuer include: a. the issuer has entered into
a grace or cure period following non-payment of a material financial obligation;
b. the issuer has entered into a temporary negotiated
waiver or standstill agreement following a payment default on a material
financial obligation; c. the formal announcement by
the issuer or their agent of a distressed debt exchange; d. a closed financing
vehicle where payment capacity is irrevocably impaired such
that it is not expected to pay interest and/or principal in full during the life
of the transaction, but where no payment default is imminent.
RD:
Restricted default. ‘RD’ ratings indicate an issuer that in Fitch’s
opinion has experienced: a. an uncured payment default or distressed
debt exchange on a bond, loan or other material financial obligation, but b. has
not entered into bankruptcy filings, administration,
receivership, liquidation, or other formal winding-up procedure, and c. has not
otherwise ceased operating. This would
include: i. the selective payment default on a specific class or currency of
debt; ii. the uncured expiry of any applicable grace period,
cure period or default forbearance period following a payment default on a bank
loan, capital markets security or other
material
financial obligation; iii. the extension of multiple waivers or forbearance
periods upon a payment default on one or more material
financial obligations, either in series or in parallel; ordinary execution of a
distressed debt exchange on one or more material financial
obligations.
D:
Default. ‘D’ ratings indicate an issuer that in Fitch’s opinion has
entered into bankruptcy filings, administration, receivership, liquidation
or other formal winding-up procedure or that has otherwise ceased
business.
Default
ratings are not assigned prospectively to entities or their obligations; within
this context, non-payment on an instrument that contains
a deferral feature or grace period will generally not be considered a default
until after the expiration of the deferral or grace period,
unless a default is otherwise driven by bankruptcy or other similar
circumstance, or by a distressed debt exchange.
Imminent
default, categorized under ‘C’, typically refers to the occasion where a payment
default has been intimated by the issuer and
is all but inevitable. This may, for example, be where an issuer has missed a
scheduled payment but (as is typical) has a grace period
during which it may cure the payment default. Another alternative would be where
an issuer has formally announced a distressed
debt exchange, but the date of the exchange still lies several days or weeks in
the immediate future.
In
all cases, the assignment of a default rating reflects the agency’s opinion as
to the most appropriate rating category consistent with the
rest of its universe of ratings and may differ from the definition of default
under the terms of an issuer’s financial obligations or local
commercial practice.
Note:
The modifiers “+” or “-“ may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not
added to ‘AAA’ ratings and ratings below the ‘CCC’ category.
II.
Fitch’s Short-Term Ratings Assigned to Issuers or Obligations in Corporate,
Public and Structure Finance
F1:
Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity
for timely payment of financial commitments; may have
an added “+” to denote any exceptionally strong credit feature.
F2:
Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of
financial commitments.
F3:
Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of
financial commitments is adequate.
B:
Speculative Short-Term Credit Quality. Minimal capacity for timely payment of
financial commitments, plus heightened vulnerability
to near term adverse changes in financial and economic conditions.
C:
High Short-Term Default Risk. Default is a real possibility.
RD:
Restricted Default. Indicates an entity that has defaulted on one or more of its
financial commitments, although it continues to meet
other financial obligations. Typically applicable to entity ratings
only.
D:
Default. Indicates a broad-based default event for an entity, or the default of
a short-term obligation.
Note: The
modifiers “+” or “-“ may be appended to a rating to denote relative status
within major rating categories. For the short-term
rating category of ‘F1’, a ‘+’ may be appended.
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