ck0000880268-20221031
March
1, 2023
American
Century Investments
Statement
of Additional Information
American
Century International Bond Funds
Emerging
Markets Debt Fund
Investor
Class (AEDVX)
I
Class (AEHDX)
Y
Class (AEYDX)
A
Class (AEDQX)
C
Class (AEDHX)
R
Class (AEDWX)
R5
Class (AEDJX)
R6
Class (AEXDX)
G
Class (AEDGX)
Global
Bond Fund
Investor
Class (AGBVX)
I
Class (AGBHX)
Y
Class (AGBWX)
A
Class (AGBAX)
C
Class (AGBTX)
R
Class (AGBRX)
R5
Class (AGBNX)
R6
Class (AGBDX)
G
Class (AGBGX)
International
Bond Fund
Investor
Class (BEGBX)
I
Class (AIBHX)
Y
Class (AIBYX)
A
Class (AIBDX)
C
Class (AIQCX)
R
Class (AIBRX)
R5
Class (AIDIX)
R6
Class (AIDDX)
G
Class (AIBGX)
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This
statement of additional information adds to the discussion in the funds’
prospectuses dated March 1, 2023, but is not a prospectus. The statement
of additional information should be read in conjunction with the funds’
current prospectuses. If you would like a copy of a prospectus, please
contact us at one of the addresses or telephone numbers listed on the back
cover or visit American Century Investments’ website at
americancentury.com.
This
statement of additional information incorporates by reference
certain
information that appears in the funds’ annual reports, which are delivered
to all investors. You may obtain a free copy of the funds’ annual reports
by calling 1-800-345-2021. |
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©2023
American Century Proprietary Holdings, Inc. All rights reserved.
American
Century International Bond Funds is a registered open-end management investment
company that was organized as a Massachusetts business trust in 1991 under the
name Benham International Funds. In October 1996, it changed its name to
American Century International Bond Funds. Throughout this statement of
additional information we refer to American Century International Bond Funds as
the trust. The trust’s fiscal year end was changed from December 31 to June 30
beginning on January 1, 2007. Beginning October 31, 2015, the trust changed its
fiscal year end from June 30 to October 31.
Each
fund described in this statement of additional information is a separate series
of the trust and operates for many purposes as if it were an independent
company. Each fund has its own investment objective, strategy, management team,
assets and tax identification and stock registration numbers.
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| Fund/Class |
Ticker
Symbol |
Inception
Date |
| Emerging
Markets Debt |
|
|
| Investor
Class |
AEDVX |
07/29/2014 |
| I
Class |
AEHDX |
04/10/2017 |
| Y
Class |
AEYDX |
04/10/2017 |
| A
Class |
AEDQX |
07/29/2014 |
| C
Class |
AEDHX |
07/29/2014 |
| R
Class |
AEDWX |
07/29/2014 |
| R5
Class |
AEDJX |
07/29/2014 |
| R6
Class |
AEXDX |
07/29/2014 |
| G
Class |
AEDGX |
11/14/2017 |
| Global
Bond |
|
|
| Investor
Class |
AGBVX |
01/31/2012 |
| I
Class |
AGBHX |
04/10/2017 |
| Y
Class |
AGBWX |
04/10/2017 |
| A
Class |
AGBAX |
01/31/2012 |
| C
Class |
AGBTX |
01/31/2012 |
| R
Class |
AGBRX |
01/31/2012 |
| R5
Class |
AGBNX |
01/31/2012 |
| R6
Class |
AGBDX |
07/26/2013 |
| G
Class |
AGBGX |
07/28/2017 |
| International
Bond |
|
|
| Investor
Class |
BEGBX |
01/07/1992 |
| I
Class |
AIBHX |
04/10/2017 |
| Y
Class |
AIBYX |
04/10/2017 |
| A
Class |
AIBDX |
10/27/1998 |
| C
Class |
AIQCX |
09/28/2007 |
| R
Class |
AIBRX |
09/28/2007 |
| R5
Class |
AIDIX |
08/02/2004 |
| R6
Class |
AIDDX |
07/26/2013 |
| G
Class |
AIBGX |
07/28/2017 |
This
section explains the extent to which the funds’ advisor, American Century
Investment Management, Inc. (ACIM), can use various investment vehicles and
strategies in managing a fund’s assets. Descriptions of the investment
techniques and risks associated with each appear in the section Investment
Strategies and Risks,
which begins on page 5. In the case of the funds’ principal investment
strategies, these descriptions elaborate upon the discussion contained in the
prospectus.
Global
Bond and Emerging Markets Debt are diversified as defined in the Investment
Company Act of 1940 (the Investment Company Act). Diversified means that, with
respect to 75% of its total assets, a fund will not invest more than 5% of its
total assets in the securities of a single issuer or own more than 10% of the
outstanding voting securities of a single issuer (other than U.S. government
securities and securities of other investment companies).
International
Bond is nondiversified. Nondiversified means that a fund may invest a greater
percentage of its assets in a smaller number of securities than a diversified
fund.
To
meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year
(1)no
more than 25% of its total assets are invested in the securities of a single
issuer (other than the U.S. government or a regulated investment company);
and
(2)with
respect to at least 50% of its total assets, no more than 5% of its total assets
are invested in the securities of a single issuer (other than the U.S.
government or a regulated investment company) and it does not own more than 10%
of the outstanding voting securities of a single issuer.
Investments
are varied according to what is judged advantageous under changing economic
conditions. It is the advisor’s policy to retain maximum flexibility in
management without restrictive provisions as to the proportion of one or another
class of securities that may be held, subject to the investment restrictions
described below. Subject to the specific limitations applicable to a fund, the
fund management teams may invest the assets of each fund in varying amounts in
other instruments when such a course is deemed appropriate in order to pursue a
fund’s investment objective. Unless otherwise noted, all investment restrictions
described below and in each fund’s prospectus are measured at the time of the
transaction in the security. If market action affecting fund securities
(including, but not limited to, appreciation, depreciation or a credit rating
event) causes a fund to exceed an investment restriction, the advisor is not
required to take immediate action. Under normal market conditions, however, the
advisor’s policies and procedures indicate that the advisor will not make any
purchases that will make the fund further outside the investment
restriction.
Under
normal market conditions, the fund invests at least 80% of its net assets in
fixed income instruments of issuers that are economically tied to emerging
markets. The fund will invest in debt instruments issued by foreign governments
and corporations. Investments are made in instruments denominated in U.S.
dollars and in local emerging markets currency.
In
determining an issuer’s location, the portfolio managers may consider various
factors including, among others, where the issuer is headquartered, where the
issuer’s principal operations are located, where a majority of the issuer’s
revenues are derived, where the principal trading market is located and the
country in which the issuer was legally organized. The weight given to each of
these factors will vary depending on the circumstances in a given
case.
The
fund may invest without limitation in both investment grade and high-yield
securities. An “investment grade” security is one that has been rated in one of
the four highest categories used by a nationally recognized statistical
organization or determined by the investment advisor to be of comparable credit
quality. A “high-yield” security is one that has been rated below the four
highest categories used by a nationally recognized statistical rating
organization, or determined by the investment advisor to be of similar
quality.
The
fund also invests in derivative instruments, including foreign currency exchange
contracts, in order to shift its investment exposure from one currency into
another for hedging purposes or to enhance returns. The fund may also invest in
other types of derivative instruments such as futures contracts and swap
agreements in order to manage duration, credit exposure and country
exposure.
Under
normal market conditions, the fund invests at least 80% of its net assets in
bonds. For purposes of this fund, the advisor defines bonds as non-money market
debt securities which may be payable in U.S. or foreign currencies, and which
may include U.S. and foreign corporate bonds and notes, government securities,
commercial paper and securities backed by mortgages or other assets. The fund
generally hedges most of its foreign currency exposure to the U.S.
dollar.
The
fund invests primarily in companies located in developed countries world-wide
(including the United States), but may also invest in emerging markets. Under
normal market conditions, the fund will invest at least 40% of its assets in
foreign investments (unless the portfolio managers deem market conditions
unfavorable, in which case the fund would invest at least 30% of its assets in
foreign investments). The fund will allocate its assets among at least three
different countries (one of which may be the United States).
The
fund may invest up to 35% of its assets in high-yield securities. A high-yield
security is one that has been rated below the four highest categories used by a
nationally recognized statistical rating organization, or determined by the
investment advisor to be of similar quality.
The
fund may invest in securities issued or guaranteed by the U.S. Treasury and
certain U.S. government agencies or instrumentalities such as the Government
National Mortgage Association (Ginnie Mae). Ginnie Mae is supported by the full
faith and credit of the U.S. government. The fund may also invest in securities
issued or guaranteed by other U.S. government agencies or instrumentalities,
such as the Federal National Mortgage Association (Fannie Mae), the Federal Home
Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank (FHLB),
which are not guaranteed by the U.S. Treasury or supported by the full faith and
credit of the U.S. government. However, they are authorized to borrow from the
U.S. Treasury to meet their obligations.
The
fund also invests in derivative instruments, including foreign currency exchange
contracts, in order to shift its investment exposure from one currency into
another for hedging purposes or to enhance returns. The fund may also invest in
other types of derivative instruments such as futures contracts and swap
agreements in order to manage duration, credit exposure and country exposure. In
certain foreign markets, swaps can also act as substitutes for other less liquid
fixed-income instruments.
For
purposes of this fund, the advisor defines bonds as non-money market debt
securities, such as corporate bonds and notes, securities issued by governments,
commercial paper and securities backed by mortgages or other assets. Under
normal market conditions, the fund will invest at least 80% of its net assets in
bonds.
The
fund may invest in both investment grade and high-yield debt securities. The
fund may also invest in emerging markets debt securities.
In
determining an issuer’s location, the portfolio managers may consider various
factors including, among others, where the issuer is headquartered, where the
issuer’s principal operations are located, where a majority of the issuer’s
revenues are derived, where the principal trading market is located and the
country in which the issuer was legally organized. The weight given to each of
these factors will vary depending on the circumstances in a given
case.
The
fund’s investments may include but shall not be limited to: (1) debt obligations
issued or guaranteed by (a) a foreign sovereign government or one of its
agencies, authorities, instrumentalities or political subdivisions including a
foreign state, province or municipality, and (b) supranational organizations
such as the World Bank, Asian Development Bank, European Investment Bank, and
European Economic Community; (2) debt obligations of (a) foreign banks and bank
holding companies, and (b) domestic banks and corporations issued in foreign
currencies; and (3) foreign corporate debt securities and commercial paper.
Some
securities will also have the country of issue reported as ‘Supranational.’
These are organizations that cannot be aligned with one particular country, such
as the International Finance Corporation or the European Development
Bank.
For
an explanation of the securities ratings referred to in the prospectus and this
statement of additional information, see Explanation
of Fixed-Income Securities Ratings
in Appendix
D.
The
rate of exchange between U.S. dollars and foreign currencies fluctuates, which
results in gains and losses to the funds. Even if the funds’ foreign security
holdings perform well, an increase in the value of the dollar relative to the
currencies in which portfolio securities are denominated can offset net
investment income.
The
advisor intends to hedge the currency risk of Global Bond Fund to help lower the
price volatility associated with currency risk. The fund will normally limit its
foreign currency exposure (from non-U.S. dollar-denominated securities or
currencies) to 30% of its total assets.
Because
International Bond Fund is designed for U.S. investors seeking currency and
interest rate diversification, the fund’s advisor limits its use of hedging
strategies intended to minimize the effect of currency fluctuations. Although
hedging strategies (if they are successful) reduce exchange rate risk, they also
reduce the potential for share price appreciation when foreign currencies
increase in value relative to the U.S. dollar.
When
the advisor considers the U.S. dollar to be attractive relative to foreign
currencies, as much as 25% of International Bond Fund’s total assets may be
hedged into U.S. dollars. For temporary defensive purposes and under
extraordinary circumstances (such as significant political events), more than
25% of the fund’s total assets may be hedged in this manner.
In
managing the funds’ currency exposure, the advisor will buy and sell foreign
currencies regularly, either in the spot (i.e., cash) market or the forward
market. Forward foreign currency exchange contracts (forward contracts) are
individually negotiated and privately traded between currency traders (usually
large commercial banks) and their customers. In most cases, no deposit
requirements exist, and these contracts are traded at a net price without
commission. Forward contracts involve an obligation to purchase or sell a
specific currency at an agreed-upon price on a future date. Most contracts
expire in less than one year. The funds also may use futures and options for
currency management purposes. For more information on futures and options,
please see Futures
and Options
on page 15.
This
section describes investment vehicles and techniques the portfolio managers can
use in managing a fund’s assets. It also details the risks associated with each,
because each investment vehicle and technique contributes to a fund’s overall
risk profile.
Asset-Backed
Securities (ABS)
To
the extent permitted by its investment objective, each fund may invest in ABS.
ABS are structured like mortgage-backed securities, but instead of mortgage
loans or interest in mortgage loans, the underlying assets may include, for
example, such items as motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property, home equity
loans, student loans, small business loans, and receivables from credit card
agreements. The ability of an issuer of ABS to enforce its security interest in
the underlying assets may be limited. The value of an ABS is affected by changes
in the market’s perception of the assets backing the security, the
creditworthiness of the servicing agent for the loan pool, the originator of the
loans, the financial institution providing any credit enhancement, and
subordination levels.
Payments
of principal and interest passed through to holders of ABS are typically
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or a priority to certain of the
borrower’s other securities. The degree of credit enhancement varies, and
generally applies to only a fraction of the asset-backed security’s par value
until exhausted. If the credit enhancement of an ABS held by a fund has been
exhausted, and if any required payments of principal and interest are not made
with respect to the underlying loans, a fund may experience losses or delays in
receiving payment.
Some
types of ABS may be less effective than other types of securities as a means of
“locking in” attractive long-term interest rates. One reason is the need to
reinvest prepayments of principal; another is the possibility of significant
unscheduled prepayments resulting from declines in interest rates. These
prepayments would have to be reinvested at lower rates. As a result, these
securities may have less potential for capital appreciation during periods of
declining interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value during periods
of rising interest rates. Prepayments may also significantly shorten the
effective maturities of these securities, especially during periods of declining
interest rates. Conversely, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates than traditional debt securities, and, therefore,
potentially increasing the volatility of a fund.
The
risks of investing in ABS are ultimately dependent upon the repayment of loans
by the individual or corporate borrowers. Although a fund would generally have
no recourse against the entity that originated the loans in the event of default
by a borrower, ABS typically are structured to mitigate this risk of
default.
ABS
are generally issued in more than one class, each with different payment terms.
Multiple class ABS may be used as a method of providing credit support through
creation of one or more classes whose right to payments is made subordinate to
the right to such payments of the remaining class or classes. Multiple classes
also may permit the issuance of securities with payment terms, interest rates or
other characteristics differing both from those of each other and from those of
the underlying assets. Examples include so-called strips (ABS entitling the
holder to disproportionate interests with respect to the allocation of interest
and principal of the assets backing the security), and securities with classes
having characteristics such as floating interest rates or scheduled amortization
of principal.
Bank
Loans
Each
fund may invest in bank loans, which include senior secured and unsecured
floating rate loans of corporations, partnerships, or other entities. Typically,
these loans hold a senior position in the borrower’s capital structure, may be
secured by the borrower’s assets and have interest rates that reset frequently.
These loans are usually rated non-investment grade by the rating agencies. An
economic downturn generally leads to higher non-payment and default rates by
borrowers, and a bank loan can lose a substantial part of its value due to these
and other adverse conditions and events. However, as compared to junk bonds,
senior floating rate loans are typically senior in the capital structure and are
often secured by collateral of the borrower. A fund’s investments in bank loans
are subject to credit risk, and there is no assurance that the liquidation of
collateral would satisfy the claims of the borrower’s obligations in the event
of non-payment of scheduled interest or principal, or that the collateral could
be readily liquidated. The interest rates on many bank loans reset frequently,
and therefore investors are subject to the risk that the return will be less
than anticipated when the investment was first made. Most bank loans, like most
investment grade bonds, are not traded on any national securities exchange. Bank
loans generally have less liquidity than investment grade bonds and there may be
less publicly available information about them.
A
fund eligible to invest in bank loans may purchase bank loans from
the primary market,
from other lenders (sometimes referred to as loan assignments) or it may also
acquire a participation interest in another lender’s portion of the bank loan.
Large bank loans to corporations or governments may be shared or syndicated
among several lenders, usually commercial or investment banks. A fund may
participate in such syndicates, or can buy part of a loan, becoming a direct
lender. Participation interests involve special types of risk, including
liquidity risk and the risks of being a lender. Risks of being a lender include
credit risk (the borrower’s ability to meet
required
principal and interest payments under the terms of the loan), industry risk (the
borrower’s industry’s exposure to rapid change or regulation), financial risk
(the effectiveness of the borrower’s financial policies and use of leverage),
liquidity risk (the adequacy of the borrower’s back-up sources of cash), and
collateral risk (the sufficiency of the collateral’s value to repay the loan in
the event of non-payment or default by the borrower). If a fund purchases a
participation interest, it may only be able to enforce its rights through the
lender, and may assume the credit risk of the lender in addition to the credit
risk of the borrower.
In
addition, transactions in bank loans may take more than seven days to settle. As
a result, the proceeds from the sale of bank loans may not be readily available
to make additional investments or to meet the fund’s redemption obligations. To
mitigate these risks, the fund monitors its short-term liquidity needs in light
of the longer settlement period of bank loans. Some bank loan interests may not
be registered under the Securities Act of 1933 and therefore not afforded the
protections of the federal securities laws.
Collateralized
Debt Obligations
Each
fund may invest in collateralized debt obligations (“CDOs”), including
collateralized loan obligations (“CLOs”), collateralized bond obligations
(“CBOs”), and other similarly structured securities. CBOs and CLOs are types of
asset backed securities. A CLO is a trust or other special purpose entity that
is typically collateralized by a pool of loans, which may include, among others,
U.S. and non-U.S. senior secured loans, senior unsecured loans, and subordinate
corporate loans, including loans that may be rated below investment grade or
equivalent unrated loans. A CBO is generally a trust which is backed by a
diversified pool of high risk, below investment grade fixed income securities.
The risks of an investment in a CDO depend largely on the type of the collateral
backing the obligation and the class of the CDO in which a fund invests. CDOs
are subject to credit, interest rate, valuation, prepayment and extension risks.
These securities are also subject to risk of default on the underlying asset,
particularly during periods of economic downturn. CDOs carry additional risks
including, but not limited to, (i) the possibility that distributions from
collateral securities will not be adequate to make interest or other payments,
(ii) the collateral may decline in value or default, (iii) a fund may invest in
CDOs that are subordinate to other classes, and (iv) the complex structure of
the security may not be fully understood at the time of investment and may
produce disputes with the issuer or unexpected investment results.
Commercial
Paper
The
funds may invest in commercial paper (CP) that is issued by utility, financial,
and industrial companies, supranational organizations and foreign governments
and their agencies and instrumentalities. Rating agencies assign ratings to
short-term securities (including CP) issuers indicating the agencies’ assessment
of credit risk. Short-term ratings assigned by certain rating agencies are
provided in Explanation
of Fixed-Income Securities Ratings, Appendix D.
Some
examples of CP and CP issuers are provided in the following
paragraphs.
Domestic
CP is issued by U.S. industrial and finance companies, utility companies,
thrifts and bank holding companies. Foreign CP is issued by non-U.S. industrial
and finance companies and financial institutions. Domestic and foreign corporate
issuers occasionally have the underlying support of a well-known, highly rated
commercial bank or insurance company. Bank support is provided in the form of a
letter of credit (an LOC) or irrevocable revolving credit commitment (an IRC).
Insurance support is provided in the form of a surety bond.
Bank
holding company CP is issued by the holding companies of many well-known
domestic banks, including Citicorp, J.P. Morgan Chase & Company and First
Union National Bank. Bank holding company CP may be issued by the parent of a
money center or regional bank.
Thrift
CP is issued by major federal- or state-chartered savings and loan associations
and savings banks.
Schedule
B Bank CP is short-term, U.S. dollar-denominated CP issued by Canadian
subsidiaries of non-Canadian banks (Schedule B banks). Whether issued as CP, a
certificate of deposit or a promissory note, each instrument issued by a
Schedule B bank ranks equally with any other deposit obligation. CP issued by
Schedule B banks provides an investor with the comfort and reduced risk of a
direct and unconditional parental bank guarantee.
Schedule
B instruments generally offer higher rates than the short-term instruments of
the parent bank or holding company.
Asset-backed
CP is issued by corporations through special programs. In a typical program, a
special purpose corporation (SPC), created and/or serviced by a bank or other
financial institution, uses the proceeds from an issuance of CP to purchase
receivables or other financial assets from one or more corporations (sellers).
The sellers transfer their interest in the receivables or other financial assets
to the SPC, and the cash flow from the receivables or other financial assets is
used to pay interest and principal on the CP. Letters of credit or other forms
of credit enhancement may be available to cover the risk that the cash flow from
the receivables or other financial assets will not be sufficient to cover the
maturing CP.
Convertible
Securities
The
funds may invest in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular time period at a specified price or formula. A
convertible security entitles the holder to receive the interest paid or accrued
on debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion or exchange,
such securities ordinarily provide a stream of income with generally higher
yields than common stocks of the same or
similar
issuers, but lower than the yield on non-convertible debt. Of course, there can
be no assurance of current income because issuers of convertible securities may
default on their obligations. In addition, there can be no assurance of capital
appreciation because the value of the underlying common stock will fluctuate.
Because of the conversion feature, the managers consider some convertible
securities to be equity equivalents.
The
price of a convertible security will normally fluctuate in some proportion to
changes in the price of the underlying asset. A convertible security is subject
to risks relating to the activities of the issuer and/or general market and
economic conditions. The stream of income typically paid on a convertible
security may tend to cushion the security against declines in the price of the
underlying asset. However, the stream of income causes fluctuations based upon
changes in interest rates and the credit quality of the issuer. In general, the
value of a convertible security is a function of (1) its yield in comparison
with yields of other securities of comparable maturity and quality that do not
have a conversion privilege and (2) its worth, at market value, if converted or
exchanged into the underlying common stock. The price of a convertible security
often reflects such variations in the price of the underlying common stock in a
way that a non-convertible security does not. At any given time, investment
value generally depends upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer and the seniority of the security in the issuer’s capital
structure.
A
convertible security may be subject to redemption at the option of the issuer at
a predetermined price. If a convertible security held by a fund is called for
redemption, the fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock or to cash, or would sell the
convertible security to a third party, which may have an adverse effect on the
fund. A convertible security may feature a put option that permits the holder of
the convertible security to sell that security back to the issuer at a
predetermined price. A fund generally invests in convertible securities for
their favorable price characteristics and total return potential and normally
would not exercise an option to convert unless the security is called or
conversion is forced.
Contingent
convertible securities (sometimes referred to as CoCos) generally either convert
into equity or have their principal written down upon the occurrence of certain
trigger events, which may be linked to the issuer’s stock price, regulatory
capital thresholds, regulatory actions relating to the issuer’s continued
viability, or other pre-specified events. Under certain circumstances, CoCos may
be subject to an automatic write-down of the principal amount or value of the
securities, sometimes to zero, thereby cancelling the securities. If such an
event occurs, a fund may not have any rights to repayment of the principal
amount of the securities that has not become due. Additionally, a fund may not
be able to collect interest payments or dividends on such securities once the
write-down has occurred. In the event of liquidation or dissolution of the
issuer, CoCos generally rank junior to the claims of holders of the issuer’s
other debt obligations. CoCos also may provide for the mandatory conversion of
the security into common stock of the issuer under certain circumstances.
Because the common stock of an issuer may not pay a dividend, a fund may
experience reduced yields (or no yield) as a result of the conversion.
Conversion of the security from debt to equity would deepen the subordination of
the investor and thereby worsen the fund’s standing in bankruptcy.
Counterparty
Risk
A
fund will be exposed to the credit risk of the counterparties with which, or the
brokers, dealers and exchanges through which, it deals, whether it engaged in
exchange traded or off-exchange transactions. If a fund’s futures commission
merchant, (FCM) becomes bankrupt or insolvent, or otherwise defaults on its
obligations to the fund, the fund may not receive all amounts owed to it in
respect of its trading, despite the clearinghouse fully discharging all of its
obligations. The Commodity Exchange Act requires an FCM to segregate all funds
received from its customers with respect to regulated futures transactions from
such FCM’s proprietary funds. If an FCM were not to do so to the full extent
required by law, the assets of an account might not be fully protected in the
event of the bankruptcy of an FCM. Furthermore, in the event of an FCM’s
bankruptcy, a fund would be limited to recovering only a pro rata share of all
available funds segregated on behalf of an FCM’s combined customer accounts,
even though certain property specifically traceable to the fund (for example,
U.S. Treasury bills deposited by the fund) was held by an FCM. FCM bankruptcies
have occurred in which customers were unable to recover from the FCM’s estate
the full amount of their funds on deposit with such FCM and owing to them. Such
situations could arise due to various factors, or a combination of factors,
including inadequate FCM capitalization, inadequate controls on customer trading
and inadequate customer capital. In addition, in the event of the bankruptcy or
insolvency of a clearinghouse, the fund might experience a loss of funds
deposited through its FCM as margin with the clearinghouse, a loss of unrealized
profits on its open positions, and the loss of funds owed to it as realized
profits on closed positions. Such a bankruptcy or insolvency might also cause a
substantial delay before the fund could obtain the return of funds owed to it by
an FCM who was a member of such clearinghouse.
Because
bi-lateral derivative transactions are traded between counterparties based on
contractual relationships, a fund is subject to the risk that a counterparty
will not perform its obligations under the related contracts. Although each fund
intends to enter into transactions only with counterparties which the advisor
believes to be creditworthy, there can be no assurance that a counterparty will
not default and that the funds will not sustain a loss on a transaction as a
result. In situations where a fund is required to post margin or other
collateral with a counterparty, the counterparty may fail to segregate the
collateral or may commingle the collateral with the counterparty’s own assets.
As a result, in the event of the counterparty’s bankruptcy or insolvency, a
fund’s collateral may be subject to the conflicting claims of the counterparty’s
creditors, and a fund may be exposed to the risk of a court treating a fund as a
general unsecured creditor of the counterparty, rather than as the owner of the
collateral.
A
fund is subject to the risk that issuers of the instruments in which it invests
and trades may default on their obligations under those instruments, and that
certain events may occur that have an immediate and significant adverse effect
on the value of those instruments. There can be no assurance that an issuer of
an instrument in which a fund invests will not default, or that an event that
has an immediate and significant adverse effect on the value of an instrument
will not occur, and that a fund will not sustain a loss on a transaction as a
result.
Transactions
entered into by a fund may be executed on various U.S. and non-U.S. exchanges,
and may be cleared and settled through various clearinghouses, custodians,
depositories and prime brokers throughout the world. Although a fund attempts to
execute, clear and settle the transactions through entities the advisor believes
to be sound, there can be no assurance that a failure by any such entity will
not lead to a loss to a fund.
Cyber
Security Risk
As
the funds increasingly rely on technology and information systems to operate,
they become susceptible to operational risks linked to security breaches in
those information systems. Both calculated attacks and unintentional events can
cause failures in the funds’ information systems. Cyber attacks can include
acquiring unauthorized access to information systems, usually through hacking or
the use of malicious software, for purposes of stealing assets or confidential
information, corrupting data, or disrupting fund operations. Cyber attacks can
also occur without direct access to information systems, for example by making
network services unavailable to intended users. Cyber security failures by, or
breaches of the information systems of, the advisor, distributors,
broker-dealers, other service providers (including, but not limited to, index
providers, fund accountants, custodians, transfer agents and administrators), or
the issuers of securities the fund invests in may also cause disruptions and
impact the funds’ business operations. Breaches in information security may
result in financial losses, interference with the funds’ ability to calculate
NAV, impediments to trading, inability of fund shareholders to transact
business, violations of applicable privacy and other laws, regulatory fines,
penalties, reputational damage, reimbursement or other compensation costs, or
additional compliance costs. Additionally, the funds may incur substantial costs
to prevent future cyber incidents. The funds have business continuity plans in
the event of, and risk management systems to help prevent, such cyber attacks,
but these plans and systems have limitations including the possibility that
certain risks have not been identified. Moreover, the funds do not control the
cyber security plans and systems of our service providers and other third party
business partners. The funds and their shareholders could be negatively impacted
as a result.
Derivative
Instruments
To
the extent permitted by its investment objectives and policies, a fund may
invest in instruments that are commonly referred to as derivative instruments.
Generally, a derivative instrument is a financial arrangement, the value of
which is based on, or derived from, a traditional security, asset, or market
index. Examples of common derivative instruments include futures contracts,
warrants, structured notes, credit default swaps, options contracts, swap
transactions and forward currency contracts.
Certain
derivative instruments may be described as structured investments. A structured
investment is a security whose value or performance is linked to an underlying
index or other security or asset class. Structured investments include
asset-backed securities (ABS), commercial and residential mortgage-backed
securities (MBS and CMBS), and collateralized mortgage obligations (CMO), which
are described more fully herein. Structured investments also include securities
backed by other types of collateral. Structured investments involve the transfer
of specified financial assets to a special purpose entity, generally a
corporation or trust, or the deposit of financial assets with a custodian; and
the issuance of securities or depositary receipts backed by, or representing
interests in, those assets.
Some
structured investments are individually negotiated agreements or are traded over
the counter. Structured investments may be organized and operated to restructure
the investment characteristics of the underlying security. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics, such
as varying maturities, payment priorities and interest rate provisions, and the
extent of such payments made with respect to structured investments is dependent
on the extent of the cash flow on the underlying instruments. Because structured
investments typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured investments
are subject to such risks as the inability or unwillingness of the issuers of
the underlying securities to repay principal and interest, and requests by the
issuers of the underlying securities to reschedule or restructure outstanding
debt and to extend additional loan amounts.
Some
derivative instruments, such as mortgage-related and other asset-backed
securities, are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There
are many different types of derivative instruments and many different ways to
use them. Futures and options are commonly used for traditional hedging purposes
to attempt to protect a fund from exposure to changing interest rates,
securities prices or currency exchange rates, and for cash management purposes
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities.
The
return on a derivative instrument may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There
is a range of risks associated with investments in derivatives,
including:
•the
risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the portfolio managers anticipate
or that the value of the structured or derivative instrument will not move or
react to changes in the underlying security, interest rate, market index or
other financial asset as anticipated;
•the
possibility that there may be no liquid secondary market may make it difficult
or impossible to close out a position when desired;
•the
risk that daily limits on price fluctuations and speculative position limits on
exchanges on which a fund may conduct its transactions in derivative instruments
may prevent profitable liquidation of positions, subjecting a fund to the
potential of greater losses;
•the
risk that adverse price movements in an instrument can result in a loss
substantially greater than a fund’s initial investment;
•the
risk that a fund will have an obligation to deliver securities or currency
pursuant to a derivatives transaction that such fund does not own at the
inception of the derivatives trade;
•the
risk that the counterparty will fail to perform its obligations;
and
•the
risk that a fund will be subject to higher volatility because some derivative
instruments create leverage.
A
fund may not invest in a derivative instrument if its credit, interest rate,
liquidity, counterparty and other risks associated with ownership of the
security are outside acceptable limits set forth in the fund’s prospectus.
The
funds’ Board of Trustees has reviewed the advisor’s derivatives
risk management program policy, which includes policies and procedures
reasonably designed to manage a fund’s derivatives risk. Unless a fund qualifies
as a “limited derivatives user,” the fund will be required to participate in the
derivatives risk management program, which includes compliance with
value-at-risk based leverage limits, oversight by a derivatives risk manager,
and additional reporting and disclosure regarding its derivatives positions. A
fund designated as a limited derivatives user has policies and procedures to
manage its aggregate derivatives risk. The advisor will report on the
derivatives risk management program to the Board of Trustees on a quarterly
basis. The derivatives risk management program complies with recently
adopted
Rule 18f-4. In connection with the adoption of Rule 18f-4, the SEC also
eliminated the existing asset segregation framework for covering derivatives and
certain financial instruments.
Equity
Equivalents
The
funds may invest in preferred stocks, other equity securities and equity
equivalents, such as convertible bonds, warrants and other securities that
permit the fund to receive an equity interest in an issuer, the opportunity to
acquire an equity interest in an issuer, or the opportunity to receive a return
on its investment that permits the fund to benefit from the growth over time in
the equity of an issuer. Equity equivalents also may include securities whose
value or return is derived from the value or return of a different security.
Depositary receipts are an example of the type of equity equivalent security in
which the fund might invest.
Preferred
stock is a type of equity security that generally pays dividends at a specified
rate and has preference over common stock in the liquidation of assets and
payment of dividends. Preferred stock may be structured similarly to a
long-dated or perpetual bond and does not ordinarily carry voting rights. Unlike
interest payments on a fixed-income security, preferred stock dividends
generally are only payable if declared by the issuer’s board of directors. A
board of directors, however, is usually not obligated to pay dividends even if
they have accrued. Additionally, if an issuer of preferred stock experiences
economic or financial difficulties, its preferred stock may lose value due to
the reduced likelihood that its board of directors will declare a dividend.
Preferred stocks are typically subordinated to bonds and other debt instruments
in an issuer’s capital structure, in which case, preferred stock dividends are
usually paid only after the company makes required payments to those bond and
other debt holders. Consequently, the value of preferred stock may react more
strongly than bonds and other debt to actual or perceived changes in a company’s
financial condition or prospects. Preferred stock may be substantially less
liquid than other securities.
Foreign
Currency Exchange Transactions
Each
fund expects to exchange dollars for its underlying currencies, and vice versa,
in the normal course of managing the fund’s underlying investments. The advisor
does not expect that a fund will hold currency that is not earning income on a
regular basis, although a fund may do so temporarily when suitable investments
are not available. A fund may purchase and sell currencies on a spot basis
(i.e., for prompt delivery and settlement), or by entering into forward currency
exchange contracts (also called forward contracts) or other contracts to
purchase and sell currencies for settlement at a future date. A fund will incur
costs in converting assets from one currency to another. Foreign exchange
dealers may charge a fee for conversion; in addition, they realize a profit
based on the difference (i.e., the spread) between the prices at which they buy
and sell various currencies in the spot and forward markets. Thus, a dealer may
offer to sell a foreign currency to a fund at one rate and repurchase it at a
lesser rate should the fund desire to resell the currency to the
dealer.
Each
fund may use foreign currency forward contracts to enhance returns by increasing
exposure to a foreign currency, or by shifting exposure to the fluctuations in
the value of foreign currencies from one foreign currency to another foreign
currency. Open positions in forwards used for non-hedging purposes will be
covered by the segregation of liquid assets, marked to market daily. Forward
contracts are agreements to exchange a specific amount of one currency for a
specified amount of another at a future date. The date may be any agreed fixed
number of days in the future. The amount of currency to be exchanged, the price
at which the exchange will
take
place, and the date of the exchange are negotiated when a fund enters into the
contract and are fixed for the term of the contract. Forward contracts are
traded in an interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement and is consummated without payment of any
commission. However, a fund may enter into forward contracts with deposit
requirements or commissions.
At
the maturity of a forward contract, a fund may complete the contract by paying
for and receiving the underlying currency, or may seek to roll forward its
contractual obligation by entering into an offsetting transaction with the same
currency trader and paying or receiving the difference between the contractual
exchange rate and the current exchange rate. A fund also may be able to enter
into an offsetting contract prior to the maturity of the underlying contract.
This practice is sometimes referred to as “cross hedging” and may be employed
if, for example, the advisor believes that one foreign currency (in which a
portion of a fund’s foreign currency holdings are denominated) will change in
value relative to the U.S. dollar differently than another foreign currency.
There is no assurance that offsetting transactions, or new forward contracts,
will always be available to a fund.
Investors
should realize that the use of forward contracts does not eliminate fluctuations
in the underlying prices of the securities. Such contracts simply establish a
rate of exchange that the fund can achieve at some future point in time.
Additionally, although such contracts tend to minimize the risk of loss due to
fluctuations in the value of the hedged currency when used as a hedge against
foreign currency declines, at the same time they tend to limit any potential
gain that might result from the change in the value of such
currency.
Because
investments in, and redemptions from, a fund will be in U.S. dollars, the
advisor expects that a fund’s normal investment activity will involve a
significant amount of currency exchange. For example, a fund may exchange its
underlying foreign currencies for U.S. dollars in order to meet shareholder
redemption requests or to pay expenses. These transactions may be executed in
the spot or forward markets.
In
addition, a fund may combine forward transactions in its underlying currency
with investments in U.S. dollar-denominated instruments, in an attempt to
construct an investment position whose overall performance will be similar to
that of a security denominated in its underlying currency. If the amount of
dollars to be exchanged is properly matched with the anticipated value of the
dollar-denominated securities, a fund should be able to lock in the foreign
currency value of the securities, and the fund’s overall investment return from
the combined position should be similar to the return from purchasing a foreign
currency-denominated instrument. This is sometimes referred to as a synthetic
investment position or a position hedge.
The
execution of a synthetic investment position may not be successful. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of a
dollar-denominated security is not exactly matched with a fund’s obligation
under the forward contract on the contract’s maturity date, a fund may be
exposed to some risk of loss from fluctuation of the dollar. Although the
advisor will attempt to hold such mismatchings to a minimum, there can be no
assurance that the advisor will be successful in doing so.
The
funds may also invest in nondeliverable forward (NDF) currency transactions. An
NDF is a transaction that represents an agreement between the fund and a
counterparty to buy or sell a specified amount of a particular currency at an
agreed upon foreign exchange rate on a future date. Unlike other currency
transactions, there is no physical delivery of the currency on the settlement of
an NDF transaction. Rather, the fund and the counterparty agree to net the
settlement by making a payment in U.S. dollars or another fully convertible
currency that represents any difference between the foreign exchange rate agreed
upon at the inception of the NDF agreement and the actual exchange rate on the
agreed upon future date. The funds may use an NDF contract to gain exposure to
foreign currencies that are not internationally traded or if the markets for
such currencies are heavily regulated or highly taxed. When currency exchange
rates do not move as anticipated, a fund could sustain losses on the NDF
transaction. This risk is heightened when the transactions involve currencies of
emerging markets countries. Additionally, certain NDF transactions which involve
currencies of less developed countries or certain other currencies, may be
thinly traded or relatively illiquid.
Foreign
Securities
Each
fund invests in the securities of foreign issuers, including foreign
governments, when these securities meet the fund’s standards of
selection.
A
description of the funds’ investment strategies regarding foreign securities is
contained in the funds’ prospectuses. Investing in securities of foreign issuers
generally involves greater risks than investing in the securities of domestic
companies including:
Currency
Risk
– The value of the foreign investments held by a fund may be significantly
affected by changes in currency exchange rates. The dollar value of a foreign
security generally decreases when the value of the dollar rises against the
foreign currency in which the security is denominated, and tends to increase
when the value of the dollar falls against such currency. In addition, the value
of fund assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities, and by currency restrictions, exchange control regulation, currency
devaluations and political developments. Please see Currency
Management
on page 4 for more information.
Social,
Political and Economic Risk
– The economies of many of the countries in which each fund invests are not as
developed as the economy of the United States and may be subject to
significantly different forces. Political or social instability, expropriation,
nationalization, confiscatory taxation and limitations on the removal of funds
or other assets also could adversely affect the value of
investments.
Further, a fund may find it difficult or be unable to enforce ownership rights,
pursue legal remedies or obtain judgments in foreign courts.
Regulatory
Risk
– Foreign companies generally are not subject to the regulatory controls imposed
on U.S. issuers and, in general, there is less publicly available information
about foreign securities than is available about domestic securities. Many
foreign companies are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic companies and there may be less stringent investor protection and
disclosure standards in some foreign markets. Certain jurisdictions do not
currently provide the Public Company Accounting Oversight Board (“PCAOB”) with
sufficient access to inspect audit work papers and practices, or otherwise do
not cooperate with U.S. regulators, potentially exposing investors in U.S.
capital markets to significant risks.Income from foreign securities owned by a
fund may be reduced by a withholding tax at the source, which would reduce
dividend income payable to shareholders.
Market
and Trading Risk
– Brokerage commission rates in foreign countries, which generally are fixed
rather than subject to negotiation as in the United States, are likely to be
higher. The securities markets in many of the countries in which a fund invests
will have substantially less trading volume than the principal U.S. markets. As
a result, the securities of some companies in these countries may be less
liquid, more volatile and harder to value than comparable U.S. securities.
Furthermore, one securities broker may represent all or a significant part of
the trading volume in a particular country, resulting in higher trading costs
and decreased liquidity due to a lack of alternative trading partners. There
generally is less government regulation and supervision of foreign stock
exchanges, brokers and issuers, which may make it difficult to enforce
contractual obligations. In addition, it may be more difficult in foreign
countries to accurately determine appropriate brokerage commissions, taxes and
other trading costs related to securities trades.
Clearance
and Settlement Risk
– Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in clearance and settlement could
result in temporary periods when assets of a fund are uninvested and no return
is earned. The inability of a fund to make intended security purchases due to
clearance and settlement problems could cause the fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
clearance and settlement problems could result either in losses to the fund due
to subsequent declines in the value of the portfolio security or, if a fund has
entered into a contract to sell the security, liability to the
purchaser.
Ownership
Risk
– Evidence of securities ownership may be uncertain in many foreign countries.
As a result, there is a risk that a fund’s trade details could be incorrectly or
fraudulently entered at the time of the transaction, resulting in a loss to the
fund.
Sanctions
Risk
– The U.S. may impose economic sanctions against companies in various sectors of
certain countries. This could limit a fund’s investment opportunities in such
countries, impairing the fund’s ability to invest in accordance with its
investment strategy and/or to meet its investment objective. For example, a fund
may be prohibited from investing in securities issued by companies subject to
such sanctions. In addition, the sanctions may require a fund to freeze its
existing investments in sanctioned companies, prohibiting the fund from selling
or otherwise transacting in these investments. Current sanctions or the threat
of potential sanctions may also impair the value or liquidity of affected
securities and negatively impact a fund.
In
early 2022, the United States and countries throughout the world imposed
economic sanctions on Russia in response to its military invasion of Ukraine.
The sanctions are broad and include restrictions on the Russian government as
well as Russian companies, individuals, and banking entities. The sanctions and
other measures, such as boycotts or changes in consumer preferences, will likely
cause declines in the value and liquidity of Russian securities, downgrades in
the credit ratings of Russian securities, devaluation of Russia’s currency, and
increased market volatility and disruption in Russia and throughout the world.
Sanctions and similar measures, such as banning Russia from financial
transaction systems that facilitate international transfers of funds, could
limit or prevent the funds from selling and buying impacted securities both in
Russia and in other markets. Such measures will likely cause significant delay
in the settlement of impacted securities transactions or prevent settlement all
together. The lack of available market prices for such securities may cause the
funds to use fair value procedures to value certain securities. The consequences
of the war and sanctions may negatively impact other regional and global
economic markets. Additionally, Russia may take counter measures or engage in
retaliatory actions—including cyberattacks and espionage—which could further
disrupt global markets and supply chains. Companies in other countries that do
business with Russia and the global commodities market for oil and natural gas,
especially, will likely feel the impact of the sanctions. The sanctions,
together with the potential for a wider armed or cyber conflict, could increase
financial market volatility globally and negatively impact the funds’
performance beyond any direct exposure to Russian issuers or
securities.
Risk
of Focusing Investment on Region or Country
– Investing a significant portion of assets in one country or region makes a
fund more dependent upon the political and economic circumstances of that
particular country or region.
Eurozone
Investment Risk –
The Economic and Monetary Union of the European Union (EMU) is comprised of the
European Union (EU) members that have adopted the euro currency. By adopting the
euro as its currency, a member state relinquishes control of its own monetary
policies and is subject to fiscal and monetary controls. EMU members could
voluntarily abandon, or be forced out of, the euro. Such events could impact the
market values of Eurozone and various other securities and currencies, cause
redenomination of certain securities into less valuable local currencies, and
create more volatile and illiquid markets. As a result, European countries are
significantly affected by fiscal and monetary controls implemented by the EMU.
The euro currency may not fully reflect the strengths and weaknesses of the
various economies that comprise the EMU and Europe generally. Certain countries
and regions in the
EU
are experiencing significant financial difficulties. Some of these countries may
be dependent on assistance from other European governments and institutions or
agencies. Assistance may be dependent on a country’s implementation of reforms
or reaching a certain level of performance. Failure to reach those objectives or
an insufficient level of assistance could result in an economic downturn that
could significantly affect the value of investments in those and other European
countries. One or more countries could depart from the EU, which could weaken
the EU and, by extension, its remaining members.
United
Kingdom Investment Risk –
Commonly known as “Brexit,” the United Kingdom’s exit from the EU occurred in
January of 2021. The UK and the EU continue to work to establish regulatory
frameworks for cooperation on financial services. Continuing uncertainty in the
UK, EU, and other financial markets may result in volatility, fluctuations in
asset values and exchange rates, decreased liquidity and unwillingness or
inability of financial and other counterparties to enter into
transactions.
Japanese
Investment Risk
– Each fund may invest in securities offered by Japanese issuers. The value of
such securities may be significantly affected by economic, political and
regulatory developments in Japan. The Japanese government contends with
persistent economic problems, including deflation, a banking system that has
suffered from non-performing loans, and tax laws that dampen growth. Other
factors having a negative impact include a heavy government budget deficit and
low interest rates.
The
Japanese economy lacks diversification, relying heavily on a small number of
industries, including the electronic machinery sector. Japan is relatively poor
in natural resources, and so it is dependent on imports, especially in the
agricultural sector. It also relies on international trade to procure
commodities needed for its strong heavy industrial sector, and therefore it is
vulnerable to fluctuations in commodity prices. Japan has a high volume of
exports, partly due to the government’s protectionist policies, which have
caused tension with Japan’s trading partners, including the United
States.
Generally,
Japanese corporations are required to provide less disclosure than that required
by U.S. law and accounting practice. Japanese accounting and auditing practices
differ significantly from U.S. standards in specific areas, including regarding
unconsolidated subsidiaries and related structures.
Risk
of Investing in China
– Investing in Chinese securities is riskier than investing in U.S. securities.
Although the Chinese government is currently implementing reforms to promote
foreign investment and reduce government economic control, there is no guarantee
that the reforms will be ongoing or effective. Investing in China involves risk
of loss due to nationalization, expropriation, and confiscation of assets and
property. Losses may also occur due to new or expanded restrictions on foreign
investments or repatriation of capital. Participants in the Chinese market are
subject to less regulation and oversight than participants in the U.S. market.
This may lead to trading volatility, difficulty in the settlement and recording
of transactions, and uncertainty in interpreting and applying laws and
regulations. Reduction in spending on Chinese products and services, institution
of tariffs or other trade barriers, or a downturn in the economies of any of
China’s key trading partners may adversely affect the securities of Chinese
issuers. Regional conflict could also have an adverse effect on the Chinese
economy.
The
SEC and the PCAOB continue to have concerns about their ability to inspect
international auditing standards of U.S. companies operating in China and
PCAOB-registered auditing firms in China. Because
the
SEC and PCAOB have limited access to information about these auditing firms and
are restricted from inspecting the audit work and practices of registered
accountants in China, there is the risk that material information about Chinese
issuers may be unavailable. As a result, there is substantially greater risk
that disclosures will be incomplete or misleading and, in the event of investor
harm, substantially less access to recourse, in comparison to U.S. domestic
companies.
The
U.S. government may occasionally place restrictions on investments in Chinese
companies. For example, in November 2020, an Executive Order was issued that
prohibits U.S. persons from purchasing or investing in certain publicly-traded
securities of companies identified as “Communist Chinese military companies” or
in instruments that are designed to provide investment exposure to those
companies. The companies identified may change from time to time. A fund may
incur losses if more investors attempt to sell such securities or if the fund is
unable to participate in an otherwise attractive investment. Securities that are
or become prohibited may become less liquid and their market prices may decline.
In addition, the market for securities of other Chinese-based issuers may also
be negatively impacted, resulting in reduced liquidity and price
declines.
Due
to Chinese governmental restrictions on foreign ownership of companies in
certain industries, Chinese operating companies often rely on variable interest
entity (VIE) structures to raise capital from non-Chinese investors. In a VIE
structure, a China-based operating company establishes an entity—typically
offshore—that enters into service and other contracts with the Chinese company
designed to provide economic exposure to the company. The offshore entity can
then issue shares and debt instruments that are sold to non-Chinese investors. A
China based operating company and the offshore VIE might appear to be the same
company—because they are presented in a consolidated manner—but they are not.
The relationship between China-based operating company and the offshore VIE is
predicated entirely on contracts with the China-based company, not equity
ownership. The Chinese government has never approved these structures and thus
could determine at any time, and without notice, that the VIE’s underlying
contractual arrangements violate Chinese law. If either the China-based company
(or its officers, directors, or Chinese equity owners) breach those contracts,
or Chinese law changes in a way that affects the enforceability of these
arrangements, or those contracts are otherwise not enforceable under Chinese
law, U.S. investors may suffer significant losses with limited recourse
available.
Bond
Connect Risk
– The funds may invest in certain securities that are listed and traded through
China’s Bond Connect Program (“Bond Connect”), which allows non-Chinese
investors to purchase certain fixed-income investments available from China’s
interbank bond market. Bond Connect uses the trading infrastructure of both Hong
Kong and China and is therefore not available on trading holidays in those
countries. As a result, prices of securities purchased through Bond Connect may
fluctuate at times when a
fund
is unable to add to or exit its position. Securities offered through Bond
Connect may lose their eligibility for trading through the program at any time.
If Bond Connect securities lose their eligibility for trading through the
program, they may be sold but can no longer be purchased through Bond
Connect.
Bond
Connect is subject to regulation by both Hong Kong and China, and 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, the Hong Kong Monetary Authority Central Money Markets Unit holds Bond
Connect securities on behalf of investors (such as the funds) via accounts
maintained with China’s two fixed-income securities clearinghouses. While these
investors may hold beneficial interest in Bond Connect securities, courts in
China have limited experience in applying the concept of beneficial ownership.
Additionally, a fund may not be able to participate in corporate actions
affecting Bond Connect securities due to time constraints or for other
operational reasons. As a result, payments of distributions could be delayed.
Bond Connect trades are settled in Chinese currency, the renminbi (“RMB”). It
cannot be guaranteed that investors will have timely access to a reliable supply
of RMB in Hong Kong.
Emerging
Markets
The
funds may invest in emerging markets to the extent set forth in the prospectuses
or in other sections of this SAI, and these investments present greater risk
than investing in foreign issuers in general.
The
funds may invest in emerging markets securities. The funds consider a security
to be an emerging markets security if its issuer is located outside the
following developed countries list, which is subject to change: Australia,
Austria, Belgium, Bermuda, Canada, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the
United States.
Repatriation
of investment income, capital, and the proceeds of sales by foreign investors
may require governmental registration and/or approval in some emerging markets
countries. A number of the currencies of developing countries have experienced
significant declines against the U.S. dollar in the past, and devaluation may
occur subsequent to investments in these currencies by a fund. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging markets
countries. Many of the emerging securities markets are relatively small, have
low trading volumes, suffer periods of relative illiquidity, and are
characterized by significant price volatility. There is the risk that a future
economic or political crisis could lead to price controls, forced mergers of
companies, expropriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies, any of which could have a detrimental effect
on a fund’s investments. Investing in many former communist or socialist
countries involves the additional risk that the government or other executive or
legislative bodies may decide not to continue to support economic reform
programs and could follow radically different political and/or economic policies
to the detriment of investors, including non-market oriented policies such as
the support of certain industries at the expense of other sectors or a return to
a completely centrally planned economy. It is possible, particularly in markets
in emerging markets countries, that securities markets could be manipulated or
that purported securities in which the funds invest may subsequently be found to
be fraudulent and as a consequence the funds could suffer losses.
Additional
risk factors include, but are not limited to, the following: varying custody,
brokerage and settlement practices; difficulty in valuation and pricing; less
public information about issuers of non-U.S. securities; less governmental
regulation and supervision over the issuance and trading of securities; the
unavailability of financial information regarding non-U.S. issuers or the
difficulty of interpreting financial information prepared under non-U.S.
accounting standards; the imposition of withholding and other taxes; adverse
political, social or diplomatic developments; limitations on the movement of
funds or other assets of an investor between different countries; difficulties
in invoking the legal process outside the United States and enforcing
contractual obligations; and the difficulty of assessing economic trends in
non-U.S. countries. Investment in non-U.S. countries also involves higher
brokerage and custodian expenses than does investment in U.S. securities traded
on a U.S. securities exchange or market. The occurrence of adverse events
affecting one particular emerging markets country or region could have more
widespread effects and could adversely impact the global trading market for
emerging markets instruments. Many of the laws that govern private and foreign
investment, securities transactions and other contractual relationships in
certain emerging markets countries are relatively new and largely untested. As a
result, an investor may be subject to a number of unusual risks, including
inadequate investor protection, contradictory legislation, incomplete, unclear
and changing laws, disregard of regulations on the part of other market
participants, lack of established or effective avenues for legal redress,
absence of standard practices and confidentiality customs characteristic of more
developed markets and lack of consistent enforcement of existing regulations.
Furthermore, it may be difficult to obtain and/or enforce a judgment in certain
countries in which assets of an investor are invested. There can be no assurance
that this difficulty in protecting and enforcing rights will not have a material
adverse effect on an investor (such as a fund) and its investments.
Company
Debt – Governments
of many emerging markets countries have exercised and continue to exercise
substantial influence over many aspects of the private sector through the
ownership or control of many companies, including some of the largest in any
given country. As a result, government actions in the future could have a
significant effect on economic conditions in emerging markets, which in turn,
may adversely affect companies in the private sector, general market conditions
and prices and yields of certain of the securities held by a fund.
Expropriation, confiscatory taxation, nationalization, political, economic or
social instability or other similar developments have occurred frequently over
the history of certain emerging markets and could adversely affect the funds’
assets should these conditions recur.
Sovereign
Debt –
Investment in sovereign debt can involve a high degree of risk. The issuers of
the sovereign debt securities in which the funds may invest have in the past
experienced substantial difficulties in servicing their external debt
obligations, which have led to defaults on certain obligations and the
restructuring of certain indebtedness. The governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity’s willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity’s policy
towards the International Monetary Fund and the political constraints to which a
governmental entity 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 averages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity’s implementation of
economic reforms and/or economic performance and the timely service of such
debtor’s obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties’ commitments to lend funds to the
governmental entity, which may further impair such debtor’s ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign debt
(including a fund) may be requested to participate in the rescheduling of such
debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
Emerging
markets governmental issuers are among the largest debtors to commercial banks,
foreign governments, international financial organizations and other financial
institutions. Certain emerging markets governmental issuers have not been able
to make payments of interest on or principal of debt obligations as those
payments have come due. Obligations arising from past restructuring agreements
may affect the economic performance and political and social stability of those
issuers.
The
ability of emerging markets governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer’s balance of
payments, including export performance, and its access to international credits
and investments. An emerging markets country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international prices of
one or more of those commodities. Increased protectionism on the part of an
emerging markets country’s trading partners could also adversely affect the
country’s exports and tarnish its trade account surplus, if any. To the extent
that emerging markets countries receive payment for their exports in currencies
other than U.S. dollars or non-emerging markets currencies, their ability to
make debt payments denominated in U.S. dollars or non-emerging markets
currencies could be affected.
To
the extent that an emerging markets country cannot generate a trade surplus, it
must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets countries
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of emerging markets country
governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging markets debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international
rates.
Another
factor bearing on the ability of emerging markets countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging markets countries to make payments on these debt
obligations.
Liquidity,
Trading Volume, Regulatory Oversight – The
securities markets of emerging markets countries are substantially smaller, less
developed, less liquid and more volatile than the major securities markets in
the United States. The lack of liquidity could have an adverse effect on the
value of a fund’s holdings, and on a fund’s ability to dispose of such holdings
in response to a specific adverse economic event, such as the deterioration in
credit worthiness of a particular debtor.
The
limited size of many emerging markets securities markets and limited trading
volume in the securities of emerging markets issuers compared to the volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. Adverse publicity and investors’ perceptions, whether or not
based on in-depth fundamental analysis, may decrease the value and liquidity of
securities.
Disclosure
and regulatory standards in emerging markets are in many respects less stringent
than U.S. standards. Issuers in lesser developed and emerging markets are
subject to accounting, auditing and financial standards and requirements that
differ, in some cases significantly, from those applicable to U.S. issuers. In
particular, the assets and profits appearing on the financial statements of such
an issuer may not reflect its financial position or results of operations in the
way they would be reflected had such financial statements been prepared in
accordance with U.S. generally accepted accounting principles. There is
substantially less publicly available information about such issuers than there
is about U.S. issuers. In addition, such issuers are not subject to regulations
similar to the U.S. Sarbanes-Oxley Act of 2002, which imposes many restrictions
and mandates on the activities of companies. There is less regulation and
monitoring by regulators of lesser developed and emerging markets securities
markets and the activities of investors, brokers and other participants than in
the United States. Moreover, issuers of securities in lesser developed and
emerging markets are not subject to the same degree of regulation as are U.S.
issuers with respect to such matters as insider trading rules, tender offer
regulation,
shareholder proxy requirements and the timely disclosure of information. There
is also less publicly available information about lesser developed and emerging
markets companies than U.S. companies.
Default,
Legal Recourse – A
fund may have limited legal recourse in the event of a default with respect to
certain debt obligations it may hold. If the issuer of a fixed income security
owned by a fund defaults, the fund may incur additional expenses to seek
recovery. Debt obligations issued by emerging markets governments differ from
debt obligations of private entities; remedies from defaults on debt obligations
issued by emerging markets governments, unlike those on private debt, must be
pursued in the courts of the defaulting party itself. A fund’s ability to
enforce its rights against private issuers may be limited. The ability to attach
assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws applicable to
private issuers of debt obligations may be substantially different from those of
other countries. Moreover, if a fund obtains a judgment in a U.S. court, it may
be difficult to enforce such judgment in the emerging markets country because
the country may not be a party to any international treaty with respect to the
recognition or enforcement of foreign judgments. Provisions of an emerging
markets country’s laws that regulate the enforcement of foreign judgments may
contain broad exceptions and involve long delays in obtaining a judgment. For
example, an emerging markets court may not enforce any foreign judgment if it
viewed the amount of damages awarded as excessive or inconsistent with practice
in that country. A party seeking to enforce a foreign judgment in an emerging
markets country may also be required to obtain approval from the central bank of
that country to execute such judgment or to repatriate any amount recovered
outside of the emerging markets country. The political context, expressed as an
emerging markets governmental issuer’s willingness to meet the terms of the debt
obligation, for example, is of considerable importance. In addition, no
assurance can be given that the holders of commercial bank debt may not contest
payments to the holders of debt obligations in the event of default under
commercial bank loan agreements.
Settlement
Risk – Settlement
and clearance procedures in certain foreign markets differ significantly from
those in the United States. Foreign settlement and clearance procedures and
trade regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically associated with the settlement of U.S.
investments. At times, settlements in certain foreign countries have not kept
pace with the number of securities transactions. These problems may make it
difficult for a fund to carry out transactions. If a fund cannot settle or is
delayed in settling a purchase of securities, it may miss attractive investment
opportunities and certain of its assets may be uninvested with no return earned
thereon for some period. If a fund cannot settle or is delayed in settling a
sale of securities, it may lose money if the value of the security then declines
or, if it has contracted to sell the security to another party, the fund could
be liable for any losses incurred.
Inflation
– Many
emerging markets have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates have had and may continue to have adverse effects on the
economies and securities markets of certain emerging markets countries. In an
attempt to control inflation, wage and price controls have been imposed in
certain countries.
Futures
and Options
Each
fund may enter into futures contracts, options or options on futures contracts.
Futures contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Generally,
futures transactions will be used to:
•protect
against a decline in market value of a fund’s securities (taking a short futures
position),
•protect
against the risk of an increase in market value for securities in which a fund
generally invests at a time when the fund is not fully-invested (taking a long
futures position), or
•provide
a temporary substitute for the purchase of an individual security that may not
be purchased in an orderly fashion.
Some
futures and options strategies, such as selling futures, buying puts and writing
calls, hedge the fund’s investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
Although
other techniques may be used to control a fund’s exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For
example, the sale of a future by a fund means a fund becomes obligated to
deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means a fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. The portfolio manager may engage in futures and options
transactions based on securities indices provided that the transactions are
consistent with a fund’s investment objectives. Examples of indices that may be
used include the Morgan Stanley Capital International Europe, Australasia, Far
East Index (MSCI EAFE) and Morgan Stanley Capital International Emerging Markets
Free Index (MSCI EMF). The portfolio manager also may engage in futures and
options transactions based on specific securities, such as U.S. Treasury bonds
or notes. Futures contracts are traded on national futures exchanges. Domestic
futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC), a U.S. government
agency.
Index
futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call
for
actual delivery or acceptance of the underlying securities, in most cases the
contracts are closed out before the settlement date. A futures position may be
closed by taking an opposite position in an identical contract (i.e., buying a
contract that has previously been sold or selling a contract that has previously
been bought).
Unlike
when a fund purchases or sells a bond, no price is paid or received by a fund
upon the purchase or sale of the future. Initially, a fund will be required to
deposit an amount of cash or securities equal to a varying specified percentage
of the contract amount. This amount is known as initial margin. The margin
deposit is intended to ensure completion of the contract (delivery or acceptance
of the underlying security) if it is not terminated prior to the specified
delivery date. A margin deposit does not constitute a margin transaction for
purposes of a fund’s investment restrictions. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish margin deposit requirements that are higher than
the exchange minimums. Cash held in the margin accounts generally is not
income-producing. However, coupon bearing securities, such as Treasury bills and
bonds, held in margin accounts generally will earn income. Subsequent payments
to and from the broker, called variation margin, will be made on a daily basis
as the price of the underlying debt securities or index fluctuates, making the
future more or less valuable, a process known as marking the contract to market.
Changes in variation margin are recorded by a fund as unrealized gains or
losses.
At
any time prior to expiration of the future, a fund may elect to close the
position by taking an opposite position. A final determination of variation
margin is then made; additional cash is required to be paid by or released to a
fund and that fund realizes a loss or gain.
Purchasing
Put and Call Options
By
purchasing a put option, a fund obtains the right (but not the obligation) to
sell the option’s underlying instrument at a fixed strike price. In return for
this right, a fund pays the current market price for the option (known as the
option premium). Options have various types of underlying instruments, including
specific securities, indices of securities prices, and futures contracts. A fund
may terminate its position in a put option it has purchased by allowing it to
expire or by exercising the option. If the option is allowed to expire, a fund
will lose the entire premium it paid. If a fund exercises the option, it
completes the sale of the underlying instrument at the strike price. A fund also
may terminate a put option position by closing it out in the secondary market at
its current price if a liquid secondary market exists.
The
buyer of a typical put option can expect to realize a gain if security prices
fall substantially. However, if the underlying instrument’s price does not fall
enough to offset the cost of purchasing the option, a put buyer can expect to
suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The
features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option’s strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall.
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
Writing
Put and Call Options
If
a fund writes a put option, it takes the opposite side of the transaction from
the option’s purchaser. In return for receipt of the premium, a fund assumes the
obligation to pay the strike price for the option’s underlying instrument if the
other party chooses to exercise the option. When writing an option on a futures
contract, a fund will be required to make margin payments to a broker or
custodian as described above for futures contracts. A fund may seek to terminate
its position in a put option it writes before exercise by closing out the option
in the secondary market at its current price. However, if the secondary market
is not liquid for a put option a fund has written, the fund must continue to be
prepared to pay the strike price while the option is outstanding, regardless of
price changes, and must continue to set aside assets to cover its
position.
If
security prices rise, a put writer would generally expect to profit, although
the gain would be limited to the amount of the premium received. If security
prices remain the same over time, the writer also would likely profit by being
able to close out the option at a lower price. If security prices fall, the put
writer would expect to suffer a loss. This loss should be less than the loss
from purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the
decline.
Writing
a call option obligates a fund to sell or deliver the option’s underlying
instrument in return for the strike price upon exercise of the option. The
characteristics of writing call options are similar to those of writing put
options, except that writing calls generally is a profitable strategy if prices
remain the same or fall. Through receipt of the option premium, a call writer
mitigates the effects of a price decline. At the same time, because a call
writer must be prepared to deliver the underlying instrument in return for the
strike price even if its current value is greater, a call writer gives up some
ability to participate in security price increases.
Combined
Positions
A
fund may purchase and write options in combination with one another, or in
combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, a fund may purchase a put
option and write a call option on the same underlying instrument to construct a
combined position whose risk and return characteristics are similar to selling a
futures contract. Another possible combined position would involve writing a
call option at one strike price and buying a call option at a lower
price
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Over-the-Counter
Options
Unlike
exchange-traded options, which are standardized with respect to the underlying
instrument, expiration date, contract size, and strike price, the terms of
over-the-counter (OTC) options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organizations of
the exchanges where they are traded. The risk of illiquidity also is greater
with OTC options because these options generally can be closed out only by
negotiation with the other party to the option.
Risks
Related to Futures and Options Transactions
Futures
and options prices can be volatile, and trading in these markets involves
certain risks. If the portfolio manager applies a hedge at an inappropriate time
or judges interest rate trends incorrectly, futures and options strategies may
lower a fund’s return.
A
fund could suffer losses if it is unable to close out its position because of an
illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the portfolio manager considers it appropriate or
desirable to do so. In the event of adverse price movements, a fund would be
required to continue making daily cash payments to maintain its required margin.
If a fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio manager would not
otherwise elect to do so. In addition, a fund may be required to deliver or take
delivery of instruments underlying futures contracts it holds. The portfolio
manager will seek to minimize these risks by limiting the futures contracts
entered into on behalf of a fund to those traded on national futures exchanges
and for which there appears to be a liquid secondary market.
A
fund could suffer losses if the prices of its futures and options positions were
poorly correlated with its other investments, or if securities underlying
futures contracts purchased by a fund had different maturities than those of the
portfolio securities being hedged. Such imperfect correlation may give rise to
circumstances in which a fund loses money on a futures contract at the same time
that it experiences a decline in the value of its hedged portfolio securities. A
fund also could lose margin payments it has deposited with a margin broker if,
for example, the broker became bankrupt.
Most
futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the maximum
amount that the price of a futures contract may vary either up or down from the
previous day’s settlement price at the end of the trading session. Once the
daily limit has been reached in a particular type of contract, no trades may be
made on that day at a price beyond the limit. However, the daily limit governs
only price movement during a particular trading day and, therefore, does not
limit potential losses. In addition, the daily limit may prevent liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Options
on Futures
By
purchasing an option on a futures contract, a fund obtains the right, but not
the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, a fund completes the sale of the underlying security
at the strike price. Purchasing an option on a futures contract does not require
a fund to make margin payments unless the option is
exercised.
Correlation
of Price Changes
Because
there are a limited number of types of exchange-traded futures and options
contracts, it is likely that the standardized contracts available will not match
a fund’s current or anticipated investments exactly. A fund may invest in
futures and options contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests (for example, by hedging intermediate-term securities with a futures
contract based on an index of long-term bond prices); this involves a risk that
the futures position will not track the performance of a fund’s other
investments.
Options
and futures prices can diverge from the prices of their underlying instruments
even if the underlying instruments correlate well with a fund’s investments.
Options and futures prices are affected by factors such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument, and the time remaining until expiration of the contract, which may
not affect security prices the same way. Imperfect correlation also may result
from differing levels of demand in the options and futures markets and
securities markets, from structural differences in how options and futures and
securities are traded, or from the imposition of daily price fluctuation limits
or trading halts. A fund may purchase or sell options and futures contracts with
a greater or lesser value than the securities it wishes to hedge or intends to
purchase in an effort to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all cases.
If price changes in a fund’s options or futures positions are poorly correlated
with its other investments, the positions may fail to produce anticipated gains
or result in losses that are not offset by gains in other
investments.
Futures
and Options Contracts Relating to Foreign Currencies
A
fund may purchase and sell currency futures and purchase and write currency
options to increase or decrease its exposure to different foreign currencies. A
fund also may purchase and write currency options in connection with currency
futures or forward contracts.
Currency
futures contracts are similar to forward currency exchange contracts, except
that they are traded on exchanges and have standard contract sizes and delivery
dates. Most currency futures contracts call for payment or delivery in U.S.
dollars.
The
uses and risks of currency futures are similar to those of futures relating to
securities or indices, as described above. Currency futures values can be
expected to correlate with exchange rates but may not reflect other factors that
affect the value of a fund’s investments. A currency hedge, for example, should
protect a German-mark-denominated security from a decline in the German mark,
but it will not protect a fund against a price decline resulting from a
deterioration in the issuer’s creditworthiness.
Liquidity
of Futures Contracts and Options
There
is no assurance that a liquid secondary market will exist for any particular
futures contract or option at any particular time. Options may have relatively
low trading volume and liquidity if their strike prices are not close to the
underlying instrument’s current price. In addition, exchanges may establish
daily price fluctuation limits for futures contracts and options and may halt
trading if a contract’s price moves upward or downward more than the limit on a
given day. On volatile trading days when the price fluctuation limit is reached
or a trading halt is imposed, it may be impossible for a fund to enter into new
positions or close out existing positions. If the secondary market for a
contract was not liquid, because of price fluctuation limits or otherwise,
prompt liquidation of unfavorable positions could be difficult or impossible,
and a fund could be required to continue holding a position until delivery or
expiration regardless of changes in its value. Under these circumstances, a
fund’s access to assets held to cover its future positions also could be
impaired.
Futures
and options trading on foreign exchanges may not be regulated as effectively as
similar transactions in the U.S. and may not involve clearing mechanisms or
guarantees similar to those available in the U.S. The value of a futures
contract or option traded on a foreign exchange may be adversely affected by the
imposition of different exercise and settlement terms, trading procedures,
margin requirements and lesser trading volume.
Restrictions
on the Use of Futures Contracts and Options
Each
fund may enter into futures contracts, options, options on futures contracts, or
swap agreements as permitted by its investment policies and the Commodity
Futures Trading Commission (CFTC) rules. The advisor to each fund has claimed an
exclusion from the definition of the term “commodity pool operator” under the
Commodity Exchange Act and, therefore, the advisor is not subject to
registration or regulation as a commodity pool operator under that Act with
respect to its provision of services to each fund.
Certain
rules adopted by the CFTC may impose additional limits on the ability of a fund
to invest in futures contracts, options on futures, swaps, and certain other
commodity interests if its investment advisor does not register with the CFTC as
a “commodity pool operator” with respect to such fund. It is expected that the
funds will be able to execute their investment strategies within the limits
adopted by the CFTC’s rules. As a result, the advisor does not intend to
register with the CFTC as a commodity pool operator on behalf of any of the
funds. In the event that one of the funds engages in transactions that
necessitate future registration with the CFTC, the advisor will register as a
commodity pool operator and comply with applicable regulations with respect to
that fund.
To
the extent required by law, each fund will segregate cash, cash equivalents or
other appropriate liquid securities on its records in an amount sufficient to
cover its obligations under the futures contracts, options and swap
agreements.
Hybrid
Securities
Hybrid
securities have characteristics that differ from both common stocks and senior
debt securities, typically ranking senior to common stock and subordinate to
senior debt in an issuer’s capital structure. Hybrid securities may have
features such as deferrable and/or non-cumulative interest payments, long-dated
maturity or no maturity, reduced or no acceleration rights, and may be subject
to principal reduction without default under certain circumstances. Because of
these features, the managers may consider some hybrid securities to be equity or
equity equivalents and some to be debt securities based on each security’s
individual characteristics.
Inflation-Linked
Securities
The
funds may purchase inflation-linked securities issued by the U.S. Treasury, U.S.
government agencies and instrumentalities other than the U.S. Treasury, and
other entities, including those issued by governments of other countries and
other foreign entities, including foreign issuers from emerging
markets.
Inflation-linked
securities are designed to offer a return linked to inflation, thereby
protecting future purchasing power of the money invested in them. However,
inflation-linked securities provide this protected return only if held to
maturity. In addition, inflation-linked securities may not trade at par value.
Real interest rates (the market rate of interest less the anticipated rate of
inflation) change over time as a result of many factors, such as what investors
are demanding as a true value for money. When real rates do change,
inflation-linked securities prices will be more sensitive to these changes than
conventional bonds, because these securities were sold originally based upon a
real interest rate that is no longer prevailing. Should market expectations for
real interest rates rise, the price of
inflation-linked
securities and the share price of a fund holding these securities will fall.
Investors in the funds should be prepared to accept not only this share price
volatility but also the possible adverse tax consequences it may
cause.
An
investment in securities featuring inflation-adjusted principal and/or interest
involves factors not associated with more traditional fixed-principal
securities. Such factors include the possibility that the inflation index may be
subject to significant changes, that changes in the index may or may not
correlate to changes in interest rates generally or changes in other indices, or
that the resulting interest may be greater or less than that payable on other
securities of similar maturities. In the event of sustained deflation, it is
possible that the amount of semiannual interest payments, the inflation-adjusted
principal of the security or the value of the stripped components will decrease.
If any of these possibilities are realized, a fund’s net asset value could be
negatively affected.
Inflation-Linked
Treasury Securities
Inflation-linked
U.S. Treasury securities are U.S. Treasury securities with a final value and
interest payment stream linked to the inflation rate. Inflation-linked U.S.
Treasury securities may be issued in either note or bond form. Inflation-linked
U.S. Treasury notes have maturities of at least one year, but not more than 10
years. Inflation-linked U.S. Treasury bonds have maturities of more than 10
years.
Inflation-linked
U.S. Treasury securities may be attractive to investors seeking an investment
backed by the full faith and credit of the U.S. government that provides a
return in excess of the rate of inflation. These securities were first sold in
the U.S. market in January 1997. Inflation-linked U.S. Treasury securities are
auctioned and issued on a quarterly basis.
Structure
and Inflation Index
– The principal value of inflation-linked U.S. Treasury securities will be
adjusted to reflect changes in the level of inflation. The index for measuring
the inflation rate for inflation-linked U.S. Treasury securities is the
non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All
Urban Consumers (Consumer Price Index) published monthly by the U.S. Department
of Labor’s Bureau of Labor Statistics.
Semiannual
coupon interest payments are made at a fixed percentage of the inflation-linked
principal value. The coupon rate for the semiannual interest rate of each
issuance of inflation-linked U.S. Treasury securities is determined at the time
the securities are sold to the public (i.e., by competitive bids in the
auction). The coupon rate will likely reflect real yields available in the U.S.
Treasury market; real yields are the prevailing yields on U.S. Treasury
securities with similar maturities, less then-prevailing inflation expectations.
While a reduction in inflation will cause a reduction in the interest payment
made on the securities, the repayment of principal at the maturity of the
security is guaranteed by the U.S. Treasury to be no less than the original face
or par amount of the security at the time of issuance.
Indexing
Methodology -
The principal value of inflation-linked U.S. Treasury securities will be
indexed, or adjusted, to account for changes in the Consumer Price Index.
Semiannual coupon interest payment amounts will be determined by multiplying the
inflation-linked principal amount by one-half the stated rate of interest on
each interest payment date.
Taxation
-
The taxation of inflation-linked U.S. Treasury securities is similar to the
taxation of conventional bonds. Both interest payments and the difference
between original principal and the inflation-adjusted principal will be treated
as interest income subject to taxation. Interest payments are taxable when
received or accrued. The inflation adjustment to the principal is subject to tax
in the year the adjustment is made, not at maturity of the security when the
cash from the repayment of principal is received. If an upward adjustment has
been made, investors in non-tax-deferred accounts will pay taxes on this amount
currently. Decreases in the indexed principal can be deducted only from current
or previous interest payments reported as income.
Inflation-linked
U.S. Treasury securities therefore have a potential cash flow mismatch to an
investor, because investors must pay taxes on the inflation-adjusted principal
before the repayment of principal is received. It is possible that, particularly
for high income tax bracket investors, inflation-linked U.S. Treasury securities
would not generate enough cash in a given year to cover the tax liability they
could create. This is similar to the current tax treatment for zero-coupon bonds
and other discount securities. If inflation-linked U.S. Treasury securities are
sold prior to maturity, capital losses or gains are realized in the same manner
as traditional bonds.
Investors
in a fund will receive dividends that represent both the interest payments and
the principal adjustments of the inflation-linked securities held in the fund’s
portfolio. An investment in a fund may, therefore, be a means to avoid the cash
flow mismatch associated with a direct investment in inflation-linked
securities. For more information about taxes and their effect on you as an
investor in the funds, see Taxes,
page 52.
U.S.
Government Agencies
A
number of U.S. government agencies and instrumentalities other than the U.S.
Treasury may issue inflation-linked securities. Some U.S. government agencies
have issued inflation-linked securities whose design mirrors that of the
inflation-linked U.S. Treasury securities described above.
Other/Foreign
Entities
Entities
other than the U.S. Treasury or U.S. government agencies and instrumentalities
may issue inflation-linked securities. While some entities have issued
inflation-linked securities whose design mirrors that of the inflation-linked
U.S. Treasury securities described above, others utilize different structures.
For example, the principal value of these securities may be adjusted with
reference to the Consumer Price Index, but the semiannual coupon interest
payments are made at a fixed percentage of the original issue
principal.
Alternatively, the principal value may remain fixed, but the coupon interest
payments may be adjusted with reference to the Consumer Price
Index.
Inflation-linked
securities issued by a foreign government are generally adjusted to reflect an
index comparable to the U.S.’s CPI index, as calculated by such foreign
government. There can be no assurance that the foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the U.S. In
addition, to the extent that the currency used to calculate the fund’s NAV is
different from the currencies of the underlying inflation-linked securities held
by the fund, changes in foreign exchange rates may negate the impact of any
adjustments to interest rates payable on inflation-linked securities when the
fund’s NAV is calculated. As inflation generally has the effect of diluting the
value of a given currency against other currencies, any increase in the value of
the fund attributable to increased interest income resulting from an adjustment
to the interest rate of an inflation-linked security may be lost through a
decrease in value of the underlying bond when its value is translated into U.S.
dollars.
Inverse
Floaters
Emerging
Markets Debt and International Bond may hold inverse floaters. An inverse
floater is a type of derivative security that bears an interest rate that moves
inversely to market interest rates. As market interest rates rise, the interest
rate on inverse floaters goes down, and vice versa. Generally, this is
accomplished by expressing the interest rate on the inverse floater as an
above-market fixed rate of interest, reduced by an amount determined by
reference to a market-based or bond-specific floating interest rate (as well as
by any fees associated with administering the inverse floater
program).
Inverse
floaters may be issued in conjunction with an equal amount of Dutch Auction
floating-rate bonds (floaters), or a market-based index may be used to set the
interest rate on these securities. A Dutch Auction is an auction system in which
the price of the security is gradually lowered until it meets a responsive bid
and is sold. Floaters and inverse floaters may be brought to market by (1) a
broker-dealer who purchases fixed-rate bonds and places them in a trust, or (2)
an issuer seeking to reduce interest expenses by using a floater/inverse floater
structure in lieu of fixed-rate bonds.
In
the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following
manner:
(i)Floater
holders receive interest based on rates set at a six-month interval or at a
Dutch Auction, which is typically held every 28 to 35 days. Current and
prospective floater holders bid the minimum interest rate that they are willing
to accept on the floaters, and the interest rate is set just high enough to
ensure that all of the floaters are sold.
(ii)Inverse
floater holders receive all of the interest that remains, if any, on the
underlying bonds after floater interest and auction fees are paid. The interest
rates on inverse floaters may be significantly reduced, even to zero, if
interest rates rise.
Procedures
for determining the interest payment on floaters and inverse floaters brought to
market directly by the issuer are comparable, although the interest paid on the
inverse floaters is based on a presumed coupon rate that would have been
required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.
Where
inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be held or sold. However, typically, there are time
constraints and other limitations associated with any right to combine interests
and claim the underlying security.
Floater
holders subject to a Dutch Auction procedure generally do not have the right to
put back their interests to the issuer or to a third party. If a Dutch Auction
fails, the floater holder may be required to hold its position until the
underlying bond matures, during which time interest on the floater is capped at
a predetermined rate.
The
secondary market for floaters and inverse floaters may be limited. The market
value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds.
LIBOR
Transition Risk
The
London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate intended to
be representative of the rate at which major international banks who are members
of the British Bankers Association lend to one another over short-terms.
Following manipulation allegations, financial institutions have started the
process of phasing out the use of LIBOR. The transition process to a
replacement rate or rates may also result in a change in the value of certain
instruments the funds hold or a change in the cost of temporary borrowing for
the funds. As LIBOR is discontinued, the LIBOR replacement 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.
The transition away from LIBOR could result in losses to the funds.
Loan
Participation Notes
In
terms of their functioning and investment risk, loan participation notes
(“LPNs”) are comparable to an investment in “normal” bonds. In return for the
investor’s commitment of capital, the issuer makes regular interest payments
and, at maturity or in accordance with an agreed upon amortization schedule, the
note is repaid at par.
However,
in contrast to “normal” bonds, there are three parties involved in the issuance
of an LPN. The legal issuer, typically a bankruptcy-remote, limited purpose
entity, issues notes to investors and uses the proceeds received from investors
to make loans to the borrower—with each loan generally having substantially
identical payment terms to the related note issued by the issuer. The borrower
is typically an operating company, and the issuer’s obligations under a note are
typically limited to the extent of any capital repayments and interest payments
made by the borrower under the related loan. Accordingly, the investor generally
assumes the credit risk of the underlying borrower. The loan participation note
structure is generally used to provide the borrower more efficient financing in
the capital markets than the borrower would be able to obtain if it issued notes
directly.
In
the event of a default by the borrower of an LPN, the fund may experience delays
in receiving payments of interest and principal while the note issuer enforces
and liquidates the underlying collateral, and there is no guarantee that the
underlying collateral will cover the principal and interest owed to the fund
under the LPN.
LPNs
are generally subject to liquidity risk. Even though an LPN may be traded on an
exchange there can be no assurance that a liquid market will develop for the
LPNs, that holders of the LPNs will be able to sell their LPNs, or that such
holders will be able to sell their LPNs for a price that reflects their
value.
Depending
on the creditworthiness of the underlying borrower, LPNs may be subject to the
risk of investing in high-yield securities. Additionally, LPNs are generally
utilized by foreign borrowers and therefore may be subject to the risk of
investing in foreign securities and emerging markets risk. Such foreign
risk could include interest payments being subject to withholding
tax.
Loan
Participations
Emerging
Markets Debt may purchase loan participations, which represent interests in the
cash flow generated by commercial loans. Each loan participation requires three
parties: a participant (or investor), a lending bank and a borrower. The
investor purchases a share in a loan originated by a lending bank, and this
participation entitles the investor to a percentage of the principal and
interest payments made by the borrower.
Loan
participations are attractive because they typically offer higher yields than
other money market instruments. However, along with these higher yields come
certain risks, not the least of which is the risk that the borrower will be
unable to repay the loan. Generally, because the lending bank does not guarantee
payment, the investor is directly exposed to risk of default by the borrower. In
addition, the investor is not a direct creditor of the borrower. The
participation represents an interest in assets owned by the lending bank. If the
lending bank becomes insolvent, the investor could be considered an unsecured
creditor of the bank instead of the holder of a participating interest in a
loan. Because of these risks, the manager must carefully consider the
creditworthiness of both the borrower and the lender.
Another
concern is liquidity. Because there is no established secondary market for loan
participations, a fund’s ability to sell them for cash is limited. Some
participation agreements place limitations on the investor’s right to resell the
loan participation, even when a buyer can be found.
Loans
of Portfolio Securities
In
order to realize additional income, a fund may lend its portfolio securities.
Such loans may not exceed one-third of a fund’s total assets valued at market,
however, this limitation does not apply to purchases of debt securities in
accordance with a fund’s investment objectives, policies and limitations, or to
repurchase agreements with respect to portfolio securities.
Cash
received from the borrower as collateral through loan transactions may be
invested in other eligible securities. Investing this cash subjects that
investment to market appreciation or depreciation. If a borrower defaults on a
securities loan because of insolvency or other reasons, the lending fund could
experience delays or costs in recovering the securities it loaned; if the value
of the loaned securities increased over the value of the collateral, a fund
could suffer a loss. To minimize the risk of default on securities loans, the
advisor adheres to guidelines prescribed by the Board of Trustees governing
lending of securities. These guidelines strictly govern:
•the
type and amount of collateral that must be received by the fund;
•the
circumstances under which additions to that collateral must be made by
borrowers;
•the
return to be received by the fund on the loaned securities;
•the
limitations on the percentage of fund assets on loan; and
•the
credit standards applied in evaluating potential borrowers of portfolio
securities.
In
addition, the guidelines require that the fund have the option to terminate any
loan of a portfolio security at any time and set requirements for recovery of
securities from borrowers.
Mortgage-Related
Securities
To
the extent permitted by its investment objective, a fund may invest in
mortgage-related securities.
Background
A
mortgage-backed security represents an ownership interest in a pool of mortgage
loans. The loans are made by financial institutions to finance home and other
real estate purchases. As the loans are repaid, investors receive payments of
both interest and principal.
Like
fixed-income securities, mortgage-backed securities pay a stated rate of
interest during the life of the security. However, unlike a bond, which returns
principal to the investor in one lump sum at maturity, mortgage-backed
securities return principal to the investor in increments during the life of the
security.
Because
the timing and speed of principal repayments vary, the cash flow on
mortgage-backed securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages or default on their loans, the
principal is distributed pro rata to investors.
As
with other fixed-income securities, the prices of mortgage-backed securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage-backed securities rise, and vice versa. Changing interest
rates have additional significance for mortgage-backed securities investors,
however, because they influence prepayment rates (the rates at which mortgage
holders prepay their mortgages), which in turn affect the yields on
mortgage-backed securities. When interest rates decline, prepayment rates
generally increase. Mortgage holders take advantage of the opportunity to
refinance their mortgages at lower rates with lower monthly payments. When
interest rates rise, mortgage holders are less inclined to refinance their
mortgages. The effect of prepayment activity on yield depends on whether the
mortgage-backed security was purchased at a premium or at a
discount.
A
fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, a fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, the fund might miss an opportunity to earn interest at higher
prevailing rates.
A
fund may invest in covered bonds or covered mortgages. Covered bonds are
securities issued by a bank and backed by a dedicated group of loans known as a
cover pool.
Collateralized
Mortgage Obligations (CMOs)
A
CMO is a multiclass bond backed by a pool of mortgage pass-through certificates
or mortgage loans. In structuring a CMO, an issuer distributes cash flow from
the underlying collateral over a series of classes called tranches. Each CMO is
a set of two or more tranches, with average lives and cash flow patterns
designed to meet specific investment objectives. The average life expectancies
of the different tranches in a four-part deal, for example, might be two, five,
seven and 20 years.
As
payments on the underlying mortgage loans are collected, the CMO issuer pays the
coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
sequential pay or plain vanilla CMO.
Some
CMOs are structured so that the prepayment or market risks are transferred from
one tranche to another. Prepayment stability is improved in some tranches if
other tranches absorb more prepayment variability.
The
final tranche of a CMO often takes the form of a Z-bond, also known as an
accrual bond or accretion bond. Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage loans. The existence
of a Z-bond tranche helps stabilize cash flow patterns in the other tranches. In
a changing interest rate environment, however, the value of the Z-bond tends to
be more volatile.
As
CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.
The
existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche—known as a companion bond, support or
non-PAC bond—that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.
Floating-rate
CMO tranches (floaters) pay a variable rate of interest. Institutional investors
with short-term liabilities, such as commercial banks, often find floating-rate
CMOs attractive investments. Super floaters and inverse floaters are variations
on the floater structure that have highly variable cash flows.
Commercial
Mortgage-Backed Securities (CMBS)
CMBS
are securities created from a pool of commercial mortgage loans, such as loans
for hotels, shopping centers, office buildings, apartment buildings, and the
like. Interest and principal payments from these loans are passed on to the
investor according to a particular schedule of payments. The credit quality of
CMBS depends primarily on the quality of the underlying loans and on the
structure of the particular deal. Generally, deals are structured with senior
and subordinate classes. Multiple classes may permit the issuance of securities
with payment terms, interest rates, or other characteristics differing both from
those of each other and those of
the
underlying assets. Examples include classes having characteristics such as
floating interest rates or scheduled amortization of principal. Rating agencies
rate the individual classes of the deal based on the degree of seniority or
subordination of a particular class and other factors. The value of these
securities may change because of actual or perceived changes in the
creditworthiness of individual borrowers, their tenants, the servicing agents,
or the general state of commercial real estate and other factors.
CMBS
may be partially stripped so that each investor class receives some interest and
some principal. When securities are completely stripped, however, all of the
interest is distributed to holders of one type of security, known as an
interest-only security (IO), and all of the principal is distributed to holders
of another type of security known as a principal-only security (PO). The funds
are permitted to invest in IO classes of CMBS. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The cash
flows and yields on IO classes are extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. In
the cases of IOs, prepayments affect the amount of cash flows provided to the
investor. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, an investor may fail to fully recoup its initial
investment in an IO class of a stripped mortgage-backed security, even if the IO
class is rated AAA or Aaa or is derived from a full faith and credit obligation.
However, because commercial mortgages are often locked out from prepayment, or
have high prepayment penalties or a defeasance mechanism, the prepayment risk
associated with a CMBS IO class is generally less than that of a residential
IO.
Adjustable
Rate Mortgage Securities
Adjustable
rate mortgage securities (ARMs) have interest rates that reset at periodic
intervals. Acquiring ARMs permits a fund to participate in increases in
prevailing current interest rates through periodic adjustments in the coupons of
mortgages underlying the pool on which ARMs are based. In addition, when
prepayments of principal are made on the underlying mortgages during periods of
rising interest rates, a fund can reinvest the proceeds of such prepayments at
rates higher than those at which they were previously invested. Mortgages
underlying most ARMs, however, have limits on the allowable annual or lifetime
increases that can be made in the interest rate that the mortgagor pays.
Therefore, if current interest rates rise above such limits over the period of
the limitation, a fund holding an ARM does not benefit from further increases in
interest rates. Moreover, when interest rates are in excess of coupon rates
(i.e., the rates being paid by mortgagors) of the mortgages, ARMs behave more
like fixed income securities and less like adjustable rate securities and are
subject to the risks associated with fixed income securities. In addition,
during periods of rising interest rates, increases in the coupon rate of
adjustable rate mortgages generally lag current market interest rates slightly,
thereby creating the potential for capital depreciation on such
securities.
GNMA
Certificates
The
Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934 (Housing Act), as amended,
authorizes GNMA to guarantee the timely payment of interest and repayment of
principal on certificates that are backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or by Title V of the
Housing Act of 1949 (FHA Loans), or guaranteed by the Department of Veterans
Affairs under the Servicemen’s Readjustment Act of 1944 (VA Loans), as amended,
or by pools of other eligible mortgage loans. The Housing Act provides that the
full faith and credit of the U.S. government is pledged to the payment of all
amounts that may be required to be paid under any guarantee. GNMA has unlimited
authority to borrow from the U.S. Treasury in order to meet its obligations
under this guarantee.
GNMA
certificates represent a pro rata interest in one or more pools of the following
types of mortgage loans: (a) fixed-rate level payment mortgage loans; (b)
fixed-rate graduated payment mortgage loans (GPMs); (c) fixed-rate growing
equity mortgage loans (GEMs); (d) fixed-rate mortgage loans secured by
manufactured (mobile) homes (MHs); (e) mortgage loans on multifamily residential
properties under construction (CLCs); (f) mortgage loans on completed
multifamily projects (PLCs); (g) fixed-rate mortgage loans that use escrowed
funds to reduce the borrower’s monthly payments during the early years of the
mortgage loans (buydown mortgage loans); and (h) mortgage loans that provide for
payment adjustments based on periodic changes in interest rates or in other
payment terms of the mortgage loans.
Fannie
Mae Certificates
The
Federal National Mortgage Association (FNMA or Fannie Mae) is a federally
chartered and privately owned corporation established under the Federal National
Mortgage Association Charter Act. Fannie Mae was originally established in 1938
as a U.S. government agency designed to provide supplemental liquidity to the
mortgage market and was reorganized as a stockholder-owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae acquires capital from
investors who would not ordinarily invest in mortgage loans directly and thereby
expands the total amount of funds available for housing. This money is used to
buy home mortgage loans from local lenders, replenishing the supply of capital
available for mortgage lending.
Fannie
Mae certificates represent a pro rata interest in one or more pools of FHA
Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by a government agency) of the
following types: (a) fixed-rate level payment mortgage loans; (b) fixed-rate
growing equity mortgage loans; (c) fixed-rate graduated payment mortgage loans;
(d) adjustable-rate mortgage loans; and (e) fixed-rate mortgage loans secured by
multifamily projects.
Fannie
Mae certificates entitle the registered holder to receive amounts representing a
pro rata interest in scheduled principal and interest payments (at the
certificate’s pass-through rate, which is net of any servicing and guarantee
fees on the underlying mortgage
loans),
any principal prepayments, and a proportionate interest in the full principal
amount of any foreclosed or otherwise liquidated mortgage loan. The full and
timely payment of interest and repayment of principal on each Fannie Mae
certificate is guaranteed by Fannie Mae; this guarantee is not backed by the
full faith and credit of the U.S. government. See Current
Status of Fannie Mae and Freddie Mac
below.
Freddie
Mac Certificates
The
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970 (FHLMC Act), as amended. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit. Its
principal activity consists of purchasing first-lien conventional residential
mortgage loans (and participation interests in such mortgage loans) and
reselling these loans in the form of mortgage-backed securities, primarily
Freddie Mac certificates.
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 Freddie Mac certificates consist of fixed- or adjustable-rate
mortgage loans with original terms to maturity of between 10 and 30 years,
substantially all of which are secured by first-liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
standards set forth in the FHLMC Act. A Freddie Mac certificate group may
include whole loans, participation interests in whole loans, undivided interests
in whole loans, and participations composing another Freddie Mac certificate
group.
Freddie
Mac guarantees to each registered holder of a Freddie Mac certificate the timely
payment of interest at the rate provided for by the certificate. Freddie Mac
also guarantees ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but generally does not guarantee the
timely repayment of principal. Freddie Mac may remit principal at any time after
default on an underlying mortgage loan, but no later than 30 days following (a)
foreclosure sale, (b) payment of a claim by any mortgage insurer, or (c) the
expiration of any right of redemption, whichever occurs later, and in any event
no later than one year after demand has been made upon the mortgager for
accelerated payment of principal. Obligations guaranteed by Freddie Mac are not
backed by the full faith and credit pledge of the U.S. government. See
Current
Status of Fannie Mae and Freddie Mac
below.
Current
Status of Fannie Mae and Freddie Mac
Since
September 2008, Fannie Mae and Freddie Mac have operated under a conservatorship
administered by the Federal Housing Finance Agency (FHFA). In addition, the U.S.
Treasury has entered into senior preferred stock purchase agreements (SPSPAs) to
provide additional financing to Fannie Mae and Freddie Mac. Although the SPSPAs
are intended to provide Fannie Mae and Freddie Mac with the necessary cash
resources to meet their obligations, Fannie Mae and Freddie Mac continue to
operate as going concerns while in conservatorship, and each remains liable for
all of its obligations, including its guaranty obligations, associated with its
mortgage-backed securities.
The
future status and role of Fannie Mae or Freddie Mac could be impacted by, among
other things, the actions taken and restrictions placed on Fannie Mae or Freddie
Mac by the FHFA in its role as conservator, the restrictions placed on Fannie
Mae’s or Freddie Mac’s operations and activities under the senior preferred
stock purchase agreements, market responses to developments at Fannie Mae or
Freddie Mac, and future legislative, regulatory, or legal action that alters the
operations, ownership, structure and/or mission of Fannie Mae or Freddie Mac,
each of which may, in turn, impact the value of, and cash flows on, any
securities guaranteed by Fannie Mae and Freddie Mac.
Stripped
Mortgage-Backed Securities
Stripped
mortgage-backed securities are created by segregating the cash flows from
underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security’s
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO.
The
market values of IOs and POs are very sensitive to interest rate and prepayment
rate fluctuations. POs, for example, increase (or decrease) in value as interest
rates decline (or rise). The price behavior of these securities also depends on
whether the mortgage collateral was purchased at a premium or discount to its
par value. Prepayments on discount coupon POs generally are much lower than
prepayments on premium coupon POs. IOs may be used to hedge a fund’s other
investments because prepayments cause the value of an IO strip to move in the
opposite direction from other mortgage-backed securities.
To-Be-Announced
Mortgage-Backed Securities
To-be-announced
(TBA) commitments are forward agreements for the purchase or sale of securities,
which are described in greater detail under the heading When-Issued
and Forward Commitment Agreements.
A fund may gain exposure to mortgage-backed securities through TBA transactions.
TBA mortgage-backed securities typically are debt securities structured by
agencies such as Fannie Mae and Freddie Mac. In a typical TBA mortgage
transaction, certain terms (such as price) are fixed, with delayed payment and
delivery on an agreed upon future settlement date. The specific mortgage-backed
securities to be delivered are not typically identified at the trade date but
the delivered security must meet specified terms (such as issuer, interest rate,
and underlying mortgage
terms).
Consequently, TBA mortgage-backed transactions involve increased interest rate
risk because the underlying mortgages may be less favorable at delivery than
anticipated. TBA mortgage contracts also involve a risk of loss if the value of
the underlying security to be purchased declines prior to delivery date. The
yield obtained for such securities may be higher or lower than yields available
in the market on delivery date.
The
funds may also take short positions in TBA investments. To enter a short sale of
a TBA security, a fund effectively agrees to sell a security it does not own at
a future date and price. The funds generally anticipate closing short TBA
positions before delivery of the respective security is required, however if the
fund is unable to close a position, the fund would have to purchase the
securities needed to settle the short sale. Such purchases could be at a
different price than anticipated, and the fund would lose or gain money based on
the acquisition price.
Municipal
Obligations
The
funds may invest in tax-exempt or taxable municipal obligations, which are
generally issued by state and local governments or government entities. Interest
payments from municipal obligations are generally exempt from federal income
tax. Interest payments from certain municipal obligations, however, are subject
to federal income tax because of the degree of non-government involvement in the
transaction or because federal tax code limitations on the issuance of
tax-exempt bonds that benefit private entities have been exceeded. Some typical
examples of these taxable municipal obligations include industrial revenue bonds
and economic development bonds issued by state or local governments to aid
private enterprise. The interest on a taxable municipal bond is often exempt
from state taxation in the issuing state. The funds do not expect to be eligible
to pass through to shareholders the tax-exempt character of interest on
municipal obligations.
Other
Investment Companies
A
fund may invest in other investment companies, such as closed-end investment
companies, unit investment trusts, exchange-traded funds (ETFs) and other
open-end investment companies, provided that the investment is consistent with a
fund’s investment policies and restrictions. Under the Investment Company Act, a
fund’s investment in such securities, subject to certain exceptions, currently
is limited to
•3%
of the total voting stock of any one investment company
•5%
of the fund’s total assets with respect to any one investment company
and
•10%
of the fund’s total assets in the aggregate.
Such
exceptions may include reliance on Rule 12d1-4 of the Investment Company Act.
Rule 12d1-4, subject to certain requirements, would permit a fund to invest in
affiliated investment companies (other American Century mutual funds and ETFs)
and unaffiliated investment companies in excess of the limitations described
above.
A
fund’s investments in other investment companies may include money market funds
managed by the advisor. Investments in money market funds are not subject to the
percentage limitations set forth above.
As
a shareholder of another investment company, a fund would bear, along with other
shareholders, its pro rata portion of the other investment company’s expenses,
including advisory fees. These expenses would be in addition to the management
fee that each fund bears directly in connection with its own
operations.
ETFs
are a type of fund bought and sold on a securities exchange. An ETF trades like
common stock and may be actively managed or index-based. A fund may purchase an
ETF to temporarily gain exposure to a portion of the U.S. or a foreign market
while awaiting purchase of underlying securities, to gain exposure to specific
asset classes or sectors, or as a substitute for investing directly in
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities. Additionally, because the price of ETF shares is based on
market price rather than net asset value (NAV), shares may trade at a price
greater than NAV (a premium) or less than NAV (a discount). A fund may also
incur brokerage commissions, as well as the cost of the bid/ask spread, when
purchasing or selling ETF shares.
Repurchase
Agreements
Each
fund may invest in repurchase agreements when they present an attractive
short-term return on cash that is not otherwise committed to the purchase of
securities pursuant to the investment policies of the fund.
A
repurchase agreement occurs when, at the time a fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time a fund’s money is invested in the
security.
Because
the security purchased constitutes collateral for the repurchase obligation, a
repurchase agreement can be considered a loan collateralized by the security
purchased. A fund’s risk is the seller’s ability to pay the agreed-upon
repurchase price on the repurchase date. If the seller defaults, a fund may
incur costs in disposing of the collateral, which would reduce the amount
realized thereon. If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. To the extent the value
of the security decreases, a fund could experience a loss.
Each
fund will limit repurchase agreement transactions to securities issued by the
U.S. government and its agencies and instrumentalities, and will enter into such
transactions with those banks and securities dealers who are deemed creditworthy
pursuant to criteria adopted by the funds’ advisor.
Repurchase
agreements maturing in more than seven days would count toward a fund’s 15%
limit on illiquid securities.
Short-Term
Securities
In
order to meet anticipated redemptions, anticipated purchases of additional
securities for a fund’s portfolio, or, in some cases, for temporary defensive
purposes, each fund may invest a portion of its assets in money market and other
short-term securities.
Examples
of those securities include:
•Securities
issued or guaranteed by the U.S. government and its agencies and
instrumentalities;
•Commercial
Paper;
•Certificates
of Deposit and Euro Dollar Certificates of Deposit;
•Bankers’
Acceptances;
•Short-term
notes, bonds, debentures or other debt instruments;
•Repurchase
agreements; and
•Money
market funds.
Swap
Agreements
Each
fund may invest in swap agreements, consistent with its investment objective and
strategies. A fund may enter into a swap agreement in order to, for example,
attempt to obtain or preserve a particular return or spread at a lower cost than
obtaining a return or spread through purchases and/or sales of instruments in
other markets; protect against currency fluctuations; attempt to manage duration
to protect against any increase in the price of securities a fund anticipates
purchasing at a later date; or gain exposure to certain markets in the most
economical way possible.
Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard “swap” transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or “swapped” between the parties are generally
calculated with respect to a “notional amount,” i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a “basket” of securities representing a
particular index. Forms of swap agreements include, for example, interest rate
swaps, under which fixed- or floating-rate interest payments on a specific
principal amount are exchanged and total return swaps, under which one party
agrees to pay the other the total return of a defined underlying asset (usually
an index, including inflation indexes, stock, bond or defined portfolio of loans
and mortgages) in exchange for fee payments, often a variable stream of cash
flows based on a reference rate. A fund may enter into credit default swap
agreements to hedge an existing position by purchasing or selling credit
protection. Credit default swaps enable an investor to buy/sell protection
against a credit event of a specific issuer. The seller of credit protection
against a security or basket of securities receives an up-front or periodic
payment to compensate against potential default event(s). A fund may enhance
returns by selling protection or attempt to mitigate credit risk by buying
protection. Market supply and demand factors may cause distortions between the
cash securities market and the credit default swap market.
Whether
a fund’s use of swap agreements will be successful depends on the advisor’s
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Interest rate swaps could result
in losses if interest rate changes are not correctly anticipated by the fund.
Total return swaps could result in losses if the reference index, security, or
investments do not perform as anticipated by the fund. Credit default swaps
could result in losses if the fund does not correctly evaluate the
creditworthiness of the issuer on which the credit default swap is based.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The funds will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness or that are cleared through a
Derivatives Clearing Organization (“DCO”). Certain restrictions imposed on the
funds by the Internal Revenue Code may limit the funds’ ability to use swap
agreements.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
and related regulatory developments require the clearing and exchange-trading of
certain standardized derivative instruments that the CFTC and SEC have defined
as “swaps.” The CFTC has implemented mandatory exchange-trading and clearing
requirements under the Dodd-Frank Act and the CFTC continues to approve
contracts for central clearing. Although exchange trading is designed to
decrease counterparty risk, it does not do so entirely because the fund will
still be subject to the credit risk of the central clearinghouse. Cleared swaps
are subject to margin requirements imposed by both the central clearinghouse and
the clearing member FCM. Uncleared swaps are now subject to posting and
collecting collateral on a daily basis to secure mark-to-market obligations
(variation margin). Swaps data reporting may subject a fund
to administrative costs, and the safeguards established to
protect trader anonymity
may not function as
expected. Exchange trading, central clearing, margin
requirements, and data reporting regulations may increase a fund’s
cost of hedging risk and, as a result, may affect shareholder
returns.
U.S.
Government Securities
Each
fund may invest in U.S. government securities including bills, notes and bonds
issued by the U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. government.
Some
U.S. government securities are supported by the direct full faith and credit of
the U.S. government; others are supported by the right of the issuer to borrow
from the U.S. Treasury; others, such as securities issued by the Federal
National Mortgage Association (FNMA), are supported by the discretionary
authority of the U.S. government to purchase the agencies’ obligations; and
others are supported only by the credit of the issuing or guaranteeing
instrumentality. There is no assurance that the U.S. government will provide
financial support to an instrumentality it sponsors when it is not obligated by
law to do so.
Variable-
and Floating-Rate Securities
Variable-
and floating-rate securities, including variable-rate demand obligations (VRDOs)
and floating-rate notes (FRNs), provide for periodic adjustments to the interest
rate. The adjustments are generally based on an index-linked formula, or
determined through a remarketing process.
These
types of securities may be combined with a put or demand feature that permits
the fund to demand payment of principal plus accrued interest from the issuer or
a financial institution. Examples of VRDOs include variable-rate demand note
(VRDN) and variable-rate demand preferreds (VRDP). VRDNs combine a demand
feature with an interest rate reset mechanism designed to result in a market
value for the security that approximates par. VRDNs are generally designed to
meet the requirements of money market fund Rule 2a-7. VRDPs are issued by a
closed-end fund that in turn invests primarily in portfolios of bonds. They
feature a floating rate dividend set via a weekly remarketing and have a fixed
term, mandatory redemption, and an unconditional par put option.
When-Issued
and Forward Commitment Agreements
Each
fund may sometimes purchase new issues of securities on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future
date.
For
example, a fund may sell a security and at the same time make a commitment to
purchase the same or a comparable security at a future date and specified price.
Conversely, a fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash and carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
particular security that a fund owns. A fund will sell that security to the
broker-dealer and simultaneously enter into a forward commitment agreement to
buy it back at a future date. This type of transaction generates income for the
fund if the dealer is willing to execute the transaction at a favorable price in
order to acquire a specific security.
When
purchasing securities on a when-issued or forward commitment basis, a fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of the security may decline prior to delivery,
which could result in a loss to a fund. While a fund will make commitments to
purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
To
the extent a fund remains fully invested or almost fully invested at the same
time it has purchased securities on a when-issued basis, there will be greater
fluctuations in its net asset value than if it solely set aside cash to pay for
when-issued securities. When the time comes to pay for the when-issued
securities, a fund will meet its obligations with available cash, through the
sale of securities, or, although it would not normally expect to do so, by
selling the when-issued securities themselves (which may have a market value
greater or less than the fund’s payment obligation). Selling securities to meet
when-issued or forward commitment obligations may generate taxable capital gains
or losses.
Zero-Coupon,
Step-Coupon, Range Floaters and Pay-In-Kind Securities
Emerging
Markets Debt may purchase zero-coupon debt securities. Zero-coupon debt
securities do not make regular cash interest payments, and are sold at a deep
discount to their face value.
Each
fund may also purchase step-coupon or step-rate debt securities. Instead of
having a fixed coupon for the life of the security, coupon or interest payments
may increase to predetermined rates at future dates. The issuer generally
retains the right to call the security. Some step-coupon securities are issued
with no coupon payments at all during an initial period, and only become
interest-bearing at a future date; these securities are sold at a deep discount
to their face value.
Finally,
Emerging Markets Debt may purchase pay-in-kind securities that do not make
regular cash interest payments, but pay interest through the issuance of
additional securities. Because such securities do not pay current cash income,
the price of these securities can be volatile when interest rates
fluctuate.
Although
zero-coupon, pay-in-kind and certain range floaters and step-coupon securities
may not pay current cash income, federal income tax law requires the holder to
include in income each year the portion of any original issue discount and other
noncash income on such securities accrued during that year. In order to continue
to qualify for treatment as a regulated investment company under the Internal
Revenue Code and avoid certain excise tax, the funds are required to make
distributions of any original issue discount and other noncash income accrued
for each year. Accordingly, the funds may be required to dispose of other
portfolio securities, which may occur in periods of adverse market prices, in
order to generate a case to meet these distribution
requirements.
Unless
otherwise indicated, with the exception of the percentage limitations on
borrowing, the policies described below apply at the time a fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in a fund’s assets will not be considered in
determining whether it has complied with its investment policies.
Fundamental
Investment Policies
The
funds’ fundamental investment policies are set forth below. These investment
policies, a fund’s status as diversified, and the investment objective of Global
Bond Fund, as set forth in the fund’s prospectus, may not be changed without
approval of a majority of the outstanding votes of shareholders of the fund.
Under the Investment Company Act, the vote of a majority of the outstanding
votes of shareholders means, the vote of (A) 67 percent or more of the voting
securities present at a shareholder meeting, if the holders of more than 50
percent of the outstanding voting securities are present or represented by
proxy; or (B) more than 50 percent of the outstanding voting securities,
whichever is less.
|
|
|
|
|
| |
| Subject |
Policy |
| Senior
Securities |
A
fund may not issue senior securities, except as permitted under the
Investment Company Act. |
| Borrowing |
A
fund may not borrow money, except that a fund may borrow for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33⅓% of the fund’s total assets (including the amount borrowed)
less liabilities (other than borrowings). |
| Lending |
A
fund may not lend any security or make any other loan if, as a result,
more than 33⅓% of the fund’s total assets would be lent to other parties,
except, (i) through the purchase of debt securities in accordance with its
investment objective, policies and limitations or (ii) by engaging in
repurchase agreements with respect to portfolio securities. |
| Real
Estate |
A
fund may not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments. This policy shall not
prevent a fund from investing in securities or other instruments backed by
real estate or securities of companies that deal in real estate or are
engaged in the real estate business. |
| Concentration |
A
fund may not concentrate its investments in securities of issuers in a
particular industry (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities). |
| Underwriting |
A
fund may not act as an underwriter of securities issued by others, except
to the extent that the fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of restricted
securities. |
| Commodities |
A
fund may not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments provided that this
limitation shall not prohibit the fund from purchasing or selling options
and futures contracts or from investing in securities or other instruments
backed by physical commodities. |
| Control |
A
fund may not invest for purposes of exercising control over
management. |
For
purposes of the investment policy relating to senior securities, a fund may
borrow from any bank provided that immediately after any such borrowing there is
asset coverage of at least 300% for all borrowings of such fund. In the event
that such asset coverage falls below 300%, the fund shall, within three days
thereafter (not including Sundays and holidays) or such longer period as the SEC
may prescribe by rules and regulations, reduce the amount of its borrowings to
an extent that the asset coverage of such borrowings is at least 300%. In
addition, when a fund enters into certain transactions involving potential
leveraging, it will hold offsetting positions or segregate assets to cover such
obligations at levels consistent with the guidance of the SEC and its
staff.
For
purposes of the investment policies relating to lending and borrowing, the funds
have received an exemptive order from the SEC regarding an interfund lending
program. Under the terms of the exemptive order, the funds may borrow money from
or lend money to other American Century Investments-advised funds that permit
such transactions. All such transactions will be subject to the limits for
borrowing and lending set forth above. The funds will borrow money through the
program only when the costs are equal to or lower than the costs of short-term
bank loans. Interfund loans and borrowings normally extend only overnight but
can have a maximum duration of seven days. The funds will lend through the
program only when the returns are higher than those available from other
short-term instruments (such as repurchase agreements). The funds may have to
borrow from a bank at a higher interest rate if an interfund loan is called or
not renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
For
purposes of the investment policy relating to concentration, a fund shall not
purchase any securities that would cause 25% or more of the value of the fund’s
net assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that
(a)there
is no limitation with respect to obligations issued or guaranteed by the U.S.
government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions and repurchase agreements secured by such obligations
(except that an Industrial Development Bond backed only by the assets and
revenues of a non-governmental user will be deemed to be an investment in the
industry represented by such user),
(b)wholly
owned finance companies will be considered to be in the industries of their
parents if their activities are primarily related to financing the activities of
their parents,
(c)utilities
will be divided according to their services, for example, gas, gas transmission,
electric and gas, electric, and telephone will each be considered a separate
industry,
(d)personal
credit and business credit businesses will be considered separate industries,
and
(e)for
Emerging Markets Debt, each industry will be subclassified by country for
concentration purposes.
Nonfundamental
Investment Policies
In
addition, the funds are subject to the following investment policies that are
not fundamental. These policies, along with the investment objectives of
Emerging Markets Debt and International Bond, as set forth in each fund’s
prospectus, may be changed by the Board of Trustees.
|
|
|
|
|
| |
| Subject |
Policy |
| Leveraging |
A
fund may not purchase additional investment securities at any time during
which outstanding borrowings exceed 5% of the total assets of the
fund. |
| Liquidity |
A
fund may not purchase any security or enter into a repurchase agreement
if, as a result, more than 15% of its net assets would be invested in
illiquid securities. Illiquid securities include repurchase agreements not
entitling the holder to payment of principal and interest within seven
days and in securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available
market. |
| Short
Sales |
A
fund may not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in futures contracts, options and
other derivative instruments are not deemed to constitute selling
securities short. |
| Margin |
A
fund may not purchase securities on margin, except to obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits in connection with
transactions involving futures, options (puts, calls, etc.), swaps, short
sales, forward contracts, commitment agreements, and other similar
investment techniques shall not be deemed to constitute purchasing
securities on margin. |
Futures
and
Options |
A
fund may enter into futures contracts and write and buy put and call
options relating to futures contracts. A fund may not, however, enter into
leveraged futures transactions if it would be possible for the fund to
lose more than the notional value of the investment. |
Issuers
with
Limited
Operating
Histories |
A
fund may invest a portion of its assets in the securities of issuers with
limited operating histories. An issuer is considered to have a limited
operating history if that issuer has a record of less than three years of
continuous operation. Periods of capital formation, incubation,
consolidations, and research and development may be considered in
determining whether a particular issuer has a record of three years of
continuous operation. |
The
Investment Company Act imposes certain additional restrictions upon the funds’
ability to acquire securities issued by insurance companies, broker-dealers,
underwriters or investment advisors, and upon transactions with affiliated
persons as defined by the Act. It also defines and forbids the creation of cross
and circular ownership. Neither the SEC nor any other agency of the federal or
state government participates in or supervises the management of the funds or
their investment practices or policies.
For
temporary defensive purposes, a fund may invest in securities that may not fit
its investment objective or its stated market. During a temporary defensive
period, a fund may direct its assets to the following investment
vehicles:
•interest-bearing
bank accounts or Certificates of Deposit;
•U.S.
government securities and repurchase agreements collateralized by U.S.
government securities; and
•money
market funds.
To
the extent a fund assumes a defensive position, it may not achieve its
investment objective.
The
portfolio turnover rate of each fund for its most recent fiscal year is included
in the Fund
Summary
section of that fund’s prospectus. The portfolio turnover rate for each fund’s
last five fiscal years (or shorter period if the fund is less than five years
old) is shown in the Financial
Highlights
tables in the prospectus.
The
portfolio manager will sell securities without regard to the length of time the
security has been held. Accordingly, the fund’s rate of portfolio turnover may
be substantial.
The
portfolio managers intend to purchase a particular security whenever they
believe it will contribute to the stated objective of a particular fund. In
order to achieve each fund’s investment objective, the portfolio managers may
sell a given security, regardless of the length of time it has been held in the
portfolio, and, regardless of the gain or loss realized on the sale. The
managers may sell a portfolio security if they believe that the security is not
fulfilling its purpose because, among other things, it did not live up to the
managers’ expectations, because it may be replaced with another security holding
greater promise, because it has reached its optimum potential, because of a
change in the circumstances of a particular company or industry or in general
economic conditions, or because of some combination of such
reasons.
Because
investment decisions are based on a particular security’s anticipated
contribution to a fund’s objectives, the managers believe that the rate of
portfolio turnover is irrelevant when they determine that a change is required
to pursue the fund’s investment objective. As a result, a fund’s annual
portfolio turnover rate cannot be anticipated and may be higher than other
mutual funds with similar investment objectives. Portfolio turnover also may
affect the character of capital gains realized and distributed by the fund, if
any, since short-term capital gains are taxable as ordinary income.
Because
the managers do not take portfolio turnover rate into account in making
investment decisions, (1) the managers have no intention of maintaining any
particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as representative
of the rates that will be attained in the future.
Variations
in a fund’s portfolio turnover rate from year to year may be due to a
fluctuating volume of shareholder purchase and redemption activity, varying
market conditions, and/or changes in the manager’s investment outlook. The
increase in turnover was largely seen in credit spread assets in the
securitization markets as the fund moved between agency and non-agency
exposures. In corporate markets, the significant increase in new issuance as
companies increased liquidity reserves significantly increased the fund’s
activity in the primary markets and spread volatility created more trading
opportunities in secondary markets.
The
advisor (ACIM) has adopted policies and procedures with respect to the
disclosure of fund portfolio holdings and characteristics, which are described
below.
Distribution
to the Public
Month-end
full portfolio holdings for each fund will generally be made available for
distribution 15 days after the end of each calendar quarter for each of the
preceding three months. This disclosure is in addition to the portfolio
disclosure in annual and semiannual shareholder reports and the quarter-end
portfolio disclosures on Form N-PORT. Such disclosures are filed with the
Securities and Exchange Commission within 60 days of each fiscal quarter end and
also posted on americancentury.com at approximately the same time the filings
are made. The distribution of holdings after the above time periods is not
limited.
On
a monthly basis, top 10 holdings (on an absolute basis and relative to the
appropriate benchmark) for each fund (except AC Alternatives Market Neutral
Value Fund, which is limited to the top five pairs by type, as described below)
will generally be made available for distribution 7 days after the end of each
month, and will be posted on americancentury.com at approximately the same
time.
Portfolio
characteristics that are derived from portfolio holdings will be made available
for distribution 7 days after the end of each month, or as soon thereafter as
possible, which timeframe may vary by fund. Certain characteristics, as
determined by the advisor, will be posted on americancentury.com monthly at
approximately the time they are made available for distribution. Data derived
from portfolio returns and any other characteristics not deemed confidential
will be available for distribution at any time. The advisor may make
determinations of confidentiality on a fund-by-fund basis, and may add or delete
characteristics to or from those considered confidential at any
time.
Any
American Century Investments fund that sells securities short as an investment
strategy will disclose full portfolio holdings in annual and semiannual
shareholder reports and on Form N-PORT). These funds will make long and short
holdings as of the end of a calendar quarter available for distribution 15 days
after the end of each calendar quarter. These funds may also make limited
disclosures as noted in the Single Event Requests section below. The
distribution of holdings after the above time periods is not
limited.
Examples
of securities (both long and short) currently or previously held in a portfolio
may be included in presentations or other marketing documents as soon as
available. The inclusion of such examples is at the relevant portfolio’s team
discretion.
So
long as portfolio holdings are disclosed in accordance with the above
parameters, the advisor makes no distinction among different categories of
recipients, such as individual investors, institutional investors,
intermediaries that distribute the funds’ shares, third-party service providers,
rating and ranking organizations, and fund affiliates. Because this information
is publicly available and widely disseminated, the advisor places no conditions
or restrictions on, and does not monitor, its use. Nor does the advisor require
special authorization for its disclosure.
Accelerated
Disclosure
The
advisor recognizes that certain parties, in addition to the advisor and its
affiliates, may have legitimate needs for information about portfolio holdings
and characteristics prior to the times prescribed above. Such accelerated
disclosure is permitted under the circumstances described below.
Ongoing
Arrangements
Certain
parties, such as investment consultants who provide regular analysis of fund
portfolios for their clients and intermediaries who pass through information to
fund shareholders, may have legitimate needs for accelerated disclosure. These
needs may include, for example, the preparation of reports for customers who
invest in the funds, the creation of analyses of fund characteristics for
intermediary or consultant clients, the reformatting of data for distribution to
the intermediary’s or consultant’s clients, and the review of fund performance
for ERISA fiduciary purposes.
In
such cases, accelerated disclosure is permitted if the service provider enters
an appropriate non-disclosure agreement with the fund’s distributor in which it
agrees to treat the information confidentially until the public distribution
date and represents that the information will be used only for the legitimate
services provided to its clients (i.e., not for trading). Non-disclosure
agreements require the approval of an attorney in the advisor’s legal
department. The advisor’s compliance department receives quarterly reports
detailing which clients received accelerated disclosure, what they received,
when they received it and the purposes of such disclosure. Compliance personnel
are required to confirm that an appropriate non-disclosure agreement has been
obtained from each recipient identified in the reports.
Those
parties who have entered into non-disclosure agreements as of December 31,
2022,
are as follows:
•Aetna
Inc.
•Alight
Solutions LLC
•AllianceBernstein
L.P.
•American
Fidelity Assurance Co.
•Ameritas
Life Insurance Corporation
•AMP
Capital Investors Limited
•Annuity
Investors Life Insurance Company
•Aon
Hewitt Investment Consulting
•Athene
Annuity & Life Assurance Company
•AUL/American
United Life Insurance Company
•AXA
Equitable Funds Management Group, LLC
•Bell
Globemedia Publishing
•Bellwether
Consulting, LLC
•BNY
Mellon Performance & Risk Analytics, LLC
•Brighthouse
Life Insurance Company
•Callan
Associates, Inc.
•Calvert
Asset Management Company, Inc.
•Cambridge
Associates, LLC
•Cambridge
Financial Services, Inc.
•Capital
Cities, LLC
•CBIZ,
Inc.
•Charles
Schwab & Co., Inc.
•Choreo,
LLC
•Clearwater
Analytics, LLC
•Cleary
Gull Inc.
•Commerce
Bank
•Connecticut
General Life Insurance Company
•Corestone
Investment Managers AG
•Corning
Incorporated
•Curcio
Webb LLC
•Deutsche
AM Distributors, Inc.
•Eckler,
Ltd.
•Electra
Information Systems, Inc.
•Equitable
Investment Management Group, LLC
•EquiTrust
Life Insurance Company
•Farm
Bureau Life Insurance Company
•Fidelity
Workplace Services, LLC
•FIL
Investment Management
•Finance-Doc
Multimanagement AG
•Fund
Evaluation Group, LLC
•Government
Employees Pension Service
•Great-West
Financial Retirement Plan Services, LLC
•GSAM
Strategist Portfolios, LLC
•The
Guardian Life Insurance Company of America
•Intel
Corporation
•InvesTrust
Consulting, LLC
•Iron
Capital Advisors
•Jefferson
National Life Insurance Company
•JLT
Investment Management Limited
•John
Hancock Financial Services, Inc.
•Kansas
City Life Insurance Company
•Kiwoom
Asset Management
•Kmotion,
Inc.
•Korea
Investment Management Co. Ltd.
•Korea
Teachers Pension
•Legal
Super Pty Ltd.
•The
Lincoln National Life Insurance Company
•Lipper
Inc.
•Marquette
Associates
•Massachusetts
Mutual Life Insurance Company
•Mercer
Investment Management, Inc.
•Merian
Global Investors Limited
•Merrill
Lynch
•Midland
National Life Insurance Company
•Minnesota
Life Insurance Company
•Modern
Woodmen of America
•Montana
Board of Investments
•Morgan
Stanley Wealth
Management
•Morningstar
Investment Management LLC
•Morningstar,
Inc.
•Morningstar
Investment Services, Inc.
•MUFG
Union Bank, NA
•Mutual
of America Life Insurance Company
•National
Life Insurance Company
•Nationwide
Financial
•NEPC
•The
Newport Group
•Nomura
Asset Management U.S.A. Inc.
•Nomura
Securities International, Inc.
•The
Northern Trust Company
•Northwestern
Mutual Life Insurance Co.
•NYLIFE
Distributors, LLC
•Pacific
Life Insurance Company
•Principal
Life Insurance Company
•Prudential
Financial
•RidgeWorth
Capital Management, Inc.
•Rocaton
Investment Advisors, LLC
•RVK,
Inc.
•S&P
Financial Communications
•Säästöpankki
(The Savings Banks)
•Security
Benefit Life Insurance Co.
•Shinhan
Asset Management
•State
Street Global Exchange
•State
Street Global Markets Canada Inc.
•Stellantis
•Symetra
Life Insurance Company
•Tokio
Marine Asset Management Co., Ltd.
•Towers
Watson Investment Services, Inc.
•Truist
Bank
•UBS
Financial Services, Inc.
•UBS
Wealth Management
•Univest
Company
•Valic
Financial Advisors Inc.
•VALIC
Retirement Services Company
•Vestek
Systems, Inc.
•Voya
Retirement Insurance and Annuity Company
•Wells
Fargo Bank, N.A.
•Wilshire
Associates Incorporated
•Zeno
Consulting Group, LLC
Once
a party has executed a non-disclosure agreement, it may receive any or all of
the following data for funds in which its clients have investments or are
actively considering investment:
(1)
Full holdings (both long and short) quarterly as soon as reasonably available;
(2)
Full holdings (long only) monthly as soon as reasonably available;
(3)
Top 10 holdings (top 5 pairs for each type for AC Alternatives Market Neutral
Value Fund) monthly as soon as reasonably available; and
(4)
Portfolio attributes (such as sector or country weights), characteristics and
performance attribution monthly as soon as reasonably available.
The
types, frequency and timing of disclosure to such parties vary.
Single
Event Requests
In
certain circumstances, the advisor may provide fund holding information on an
accelerated basis outside of an ongoing arrangement with manager-level or higher
authorization. For example, from time to time the advisor may receive requests
for proposals (RFPs) from consultants or potential clients that request
information about a fund’s holdings on an accelerated basis. As long as such
requests are on a one-time basis, and do not result in continued receipt of
data, such information may be provided in the RFP. In these circumstances, top
15 long and short holdings may be disclosed 7 days after the end of each month.
Such disclosure may be presented in paired trades, such as by showing a long
holding in one sector or security and a corresponding short holding in another
sector or security together to show a long/short strategy. Such information will
be provided with a confidentiality legend and only in cases where the advisor
has reason to believe that the data will be used only for legitimate purposes
and not for trading.
Service
Providers
Various
service providers to the fund and the fund’s advisor must have access to some or
all of the fund’s portfolio holdings information on an accelerated basis from
time to time in the ordinary course of providing services to the funds. These
service providers include the fund’s custodian (daily, with no lag), auditors
(as needed) and brokers involved in the execution of fund trades (as needed).
Additional information about these service providers and their relationships
with the fund and the advisor are provided elsewhere in this statement of
additional information. In addition, the fund’s investment advisor may use
analytical systems provided by third party data aggregators who have access to
the fund’s portfolio holdings daily, with no lag. These data aggregators enter
into separate non-disclosure agreements after authorization by an appropriate
officer of the advisor. The agreements with service providers and data
aggregators generally require that they treat the funds’ portfolio holdings
information confidentially until the public distribution date and represent that
the information will be used only for the legitimate services it provides (i.e.,
not for trading).
Additional
Safeguards
The
advisor’s policies and procedures include a number of safeguards designed to
control disclosure of portfolio holdings and characteristics so that such
disclosure is consistent with the best interests of fund shareholders, including
procedures to address conflicts between the interests of shareholders and those
of the advisor and its affiliates. First, the frequency with which this
information is disclosed to the public, and the length of time between the date
of the information and the date on which the information is disclosed, are
selected to minimize the possibility of a third party improperly benefiting from
fund investment decisions to the detriment of fund shareholders. In the event
that a request for portfolio holdings or characteristics creates a potential
conflict of interest that is not addressed by the safeguards and procedures
described above, the advisor’s procedures require that such requests may only be
granted with the approval of the advisor’s legal department and the relevant
chief investment officers. In addition, distribution of portfolio holdings
information, including compliance with the advisor’s policies and the resolution
of any potential conflicts that may arise, is monitored quarterly by the
advisor’s compliance department. Finally, the funds’ Board of Trustees exercises
oversight of disclosure of the funds’ portfolio securities. The board has
received and reviewed a summary of the advisor’s policy and is informed on a
quarterly basis of any changes to or violations of such policy detected during
the prior quarter.
Neither
the advisor nor the funds receive any compensation from any party for the
distribution of portfolio holdings information.
The
advisor reserves the right to change its policies and procedures with respect to
the distribution of portfolio holdings information at any time. There is no
guarantee that these policies and procedures will protect the funds from the
potential misuse of holdings information by individuals or firms in possession
of such information.
The
individuals listed below serve as trustees of the funds. Each trustee will
continue to serve in this capacity until death, retirement, resignation or
removal from office. The board has adopted a mandatory retirement age for
trustees who are not “interested persons,” as that term is defined in the
Investment Company Act (independent trustees). Independent trustees shall retire
on December 31 of the year in which they reach their 76th
birthday.
Jonathan
S. Thomas is an “interested person” because he currently serves as President and
Chief Executive Officer of American Century Companies, Inc. (ACC), the parent
company of American Century Investment Management, Inc. (ACIM or the advisor).
The other trustees (more than three-fourths of the total number) are
independent. They are not employees, directors or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACIM, American Century Investment Services, Inc. (ACIS)
and American Century Services, LLC (ACS), and they do not have any other
affiliations, positions or relationships that would cause them to be considered
“interested persons” under the Investment Company Act. The trustees serve in
this capacity for eight (in the case of Jonathan S. Thomas, 16; and Jeremy I.
Bulow, 9) registered investment companies in the American Century Investments
family of funds.
The
following table presents additional information about the trustees. The mailing
address for each trustee other than Jonathan S. Thomas is 3945 Freedom Circle,
Suite #800, Santa Clara, California 95054. The mailing address for Jonathan S.
Thomas is 4500 Main Street, Kansas City, Missouri 64111.
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Name
(Year
of Birth) |
Position(s)
Held with Funds |
Length
of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of American Century Portfolios Overseen by Trustee |
Other
Directorships Held During Past 5 Years |
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Independent
Trustees |
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Tanya
S. Beder
(1955) |
Trustee
and Board Chair |
Since
2011 (Board Chair since 2022) |
Chairman
and CEO, SBCC
Group Inc.
(independent advisory services) (2006 to present) |
32 |
Kirby
Corporation; Nabors Industries,
Ltd. |
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Name
(Year
of Birth) |
Position(s)
Held with Funds |
Length
of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of American Century Portfolios Overseen by Trustee |
Other
Directorships Held During Past 5 Years |
|
Jeremy
I. Bulow
(1954) |
Trustee |
Since
2011 |
Professor
of Economics, Stanford
University, Graduate School of Business
(1979 to present) |
76
|
None |
Jennifer
Cabalquinto
(1968) |
Trustee |
Since
2021 |
Chief
Financial Officer, 2K
(interactive entertainment) (2021 to present); Special Advisor,
GSW
Sports, LLC (2020
to 2021); Chief Financial Officer, GSW
Sports, LLC (2013
to 2020) |
32 |
Sabio
Holdings, Inc. |
|
Anne
Casscells
(1958) |
Trustee |
Since
2016 |
Co-Chief
Executive Officer and Chief Investment Officer, Aetos
Alternatives Management
(investment advisory firm) (2001 to present) |
32 |
None |
Jonathan
D. Levin
(1972) |
Trustee |
Since
2016 |
Philip
H. Knight Professor and Dean, Graduate
School of Business, Stanford University
(2016 to present); Professor, Stanford
University
(2000 to present); |
32 |
None |
|
Peter
F. Pervere
(1947) |
Trustee |
Since
2007 |
Retired |
32 |
None |
|
John
B. Shoven (1947) |
Trustee |
Since
2002 |
Charles
R. Schwab Professor of Economics, Stanford
University
(1973 to present, emeritus since 2019) |
32 |
Cadence
Design Systems; Exponent;
Financial Engines |
|
Interested
Trustee |
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Jonathan
S. Thomas
(1963) |
Trustee |
Since
2007 |
President
and Chief Executive Officer, ACC
(2007 to present). Also serves as Chief Executive Officer, ACS;
Director, ACC
and other ACC
subsidiaries |
140 |
None |
Qualifications
of Trustees
Generally,
no one factor was decisive in the selection of the trustees to the board.
Qualifications considered by the board to be important to the selection and
retention of trustees include the following: (i) the individual’s business and
professional experience and accomplishments; (ii) the individual’s educational
background and accomplishments; (iii) the individual’s experience and expertise
performing senior policy-making functions in business, government, education,
accounting, law and/or administration; (iv) how the individual’s expertise and
experience would contribute to the mix of relevant skills and experience on the
board; (v) the individual’s ability to work effectively with the other members
of the board; and (vi) the individual’s ability and willingness to make the time
commitment necessary to serve as an effective trustee. In addition, the
individuals’ ability to review and critically evaluate information, their
ability to evaluate fund service providers, their ability to exercise good
business judgment on behalf of fund shareholders, their prior service on the
board, and their familiarity with the funds are considered important
assets.
While
the board has not adopted a specific policy on diversity, it takes overall
diversity into account when considering and evaluating nominees for trustee. The
board generally considers the manner in which each trustee’s professional
experience, background, skills, and other individual attributes will contribute
to the effectiveness of the board. Additional information about each trustee’s
individual educational and professional experience (supplementing the
information provided in the table above) follows.
Tanya
S. Beder:
BA, Yale University; MBA, Harvard University; Fellow in Practice, International
Center for Finance, Yale University, School of Management; formerly, Lecturer in
Public Policy, Stanford University; formerly, Chief Executive Officer, Tribeca
Global Management LLC (asset management firm); formerly, Managing Director and
Head of Strategic Quantitative Investment Division, Caxton Associates LLC;
formerly, President and Co-Founder, Capital Market Risk Advisors Inc.; formerly
Founder and Chief Executive Officer, SB Consulting Corp.
Jeremy
I. Bulow: BA,
MA, Yale University; PhD in Economics, Massachusetts Institute of Technology;
formerly, Director, Bureau of Economics, Federal Trade Commission
Jennifer
Cabalquinto: BS
in Accounting, State University of New York; Experienced Financial Leadership
Program Graduate, General Electric Company; formerly, Chief Financial Officer,
Legal Solutions Holdings Inc.; formerly, Chief Financial Officer, NBC Universal,
Universal Studios Hollywood; formerly, Vice President, Finance, NBC Universal,
Los Angeles Television Station Group
Anne
Casscells:
BA in British Studies, Yale University; MBA, Stanford Graduate School of
Business;
formerly Lecturer in Accounting, Stanford University, Graduate School of
Business; formerly
Chief Investment Officer and Managing Director of Investment Policy Research,
Stanford Management Company; formerly Vice President, Fixed Income Division,
Goldman Sachs
Jonathan
D. Levin: BA
in English, BS in Mathematics, Stanford University; MPhil in Economics, Oxford
University; PhD in Economics, Massachusetts Institute of Technology; Senior
Fellow, Stanford Institute for Economic Policy Research; Trustee, Gordon and
Betty Moore Foundation; Member, President’s Council of Advisors on Science and
Technology
Peter
F. Pervere:
BA in History, Stanford University; CPA; formerly, Vice President and Chief
Financial Officer, Commerce One, Inc. (software and services provider);
formerly, Vice President and Corporate Controller, Sybase, Inc.; formerly with
accounting firm of Arthur Young & Co.
John
B. Shoven:
BA in Physics, University of California; PhD in Economics, Yale University;
formerly, Director of the Stanford Institute for Economic Policy Research;
formerly, Chair of Economics and Dean of Humanities and Sciences, Stanford
University
Jonathan
S. Thomas:
BA
in Economics, University of Massachusetts; MBA, Boston College; formerly held
senior leadership roles with Fidelity Investments, Boston Financial Services,
Bank of America and Morgan Stanley; serves on the Board of Governors of the
Investment Company Institute
Responsibilities
of the Board
The
board is responsible for overseeing the advisor’s management and operations of
the fund pursuant to the management agreement. Trustees also have significant
responsibilities under the federal securities laws. Among other things,
they:
•oversee
the performance of the funds;
•oversee
the quality of the advisory and shareholder services provided by the
advisor;
•review
annually the fees paid to the advisor for its services;
•monitor
potential conflicts of interest between the funds and their affiliates,
including the advisor;
•oversee
custody of assets and the valuation of securities; and
•oversee
the funds’ compliance program.
In
performing their duties, board members receive detailed information about the
funds and the advisor regularly throughout the year, and they meet in person at
least quarterly with management of the advisor to review reports about fund
operations. Certain Board committee members also hold periodic telephone
conferences with management between quarterly board meetings. The trustees’ role
is to provide oversight and not to provide day-to-day management.
The
board has all powers necessary or convenient to carry out its responsibilities.
Consequently, the board may adopt bylaws providing for the regulation and
management of the affairs of the funds and may amend and repeal them to the
extent that such bylaws do not reserve that right to the funds’ shareholders.
They may increase or reduce the number of board members and may, subject to the
Investment Company Act, fill board vacancies. Board members also may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate. They may establish and terminate committees consisting of two or
more trustees who may exercise the powers and authority of the board as
determined by the trustees. They may, in general, delegate such authority as
they consider desirable to any officer of the funds, to any board committee and
to any agent or employee of the funds or to any custodian, transfer agent,
investor servicing agent, principal underwriter or other service provider for a
fund.
To
communicate with the board, or a member of the board, a shareholder should send
a written communication addressed to the board or member of the board to the
attention of the Corporate Secretary at the following address: P.O. Box 418210,
Kansas City, Missouri 64141-9210. Shareholders who prefer to communicate by
email may send their comments to [email protected]. All
shareholder communications received will be forwarded to the board or to the
independent board chair.
Board
Leadership Structure and Standing Board Committees
Tanya
S. Beder currently serves as the independent board chair and has served in such
capacity since 2022. Of the board’s members, Jonathan S. Thomas is the only
member who is an “interested person” as that term is defined in the Investment
Company Act. The remaining members are independent trustees. The independent
trustees meet separately to consider a variety of matters that are scheduled to
come before the board and meet periodically with the fund’s Chief Compliance
Officer and fund auditors. They are advised by independent legal counsel. No
independent trustee may serve as an officer or employee of a fund. The board has
also established several committees, as described below. Each committee is
comprised solely of independent trustees. The board believes that the current
leadership structure, with independent trustees filling all but one position on
the board, with an independent trustee serving as board chair and with the board
committees comprised only of independent trustees, is appropriate and allows for
independent oversight of the fund.
The
board has an Audit and Compliance Committee that approves the funds’ engagement
of the independent registered public accounting firm and recommends approval of
such engagement to the independent trustees. The committee also oversees the
activities of the accounting firm, receives regular reports regarding fund
accounting, oversees securities valuation (approving the funds’ or the
trust’s
valuation policy and receiving reports regarding instances of fair valuation
thereunder), and receives regular reports from the advisor’s internal audit
department. The committee also reviews the results of the funds’ compliance
testing program, meets regularly with the fund’s Chief Compliance Officer, and
monitors implementation of the funds’ Code of Ethics. The committee currently
consists of Peter F. Pervere (chair), Tanya S. Beder, Jennifer Cabalquinto and
Anne Casscells. The committee met four times during the funds’ fiscal year ended
October 31, 2022.
The
board also has a Portfolio Committee that meets quarterly to review the
investment activities and strategies used to manage the funds’ assets and
monitor investment performance. The committee regularly receives reports from
the advisor’s Chief Investment Officer, portfolio managers, credit analysts and
other investment personnel concerning the funds’ investments. The committee also
receives information regarding fund trading activities and monitors derivative
usage. It currently consists of Anne Casscells (chair), Tanya S. Beder, Jeremy
I. Bulow, Jonathan D. Levin and John B. Shoven. The committee met four times
during the funds’ fiscal year ended October 31, 2022.
The
Client Experience Oversight Committee monitors the quality of services that the
funds offer both to direct customers and to intermediaries who offer fund shares
to their customers. All channels of communication (written, telephone, web and
mobile) are reviewed. The level of performance is compared to peer competitors.
The committee also monitors payments to intermediaries and trading in fund
shares that could harm the interests of other shareholders and reviews future
strategic initiatives of the advisor and their potential effects on fund
shareholders. The committee currently consists of John B. Shoven (chair), Jeremy
I. Bulow, Jonathan D. Levin and Peter F. Pervere. The committee met four times
during the funds’ fiscal year ended October 31, 2022.
The
Technology and Risk Committee coordinates the board’s oversight of the funds’
risk management processes and monitors the systems, practices and procedures the
advisor uses to manage the funds’ risks. In addition, the committee oversees
enterprise technology risk management and the advisor’s processes for oversight
of vendors that provide critical services or technologies to the funds or on
which the advisor relies in providing services to the funds. It also makes
recommendations to the board regarding the allocation of risk oversight
activities among the board’s committees. The committee currently consists of
Jennifer Cabalquinto (chair), Tanya S. Beder, Anne Casscells and Peter F.
Pevere. The committee met four times during the funds’ fiscal year ended October
31, 2022.
The
board has a Corporate Governance Committee that is responsible for reviewing
board procedures and committee structures. The committee also considers and
recommends individuals for nomination as trustees. The names of potential
trustee candidates may be drawn from a number of sources, including
recommendations from members of the board, the advisor (in the case of
interested trustees only), shareholders and third party search firms. The
committee seeks to identify and recruit the best available candidates and will
evaluate qualified shareholder nominees on the same basis as those identified
through other sources. Although not written, the fund has a policy of
considering all candidates recommended in writing by shareholders. Shareholders
may submit trustee nominations in writing to the Corporate Secretary, P.O. Box
418210, Kansas City, Missouri 64141-9210, or by email to
[email protected]. The nomination should include the
following information:
•Shareholder’s
name, the fund name, number of fund shares owned and length of period
held;
•Name,
age and address of the candidate;
•A
detailed resume describing, among other things, the candidate’s educational
background, occupation, employment history, financial knowledge and expertise
and material outside commitments (e.g., memberships on other boards and
committees, charitable foundations, etc.);
•Any
other information relating to the candidate that is required to be disclosed in
solicitations of proxies for election of trustees in an election contest
pursuant to Regulation 14A under the Securities Exchange Act of
1934;
•A
supporting statement that (i) describes the candidate’s reasons for seeking
election to the board and(ii) documents his/her qualifications to serve as a
trustee; and
•A
signed statement from the candidate confirming his/her willingness to serve on
the board.
The
Corporate Governance Committee also may consider, and make recommendations to
the board regarding, other matters relating to the corporate governance of the
funds. It currently consists of Jonathan D. Levin (chair), Tanya
S. Beder,
Jeremy I. Bulow and John B. Shoven. The committee met four times during the
funds’ fiscal year ended October 31, 2022.
Risk
Oversight by the Board
As
previously disclosed, the board oversees the advisor’s management of the funds
and meets at least quarterly with management of the advisor to review reports
and receive information regarding fund operations. Risk oversight relating to
the funds is one component of the board’s oversight and is undertaken in
connection with the duties of the board. As described in the previous section,
the board’s committees, including the Technology and Risk Committee, assist the
board in overseeing various types of risks relating to the funds. The board
receives regular reports from each committee regarding the committee’s areas of
oversight responsibility. In addition, the board receives information regarding,
and has discussions with senior management of the advisor about, the advisor’s
enterprise risk management systems and strategies. There can be no assurance
that all elements of risk, or even all elements of material risk, will be
disclosed to or identified by the board, or that the advisor’s risk management
systems and strategies, and the board’s oversight thereof, will mitigate all
elements of risk, or even all elements of material risk, to the
funds.
Board
Compensation
Each
independent trustee receives compensation for service as a member of the board.
Under the terms of each management agreement with the advisor, the funds are
responsible for paying such fees and expenses. None of the interested trustees
or officers of the funds receive compensation from the funds. For the fiscal
year ended October 31, 2022,
each independent trustee received the following compensation for his or her
service to the funds and the American Century family of
funds.
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| Name
of Trustee |
Total
Compensation for Service
as
Trustee of the Funds1 |
Total
Compensation for Service as Directors/Trustees for the
American
Century
Investments Family of Funds2 |
| Tanya
S. Beder |
$29,988 |
$382,500 |
| Jeremy
I. Bulow |
$22,895 |
$395,833 |
| Anne
Casscells |
$23,929 |
$305,000 |
| Jennifer
Cabalquinto |
$23,603 |
$300,833 |
|
Ronald
J. Gilson3 |
$5,226 |
$75,000 |
|
Frederick
L.A. Grauer3 |
$3,953 |
$49,167 |
| Jonathan
D. Levin |
$23,603 |
$300,833 |
| Peter
F. Pervere |
$24,589 |
$313,333 |
| John
B. Shoven |
$23,804 |
$303,333 |
1 Includes
compensation paid to the trustees for fiscal year ended October 31, 2022, and
also includes amounts deferred at the election of the trustees under the
American Century Mutual Funds’ Independent Directors’ Deferred Compensation
Plan.
2 Includes
compensation paid to each trustee for his or her service as director/trustee for
eight (in the case of Mr.
Bulow
and Mr. Gilson, nine) investment companies in the American Century Investments
family of funds. The total amount of deferred compensation included in the table
is as follows: Mr.
Bulow, $86,459;
Ms. Casscells, $305,000;
and Mr. Pervere, $31,333.
3 Mr.
Gilson and Mr. Grauer retired from the board on December 31, 2021.
None
of the funds currently provides any pension or retirement benefits to the
trustees except pursuant to the American Century Mutual Funds’ Independent
Directors’ Deferred Compensation Plan adopted by the trust. Under the plan, the
independent trustees may defer receipt of all or any part of the fees to be paid
to them for serving as trustees of the funds. All deferred fees are credited to
accounts established in the names of the trustees. The amounts credited to each
account then increase or decrease, as the case may be, in accordance with the
performance of one or more American Century funds selected by the trustees. The
account balance continues to fluctuate in accordance with the performance of the
selected fund or funds until final payment of all amounts credited to the
account. Trustees are allowed to change their designation of funds from time to
time.
Generally,
deferred fees are not payable to a trustee until the distribution date elected
by the trustee in accordance with the terms of the plan. Such distribution date
may be a date on or after the trustee’s retirement date, but may be an earlier
date if the trustee agrees not to make any additional deferrals after such
distribution date. Distributions may commence prior to the elected payment date
for certain reasons specified in the plan, such as unforeseeable emergencies,
death or disability. Trustees may receive deferred fee account balances either
in a lump sum payment or in substantially equal installment payments to be made
over a period not to exceed 10 years. Upon the death of a trustee, all remaining
deferred fee account balances are paid to the trustee’s beneficiary or, if none,
to the trustee’s estate.
The
plan is an unfunded plan and, accordingly, the funds have no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
met all payment obligations under the plan. The rights of trustees to receive
their deferred fee account balances are the same as the rights of a general
unsecured creditor of the fund. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.
Ownership
of Fund Shares
The
trustees owned shares in the funds as of December 31, 2022, as shown in the
table below.
|
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|
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|
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|
|
|
|
|
|
| |
| |
|
| |
Tanya
S.
Beder |
Jeremy
I.
Bulow |
Jennifer
Cabalquinto |
Anne
Casscells |
| Dollar
Range of Equity Securities in the Fund: |
| Emerging
Markets Debt |
A |
A |
A |
A |
| Global
Bond |
A |
A |
A |
A |
| International
Bond |
A |
A |
A |
A |
Aggregate
Dollar Range of Equity
Securities in all Registered
Investment
Companies Overseen by Trustees in
Family of Investment
Companies |
E |
D |
A |
E |
Ranges:
A—none, B—$1-$10,000, C—$10,001-$50,000, D—$50,001-$100,000, E—More than
$100,000
|
|
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|
|
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|
|
|
|
|
|
|
|
| |
| |
|
| |
Jonathan
D. Levin |
Peter
F.
Pervere |
John
B.
Shoven |
Jonathan
S. Thomas |
| Dollar
Range of Equity Securities in the Fund: |
| Emerging
Markets Debt |
A |
A |
A |
A |
| Global
Bond |
A |
A |
A |
A |
| International
Bond |
A |
A |
A |
A |
Aggregate
Dollar Range of Equity
Securities in all Registered
Investment
Companies Overseen by Trustees in
Family of Investment
Companies |
A |
E |
E |
E |
Ranges:
A—none, B—$1-$10,000, C—$10,001-$50,000, D—$50,001-$100,000, E—More than
$100,000
Beneficial
Ownership of Affiliates by Independent Trustees
No
independent trustee or his or her immediate family members beneficially owned
shares of the advisor, the principal underwriter of the funds or any other
person directly or indirectly controlling, controlled by, or under common
control with the advisor or the funds’ principal underwriter as of December 31,
2022.
The
following table presents certain information about the executive officers of the
funds. Each officer serves as an officer for 16 investment companies in the
American Century family of funds. No officer is compensated for his or her
service as an officer of the funds. The listed officers are interested persons
of the funds and are appointed or re-appointed on an annual basis. The mailing
address for each of the officers listed below is 4500 Main Street, Kansas City,
Missouri 64111.
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| |
Name
(Year
of Birth) |
Offices
with
the Funds |
Principal
Occupation(s) During the Past Five Years |
Patrick
Bannigan
(1965) |
President
since
2019 |
Executive
Vice President and Director, ACC
(2012 to present); Chief Financial Officer, Chief Accounting Officer and
Treasurer, ACC (2015
to present). Also serves as President, ACS;
Vice President, ACIM;
Chief Financial Officer, Chief Accounting Officer and/or
Director, ACIM,
ACS and
other ACC subsidiaries |
R.
Wes Campbell
(1974) |
Chief
Financial
Officer and Treasurer
since 2018 |
Vice
President, ACS
(2020
to present); Investment Operations and Investment Accounting, ACS
(2000 to present) |
Amy
D. Shelton
(1964) |
Chief
Compliance
Officer and Vice President since 2014 |
Chief
Compliance Officer, American Century funds, (2014 to present); Chief
Compliance Officer, ACIM
(2014 to present); Chief Compliance Officer, ACIS
(2009 to present). Also serves as Vice President, ACIS |
John
Pak
(1968) |
General
Counsel and
Senior Vice President since 2021 |
General
Counsel and Senior Vice President, ACC
(2021 to present); Also serves as General Counsel and Senior Vice
President, ACIM,
ACS
and ACIS.
Chief Legal Officer of Investment and Wealth Management, The Bank of New
York Mellon (2014 to 2021) |
|
|
|
|
|
|
|
|
| |
Name
(Year
of Birth) |
Offices
with
the Funds |
Principal
Occupation(s) During the Past Five Years |
David
H. Reinmiller
(1963) |
Vice
President
since 2000 |
Attorney,
ACC
(1994 to present). Also serves as Vice President, ACIM
and ACS |
Ward
D. Stauffer
(1960) |
Secretary
since
2005 |
Attorney,
ACC
(June 2003 to present) |
The
funds, their investment advisor and principal underwriter have adopted codes of
ethics under Rule 17j-1 of the Investment Company Act. They permit personnel
subject to the codes to invest in securities, including securities that may be
purchased or held by the funds, provided that they first obtain approval from
the compliance department before making such investments.
The
funds’ Board of Trustees has adopted a general statement of proxy voting
principles that governs the exercise of voting and consent rights associated
with the securities purchased and/or held by the funds. The funds have delegated
to the advisor the responsibility for exercising such rights, subject to the
board’s oversight. The advisor has adopted proxy voting policies that describe
in detail how the advisor intends to exercise its delegated proxy voting
authority in a manner consistent with the board’s principles.
Copies
of the advisor’s proxy voting policies are attached hereto as Appendix E. Copies
of the board’s proxy voting principles, as well as information regarding how the
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 are available at americancentury.com/proxy. The
advisor’s proxy voting record also is available on the SEC’s website at
sec.gov.
A
list of the funds’ principal shareholders appears in Appendix
A.
The
funds have no employees. To conduct the funds’ day-to-day activities, the trust
has hired a number of service providers. Each service provider has a specific
function to fill on behalf of the funds that is described
below.
ACIM,
ACS and ACIS are wholly owned, directly or indirectly, by ACC. The Stowers
Institute for Medical Research (SIMR) controls ACC by virtue of its beneficial
ownership of more than 25% of the voting securities of ACC. SIMR is part of a
not-for-profit biomedical research organization dedicated to finding the keys to
the causes, treatments and prevention of disease.
American
Century Investment Management, Inc. (ACIM) serves as the investment advisor for
each of the funds. A description of the responsibilities of the advisor (ACIM)
appears in each prospectus under the heading Management.
Each
class of each fund is subject to a contractual unified management fee based on a
percentage of the daily net assets of such class. For more information about the
unified management fee, see The
Investment Advisor
under the heading Management
in each fund’s prospectus.
Emerging
Markets Debt Fund
The
unified management fee for each of the Investor Class, A Class, C Class and R
Class is 0.96%. The unified management fee for the I Class is 0.86%. The unified
management fee for the Y Class and R5 Class is 0.76%. The unified management fee
for the R6 Class and G Class is 0.71%. The amount of the fee is calculated daily
and paid monthly in arrears.
Global
Bond Fund
The
unified management fee for each of the Investor Class, A Class, C Class and R
Class is 0.83%. The unified management fee for the I Class is 0.73%. The unified
management fee for the Y Class and R5 Class is 0.63%. The unified management fee
for the R6 Class and G Class is 0.58%. The amount of the fee is calculated daily
and paid monthly in arrears.
International
Bond Fund
The
annual rate at which the unified management fee is assessed is determined daily
in a multi-step process. First, the fund is categorized according to the broad
asset class in which it invests (e.g., money market, bond or equity), and the
assets of all funds for which ACIM serves as the investment advisor and for
which American Century Investment Services, Inc. (ACIS) serves as the
distributor are totaled for each category (“Fund Category Assets”). Second, the
assets are totaled for certain other accounts managed by the advisor (“Other
Account Category Assets”). To be included, these accounts must have the same
management team and
investment
objective as a fund in the same category with the same Board of Trustees as the
trust. Together, the Fund Category Assets and the Other Account Category Assets
comprise the “Investment Category Assets.” The Investment Category Fee Rate is
then calculated by applying the fund’s Investment Category Fee Schedule to the
Investment Category Assets and dividing the result by the Investment Category
Assets.
Finally,
a separate Complex Fee Schedule is applied to the assets of all funds for which
ACIM serves as the investment advisor and for which ACIS serves as the
distributor (the “Complex Assets”), and the Complex Fee Rate is calculated based
on the resulting total. The Investment Category Fee Rate and the Complex Fee
Rate are then added to determine the Management Fee Rate payable by a class of
the fund to the advisor.
For
purposes of determining the assets that comprise the Fund Category Assets, Other
Account Category Assets and Complex Assets, the assets of registered investment
companies managed by the advisor that invest exclusively in the shares of other
registered investment companies shall not be included.
The
schedules by which the unified management fee for International Bond is
determined are shown below.
|
|
|
|
|
| |
| Investment
Category Fee Schedule for International Bond |
| Category
Assets |
Fee
Rate |
| First
$1 billion |
0.6100% |
| Next
$1 billion |
0.5580% |
| Next
$3 billion |
0.5280% |
| Next
$5 billion |
0.5080% |
| Next
$15 billion |
0.4950% |
| Next
$25 billion |
0.4930% |
| Thereafter |
0.4925% |
The
Complex Fee is determined according to the schedule below.
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|
|
|
| |
| Complex
Assets |
Investor,
A, C and
R Class Fee Rate |
I
Class
Fee Rate |
Y
and R5 Class
Fee Rate |
R6
and G Class
Fee Rate |
| First
$2.5 billion |
0.3100% |
0.2100% |
0.1100% |
0.0600% |
| Next
$7.5 billion |
0.3000% |
0.2000% |
0.1000% |
0.0500% |
| Next
$15 billion |
0.2985% |
0.1985% |
0.0985% |
0.0485% |
| Next
$25 billion |
0.2970% |
0.1970% |
0.0970% |
0.0470% |
| Next
$25 billion |
0.2870% |
0.1870% |
0.0870% |
0.0370% |
| Next
$25 billion |
0.2800% |
0.1800% |
0.0800% |
0.0300% |
| Next
$25 billion |
0.2700% |
0.1700% |
0.0700% |
0.0200% |
| Next
$25 billion |
0.2650% |
0.1650% |
0.0650% |
0.0150% |
| Next
$25 billion |
0.2600% |
0.1600% |
0.0600% |
0.0100% |
| Next
$25 billion |
0.2550% |
0.1550% |
0.0550% |
0.0050% |
| Thereafter |
0.2500% |
0.1500% |
0.0500% |
0.0000% |
All
Funds in American Century International Bond Funds
On
each calendar day, each class of each fund accrues a management fee that is
equal to the class’s Management Fee Rate times the net assets of the class
divided by 365 (366 in leap years). On the first business day of each month, the
funds pay a management fee to the advisor for the previous month. The fee for
the previous month is the sum of the calculated daily fees for each class of a
fund during the previous month.
The
management agreement between the trust and the advisor shall continue in effect
for a period of two years from its effective date (unless sooner terminated in
accordance with its terms) and shall continue in effect from year to year
thereafter for each fund so long as such continuance is approved at least
annually by:
(1)either
the funds’ Board of Trustees, or a majority of the outstanding voting securities
of such fund (as defined in the Investment Company Act); and
(2)the
vote of a majority of the trustees of the funds who are not parties to the
agreement, or interested persons of the advisor, cast in person at a meeting
called for the purpose of voting on such approval.
The
management agreement states that the funds’ Board of Trustees or a majority of
the outstanding voting securities of each class of such fund may terminate the
management agreement at any time without payment of any penalty on 60 days’
written notice to the advisor. The management agreement shall be automatically
terminated if it is assigned.
The
management agreement states that the advisor shall not be liable to the funds or
its shareholders for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and
duties.
The
management agreement also provides that the advisor and its officers, trustees
or directors and employees may engage in other business, render services to
others, and devote time and attention to any other business whether of a similar
or dissimilar nature.
Certain
investments may be appropriate for the funds and also for other clients advised
by the advisor. Investment decisions for the funds and other clients are made
with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by the fund.
The
advisor may aggregate purchase and sale orders of the funds with purchase and
sale orders of its other clients when the advisor believes that such aggregation
provides the best execution for the funds. The Board of Trustees has approved
the policy of the advisor with respect to the aggregation of portfolio
transactions. Fixed-income securities transactions are not executed through a
centralized trading desk. Instead, portfolio teams are responsible for executing
trades with broker-dealers in a predominantly dealer marketplace. Trade
allocation decisions are made by the portfolio managers at the time of trade
execution and orders entered on the fixed-income order management system. The
advisor will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The advisor
receives no additional compensation or remuneration as a result of such
aggregation.
Unified
management fees incurred by the funds for the fiscal years ended October 31,
2022,
October 31, 2021 and October 31, 2020, are indicated in the following table.
|
|
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|
|
|
|
|
|
|
| |
| Unified
Management Fees |
| Fund |
2022 |
2021 |
2020 |
| Emerging
Markets Debt |
$1,201,2541 |
$1,208,3742 |
$1,064,5923 |
| Global
Bond |
$2,817,6294 |
$2,899,2135 |
$2,685,2486 |
| International
Bond |
$3,258,2847 |
$3,641,6538 |
$3,415,6589 |
1 Amount
shown reflects waiver by advisor of $3,481,581 in management fees.
2 Amount
shown reflects waiver by advisor of $3,779,286 in management fees.
3 Amount
shown reflects waiver by advisor of $2,036,579 in management fees.
4 Amount
shown reflects waiver by advisor of $10,690,790
in management fees.
5 Amount
shown reflects waiver by advisor of $11,623,715 in management fees.
6 Amount
shown reflects waiver by advisor of $6,297,357 in management fees.
7 Amount
shown reflects waiver by advisor of $1,524,330
in management fees.
8 Amount
shown reflects waiver by advisor of $1,708,697 in management fees.
9 Amount
shown reflects waiver by advisor of $1,063,692 in management fees.
Accounts
Managed
The
portfolio managers are responsible for the day-to-day management of various
accounts, as indicated by the following table. None of these accounts has an
advisory fee based on the performance of the account.
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|
|
|
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|
| |
| Accounts
Managed As of October 31, 2022 |
|
|
| Registered
Investment
Companies (e.g.,
other American
Century
Investments
funds and American
Century Investments-
subadvised
funds) |
Other
Pooled
Investment Vehicles
(e.g., commingled
trusts and
529
education
savings plans) |
Other
Accounts
(e.g., separate
accounts and
corporate
accounts,
including incubation
strategies and
corporate
money) |
| Rajat
Ahuja |
Number
of Accounts |
7 |
1 |
1 |
|
| Assets |
$10.2
billion1 |
$27.2
million |
$12.5
million |
| Lynn
Chen |
Number
of Accounts |
3 |
1 |
6 |
|
| Assets |
$2.7
billion2 |
$48.2
million |
$1.2
billion |
| Simon
Chester |
Number
of Accounts |
2 |
1 |
5 |
| |
Assets |
$2.6
billion2 |
$48.2
million |
$1.2
billion |
| John
A. Lovito |
Number
of Accounts |
4 |
2 |
5 |
| |
Assets |
$3.1
billion3 |
$75.3
million |
$1.2
billion |
| Thomas
Youn |
Number
of Accounts |
4 |
0 |
0 |
|
| Assets |
$1.4
billion1 |
N/A |
N/A |
1 Includes
$545.0
million
in Emerging Markets Debt Fund.
2 Includes
$1.9 billion
in Global Bond Fund and $634.7
million
in International Bond Fund.
3 Includes
$545.0
million in
Emerging Markets Debt Fund; $1.9
billion
in Global Bond Fund; and $634.7
million in
International Bond Fund.
Potential
Conflicts of Interest
Certain
conflicts of interest may arise in connection with the management of multiple
portfolios. Potential conflicts include, for example, conflicts among investment
strategies, such as one portfolio buying or selling a security while another
portfolio has a differing, potentially opposite position in such security. This
may include one portfolio taking a short position in the security of an issuer
that is held long in another portfolio (or vice versa). Other potential
conflicts may arise with respect to the allocation of investment opportunities,
which are discussed in more detail below. American Century Investments has
adopted policies and procedures that are designed to minimize the effects of
these conflicts.
Responsibility
for managing American Century Investments client portfolios is organized
according to investment discipline. Investment disciplines include, for example,
disciplined equity, global growth equity, global value equity, global
fixed-income, multi-asset strategies, exchange traded funds, and Avantis
Investors funds. Within each discipline are one or more portfolio teams
responsible for managing specific client portfolios. Generally, client
portfolios with similar strategies are managed by the same team using the same
objective, approach, and philosophy. Accordingly, portfolio holdings, position
sizes, and industry and sector exposures tend to be similar across similar
portfolios, which minimizes the potential for conflicts of interest. In
addition, American Century Investments maintains an ethical wall that restricts
real time access to information regarding any portfolio’s transaction activities
and positions to team members that have responsibility for a given portfolio or
are within the same equity investment discipline. The ethical wall is intended
to aid in preventing the misuse of portfolio holdings information and trading
activity in other disciplines.
For
each investment strategy, one portfolio is generally designated as the “policy
portfolio.” Other portfolios with similar investment objectives, guidelines and
restrictions, if any, are referred to as “tracking portfolios.” When managing
policy and tracking portfolios, a portfolio team typically purchases and sells
securities across all portfolios that the team manages. American Century
Investments’ trading systems include various order entry programs that assist in
the management of multiple portfolios, such as the ability to purchase or sell
the same relative amount of one security across several funds. In some cases a
tracking portfolio may have additional restrictions or limitations that cause it
to be managed separately from the policy portfolio. Portfolio managers make
purchase and sale decisions for such portfolios alongside the policy portfolio
to the extent the overlap is appropriate, and separately, if the overlap is
not.
American
Century Investments may aggregate orders to purchase or sell the same security
for multiple portfolios when it believes such aggregation is consistent with its
duty to seek best execution on behalf of its clients. Orders of certain client
portfolios may, by investment restriction or otherwise, be determined not
available for aggregation. American Century Investments has adopted policies
and
procedures to minimize the risk that a client portfolio could be systematically
advantaged or disadvantaged in connection with the aggregation of orders. To the
extent equity trades are aggregated, shares purchased or sold are generally
allocated to the participating portfolios pro rata based on order size. Because
initial public offerings (IPOs) are usually available in limited supply and in
amounts too small to permit across-the-board pro rata allocations, American
Century Investments has adopted special procedures designed to promote a fair
and equitable allocation of IPO securities among clients over time. A
centralized trading desk executes all fixed income securities transactions for
Avantis ETFs and mutual funds. For all other funds in the American Century
complex, portfolio teams are responsible for executing fixed income trades with
broker/dealers in a predominantly dealer marketplace. Trade allocation decisions
are made by the portfolio manager at the time of trade execution and orders
entered on the fixed-income order management system.
Finally,
investment of American Century Investments’ corporate assets in proprietary
accounts may raise additional conflicts of interest. To mitigate these potential
conflicts of interest, American Century Investments has adopted policies and
procedures intended to provide that trading in proprietary accounts is performed
in a manner that does not give improper advantage to American Century
Investments to the detriment of client portfolios.
Compensation
American
Century Investments portfolio manager compensation is structured to align the
interests of portfolio managers with those of the shareholders whose assets they
manage. As of October 31, 2022,
it included the components described below, each of which is determined with
reference to a number of factors such as overall performance, market
competition, and internal equity.
Base
Salary
Portfolio
managers receive base pay in the form of a fixed annual
salary.
Bonus
A
significant portion of portfolio manager compensation takes the form of an
annual incentive bonus, which is determined by a combination of factors. One
factor is investment performance. The mutual funds’ investment performance is
generally measured by a combination of one-, three- and five-year pre-tax
performance relative to various benchmarks and/or internally-customized peer
groups, such as those indicated below. The performance comparison periods may be
adjusted based on a fund’s inception date or a portfolio manager’s tenure on the
fund.
|
|
|
|
|
|
|
|
| |
| Fund |
Benchmarks |
Peer
Group |
| Emerging
Markets Debt |
50%
JP Morgan GBI-EMBI Global Diversified Index/50% JP Morgan GBI-EM Global
Diversified Index |
EAA
Fund Global Emerging Markets Bond
US Fund Emerging Markets
Bond |
| Global
Bond |
Bloomberg
Global Aggregate Bond Index (USD, hedged) |
Morningstar
Global Bond-USD Hedged |
| International
Bond |
Bloomberg
Global Aggregate Bond ex-USD (Unhedged)1 |
Morningstar
Global Bond |
1 Prior
to January 1, 2015, this benchmark was the Barclays Global Treasury ex-US Bond
Index; 25% weight in Japan and 5% maximum weights in Austria, Ireland, Finland
and Portugal; minimum AA quality; FX-adjusted (investable index).
Portfolio
managers may have responsibility for multiple American Century Investments
mutual funds. In such cases, the performance of each is assigned a percentage
weight appropriate for the portfolio manager’s relative levels of
responsibility. Portfolio managers also may have responsibility for other types
of managed portfolios or ETFs. If the performance of a managed account or ETF is
considered for purposes of compensation, it is generally measured via the same
criteria as an American Century Investments mutual fund (i.e., relative to the
performance of a benchmark and/or peer group).
A
second factor in the bonus calculation relates to the performance of a number of
American Century Investments mutual funds managed according to one of the
following investment disciplines: global growth equity, global value equity,
disciplined equity, global fixed-income and multi-asset strategies. The
performance of American Century ETFs may also be included for certain investment
disciplines. Performance is measured for each product individually as described
above and then combined to create an overall composite for the product group.
These composites may measure one-year performance (equal weighted) or a
combination of one-, three- and five-year performance (equal or asset weighted)
depending on the portfolio manager’s responsibilities and products managed and
the composite for certain portfolio managers may include multiple disciplines.
This feature is designed to encourage effective teamwork among portfolio
management teams in achieving long-term investment success for similarly styled
portfolios.
A
portion of portfolio managers’ bonuses may be discretionary and may be tied to
factors such as profitability or individual performance goals, such as research
projects and/or the development of new products.
Restricted
Stock Plan
Portfolio
managers are eligible for grants of restricted stock of ACC. These grants are
discretionary, and eligibility and availability can vary from year to year. The
size of an individual’s grant is determined by individual and product
performance as well as other product-specific considerations such as
profitability. Grants can appreciate/depreciate in value based on the
performance of the ACC stock during the restriction period (generally three to
four years).
Deferred
Compensation Plans
Portfolio
managers are eligible for grants of deferred compensation. These grants are used
in very limited situations, primarily for retention purposes. Grants are fixed
and can appreciate/depreciate in value based on the performance of the American
Century Investments mutual funds in which the portfolio manager chooses to
invest them.
Ownership
of Securities
The
following table indicates the dollar range of securities of the fund
beneficially owned by each fund’s portfolio managers as of October 31,
2022.
|
|
|
|
|
| |
| Ownership
of Securities |
| |
Aggregate Dollar Range
of Securities in Fund |
| Emerging
Markets Debt Fund |
|
| John
A. Lovito |
A |
| Thomas
Youn |
A |
| Rajat
Ahuja |
A |
|
Global
Bond
Fund |
|
| John
A. Lovito |
A |
| Lynn
Chen |
A |
| Simon
Chester |
A |
| International
Bond Fund |
|
| John
A. Lovito |
A |
| Lynn
Chen |
A |
| Simon
Chester |
A |
Ranges:
A – none; B – $1-$10,000; C – $10,001-$50,000; D – $50,001-$100,000; E –
$100,001-$500,000; F – $500,001-$1,000,000; G – More than
$1,000,000.
American
Century Services, LLC (ACS), 4500 Main Street, Kansas City, Missouri 64111,
serves as transfer agent and dividend-paying agent for the funds. It provides
physical facilities, computer hardware and software and personnel, for the
day-to-day administration of the funds and the advisor. The advisor pays ACS’s
costs for serving as transfer agent and dividend-payment agent for the funds out
of the advisor’s unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption Investment
Advisor
on page 40.
Proceeds
from purchases of fund shares may pass through accounts maintained by the
transfer agent at Commerce Bank, N.A. or UMB Bank, n.a. before being held at the
fund’s custodian. Redemption proceeds also may pass from the custodian to the
shareholder through such bank accounts.
From
time to time, special services may be offered to shareholders who maintain
higher share balances in our family of funds. These services may include the
waiver of minimum investment requirements, expedited confirmation of shareholder
transactions, newsletters and a team of personal representatives. Any expenses
associated with these special services will be paid by the advisor.
The
advisor has entered into an Administration Agreement with State Street Bank and
Trust Company (SSB) to provide certain fund accounting, fund financial
reporting, tax and treasury/tax compliance services for the funds, including
striking the daily net asset value for the funds. The advisor pays SSB a monthly
fee as compensation for these services that is based on the total net assets of
accounts in the American Century complex serviced by SSB. ACS does pay SSB for
some additional services on a per fund basis. While ACS continues to serve as
the administrator of the funds, SSB provides sub-administrative services that
were previously undertaken by ACS.
The
funds’ shares are distributed by American Century Investment Services, Inc.
(ACIS), a registered broker-dealer. The distributor is a wholly owned subsidiary
of ACC, and its principal business address is 4500 Main Street, Kansas City,
Missouri 64111.
The
distributor is the principal underwriter of the funds’ shares. The distributor
makes a continuous, best-efforts underwriting of the funds’ shares. This means
the distributor has no liability for unsold shares. The advisor pays ACIS’s
costs for serving as principal underwriter of the funds’ shares out of the
advisor’s unified management fee. For a description of this fee and the terms of
its payment, see the above discussion under the caption Investment
Advisor
on page 40. ACIS does not earn commissions for distributing the funds’
shares.
Certain
financial intermediaries unaffiliated with the distributor or the funds may
perform various administrative and shareholder services for their clients who
are invested in the funds. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the funds
and their performance, preparing and distributing client account statements, and
other administrative and shareholder services that would otherwise be provided
by the distributor or its affiliates. The distributor may pay fees out of its
own resources to such financial intermediaries for providing these
services.
State
Street Bank and Trust Company (SSB), State Street Financial Center, One Lincoln
Street, Boston, Massachusetts 02111 serves as custodian of the funds’ cash and
securities under a Master Custodian Agreement with the trust. Foreign
securities, if any, are held by foreign banks participating in a network
coordinated by SSB. The custodian takes no part in determining the investment
policies of the funds or in deciding which securities are purchased or sold by
the funds. The funds, however, may invest in certain obligations of the
custodian and may purchase or sell certain securities from or to the
custodian.
State
Street Bank and Trust Company (SSB) serves as securities lending agent for the
funds pursuant to a Securities Lending Administration Agreement with the
advisor. The following table provides the amounts of income and
fees/compensation related to the funds’ securities lending activities during the
most recent fiscal year:
|
|
|
|
|
| |
|
| Emerging
Markets Debt Fund |
| Gross
income from securities lending activities |
$96,918 |
| Fees
and/or compensation paid by the fund for securities lending activities and
related services: |
|
| Fees
paid to securities lending agent from a revenue split |
$7,809 |
| Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
$3,120 |
| Administrative
fees not included in the revenue split |
$0 |
| Indemnification
fee not included in the revenue split |
$0 |
| Rebate
(paid to borrower) |
$15,856 |
| Other
fees not included in revenue split |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$26,785 |
| Net
income from securities lending activities |
$70,133 |
As
the funds’ securities lending agent, SSB provides the following services:
locating borrowers for fund securities, executing loans of portfolio securities
pursuant to terms and parameters defined by the advisor and the Board of
Directors, monitoring the daily value of the loaned securities and collateral,
requiring additional collateral as necessary, managing cash collateral, and
providing certain limited recordkeeping and accounting services.
The
funds’ Board appointed Deloitte & Touche LLP to serve as the funds’
independent registered public accounting firm for the fiscal year ended October
31, 2022. The address of Deloitte & Touche LLP is 1100 Walnut Street, Suite
3300, Kansas City, Missouri 64106. As the independent registered public
accounting firm of the funds, Deloitte & Touche LLP provides
services including auditing the annual financial statements and financial
highlights for each fund.
For
the fiscal year ended October 31, 2021, PricewaterhouseCoopers LLP served as the
independent registered public accounting firm of the funds. The address of
PricewaterhouseCoopers LLP is 1100 Walnut, Suite 1300, Kansas City, Missouri
64106. As the independent registered public accounting firm of the funds,
PricewaterhouseCoopers LLP provided services including auditing the annual
financial statements and financial highlights for each fund.
The
advisor places orders for equity portfolio transactions with broker-dealers, who
receive commissions for their services. Generally, commissions relating to
securities traded on foreign exchanges will be higher than commissions relating
to securities traded on U.S. exchanges. The advisor purchases and sells
fixed-income securities through principal transactions, meaning the advisor
normally purchases securities on a net basis directly from the issuer or a
primary market-maker acting as principal for the securities. The funds generally
do not pay a stated brokerage commission on these transactions, although the
purchase price for debt securities usually includes an undisclosed compensation.
Purchases of securities from underwriters typically include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market-makers typically include a dealer’s mark-up (i.e., a spread
between the bid and asked prices).
Under
the management agreement between the funds and the advisor, the advisor has the
responsibility of selecting brokers and dealers to execute portfolio
transactions. The funds’ policy is to secure the most favorable prices and
execution of orders on its portfolio transactions. The advisor selects
broker-dealers on their perceived ability to obtain “best execution” in
effecting transactions in its clients’ portfolios. In selecting broker-dealers
to effect portfolio transactions relating to equity securities, the advisor
considers the full range and quality of a broker-dealer’s research and brokerage
services, including, but not limited to, the following:
•applicable
commission rates and other transaction costs charged by the
broker-dealer
•value
of research provided to the advisor by the broker-dealer (including economic
forecasts, fundamental and technical advice on individual securities, market
analysis, and advice, either directly or through publications or writings, as to
the value of securities, availability of securities or of purchasers/sellers of
securities)
•timeliness
of the broker-dealer’s trade executions
•efficiency
and accuracy of the broker-dealer’s clearance and settlement
processes
•broker-dealer’s
ability to provide data on securities executions
•financial
condition of the broker-dealer
•the
quality of the overall brokerage and customer service provided by the
broker-dealer
In
transactions to buy and sell fixed-income securities, the selection of the
broker-dealer is determined by the availability of the desired security and its
offering price, as well as the broker-dealer’s general execution and operational
and financial capabilities in the type of transaction involved. The advisor will
seek to obtain prompt execution of orders at the most favorable prices or
yields. The advisor does not consider the receipt of products or services other
than brokerage or research services in selecting
broker-dealers.
On
an ongoing basis, the advisor seeks to determine what levels of commission rates
are reasonable in the marketplace. In evaluating the reasonableness of
commission rates, the advisor considers:
•rates
quoted by broker-dealers
•the
size of a particular transaction, in terms of the number of shares, dollar
amount, and number of clients involved
•the
ability of a broker-dealer to execute large trades while minimizing market
impact the complexity of a particular transaction
•the
nature and character of the markets on which a particular trade takes
place
•the
level and type of business done with a particular firm over a period of
time
•the
ability of a broker-dealer to provide anonymity while executing
trades
•historical
commission rates
•rates
that other institutional investors are paying, based on publicly available
information
The
brokerage commissions paid by the funds may exceed those that another
broker-dealer might have charged for effecting the same transactions, because of
the value of the brokerage and research services provided by the broker-dealer.
Research services furnished by broker-dealers through whom the funds effect
securities transactions may be used by the advisor in servicing all of its
accounts, and not all such services may be used by the advisor in managing the
portfolios of the funds.
Pursuant
to its internal allocation procedures, the advisor regularly evaluates the
brokerage and research services provided by each broker-dealer that it uses. On
a periodic basis, members of the advisor’s portfolio management team assess the
quality and value of research and brokerage services provided by each
broker-dealer that provides execution services and research to the advisor for
its clients’ accounts. The results of the periodic assessments are used to add
or remove brokers from the approved brokers list, if needed, and to set research
budgets for the following period. Execution-only brokers are used where deemed
appropriate.
In
the fiscal years ended October 31, 2022,
October 31, 2021 and October 31, 2020, the brokerage commissions including, as
applicable, futures commissions, of each fund are listed in the following table.
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund |
2022 |
2021 |
2020 |
| Emerging
Markets Debt |
$34,377 |
$21,516 |
$15,333 |
| Global
Bond |
$237,640 |
$190,927 |
$77,460 |
| International
Bond |
$89,853 |
$86,366 |
$47,995 |
Brokerage
commissions paid by a fund may vary significantly from year to year as a result
of changing asset levels throughout the year, portfolio turnover, varying market
conditions, and other factors.
As
of the end of its most recently completed fiscal year, each of the funds listed
below owned securities of its regular brokers or dealers (as defined by Rule
10b-1 under the Investment Company Act) or of their parent
companies.
|
|
|
|
|
|
|
|
| |
| Fund |
Broker,
Dealer or Parent |
Value
of Securities Owned as of
October 31, 2022 |
| Global
Bond |
BANK
OF AMERICA CORP |
$9,692,829 |
|
| JPMorgan
Chase & Co |
$5,986,089 |
|
| Credit
Agricole Assurances SA |
$5,437,848 |
|
| BNP
PARIBAS |
$5,399,706 |
|
| GOLDMAN
SACHS GROUP INC/THE |
$4,944,725 |
|
| MORGAN
STANLEY |
$4,615,730 |
|
| UBS
Group AG |
$3,745,629 |
|
| CITIGROUP
INC |
$2,723,465 |
|
| TORONTO-DOMINION
BANK/THE |
$2,133,407 |
|
| Bank
of New York Mellon Corp/The |
$967,175 |
| International
Bond |
Credit
Agricole Assurances SA |
$5,685,253 |
|
| BNP
PARIBAS |
$2,654,696 |
|
| UBS
Group AG |
$1,633,147 |
|
| GOLDMAN
SACHS GROUP INC/THE |
$987,459 |
|
| CITIGROUP
INC |
$938,140 |
|
| BANK
OF AMERICA CORP |
$426,287 |
|
| TORONTO-DOMINION
BANK/THE |
$210,540 |
|
| JPMorgan
Chase & Co |
$96,950 |
The
Declaration of Trust permits the Board of Trustees to issue an unlimited number
of full and fractional shares of beneficial interest without par value, which
may be issued in series (or funds). Each of the funds named on the front of this
statement of additional information is a series of shares issued by the trust.
In addition, each series (or fund) may be divided into separate classes. See
Multiple
Class Structure
which follows. Additional funds and classes may be added without a shareholder
vote.
Each
fund votes separately on matters affecting that fund exclusively. Voting rights
are not cumulative, so that investors holding more than 50% of the trust’s (all
funds’) outstanding shares may be able to elect a Board of Trustees. The trust
undertakes dollar-based voting, meaning that the number of votes a shareholder
is entitled to is based upon the dollar amount of the shareholder’s investment.
The election of trustees is determined by the votes received from all the
trust’s shareholders without regard to whether a majority of shares of any one
fund voted in favor of a particular nominee or all nominees as a
group.
Each
shareholder has rights to dividends and distributions declared by the fund he or
she owns and to the net assets of such fund upon its liquidation or dissolution
proportionate to his or her share ownership interest in the fund. Shares of each
fund have equal voting rights, although each fund votes separately on matters
affecting that fund exclusively.
The
trust shall continue unless terminated by (1) approval of at least two-thirds of
the shares of each fund entitled to vote or (2) the trustees by written notice
to shareholders of each fund. Any fund may be terminated by (1) approval of at
least two-thirds of the shares of that fund or (2) the trustees by written
notice to shareholders of that fund.
Upon
termination of the trust or a fund, as the case may be, the trust shall pay or
otherwise provide for all charges, taxes, expenses and liabilities belonging to
the trust or the fund. Thereafter, the trust shall reduce the remaining assets
belonging to each fund (or the particular fund) to cash, shares of other
securities or any combination thereof, and distribute the proceeds belonging to
each fund (or the particular fund) to the shareholders of that fund ratably
according to the number of shares of that fund held by each shareholder on the
termination date.
Shareholders
of a Massachusetts business trust could, under certain circumstances, be held
personally liable for its obligations. However, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the trust. The Declaration of Trust also provides for indemnification and
reimbursement of expenses of any shareholder held personally liable for
obligations of the trust. The Declaration of Trust provides that the trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the trust and satisfy any judgment thereon. The
Declaration of Trust further provides that the trust may maintain appropriate
insurance (for example, fidelity, bonding and errors and omissions insurance)
for the protection of the trust, its shareholders, trustees, officers, employees
and agents to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss as a result of shareholder liability is
limited to circumstances in which both inadequate insurance exists and the trust
is unable to meet its obligations.
The
assets belonging to each series or class of shares are held separately by the
custodian and the shares of each series or class represent a beneficial interest
in the principal, earnings and profit (or losses) of investments and other
assets held for each fund or class. Your rights as a shareholder are the same
for all series of securities unless otherwise stated. Within their respective
series or class, all shares have equal redemption rights. Each share, when
issued, is fully paid and non-assessable.
The
Board of Trustees has adopted a multiple class plan pursuant to Rule 18f-3
under
the Investment
Company Act.
The plan is described in the prospectus of any fund that offers more than one
class. Pursuant to such plan, the funds may issue the following classes of
shares: Investor Class, I Class, Y Class, A Class, C Class, R Class, R5 Class,
R6 Class and G Class. Not all funds offer all classes.
The
Investor Class is made available to investors directly from American Century
Investments and/or through some financial intermediaries. Additional information
regarding eligibility for Investor Class shares may be found in the funds’
prospectuses. The I Class is made available to institutional shareholders or
through financial intermediaries that provide various shareholder and
administrative services. Y Class shares are available through financial
intermediaries that offer fee-based advisory programs. The A and C Classes also
are made available through financial intermediaries, for purchase by individual
investors who receive advisory and personal services from the intermediary. The
R Class is made available through financial intermediaries and is generally used
in 401(k) and other retirement plans. The R5 and R6 Classes are generally
available only to participants in employer-sponsored retirement plans where a
financial intermediary provides recordkeeping services to plan participants. G
Class shares are available for purchase only by funds advised by American
Century Investments and other American Century advisory clients that are subject
to a contractual fee for investment management services. The classes have
different unified management fees as a result of their separate arrangements for
shareholder services. In addition, the A, C and R Class shares each are subject
to a separate Master Distribution and Individual Shareholder Services Plan (the
A Class Plan, C Class Plan and R Class Plan, respectively and collectively, the
plans) described below. The plans have been adopted by the fund’s Board of
Trustees in accordance with Rule 12b-1 adopted by the SEC under the Investment
Company Act.
Rule
12b-1
Rule
12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by its Board of
Trustees and approved by its shareholders. Pursuant to such rule, the Board of
Trustees of the funds’ A, C and R Classes have approved and entered into the A
Class Plan, C Class Plan and R Class Plan, respectively. The plans are described
below.
In
adopting the plans, the Board of Trustees (including a majority of trustees who
are not interested persons of the funds, as defined in the Investment Company
Act, hereafter referred to as the independent trustees) determined that there
was a reasonable likelihood that the plans would benefit the funds and the
shareholders of the affected class. Some of the anticipated benefits include
improved name recognition of the funds generally; and growing assets in existing
funds, which helps retain and attract investment management talent, provides a
better environment for improving fund performance, and can lower the total
expense ratio for funds with stepped-fee schedules. Pursuant to Rule 12b-1,
information about revenues and expenses under the plans is presented to the
Board of Trustees quarterly. Continuance of the plans must be approved by the
Board of Trustees, including a majority of the independent trustees, annually.
The plans may be amended by a vote of the Board of Trustees, including a
majority of the independent trustees, except that the plans may not be amended
to materially increase the amount to be spent for distribution without majority
approval of the shareholders of the affected class. The plans terminate
automatically in the event of an assignment and may be terminated upon a vote of
a majority of the independent trustees or by vote of a majority of the
outstanding voting securities of the affected class.
All
fees paid under the plans will be made in accordance with Section 2830 of the
Conduct Rules of the Financial Industry Regulatory Authority
(FINRA).
The
Share Class Plans
As
described in the prospectuses, the A, C and R Class shares of the funds are made
available to persons purchasing through broker-dealers, banks, insurance
companies and other financial intermediaries that provide various
administrative, shareholder and distribution services. In addition, the A, C and
R Classes are made available to participants in employer-sponsored retirement
plans. The funds’ distributor enters into contracts with various banks,
broker-dealers, insurance companies and other financial intermediaries, with
respect to the sale of the funds’ shares and/or the use of the funds’ shares in
various investment products or in connection with various financial
services.
Certain
recordkeeping and administrative services that would otherwise be performed by
the funds’ transfer agent may be performed by a plan sponsor (or its agents) or
by a financial intermediary for A, C and R Class investors. In addition to such
services, the financial intermediaries provide various individual shareholder
and distribution services.
To
enable the funds’ shares to be made available through such plans and financial
intermediaries, and to compensate them for such services, the funds’ Board of
Trustees has adopted the A, C and R Class Plans. Pursuant to the plans, the
following fees are paid and described further below.
A
Class
The
A Class pays the funds’ distributor 0.25% annually of the average daily net
asset value of the A Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services and for distribution
services, including past distribution services. This payment is fixed at 0.25%
and is not based on expenses incurred by the distributor.
C
Class
The
C Class pays the funds’ distributor 1.00% annually of the average daily net
asset value of the funds’ C Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services and 0.75% of which is
paid for distribution services, including past distribution services. This
payment is fixed at 1.00% and is not based on expenses incurred by the
distributor.
R
Class
The
R Class pays the funds’ distributor 0.50% annually of the average daily net
asset value of the R Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services and for distribution
services, including past distribution services. This payment is fixed at 0.50%
and is not based on expenses incurred by the distributor.
During
the fiscal year ended October 31, 2022,
the aggregate amount of fees paid under each class plan is included in the table
below.
|
|
|
|
|
|
|
|
|
|
|
| |
| |
A
Class |
C
Class |
R
Class |
| Emerging
Markets Debt |
$614 |
$283 |
$736 |
| Global
Bond |
$3,147 |
$4,036 |
$1,309 |
| International
Bond |
$7,697 |
$871 |
$248 |
The
distributor then makes these payments to the financial intermediaries (including
underwriters and broker-dealers, who may use some of the proceeds to compensate
sales personnel) who offer the A, C and R Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments
may be made for a variety of individual shareholder services, including, but not
limited to:
(a)providing
individualized and customized investment advisory services, including the
consideration of shareholder profiles and specific goals;
(b)creating
investment models and asset allocation models for use by shareholders in
selecting appropriate funds;
(c)conducting
proprietary research about investment choices and the market in
general;
(d)periodic
rebalancing of shareholder accounts to ensure compliance with the selected asset
allocation;
(e)consolidating
shareholder accounts in one place;
(f)paying
service fees for providing personal, continuing services to investors, as
contemplated by the Conduct Rules of FINRA; and
(g)other
individual services.
Individual
shareholder services do not include those activities and expenses that are
primarily intended to result in the sale of additional shares of the
funds.
Distribution
services include any activity undertaken or expense incurred that is primarily
intended to result in the sale of A, C and/or R Class shares, which services may
include but are not limited to:
(a)paying
sales commissions, on-going commissions and other payments to brokers, dealers,
financial institutions or others who sell the A, C and R Class shares pursuant
to selling agreements;
(b)compensating
registered representatives or other employees of the distributor who engage in
or support distribution of the A, C and R Class shares;
(c)compensating
and paying expenses (including overhead and telephone expenses) of the
distributor;
(d)printing
prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e)preparing,
printing and distributing sales literature and advertising materials provided to
the funds’ shareholders and prospective shareholders;
(f)receiving
and answering correspondence from prospective shareholders, including
distributing prospectuses, statements of additional information, and shareholder
reports;
(g)providing
facilities to answer questions from prospective shareholders about fund
shares;
(h)complying
with federal and state securities laws pertaining to the sale of fund
shares;
(i)assisting
shareholders in completing application forms and selecting dividend and other
account options;
(j)providing
other reasonable assistance in connection with the distribution of fund
shares;
(k)organizing
and conducting sales seminars and payments in the form of transactional and
compensation or promotional incentives;
(l)profit
on the foregoing; and
(m)such
other distribution and services activities as the advisor determines may be paid
for by the funds pursuant to the terms of the agreement between the corporation
and the funds’ distributor and in accordance with Rule 12b-1 of the Investment
Company Act.
The
net asset value (NAV) for each class of each fund is calculated by adding the
value of all portfolio securities and other assets attributable to the class,
deducting liabilities and dividing the result by the number of shares of the
class outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
All
classes of the funds except the A Class are offered at their NAV. The A Class of
the funds is offered at its public offering price, which is the NAV plus the
appropriate sales charge. This calculation may be expressed as a
formula:
Offering
Price = NAV/(1 – Sales Charge as a % of Offering Price)
For
example, if the NAV of a fund’s A Class shares is $5.00, the public offering
price would be $5.00/(1-4.50%) = $5.24.
Each
fund’s NAV is calculated as of the close of regular
trading
on the New York Stock Exchange (the NYSE), each day the NYSE is open for
business. The NYSE usually closes at 4 p.m. Eastern time. The NYSE typically
observes the following holidays: New Year’s Day, Martin Luther King Jr. Day,
Presidents’ Day, Good Friday, Memorial Day, Juneteenth National Independence
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Although
the fund expects the same holidays to be observed in the future, the NYSE may
modify its holiday schedule at any time.
Debt
securities and swap agreements are generally valued using evaluated prices
obtained from approved independent pricing services or at the most recent mean
of the bid and asked prices provided by investment dealers in accordance with
the valuation policies and procedures.
Pricing
services will generally provide evaluated prices based on accepted industry
conventions, which may require the pricing service to exercise its own
discretion. Evaluated prices are commonly derived through utilization of market
models that take into consideration various market factors, assumptions, and
security characteristics including, but not limited to; trade data, quotations
from broker-dealers and active market makers, relevant yield curve and spread
data, related sector levels, creditworthiness, trade data or market information
on comparable securities and other relevant security-specific information.
Pricing services may exercise discretion including, but not limited to;
selecting and designing the valuation methodology, determining the source and
relevance of inputs and assumptions, and assessing price challenges received
from its clients. Pricing services may provide prices when market quotations are
not available or when certain pricing inputs may be stale. The use of different
models or inputs may result in different pricing services determining a
different price for the same security. Pricing services generally value
fixed-income securities assuming orderly transactions of an institutional round
lot size but may consider trades of smaller sizes in their models. The fund may
hold or transact in such securities in smaller lot sizes, sometimes referred to
as “odd-lots.” Securities may trade at different prices when transacted in
different lot sizes. The methods used by the pricing services and the valuations
so established are reviewed by the valuation designee under the oversight of the
Board of Trustees.
Securities
maturing within 60 days of the valuation date may also be valued at cost, plus
or minus any amortized discount or premium, unless it is determined, based on
established guidelines and procedures, that this would not result in fair
valuation of a given security. Other assets and securities for which market
quotations or the methods described above are not readily available are valued
in good faith in accordance with the valuation designee’s
procedures.
Equity
securities (including exchange-traded funds) and other equity instruments for
which market quotations are readily available are valued at the last reported
official closing price or sale price as of the time of valuation. Futures
contracts are generally valued at the settlement price as provided by the
exchange or clearing corporation. Portfolio securities primarily traded on
foreign securities exchanges that are open later than the NYSE are valued at the
last sale price reported at the time the NAV is determined.
Trading
in securities on European, African
and Asian securities exchanges and over-the-counter markets is normally
completed at various times before the close of business on each day that the
NYSE is open. The advisor typically completes its trading on behalf of
the
fund in various markets before the NYSE closes for the day. If an event were to
occur after the value of a security was established but before the NAV per share
was determined that was likely to materially change the NAV, then that security
would be valued as determined in accordance with procedures adopted by the Board
of Trustees.
Trading
of these securities in foreign markets may not take place on every day that the
NYSE is open. In addition, trading may take place in various foreign markets and
on some electronic trading networks on Saturdays or on other days when the NYSE
is not open and on which the funds’ NAVs are not calculated. Therefore, these
calculations do not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such calculation, and the
value of the funds’ portfolios may be affected on days when shares of the funds
may not be purchased or redeemed.
When
market quotations are not readily available or are believed by the valuation
designee to be unreliable, securities and other assets are valued at fair value
as determined in accordance with its policies and procedures.
The
value of any security or other asset denominated in a currency other than U.S.
dollars is then converted to U.S. dollars at the prevailing foreign exchange
rate at the time the fund’s NAV is determined. Securities that are neither
listed on a securities exchange nor traded over the counter may be priced using
the mean of the bid and asked prices obtained from an independent broker who is
an established market maker in the security.
Each
fund intends to qualify annually as a regulated investment company (RIC) under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). RICs
generally are not subject to federal and state income taxes. To qualify as a RIC
a fund must, among other requirements, distribute substantially all of its net
investment income and net realized capital gains (if any) to investors each
year. If a fund were not eligible to be treated as a RIC, it would be liable for
taxes at the fund level on all its income, significantly reducing its
distributions to investors and eliminating investors’ ability to treat
distributions received from the fund in the same manner in which they were
realized by the fund. Under certain circumstances, the Code allows funds to cure
deficiencies that would otherwise result in the loss of RIC status, including by
paying a fund-level tax.
To
qualify as a RIC, a fund must meet certain requirements of the Code, among which
are requirements relating to sources of its income and diversification of its
assets. A fund is also required to distribute 90% of its investment company
taxable income each year. Additionally, a fund must declare dividends by
December 31 of each year equal to at least 98% of ordinary income (as of
December 31) and 98.2% of capital gains (as of October 31) to avoid the
nondeductible 4% federal excise tax on any undistributed
amounts.
Certain
bonds purchased by a fund may be treated as bonds that were originally issued at
a discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash is actually received by a fund until the maturity of the bond,
original issue discount is treated for federal income tax purposes as income
earned by a fund over the term of the bond, and therefore is subject to the
distribution requirements of the Code. The annual amount of income earned on
such a bond by a fund generally is determined on the basis of a constant yield
to maturity that takes into account the semiannual compounding of accrued
interest.
In
addition, some of the bonds may be purchased by a fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a fund elects to include market discount in
income in tax years to which it is attributable or if the amount is considered
de minimis). Generally, market discount accrues on a daily basis for each day
the bond is held by a fund on a constant yield to maturity basis. In the case of
any debt security having a fixed maturity date of not more than one year from
date of issue, the gain realized on disposition generally will be treated as a
short-term capital gain. In the case of any debt security having a fixed
maturity date of not more than one year from date of issue, the gain realized on
disposition generally will be treated as a short-term capital gain. If a fund
holds the foregoing kinds of securities, it may be required to pay out as an
income distribution each year an amount that is greater than the total amount of
cash interest the fund actually received, which distributions may be made from
the assets of the fund or, if necessary, by disposition of portfolio securities,
including at a time when such disposition may not otherwise be
advantageous.
A
fund’s investments in foreign securities may be subject to withholding and other
taxes imposed by foreign countries. However, tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Any foreign
taxes paid by a fund will reduce its dividends distributions to
investors.
A
fund’s transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund, defer fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require a fund to mark-to-market certain types of the positions in its
portfolio (i.e., treat them as if they were
sold),
which may cause the fund to recognize income without receiving cash with which
to make distributions in amounts necessary to satisfy the distribution
requirements of the Code for relief from income and excise taxes. A fund will
monitor its transactions and may make such tax elections as fund management
deems appropriate with respect to these transactions.
Under
the Code, gains or losses attributable to fluctuations in exchange rates that
occur between the time a fund accrues income or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time a
fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, in disposing of debt securities
denominated in foreign currencies, certain forward currency contracts, or other
instruments, gains or losses attributable to fluctuations in the value of a
foreign currency between the date the security, contract, or other instrument is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of a fund’s investment company taxable income
distributed to shareholders as ordinary income. This treatment could increase or
decrease a fund’s ordinary income distributions, which may cause some or all of
a fund’s previously distributed income to be classified as a return of
capital.
As
of October 31, 2022,
the funds had the following capital loss carryovers. When a fund has a capital
loss carryover, it does not make capital gains distributions until the loss has
been offset. The Regulated Investment Company Modernization Act of 2010 allows
the funds to carry forward capital losses incurred in future taxable years for
an unlimited period.
|
|
|
|
|
| |
| Fund |
Unlimited |
| Emerging
Markets Debt |
$(69,933,561) |
| Global
Bond |
$(104,815,666) |
| International
Bond |
$(9,037,193) |
If
you have not complied with certain provisions of the Internal Revenue Code and
Regulations, either American Century Investments or your financial intermediary
is required by federal law to withhold and remit to the IRS the applicable
federal withholding rate of reportable payments (which may include dividends,
capital gains distributions and redemption proceeds). Those regulations require
you to certify that the Social Security number or tax identification number you
provide is correct and that you are not subject to withholding for previous
under-reporting to the IRS. You will be asked to make the appropriate
certification on your account application. Payments reported by us to the IRS
that omit your Social Security number or tax identification number will subject
us to a non-refundable penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed.
If
fund shares are purchased through taxable accounts, distributions of either cash
or additional shares of net investment income and net short-term capital gains
are taxable to you as ordinary income, unless they are designated as qualified
dividend income and you meet a minimum required holding period with respect to
your shares of a fund, in which case such distributions are taxed at the
long-term capital gains tax rate. Qualified dividend income is a dividend
received by a fund from the stock of a domestic or qualifying foreign
corporation, provided that the fund has held the stock for a required holding
period and the stock was not on loan at the time of the dividend. The required
holding period for qualified dividend income is met if the underlying shares are
held more than 60 days in the 121-day period beginning 60 days prior to the
ex-dividend date. Dividends received by a fund on shares of stock of domestic
corporations may qualify for the 70% dividends-received deduction when
distributed to corporate shareholders to the extent that a fund held those
shares for more than 45 days. The funds do not expect a significant portion of
their distributions to be qualified dividend income or to qualify for the
corporate dividends-received deduction.
Distributions
from gains on assets held by a fund longer than 12 months are taxable as
long-term gains regardless of the length of time you have held your shares in
the fund. If you purchase shares in a fund and sell them at a loss within six
months, your loss on the sale of those shares will be treated as a long-term
capital loss to the extent of any long-term capital gains dividends you received
on those shares.
Each
fund may use the “equalization method” of accounting to allocate a portion of
their earnings and profits to redemption proceeds. Although using this method
generally will not affect a fund’s total returns, it may reduce the amount that
a fund would otherwise distribute to continuing shareholders by reducing the
effect of redemptions of fund shares on fund distributions to
shareholders.
A
redemption of shares of a fund (including a redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
you generally will recognize gain or loss in an amount equal to the difference
between the basis of the shares and the amount received. If a loss is realized
on the redemption of fund shares, the reinvestment in additional fund shares
within 30 days before or after the redemption may be subject to the “wash sale”
rules of the Code, resulting in a postponement of the recognition of such loss
for federal income tax purposes.
A
3.8% Medicare contribution tax is imposed on net investment income, including
interest, dividends and capital gains, provided you meet specified income
levels.
Distributions
by the funds also may be subject to state and local taxes, even if all or a
substantial part of such distributions are derived from interest on U.S.
government obligations which, if you received such interest directly, would be
exempt from state income tax. However, most but not all states allow this tax
exemption to pass through to fund shareholders when a fund pays distributions to
its shareholders. You should consult your tax advisor about the tax status of
such distributions in your state.
The
information above is only a summary of some of the tax considerations affecting
the funds and their U.S. shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.
The
funds’ financial statements for the fiscal year ended October 31, 2022
have been audited by Deloitte
& Touche LLP,
independent registered public accounting firm. Their Report of Independent
Registered Public Accounting Firm and the financial statements included in the
funds’ annual
reports
for the fiscal year ended October 31, 2022,
are incorporated herein by reference.
As
of January 31, 2023,
the following shareholders owned more than 5% of the outstanding shares of a
class of the fund. The table shows shares owned of record unless otherwise
noted.
|
|
|
|
|
|
|
|
| |
Fund/
Class |
Shareholder |
Percentage
of Outstanding
Shares Owned of Record |
| Emerging
Markets Debt |
| Investor
Class |
|
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice Portfolio Moderate Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
36% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice Portfolio Conservative Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
24% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice Portfolio Aggressive Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
13% |
|
| Charles
Schwab & Co Inc
San Francisco, CA |
11% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice Portfolio Very Conservative Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
10% |
| I
Class |
|
|
| Capinco
c/o US Bank
Milwaukee, WI |
42% |
|
| American
Enterprise Investment Svc
Minneapolis, MN |
28% |
|
| National
Financial Services LLC
Jersey City, NJ |
16% |
|
| Pershing
LLC
Jersey City, NJ |
14% |
| Y
Class |
|
|
| Pershing
LLC
Jersey City, NJ |
99.93% |
| A
Class |
|
|
| American
Enterprise Investment Svc
Minneapolis, MN |
66% |
|
| LPL
Financial
San Diego, CA |
24% |
| |
Pershing
LLC
Jersey City, NJ |
11% |
| C
Class |
|
|
| American
Enterprise Investment Svc
Minneapolis, MN |
66% |
| |
American
Century Investment Management, Inc
Kansas
City, MO
Shares
owned of record and beneficially |
34% |
|
|
|
|
|
|
|
|
| |
Fund/
Class |
Shareholder |
Percentage
of Outstanding
Shares Owned of Record |
| Emerging
Markets Debt |
| R
Class |
|
| |
SSB&T
Cust Cohen Roberts & Associates LLC
Mayfield Hts, OH |
8% |
|
| SSB&T
Cust Studio West Landscape Architecture
La Mesa, CA |
7% |
|
| SSB&T
Cust Aquatica Pool Management Inc
San Antonio, TX |
7% |
|
| SSB&T
Cust Marex Inc.
Fredericksburg, VA |
6% |
|
| SSB&T
Cust Public Works Parnters LLC
College Point, NY |
5% |
| R5
Class |
|
|
|
American
Century Investment Management, Inc
Kansas
City, MO
Shares
owned of record and beneficially |
93% |
|
| Ascensus
Trust Company FBO I V Interactive LLC 401(K) PS PLA
Fargo, ND |
7% |
| R6
Class |
|
|
|
State
Street Bank & Trust Co TTEE FBO
Hallmark
Voluntary EE Bene TR
Quincy,
MA
Shares
owned of record and beneficially |
50% |
|
| TIAA,
FSB, CUST/TTEE FBO Retirement Plans
St. Louis, MO |
50% |
| G
Class |
|
|
|
AC
Retirement Date Trust
Woburn,
MA
Includes
7.98% registered for the benefit of TD 2040 Trust; 7.83% registered for
the benefit of TD 2035 Trust; 7.51% registered for the benefit of TD 2045
Trust; 7.04% registered for the benefit of TD 2030 Trust; and 5.07%
registered for the benefit of TD 2050 Trust |
45% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice 2035 Portfolio Emerging Markets Debt Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
10% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice 2040 Portfolio Emerging Markets Debt Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
7% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice 2045 Portfolio Emerging Markets Debt Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
7% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice 2030 Portfolio Emerging Markets Debt Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
7% |
|
|
American
Century Services LLC, SSB&T Custodian
One
Choice 2025 Portfolio Emerging Markets Debt Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
5% |
|
|
|
|
|
|
|
|
| |
Fund/
Class |
Shareholder |
Percentage
of Outstanding
Shares Owned of Record |
| Global
Bond |
| Investor
Class |
|
| |
American
Century Services LLC SSB&T Custodian
One
Choice Portfolio Conservative Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
35% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice Portfolio Moderate Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
33% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice Portfolio Very Conservative Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
16% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice Portfolio Aggressive Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
10% |
| I
Class |
|
|
| American
Enterprise Investment Svc
Minneapolis, MN |
45% |
|
| Charles
Schwab & Co Inc
San Francisco, CA |
18% |
|
| Spec
Cdy A/C Excl Ben Cust UBSFSI
Weehawken, NJ |
17% |
|
| National
Financial Services LLC
Jersey City, NJ |
9% |
|
| Raymond
James
St. Petersburg, FL |
7% |
| Y
Class |
|
|
| Pershing
LLC
Jersey City, NJ |
99.97% |
| A
Class |
|
| |
Pershing
LLC
Jersey City, NJ |
39% |
|
| American
Enterprise Investment Svc
Minneapolis, MN |
29% |
|
| Spec
Cdy A/C Excl Ben Cust UBSFSI
Weehawken, NJ |
10% |
|
| Ascensus
Trust Company FBO
Weiss Communications Inc.
Fargo, ND |
5% |
|
|
Edward
D Jones & Co
Saint
Louis, MO
Shares
owned of record and beneficially |
5% |
|
|
|
|
|
|
|
|
| |
Fund/
Class |
Shareholder |
Percentage
of Outstanding
Shares Owned of Record |
| Global
Bond |
| C
Class |
|
|
| American
Enterprise Investment Svc
Minneapolis, MN |
29% |
|
| Spec
Cdy A/C Excl Ben Cust UBSFSI
Weehawken, NJ |
21% |
|
| Raymond
James
St. Petersburg, FL |
14% |
|
|
Neil
Leduc & Amy Leduc JTWROS
N
Dartmouth, MA
Shares
owned of record and beneficially |
12% |
|
| Vanguard
Brokerage Services
Malvern, PA |
9% |
| |
SSB&T
Cust Bowtie Engineering LLC Simple IRA Cason Rogers
Athens,
GA
Shares
owned of record and beneficially
|
6% |
| R
Class |
|
|
|
SSB&T
Cust Bonfiglio Builders LLC Gina M Bonfiglio
Charlotte,
NC
Shares owned of record and beneficially |
8% |
|
|
SSB&T
Cust Office Tree LLC Ben Howard
Henderson,
NV
Shares
owned of record and beneficially |
8% |
|
|
SSB&T
Cust Certified Capital Inc Trailer Finan Shannon J Ivey
Rogers,
MN
Shares
owned of record and beneficially |
7% |
|
|
SSB&T
Cust Agalliu Contracting LLC Matthias Agalliu
Staten
Island, NY
Shares
owned of record and beneficially |
6% |
|
|
SSB&T
Cust Aquatica Pool Management Inc Jason Cherry
San
Antonio, TX
Shares
owned of record and beneficially |
5% |
|
|
SSB&T
Cust Jsrams Inc Sathish Kumar Radhakrishnan
Roseville,
CA
Shares
owned of record and beneficially |
5% |
| R5
Class |
|
| |
Charles
Schwab & Co Inc
San Francisco, CA |
94% |
| R6
Class |
|
|
| National
Financial Services LLC
Jersey City, NJ |
64% |
|
| Vanguard
Fiduciary Trust Company FBO 401K Clients
Valley Forge, PA |
18% |
|
| Great-West
Trust Company LLC
TTEE Employee Benefits Clients 401K
Greenwood Vlg,
CO |
10% |
|
|
|
|
|
|
|
|
| |
Fund/
Class |
Shareholder |
Percentage
of Outstanding
Shares Owned of Record |
| Global
Bond |
| G
Class |
|
|
|
AC
Retirement Date Trust
Woburn,
MA
Includes
8.28% registered for the benefit of TD 2030 Trust; 7.14% registered for
the benefit of TD 2035 Trust; 6.71% registered for the benefit of TD 2025
Trust; 5.90% registered for the benefit of TD 2040 Trust; and 5.18%
registered for the benefit of TD In Retirement Trust |
44% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice In Retirement Portfolio Global Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
10% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice 2025 Portfolio Global Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
9% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice 2035 Portfolio Global Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
9% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice 2030 Portfolio Global Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
8% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice 2040 Portfolio Global Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
5% |
| International
Bond |
| Investor
Class |
|
|
|
American
Century Services LLC SSB&T Custodian
One
Choice Portfolio Conservative Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
31% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice Portfolio Moderate Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
17% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice Portfolio Very Conservative Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
16% |
|
| John
Hancock Trust Company LLC
Boston, MA |
5% |
|
| Charles
Schwab & Co Inc
San Francisco, CA |
5% |
| I
Class |
|
|
|
KS
Postsecondary Education SP SSB&T Custodian
Kansas
City, MO
Includes
14.15% registered for the benefit of Schwab 40% Equity Intl Bond Advisor
Omnibus;12.13% registered for the benefit of Schwab 60% Equity Intl Bond
Advisor Omnibus; 10.20% registered for the benefit of Schwab 50% Equity
Intl Bond Advisor Omnibus; 9.45% registered for the benefit of Schwab 20%
Equity Intl Bond Advisor Omnibus; 9.41% registered for the benefit of
Schwab 30% Equity Intl Bond Advisor Omnibus; 5.69% registered for the
benefit of Schwab 80% Equity Intl Bond Advisor Omnibus; and 5.09%
registered for the benefit of KPESP LQ Short Term Plus |
97% |
|
|
|
|
|
|
|
|
| |
Fund/
Class |
Shareholder |
Percentage
of Outstanding
Shares Owned of Record |
| International
Bond |
| Y
Class |
|
|
| Pershing
LLC
Jersey City, NJ |
99.91% |
| A
Class |
|
|
| MSSB
LLC
New York, NY |
28% |
|
| Pershing
LLC
Jersey City, NJ |
18% |
|
| John
Hancock Trust Company LLC
Boston, MA |
8% |
|
| Principal
Trust Co FBO Makino Inc Nonqualified Plan
Wilmington, DE |
8% |
|
| American
Enterprise Investment Svc
Minneapolis, MN |
5% |
| C
Class |
|
|
| Wells
Fargo Clearing Services LLC
Saint Louis, MO |
83% |
|
| Pershing
LLC
Jersey City, NJ |
13% |
| R
Class |
|
| SSB&T
Cust Bonfiglio Builders LLC Paul Bonfiglio
Charlotte, NC |
20% |
|
| SSB&T
Cust Bonfiglio Builders LLC Gina M Bonfiglio
Charlotte, NC |
20% |
|
| SSB&T
Cust Head In The Right Direction LLC Naama Barta
Garrison, NY |
11% |
|
| SSB&T
Cust Almond Tree Group Family Daycare Junior Bazzey
Brooklyn,
NY |
8% |
| |
SSB&T
Cust Y Ciliberti Diamonds Inc Thomas Falkenstein
Miami Beach,
FL |
5% |
| R5
Class |
|
| Goulstorrs
& Co Inc
Boston, MA |
97% |
| R6
Class |
|
| Charles
Schwab & Co Inc.
San Francisco, CA |
56% |
|
| State
Street Bank & Trust Co TTEE
FBO Hallmark Voluntary EE Bene
TR
Quincy, MA |
41% |
| G
Class |
|
|
AC
Retirement Date Trust
Woburn,
MA
Includes
12.09% registered for the benefit of TD 2030 Trust; 10.12% registered for
the benefit of TD 2025 Trust; 7.96% registered for the benefit of TD 2035
Trust; and 7.95% registered for the benefit of TD In Retirement
Trust |
41% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice In Retirement Portfolio International Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
15% |
|
|
|
|
|
|
|
|
| |
Fund/
Class |
Shareholder |
Percentage
of Outstanding
Shares Owned of Record |
| International
Bond |
| G
Class |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice 2025 Portfolio International Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
14% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice 2030 Portfolio International Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
12% |
|
|
American
Century Services LLC SSB&T Custodian
One
Choice 2035 Portfolio International Bond Omnibus
Kansas
City, MO
Shares
owned of record and beneficially |
10% |
A
shareholder owning beneficially more than 25% of the trust’s outstanding shares
may be considered a controlling person. The vote of any such person could have a
more significant effect on matters presented at a shareholders’ meeting than
votes of other shareholders. Although AC Retirement Date Trust is the record
owner of more than 25% of the shares of the trust, it is not a control person
because it is not a beneficial owner of such shares. As of January 31,
2023,
the officers and trustees of the funds, as a group, owned less than 1% of any
class of the funds’ outstanding shares.
Sales
Charges
The
sales charges applicable to the A and C Classes of the funds are described in
the prospectuses for those classes in the section titled Investing
Through a Financial Intermediary.
Shares of the A Class are subject to an initial sales charge, which declines as
the amount of the purchase increases. Additional information regarding
reductions and, if applicable, waivers of the sales charges may be found in the
funds’ prospectuses.
Shares
of the A and C Classes are subject to a contingent deferred sales charge (CDSC)
upon redemption of the shares in certain circumstances. The specific charges and
when they apply are described in the relevant prospectuses. The CDSC may be
waived for certain redemptions by some shareholders, as described in the
prospectuses.
An
investor may terminate his relationship with an intermediary at any time. If the
investor does not establish a relationship with a new intermediary and transfer
any accounts to that new intermediary, such accounts may be exchanged to the
Investor Class of the fund, if such class is available. The investor will be the
shareholder of record of such accounts. In this situation, any applicable CDSCs
will be charged when the exchange is made.
During
the last full fiscal year ended October 31, 2022,
the funds had no CDSCs paid to the distributor from the A Class and C Class
shares.
Payments
to Dealers
The
funds’ distributor expects to pay dealer commissions to the financial
intermediaries who sell A and/or C Class shares of the funds at the time of such
sales. Payments for A Class shares will be as follows
|
|
|
|
|
| |
| Purchase
Amount |
Dealer
Commission as a % of Offering Price |
| <
$99,999 |
4.00% |
| $100,000
- $249,999 |
3.00% |
| $250,000
- $499,999 |
2.00% |
| $500,000
- $999,999 |
1.75% |
| $1,000,000
- $3,999,999 |
0.75% |
| $4,000,000
- $9,999,999 |
0.50% |
| >
$10,000,000 |
0.25% |
No
dealer commission will be paid on purchases by employer-sponsored retirement
plans. For this purpose, employer-sponsored retirement plans do not include SEP
IRAs, SIMPLE IRAs or SARSEPs. Payments will equal 1.00% of the purchase price of
the C Class shares sold by the financial intermediary. The distributor will
retain the 12b-1 fee paid by the C Class of funds for the first 12 months after
the shares are purchased. This fee is intended in part to permit the distributor
to recoup a portion of ongoing sales commissions to dealers plus financing
costs, if any. Beginning with the first day of the 13th month, the distributor
will make the C Class distribution and individual shareholder services fee
payments described above to the financial intermediaries involved on a quarterly
basis. In addition, C Class purchases, and A Class purchases greater than
$1,000,000 are subject to a CDSC as described in the prospectuses.
From
time to time, the distributor may make additional payments to dealers, including
but not limited to payment assistance for conferences and seminars, provision of
sales or training programs for dealer employees and/or the public (including, in
some cases, payment for travel expenses for registered representatives and other
dealer employees who participate), advertising and sales campaigns about a fund
or funds, and assistance in financing dealer-sponsored events. Other payments
may be offered as well, and all such payments will be consistent with applicable
law, including the then-current rules of the Financial Industry Regulatory
Authority. Such payments will not change the price paid by investors for shares
of the funds.
Information
about buying, selling, exchanging and, if applicable, converting fund shares is
contained in the funds’ prospectuses. The prospectuses are available to
investors without charge and may be obtained by calling us.
Employer-Sponsored
Retirement Plans
Certain
group employer-sponsored retirement plans that hold a single account for all
plan participants with the fund, or that are part of a retirement plan or
platform offered by banks, broker-dealers, financial advisors or insurance
companies, or serviced by retirement recordkeepers are eligible to purchase
Investor, A, C, R, R5 and R6 Class shares. Employer-sponsored retirement plans
are not eligible to purchase I or Y Class shares. A and C Class purchases are
available at net asset value with no dealer commission paid to the financial
professional and do not incur a CDSC. A, C and R Class shares purchased in
employer-sponsored retirement plans are subject to applicable distribution and
service (12b-1) fees, which the financial intermediary begins receiving
immediately at the time of purchase. American Century Investments does not
impose minimum initial investment amount, plan size or participant number
requirement by class for employer-sponsored retirement plans; however, financial
intermediaries or plan recordkeepers may require plans to meet different
requirements.
Examples
of employer-sponsored retirement plans include the following:
•401(a)
plans
•pension
plans
•profit
sharing plans
•401(k)
plans (including plans with a Roth 401(k)
feature,
SIMPLE 401(k) plans and Solo 401(k) plans
•money
purchase plans
•target
benefit plans
•Taft-Hartley
multi-employer pension plans
•SERP
and “Top Hat” plans
•ERISA
trusts
•employee
benefit plans and trusts
•employer-sponsored
health plans
•457
plans
•KEOGH
or HR(10) plans
•employer-sponsored
403(b) plans
(including
plans with a Roth 403(b) feature)
•nonqualified
deferred compensation plans
•nonqualified
excess benefit plans
•nonqualified
retirement plans
