ck0000100334-20231031
March
1, 2024
American
Century Investments
Statement
of Additional Information
American
Century Mutual Funds, Inc.
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| Balanced
Fund |
Select Fund |
Sustainable
Equity Fund |
| Investor
Class (TWBIX) |
Investor
Class (TWCIX) |
Investor
Class (AFDIX) |
| I
Class (ABINX) |
I
Class (TWSIX) |
I
Class (AFEIX) |
| R5
Class (ABGNX) |
Y
Class (ASLWX) |
Y
Class (AFYDX) |
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| A
Class (TWCAX) |
A
Class (AFDAX) |
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| C
Class (ACSLX) |
C
Class (AFDCX) |
| Growth
Fund |
R
Class (ASERX) |
R
Class (AFDRX) |
| Investor
Class (TWCGX) |
R5
Class (ASLGX) |
R5
Class (AFDGX) |
| I
Class (TWGIX) |
R6
Class (ASDEX) |
R6
Class (AFEDX) |
| Y
Class (AGYWX) |
G
Class (ASLDX) |
G
Class (AFEGX) |
| A
Class (TCRAX) |
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| C
Class (TWRCX) |
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| R
Class (AGWRX) |
Small
Cap Growth Fund |
Ultra® Fund |
| R5
Class (AGWUX) |
Investor
Class (ANOIX) |
Investor
Class (TWCUX) |
| R6
Class (AGRDX) |
I
Class (ANONX) |
I
Class (TWUIX) |
| G
Class (ACIHX) |
Y
Class (ANOYX) |
Y
Class (AULYX) |
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| A
Class (ANOAX) |
A
Class (TWUAX) |
| Heritage
Fund |
C
Class (ANOCX) |
C
Class (TWCCX) |
| Investor
Class (TWHIX) |
R
Class (ANORX) |
R
Class (AULRX) |
| I
Class (ATHIX) |
R5
Class (ANOGX) |
R5
Class (AULGX) |
| Y
Class (ATHYX) |
R6
Class (ANODX) |
R6
Class (AULDX) |
| A
Class (ATHAX) |
G
Class (ANOHX) |
G
Class (AULNX) |
| C
Class (AHGCX) |
| |
| R
Class (ATHWX) |
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| R5
Class (ATHGX) |
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| R6
Class (ATHDX) |
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| G
Class (ACILX) |
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statement of additional information adds to the discussion in the funds’
prospectuses dated March 1, 2024 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. |
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This
statement of additional information incorporates by reference
certain
information that appears in the funds’ annual and semiannual
reports,
which
are delivered to all investors. You may obtain a free copy
of
the funds’ annual and semiannual reports by calling
1-800-345-2021.
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©2024
American Century Proprietary Holdings, Inc. All rights reserved.
American
Century Mutual Funds, Inc. is a registered open-end management investment
company that was organized in 1957 as a Delaware corporation under the name
Twentieth Century Investors, Inc. On July 2, 1990, the company reorganized as a
Maryland corporation, and in January 1997 it changed its name to American
Century Mutual Funds, Inc. Throughout this statement of additional information
we refer to American Century Mutual Funds, Inc. as the corporation.
Each
fund described in this statement of additional information is a separate series
of the corporation 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.
Effective
December 1, 2009, New Opportunities II Fund was renamed Small Cap Growth Fund.
Effective August 10, 2016, Fundamental Equity was renamed Sustainable Equity.
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| Fund |
Ticker
Symbol |
Inception
Date |
| Balanced |
|
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| Investor
Class |
TWBIX |
10/20/1988 |
| I
Class |
ABINX |
05/01/2000 |
| R5
Class |
ABGNX |
04/10/2017 |
| Growth |
|
|
| Investor
Class |
TWCGX |
10/31/19581 |
| I
Class |
TWGIX |
06/16/1997 |
| Y
Class |
AGYWX |
04/10/2017 |
| A
Class |
TCRAX |
06/04/1997 |
| C
Class |
TWRCX |
03/01/2010 |
| R
Class |
AGWRX |
08/29/2003 |
| R5
Class |
AGWUX |
04/10/2017 |
| R6
Class |
AGRDX |
07/26/2013 |
| G
Class |
ACIHX |
03/01/2022 |
| Heritage |
|
|
| Investor
Class |
TWHIX |
11/10/1987 |
| I
Class |
ATHIX |
06/16/1997 |
| Y
Class |
ATHYX |
04/10/2017 |
| A
Class |
ATHAX |
07/11/1997 |
| C
Class |
AHGCX |
06/26/2001 |
| R
Class |
ATHWX |
09/28/2007 |
| G
Class |
ACILX |
03/01/2022 |
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| Fund |
Ticker
Symbol |
Inception
Date |
| R5
Class |
ATHGX |
04/10/2017 |
| R6
Class |
ATHDX |
07/26/2013 |
| Select |
|
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| Investor
Class |
TWCIX |
10/31/19581 |
| I
Class |
TWSIX |
03/13/1997 |
| Y
Class |
ASLWX |
04/10/2017 |
| A
Class |
TWCAX |
08/08/1997 |
| C
Class |
ACSLX |
01/31/2003 |
| R
Class |
ASERX |
07/29/2005 |
| R5
Class |
ASLGX |
04/10/2017 |
| R6
Class |
ASDEX |
07/26/2013 |
| G
Class |
ASLDX |
11/02/2023 |
| Small
Cap Growth |
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| Investor
Class |
ANOIX |
06/01/2001 |
| I
Class |
ANONX |
05/18/2007 |
| Y
Class |
ANOYX |
04/10/2017 |
| A
Class |
ANOAX |
01/31/2003 |
| C
Class |
ANOCX |
01/31/2003 |
| R
Class |
ANORX |
09/28/2007 |
| R5
Class |
ANOGX |
04/10/2017 |
| R6
Class |
ANODX |
07/26/2013 |
| G
Class |
ANOHX |
04/01/2019 |
| Sustainable
Equity |
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| Investor
Class |
AFDIX |
07/29/2005 |
| I
Class |
AFEIX |
07/29/2005 |
| Y
Class |
AFYDX |
04/10/2017 |
| A
Class |
AFDAX |
11/30/2004 |
| C
Class |
AFDCX |
11/30/2004 |
| R
Class |
AFDRX |
07/29/2005 |
| R5
Class |
AFDGX |
04/10/2017 |
| R6
Class |
AFEDX |
04/01/2019 |
| G
Class |
AFEGX |
04/01/2019 |
| Ultra |
| |
| Investor
Class |
TWCUX |
11/02/1981 |
| I
Class |
TWUIX |
11/14/1996 |
| Y
Class |
AULYX |
04/10/2017 |
| A
Class |
TWUAX |
10/02/1996 |
| C
Class |
TWCCX |
10/29/2001 |
| R
Class |
AULRX |
08/29/2003 |
| R5
Class |
AULGX |
04/10/2017 |
| R6
Class |
AULDX |
07/26/2013 |
| G
Class |
AULNX
|
08/01/2019 |
1
The
fund’s actual inception date is October 31, 1958; however, the advisor
implemented the fund’s current investment philosophy and practices June 30,
1971.
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 each 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 discussions contained in the
prospectuses.
Each
fund is 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, each 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).
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.
In
general, within the restrictions outlined here and in the funds’ prospectuses,
the portfolio managers have broad powers to decide how to invest fund assets,
including the power to hold them uninvested.
It
is the advisor’s intention that each fund will generally consist of domestic and
foreign common stocks, convertible securities and equity-equivalent securities.
However, subject to the specific limitations applicable to a fund, the funds’
management teams may invest the assets of each fund in varying amounts in other
instruments and may use other techniques, such as those reflected in the
Fund
Investments and Risks
section, when such a course is deemed appropriate to pursue a fund’s investment
objective. Senior securities that, in the opinion of the portfolio managers, are
high-grade issues also may be purchased for defensive purposes.
So
long as a sufficient number of acceptable securities are available, the
portfolio managers intend to keep the funds fully invested, regardless of the
movement of stock or bond prices generally. However, should a fund’s investment
methodology fail to identify sufficient acceptable securities, or for any other
reason including the desire to take a temporary defensive position, the funds
may invest their assets in money market and other short-term securities. See
Temporary
Defensive Measures,
page 27. In most circumstances, each fund’s actual level of cash and cash
equivalents will be less than 10%. The managers may use futures contracts as a
way to expose each fund’s cash assets to the market while maintaining liquidity.
The managers may not leverage a fund’s portfolio without appropriately
segregating assets to cover such positions. See Derivative
Instruments,
page 8, Futures
and Options,
page 11 and Short-Term
Securities,
page 23.
In
general, within the restrictions outlined here and in the fund’s prospectus, the
portfolio managers have broad powers to decide how to invest fund assets,
including the power to hold them uninvested. As a matter of fundamental policy,
the managers will invest approximately 60% of the fund’s portfolio in equity
securities and the remainder in bonds and other fixed-income securities. The
equity portion of the fund generally will be invested in equity securities of
large capitalization companies. The fund’s investment approach may cause its
equity portion to be more heavily invested in some industries than in others.
However, it may not invest more than 25% of its net assets in companies whose
principal business activities are in the same industry. In addition, as a
diversified investment company, its investments in a single issue are limited,
as described above in Fund
Investment Guidelines.
The portfolio managers also may purchase foreign securities, convertible
securities, equity-equivalent securities, futures contracts and similar
securities, and short-term securities.
The
fixed-income portion of the fund generally will be invested in a diversified
portfolio of high- and medium-grade government, corporate, mortgage-backed,
asset-backed and similar securities. There are no maturity restrictions on the
individual securities in
which
the fund invests. The fixed-income portion of the fund will have a weighted
average maturity of three and a half years or longer. The managers will actively
manage the portfolio, adjusting the portfolio’s weighted average maturity in
response to expected changes in interest rates. During periods of rising
interest rates, or when rates are expected to rise, a shorter-weighted average
maturity may be adopted in order to reduce the effect of bond price declines on
the fund’s net asset value. When interest rates are falling, or expected to
fall, and bond prices rising, or expected to rise, a longer-weighted average
portfolio maturity may be adopted.
To
achieve its objective, the fixed-income portion of the fund may invest some or
all of its assets in a diversified portfolio of high- and medium-grade debt
securities payable in U.S. and up to 10% in foreign currencies.
Non-investment-grade securities are subject to greater credit risk and
consequently offer higher yields.
The
fixed-income portion of the fund may invest no more than 5% of its assets in
securities rated below investment grade. For a description of the fixed-income
securities rating system, see Explanation
of Fixed-Income Securities Ratings,
in Appendix
D.
It also may invest in unrated securities if the portfolio managers determine
that they are of equivalent credit quality. The fixed-income portion of Balanced
also may invest in derivative instruments such as options, futures contracts,
options on futures contracts, and swap agreements (including, but not limited
to, credit default swap agreements), or in mortgage- or asset-backed securities,
provided that such investments are in keeping with the fund’s investment
objective.
The
fixed-income portion of Balanced may invest in U.S. dollar-denominated
securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities. Specifically, it may invest in (1) direct obligations of the
United States, such as Treasury bills, notes and bonds, which are supported by
the full faith and credit of the United States; and (2) obligations (including
mortgage-related securities) issued or guaranteed by agencies and
instrumentalities of the U.S. government. These agencies and instrumentalities
may include, but are not limited to the Government National Mortgage
Association, Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation, Federal Farm Credit Banks, Federal Home Loan Banks and Resolution
Funding Corporation. The securities of some of these agencies and
instrumentalities, such as the Government National Mortgage Association, are
guaranteed as to principal and interest by the U.S. Treasury, and other
securities are supported by the right of the issuer, such as the Federal Home
Loan Banks, to borrow from the Treasury. Other obligations, including those
issued by the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, are supported only by the credit of the
instrumentality.
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)
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 asset-backed security 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, or the financial institution providing any credit
enhancement.
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 asset-backed security held by
the fund has been exhausted, and if any required payments of principal and
interest are not made with respect to the underlying loans, the 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 the fund.
The
risks of investing in ABS are ultimately dependent upon the repayment of loans
by the individual or corporate borrowers. Although the 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
Balanced
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
Obligations
The
funds may also invest in collateralized
obligations including
collateralized debt obligations (CDOs), collateralized loan obligations (CLOs),
collateralized bond obligations (CBOs), collateralized
mortgage oblications (CMOs),
and other similarly structured investments. 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. A
CMO is a multiclass bond backed by a pool of mortgage pass-through certificates
or mortgage loans. CMOs are discussed in more detail in the Mortgage-Backed
Securities section below.
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.
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.
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.
Debt
Securities
Each
of the funds, other than Balanced, for which investing in debt securities is
required, may invest in debt securities when the portfolio managers believe such
securities represent an attractive investment for the fund. The funds may invest
in debt securities for income, or as a defensive strategy when the managers
believe adverse
market,
economic, political
or
other
conditions exist.
The
value of debt securities in which the funds may invest will fluctuate based upon
changes in interest rates and the credit quality of the issuer. Except for
Balanced, which may invest 5% of the fixed income portion of its assets in
securities rated below investment-grade, debt securities generally will be
limited to investment-grade obligations. Investment-grade means that at the time
of purchase, such obligations are rated within the four highest categories by a
nationally recognized statistical rating organization (for example, at least Baa
by Moody’s Investors Service, Inc. or BBB by Standard & Poor’s Corporation),
or, if not rated, are of equivalent investment quality as determined by the
fund’s advisor. According to Moody’s, bonds rated Baa are medium-grade and
possess some speculative
characteristics.
A BBB rating by S&P indicates S&P’s belief that a security exhibits a
satisfactory degree of safety and capacity for repayment, but is more vulnerable
to adverse economic conditions and changing circumstances.
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. Issuers of these securities
often have short financial histories or questionable credit. High-yield bonds,
which are below investment grade and sometimes referred to as junk bonds, are
regarded as predominantly speculative with respect to the issuer’s continuing
ability to meet principal and interest payments.
In
addition, the value of a fund’s investments in fixed-income securities will
change as prevailing interest rates change. In general, the prices of such
securities vary inversely with interest rates. As prevailing interest rates
fall, the prices of bonds and other securities that trade on a yield basis
generally rise. When prevailing interest rates rise, bond prices generally fall.
Depending upon the particular amount and type of fixed-income securities
holdings of a fund, these changes may impact the net asset value of that fund’s
shares.
Depositary
Receipts
American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) are receipts
representing ownership of shares of a foreign-based issuer held in trust by a
bank or similar financial institution. These are designed for U.S. and global
securities markets as alternatives to purchasing underlying securities in their
corresponding national markets and currencies. ADRs and GDRs can be sponsored or
unsponsored.
Sponsored
ADRs and GDRs are certificates in which a bank or financial institution
participates with a custodian. Issuers of unsponsored ADRs and GDRs are not
contractually obligated to disclose material information in the United States.
Therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR or GDR.
ADRs
are dollar-denominated receipts representing interests in the securities of a
foreign issuer. They are issued by U.S. banks and traded on exchanges or over
the counter in the United States. Ordinary shares are shares of foreign issuers
that are traded abroad and on a U.S. exchange. New York shares are shares that a
foreign issuer has allocated for trading in the United States. ADRs, ordinary
shares and New York shares all may be purchased with and sold for U.S. dollars,
which protect the fund from the foreign settlement risks described under the
section titled Foreign
Securities,
page 13.
Derivative
Instruments
To
the extent permitted by its investment objectives and policies, each of the
funds may invest in 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. A
fund may not invest in a derivative instrument if its credit, interest rate,
liquidity, counterparty or other associated risks are outside acceptable limits
set forth in its prospectus. The advisor has a derivatives risk management
program that includes policies and procedures reasonably designed to manage each
fund’s respective derivatives risk. The derivatives risk management program
complies with Rule 18f-4 of the Investment Company Act. 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 Directors on a quarterly
basis.
Examples
of common derivative instruments include futures contracts, warrants, structured
notes, credit default swaps, options contracts, swap transactions, forward
currency contracts, and treasury futures, including foreign government bond
futures.
The
risks associated with investments in derivatives differ from, and may be greater
than, the risks associated with investing directly in traditional
investments.
Leverage
Risk
– Relatively small market movements may cause large changes in an investment’s
value. Leverage is associated with certain types of derivatives or trading
strategies. Certain transactions in derivatives (such as futures transactions or
sales of put options) involve substantial leverage and may expose a fund to
potential losses that exceed the amount of initial investment.
Hedging
Risk
– When used to hedge against a position in a fund, losses on a derivative
instrument are typically offset by gains on the hedged position, and vice versa.
Thus, though hedging can minimize or cancel out losses, it can also have the
same effect on gains. Occasionally, there may be imperfect matching between the
derivative and the underlying security, such a match may prevent the fund from
achieving the intended hedge or expose it to a risk of loss. There is no
guarantee that a fund’s hedging strategy will be effective. Portfolio managers
may decide not to hedge against any given risk either because they deem such
risk improbable or they do not foresee the occurrence of the risk. Additionally,
certain risks may be impossible to hedge against.
Correlation
Risk
– The value of the underlying security, interest rate, market index or other
financial asset may not move in the direction the portfolio managers anticipate.
Additionally, the value of the derivative may not move or react to changes in
the underlying security, interest rate, market index or other financial asset as
anticipated.
Illiquidity
Risk
– There may be no liquid secondary market, which may make it difficult or
impossible to close out a position when desired. For exchange-traded derivatives
contracts, daily limits on price fluctuations and speculative position limits
set by the exchanges on which the fund transacts in derivative instruments may
prevent profitable liquidation of positions, subjecting a fund to the potential
of greater losses.
Settlement
Risk
– A fund may 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.
Counterparty
Risk
– A counterparty may fail to perform its obligations. 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.
Volatility
Risk
– A fund could face higher volatility because some derivative instruments create
leverage.
Forward
Currency Exchange Contracts
Each
fund may purchase and sell foreign currency on a spot (i.e., cash) basis and may
engage in forward currency contracts, currency options and futures transactions
for hedging or any other lawful purpose.
The
funds expect to use forward currency contracts under two
circumstances:
(1)When
the portfolio managers are purchasing or selling a security denominated in a
foreign currency and wish to lock in the U.S. dollar price of that security, the
portfolio managers would be able to enter into a forward currency contract to do
so;
(2)When
the portfolio managers believe that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, a fund would be able
to enter into a forward currency contract to sell foreign currency for a fixed
U.S. dollar amount approximating the value of some or all of its portfolio
securities either denominated in, or whose value is tied to, such foreign
currency.
In
the first circumstance, when a fund enters into a trade for the purchase or sale
of a security denominated in a foreign currency, it may be desirable to
establish (lock in) the U.S. dollar cost or proceeds. By entering into forward
currency contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar
and the subject foreign currency.
In
the second circumstance, when the portfolio managers believe that the currency
of a particular country may suffer a substantial decline relative to the U.S.
dollar, a fund could enter into a forward currency contract to sell for a fixed
dollar amount the amount in foreign currencies approximating the value of some
or all of its portfolio securities either denominated in, or whose value is tied
to, such foreign currency. The fund will generally cover outstanding forward
contracts by maintaining liquid portfolio securities denominated in, or whose
value is tied to, the currency underlying the forward contract or the currency
being hedged.
The
precise matching of forward currency contracts in the amounts and values of
securities involved generally would not be possible because the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward currency contract is
entered into and the date it matures. Predicting short-term currency market
movements is extremely difficult, and the successful execution of short-term
hedging strategy is highly uncertain. Normally, consideration of the prospect
for currency parities will be incorporated into the long-term investment
decisions made with respect to overall diversification strategies. However, the
portfolio managers believe that it is important to have flexibility to enter
into such forward currency contracts when they determine that a fund’s best
interests may be served.
When
the forward currency contract matures, the fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate the obligation to deliver the foreign currency by
purchasing an offsetting forward currency contract with the same currency trader
that obligates the fund to purchase, on the same maturity date, the same amount
of the foreign currency.
It
is impossible to forecast with absolute precision the market value of portfolio
securities at the expiration of the forward currency contract. Accordingly, it
may be necessary for a fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the fund is obligated to
deliver and if a decision is made to sell the security to make delivery of the
foreign currency the fund is obligated to deliver.
Futures
and Options
The
funds may enter into futures contracts, options or options on futures contracts.
The funds may not, however, enter into a futures transaction for speculative
purposes. 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. Strategies such as selling
futures, buying puts, and writing calls, hedge a fund’s investments against
price fluctuations. Other strategies, such as buying futures, writing puts and
buying calls, tend to increase market exposure.
Futures
Generally,
futures transactions will be used to:
•protect
against a decline in market value of the fund’s securities (taking a short
futures position),
•protect
against the risk of an increase in market value for securities in which the 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 a 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 the 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 the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. The portfolio managers may engage in futures and options
transactions, provided that the transactions are consistent with the fund’s
investment objectives. The managers 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. 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 the fund purchases or sells a security, no price is paid or received by the
fund upon the purchase or sale of the future. Initially, the 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 the 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 security 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 the fund as unrealized gains or
losses. At any time prior to expiration of the future, the 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 the fund and the fund realizes a loss or gain.
Options
By
buying a put option, a fund obtains the right (but not the obligation) to sell
the instrument underlying the option at a fixed strike price and in return a
fund pays the current market price for the option (known as the option premium).
A fund may terminate its position in a put option it has purchased by allowing
it to expire, by exercising the option or by entering into an offsetting
transaction, if a liquid market exists. If the option is allowed to expire, a
fund will lose the entire premium it paid. If a fund exercises a put option on a
security, it will sell the instrument underlying the option at the strike price.
The buyer of a typical put option can expect to realize a gain if the value of
the underlying instrument falls substantially. However, if the price of the
instrument underlying the option 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 buyer of a call option obtains the right to purchase, rather
than sell, the instrument underlying the option at the option’s strike price.
The buyer of a typical call option can expect to realize a gain if the value of
the underlying instrument increases substantially and can expect to suffer a
loss if security prices do not rise sufficiently to offset the cost of the
option.
When
a fund writes a put option, it takes the opposite side of the transaction from
the option’s buyer. In return for the receipt of the premium, a fund assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. A fund may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. Otherwise, a fund must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below. If the price of the underlying instrument rises, a put writer would
generally realize as profit the premium it received. If the price of the
underlying instrument
remains
the same over time, it is likely that the writer will also profit, because it
should be able to close out the option at a lower price. If the price of the
underlying instrument falls, the put writer would expect to suffer a
loss.
A
fund writing a call option is obligated to sell or deliver the option’s
underlying instrument in return for the strike price upon exercise of the
option. Writing calls generally is a profitable strategy if the price of the
underlying instrument remains the same or falls. A call writer offsets part of
the effect of a price decline by receipt of the option premium, but gives up
some ability to participate in security price increases. The writer of an
exchange traded put or call option on a security, an index of securities or a
futures contract is required to deposit cash or securities or a letter of credit
as margin and to make mark to market payments of variation margin as the
position becomes unprofitable.
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, the 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.
Although
they do not currently intend to do so, the funds may write (or sell) call
options that obligate them to sell (or deliver) the option’s underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the funds would give up some
ability to participate in a price increase on the underlying security. If a fund
were to engage in options transactions, it would own the futures contract at the
time a call were written and would keep the contract open until the obligation
to deliver it pursuant to the call expired.
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 managers apply a hedge at an inappropriate time
or judge interest rate or equity market 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 managers consider 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 the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio managers 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
managers will seek to minimize these risks by limiting the futures contracts
entered into on behalf of the funds 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.
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.
When
purchasing an option on a futures contract, the fund assumes the risk of the
premium paid for the option plus related transaction costs. The purchase of an
option on a futures contract also entails the risk that changes in the value of
the underlying futures contract will not be fully reflected in the value of the
option purchased.
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.
The
CFTC recently adopted certain rule amendments that 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.
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 the 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
cashflows based on a reference rate.
The
funds 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). The 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.
Equity
Equivalents
In
addition to investing in common stocks, the funds may invest in other equity
securities and equity equivalents, including securities that permit a 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. Examples of equity securities and equity equivalents include common
stock, preferred stock, securities convertible into common stock, stock futures
contracts and stock index futures contracts.
Equity
equivalents also may include securities whose value or return is derived from
the value or return of a different security.
ESG
Integration Risk
The
portfolio managers use a variety of analytical research tools and techniques to
help them make decisions about buying or holding stocks of companies that meet
their investment criteria and selling the stocks of companies that do not. In
addition to fundamental financial metrics, the portfolio managers may also
consider environmental, social, and/or governance (ESG) data to evaluate a
company’s sustainability characteristics. However, the portfolio managers may
not consider ESG data with respect to every investment decision and, even when
such data is considered, they may conclude that other attributes of an
investment outweigh sustainability-related considerations when making decisions
for the funds. Sustainability-related characteristics may or may not impact the
performance of an investee company or the funds, and the funds may perform
differently than other funds that do not consider ESG data. Companies with
strong sustainability-related characteristics may or may not outperform
companies with weak sustainability-related characteristics. ESG data used by the
portfolio managers often lacks standardization, consistency, and transparency,
and also may not be available, complete, or accurate.
Foreign
Securities
The
funds may invest an unlimited portion of their assets in the securities of
issuers located in foreign countries, including foreign governments, when these
securities meet its standards of selection. In determining where a company is
located, the portfolio managers will consider various factors, including where
the company is headquartered, where the company’s principal operations are
located, where a majority of the company’s revenues are derived, where the
principal trading market is located and the country in which the company was
legally organized. The weight given to each of these factors will vary depending
on the circumstances in a given case.
The
funds may make such investments either directly in foreign securities or
indirectly by purchasing depositary receipts for foreign securities. Depositary
receipts, depositary shares or similar instruments are securities that are
listed on exchanges or quoted in the domestic over-the-counter markets in one
country, but represent shares of issuers domiciled in another country. Direct
investments in foreign securities may be made either on foreign securities
exchanges or in the over-the-counter markets.
The
funds consider a security to be a developed country security if its issuer is
located in 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. Securities of foreign issuers may trade in the
U.S. or foreign securities markets.
Investments
in foreign securities may present certain risks, including:
Currency
Risk.
The value of the foreign investments held by the funds 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.
Social,
Political and Economic Risk.
The economies of many of the countries in which the funds invest 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,
the funds 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
the funds 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 the funds
invest 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.
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 the funds are uninvested and no
return is earned. The inability of the funds to make intended security purchases
due to clearance and settlement problems could cause the funds to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to clearance and settlement problems could result either in
losses to the funds due to subsequent declines in the value of the portfolio
security or, if the 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.
Emerging
Markets Risk.
Each fund may invest its holdings in securities of issuers located in emerging
market (developing) countries. The funds consider “emerging market countries” to
include all countries that are not considered by the advisor to be developed
countries, which are listed on page 13.
Investing
in securities of issuers in emerging market countries involves exposure to
significantly higher risk than investing in countries with developed markets.
Risks of investing in emerging markets countries may relate to lack of
liquidity, market manipulation, limited reliable access to capital, and
differing foreign investment structures. Emerging market countries may have
economic structures that generally are less diverse and mature, and political
systems that can be expected to be less stable than those of developed
countries. Securities prices in emerging market countries can be significantly
more volatile than in developed countries, reflecting the greater uncertainties
of investing in lesser developed markets and economies. In particular, emerging
market countries may have relatively unstable governments, and may present the
risk of nationalization of businesses, expropriation, confiscatory taxation or
in certain instances, reversion to closed-market, centrally planned economies.
Such countries may also have less protection of property rights than developed
countries.
The
economies of emerging market countries may be based predominantly on only a few
industries or may be dependent on revenues from particular commodities or on
international aid or developmental assistance, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. In addition, securities markets in
emerging market countries may trade a relatively small number of securities and
may be unable to respond effectively to increases in trading volume, potentially
resulting in a lack of liquidity and in volatility in the price of securities
traded on those markets. Also, securities markets in emerging market countries
typically offer less regulatory protection for investors.
Sanctions.
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.
Inflation-linked
Securities
Balanced
may purchase inflation-linked securities issued by the U.S. Treasury, U.S.
government agencies and instrumentalities other than the U.S. Treasury, and
entities other than the U.S. Treasury or U.S. government agencies and
instrumentalities.
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-indexed 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-indexed
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-indexed 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-indexed 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 54.
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
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.
Initial
Public Offerings
The
funds may invest in initial public offerings (IPOs) of common stock or other
equity securities issued by a company. The purchase of securities in an IPO may
involve higher transaction costs than those associated with the purchase of
securities already traded on exchanges or other established markets. In addition
to the risks associated with equity securities generally, IPO securities may be
subject to additional risk due to factors such as the absence of a prior public
market, unseasoned trading and speculation, a potentially small number of
securities available for trading, limited information about the issuer and other
factors. These factors may cause IPO shares to be volatile in price. While a
fund may hold IPO securities for a period of time, it may sell them in the
aftermarket soon after the purchase, which could increase portfolio turnover and
lead to increased expenses such as commissions and transaction costs.
Investments in IPOs could have a magnified impact (either positive or negative)
on performance if a fund’s assets are relatively small. The impact of IPOs on a
fund’s performance may tend to diminish as assets grow.
Inverse
Floaters
Balanced
may invest in 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.
Investment
in Issuers with Limited Operating Histories
The
funds may invest the following portions of their assets in the equity securities
of issuers with limited operating histories: Balanced, Growth, Select,
Sustainable Equity and Ultra up to 5%; Heritage and Small Cap Growth up to 10%.
The managers consider an issuer to have a limited operating history if that
issuer has a record of less than three years of continuous operation. The
managers will consider periods of capital formation, incubation, consolidations,
and research and development in determining whether a particular issuer has a
record of three years of continuous operation.
Investments
in securities of issuers with limited operating histories may involve greater
risks than investments in securities of more mature issuers. By their nature,
such issuers present limited operating histories and financial information upon
which the managers may base their investment decision on behalf of the funds. In
addition, financial and other information regarding such issuers, when
available, may be incomplete or inaccurate.
For
purposes of this limitation, “issuers” refers to operating companies that issue
securities for the purposes of issuing debt or raising capital as a means of
financing their ongoing operations. It does not, however, refer to entities,
corporate or otherwise, that are created for the express purpose of securitizing
obligations or income streams. For example, a fund’s investments in a trust
created for the purpose of pooling mortgage obligations would not be subject to
the limitation.
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 lead to increased volatility or illiquidity in
markets for instruments that currently rely on LIBOR. The transition 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.
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 the fund’s total assets valued at market,
however, this limitation does not apply to purchases of debt securities in
accordance with the 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, the fund
could suffer a loss. To minimize the risk of default on securities loans, the
advisor adheres to guidelines prescribed by the Board of Directors governing
lending of securities. These guidelines strictly govern:
(1)the
type and amount of collateral that must be received by the fund;
(2)the
circumstances under which additions to that collateral must be made by
borrowers;
(3)the
return to be received by the fund on the loaned securities;
(4)the
limitations on the percentage of fund assets on loan; and
(5)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-Backed
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 such as U.S. Treasury bonds, 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, the 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, a fund might miss an opportunity to earn interest at higher
prevailing rates.
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.
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.
Credit
Risk Transfer Securities
Credit
risk transfer securities (CRTs) transfer the credit risk related to certain
types of mortgage-backed securities to the owner of the credit risk transfer.
Government entities, such as Fannie Mae or Freddie Mac, primarily issue CRTs.
CRTs trade in an active over the counter market facilitated by well-known
investment banks. Though an active OTC market for trading exists, CRTs may be
less liquid than exchange traded securities. CRTs are unguaranteed and unsecured
fixed or floating rate general obligations. Holders of CRTs receive compensation
for providing credit protection to the issuer. The issuer of the CRT selects the
pool of mortgage loans based on that entity’s eligibility criteria, and the
performance of the CRTs will be directly affected by the selection of such
underlying mortgage loans. The risks associated with an investment in a CRT
differ from the risks of investing in mortgage-backed securities issued by
government entities or issued by private issuers because some or all of the
mortgage default or credit risk associated with the underlying mortgage loans is
transferred to investors. Accordingly, investors in CRTs could lose some or all
of their investment if the underlying mortgage loans default.
Collateralized
Mortgage Obligations (CMOs)
A
CMO is a multiclass bond backed by a pool of mortgage pass-through certificates
or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie Mae or Freddie
Mac pass-through certificates; (b) unsecured mortgage loans insured by the
Federal Housing Administration or guaranteed by the Department of Veterans’
Affairs; (c) unsecuritized conventional mortgages; or (d) any combination
thereof.
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 that is usually tied to
a reference rate, such as the Secured Overnight Financing Rate
(SOFR).
Institutional
investors with short-term liabilities, such as commercial banks, often find
floating-rate CMOs attractive investments. Super floaters (which float a certain
percentage above a reference rate) and inverse floaters (which float inversely
to a reference rate) are variations on the floater structure that have highly
variable cash flows.
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.
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. They may be issued by
U.S. government agencies or by private issuers. 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.
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.
Mortgage
Dollar Rolls
Balanced
may enter into mortgage dollar rolls in which a fund sells mortgage-backed
securities to financial institutions for delivery in the current month and
simultaneously contracts to repurchase similar securities on a specified future
date. During the period between the sale and repurchase (the “roll period”), the
fund forgoes principal and interest paid on the mortgage-backed securities. The
fund is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the “drop”), as well
as by the interest earned on the cash proceeds of the initial sale. The fund
will use the proceeds generated from the transaction to invest in other
securities that are permissible investments for the fund. Such investments may
have a leveraging effect, increasing the volatility of the fund. Generally,
the funds intend to physically settle dollar roll transactions within 35 days of
their trade dates. If a dollar roll cannot be physically settled in this time,
it will be treated as a derivatives transaction for purposes of the fund’s
derivative risk management program. The derivative risk management program is
described in greater detail in the
Derivative Instruments
section.
A
fund could suffer a loss if the contracting party fails to perform the future
transaction and the fund is therefore unable to buy back the mortgage-backed
securities it initially sold. The fund also takes the risk that the
mortgage-backed securities that it repurchases at a later date will have less
favorable market characteristics than the securities originally
sold.
Municipal
Bonds
Municipal
bonds, which generally have maturities of more than one year when issued, are
designed to meet longer-term capital needs. These securities have two principal
classifications: general obligation bonds and revenue bonds.
General
obligation (GO) bonds are issued by states, counties, cities, towns and regional
districts to fund a variety of public projects, including construction of and
improvements to schools, highways, and water and sewer systems. GO bonds are
backed by the issuer’s full faith and credit based on its ability to levy taxes
for the timely payment of interest and repayment of principal, although such
levies may be constitutionally or statutorily limited as to rate or
amount.
Revenue
bonds are not backed by an issuer’s taxing authority; rather, interest and
principal are secured by the net revenues from a project or facility. Revenue
bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and seaport facilities and hospitals.
Industrial
development bonds (IDBs), a type of revenue bond, are issued by or on behalf of
public authorities to finance privately operated facilities. These bonds are
used to finance business, manufacturing, housing, athletic and pollution control
projects, as well as public facilities such as mass transit systems, air and
seaport facilities and parking garages. Payment of interest and repayment of
principal on an IDB depend solely on the ability of the facility’s operator to
meet financial obligations, and on the pledge, if any, of the real or personal
property financed. The interest earned on IDBs may be subject to the federal
alternative minimum tax.
Some
longer-term municipal bonds allow an investor to “put” or sell the security at a
specified time and price to the issuer or other “put provider.” If a put
provider fails to honor its commitment to purchase the security, the fund may
have to treat the security’s final maturity as its effective maturity,
lengthening the fund’s weighted average maturity and increasing the volatility
of the fund.
Municipal
Notes
Municipal
notes are issued by state and local governments or government entities to
provide short-term capital or to meet cash flow needs.
Tax
anticipation notes (TANs) are issued in anticipation of seasonal tax revenues,
such as ad valorem property, income, sales, use and business taxes, and are
payable from these future taxes. TANs usually are general obligations of the
issuer. General obligations are backed by the issuer’s full faith and credit
based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue
anticipation notes (RANs) are issued with the expectation that receipt of future
revenues, such as federal revenue sharing or state aid payments, will be used to
repay the notes. Typically, these notes also constitute general obligations of
the issuer.
Bond
anticipation notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
Other
Investment Companies
Each
of the funds 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 the 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 a 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.
Private
Placement Securities
The
funds may invest in private placement securities. Private placement securities
are securities that are not registered under the Securities Act of 1933. They
are generally eligible for sale only to certain eligible investors. Private
placements often may offer attractive opportunities for investment not otherwise
available on the open market.
Investments
in private placements are generally considered to be illiquid. Privately placed
securities may be difficult to sell promptly or at reasonable prices and might
thereby cause a fund difficulty in satisfying redemption requests. In addition,
less information may be available about companies that make private placements
than about publicly offered companies and such companies may not be subject to
the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Privately placed securities
are typically fair valued and generally have no secondary trading market;
therefore, such investments may be more difficult to value than publicly traded
securities. Difficulty in valuing a private placement may make it difficult to
accurately determine a fund’s exposure to private placement investments, which
could cause a fund to invest to a greater extent than permitted in illiquid
investments and subject a fund to increased risks.
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 that 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 the 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. The fund’s risk is the seller’s ability to pay the agreed-upon
repurchase price on the repurchase date. If the seller defaults, the 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, the fund could experience a loss.
The
funds 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
by the funds’ advisor.
Repurchase
agreements maturing in more than seven days would count toward a fund’s 15%
limit on illiquid securities.
Restricted
and Illiquid Securities
The
funds may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the funds’ criteria for selection. Restricted
securities include securities that cannot be sold to the public without
registration under the Securities Act of 1933 or the availability of an
exemption from registration, or that are “not readily marketable” because they
are subject to other legal or contractual delays in or restrictions on resale.
Rule 144A securities are securities that are privately placed with and traded
among qualified institutional investors rather than the general public. Although
Rule 144A securities are considered restricted securities, they are not
necessarily illiquid.
With
respect to securities eligible for resale under Rule 144A, the advisor will
determine the liquidity of such securities pursuant to the fund's Liquidity Risk
Management Program, approved by the Board of Directors in accordance with Rule
22e-4.
Because
the secondary market for such securities is generally limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and a fund may, from time to time, hold a Rule 144A or other
security that is illiquid. In such an event, the portfolio managers will
consider appropriate remedies to minimize the effect on such fund’s liquidity.
Each of the funds may invest no more than 15% of the value of its assets in
illiquid securities.
Short
Sales
A
fund may engage in short sales for cash management purposes only if, at the time
of the short sale, the fund owns or has the right to acquire securities
equivalent in kind and amount to the securities being sold short.
In
a short sale, the seller does not immediately deliver the securities sold and is
said to have a short position in those securities until delivery occurs. To make
delivery to the purchaser, the executing broker borrows the securities being
sold short on behalf of the seller. While the short position is maintained, the
seller collateralizes its obligation to deliver the securities sold short in an
amount equal to the proceeds of the short sale plus an additional margin amount
established by the Board of Governors of the Federal Reserve. If a fund engages
in a short sale, the fund’s custodian will segregate cash, cash equivalents or
other appropriate liquid securities on its records in an amount sufficient to
meet the purchase price. There will be certain additional transaction costs
associated with short sales, but the fund will endeavor to offset these costs
with income from the investment of the cash proceeds of short
sales.
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, these funds may invest a portion of their 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
•Money
market funds
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
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. 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.
Structured
investments are generally individually negotiated agreements or traded over the
counter, and as such, there is no active trading market for such investments.
Thus structured investments may be less liquid than other securities. Because
structured investments typically involve no credit enhancement, their credit
risk generally will be equivalent to that of the underlying instruments. In
addition, structured investments are subject to the risks that the issuers of
the underlying securities may be unable or unwilling to repay principal and
interest (credit risk), and that issuers of the underlying securities may
request to reschedule or restructure outstanding debt and to extend additional
loan amounts (prepayment or extension risk).
Tender
Option Bonds
Tender
Option Bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations, and thus they are of particular interest to
money market funds.
TOBs
are created by municipal bond dealers who purchase long-term tax-exempt bonds in
the secondary market, place the certificates in trusts, and sell interests in
the trusts with puts or other liquidity guarantees attached. The credit quality
of the resulting synthetic short-term instrument is based on the put provider’s
short-term rating and the underlying bond’s long-term rating.
There
is some risk that a remarketing agent will renege on a tender option agreement
if the underlying bond is downgraded or defaults. Because of this, the portfolio
managers monitor the credit quality of bonds underlying the funds’ TOB holdings
and intend to sell or put back any TOB if the rating on the underlying bond
falls below the second-highest rating category designated by a rating
agency.
U.S.
Government Securities
U.S.
Treasury bills, notes, zero-coupon bonds and other bonds are direct obligations
of the U.S. Treasury, which has never failed to pay interest and repay principal
when due. Treasury bills have initial maturities of one year or less, Treasury
notes from two to 10 years, and Treasury bonds more than 10 years. Although U.S.
Treasury securities carry little principal risk if held to maturity, the prices
of these securities (like all debt securities) change between issuance and
maturity in response to fluctuating market interest rates.
A
number of U.S. government agencies and instrumentalities issue debt securities.
These agencies generally are created by Congress to fulfill a specific need,
such as providing credit to home buyers or farmers. Among these agencies are the
Federal Home Loan Banks, the Federal Farm Credit Banks and the Resolution
Funding Corporation.
Some
agency securities are backed by the full faith and credit of the U.S.
government, and some are guaranteed only by the issuing agency. Agency
securities typically offer somewhat higher yields than U.S. Treasury securities
with similar maturities. However, these securities may involve greater risk of
default than securities backed by the U.S. Treasury. Occasionally,
Congressional negotiations regarding increasing the U.S. statutory debt ceiling
cause uncertainty in the market. Uncertainty, or a default on U.S. government
debt, could cause the credit rating of the U.S. government to be downgraded,
increase volatility in debt and equity markets, result in higher interest rates,
reduce prices of U.S. Treasury securities, or increase the costs of certain
kinds of debt.
Interest
rates on agency securities may be fixed for the term of the investment
(fixed-rate agency securities) or tied to prevailing interest rates
(floating-rate agency securities). Interest rate resets on floating-rate agency
securities generally occur at intervals of one year or less, based on changes in
a predetermined interest rate index.
Floating-rate
agency securities frequently have caps limiting the extent to which coupon rates
can be raised. The price of a floating-rate agency security may decline if its
capped coupon rate is lower than prevailing market interest rates. Fixed- and
floating-rate agency securities may be issued with a call date (which permits
redemption before the maturity date). The exercise of a call may reduce an
obligation’s yield to maturity.
Interest
Rate Resets on Floating-Rate U.S. Government Agency Securities
Interest
rate resets on floating-rate U.S. government agency securities generally occur
at intervals of one year or less in response to changes in a predetermined
interest rate index. There are two main categories of indices: those based on
U.S. Treasury securities and those derived from a calculated measure, such as a
cost-of-funds index. Commonly used indices include the three-month, six-month
and one-year Treasury bill rates; the two-year Treasury note yield and the
Eleventh District Federal Home Loan Bank Cost of Funds Index (EDCOFI).
Fluctuations in the prices of floating-rate U.S. government agency securities
are typically attributed to differences between the coupon rates on these
securities and prevailing market interest rates between interest rate reset
dates.
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 notes
(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
The
funds 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. The 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 that security may decline prior to delivery,
which could result in a loss to the fund. While the 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, the 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.
Generally,
the funds intend to physically settle when-issued and forward commitments within
35 days of their trade dates. If such a transaction cannot be physically settled
in this time, it will be treated as a derivatives transaction for purposes of
the fund’s derivative risk management program. The derivative risk management
program is described in greater detail in the Derivative
Instruments
section.
Zero-Coupon
and Step-Coupon Securities
The
funds may purchase zero-coupon debt securities. Zero-coupon securities do not
make regular cash interest payments, and are sold at a deep discount to their
face value.
The
funds 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.
Although
zero-coupon and certain 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.
For
purposes of a fund’s investment policies, the party identified as the “issuer”
of a municipal security depends on the form and conditions of the security. When
the assets and revenues of a political subdivision are separate from those of
the government that created the subdivision and the security is backed only by
the assets and revenues of the subdivision, the subdivision is deemed the sole
issuer. Similarly, in the case of an Industrial Development Bond, if the bond
were backed only by the assets and revenues of a non-governmental user, the
non-governmental user would be deemed the sole issuer. If, in either case, the
creating government or some other entity were to guarantee the security, the
guarantee would be considered a separate security and treated as an issue of the
guaranteeing entity.
Fundamental
Investment Policies
The
funds’ fundamental investment policies are set forth below. These investment
policies, a fund’s investment objective set forth in its prospectus, and a
fund’s status as diversified may not be changed without approval of a majority
of the outstanding votes of shareholders of a 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.
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| 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%.
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, and
(d)personal
credit and business credit businesses will be considered separate
industries.
Nonfundamental
Investment Policies
In
addition, the funds are subject to the following investment policies that are
not fundamental and may be changed by the Board of Directors.
|
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|
|
|
| |
| 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 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, shorts
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 in the equity securities of issuers with limited operating
histories. See Investment
in Issuers with Limited Operating Histories
under Fund
Investments and Risks.
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.
For
temporary defensive purposes, each fund may invest in securities that may not
fit its investment objective or its stated market. During a temporary defensive
period, a fund may invest a portion of its assets in money market, cash,
cash-equivalents or 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;
•interest-bearing
bank accounts or certificates of deposit;
•short-term
notes, bonds, or other debt instruments;
•repurchase
agreements; 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 a shorter period if the fund is
less than five years old) is shown in the Financial Highlights tables in the
prospectus. 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 managers’ investment outlook.
Balanced Fund experienced increased portfolio turnover for the fiscal year ended
October 31, 2021, due to changes in the portfolio management team and investment
strategy for the equity portion of the fund.
The
managers may sell securities without regard to the length of time the security
has been held. Accordingly, each fund’s portfolio turnover rate may be
substantial.
The
portfolio managers intend to purchase a given 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 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.
When
a general decline in security prices is anticipated, the equity funds may
decrease or eliminate entirely their equity positions and increase their cash
positions, and when a general rise in price levels is anticipated, the equity
funds may increase their equity positions and decrease their cash positions.
However, it should be expected that the funds will, under most circumstances, be
essentially fully invested in equity securities.
Because
investment decisions are based on a particular security’s anticipated
contribution to a fund’s investment objective, 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 that of
other mutual funds with similar investment objectives. Higher turnover would
generate correspondingly greater brokerage commissions, which is a cost the
funds pay directly. Portfolio turnover also may affect the character of capital
gains realized and distributed by the fund, if any, because short-term capital
gains are characterized 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.
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 funds’ 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, 2023,
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
•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
•Capital Cities,
LLC
•CBIZ,
Inc.
•Charles
Schwab & Co., Inc.
•Choreo,
LLC
•Clearwater
Analytics, LLC
•Cleary
Gull Inc.
•Commerce
Bank N.A
•Connecticut
General Life Insurance Company
•Corestone
Investment Managers AG
•Corning
Incorporated
•Curcio
Webb LLC
•Deutsche
AM Distributors, Inc.
•Eckler,
Ltd.
•Electra
Information Systems, Inc.
•Empower
Plan Services, LLC
•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
•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 Distributors LLC
•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.
•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, Inc.
•RidgeWorth
Capital Management, Inc.
•Rocaton
Investment Advisors, LLC
•RVK,
Inc.
•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.
•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
Advisors LLC
•WTW
•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 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 funds and the funds’ advisor must have access to some
or all of the funds’ 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 funds’ 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 funds and the advisor are provided elsewhere in this statement of
additional information. In addition, the funds’ investment advisor may use
analytical systems provided by third party data aggregators who have access to
the funds’ 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 Directors
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 directors of the funds. Each director will
continue to serve in this capacity until death, retirement, resignation or
removal from office. The board has adopted a mandatory retirement age for
directors who are not “interested persons,” as that term is defined in the
Investment Company Act (independent directors). Independent directors shall
retire on December 31 of the year in which they reach their 75th
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 directors (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 directors serve in
this capacity for seven (in the case of Jonathan S. Thomas, 16; and Thomas
W. Bunn, 8)
registered investment companies in the American Century Investments family of
funds.
The
following table presents additional information about the directors. The mailing
address for each director 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
Director
|
Other
Directorships
Held
During Past
5
Years
|
|
Independent
Directors
|
|
|
|
|
Brian
Bulatao
(1964) |
Director |
Since
2022 |
Chief
Administrative Officer, Activision
Blizzard, Inc.
(2021 to present); Under Secretary of State for Management,
U.S. Department of State
(2018 to 2021); Chief Operating Officer, Central
Intelligence Agency
(2017 to 2018) |
65 |
None |
| Thomas
W. Bunn (1953) |
Director |
Since
2017 |
Retired |
120 |
None |
|
Chris
H. Cheesman
(1962) |
Director |
Since
2019 |
Retired.
Senior Vice President & Chief Audit Executive, AllianceBernstein
(1999 to 2018) |
65 |
Alleghany
Corporation
(2021
to 2022) |
Barry
Fink
(1955) |
Director |
Since
2012 (independent since 2016) |
Retired |
65 |
None |
|
Rajesh
K. Gupta (1960) |
Director |
Since
2019 |
Partner
Emeritus, SeaCrest
Investment Management
and SeaCrest
Wealth Management
(2019 to present); Chief Executive Officer and Chief Investment Officer,
SeaCrest
Investment Management
(2006 to 2019); Chief Executive Officer and Chief Investment
Officer, SeaCrest
Wealth Management
(2008 to 2019) |
65 |
None |
|
Lynn
Jenkins (1963) |
Director |
Since
2019 |
Consultant,
LJ
Strategies
(2019 to present); United States Representative,
U.S. House of Representatives (2009
to 2018) |
65 |
MGP
Ingredients, Inc. (2019 to 2021) |
Jan
M. Lewis
(1957) |
Director
and Board Chair |
Since
2011 (Board Chair since 2022) |
Retired |
65 |
None |
Gary
C. Meltzer
(1963) |
Director |
Since
2022 |
Advisor,
Pontoro
(2021 to present); Executive Advisor, Consultant and Investor,
Harris
Ariel Advisory LLC
(2020 to present); Managing Partner, PricewaterhouseCoopers
LLP
(1985 to 2020) |
65 |
ExcelFin
Acquisition Corp., Apollo Realty Income Solutions, Inc.
|
|
Interested
Director
|
|
|
| |
Jonathan
S. Thomas
(1963) |
Director
|
Since
2007 |
President
and Chief Executive Officer, ACC
(2007 to present). Also serves as Chief Executive Officer, ACS;
Director, ACC
and other ACC
subsidiaries |
151 |
None |
Qualifications
of Directors
Generally,
no one factor was decisive in the selection of the directors to the board.
Qualifications considered by the board to be important to the selection and
retention of directors 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 director. 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.
When
assessing potential new directors, the board has a policy of considering
individuals from various and diverse backgrounds. Such diverse backgrounds may
include differences in professional experience, education, individual skill sets
and other individual attributes. Additional information about each director’s
individual educational and professional experience (supplementing the
information provided in the table above) follows and was considered as part of
his or her nomination to, or retention on, the board.
Brian
Bulatao:
BS in Engineering Management, United States Military Academy at West Point; MBA
from Harvard Business School; former military service followed by experience at
McKinsey & Co. (global management consulting) and in the private equity
industry; experience in senior management positions in government and the
private sector
Thomas
W. Bunn: BS
in Business Administration, Wake Forest University; MBA in Finance, University
of North Carolina at Chapel Hill; formerly Vice Chairman and President,
KeyCorp
(banking
services); 31 years of experience in investment, commercial and corporate
banking managing directorship roles with Bank of America
Chris
H. Cheesman:
BS in Business Administration (Accounting), Hofstra University; 32 years of
experience in global financial services at AllianceBernstein; formerly, auditor
with Price Waterhouse; Certified Public Accountant and Certified Financial
Services Auditor
Barry
Fink:
BA in English and History, Binghamton University; Juris Doctorate, University of
Michigan; formerly held leadership roles including chief operating officer with
American Century Investments; formerly held leadership roles during a 20-year
career with Morgan Stanley Investment Management; formerly asset management and
securities law attorney at Seward & Kissel; serves on the Executive
Committee of the Board of Directors of ICI Mutual Insurance Company
Rajesh
K. Gupta: BS
in Quantitative Analysis, New York University, Stern School of Business; MBA in
Finance, New York University, Stern School of Business; formerly held leadership
roles during 19-year career with Morgan Stanley Investment
Management
Lynn
Jenkins: BS
in Accounting, Weber State University; AA in Business, Kansas State University;
formerly, United States Representative; formerly, Kansas State Treasurer, Kansas
State Senator and Kansas State Representative; 20 years of experience in finance
and accounting, including as a certified public accountant
Jan
M. Lewis:
BS in Civil Engineering, University of Nebraska and MBA, Rockhurst College;
Graduate Certificate in Financial Markets and Institutions, Boston University;
formerly, President and Chief Executive Officer, Catholic Charities of Northeast
Kansas (human services organization); formerly, President, BUCON, Inc.
(full-service design-build construction company); 20 years of experience with
Butler Manufacturing Company (metal buildings producer) and its
subsidiaries
Gary
C. Meltzer:
BS in Accounting, Binghamton University; Certified Public Accountant; formerly
held a variety of roles during 35 years of experience as business advisor and
independent auditor providing high quality audits and value-added services with
PricewaterhouseCoopers LLP
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 funds pursuant to the management agreements. Directors 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 and
other service providers to the funds;
•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, the advisor and other service providers to the funds regularly throughout
the year, and meet at least quarterly with management of the advisor to review
reports about fund operations. The directors’ 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 directors who may exercise the powers and authority of the board as
determined by the directors. 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 attention of the corporate secretary
(the “Corporate Secretary”) at American Century funds, P.O. Box 418210, Kansas
City, Missouri 64141-9210. Shareholders who prefer to communicate by email may
send their comments to [email protected]. The Corporate
Secretary will forward all such communications to each member of the Compliance
and Shareholder Services Committee, or if applicable, the individual director(s)
and/or committee chair named in the correspondence. However, if a shareholder
communication is addressed exclusively to the funds’ independent directors, the
Corporate Secretary will forward the communication to the Compliance and
Shareholder Services Committee chair, who will determine the appropriate
action.
Board
Leadership Structure and Standing Board Committees
Jan
M. Lewis currently serves as the independent board chair and has served in such
capacity since 2022. All of the board’s members except for Jonathan S. Thomas
are independent directors. The independent directors meet separately, as needed
and at least in conjunction with each quarterly meeting of the board, to oversee
fund activities, review contractual arrangements with service providers, review
fund performance and meet periodically with the funds’ Chief Compliance Officer
and fund auditors. They are advised by independent legal counsel. No independent
director may serve as an officer or employee of a fund. The board has also
established several committees, as described below. The board believes that the
current leadership structure, with independent directors filling all but one
position on the board, with an independent director serving as board chair, and
with the board committees comprised only of independent directors, is
appropriate and allows for independent oversight of the funds.
The
board has an Audit Committee that approves the funds’ (or corporation’s)
engagement of the independent registered public accounting firm and recommends
approval of such engagement to the funds’ board. The committee also oversees the
activities of the accounting firm, receives regular reports regarding fund
accounting, oversees securities valuation by the advisor as valuation designee
and receives regular reports from the advisor’s internal audit department. The
Audit Committee meets with the corporation’s independent auditors to review and
approve the scope and results of their professional services; to review the
procedures for evaluating the adequacy of the corporation’s accounting controls;
to consider the range of audit fees; and to make recommendations to the board
regarding the engagement of the funds’ independent auditors. The committee
currently consists of Chris H. Cheesman (chair), Barry Fink, Lynn M. Jenkins and
Gary C. Meltzer. It met
four times
during the fiscal year ended October 31, 2023.
The
board has a Governance Committee that is responsible for reviewing board
procedures and committee structures. The committee also considers and recommends
individuals for nomination as directors. The names of potential director
candidates may be drawn from a number of sources, including members of the
board, management and shareholders. Shareholders may submit director nominations
at any time to the Corporate Secretary, American Century funds, P.O. Box 418210,
Kansas City, MO 64141-9210. When submitting nominations, shareholders should
include the name, age and address of the candidate, as well as a detailed resume
of the candidate’s qualifications and a signed statement from the candidate of
his/her willingness to serve on the board. Shareholders submitting nominations
should also include information concerning the number of fund shares and length
of time held by the shareholder, and if applicable, similar information for the
potential candidate. All nominations submitted by shareholders will be forwarded
to the chair of the Governance Committee for consideration. The Corporate
Secretary will maintain copies of such materials for future reference by the
committee when filling board positions.
If
this process yields more than one desirable candidate, the committee will rank
them by order of preference depending on their qualifications and the funds’
needs. The candidate(s) may then be contacted to evaluate their interest and be
interviewed by the full committee. Based upon its evaluation and any appropriate
background checks, the committee will decide whether to recommend a candidate’s
nomination to the board.
The
Governance Committee also may recommend the creation of new committees, evaluate
the membership structure of new and existing committees, consider the frequency
and duration of board and committee meetings and otherwise evaluate the
responsibilities, processes, resources, performance and compensation of the
board. The committee currently consists of Barry Fink (chair), Brian
Bulatao,
Lynn M. Jenkins, Jan M. Lewis and Gary
C. Meltzer.
It met three
times
during the fiscal year ended October 31, 2023.
The
board also has a Compliance and Shareholder Services Committee, which reviews
the results of the funds’ compliance testing program, meets regularly with the
funds’ Chief Compliance Officer, reviews shareholder communications, reviews
quarterly reports
regarding
the quality of shareholder service provided by the advisor, and monitors
implementation of the funds’ Code of Ethics. The committee currently consists of
Thomas W. Bunn (chair), Brian Bulatao, Rajesh K. Gupta and
Jan M. Lewis. It met four times during the fiscal year ended October 31,
2023.
The
board has a Fund Performance Review Committee that meets quarterly to review the
investment activities and strategies used to manage fund assets and monitor
investment performance. The committee regularly receives reports from the
advisor’s chief investment officer, portfolio managers and other investment
personnel concerning the funds’ efforts to achieve their investment objectives.
The committee also receives information regarding fund trading activities and
monitors derivative usage. The Committee does not review individual security
selections. The committee currently consists of Rajesh K. Gupta (chair), Brian
Bulatao, Thomas W. Bunn, Chris H. Cheesman, Barry Fink, Lynn M. Jenkins, Jan M.
Lewis and
Gary
C. Meltzer. The committee met four times during the fiscal year ended October
31,
2023.
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 above, the board’s
committees assist the board in overseeing various types of risks relating to the
funds, including, but not limited to, investment risk, operational risk and
enterprise risk. The board receives regular reports from each committee
regarding the committee’s areas of oversight responsibility and, through those
reports and its regular interactions with management of the advisor during and
between meetings, analyzes, evaluates, and provides feedback on the advisor’s
risk management processes. In addition, the board receives information
regarding, and has discussions with senior management of the advisor about, the
advisor’s enterprise risk management system and strategies, including an annual
review of the advisor’s risk management practices. 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
For
the fiscal year ended October 31, 2023,
each independent director received the following compensation for his or her
service to the funds and the American Century family of funds. Under the terms
of the management agreement with the advisor, the funds are responsible for
paying such fees and expenses. Neither Jonathan Thomas nor any officers of the
funds receives compensation from the funds.
|
|
|
|
|
|
|
|
| |
| Name
of Director |
Total
Compensation for Services as Director of
the
Funds(1) |
Total
Compensation for Service as Directors/Trustees for the
American
Century
Investments Family of Funds(2) |
| Independent
Directors |
| |
| Brian
Bulatao |
$127,121 |
$298,375 |
| Thomas
W. Bunn |
$145,475 |
$343,500 |
Chris
H. Cheesman
|
$145,475 |
$343,500 |
| Barry
Fink |
$145,475 |
$343,500 |
| Rajesh
K. Gupta |
$145,475 |
$343,500 |
| Lynn
Jenkins |
$137,852 |
$325,500 |
| Jan
M. Lewis |
$169,615 |
$400,500 |
| Gary
C. Meltzer |
$127,121 |
$298,375 |
|
Stephen
E. Yates(3) |
$137,852 |
$471,333 |
1 Includes
compensation paid to the directors for the fiscal year ended October 31, 2023,
and also includes amounts deferred at the election of the directors under the
American Century Mutual Funds’ Independent Directors’ Deferred Compensation
Plan.
2 Includes
compensation paid to each director for his or her service as director/trustee
for seven (in the case of Mr. Bunn,
eight) investment companies in the American Century Investments family of funds.
The total amount of deferred compensation included in the table is as follows:
Ms. Jenkins,
$130,200.
3
Mr.
Yates
retired from the board on December 31, 2023.
None
of the funds currently provides any pension or retirement benefits to the
directors except pursuant to the American Century Mutual Funds’ Independent
Directors’ Deferred Compensation Plan adopted by the corporation. Under the
plan, the independent directors may defer receipt of all or any part of the fees
to be paid to them for serving as directors of the funds. All deferred fees are
credited to accounts established in the names of the directors. 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 directors. 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. Directors are allowed to change their designation of
funds from time to time.
Generally,
deferred fees are not payable to a director until the distribution date elected
by the director in accordance with the terms of the plan. Such distribution date
may be a date on or after the director’s retirement date, but may be an earlier
date if the director 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. Directors 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 director, all
remaining deferred fee account balances are paid to the director’s beneficiary
or, if none, to the director’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 directors to receive
their deferred fee account balances are the same as the rights of a general
unsecured creditor of the funds. 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
directors owned shares in the funds as of December 31,
2023 as
shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
of Director |
| |
Jonathan
S.
Thomas |
Brian
Bulatao |
Thomas
W.
Bunn |
Chris
H.
Cheesman |
Barry
Fink |
| Dollar
Range of Equity Securities in the Funds: |
|
|
|
| |
| Balanced |
A |
A |
A |
A |
A |
| Growth |
E |
A |
A |
A |
A |
| Heritage |
D |
A |
A |
A |
A |
| Select |
E |
A |
A |
A |
A |
| Small
Cap Growth |
E |
A |
A |
B |
A |
| Sustainable
Equity |
C |
A |
A |
A |
A |
| Ultra |
E |
A |
E |
A |
A |
|
Aggregate
Dollar Range of Equity
Securities
in all Registered Investment
Companies
Overseen by Director
in
Family of Investment Companies
|
E |
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
of Director |
| |
Rajesh
K.
Gupta |
Lynn
Jenkins |
Jan
M.
Lewis
|
Gary
C.
Meltzer |
| Dollar
Range of Equity Securities in the Funds: |
|
|
| |
| Balanced |
A |
E |
A |
A |
| Growth |
A |
A |
E |
A |
| Heritage |
A |
A |
D |
A |
| Select |
A |
A |
D |
A |
| Small
Cap Growth |
A |
A |
D |
A |
| Sustainable
Equity |
A |
A |
A |
A |
| Ultra |
A |
A |
A |
A |
|
Aggregate
Dollar Range of Equity
Securities
in all Registered Investment
Companies
Overseen by Director
in
Family of Investment Companies
|
E |
E |
E |
A |
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 Directors
No
independent director or his or her immediate family members beneficially owned
shares of the advisor, the funds’ principal underwriter 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, 2023.
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 officer listed below is 4500 Main Street, Kansas City, Missouri
64111.
|
|
|
|
|
|
|
|
| |
|
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 since
2023 |
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) |
Cihan
Kasikara
(1974) |
Vice
President since 2023 |
Senior
Vice President, ACS
(2022 to present); Treasurer, ACS
(2023 to present); Vice President, ACS
(2020 to 2022); Vice President, Franklin
Templeton
( 2015 to 2020) |
| Kathleen
Gunja Nelson (1976) |
Vice
President since 2023 |
Vice
President, ACS
(2017 to present) |
Ward
D.
Stauffer
(1960) |
Secretary
since
2005 |
Attorney,
ACC
(2003 to present) |
The
funds, their investment advisor, principal underwriter and, if applicable,
subadvisor 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
advisor is responsible for exercising the voting rights associated with the
securities purchased and/or held by the funds. The funds’ Board of Directors has
approved the advisor’s proxy voting policies to govern the advisor’s proxy
voting activities.
A
copy of the advisor’s proxy voting policies is attached hereto as Appendix E.
Information regarding how the advisor voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is 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
corporation 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 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. The amount of the fee is calculated daily and paid
monthly in arrears. For each fund with a stepped fee schedule, the rate of the
fee is determined by applying the formula indicated in the table below. This
formula takes into account the assets of the fund as well as certain assets, if
any, of other clients of the advisor outside the American Century Investments
fund family (such as subadvised funds and separate accounts), as well as
exchange-traded funds managed by the advisor, that use very similar investment
teams and strategies (strategy assets). The use of strategy assets, rather than
fund assets alone, in calculating the fee rate for a particular fund could allow
the fund to realize scheduled cost savings more quickly. However, it is possible
that a fund’s strategy assets will not include assets of other accounts or that
any such assets may not be sufficient to result in a lower fee rate. The
management fee schedules for the funds appear below.
|
|
|
|
|
|
|
|
| |
| Fund |
Class |
Percentage
of Strategy Assets |
| Balanced |
Investor |
0.900%
of the first $1 billion
0.800% over $1 billion |
| |
I
and R5 |
0.700%
of the first $1 billion
0.600% over $1 billion |
| Growth |
Investor,
A, C, and R |
0.990%
of the first $4 billion
0.970% of the next $4 billion
0.950% of the
next $4 billion
0.930% of the next $4 billion
0.910% of the next $4
billion
0.890% of the next $5 billion
0.800% over $25
billion |
| |
I
and R5 |
0.790%
of the first $4 billion
0.770% of the next $4 billion
0.750% of the
next $4 billion
0.730% of the next $4 billion
0.710% of the next $4
billion
0.690% of the next $5 billion
0.600% over $25
billion |
| |
Y,
R6 and G |
0.640%
of the first $4 billion
0.620% of the next $4 billion
0.600% of the
next $4 billion
0.580% of the next $4 billion
0.560% of the next $4
billion
0.540% of the next $5 billion
0.450% over $25
billion |
| Heritage |
Investor,
A, C and R |
1.000% |
| |
I
and R5 |
0.800% |
| |
Y,
R6 and G |
0.650% |
|
|
|
|
|
|
|
|
| |
| Fund |
Class |
Percentage
of Strategy Assets |
| Select |
Investor,
A, C and R |
0.990%
of the first $4 billion
0.970% of the next $4 billion
0.950% of the
next $4 billion
0.930% of the next $4 billion
0.910% of the next $4
billion
0.890% of the next $5 billion
0.800% over $25
billion |
| |
I
and R5 |
0.790%
of the first $4 billion
0.770% of the next $4 billion
0.750% of the
next $4 billion
0.730% of the next $4 billion
0.710% of the next $4
billion
0.690% of the next $5 billion
0.600% over $25
billion |
|
| Y,
R6 and G |
0.640%
of the first $4 billion
0.620% of the next $4 billion
0.600% of the
next $4 billion
0.580% of the next $4 billion
0.560% of the next $4
billion
0.540% of the next $5 billion
0.450% over $25
billion |
| Small
Cap Growth |
Investor,
A, C and R |
1.500%
of the first $250 million
1.250% of the next $250 million
1.150% of
the next $250 million
1.100% over $750 million |
| |
I
and R5 |
1.300%
of the first $250 million
1.050% of the next $250 million
0.950% of
the next $250 million
0.900% over $750 million |
|
| Y,
R6 and G |
1.150%
of the first $250 million
0.900% of the next $250 million
0.800% of
the next $250 million
0.750% over $750 million |
| Sustainable
Equity |
Investor,
A, C and R |
0.790%
of the first $5 billion
0.765% of the next $5 billion
0.740% over
$10 billion |
| |
I
and R5 |
0.590%
of the first $5 billion
0.565% of the next $5 billion
0.540% over
$10 billion |
|
| Y,
R6 and G |
0.440%
of the first $5 billion
0.415% of the next $5 billion
0.390% over
$10 billion |
| Ultra |
Investor,
A, C and R |
0.990%
of the first $4 billion
0.970% of the next $4 billion
0.950% of the
next $4 billion
0.930% of the next $4 billion
0.910% of the next $4
billion
0.890% of the next $5 billion
0.800% over $25
billion |
|
|
|
|
|
|
|
|
| |
| Fund |
Class |
Percentage
of Strategy Assets |
| |
I
and R5 |
0.790%
of the first $4 billion
0.770% of the next $4 billion
0.750% of the
next $4 billion
0.730% of the next $4 billion
0.710% of the next $4
billion
0.690% of the next $5 billion
0.600% over $25
billion |
|
| Y,
R6 and G |
0.640%
of the first $4 billion
0.620% of the next $4 billion
0.600% of the
next $4 billion
0.580% of the next $4 billion
0.560% of the next $4
billion
0.540% of the next $5 billion
0.450% over $25
billion |
On
each calendar day, each class of each fund accrues a management fee that is
equal to the class’s management fee rate (as calculated pursuant to the above
schedules) 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 management fee is the sum of the daily fee
calculations for each day of the previous month.
The
management agreement between the corporation 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 fund’s Board of Directors, 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 directors of the fund 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 Directors 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 the advisor shall not be liable to the funds or
their 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, 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 a 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 Directors has approved
the policy of the advisor with respect to the aggregation of portfolio
transactions. To the extent equity trades are aggregated, shares purchased or
sold are generally allocated to the participating portfolios pro rata based on
order size. 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 each fund for the fiscal periods ended October 31,
2023, 2022 and 2021, are indicated in the following tables.
|
|
|
|
|
|
|
|
|
|
|
| |
| Unified
Management Fees |
|
| |
| Fund |
2023 |
2022 |
2021 |
| Balanced |
$7,473,825 |
$8,528,045 |
$9,247,090 |
| Growth |
$89,112,449(1) |
$99,049,683(7) |
$109,327,252(13) |
| Heritage |
$40,965,730(2)
|
$46,417,581(8)
|
$58,171,858 |
| Select |
$36,607,711(3)
|
$40,555,655(9) |
$43,376,106(14) |
| Small
Cap Growth |
$19,952,833(4)
|
$16,886,403(10) |
$16,956,923(15)
|
| Sustainable
Equity |
$9,979,511(5)
|
$9,669,978(11)
|
$9,055,774(16)
|
| Ultra |
$154,500,681(6)
|
$166,038,221(12) |
$181,547,155(17) |
1Amount
shown reflects waiver by advisor of $12,226,058 in management fees.
2Amount
shown reflects waiver by advisor of $6,484,858 in management fees.
3Amount
shown reflects waiver by advisor of $2,171,167 in management fees.
4Amount
shown reflects waiver by advisor of $2,506,457 in management fees.
5Amount
shown reflects waiver by advisor of $11,879,136 in management fees.
6Amount
shown reflects waiver by advisor of $4,383,634 in management fees.
7Amount
shown reflects waiver by advisor of $7,011,878 in management fees.
8Amount
shown reflects waiver by advisor of $3,779,579 in management fees.
9Amount
shown reflects waiver by advisor of $1,614,656 in management fees.
10Amount
shown reflects waiver by advisor of $2,612,250 in management fees.
11Amount
shown reflects waiver by advisor of $8,801,650 in management fees.
12Amount
shown reflects waiver by advisor of $2,512,502 in management fees.
13Amount
shown reflects waiver by advisor of $367,870 in management fees.
14Amount
shown reflects waiver by advisor of $1,054,000 in management fees.
15Amount
shown reflects waiver by advisor of $2,839,327 in management fees.
16Amount
shown reflects waiver by advisor of $9,440,368 in management fees.
17Amount
shown reflects waiver by advisor of $235,683 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 have an
advisory fee based on the performance of the
account.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Accounts
Managed (As of October 31, 2023) |
| |
| |
|
Registered
Investment
Companies
(e.g., 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)
|
| Jeffrey
R. Bourke |
Number
of Accounts |
2 |
1 |
6 |
| Assets |
$18.5
billion(1) |
$
1.5 billion |
$3.1
billion |
| Robert
J. Bove |
Number
of Accounts |
7 |
0 |
1 |
| Assets |
$6.0
billion(2) |
$0 |
$847.4
thousand |
| Rob
Brookby |
Number
of Accounts |
4 |
0 |
1 |
| Assets |
$5.3
billion(3)
|
$0 |
$581.0
thousand |
| Justin
M. Brown |
Number
of Accounts |
8 |
1 |
2 |
| Assets |
$17.9
billion (4) |
$194.1
million |
$509.2
million |
| Robert
Gahagan |
Number
of Accounts |
14 |
0 |
2 |
| Assets |
$18.0
billion(5)
|
$0 |
$461.0
million |
| Jason
Greenblath |
Number
of Accounts |
12 |
1 |
0 |
| Assets |
$12.0
billion(5) |
$92.6
million |
$0 |
| Jeff
Hoernemann |
Number
of Accounts |
1 |
0 |
4 |
| Assets |
$2.4
billion(6) |
$0 |
$159.3
million |
| Christopher
J. Krantz |
Number
of Accounts |
1 |
0 |
1 |
| Assets |
$4.1
billion(7) |
$0 |
$229.9
million |
| Keith
Lee |
Number
of Accounts |
5 |
3 |
7 |
| Assets |
$24.3
billion(8) |
$1.8
billion |
$2.6
billion |
| Michael
Li |
Number
of Accounts |
5 |
4 |
11 |
| Assets |
$24.3
billion(8) |
$1.8
billion |
$4.4
billion |
| Scott
Marolf |
Number
of Accounts |
3 |
1 |
1 |
| Assets |
$12.0
billion(9) |
$194.1
million |
$508.4
million |
| Joseph
Reiland |
Number
of Accounts |
9 |
1 |
2 |
| Assets |
$
18.0 billion(4) |
$194.1
million |
$509.2
million |
| Charles
Tan |
Number
of Accounts |
13 |
0 |
0 |
| Assets |
$12.1
billion(5) |
$0 |
$0 |
| Jackie
Wagner |
Number
of Accounts |
1 |
0 |
4 |
| Assets |
$2.4
billion(6) |
$0 |
$159.3
million |
| Nalin
Yogasundram |
Number
of Accounts |
4 |
0 |
1 |
| Assets |
$5.3
billion(3) |
$0 |
$581.1
thousand |
1
Includes
$18.5
billion in Ultra.
2
Includes
$802.1
million in
Balanced and $4.1
billion in Sustainable Equity.
3
Includes
$4.8
billion
in Heritage.
4
Includes
$4.1
billion in Sustainable Equity and $12.0
billion in Growth.
5
Includes
$802.1
million
in Balanced.
6
Includes
$2.4
billion
in Small Cap Growth.
7
Includes
$4.1
billion
in Select.
8
Includes
$4.1
billion in Select and $18.5
billion in Ultra.
9
Includes
$12.0
billion in Growth.
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
the 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. There is an ethical wall
between the Avantis trading desk and all other American Century traders. The
Advisor’s Global Head of Trading monitors all trading activity for best
execution and to make sure no set of clients is being systematically
disadvantaged.
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, 2023,
it includes 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 of funds a portfolio manager manages. 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
(1) |
| Balanced |
S&P
500 Index
Bloomberg U.S. Aggregate Bond Index |
Morningstar
Allocation -- 50% to 70% Equity |
| Growth |
Russell
1000 Growth Index |
Morningstar
Large Growth |
| Heritage |
Russell
Midcap Growth Index |
Morningstar
Mid-Cap Growth |
| Select |
Russell
1000 Growth Index |
Morningstar
Large Growth |
| Small
Cap Growth |
Russell
2000 Growth Index |
Morningstar
Small Growth |
| Sustainable
Equity |
S&P
500 Index |
Morningstar
Large Blend |
| Ultra |
Russell
1000 Growth Index |
Morningstar
Large Growth |
1 Custom
peer groups are constructed using all the funds in the indicated categories as a
starting point. Funds are then eliminated from the peer group based on a
standardized methodology designed to result in a final peer group that is both
more stable over the long term (i.e., has less peer turnover) and that more
closely represents the fund’s true peers based on internal investment
mandates.
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 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 Plans
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 each fund
beneficially owned by the fund’s portfolio managers as of October 31,
2023.
Certain portfolio managers serve on teams that oversee a number of funds in the
same broad investment strategy and are not expected to invest in each
fund.
|
|
|
|
|
|
|
|
| |
| Ownership
of Securities |
|
| |
Aggregate Dollar Range
of Securities in Fund |
|
| Balanced |
| |
| Robert
J. Bove |
A |
|
| Justin
Brown |
A |
|
| Robert
V. Gahagan |
A |
|
| Jason
Greenblath |
A |
|
| Joseph
Reiland |
A |
|
|
Charles
Tan
|
A |
|
| Growth |
| |
| Justin
Brown |
E(1) |
|
| Scott
Marolf |
F |
|
| Joseph
Reiland |
G |
|
| Heritage |
| |
| Rob
Brookby |
F |
|
| Nalin
Yogasundram |
E |
|
| Select |
| |
| Christopher
J. Krantz |
G |
|
| Keith
Lee |
G |
|
| Michael
Li |
E |
|
| Small
Cap Growth |
| |
| Jeff
Hoernemann |
D |
|
| Jackie
Wagner |
E |
|
| Sustainable
Equity |
| |
| Robert
J. Bove |
E |
|
| Justin
M. Brown |
D |
|
| Joseph
Reiland |
G |
|
| Ultra |
| |
| Jeffrey
R. Bourke |
A(2) |
|
| Keith
Lee |
G |
|
| Michael
Li |
G |
|
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.
1
This figure excludes 401(k) investments in a collective trust vehicle that is
managed substantially identically to Growth. Inclusion of such 401(k)
investments would result in the amount categorized in the table as a
G for
Justin Brown.
2
This
figure excludes 401(k) investments in a collective trust vehicle that is managed
substantially identically to Ultra. Inclusion of such 401(k) investments would
result in the amount categorized in the table as a F for Jeffrey
Bourke.
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-paying
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 each fund. 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 services 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 39. 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
Congress
Street, Suite
1,
Boston, Massachusetts 02114-2016
serves as custodian of the funds’ cash and securities under a Master Custodian
Agreement with the corporation. 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:
|
|
|
|
|
|
|
|
| |
|
| Growth |
Heritage |
| Gross
income from securities lending activities |
$1,742,047 |
$780,960.93 |
| 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 |
$139,844 |
$7,077 |
|
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 |
$8,525 |
$5,658 |
|
Administrative
fees not included in the revenue split |
$0 |
$0 |
|
Indemnification
fee not included in the revenue split |
$0 |
$0 |
|
Rebate
(paid to borrower) |
$330,966 |
$703,767 |
|
Other
fees not included in revenue split |
$0 |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$479,335 |
$716,503 |
| Net
income from securities lending activities |
$1,262,712 |
$64,458 |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
| |
|
| Select |
Small
Cap Growth |
| Gross
income from securities lending activities |
$388,580 |
$613,119 |
| 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 |
$33,268 |
$6,381 |
|
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 |
$1,769 |
$4,202 |
|
Administrative
fees not included in the revenue split |
$0 |
$0 |
|
Indemnification
fee not included in the revenue split |
$0 |
$0 |
|
Rebate
(paid to borrower) |
$52,531 |
$544,420 |
|
Other
fees not included in revenue split |
$0 |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$87,568 |
$555,004 |
| Net
income from securities lending activities |
$301,012 |
$58,115 |
|
|
|
|
|
| |
|
| Ultra |
| Gross
income from securities lending activities |
$164,618 |
| 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 |
$4,562 |
|
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 |
$871 |
|
Administrative
fees not included in the revenue split |
$0 |
|
Indemnification
fee not included in the revenue split |
$0 |
|
Rebate
(paid to borrower) |
$118,237 |
|
Other
fees not included in revenue split |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$123,671 |
| Net
income from securities lending activities |
$40,947 |
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.
Deloitte
& Touche LLP is the independent registered public accounting firm of the
funds. The address of Deloitte & Touche LLP is 1100 Walnut Street, 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.
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, 2023,
2022
and 2021,
the brokerage commissions including, as applicable, futures commissions, of each
fund are listed in the following table.
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund |
2023 |
2022 |
2021 |
| Balanced |
$65,260 |
$58,988 |
$282,947 |
| Growth |
$808,286 |
$1,098,077 |
$865,682 |
| Heritage |
$1,419,481 |
$983,743 |
$1,102,238 |
| Select |
$187,025 |
$209,469 |
$149,778 |
| Small
Cap Growth |
$1,424,550 |
$1,097,667 |
$1,283,722 |
| Sustainable
Equity |
$436,494 |
$188,517 |
$213,582 |
| Ultra |
$979,648 |
$843,621 |
$546,049 |
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. The
increase in
brokerage commissions for
Sustainable Equity
is correlated with the
growth of assets under management.
As
of October 31, 2023,
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 of 1940) or
of their parent companies.
|
|
|
|
|
|
|
|
| |
| Fund |
Broker,
Dealer or Parent |
Value
of Securities Owned As of
October
31, 2023 |
| Balanced |
Ameriprise
Financial, Inc.
|
$3,016,412 |
|
| Banco
Santander SA |
$547,595 |
| |
Bank
of America Corp. |
$6,280,504 |
|
| Barclays
PLC |
$423,043 |
|
| Charles
Schwab Corp. |
$497,216 |
|
| Citigroup,
Inc. |
$1,433,170 |
|
| Deutsche
Bank AG |
$314,859 |
|
| Goldman
Sachs Group Inc. |
$1,443,552 |
| |
JPMorgan
Chase & Co. |
$9,216,206 |
| |
Morgan
Stanley |
$8,902,476 |
|
| UBS
Group AG |
$826,283 |
| |
Wells
Fargo & Co. |
$1,458,415 |
| Growth |
None |
|
| Heritage |
LPL
Financial Holdings, Inc. |
$107,106,143 |
| Select |
None |
|
| Small
Cap Growth |
Evercore
Inc. |
$10,650,807 |
| Sustainable
Equity |
Ameriprise
Financial, Inc. |
$25,443,680 |
| |
Bank
of America Corp. |
$33,636,470 |
| |
JPMorgan
Chase & Co. |
$61,771,981 |
|
| Morgan
Stanley
|
$54,831,819 |
| Ultra |
None |
|
Each
of the funds named on the front of this statement of additional information is a
series of shares issued by the corporation, and shares of each fund have equal
voting rights. 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 investors holding more than 50% of the corporation’s (all
funds’) outstanding shares may be able to elect a Board of Directors. The
corporation 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 directors is determined by the votes received from
all the corporation’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.
The
assets belonging to each series are held separately by the custodian and the
shares of each series represent a beneficial interest in the principal, earnings
and profit (or losses) of investments and other assets held for each series.
Within their respective series, all shares have equal redemption rights. Each
share, when issued, is fully paid and non-assessable.
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.
The
corporation’s Board of Directors 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 funds’ Board of
Directors 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
Directors and approved by its shareholders. Pursuant to such rule, the Board of
Directors 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 Directors (including a majority of directors
who are not interested persons of the funds, as defined in the Investment
Company Act, hereafter referred to as the independent directors) 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 Directors quarterly. Continuance of the plans must be approved by the
Board of Directors, including a majority of the independent directors, annually.
The plans may be amended by a vote of the Board of Directors, including a
majority of the independent directors, 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 directors or by vote of a majority of outstanding
shareholder votes 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
Directors 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, 2023, the aggregate amount of fees paid under
each class plan was:
|
|
|
|
|
|
|
|
|
|
|
| |
| |
A
Class |
C
Class |
R
Class |
| Growth |
$278,893 |
$95,367 |
$387,846 |
| Heritage |
$553,091 |
$85,288 |
$111,892 |
| Select |
$143,171 |
$25,744 |
$20,176 |
| Small
Cap Growth |
$239,481 |
$117,363 |
$51,557 |
| Sustainable
Equity |
$221,102 |
$102,349 |
$78,805 |
| Ultra |
$505,099 |
$276,624 |
$230,821 |
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 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 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 funds’ A, C and R Class shares;
(c)paying
and compensating 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 12b1 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 net asset value
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/(1-5.75%) = $5.31.
Each
fund’s NAV is calculated as of the close of business of 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 funds expect the
same holidays to be observed in the future, the NYSE may modify its holiday
schedule at any time.
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. 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 equity securities on European 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. Model-derived fair value factors
may be applied to the market quotations of certain foreign equity securities
whose last closing price was before the time the NAV was determined. Factors are
based on observable market data and are generally provided by an independent
pricing service. Such factors are designed to estimate the price of the foreign
equity security that would have prevailed at the time the NAV is
determined.
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, such
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.
Debt
securities are generally valued through valuations obtained from a commercial
pricing service 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 Directors.
There
are a number of pricing services available, and the valuation designee, on the
basis of ongoing evaluation of these services, may use other pricing services or
discontinue the use of any pricing service in whole or in part.
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 that this
would not result in fair valuation of a given security. Other assets and
securities for which quotations are not readily available are valued in good
faith in accordance with the valuation designee’s 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 or 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.
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.
A
fund’s investment 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 dividend distributions to
investors.
If
a fund purchases the securities of certain foreign investment entities called
passive foreign investment companies (PFIC), capital gains on the sale of those
holdings will be deemed ordinary income regardless of how long the fund holds
the investment. The fund also may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to the
fund. To avoid such tax and interest, the fund may elect to treat PFICs as sold
on the last day of its fiscal year, mark-to-market these securities, and
recognize any unrealized gains (or losses, to the extent of previously
recognized gains) as ordinary income each year.
As
of October 31,
2023,
the funds in the table below 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 |
| Balanced
|
$(79,818,758) |
| Growth |
- |
| Heritage |
- |
| Select |
- |
| Small
Cap Growth |
$(212,314,849)
|
| Sustainable
Equity |
- |
| Ultra |
- |
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 same
rate as long-term capital gains. 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 the funds on shares of stock of domestic
corporations may qualify for the 70% dividends received deduction when
distributed to corporate shareholders to the extent that the fund held those
shares for more than 45 days.
Distributions
from gains on assets held by the funds 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 the 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 dividend you received on those
shares.
Each
fund may use the “equalization method” of accounting to allocate a portion of
its 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 and financial highlights for the fiscal year ended
October 31, 2023
have
been audited by Deloitte & Touche LLP, independent registered public
accounting firm. Their Reports of Independent Registered Public Accounting Firm
and the financial statements included in the annual
reports
of each of these funds for the fiscal year ended October 31, 2023,
are incorporated herein by reference.
As
of
