2022-07-14MSMortgageSecuritiesTrust_485B_PSP_February2023
MORTGAGE
SECURITIES TRUST
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Statement
of Additional Information
February
28, 2023
This
Statement of Additional Information (“SAI”) is not a prospectus. The Prospectus
(dated February
28, 2023) for Morgan Stanley Mortgage
Securities Trust may be obtained without charge from the Fund at its address or
telephone number listed below.
Morgan
Stanley
Mortgage
Securities Trust
522 Fifth
Avenue
New York,
NY 10036
1-800-869-6397
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Glossary
of Selected Defined Terms
The terms
defined in this glossary are frequently used in this SAI (other terms used
occasionally are defined in the text of the document).
“Administrator” — Morgan
Stanley Investment Management Inc., a wholly-owned fund services subsidiary of
Morgan Stanley.
“Adviser” — Morgan
Stanley Investment Management Inc., a wholly-owned investment adviser subsidiary
of Morgan Stanley.
“Co-Transfer
Agent” — Eaton
Vance Management, a wholly-owned subsidiary of Morgan Stanley.
“Custodian” — State
Street Bank and Trust Company.
“Distributor” — Morgan
Stanley Distribution, Inc., a wholly-owned broker-dealer subsidiary of Morgan
Stanley.
“Financial
Intermediaries” —
Authorized third parties, such as broker-dealers or other financial
intermediaries that have entered into a selling
agreement with the Distributor.
“Fund” — Morgan
Stanley Mortgage Securities Trust, a registered open-end investment
company.
“Independent
Trustees” —Trustees
who are not “interested persons” (as defined by the Investment Company Act of
1940, as amended (“1940
Act”)) of the Fund.
“Morgan
Stanley Funds” —
Registered investment companies for which the Adviser serves as the investment
adviser and that hold themselves
out to investors as related companies for investment and investor
services.
“Transfer
Agent” —
SS&C Global Investor and Distribution Solutions, Inc.
“Trustees” — The
Board of Trustees of the Fund.
FUND
HISTORY
The Fund
was organized as a Massachusetts business trust, under a Declaration of Trust,
on November 20, 1986, with the name Dean
Witter Government Securities Plus. Effective August 17, 1992, the Fund’s name
was changed by the Trustees to Dean Witter Federal
Securities Trust. Effective June 22, 1998, the Fund’s name was changed to Morgan
Stanley Dean Witter Federal Securities Trust.
Effective June 18, 2001, the Fund’s name was changed to Morgan Stanley Federal
Securities Trust. Effective June 22, 2005, the Fund’s
name was changed to Morgan Stanley Mortgage Securities Trust.
DESCRIPTION
OF THE FUND AND ITS INVESTMENTS AND RISKS
Classification
The Fund
is an open-end, diversified management investment company whose investment
objective is to seek a high level of current income.
Investment
Strategies and Risks
The
following discussion of the Fund’s investment strategies and risks should be
read with the sections of the Fund’s Prospectus titled “Principal
Investment Strategies,” “Principal Risks” and “Additional Information About the
Fund’s Investment Objective, Strategies and
Risks.”
Municipals. Municipal
securities include debt obligations of states, territories or possessions of the
United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the income on
which is exempt from federal income tax at the time
of issuance, in the opinion of bond counsel or other counsel to the issuers of
such securities. Municipals include both municipal
bonds (those securities with maturities of five years or more) and municipal
notes (those with maturities of less than five years).
Municipal bonds are issued for a wide variety of reasons: to construct public
facilities, such as airports, highways, bridges, schools,
hospitals, mass transportation, streets, water and sewer works; to obtain funds
for operating expenses; to refund outstanding municipal
obligations; and to loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered
municipal bonds if their interest is exempt from federal income tax. Industrial
development bonds are issued by, or on behalf of,
public authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers,
airports, mass transportation systems and water, gas or sewage works. Industrial
development bonds are ordinarily dependent on the
credit quality of a private user, not the public issuer. Private activity bonds
are another type of municipal security.
The two
principal classifications of municipal bonds are “general obligation” and
“revenue” or “special tax” bonds. General obligation
bonds are secured by the issuer’s pledge of its full faith, credit and taxing
power for the payment of principal and interest. Thus,
these bonds may be vulnerable to limits on a government’s power or ability to
raise revenue or increase taxes and its ability to maintain a
fiscally sound budget. The timely payments may also be influenced by any
unfunded pension liabilities or other post-employee
benefit plan liabilities. These bonds may also depend on legislative
appropriation and/or funding or other support from other
governmental bodies in order to make payments. Revenue or special tax bonds are
payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other tax, but not from general tax revenues.
As a result, these bonds historically have been subject to a greater risk of
default than general obligation bonds because investors
can look only to the revenue generated by the project or other revenue source
backing the project, rather than to the general taxing
authority of the state or local government issuer of the
obligations.
Industrial
revenue bonds in most cases are revenue bonds and generally do not have the
pledge of the credit of the issuer. The payment of
the principal and interest on such industrial revenue bonds is dependent solely
on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such
payment. Short-term municipal obligations issued by states, cities,
municipalities or municipal agencies, include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, construction loan notes and
short-term discount notes.
Private
activity bonds may be used by municipalities to finance the development of
industrial facilities for use by private enterprise. Principal
and interest payments are to be made by the private enterprise benefitting from
the development, which means that the holder of
the bond is exposed to the risk that the private issuer may default on the bond.
The credit and quality of private activity bonds and
industrial development bonds are usually related to the credit of the corporate
user of the facilities. Payment of interest on and
repayment of principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
Municipal
notes are issued to meet the short-term funding requirements of local, regional
and state governments. Municipal notes include
bond anticipation notes, revenue anticipation notes and tax and revenue
anticipation notes. These are short-term debt obligations
issued by state and local governments to aid cash flows while waiting for taxes
or revenue to be collected, at which time the debt
is retired. Other types of municipal notes in which the Fund
may invest are construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes and similar
instruments.
Municipal
bonds generally include debt obligations issued by states and their political
subdivisions, and duly constituted authorities and
corporations, to obtain funds to construct, repair or improve various public
facilities such as airports, bridges, highways, hospitals,
housing, schools, streets and water and sewer works. Municipal bonds may also be
issued to refinance outstanding obligations
as well as to obtain funds for general operating expenses and for loans to other
public institutions and facilities. In addition,
municipal bonds may include obligations of municipal housing authorities and
single-family mortgage revenue bonds. Weaknesses
in federal housing subsidy programs and their administration may result in a
decrease of subsidies available for payment of
principal and interest on housing authority bonds. Economic developments,
including fluctuations in interest rates and increasing construction
and operating costs, may also adversely impact revenues of housing authorities.
In the case of some housing authorities, inability
to obtain additional financing could also reduce revenues available to pay
existing obligations. Single-family mortgage revenue
bonds are subject to extraordinary mandatory redemption at par in whole or in
part from the proceeds derived from prepayments
of underlying mortgage loans and also from the unused proceeds of the issue
within a stated period which may be within a
year from the date of issue.
Note
obligations with demand or put options may have a stated maturity in excess of
one year, but permit any holder to demand payment of
principal plus accrued interest upon a specified number of days’ notice.
Frequently, such obligations are secured by letters of credit
or other credit support arrangements provided by banks. The issuer of such notes
normally has a corresponding right, after a given
period, to repay at its discretion the outstanding principal of the note plus
accrued interest upon a specific number of days’ notice to
the bondholders. The interest rate on a demand note may be based upon a known
lending rate, such as the prime lending rate, and
be adjusted when such rate changes, or the interest rate on a demand note may be
a market rate that is adjusted at specified intervals.
Each note purchased by the Fund will
meet the quality criteria set out in the Prospectus for the Fund.
The yields
of municipal bonds depend on, among other things, general money market
conditions, conditions in the municipal bond market,
the size of a particular offering, the maturity of the obligation, and the
rating of the issue. The ratings of Moody’s
Investors Service,
Inc. (“Moody’s”) and S&P
Global Ratings Group, a division of S&P Global Inc. (“S&P”) represent
their opinions of the quality of
the municipal bonds rated by them. It should be emphasized that such ratings are
general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields, while municipal bonds of the
same maturity and coupon, but with different ratings, may have the same yield.
It will be the responsibility of the Adviser to
appraise
independently the fundamental quality of the bonds held by the Fund.
Municipal
bonds are sometimes purchased on a “when-issued” or “delayed-delivery” basis,
which means the Fund has committed to purchase
certain specified securities at an agreed-upon price when they are issued. The
period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From time
to time proposals have been introduced before Congress to restrict or eliminate
the federal income tax exemption for interest
on municipal bonds. Similar proposals may be introduced in the
future.
Similarly,
from time to time proposals have been introduced before state and local
legislatures to restrict or eliminate the state and local
income tax exemption for interest on municipal bonds. Similar proposals may be
introduced in the future.
The Fund may
also purchase bonds the income on which is subject to the alternative minimum
tax (“AMT bonds”). AMT bonds are tax-exempt
private activity bonds issued after August 7, 1986, the proceeds of which are
directed, at least in part, to private, for-profit organizations.
While the income from AMT bonds is exempt from regular federal income tax, it is
a tax preference item in the calculation
of the alternative minimum tax. The alternative minimum tax is a special
separate tax that applies to some taxpayers who have
certain adjustments to income or tax preference items.
An issuer
of municipal securities may file for bankruptcy or otherwise seek to reorganize
its debts by extending debt maturities, reducing
the amount of principal or interest, refinancing the debt or taking other
measures, in each case which may significantly affect the
rights of creditors and the value of the municipal securities and the value of
the Fund’s
investments in such municipal securities.
In addition, changes to bankruptcy laws may adversely impact the Fund’s
investments in municipal securities, including creditor
rights, if the issuer seeks bankruptcy protection.
Build
America Bonds are taxable municipal securities on which the issuer receives
federal support of the interest paid. Assuming certain
specified conditions are satisfied, issuers of Build America Bonds may either
(i) receive reimbursement from the U.S. Treasury with
respect to a portion of its interest payments on the bonds (“direct pay” Build
America Bonds) or (ii) provide tax credits to investors
in the bonds (“tax credit” Build America Bonds). Unlike most other municipal
securities, interest received on Build America Bonds is
subject to federal and state income tax. Issuance of Build America Bonds ceased
on December 31, 2010. The number of Build
America Bonds available in the market is limited, which may negatively affect
the value of the Build America Bonds.
The
Fund may
hold municipal private placements. These securities are sold through private
negotiations, usually to institutions or mutual
funds, and generally have resale restrictions. Their yields are usually higher
than comparable public securities to compensate the
investor for their limited marketability.
Lease
Obligations. Included
within the revenue bonds category in which the Fund
may invest are participations in lease obligations or
installment purchase contracts (hereinafter collectively called “lease
obligations”) of municipalities. State and local governments, agencies
or authorities issue lease obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated
with general obligation or other revenue bonds. Leases, and installment purchase
or conditional sale contracts (which may provide
for title to the leased asset to pass eventually to the issuer), have developed
as a means for governmental issuers to acquire property
and equipment without the necessity of complying with the constitutional and
statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain “non-appropriation” clauses
that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative
body on an annual or other periodic basis. Consequently, continued lease
payments on those lease obligations containing “non-appropriation”
clauses are dependent on future legislative actions. If such legislative actions
do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
In
addition, lease obligations do not have the depth of marketability associated
with more conventional municipal obligations, and, as a
result, certain of such lease obligations may be considered illiquid securities.
The Adviser, pursuant to procedures adopted by the Trustees,
will make a determination as to the liquidity of each lease obligation purchased
by the Fund. If a
lease obligation is determined
to be “liquid,” the security will not be included within the category “illiquid
securities.”
Collateralized
Mortgage Obligations. The Fund
may invest in collateralized mortgage obligations (“CMOs”), which
are mortgage-backed
securities (“MBS”) that are collateralized by mortgage loans or mortgage
pass-through securities, and multi-class pass-through securities,
which are equity interests in a trust composed of mortgage loans or other MBS.
Unless the context indicates otherwise, the discussion
of CMOs below also applies to multi-class pass-through securities.
CMOs may
be issued by governmental or government-related entities or by private entities,
such as banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market traders. CMOs are issued in multiple
classes, often referred to as “tranches,” with each tranche having a specific
fixed or floating coupon rate and stated maturity or final
distribution date. Under the traditional CMO structure, the cash flows generated
by the mortgages or mortgage pass-through securities
in the collateral pool are used to first pay interest and then pay principal to
the holders of the CMOs. Subject to the various provisions
of individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required
to pay the stated interest) is used to retire the bonds.
The
principal and interest on the underlying collateral may be allocated among the
several tranches of a CMO in innumerable ways, including
“interest only” and “inverse interest only” tranches. In a common CMO structure,
the tranches are retired sequentially in the order
of their respective stated maturities or final distribution dates (as opposed to
the pro-rata return of principal found in traditional
pass-through obligations). The fastest-pay tranches would initially receive all
principal payments. When those tranches are retired,
the next tranches in the sequence receive all of the principal payments until
they are retired. The sequential retirement of bond
groups continues until the last tranche is retired. Accordingly, the CMO
structure allows the issuer to use cash flows of long maturity,
monthly-pay collateral to formulate securities with short, intermediate, and
long final maturities and expected average lives and risk
characteristics.
The
primary risk of CMOs is the uncertainty of the timing of cash flows that results
from the rate of prepayments on the underlying mortgages
serving as collateral and from the structure of the particular CMO transaction
(that is, the priority of the individual tranches).
An increase or decrease in prepayment rates (resulting from a decrease or
increase in mortgage interest rates) may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates and will affect the yield and price of CMOs. In
addition, if the collateral securing CMOs or any third-party guarantees are
insufficient to make payments, the Fund
could sustain a
loss. The prices of certain CMOs, depending on their structure and the rate of
prepayments, can be volatile. Some CMOs may also
not be as liquid as other types of mortgage-backed securities. As a result, it
may be difficult or impossible to sell the securities
at an advantageous time or price.
Privately
issued CMOs are arrangements in which the underlying mortgages are held by the
issuer, which then issues debt collateralized
by the underlying mortgage assets. Such securities may be backed by mortgage
insurance, letters of credit, or other credit
enhancing features. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may
be guaranteed by the U.S. Government or its agencies and instrumentalities,
these CMOs represent obligations solely of the
private issuer and are not insured or guaranteed by the U.S. Government, its
agencies and instrumentalities or any other person or entity.
Privately issued CMOs are subject to prepayment risk due to the possibility that
prepayments on the underlying assets will alter the
cash flow. Yields on privately issued CMOs have been historically higher than
the yields on CMOs backed by mortgages guaranteed
by U.S. government agencies and instrumentalities. The risk of loss due to
default on privately issued CMOs, however, is historically
higher since the U.S. Government has not guaranteed them.
New types
of CMO tranches have evolved. These include floating rate CMOs, planned
amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal and
interest received by each tranche from the underlying
collateral. For example, an inverse interest-only class CMO entitles holders to
receive no payments of principal and to
receive
interest at a rate that will vary inversely with a specified index or a multiple
thereof. Under certain of these newer structures, given
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the
type of CMOs in which the Fund
invests, the investment may be subject to a greater or lesser risk of prepayment
than other types of
MBS.
CMOs may
include real estate mortgage investment conduits (“REMICs”). REMICs, which were
authorized under the Tax Reform Act of
1986, are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. A REMIC is a
CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended (the “Code”), and invests in
certain mortgages principally secured by interests in real
property.
The Fund
may invest in, among others, parallel pay CMOs and planned amortization class
CMOs (“PAC Bonds”). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one tranche. These simultaneous payments
are taken into account in calculating the stated maturity date or final
distribution date of each tranche which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds are a form of
parallel pay CMO, with the required principal payment on such securities having
the highest priority after interest has been paid to
all classes. PAC Bonds generally require payments of a specified amount of
principal on each payment date.
Stripped
Mortgage-Backed Securities. The Fund
may invest in stripped mortgage-backed securities (“SMBS”). An SMBS is a
derivative
multi-class mortgage-backed security. SMBS usually are structured with two
classes that receive different proportions of the interest
and principal distribution on a pool of mortgage assets. In the most extreme
case, one class will receive all of the interest (the interest-only
or “IO” class), while the other class will receive all of the principal (the
principal-only or “PO” class). The yield to maturity
on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such security’s yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of
principal, the Fund
may fail to fully recoup its initial investment
in these securities. Conversely, if the underlying mortgage assets experience
less than anticipated prepayments of principal, the yield
of POs could be materially adversely affected. The market values of IOs and POs
are subject to greater risk of fluctuation in response
to changes in market rates of interest than many other types of mortgage-backed
securities. To the extent the Fund
invests in IOs and
POs, it may increase the risk of fluctuations in the net asset
value per share (“NAV”) of the
Fund.
Credit
Enhancement.
Mortgage-related securities are often backed by a pool of assets representing
the obligations of a number of parties.
To lessen the effect of failure by obligors on underlying assets to make
payments, these securities may have various types of credit
support. Credit support falls into two primary categories: (i) liquidity
protection, and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
generally refers to the provision of advances, typically
by the entity administering the pool of assets, to ensure that the pass-through
of payments due on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be provided through guarantees, insurance policies or letters
of credit obtained by the issuer or sponsor from third-parties (referred to
herein as “third-party credit support”), through various
means of structuring the transaction or through a combination of such
approaches.
The
ratings of mortgage-related securities for which third-party credit enhancement
provides liquidity protection or protection against
losses from default are generally dependent upon the continued creditworthiness
of the provider of the credit enhancement. The
ratings of such securities could decline in the event of deterioration in the
creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples
of credit support arising out of the structure of the transaction include
“senior-subordinated securities” (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal and interest thereon, with defaults on the
underlying assets being borne first by the holders of the most subordinated
class), creation of “reserve funds” (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and “over-collateralization”
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each security is generally
based on historical information with respect to the level of credit risk
associated with the underlying assets. Delinquency or loss in
excess of that which is anticipated could adversely affect the return on an
investment in such a security.
Inverse
Floaters. Inverse
floating rate obligations are obligations which pay interest at rates that vary
inversely with changes in market
rates of interest. Because the interest rate paid to holders of such obligations
is generally determined by subtracting a variable or
floating rate from a predetermined amount, the interest rate paid to holders of
such obligations will decrease as such variable or floating
rate increases and increase as such variable or floating rate
decreases.
Like most
other fixed-income securities, the value of inverse floaters will decrease as
interest rates increase. They are more volatile, however,
than most other fixed-income securities because the coupon rate on an inverse
floater typically changes at a multiple of the change in
the relevant index rate. Thus, any rise in the index rate (as a consequence of
an increase in interest rates) causes a correspondingly
greater drop in the coupon rate of an inverse floater while a drop in the index
rate causes a correspondingly greater
increase
in the coupon of an inverse floater. Some inverse floaters may also increase or
decrease in value substantially because of changes in
the rate of prepayments.
Inverse
floating rate investments tend to underperform the market for fixed-rate bonds
in a rising interest rate environment, but tend to
outperform the market for fixed-rate bonds when interest rates decline or remain
relatively stable. Inverse floating rate investments have
varying degrees of liquidity.
Commercial
Mortgage-Backed Securities. Commercial
mortgage-backed securities (“CMBS”) are generally multi-class or
pass-through
securities issued by special purpose entities that represent an undivided
interest in a portfolio of mortgage loans backed by commercial
properties, including, but not limited to, industrial and warehouse properties,
office buildings, retail space and shopping malls,
hotels, healthcare facilities, multifamily properties and cooperative
apartments. Private lenders, such as banks or insurance companies,
originate these loans and then sell the loans directly into a CMBS trust or
other entity. The commercial mortgage loans that
underlie CMBS are generally not amortizing or not fully amortizing. That is, at
their maturity date, repayment of the remaining principal
balance or “balloon” is due and is repaid through the attainment of an
additional loan or sale of this property. An extension of the
final payment on commercial mortgages will increase the average life of the
CMBS, generally resulting in a lower yield for discount
bonds and a higher yield for premium bonds.
CMBS are
subject to credit risk and prepayment risk. Although prepayment risk is present,
it is of a lesser degree in the CMBS than in the
residential mortgage market; commercial real estate property loans often contain
provisions which substantially reduce the likelihood
that such securities will be prepaid (e.g., significant prepayment penalties on
loans and, in some cases, prohibition on principal
payments for several years following origination).
Asset-Backed
Securities. The Fund
may invest in asset-backed securities. Asset-backed securities utilize the
securitization techniques used to
develop MBS. These
techniques are also applied to a broad range of other assets. Various types of
assets, primarily automobile and credit
card receivables and home equity loans, are being securitized in pass-through
structures similar to the mortgage pass-through
structures. These types of securities are known as asset-backed
securities. The Fund
may invest in any type of asset-backed security.
Asset-backed securities have risk characteristics similar to MBS. Like MBS, they
generally decrease in value as a result of interest
rate increases, but may benefit less than other fixed-income securities from
declining interest rates, principally because of prepayments.
Also, as in the case of MBS, prepayments generally increase during a period of
declining interest rates although other factors,
such as changes in credit use and payment patterns, may also influence
prepayment rates. Asset-backed securities also involve the risk
that various federal and state consumer laws and other legal, regulatory and
economic factors may result in the collateral backing
the securities being insufficient to support payment on the
securities.
Illiquid
Investments. In
accordance with Rule 22e-4 (the “Liquidity Rule”) under the 1940 Act,
the Fund
may invest up to 15% of its net
assets in “illiquid investments” that are assets. For these purposes,
“illiquid investments” are investments that the Fund
reasonably
expects cannot be sold or disposed of in current market conditions in seven
calendar days or less without the sale or disposition
significantly changing the market value of the investment. For the Fund,
each portfolio investment must be classified at least
monthly into one of four liquidity categories (illiquid, as discussed above, as
well as highly liquid, moderately liquid and less liquid),
which are defined pursuant to the Liquidity Rule and classified in accordance
with the Fund’s written
liquidity risk management
program by the program administrator designated by the Fund’s
Board of Trustees.
Such classification is to be made using
information obtained after reasonable inquiry and taking into account relevant
market, trading and investment-specific considerations.
In making such classifications, the Fund
determines whether trading varying portions of a position in a particular
portfolio
investment or asset class, in sizes that the Fund would reasonably anticipate
trading, is reasonably expected to significantly affect its
liquidity. If so, this determination is taken into account when classifying the
liquidity of that investment. The Fund may
be assisted
in classification determinations by one or more third-party service providers.
Assets classified according to this process as “illiquid
investments” are those subject to the 15% limit on illiquid
investments.
In the
event that changes in the portfolio or other external events cause the Fund
to exceed this limit, the Fund must take steps to bring its
illiquid investments that are assets to or below the applicable limit of its net
assets within a reasonable period of time. This requirement
would not force the Fund
to liquidate any portfolio investment.
The SEC
has recently proposed amendments to the Liquidity Rule that, if adopted, would
result in changes to the Fund’s
liquidity classification
framework and could potentially increase the percentage of the Fund’s
investments classified as illiquid. In addition, the
Fund’s
operations and investment strategies may be adversely impacted if the proposed
amendments are adopted.
Loan-Related
Investments. Loan-related
investments may include, without limitation, bank loans, direct lending and loan
participations
and assignments. In addition to risks generally associated with debt
investments, loan-related investments are subject to other
risks. Loans in which the Fund
may invest may not be rated by a rating agency, will not be registered with the
U.S.
Securities and
Exchange Commission (“SEC”) or any state securities commission and will
not be listed on any national securities exchange. Investors
in loans, such as the Fund,
may not be entitled to rely on the anti-fraud protections of the federal
securities laws, although they may
be entitled to certain contractual remedies. The amount of public information
available with respect to loans will generally
be less
extensive than that available for registered or exchange-listed securities. In
evaluating the creditworthiness of borrowers, the Adviser
will consider, and may rely in part on, analyses performed by
others.
The market
for loan obligations may be subject to irregular trading activity, wide bid/ask
spreads and extended trade settlement periods.
Because transactions in many loans are subject to extended trade settlement
periods, the Fund
may not receive the proceeds from the
sale of a loan for a period after the sale. As a result, sale proceeds related
to the sale of loans may not be available to make additional
investments or to meet the Fund’s
redemption obligations for a period after the sale of the loans, and, as a
result, the Fund may have
to sell other investments or engage in borrowing transactions, such as borrowing
from its credit facility, if necessary to raise cash to
meet its obligations. In addition, the Fund
may not be able to readily dispose of its loans at prices that approximate those
at which the
Fund could sell such loans if they were more widely-traded and, as a result of
such illiquidity, the Fund
may have to hold additional
cash or sell other investments or engage in borrowing transactions, such as
borrowing from its credit facility, if necessary to raise cash
to meet its obligations, including redemption obligations. To the extent a
readily available market ceases to exist for a particular
investment, such investment would be treated as illiquid for purposes of
the Fund’s
limitations on illiquid investments.
Loans are
subject to the risk of non-payment of scheduled interest or principal. Such
non-payment would result in a reduction of income
to the Fund,
a reduction in the value of the investment and a potential decrease in the
Fund’s NAV. There can be no assurance
that the liquidation of any collateral securing a loan would satisfy a
borrower’s obligation in the event of non-payment of scheduled
interest or principal payments, or that such collateral could be readily
liquidated. In the event of bankruptcy of a borrower, the Fund
could experience delays or limitations with respect to its ability to realize
the benefits of the collateral securing a loan. The collateral
securing a loan may lose all or substantially all of its value in the event of
the bankruptcy of a borrower. Some loans are subject to
the risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate such loans to presently existing
or future indebtedness of the borrower or take other action detrimental to the
holders of loans including, in certain circumstances,
invalidating such loans or causing interest previously paid to be refunded to
the borrower. If interest were required to be
refunded, it could negatively affect the Fund’s
performance.
Direct
Lending. When
the Fund
acts as a direct lender, it may participate in structuring the loan. Under these
circumstances, it will have a
direct contractual relationship with the borrower, may enforce compliance by the
borrower with the terms of the loan agreement
and may have rights with respect to any funds acquired by other lenders through
set-off. Lenders also have full voting and consent
rights under the applicable loan agreement. Action subject to lender vote or
consent generally requires the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
loan. Certain decisions, such as reducing the amount of
interest on or principal of a loan, releasing collateral, changing the maturity
of a loan or a change in control of the borrower,
frequently require the unanimous vote or consent of all lenders
affected.
Loan
Participations and Assignments. Loan
participations are interests in loans or other direct debt instruments relating
to amounts owed by a
corporate, governmental or other borrower to another party. These loans may
represent amounts owed to lenders or lending
syndicates, to suppliers of goods or services (trade claims or other
receivables), or to other parties (“Lenders”) and may be fixed-rate
or floating rate. These loans also may be arranged through private negotiations
between an issuer of sovereign debt obligations
and Lenders.
The Fund’s
investments in loans may be in the form of a participation in loans
(“Participations”) and assignments of all or a portion of loans
(“Assignments”) from third parties. In the case of a
Participation, the Fund
will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of
the payments from the borrower. In the event of an insolvency of the Lender
selling a Participation, the Fund
may be treated as
a general creditor of the Lender and may not benefit from any set-off between
the Lender and the borrower. Certain Participations
may be structured in a manner designed to avoid purchasers of Participations
being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
a Lender’s insolvency, the Lender’s servicing of the
Participation may be delayed and the assignability of the Participation may be
impaired. The Fund
will acquire Participations only if
the Lender interpositioned between the Fund
and the borrower is determined by the Adviser to be creditworthy.
When the Fund
purchases Assignments from Lenders it will acquire direct rights against the
borrower on the loan. However, because Assignments
are arranged through private negotiations between potential assignees and
potential assignors, the rights and obligations acquired
by the Fund
as the purchaser of an Assignment may differ from, and be more limited than,
those held by the assigning Lender.
Because there is no liquid market for Participations and Assignments, it is
likely that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities
and the Fund’s
ability to dispose of particular Assignments or Participations when necessary to
meet the Fund’s
liquidity needs or
in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary
market for Participations and Assignments also may make it more difficult
for the Fund
to assign a value to these securities for
purposes of valuing the Fund’s
securities and calculating its NAV.
Participations
and Assignments involve a risk of loss in case of default or insolvency of the
borrower. In addition, they may offer less legal
protection to the Fund
in the event of fraud or misrepresentation and may involve a risk of insolvency
of the Lender. Certain
Participations
and Assignments may also include standby financing commitments that obligate the
investing Fund to supply additional
cash to the borrower on demand. Participations involving emerging market country
issuers may relate to loans as to which there has
been or currently exists an event of default or other failure to make payment
when due, and may represent amounts owed to Lenders
that are themselves subject to political and economic risks, including the risk
of currency devaluation, expropriation, or failure.
Such Participations and Assignments present additional risk of default or
loss.
Bank loans
generally are negotiated between a borrower and several financial institutional
lenders represented by one or more lenders acting as
agent of all the lenders. The agent is responsible for negotiating the loan
agreement that establishes the terms and conditions of the
loan and the rights of the borrower and the lenders, monitoring any collateral,
and collecting principal and interest on the loan. By
investing in a loan, the Fund
becomes a member of a syndicate of lenders. Investments in bank loans entail
those risks described
above, such as liquidity risk and risk of default.
Derivatives.
The Fund
may, but is not
required to, use various derivatives and other similar instruments as described
below. Derivatives
may be used for a variety of purposes including hedging, risk management,
portfolio management or to earn income. Any or all of
the investment techniques described herein may be used at any time and there is
no particular strategy that dictates the use of one
technique rather than another, as the use of any derivative by the Fund
is a function of numerous variables, including market conditions.
The Fund
complies with applicable regulatory requirements when using derivatives.
Although the Adviser seeks to use derivatives
to further the Fund’s
investment objective, no assurance can be given that the use of derivatives will
achieve this result.
General
Risks of Derivatives.
Derivatives utilized by the Fund
may involve the purchase and sale of derivative instruments. A derivative
is a
financial instrument the value of which depends upon (or derives from) the value
of another asset, security, interest rate, index or financial
instrument. Derivatives may relate to a wide variety of underlying instruments,
including equity and debt securities, indices, interest
rates, currencies and other assets. Certain derivative instruments that
the Fund
may use and the risks of those instruments are described
in further detail below. The Fund
may in the future also utilize derivatives techniques, instruments and
strategies that may be newly
developed or permitted as a result of regulatory changes, consistent
with the Fund’s
investment objective and policies. Such newly
developed techniques, instruments and strategies may involve risks different
than or in addition to those described herein. No assurance
can be given that any derivatives strategy employed by the Fund
will be successful.
The risks
associated with the use of derivatives are different from, and possibly greater
than, the risks associated with investing directly
in the instruments underlying such derivatives. Derivatives are highly
specialized instruments that require investment techniques
and risk analyses different from other portfolio investments. The use of
derivative instruments requires an understanding not only
of the underlying instrument but also of the derivative itself. Certain risk
factors generally applicable to derivative transactions
are described below.
■ |
Derivatives
are subject to the risk that the market value of the derivative itself or
the market value of underlying instruments will change
in a way adverse to the
Fund’s interests. The
Fund bears the risk that the Adviser may incorrectly forecast future
market trends
and other financial or economic factors or the value of the underlying
security, index, interest rate or currency when establishing
a derivatives position for the
Fund. |
■ |
Derivatives
may be subject to pricing risk, which exists when a derivative becomes
extraordinarily expensive (or inexpensive) relative
to historical prices or corresponding instruments. Under such market
conditions, it may not be economically feasible to initiate
a transaction or liquidate a position at an advantageous time or
price. |
■ |
Many
derivatives are complex and often valued subjectively. Improper valuations
can result in increased payment requirements to
counterparties or a loss of value to the
Fund. Many derivatives may also involve operational and legal
risks. |
■ |
Using
derivatives as a hedge against a portfolio investment
subjects the
Fund to the risk that the derivative will have imperfect correlation
with the portfolio investment, which could result in the
Fund incurring substantial losses. This correlation risk may be
greater in the case of derivatives based on an index or other basket of
securities, as the portfolio securities being hedged may not
duplicate the components of the underlying index or the basket may not be
of exactly the same type of obligation as those underlying
the derivative. The use of derivatives for “cross hedging” purposes (using
a derivative based on one instrument as a hedge
on a different instrument) may also involve greater correlation
risks. |
■ |
While
using derivatives for hedging purposes can reduce the
Fund’s risk of loss, it may also limit the
Fund’s opportunity for gains
or result in losses by offsetting or limiting the
Fund’s ability to participate in favorable price movements in portfolio
investments. |
■ |
Derivatives
transactions for non-hedging purposes involve greater risks and may result
in losses which would not be offset by increases
in the value of portfolio securities or declines in the cost of securities
to be acquired. In the event that the
Fund enters into
a derivatives transaction as an alternative to purchasing or selling the
underlying instrument or in order to obtain desired exposure
to an index or market, the
Fund will be exposed to the same risks as are incurred in purchasing or
selling the underlying
instruments directly as well as the additional risks associated with
derivatives transactions. |
■ |
The
use of certain derivatives transactions, including over-the-counter
(“OTC”) derivatives, involves the risk of loss resulting from
the insolvency or bankruptcy of the counterparty to the contract or the
failure by the counterparty to make required payments
or otherwise comply with the terms of the contract. In the event of
default by a counterparty, the
Fund may have contractual
remedies pursuant to the agreements related to the
transaction. |
■ |
Liquidity
risk exists when a particular derivative is difficult to purchase or sell.
If a derivative transaction is particularly large or if the
relevant market is illiquid, the
Fund may be unable to initiate a transaction or liquidate a position at an
advantageous time or
price. |
■ |
While
some derivatives are cleared through a regulated, central clearinghouse,
many derivatives transactions are not entered into or
traded on exchanges or in markets regulated by the U.S. Commodity Futures
Trading Commission (“CFTC”) or the SEC. Instead,
in some cases, certain types of bilateral OTC derivatives are entered into
directly by the
Fund and a counterparty and may
be traded only through financial institutions acting as market makers. OTC
derivatives transactions can only be entered into
with a willing counterparty that is approved by the Adviser in accordance
with guidelines established by the Board. Where no
such counterparty is available, the
Fund will be unable to enter into a desired OTC transaction. There also
may be greater risk
that no liquid secondary market in the trading of OTC derivatives will
exist, in which case the
Fund may be required to hold
such instruments until exercise, expiration or maturity. Many of the
protections afforded to participants in the cleared derivatives
markets are not available to participants in bilateral OTC derivatives
transactions. Bilateral OTC derivatives transactions
are not subject to the guarantee of a clearinghouse and, as a
result, the
Fund would bear greater risk of default by the
counterparties to such transactions. |
■ |
The Fund
may be required to make physical delivery of portfolio securities
underlying a derivative in order to close out or to meet
margin and payment requirements and a derivatives position or to sell
portfolio securities at a time or price at which it may be
disadvantageous to do so in order to obtain cash to close out or to
maintain a derivatives position. |
■ |
As a
result of the structure of certain derivatives, adverse changes in, among
other things, interest rates, volatility or the value of the
underlying instrument can result in losses substantially greater than the
amount invested in the derivative itself. Certain derivatives
have the potential for unlimited loss, regardless of the size of the
initial investment. |
■ |
Certain
derivatives may be classified as illiquid and therefore subject to
the
Fund’s limitation on investments in illiquid investments. |
■ |
Derivatives
transactions conducted outside the United States may not be conducted in
the same manner as those entered into on
U.S. exchanges, and may be subject to different margin, exercise,
settlement or expiration procedures. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign
exchanges. Many of the risks of OTC derivatives
transactions are also applicable to derivatives transactions conducted
outside the United States. Derivatives transactions
conducted outside the United States are subject to the risk of
governmental action affecting the trading in, or the prices
of, foreign securities, currencies and other instruments. The value of
such positions could be adversely affected by foreign political
and economic factors; lesser availability of data on which to make trading
decisions; delays on the
Fund’s ability to act upon
economic events occurring in foreign markets; and less liquidity than U.S.
markets. |
■ |
Currency
derivatives are subject to additional risks. Currency derivatives
transactions may be negatively affected by government exchange
controls, blockages and manipulation. Currency exchange rates may be
influenced by factors extrinsic to a country’s economy.
There is no systematic reporting of last sale information with respect to
underlying foreign currencies. As a result, the available
information on which trading in currency derivatives will be based may not
be as complete as comparable data for other
transactions. Events could occur in the foreign currency market which will
not be reflected in currency derivatives until the
following day, making it more difficult for the
Fund to respond to such events in a timely
manner. |
Combined
Transactions. Combined
transactions involve entering into multiple derivatives transactions (such as
multiple options transactions,
including purchasing and writing options in combination with each other;
multiple futures transactions; and combinations
of options, futures, forward and swap transactions) instead of a single
derivatives transaction in order to customize the risk and
return characteristics of the overall position. Combined transactions typically
contain elements of risk that are present in each of
the component transactions. The Fund
may enter into a combined transaction instead of a single derivatives
transaction when, in
the opinion of the Adviser, it is in the best interest of the Fund to do so.
Because combined transactions involve multiple transactions,
they may result in higher transaction costs and may be more difficult to close
out.
Regulatory
Matters.
Regulatory developments affecting the exchange-traded and OTC derivatives
markets may impair the Fund’s
ability to
manage or hedge its investment portfolio through the use of derivatives. In
particular, in October 2020, the SEC adopted a final rule
related to the use of derivatives, short sales, reverse repurchase agreements
and certain other transactions by registered investment
companies that rescinded and withdrew the guidance of the SEC and its staff
regarding asset segregation and cover transactions
previously applicable to the Fund’s derivatives and other transactions. These
requirements may limit the ability of the Fund to
use derivatives and reverse repurchase agreements and similar financing
transactions as part of its investment strategies. The final rule
requires the Fund to trade derivatives and other transactions that create future
payment or delivery obligations subject to a value-at-risk
(“VaR”) leverage limit, certain derivatives risk management program and
reporting requirements. Generally, these requirements
apply unless the Fund qualifies as a “limited derivatives user.” Under the final
rule, when the Fund trades reverse repurchase
agreements or similar financing transactions, including certain tender option
bonds, it needs to aggregate the amount of indebtedness
associated with the reverse repurchase agreements or similar financing
transactions with the aggregate amount of any other
senior securities representing indebtedness when calculating the Fund’s asset
coverage ratio or treat all such transactions as derivatives
transactions. Reverse repurchase agreements or similar financing transactions
aggregated with other indebtedness do not need to be
included in the calculation of whether the Fund is a limited derivatives user,
but for funds subject to the VaR testing, reverse
repurchase agreements and similar financing transactions must be included for
purposes of such testing whether treated as
derivatives
transactions or not. The SEC also provided guidance in connection with the rule
regarding use of securities lending collateral
that may limit the Fund’s securities lending activities. In addition, under the
rule, the Fund is permitted to invest in a security
on a when-issued or forward-settling basis, or with a non-standard settlement
cycle, and the transaction will be deemed not to involve
a senior security under the 1940 Act, provided that (i) the Fund intends to
physically settle the transaction and (ii) the transaction
will settle within 35 days of its trade date (the “Delayed-Settlement Securities
Provision”). The Fund may otherwise engage in
such transactions that do not meet the conditions of the Delayed-Settlement
Securities Provision so long as the Fund treats any such
transaction as a “derivatives transaction” for purposes of compliance with the
rule. Furthermore, under the rule, the Fund will be
permitted to enter into an unfunded commitment agreement, and such unfunded
commitment agreement will not be subject to the
asset coverage requirements under the 1940 Act, if the Fund reasonably believes,
at the time it enters into such agreement, that it will
have sufficient cash and cash equivalents to meet its obligations with respect
to all such agreements as they come due. These requirements
may increase the cost of the Fund’s investments and cost of doing business,
which could adversely affect investors. The Dodd-Frank
Act and the rules promulgated thereunder may limit the ability
of the Fund
to enter into one or more exchange-traded or OTC
derivatives transactions.
The Fund’s
use of derivatives may also be limited by the requirements of the Code for
qualification as a RIC for
U.S. federal income tax
purposes.
The
Adviser, with respect to the Fund, has filed a notice of eligibility with the
National Futures Association (“NFA”) claiming an exclusion
from the definition of the term “commodity pool operator” (“CPO”) pursuant to
CFTC Regulation 4.5, as promulgated under the
Commodity Exchange Act, as amended (“CEA”), with respect to the Fund’s
operations. Therefore, neither the Fund nor the
Adviser (with respect to the Fund) is subject to registration or regulation as a
commodity pool or CPO under the CEA. If the Adviser or
the Fund becomes subject to these requirements, as well as related NFA rules,
the Fund may incur additional compliance and other
expenses.
With
respect to investments in swap transactions, commodity futures, commodity
options or certain other commodity interests used for
purposes other than bona fide hedging purposes, as such term is defined in CFTC
regulations, an investment company must meet one of the
following tests under the CFTC regulations in order for its investment adviser
to claim an exemption from being considered
a CPO. First, the aggregate initial margin and premiums required to establish an
investment company’s positions in such investments
may not exceed five percent (5%) of the liquidation value of the investment
company’s portfolio (after accounting for unrealized
profits and unrealized losses on any such investments). Alternatively, the
aggregate net notional value of such instruments, determined
at the time of the most recent position established, may not exceed one hundred
percent (100%) of the liquidation value of the
investment company’s portfolio (after accounting for unrealized profits and
unrealized losses on any such positions). In addition
to meeting one of the foregoing trading limitations, the investment company may
not market itself as a commodity pool or otherwise
as a vehicle for trading in the commodity futures, commodity options or swaps
and derivatives markets.
Regulations
recently adopted by federal banking regulators under the Dodd-Frank Act require
that certain qualified financial contracts
(“QFCs”) with counterparties that are part of U.S. or foreign global
systemically important banking organizations be amended to
include contractual restrictions on close-out and cross-default rights. QFCs
include, but are not limited to, securities contracts,
commodities contracts, forward contracts, repurchase agreements, securities
lending agreements and swaps agreements, as well as
related master agreements, security agreements, credit enhancements, and
reimbursement obligations. If a covered counterparty
of the Fund
or certain of the covered counterparty’s affiliates were to become subject to
certain insolvency proceedings, the Fund
may be temporarily unable to exercise certain default rights, and the QFC may be
transferred to another entity. These requirements
may impact the Fund’s
credit and counterparty risks.
Options. An option
is a contract that gives the holder of the option the right, but not the
obligation, to buy from (in the case of a call
option) or sell to (in the case of a put option) the buyer or seller, as
applicable, of the option (the “option writer”) the underlying instrument
at a specified fixed price (the “exercise price”) on or prior to a specified
date for American options or only at expiration for European
options (the “expiration date”). The buyer of the option pays to the option
writer the option premium, which is the purchase
price of the option.
Exchange-traded
options are issued by a regulated intermediary such as the Options
Clearing Corporation (“OCC”), which guarantees
the performance of the obligations of the parties to such options. OTC options
are purchased from or sold to counterparties
through direct bilateral agreements between the Fund
and its counterparties. Certain options, such as options on individual
securities, are settled through physical delivery of the underlying security,
whereas other options, such as index options, may be
settled in cash in an amount based on the difference between the value of the
underlying instrument and the strike price, which is
then multiplied by a specified multiplier.
Writing
Options. The Fund
may write call and put options. As the writer of a call
option, the Fund
receives the premium from the purchaser
of the option and has the obligation, upon exercise of the option, to deliver
the underlying security upon payment of the exercise
price. If the option expires without being exercised the Fund
is not required to deliver the underlying security and retains the premium
received.
The
Fund may only write call options that are “covered.” A call option on a
security is covered if (a) the Fund
owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional
cash consideration is required, such amount is maintained by the Fund
in earmarked or segregated cash or liquid assets) upon
conversion or exchange of other securities held by the Fund;
or (b) the Fund
has purchased a call on the underlying security, the
exercise price of which is (i) equal to or less than the exercise price of the
call written, or (ii) greater than the exercise price of the call
written, provided the difference is maintained by the Fund
in earmarked or segregated cash or liquid assets.
Selling
call options involves the risk that the Fund
may be required to sell the underlying security at a disadvantageous price,
below the market
price of such security, at the time the option is exercised. As the writer of a
covered call option, the Fund
forgoes, during the
option’s life, the opportunity to profit from increases in the market
value of the underlying security covering the option above the sum of the
premium and the exercise price but retains the risk of loss should the price of
the underlying security decline.
The
Fund may write put options. As the writer of a put
option, the Fund
receives the premium from the purchaser of the option and has the
obligation, upon exercise of the option, to pay the exercise price and receive
delivery of the underlying security. If the option expires
without being exercised, the Fund
is not required to receive the underlying security in exchange for the exercise
price and retains
the option premium.
The Fund
may only write put options that are “covered.” A put option on a security is
covered if (a) the Fund
earmarks or segregates cash or
liquid assets equal to the exercise price; or (b) the Fund
has purchased a put on the same security as the put written, the exercise
price of which is (i) equal to or greater than the exercise price of the put
written, or (ii) less than the exercise price of the put written,
provided the difference is maintained by the Fund
in earmarked or segregated cash or liquid assets.
Selling
put options involves the risk that the Fund
may be required to buy the underlying security at a disadvantageous price, above
the market
price of such security, at the time the option is exercised.
While the Fund’s
potential gain in writing a covered put option is limited
to the premium received plus the interest earned on the liquid assets covering
the put option, the Fund’s
risk of loss is equal to the
entire value of the underlying security, offset only by the amount of the
premium received.
The Fund
may close out an options position that it has written through a closing purchase
transaction. The Fund
could execute a closing
purchase transaction with respect to a written call option by purchasing a call
option on the same underlying security that has the same
exercise price and expiration date as the call option written
by the
Fund. The Fund
could execute a closing purchase transaction
with respect to a put option written by purchasing a put option on the same
underlying security and having the same exercise
price and expiration date as the put option written by the Fund.
A closing purchase transaction may or may not result in a profit
to the
Fund. The Fund
can close out its position as an option writer only if a liquid market exists
for options on the same underlying
security that have the same exercise price and expiration date as the option
written by the Fund.
There is no assurance that such
a market will exist with respect to any particular option.
The writer
of an American option generally has no control over the time when the option is
exercised and the option writer is required
to deliver or acquire the underlying security. Once an option writer has
received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option. Thus, the use
of options may require the Fund
to buy or sell
portfolio securities at inopportune times or for prices other than the current
market values of such securities, which may limit the amount of
appreciation the Fund
can realize on an investment, or may cause the Fund
to hold a security that it might otherwise sell.
Purchasing
Options. The Fund
may purchase call and put options. As the buyer of a call
option, the Fund
pays the premium to the option
writer and has the right to purchase the underlying security from the option
writer at the exercise price. If the market price of the
underlying security rises above the exercise price, the Fund
could exercise the option and acquire the underlying security at a below-market
price, which could result in a gain to the Fund,
minus the premium paid. As the buyer of a put option, the Fund
pays the
premium to the option writer and has the right to sell the underlying security
to the option writer at the exercise price. If the market
price of the underlying security declines below the exercise
price, the Fund
could exercise the option and sell the underlying security
at an above-market price, which could result in a gain to the Fund,
minus the premium paid. The Fund
may buy call and put
options whether or not it holds the underlying securities.
As a buyer
of a call or put option, the Fund
may sell put or call options that it has purchased at any time prior to such
option’s expiration
date through a closing sale transaction. The principal factors affecting the
market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security in
relation to the exercise price of the option, the
volatility of the underlying security, the underlying security’s dividend
policy, and the time remaining until the expiration date. A closing
sale transaction may or may not result in a profit to the
Fund. The Fund’s
ability to initiate a closing sale transaction is dependent
upon the liquidity of the options market and there is no assurance that such a
market will exist with respect to any particular
option. If the Fund
does not exercise or sell an option prior to its expiration date, the option
expires and becomes worthless.
OTC
Options. Unlike
exchange-traded options, which are standardized with respect to the underlying
instrument, expiration date, contract
size and strike price, the terms of OTC options generally are established
through negotiation between the parties to the
options
contract. This type of arrangement allows the purchaser and writer greater
flexibility to tailor the option to their needs. OTC options
are available for a greater variety of securities or baskets of securities, and
in a wider range of expiration dates and exercise prices,
than exchange-traded options. However, unlike exchange-traded options, which are
issued and guaranteed by a regulated intermediary,
such as the OCC, OTC options are entered into directly with the counterparty.
Unless the counterparties provide
for it, there is no central clearing or guaranty function for an OTC option.
Therefore, OTC options are subject to the risk of default or
non-performance by the counterparty. Accordingly, the Adviser must assess the
creditworthiness of the counterparty to determine
the likelihood that the terms of the option will be satisfied. There can be no
assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. As a result,
the Fund
may be unable to enter into closing sale transactions
with respect to OTC options.
Index
Options. Call and
put options on indices operate similarly to options on securities. Rather than
the right to buy or sell a single security
at a specified price, options on an index give the holder the right to receive,
upon exercise of the option, an amount of cash determined
by reference to the difference between the value of the underlying index and the
strike price. The underlying index may be a
broad-based index or a narrower market index. Unlike many options on securities,
all settlements are in cash. The settlement amount,
which the writer of an index option must pay to the holder of the option upon
exercise, is generally equal to the difference between
the strike price of the option and the value of the underlying index, multiplied
by a specified multiplier. The multiplier determines
the size of the investment position the option represents. Gain or loss
to the Fund
on index options transactions will depend, in
part, on price movements of the underlying index generally or in a particular
segment of the index rather than price movements
of individual components of the index. As with other options, the Fund
may close out its position in index options through
closing purchase transactions and closing sale transactions provided that a
liquid secondary market exists for such options.
Index
options written by the Fund
will generally be covered in a manner similar to the covering of other types of
options, by holding an
offsetting financial position and/or earmarking or segregating cash or liquid
assets. The Fund
may cover call options written on an index by
owning securities or other assets whose price changes, in the opinion of the
Adviser, are expected to correlate to those of the underlying
index.
Foreign
Currency Options. Options
on foreign currencies operate similarly to options on securities. Rather than
the right to buy or sell a single
security at a specified price, options on foreign currencies give the holder the
right to buy or sell foreign currency for a fixed amount in
U.S. dollars or other base currencies. Options on foreign currencies are traded
primarily in the OTC market, but may also be traded
on U.S. and foreign exchanges. The value of a foreign currency option is
dependent upon the value of the underlying foreign
currency relative to the U.S. dollar or other base currency. The price of the
option may vary with changes, among other things, in
the value of either or both currencies and has no relationship to the investment
merits of a foreign security. Options on foreign
currencies are affected by all of those factors that influence foreign exchange
rates and foreign investment generally. As with other
options, the Fund
may close out its position in foreign currency options through closing purchase
transactions and closing sale transactions
provided that a liquid market exists for such options.
Foreign
currency options written by the Fund
will generally be covered in a manner similar to the covering of other types of
options, by holding
an offsetting financial position and/or earmarking or segregating cash or liquid
assets.
Additional
Risks of Options Transactions. The risks
associated with options transactions are different from, and possibly greater
than, the risks
associated with investing directly in the underlying instruments. Options are
highly specialized instruments that require investment
techniques and risk analyses different from those associated with other
portfolio investments. The use of options requires an
understanding not only of the underlying instrument but also of the option
itself. Options may be subject to the risk factors generally
applicable to derivatives transactions described herein, and may also be subject
to certain additional risk factors, including:
■ |
The
exercise of options written or purchased by the
Fund could cause the
Fund to sell portfolio securities, thus increasing the
Fund’s
portfolio turnover. |
■ |
The Fund
pays brokerage commissions each time it writes or purchases an option or
buys or sells an underlying security in connection
with the exercise of an option. Such brokerage commissions could be higher
relative to the commissions for direct purchases
of sales of the underlying securities. |
■ |
The Fund’s
options transactions may be subject to limitations on options positions
established by the SEC, the CFTC or the exchanges
on which such options are traded. |
■ |
The
hours of trading for exchange-listed options may not coincide with the
hours during which the underlying securities are traded.
To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements
can take place in the underlying securities that cannot be reflected in
the options markets. |
■ |
Index
options based upon a narrow index of securities or other assets may
present greater risks than options based on broad market
indices, as narrower indices are more susceptible to rapid and extreme
fluctuations as a result of changes in the values of a
smaller number of securities or other
assets. |
■ |
The Fund
is subject to the risk of market movements between the time that an option
is exercised and the time of performance thereunder,
which could increase the extent of any losses suffered
by the
Fund in connection with options
transactions. |
Currency
Forwards. A
foreign currency forward exchange contract is a negotiated agreement between two
parties to exchange specified
amounts of two or more currencies at a specified future time at a specified
rate. The rate specified by the foreign currency forward
exchange contract can be higher or lower than the spot rate between the
currencies that are the subject of the contract. The
Fund may
also invest in non-deliverable foreign currency forward exchange contracts
(“NDFs”). NDFs are similar to other foreign currency
forward exchange contracts, but do not require or permit physical delivery of
currency upon settlement. Instead, settlement is made in
cash based on the difference between the contracted exchange rate and the spot
foreign exchange rate at settlement. Currency
futures are similar to foreign currency forward exchange contracts, except that
they are traded on an exchange and standardized
as to contract size and delivery date. Most currency futures call for payment or
delivery in U.S. dollars. Unanticipated changes in
currency prices may result in losses to the Fund
and poorer overall performance for the Fund
than if it had not entered into
foreign currency forward exchange contracts. The typical use of a foreign
currency forward exchange contract is to “lock in” the price of a
security in U.S. dollars or some other foreign currency,
which the Fund
is holding in its portfolio. By entering into a foreign
currency forward exchange contract for the purchase or sale, for a fixed amount
of dollars or other currency, of the amount of foreign
currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar or other
currency which is being used for the security purchase
and the foreign currency in which the security is denominated during the period
between the date on which the security is purchased
or sold and the date on which payment is made or received. The Adviser also may
from time to time utilize foreign currency
forward exchange contracts for other purposes. For example, they may be used to
hedge a foreign security held in the portfolio
against a decline in value of the applicable foreign currency. They also may be
used to lock in the current exchange rate of the
currency in which those securities anticipated to be purchased are denominated.
At times, the Fund
may enter into “cross-currency”
hedging transactions involving currencies other than those in which securities
are held or proposed to be purchased are denominated.
The Fund
will not enter into foreign currency forward exchange contracts or maintain a
net exposure to these contracts where the consummation
of the contracts would obligate the Fund
to deliver an amount of foreign currency in excess of the value
of the Fund’s
portfolio
securities.
The Fund
may be limited in its ability to enter into hedging transactions involving
foreign currency forward exchange contracts by the Code
requirements relating to qualification as a RIC.
Foreign
currency forward exchange contracts may limit gains on portfolio securities that
could otherwise be realized had they not been
utilized and could result in losses. The contracts also may
increase the Fund’s
volatility and may involve a significant amount of risk
relative to the investment of cash.
Futures
Contracts. A futures
contract is a standardized agreement to buy or sell a specific quantity of an
underlying asset, reference rate or
index at a specific price at a specific future time (the “settlement date”).
Futures contracts may be based on, among other things, a
specified equity security (securities futures), a specified debt security or
reference rate (interest rate futures), the value of a specified
securities index (index futures) or the value of a foreign currency (currency
futures). While the value of a futures contract tends to
increase and decrease in tandem with the value of the underlying instrument,
differences between the futures market and the market for
the underlying asset may result in an imperfect correlation. The buyer of a
futures contract agrees to purchase the underlying
instrument on the settlement date and is said to be “long” the contract. The
seller of a futures contract agrees to sell the underlying
instrument on the settlement date and is said to be “short” the contract.
Futures contracts call for settlement only on the expiration
date and cannot be “exercised” at any other time during their term.
Depending
on the terms of the particular contract, futures contracts are settled through
either physical delivery of the underlying instrument
on the settlement date (such as in the case of futures based on a specified debt
security) or by payment of a cash settlement
amount on the settlement date (such as in the case of futures contracts relating
to broad-based securities indices). In the case of
cash-settled futures contracts, the settlement amount is equal to the difference
between the reference instrument’s price on the last
trading day of the contract and the reference instrument’s price at the time the
contract was entered into. Most futures contracts, particularly
futures contracts requiring physical delivery, are not held until the settlement
date, but instead are offset before the settlement
date through the establishment of an opposite and equal futures position (buying
a contract that had been sold, or selling a contract
that had been purchased). All futures transactions are effected through a
clearinghouse associated with the exchange on which the
futures are traded.
The buyer
and seller of a futures contract are not required to deliver or pay for the
underlying commodity unless the contract is held until the
settlement date. However, both the buyer and seller are required to deposit
“initial margin” with a futures commission merchant
(“FCM”) when the futures contract is entered into. Initial margin deposits are
typically calculated as a percentage of the contract’s
market value. If the value of either party’s position declines, the party will
be required to make additional “variation margin”
payments to settle the change in value on a daily basis. The process is known as
“marking-to-market.” Upon the closing of a futures
position through the establishment of an offsetting position, a final
determination of variation margin will be made and additional
cash will be paid by or released to the
Fund.
Options
on Futures Contracts. Options
on futures contracts are similar to options on securities except that options on
futures contracts give the
purchasers the right, in return for the premium paid, to assume a position in a
futures contract (a long position in the case of a call
option and a short position in the case of a put option) at a specified exercise
price at any time prior to the expiration of the option.
Upon exercise of the option, the parties will be subject to all of the risks
associated with futures transactions and subject to margin
requirements. As the writer of options on futures contracts, the Fund
would also be subject to initial and variation margin requirements
on the option position.
Options on
futures contracts written by the Fund
will generally be covered in a manner similar to the covering of other types of
options,
by holding an offsetting financial position and/or earmarking or segregating
cash or liquid assets. The Fund
may cover an option on
a futures contract by purchasing or selling the underlying futures contract. In
such instances the exercise of the option will serve to
close out the Fund’s
futures position.
Additional
Risks of Futures Transactions. The risks
associated with futures contract transactions are different from, and possibly
greater than, the
risks associated with investing directly in the underlying instruments. Futures
are highly specialized instruments that require investment
techniques and risk analyses different from those associated with other
portfolio investments. The use of futures requires an
understanding not only of the underlying instrument but also of the futures
contract itself. Futures may be subject to the risk factors
generally applicable to derivatives transactions described herein, and may also
be subject to certain additional risk factors, including:
■ |
The
risk of loss in buying and selling futures contracts can be substantial.
Small price movements in the commodity, security, index,
currency or instrument underlying a futures position may result in
immediate and substantial loss (or gain) to the
Fund. |
■ |
Buying
and selling futures contracts may result in losses in excess of the amount
invested in the position in the form of initial margin.
In the event of adverse price movements in the underlying commodity,
security, index, currency or instrument, the
Fund
would be required to make daily cash payments to maintain its required
margin. The
Fund may be required to sell portfolio
securities, or make or take delivery of the underlying securities in order
to meet daily margin requirements at a time when
it may be disadvantageous to do so. The
Fund could lose margin payments deposited with an FCM if the FCM breaches
its
agreement with the
Fund, becomes insolvent or declares
bankruptcy. |
■ |
Most
exchanges limit the amount of fluctuation permitted in futures contract
prices during any single trading day. Once the daily
limit has been reached in a particular futures contract, no trades may be
made on that day at prices beyond that limit. If futures
contract prices were to move to the daily limit for several trading days
with little or no trading, the
Fund could be prevented
from prompt liquidation of a futures position and subject to substantial
losses. The daily limit governs only price movements
during a single trading day and therefore does not
limit the
Fund’s potential losses. |
■ |
Index
futures based upon a narrower index of securities may present greater
risks than futures based on broad market indices, as narrower
indices are more susceptible to rapid and extreme fluctuations as a result
of changes in value of a small number of securities. |
Swaps. An OTC
swap contract is an agreement between two parties pursuant to which the parties
exchange payments at specified dates on
the basis of a specified notional amount, with the payments calculated by
reference to specified securities, indices, reference rates,
currencies or other instruments. Most swap agreements provide that when the
period payment dates for both parties are the same, the
payments are made on a net basis (i.e., the two payment streams are netted out,
with only the net amount paid by one party to
the other). The Fund’s
obligations or rights under a swap contract entered into on a net basis will
generally be equal only to the net
amount to be paid or received under the agreement, based on the relative values
of the positions held by each counterparty. Many swap
agreements are not entered into or traded on exchanges and often there is no
central clearing or guaranty function for swaps.
These OTC swaps are often subject to the risk of default or non-performance by
the counterparty. Accordingly, the Adviser must
assess the creditworthiness of the counterparty to determine the likelihood that
the terms of the swap will be satisfied.
Swap
agreements allow for a wide variety of transactions. For example, fixed-rate
payments may be exchanged for floating rate payments,
U.S. dollar-denominated payments may be exchanged for payments denominated in
foreign currencies, and payments tied to the
price of one security, index, reference rate, currency or other instrument may
be exchanged for payments tied to the price of a different
security, index, reference rate, currency or other instrument. Swap contracts
are typically individually negotiated and structured
to provide exposure to a variety of particular types of investments or market
factors. Swap contracts can take many different
forms and are known by a variety of names. To the extent consistent
with the Fund’s
investment objective and policies, the
Fund is
not limited to any particular form or variety of swap
contract. The Fund
may utilize swaps to increase or decrease its exposure
to the underlying instrument, reference rate, foreign currency, market index or
other asset. The
Fund may also enter into related
derivative instruments including caps, floors and collars.
The Dodd-Frank
Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and related
regulatory developments require
the eventual clearing and exchange-trading of many standardized OTC derivative
instruments that the CFTC and SEC defined as
“swaps” and “security based swaps,” respectively. Mandatory exchange-trading and
clearing is occurring on a phased-in basis
based on the type of market participant and CFTC approval of contracts for
central clearing and exchange-trading. In a cleared swap,
the Fund’s
ultimate counterparty is a central clearinghouse rather than a brokerage firm,
bank or other financial institution. The Fund
initially will enter into cleared swaps through an executing broker. Such
transactions will then be submitted for
clearing
and, if cleared, will be held at regulated FCMs that are members of the
clearinghouse that serves as the central counterparty. When
the Fund
enters into a cleared swap, it must deliver to the central counterparty (via an
FCM) an amount referred to as “initial margin.”
Initial margin requirements are determined by the central counterparty, but an
FCM may require additional initial margin above the
amount required by the central counterparty. During the term of the swap
agreement, a “variation margin” amount may also be
required to be paid by the Fund
or may be received by the Fund
in accordance with margin controls set for such accounts, depending
upon changes in the price of the underlying reference asset subject to the swap
agreement. At the conclusion of the term of the
swap agreement, if the Fund
has a loss equal to or greater than the margin amount, the margin amount is paid
to the FCM along with
any loss that is greater than such margin amount. If the Fund
has a loss of less than the margin amount, the excess margin is
returned to the Fund. If the Fund
has a gain, the full margin amount and the amount of the gain is paid to the
Fund.
Central
clearing is designed to reduce counterparty credit risk compared to uncleared
swaps because central clearing interposes the central
clearinghouse as the counterparty to each participant’s swap, but it does not
eliminate those risks completely. There is also a risk of
loss by the Fund
of the initial and variation margin deposits in the event of bankruptcy of the
FCM with which the Fund has an open
position in a swap contract. The assets of the Fund
may not be fully protected in the event of the bankruptcy of the FCM or
central
counterparty because the Fund might be limited to recovering only a pro rata
share of all available funds and margin segregated
on behalf of an FCM’s or central counterparty’s customers or clearing members.
If the FCM does not provide accurate reporting, the Fund
is also subject to the risk that the FCM could use the Fund’s assets, which are
held in an omnibus account with assets
belonging to the FCM’s other customers, to satisfy its own financial obligations
or the payment obligations of another customer
to the central counterparty.
As a
result of recent regulatory developments, certain standardized swaps are
currently subject to mandatory central clearing and some of these
cleared swaps must be traded on an exchange or swap execution facility (“SEF”).
An SEF is an electronic trading platform in which
multiple market participants can execute swap transactions by accepting bids and
offers made by multiple other participants on the
platform. Transactions executed on an SEF may increase market transparency and
liquidity but may cause the Fund
to incur increased
expenses to execute swaps. Central clearing should decrease counterparty risk
and increase liquidity compared to bilateral swaps
because central clearing interposes the central clearinghouse as the
counterparty to each participant’s swap. However, central clearing
does not eliminate counterparty risk or liquidity risk entirely. In addition,
depending on the size of the Fund
and other factors,
the margin required under the rules of a clearinghouse and by a clearing member
may be in excess of the collateral required to be posted
by the Fund
to support its obligations under a similar bilateral swap. However, the CFTC and
other applicable regulators have
adopted rules imposing certain margin requirements, including minimums, on
uncleared swaps which may result in the Fund
and its
counterparties posting higher margin amounts for uncleared swaps. Requiring
margin on uncleared swaps may reduce, but not
eliminate, counterparty credit risk.
In
addition, with respect to cleared swaps, the Fund
may not be able to obtain as favorable terms as it would be able to negotiate
for an
uncleared swap. In addition, an FCM may unilaterally impose position limits or
additional margin requirements for certain types of swaps
in which the Fund
may invest. Central counterparties and FCMs generally can require termination of
existing cleared swap transactions
at any time, and can also require increases in margin above the margin that is
required at the initiation of the swap agreement.
Margin requirements for cleared swaps vary on a number of factors, and the
margin required under the rules of the clearinghouse
and FCM may be in excess of the collateral required to be posted
by the Fund
to support its obligations under a similar uncleared
swap. However, as noted above, regulators have adopted rules imposing certain
margin requirements, including minimums,
on uncleared swaps, which may result in the Fund
and its counterparties posting higher margin amounts for uncleared swaps.
Requiring margin on uncleared swaps may reduce, but not eliminate, counterparty
credit risk.
The Fund
is also subject to the risk that, after entering into a cleared swap with an
executing broker, no FCM or central counterparty is willing
or able to clear the transaction. In such an event, the central counterparty
would void the trade. Before the Fund
can enter into a new
trade, market conditions may become less favorable to the Fund.
The
Adviser will continue to monitor developments regarding trading and execution of
cleared swaps on exchanges, particularly to the extent
regulatory changes affect the Fund’s
ability to enter into swap agreements and the costs and risks associated with
such investments.
Interest
Rate Swaps, Caps, Floors and Collars. Interest
rate swaps consist of an agreement between two parties to exchange their
respective
commitments to pay or receive interest (e.g., an exchange of floating rate
payments for fixed-rate payments). Interest rate swaps are
generally entered into on a net basis. Interest rate swaps do not involve the
delivery of securities, other underlying assets, or principal.
Accordingly, the risk of market loss with respect to interest rate and total
rate of return swaps is typically limited to the net amount of
interest payments that the Fund
is contractually obligated to make.
The
Fund may also buy or sell interest rate caps, floors and collars. The
purchase of an interest rate cap entitles the purchaser, to the extent
that a specified interest rate index exceeds a predetermined level, to receive
payments of interest on a specified notional amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified
interest rate falls below a predetermined level, to receive payments of interest
on a specified notional amount from the party
selling
the interest rate floor. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range of
interest rates. Caps, floors and collars may be less liquid than other types of
derivatives.
Index
Swaps. An index
swap consists of an agreement between two parties in which a party typically
exchanges a cash flow based on a notional
amount of a reference index for a cash flow based on a different index or on
another specified instrument or reference rate. Index
swaps are generally entered into on a net basis.
Total
Return Swaps. Total
return swaps are contracts in which one party agrees to make periodic payments
to another party based on the change
in market value of the assets underlying the contract, which may include, but
not be limited to, a specified security, basket of
securities or securities indices during the specified period, in return for
periodic payments based on a fixed or variable interest rate or the
total return from other underlying assets. Total return swaps may be used to
obtain long or short exposure to a security or market
without owning or taking physical custody of such security or investing directly
in such market. The Fund
may incur a theoretically
unlimited loss on short exposures. In comparison, the Fund may incur losses on
long exposures, but such losses are limited by
the fact that the underlying security’s price cannot fall below
zero. Total
return swaps may effectively add leverage to the
Fund’s
portfolio because, in addition to its total net assets, the Fund
would be subject to investment exposure on the notional amount of
the swap.
Total
return swaps are subject to the risk that a counterparty will default on its
payment obligations to the Fund
thereunder, and conversely,
that the Fund
will not be able to meet its obligation to the counterparty. Generally,
the Fund
will enter into total return swaps on a
net basis (i.e., the two payment streams are netted against one another with
the Fund
receiving or paying, as the case may be, only
the net amount of the two payments).
Inflation
Swaps. Inflation
swap agreements are contracts in which one party typically agrees to pay the
cumulative percentage increase in a price
index, such as the Consumer Price Index, over the term of the swap (with some
lag on the referenced inflation index), and the other
party pays a compounded fixed rate. Inflation swap agreements may be used to
protect the NAV
of the Fund
against an unexpected
change in the rate of inflation measured by an inflation index. The value of
inflation swap agreements is expected to change in
response to changes in real interest rates. Real interest rates are tied to the
relationship between nominal interest rates and the rate
of inflation.
Currency
Swaps. A
currency swap consists of an agreement between two parties to exchange cash
flows on a notional amount of two or more
currencies based on the relative value differential among them, such as
exchanging a right to receive a payment in foreign currency
for the right to receive U.S. dollars. Currency swap agreements may be entered
into on a net basis or may involve the delivery
of the entire principal value of one designated currency in exchange for the
entire principal value of another designated currency.
In such cases, the entire principal value of a currency swap is subject to the
risk that the counterparty will default on its contractual
delivery obligations.
Credit
Default Swaps. A credit
default swap consists of an agreement between two parties in which the “buyer”
typically agrees to pay to the
“seller” a periodic stream of payments over the term of the contract and the
seller agrees to pay the buyer the par (or other agreed-upon)
value of a referenced debt obligation upon the occurrence of a credit event with
respect to the issuer of that referenced debt
obligation. Generally, a credit event means bankruptcy, failure to pay,
obligation acceleration or modified restructuring. The
Fund may
be either the buyer or seller in a credit default swap. Where the Fund
is the buyer of a credit default swap contract, it would
typically be entitled to receive the par (or other agreed-upon) value of a
referenced debt obligation from the counterparty to the
contract only in the event of a default or similar event by the issuer of the
debt obligation. If no default occurs, the Fund
would have paid
to the counterparty a periodic stream of payments over the term of the contract
and received no benefit from the contract. The
use of credit default swaps could result in losses to the Fund
if the Adviser fails to correctly evaluate the creditworthiness
of the issuer of the referenced debt obligation.
Swaptions. An option
on a swap agreement, also called a “swaption,” is an option that gives the buyer
the right, but not the obligation,
to enter into a swap on a future date in exchange for a premium. A receiver
swaption gives the owner the right to receive the return
of a specified asset, reference rate, or index. A payer swaption gives the owner
the right to pay the return of a specified asset,
reference rate, or index. Swaptions also include options that allow an existing
swap to be terminated or extended by one of the counterparties.
General
Risks of Swaps. The risks
associated with swap transactions are different from, and possibly greater than,
the risks associated with
investing directly in the underlying instruments. Swaps are highly specialized
instruments that require investment techniques and risk
analyses different from those associated with other portfolio investments. The
use of swaps requires an understanding not only of
the underlying instrument but also of the swap contract itself. Swap
transactions may be subject to the risk factors generally applicable
to derivatives transactions described above, and may also be subject to certain
additional risk factors, including:
■ |
OTC
swap agreements are not traded on exchanges and may be subject to
liquidity risk, which exists when a particular swap is difficult
to purchase or sell. |
■ |
In
addition to the risk of default by the counterparty, if the
creditworthiness of a counterparty to a swap agreement declines, the
value
of the swap agreement would be likely to decline, potentially resulting in
losses. |
■ |
The
swaps market is subject to extensive regulation under the Dodd-Frank Act
and certain CFTC and SEC rules promulgated thereunder.
It is possible that further developments in the swaps market, including
new and additional governmental regulation, could
result in higher Fund costs and expenses and could adversely
affect the
Fund’s ability to utilize swaps, terminate existing swap
agreements or realize amounts to be received under such
agreements. |
Foreign
Securities. Investing
in foreign securities involves certain special considerations which are not
typically associated with investments
in the securities of U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting
standards and may have policies that are not comparable to those of domestic
issuers. As a result, there may be less information
available about foreign issuers than about domestic issuers. Securities of some
foreign issuers may be less liquid and more volatile
than securities of comparable domestic issuers. There is generally less
stringent investor protections and disclosure standards, and less
government supervision and regulation of stock exchanges, brokers and listed
issuers than in the United States. In addition, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or
diplomatic developments which could affect U.S. investments in those countries.
The costs of investing in foreign countries frequently
are higher than the costs of investing in the United States. Although the
Adviser endeavors to achieve the most favorable execution
costs in portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, investments in certain foreign markets that have
historically been considered stable may become
more volatile and subject to increased risk due to ongoing developments and
changing conditions in such markets. Moreover,
the growing interconnectivity of global economies and financial markets has
increased the probability that adverse developments
and conditions in one country or region will affect the stability of economies
and financial markets in other countries or
regions. For instance, if one or more countries leave the European Union (“EU”)
or the EU dissolves, the world’s securities markets
likely will be significantly disrupted.
Investments
in foreign markets may also be adversely affected by governmental actions such
as the imposition of capital controls, nationalization
of companies or industries, expropriation of assets or the imposition of
punitive taxes. The governments of certain countries
may prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain sectors or industries.
In addition, a foreign government may limit or cause delay in the convertibility
or repatriation of its currency which would
adversely affect the U.S. dollar value and/or liquidity of investments
denominated in that currency. Certain foreign investments
may become less liquid in response to market developments or adverse investor
perceptions, or become illiquid after purchase
by the Fund,
particularly during periods of market turmoil. When the Fund
holds illiquid investments, its portfolio may be harder to
value.
Investments
in securities of foreign issuers may be denominated in foreign currencies.
Accordingly, the value of the Fund’s
assets, as measured
in U.S. dollars, may be affected favorably or unfavorably by changes in currency
exchange rates and in exchange control regulations. The Fund
may incur costs in connection with conversions between various
currencies.
Certain
foreign markets may rely heavily on particular industries or foreign capital and
are more vulnerable to diplomatic developments,
the imposition of economic sanctions against a particular country or countries,
organizations, companies, entities and/or
individuals, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. International trade
barriers or economic sanctions against foreign countries, organizations,
companies, entities and/or individuals, may adversely affect
the Fund’s
foreign holdings or exposures. Investments in foreign markets may also be
adversely affected by governmental actions
such as the imposition of capital controls, nationalization of companies or
industries, expropriation of assets, or the imposition
of punitive taxes. Governmental actions can have a significant effect on the
economic conditions in foreign countries, which also
may adversely affect the value and liquidity of the Fund’s
investments. For example, the governments of certain countries may
prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain sectors or industries. In addition,
a foreign government may limit or cause delay in the convertibility or
repatriation of its currency which would adversely affect the
U.S. dollar value and/or liquidity of investments denominated in that currency.
Any of these actions could severely affect security
prices, impair the Fund’s
ability to purchase or sell foreign securities or transfer the Fund’s
assets back into the U.S., or otherwise
adversely affect the Fund’s
operations. Certain foreign investments may become less liquid in response to
market developments
or adverse investor perceptions, or become illiquid after purchase
by the Fund,
particularly during periods of market turmoil.
Certain foreign investments may become illiquid when, for instance, there are
few, if any, interested buyers and sellers or when
dealers are unwilling to make a market for certain securities.
When the Fund
holds illiquid investments, its portfolio may be harder to
value.
Certain
foreign governments may levy withholding or other taxes on dividend and interest
income. Although in some countries a portion of
these taxes may be recoverable, the non-recovered portion of foreign withholding
taxes will reduce the income received from
investments in such countries. The Fund may
be able to pass through to its shareholders
a credit for U.S. tax purposes with respect to
any such foreign taxes.
Unless
otherwise noted in the
Fund’s Prospectus, the Adviser may consider an issuer to be from a
particular country (including the United
States) or geographic region if: (i) its principal securities trading market is
in that country or geographic region; (ii) alone or on a
consolidated basis it derives 50% or more of its annual revenue or profits from
goods produced, sales made or services performed in that
country or geographic region or has at least 50% of its assets, core business
operations and/or employees in that country or geographic
region; or (iii) it is organized under the laws of, or has a principal office
in, that country or geographic region. By applying these
tests, it is possible that a particular issuer could be deemed to be from more
than one country or geographic region.
Foreign
securities may include, without limitation, foreign equity securities, which are
equity securities of a non-U.S. issuer, foreign government
fixed-income securities, which are fixed-income securities issued by a
government other than the U.S. Government or government-related
issuer in a country other than the United States, and foreign corporate
fixed-income securities, which are fixed-income
securities issued by a private issuer in a country other than the United
States.
Investments
in foreign companies and countries are subject to economic sanction and trade
laws in the United States and other jurisdictions.
These laws and related governmental actions may, from time to time, prohibit
the Fund
from investing in certain countries
and in certain companies. Investments in certain countries and companies may be,
and have in the past been, restricted as a result of
the imposition of economic sanctions. In addition, economic sanction laws in the
United States and other jurisdictions may prohibit
the Fund
from transacting with a particular country or countries, organizations,
companies, entities and/or individuals. These
types of sanctions may significantly restrict or completely prohibit investment
activities in certain jurisdictions.
Economic
sanctions and other similar governmental actions could, among other things,
effectively restrict or eliminate the Fund’s
ability to
purchase or sell securities or groups of securities, and thus may make the
Fund’s investments in such securities less liquid or more
difficult to value. In addition, as a result of economic sanctions, the Fund may
be forced to sell or otherwise dispose of investments
at inopportune times or prices, which could result in losses to the Fund and
increased transaction costs. These conditions may be in
place for a substantial period of time and enacted with limited advance notice
to the Fund.
In
addition, such economic sanctions or other government restrictions may
negatively impact the value or liquidity of the Fund’s
investments,
and could impair the Fund’s ability to meet its investment objective or invest
in accordance with its investment strategy because
the Fund may, for example, be prohibited from investing in securities issued by
companies subject to such restrictions and the Fund
could be required to freeze or divest its existing investments that the Adviser
would otherwise consider to be attractive.
The risks
posed by economic sanctions against a particular foreign country, its nationals
or industries or businesses within the country may be
heightened to the extent the Fund
invests significantly in the affected country or region or in issuers from the
affected country
that depend on global markets.
Referendum
on the UK’s EU Membership. In
an advisory referendum held in June 2016, the United Kingdom (“UK”) electorate
voted to leave
the EU, an event widely referred to as “Brexit.” On January 31, 2020, the UK
officially withdrew from the EU and the UK entered a
transition period which ended on December 31, 2020. On December 30, 2020, the EU
and UK signed the EU-UK Trade and
Cooperation Agreement (“TCA”), an agreement on the terms governing certain
aspects of the EU’s and the UK’s relationship following
the end of the transition period. Notwithstanding the TCA, following the
transition period, there is likely to be considerable
uncertainty as to the UK’s post-transition framework.
The impact
on the UK and the EU and the broader global economy is still unknown but could
be significant and could result in increased
volatility and illiquidity and potentially lower economic growth. Brexit may
have a negative impact on the economy and currency
of the UK and the EU as a result of anticipated, perceived or actual changes to
the UK’s economic and political relations with the
EU. The impact of Brexit, and its ultimate implementation, on the economic,
political and regulatory environment of the UK and the
EU could have global ramifications.
The Fund may
make investments in the UK, other EU members and in non-EU countries that are
directly or indirectly affected by the exit
of the UK from the EU. Adverse legal, regulatory or economic conditions
affecting the economies of the countries in which the
Fund
conduct its
business (including making investments) and any corresponding deterioration in
global macro-economic conditions
could have a material adverse effect on the Fund’s
investment returns. Potential consequences to which the Fund may
be exposed,
directly or indirectly, as a result of the UK referendum vote include, but are
not limited to, market dislocations, economic and
financial instability in the UK and in other EU members, increased volatility
and reduced liquidity in financial markets, reduced availability
of capital, an adverse effect on investor and market sentiment, Sterling and
Euro destabilization, reduced deal flow in the
Fund’s
target markets, increased counterparty risk and regulatory, legal and compliance
uncertainties. Any of the foregoing or similar risks
could have a material adverse effect on the operations, financial condition or
investment returns of the Fund
and/or the Adviser in
general. The effects on the UK, European and global economies of the exit of the
UK (and/or other EU members during the term of
the Fund)
from the EU, or the exit of other EU members from the European monetary area
and/or the redenomination of financial
instruments from the Euro to a different currency, are difficult to predict and
to protect fully against. Many of the foregoing risks are
outside of the control of the Fund
and the Adviser. These risks may affect the Fund,
the Adviser and other service providers given
economic, political and regulatory uncertainty created by
Brexit.
Emerging
Market Securities. The Fund
may invest in emerging market securities. An emerging market security is a
security issued by an
emerging market foreign government or private issuer. An emerging market foreign
government or private issuer has one or more of
the following characteristics: (i) its principal securities trading market is in
an emerging market or developing country; (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue or profits
from goods produced, sales made or services performed
in an emerging market or developing country or has at least 50% of its assets,
core business operations and/or employees in an
emerging market or developing country; or (iii) it is organized under the laws
of, or has a principal office in, an emerging market or
developing country. Based on these criteria it is possible for a security to be
considered issued by an issuer in more than one country.
Therefore, it is possible for the securities of any issuer that has one or more
of these characteristics in connection with any emerging
market or developing country not to be considered an emerging market security if
it also has one or more of these characteristics
in connection with a developed country.
Emerging
market describes any country that is generally considered to be an emerging or
developing country by major organizations in the
international financial community or by the Fund’s
benchmark index.
The
economies of individual emerging market or developing countries may differ
favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation or deflation,
currency depreciation, capital reinvestment, resource self-sufficiency
and balance of payments position. Further, the economies of developing countries
generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures. These
economies also have been, and may continue
to be, adversely affected by economic conditions in the countries with which
they trade.
Prior
governmental approval for foreign investments may be required under certain
circumstances in some emerging market or developing
countries, and the extent of foreign investment in certain fixed-income
securities and domestic companies may be subject to
limitation in other emerging market or developing countries. Foreign ownership
limitations also may be imposed by the charters of
individual companies in emerging market or developing countries to prevent,
among other concerns, violation of foreign investment
limitations. Repatriation of investment income, capital and the proceeds of
sales by foreign investors may require governmental
registration and/or approval in some emerging countries. The Fund
could be adversely affected by delays in, or a refusal to
grant, any required governmental registration or approval for such repatriation.
Any investment subject to such repatriation controls
will be considered illiquid if it appears reasonably likely that this process
will take more than seven days.
Certain
emerging market countries may be subject to less stringent requirements
regarding accounting, auditing, financial reporting and record
keeping and therefore, material information related to an investment may not be
available or reliable. In addition, the Fund
is limited in its ability to exercise its legal rights or enforce a
counterparty’s legal obligations in certain jurisdictions outside of the
United States, in particular, in emerging markets countries.
Investment
in emerging market or developing countries may entail purchasing securities
issued by or on behalf of entities that are insolvent,
bankrupt, in default or otherwise engaged in an attempt to reorganize or
reschedule their obligations and in entities that have
little or no proven credit rating or credit history. In any such case, the
issuer’s poor or deteriorating financial condition may increase
the likelihood that the Fund
will experience losses or diminution in available gains due to bankruptcy,
insolvency or fraud. Emerging
market or developing countries also pose the risk of nationalization,
expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies
of such countries or the value of the Fund’s
investments in those countries. In addition, it may be difficult to obtain and
enforce a
judgment in a court outside the United States.
The Fund
may also be exposed to an extra degree of custodial and/or market risk,
especially where the securities purchased are not traded on
an official exchange or where ownership records regarding the securities are
maintained by an unregulated entity (or even the issuer
itself).
Brady
Bonds. Brady
Bonds are fixed-income securities that are created through the exchange of
existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by Nicholas F. Brady when he was the U.S.
Secretary of the Treasury. They may be collateralized or uncollateralized and
issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the OTC
secondary market. The Fund
will invest in Brady Bonds only if they are
consistent with the Fund’s quality specifications. Dollar-denominated,
collateralized Brady Bonds may be fixed-rate par bonds or
floating rate discount bonds. Interest payments on Brady Bonds generally are
collateralized by cash or securities in an amount
that, in the case of fixed-rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds,
initially is equal to at least one year’s rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to “value recovery
payments” in certain circumstances, which in effect constitute
supplemental interest payments but generally are not
collateralized.
Brady
Bonds are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the “residual
risk”). In the event of a default with respect to
collateralized
Brady Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations
held as collateral for the payment of principal will not be distributed to
investors, nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will
continue to be outstanding, at which time the face amount of the collateral will
equal the principal payments due on the Brady
Bonds in the normal course. However, Brady Bonds should be viewed as speculative
in light of the history of defaults with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds.
Sovereign
Debt. Debt
obligations known as “sovereign debt” are obligations of governmental issuers in
emerging market or developing
countries and industrialized countries. Certain emerging market or developing
countries are among the largest debtors to commercial
banks and foreign governments. The issuer or governmental authority that
controls the repayment of sovereign debt may not be
willing or able to repay the principal and/or pay interest when due in
accordance with the terms of such obligations.
A
governmental entity’s willingness or ability to repay principal and pay interest
due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is
due, the relative size of the debt service burden to the economy as a whole, the
government’s dependence on expected disbursements
from third parties, the government’s policy toward the International Monetary
Fund and the political constraints to which a
government may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. The commitment on the part
of these governments, agencies and others to make such disbursements may be
conditioned on a debtor’s implementation of economic
reforms or economic performance and the timely service of such debtor’s
obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties’
commitments to lend funds to the government debtor, which may further impair
such debtor’s ability or willingness to timely
service its debts. Holders of sovereign debt may be requested to participate in
the rescheduling of such debt and to extend further
loans to governmental entities. In addition, no assurance can be given that the
holders of commercial bank debt will not contest
payments to the holders of other foreign government debt obligations in the
event of default under their commercial bank loan
agreements. The issuers of the government debt securities in which the Fund may
invest have in the past experienced substantial difficulties
in servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments
by negotiating new or amended credit agreements or converting outstanding
principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. There can be no assurance
that the Brady Bonds and other foreign government
debt securities in which the Fund may invest will not be subject to similar
restructuring arrangements or to requests for new
credit, which may adversely affect the Fund’s holdings. Furthermore, certain
participants in the secondary market for such debt may be
directly involved in negotiating the terms of these arrangements and may
therefore have access to information not available to other
market participants.
Money
Market Securities. In
addition to the short-term fixed-income securities in which the Fund may
otherwise invest, the Fund may invest
in various money market securities for cash management purposes or when assuming
a temporary defensive position, which
among others may include commercial paper, bankers’ acceptances, bank
obligations, corporate debt securities, certificates of deposit,
U.S. government securities, obligations of savings institutions and repurchase
agreements. Such securities are limited to:
U.S.
Government Securities.
Obligations issued or guaranteed as to principal and interest by the United
States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its
instrumentalities (such as the Federal Home Loan Bank), including Treasury
bills, notes and bonds; issuers, such as the Federal National
Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage
Corporation (“Freddie Mac”), that are supported
by the discretionary authority of the U.S. government to purchase certain
obligations of the issuer to assist it in meeting its debt
obligations; and other issuers, such as the Federal Farm Credit System, that are
supported only by the credit of such issuer.
If a U.S.
government security is not backed by the full faith and credit of the United
States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment
and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitment. The maximum potential liability of the
issuers of some U.S. government securities held by the Fund may greatly exceed
their current resources, including their legal right to support
from the U.S. Treasury. It is possible that these issuers will not have the
funds to meet their payment obligations in the future.
Bank
Obligations.
Obligations (including certificates of deposit, time deposits and bankers’
acceptances) of banks subject to regulation by the
U.S. Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations
of foreign branches of domestic banks except to the extent below;
Eurodollar
Certificates of Deposit.
Eurodollar certificates of deposit issued by foreign branches of domestic banks
having total assets of $1 billion
or more;
Obligations
of Savings Institutions.
Certificates of deposit of savings banks and savings and loan associations,
having total assets of $1 billion or
more;
Fully
Insured Certificates of Deposit.
Certificates of deposit of banks and savings institutions, having total assets
of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of
which is administered by the FDIC), limited to $250,000 principal amount per
certificate and to 10% or less of the Fund’s total
assets in all such obligations and in all illiquid assets in the
aggregate;
Commercial
Paper.
Commercial paper rated at time of purchase by one or more nationally recognized
statistical rating organizations in one of
their two highest categories (e.g., A-l or A-2 by S&P, Prime 1 or Prime 2 by
Moody’s or F1 or F2 by Fitch Ratings, Inc. (“Fitch”))
or, if not rated, determined to be of comparable quality by the Adviser;
and
Repurchase
Agreements. The Fund
may invest in repurchase agreements. When cash may be available for only a few
days, it may be invested
by the Fund in repurchase agreements until such time as it may otherwise be
invested or used for payments of obligations of the Fund.
These agreements typically involve the acquisition by the Fund of debt
securities from a selling financial institution such as a bank,
savings and loan association or broker-dealer. The agreement provides that the
Fund will sell back to the institution, and that the
institution will repurchase, the underlying securities serving as collateral at
a specified price and at a fixed time in the future, usually
not more than seven days from the date of purchase. The collateral will be
marked-to-market daily to determine that the value of the
collateral, as specified in the agreement, does not decrease below the purchase
price plus accrued interest. If such decrease occurs,
additional collateral will be requested and, when received, added to the account
to maintain full collateralization. The Fund will
accrue interest from the institution until the time when the repurchase is to
occur. Although this date is deemed by the Fund to be the
maturity date of a repurchase agreement, the maturities of securities subject to
repurchase agreements are not subject to any limits.
While
repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures
approved by the Trustees that are designed to minimize such risks. These
procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored
by the Adviser. In addition, as described above, the value of the collateral
underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy
by a selling financial institution, the Fund will seek to liquidate such
collateral. However, the exercising of the Fund’s right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss.
Reverse
Repurchase Agreements and Dollar Rolls. The Fund
may invest up to 10% of its total assets in reverse repurchase agreements
and dollar rolls. Under a reverse repurchase agreement, the Fund
sells a security and promises to repurchase that security at an
agreed-upon future date and price. The price paid to repurchase the security
reflects interest accrued during the term of the agreement.
Reverse repurchase agreements may be entered into for, among other things,
obtaining leverage, facilitating short-term liquidity
or when the Adviser expects that the interest income to be earned from the
investment of the transaction proceeds will be greater
than the related interest expense. Reverse repurchase agreements may be viewed
as a speculative form of borrowing called leveraging.
Furthermore, reverse repurchase agreements involve the risks that (i) the
interest income earned in the investment of the proceeds
will be less than the interest expense, (ii) the market value of the securities
retained in lieu of sale by the Fund
may decline below the
price of the securities the Fund has sold but is obligated to repurchase, (iii)
the market value of the securities sold will decline
below the price at which the Fund is required to repurchase them and (iv) the
securities will not be returned to the Fund. All forms of
borrowing (including reverse repurchase agreements) are limited in the aggregate
and may not exceed 33⅓% of the Fund’s total
assets, except as permitted by law or SEC requirements.
The Fund
may enter into dollar rolls in which the Fund sells securities for delivery in
the current month and simultaneously contracts
to repurchase substantially similar (same type and coupon) securities on a
specified future date. The Fund is compensated by the
difference between the current sales price and the lower 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.
In
addition, the use of leverage may cause the Fund
to liquidate portfolio positions when it may not be advantageous to do so to
satisfy
its obligations. Leverage, including borrowing, may cause the Fund
to be more volatile than if the Fund had not been leveraged.
This is because leverage tends to exaggerate the effect of any increase or
decrease in the value of the Fund’s
portfolio securities.
Loans
of Portfolio Securities. The Fund
may lend its portfolio securities to brokers, dealers, banks and other
institutional investors. By lending
its portfolio securities, the Fund
attempts to increase its net investment income through the receipt of interest
on the cash collateral
with respect to the loan or fees received from the borrower in connection with
the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund
employs an agent to
implement the securities lending program and the agent receives a fee from
the Fund for
its services. The Fund
will not lend more than
33⅓% of the value of its total assets.
The Fund
may lend its portfolio securities so long as the terms, structure and the
aggregate amount of such loans are not inconsistent with the
1940 Act or the rules and regulations or interpretations of the SEC thereunder,
which currently require that (i) the borrower pledge and
maintain with the Fund collateral consisting of liquid, unencumbered assets
having a value not less than 100% of the value of
the securities loaned; (ii) the borrower adds to such collateral whenever the
price of the securities loaned rises (i.e., the borrower
“marks-to-market” on a daily basis); (iii) the loan be made subject to
termination by the Fund at any time; and (iv) the Fund
receives a reasonable return on the loan (which may include the Fund investing
any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value. In addition, voting rights may pass with
the loaned securities, but the Fund
will retain the right to call any security in anticipation of a vote that the
Adviser deems material
to the security on loan.
Loans of
securities involve a risk that the borrower may fail to return the securities or
may fail to maintain the proper amount of collateral,
which may result in a loss of money by the Fund.
There may be risks of delay and costs involved in recovery of securities or
even loss
of rights in the collateral should the borrower of the securities fail
financially. These delays and costs could be greater for foreign
securities. However, loans will be made only to borrowers deemed by the Adviser
to be creditworthy and when, in the judgment
of the Adviser, the income that can be earned from such securities loans
justifies the attendant risk. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer, bank or institution, will
be considered in making decisions with respect to
the lending of securities, subject to review by the Fund’s
Board of Trustees. The Fund
also bears the risk that the reinvestment
of collateral will result in a principal loss. Finally, there is the risk that
the price of the securities will increase while they are on
loan and the collateral will not be adequate to cover their value.
Borrowing. The Fund
has an operating policy, which may be changed by the Fund’s Board of
Trustees,
not to borrow except from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the lower
of cost or current value) of its total assets
(not including the amount borrowed). Should the Board of Trustees
remove this operating policy, the Fund would
be permitted
to borrow money from banks in accordance with the 1940 Act
or the rules and regulations promulgated by the SEC
thereunder.
Currently, the 1940 Act permits a fund to borrow money from banks in an amount
up to 331/3% of its total assets (including
the amount borrowed) less its liabilities (not including any borrowings but
including the fair market value at the time of computation
of any other senior securities then outstanding). The Fund may
also borrow an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes such as clearance of portfolio
transactions. The Fund will
only borrow when the
Adviser believes that such borrowings will benefit the Fund after taking into
account considerations such as interest income and
possible gains or losses upon liquidation. The Fund will
maintain asset coverage in accordance with the 1940 Act.
Borrowing
by the Fund
creates an opportunity for increased net income but, at the same time, creates
special risks. For example, leveraging
may exaggerate changes in and increase the volatility of the NAV
of the Fund.
This is because leverage tends to exaggerate the effect
of any increase or decrease in the value of the Fund’s
portfolio securities. The use of leverage also may cause the Fund
to liquidate
portfolio positions when it may not be advantageous to do so in order to satisfy
its obligations or to maintain asset coverage.
In
general, the Fund
may not issue any class of senior security, except that the Fund may
(i) borrow from banks, provided that immediately
following any such borrowing there is an asset coverage of at least 300% for all
Fund borrowings and in the event such asset
coverage falls below 300% the Fund will within three days 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 shall be at least 300%, and (ii)
engage in trading practices that involve the issuance of a senior security,
including but not limited to options,
futures, forward contracts
and reverse repurchase agreements in accordance with applicable SEC
requirements.The
borrowings subject to these limits include
borrowings through reverse repurchase agreements and similar financing
transactions unless the Fund has elected to treat all such
transactions as derivatives transactions under applicable SEC
requirements.
When-Issued
and Delayed Delivery Securities, TBAs and Forward Commitments. The Fund
may purchase or sell securities on a when-issued
or delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When these transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of
commitment. The Fund may sell the securities before the settlement date if it is
deemed advisable. The securities so purchased or sold are
subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date. In addition, the Fund
may invest in to-be-announced pass-through mortgage securities, which settle on
a delayed delivery basis (“TBAs”). In a TBA
transaction, the buyer and seller agree upon general trade parameters such as
agency, settlement date, par amount, and price at the time
the contract is entered into but the MBS are delivered in the future, generally
30 days later. Accordingly, the Fund’s investments
in TBAs are subject to risks such as failure of the counterparty to perform its
obligation to deliver the security, the characteristics
of a security delivered to the Fund may be less favorable than expected and the
security the Fund buys will lose value prior to
its delivery.
At the
time the Fund
makes the commitment to purchase or sell securities on a when-issued, delayed
delivery or forward commitment
basis, it will record the transaction and thereafter reflect the value, each
day, of such security purchased, or if a sale, the proceeds
to be received, in determining its NAV. At the time of delivery of the
securities, their value may be more or less than the
purchase
or sale price. An increase in the percentage of the Fund’s
assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of its
NAV.
Non-Publicly
Traded Securities, Private Placements and Restricted Securities.
The Fund may
invest in securities that are neither listed on
a stock exchange nor traded OTC,
including privately placed and restricted securities. Such unlisted securities
may involve a higher
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Fund or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. The illiquidity
of the market, as well as the lack of publicly available information regarding
these securities, may also adversely affect the ability of
the Fund to
arrive at a fair value for certain securities at certain times and could make it
difficult for the Fund to
sell certain securities.
If such securities are required to be registered under the securities laws of
one or more jurisdictions before being sold, the
Fund may
be required to bear the expenses of registration.
Investment
Company Securities.
Investment company securities are equity securities and include securities of
other open-end, closed-end
and unregistered investment companies, including foreign investment companies,
hedge funds and ETFs.
The Fund
may, to the
extent noted in the Fund’s non-fundamental limitations, invest in investment
company securities as may be permitted by (i) the
1940 Act;
(ii) the rules and regulations promulgated by the SEC under
the 1940 Act; or (iii) an exemption or other relief applicable
to the Fund from provisions of the 1940 Act. The 1940 Act generally prohibits an
investment company from acquiring more than
3% of the outstanding voting shares of an investment company and limits such
investments to no more than 5% of the
Fund’s
total assets in any one investment company and no more than 10% in any
combination of investment companies. The 1940 Act also
prohibits the Fund
from acquiring in the aggregate more than 10% of the outstanding voting shares
of any registered closed-end
investment company. The Fund
may invest in investment company securities of investment companies managed by
the Adviser or its
affiliates to the extent permitted under the 1940 Act or as otherwise authorized
by the SEC. To the extent the Fund
invests a portion of
its assets in investment company securities, those assets will be subject to the
risks of the purchased investment company’s portfolio
securities, and a shareholder in the Fund will bear not only their proportionate
share of the expenses of the Fund, but also, indirectly
the expenses of the purchased investment company.
Money
Market Funds. To
the extent permitted by applicable law, the Fund
may invest all or some of its short term cash investments in any
money market fund advised or managed by the Adviser or its affiliates. In
connection with any such investments, the Fund,
to the extent
permitted by the 1940 Act, will pay its share of all expenses (other than
advisory and administrative fees) of a money market
fund in which it invests, which may result in the Fund bearing some additional
expenses. The rules governing money market funds: (1)
permit (and, under certain circumstances, require) certain money market funds to
impose a “liquidity fee” (up to 2%), or a “redemption
gate” that temporarily restricts redemptions from a money market fund, if weekly
liquidity levels fall below the required regulatory
threshold, and (2) require “institutional money market funds” to operate with a
floating NAV per share rounded to a minimum of
the fourth decimal place in the case of a fund with a $1.0000 share price or an
equivalent or more precise level of accuracy
for money market funds with a different share price (e.g., $10.000 per share, or
$100.00 per share). These may affect the investment
strategies, performance and operating expenses of money market funds.
“Government money market funds,” as defined under Rule
2a-7 of the 1940 Act, are exempt from these requirements, though such funds may
choose to opt-in to the implementation
of liquidity fees and redemption gates.
Exchange-Traded
Funds.
The Fund may
invest in ETFs. Investments in ETFs are subject to a variety of risks, including
risks of a direct
investment in the underlying securities that the ETF holds. For example, the
general level of stock prices may decline, thereby adversely
affecting the value of the underlying investments of the ETF and, consequently,
the value of the ETF. In addition, the market
value of the ETF shares may differ from their NAV because the supply and demand
in the market for ETF shares at any point is not
always identical to the supply and demand in the market for the underlying
securities. Also, ETFs that track particular indices typically
will be unable to match the performance of the index exactly due to, among other
things, the ETF’s operating expenses and transaction
costs. ETFs typically incur fees that are separate from those fees incurred
directly by the Fund.
Therefore, as a shareholder in an ETF
(as with other investment companies), the Fund
would bear its ratable share of that entity’s expenses. At the same time,
the Fund
would continue to pay its own investment management fees and other expenses. As
a result, the Fund
and its shareholders, in effect,
will be absorbing fees at two levels with respect to investments in ETFs.
Further,
certain of the ETFs in which the Fund
may invest
are leveraged. Leveraged ETFs seek to deliver multiples of the performance of
the index or other benchmark they track and use
derivatives in an effort to amplify the returns of the underlying index or
benchmark. While leveraged ETFs may offer the potential
for greater return, the potential for loss and the speed at which losses can be
realized also are greater. Most leveraged ETFs “reset”
daily, meaning they are designed to achieve their stated objectives on a daily
basis. Leveraged ETFs can deviate substantially from the
performance of their underlying benchmark over longer periods of time,
particularly in volatile periods. The more the Fund
invests in
such leveraged ETFs, the more this leverage will magnify any losses on those
investments.
Furthermore, disruptions in the markets
for the securities underlying ETFs purchased or sold by the Fund could result in
losses on the Fund’s investment in ETFs.
High
Yield Securities. High
yield securities are generally considered to include fixed-income securities
rated below the four highest rating
categories at the time of purchase (e.g., Ba through C by Moody’s, or BB through
D by S&P or Fitch) and
unrated fixed-income
securities considered by the Adviser to be of equivalent quality. High yield
securities are not considered investment grade and are
commonly referred to as “junk bonds” or high yield, high risk securities.
Investment grade securities that the Fund
holds may be downgraded
to below investment grade by the rating agencies. If the Fund
holds a security that is downgraded, the Fund may choose to retain
the security.
While high
yield securities offer higher yields, they also normally carry a high degree of
credit risk and are considered speculative by the major
credit rating agencies. High yield securities may be issued as a consequence of
corporate restructuring or similar events. High yield
securities are often issued by smaller, less creditworthy issuers, or by highly
leveraged (indebted) issuers, that are generally less able
than more established or less leveraged issuers to make scheduled payments of
interest and principal. In comparison to investment
grade securities, the price movement of these securities is influenced less by
changes in interest rates and more by the financial
and business position of the issuer. The values of high yield securities are
more volatile and may react with greater sensitivity to market
changes.
High yield
securities are frequently ranked junior to claims by other creditors. If the
issuer cannot meet its obligations, the senior obligations
are generally paid off before the junior obligations, which will potentially
limit the Fund’s
ability to fully recover principal or to
receive interest payments when senior securities are in default. Thus, investors
in high yield securities have a lower degree of protection
with respect to principal and interest payments then do investors in higher
rated securities. In addition, lower-rated securities
frequently have call or redemption features that would permit an issuer to
repurchase the security from the Fund.
If a call were
exercised by the issuer during a period of declining interest
rates, the Fund
likely would have to replace such called security with a lower
yielding security, thus decreasing the net investment income to the Fund and any
dividends to investors.
The
secondary market for high yield securities is concentrated in relatively few
market makers and is dominated by institutional investors,
including mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities
is not as liquid as, and is more volatile than, the secondary market for
higher-rated securities. Because high yield securities are less
liquid, judgment may play a greater role in valuing certain
of the Fund’s securities
than is the case with securities trading in a more
liquid market. Also, future legislation may have a possible negative impact on
the market for high yield, high risk securities.
The credit
rating of a high yield security does not necessarily address its market value
risk. Ratings and market value may change from time
to time, positively or negatively, to reflect new developments regarding the
issuer.
The high
yield securities markets may react strongly to adverse news about an issuer or
the economy, or to the perception or expectation
of adverse news, whether or not it is based on fundamental analysis.
Additionally, prices for high yield securities may be affected
by legislative and regulatory developments. These developments could adversely
affect the Fund’s
NAV and investment practices,
the secondary market for high yield securities, the financial condition of
issuers of these securities and the value and liquidity
of outstanding high yield securities, especially in a thinly traded
market.
Regulatory
and Legal Risk. U.S. and
non-U.S. governmental agencies and other regulators regularly implement
additional regulations
and legislators pass new laws that affect the investments held by the Fund,
the strategies used by the Fund
or the level of regulation
or taxation applying to the Fund (such as regulations related to investments in
derivatives and other transactions). These regulations
and laws impact the investment strategies, performance, costs and operations of
the Fund or taxation of shareholders.
Special
Risks Related to Cyber Security.
The Fund and
its service providers are susceptible to cyber security risks that include,
among
other things, theft, unauthorized monitoring, release, misuse, loss, destruction
or corruption of confidential and highly restricted
data; denial of service attacks; unauthorized access to relevant systems;
compromises to networks or devices that the Fund
and its
service providers use to service the Fund’s
operations; or operational disruption or failures in the physical infrastructure
or operating
systems that support the Fund and
its service providers. Cyber attacks against or security breakdowns of
the Fund or
its service
providers may adversely impact the Fund and
its shareholders, potentially resulting in, among other things, financial
losses; the
inability of Fund shareholders to transact business and the Fund to
process transactions; inability to calculate the Fund’s
NAV; violations
of applicable privacy and other laws; regulatory fines, penalties, reputational
damage, reimbursement or other compensation
costs; and/or additional compliance costs. The Fund may
incur additional costs for cyber security risk management and
remediation purposes. In addition, cyber security risks may also impact issuers
of securities in which the Fund
invests, which may cause the Fund’s
investment in such issuers to lose value. There can be no assurance that
the Fund or
its service providers will not suffer
losses relating to cyber attacks or other information security breaches in the
future.
LIBOR
Discontinuance or Unavailability Risk. The Fund’s
investments, payment obligations and financing terms may be based on
floating rates, such as the London Interbank Offered Rates (collectively,
“LIBOR”), Euro Interbank Offered Rate and other similar
types of reference rates (each, a “Reference Rate”). These Reference Rates are
generally intended to represent the rate at which contributing
banks may obtain short-term borrowings from each other within certain financial
markets. On July 27, 2017, the Chief Executive
of the UK Financial Conduct Authority (“FCA”), which regulates LIBOR, announced
that the FCA will no longer persuade
nor require banks to submit rates for the calculation of LIBOR and certain other
Reference Rates after 2021. Such
announcement
indicates that the continuation of LIBOR and other Reference Rates on the
current basis cannot and will not be guaranteed
after the end of 2021. On March 5, 2021, the FCA announced that LIBOR will
either cease to be provided by any administrator,
or no longer be representative for many LIBOR settings after December 31, 2021,
and for the most widely used tenors of U.S.
dollar LIBOR after June 30, 2023. In addition, in connection with supervisory
guidance from regulators, many regulated entities
have ceased to enter into new LIBOR-based contracts after January 1, 2022. These
announcements and developments and any
additional regulatory or market changes may have an adverse impact on
the Fund
or its investments.
Regulators
and market participants are currently engaged in identifying successor Reference
Rates (“Alternative Reference Rates”). Additionally,
it is expected that market participants will focus on the transition mechanisms
by which the Reference Rates in existing contracts
or instruments may be amended, whether through marketwide protocols, fallback
contractual provisions, bespoke negotiations
or amendments or otherwise, in connection with the federal Adjustable Interest
Rate (LIBOR) Act. Nonetheless, the termination
of certain Reference Rates presents risks to the Fund.
At this time, it is not possible to completely identify or predict the
effect of
any such changes, any establishment of Alternative Reference Rates or any other
reforms to Reference Rates that may be enacted in
the UK or elsewhere. The elimination of a Reference Rate or any other changes or
reforms to the determination or supervision
of Reference Rates could have an adverse impact on the market for or value of
any securities or payments linked to those Reference
Rates and other financial obligations held by the Fund
or on its overall financial condition or results of operations. To identify a
successor rate for US dollar LIBOR, the Alternative Reference Rates Committee
(“ARRC”), a U.S.-based group convened by the
Federal Reserve Board and the Federal Reserve Bank of New York, was formed. The
ARRC has identified Secured Overnight Financing
Rate (“SOFR”) as its preferred alternative rate for LIBOR. SOFR is a measure of
the cost of borrowing cash overnight, collateralized
by the U.S. Treasury securities, and is based on directly observable U.S.
Treasury backed repurchase transactions. It is expected
that a substantial portion of future floating rate investments will be linked to
SOFR or benchmark rates derived from SOFR. At
this time, it is not possible to predict the effect of the transition to these
benchmark rates.
The
transition process might lead to increased volatility and illiquidity in markets
that currently rely on Reference Rates to determine interest
rates. It could also lead to a reduction in the value of some Reference
Rate-based investments held by the Fund
and reduce the
effectiveness of new hedges placed against existing Reference Rate-based
instruments. While market participants are endeavoring to
minimize the economic impact of the transition from Reference Rates to
Alternative Reference Rates, the transition away from LIBOR and
certain other Reference Rates could, among other negative
consequences:
■ |
Adversely
impact the pricing, liquidity, value of, return on and trading for a broad
array of financial products, including any Reference
Rate-linked securities, loans and derivatives in which the
Fund may invest; |
■ |
Require
extensive negotiations of and/or amendments to agreements and other
documentation governing Reference Rate-linked investments
products; |
■ |
Lead
to disputes, litigation or other actions with counterparties or portfolio
companies regarding the interpretation and enforceability
of “fallback” provisions that provide for an alternative reference
rate in the event of Reference Rate unavailability; or |
■ |
Cause
the
Fund to incur additional costs in relation to any of the above
factors. |
The risks
associated with the above factors, including decreased liquidity, are heightened
with respect to investments in Reference Rate-based
products that do not include a fallback provision that addresses how interest
rates will be determined if LIBOR and certain
other Reference Rates stop being published. Even with some Reference Rate-based
instruments that may contemplate a scenario
where Reference Rates are no longer available by providing for an alternative
rate-setting methodology and/or increased costs for
certain Reference Rate-related instruments or financing transactions, there may
be significant uncertainty regarding the effectiveness
of any such alternative methodologies, resulting in prolonged adverse market
conditions for the Fund.
In many cases, in the event
that an instrument falls back to an Alternative Reference Rate, the Alternative
Reference Rate would not perform the same as the
Reference Rate being replaced would have and may not include adjustments to such
rates that are reflective of current economic
circumstances or differences between such rate and LIBOR. Since the usefulness
of LIBOR and certain other Reference Rates as
benchmarks could deteriorate during the transition period, these effects could
occur prior to June 2023 for those Reference Rates
which are expected to be discontinued at that time. There also remains
uncertainty and risk regarding the willingness and ability of
issuers to include enhanced provisions in new and existing contracts or
instruments. In addition, when a Reference Rate is discontinued,
the Alternative Reference Rate may be lower than market expectations, which
could have an adverse impact on the value of
preferred and debt securities with floating or fixed-to-floating rate coupons.
Various pieces of legislation, including recent federal
legislation and laws enacted by the states of New York and Alabama, may affect
the transition of LIBOR-based instruments as well by
permitting trustees and calculation agents to transition instruments with no
LIBOR transition language to an Alternative Reference
Rate provided for in such legislation. Such pieces of legislation also include
safe harbors from liability, which may limit the recourse
the Fund
may have if the Alternative Reference Rate does not fully compensate the Fund
for the transition of an instrument from
LIBOR. It is uncertain what impact any such legislation may have. In addition,
any Alternative Reference Rate and any pricing adjustments
imposed by a regulator or counterparties or otherwise may adversely affect
the Fund’s
performance or NAV.
ESG
Investment Risk. The
Fund’s incorporation of ESG information and application of related analyses when
selecting investment may affect
the Fund’s performance, and there is no guarantee that the incorporation of ESG
information will result in better
performance.
A company’s ESG practices or the Adviser’s assessment of such may change over
time. Additionally, the Adviser’s incorporation
of ESG-related information in connection with identifying and selecting
investments may require subjective analysis based on
qualitative assessments and may be impacted by data availability for a
particular company or issuer, including if the data is inaccurate,
incomplete, unavailable or based on estimates. The Adviser’s consideration
of ESG information may result in the Fund buying
certain securities or forgoing opportunities to buy certain securities. The
Fund’s investments in certain companies may be susceptible
to various factors that may impact its businesses or operations, including the
effects of general economic conditions throughout
the world, increased competition from other providers of services, unfavorable
tax laws or accounting policies and high leverage.
ESG considerations within the Adviser’s investment process for the Fund may vary
across asset classes, industries and sectors.
Other factors are also considered by the Adviser and no one factor or
consideration is determinative. ESG considerations with respect to
the Fund’s investments are not the sole determinant of whether or not an
investment can be made or a holding can remain in the
Fund’s portfolio.
Market
and Geopolitical Risk. The value
of your investment in the Fund
is based on the values of the Fund’s
investments. These values
change daily due to economic and other events that affect markets generally, as
well as those that affect particular regions, countries,
industries, companies or governments. Price movements, sometimes called
volatility, may be greater or less depending on the types
of securities the Fund
owns and the markets in which the securities trade. The increasing
interconnectivity between global economies
and financial markets increases the likelihood that events or conditions in one
region or financial market may adversely impact
issuers in a different country, region or financial market. Securities in
the Fund’s
portfolio may underperform due to inflation (or
expectations for inflation), interest rates, global demand for particular
products or resources, natural disasters, pandemics, epidemics,
terrorism, regulatory events and governmental or quasi-governmental actions. The
occurrence of global events similar to those in
recent years, such as terrorist attacks around the world, natural disasters,
social and political discord or debt crises and downgrades,
among others, may result in market volatility and may have long term effects on
both the U.S. and global financial markets.
The occurrence of such events may be sudden and unexpected, and it is difficult
to predict when similar events affecting the U.S. or
global financial markets may occur, the effects that such events may have and
the duration of those effects. Any such event(s) could have
a significant adverse impact on the value, liquidity and risk profile of
the Fund’s
portfolio, as well as its ability to sell securities
to meet redemptions. There is a risk that you may lose money by investing in
the
Fund.
Social,
political, economic and other conditions and events, such as war, natural
disasters, health emergencies (e.g., epidemics and pandemics),
terrorism, conflicts may occur and could significantly impact issuers,
industries, governments and other systems, including
the financial markets. As global systems, economies and financial markets are
increasingly interconnected, events that once had only
local impact are now more likely to have regional or even global effects. Events
that occur in one country, region or financial market
will, more frequently, adversely impact issuers in other countries, regions or
markets. These impacts can be exacerbated by failures
of governments and societies to adequately respond to an emerging event or
threat. These types of events quickly and significantly
impact markets in the U.S. and across the globe leading to extreme market
volatility and disruption. The extent and nature of
the impact on supply chains or economies and markets from these events is
unknown, particularly if a health emergency or other
similar event, such as the COVID-19 (the “Coronavirus”) outbreak, persists for
an extended period of time. Social, political, economic
and other conditions and events, such as natural disasters, health emergencies
(e.g., epidemics and pandemics), terrorism, conflicts,
social unrest, recessions, inflation, rapid interest rate changes and supply
chain disruption could reduce consumer demand or
economic output, result in market closures, travel restrictions or quarantines,
and generally have a significant impact on the economies
and financial markets and the Adviser’s investment advisory activities and
services of other service providers, which in turn could
adversely affect the Fund’s
investments and other operations. The value of the Fund’s
investment may decrease as a result of such
events, particularly if these events adversely impact the operations and
effectiveness of the Adviser or key service providers or if these
events disrupt systems and processes necessary or beneficial to the investment
advisory or other activities on behalf the
Fund.
Many
countries have experienced outbreaks of infectious illnesses in recent decades,
including swine flu, avian influenza, SARS and the
Coronavirus, and may experience similar outbreaks in the future. For example,
the Coronavirus outbreak has resulted in numerous
deaths and the imposition of both local and more widespread “work from home” and
other quarantine measures, border closures
and other travel restrictions, causing social unrest and commercial disruption
on a global scale and significant volatility in financial
markets.
The
Coronavirus has had, and is expected to continue to have, a material adverse
impact on local economies in the affected jurisdictions
and also on the global economy, as cross border commercial activity and market
sentiment are increasingly impacted by the
Coronavirus and government and other measures seeking to contain its spread. The
global impact of the Coronavirus has continued
to evolve and has, at times, created disruption in supply chains, and adversely
impacted a number of industries, including but not
limited to retail, transportation, hospitality and entertainment. In addition to
these developments having adverse consequences
for certain companies and other issuers in which the Fund
invests and the value of the Fund’s
investments therein, the operations
of the Adviser (including those relating to the Fund) could be impacted
adversely, including through quarantine measures and travel
restrictions imposed on the Adviser’s or service providers’ personnel located in
affected countries, regions or local areas, or any
related health issues of such personnel. Any of the foregoing events could
materially and adversely affect the Adviser’s ability to source,
manage and divest investments on behalf of the Fund
and pursue the Fund’s
investment objectives and strategies. Similar
consequences
could arise with respect to other infectious diseases. Given the significant
economic and financial market disruptions and
general uncertainty associated with the Coronavirus pandemic, the valuation and
performance of the Fund’s investments may be impacted
adversely.
In light
of current market conditions, until recently interest rates and bond yields in
the United States and many other countries were at or near
historic lows, and in some cases, such rates and yields are negative. During
periods of very low or negative interest rates, the
Fund’s
susceptibility to interest rate risk (i.e., the risks associated with changes in
interest rates) may be magnified, its yield and income may
be diminished and its performance may be adversely affected (e.g., during
periods of very low or negative interest rates, the Fund
may be unable to maintain positive returns). These levels of interest rates (or
negative interest rates) may magnify the risks associated
with rising interest rates. Changing interest rates, including rates that fall
below zero, may have unpredictable effects on markets,
including market volatility and reduced liquidity, and may adversely affect
the Fund’s
yield, income and performance.
Government
and other public debt, including municipal obligations in which the Fund
may invest, can be adversely affected by large and sudden
changes in local and global economic conditions that result in increased debt
levels. Although high levels of government and other
public debt do not necessarily indicate or cause economic problems, high levels
of debt may create certain systemic risks if sound debt
management practices are not implemented. A high debt level may increase market
pressures to meet an issuer’s funding needs,
which may increase borrowing costs and cause a government or public or municipal
entity to issue additional debt, thereby increasing
the risk of refinancing. A high debt level also raises concerns that the issuer
may be unable or unwilling to repay the principal
or interest on its debt, which may adversely impact instruments held by
the Fund
that rely on such payments. Governmental
and quasi-governmental responses to certain economic or other conditions may
lead to increasing government and other
public debt, which heighten these risks. Unsustainable debt levels can lead to
declines in the value of currency, and can prevent a
government from implementing effective counter-cyclical fiscal policy during
economic downturns, can generate or contribute to an
economic downturn or cause other adverse economic or market developments, such
as increases in inflation or volatility. Increasing
government and other public debt may adversely affect issuers, obligors,
guarantors or instruments across a variety of asset classes.
Fund
Policies/Investment Restrictions
The
investment objective, policies and restrictions listed below have been adopted
by the Fund as fundamental policies. Under the 1940 Act,
a fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund. The 1940
Act defines a majority as the lesser of (a) 67% or more of the shares present at
a meeting of shareholders, if the holders of 50% of the
outstanding shares of the Fund are present or represented by proxy; or (b) more
than 50% of the outstanding shares of the Fund.
For purposes of the following restrictions: (i) all percentage limitations apply
immediately after a purchase or initial investment,
except in the case of borrowings; and (ii) any subsequent change in any
applicable percentage resulting from market fluctuations
or other changes in total or net assets does not require elimination of any
security from the portfolio, except in the case of
borrowing.
The Fund
will:
1. Seek a
high level of current income.
The Fund
will not:
1. Invest
in a manner inconsistent with its classification as a “diversified company” as
provided by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption
or other relief applicable to the Fund from the provisions of the 1940 Act, as
amended from time to time.
2. Borrow
money, except the Fund may borrow money to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other
relief applicable to the Fund from the provisions of the 1940 Act, as amended
from time to time.
3. Make
loans of money or property to any person, except (a) to the extent that
securities or interests in which the Fund may invest are
considered to be loans, (b) through the loan of portfolio securities, (c) by
engaging in repurchase agreements, or (d) as may otherwise
be permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other relief
applicable to the Fund from the provision of the 1940
Act, as amended from time to time.
4.
Purchase or sell physical commodities unless required as a result of ownership
of securities or other instruments; provided that this restriction
shall not prohibit the Fund from purchasing or selling options, futures
contracts and related options thereon, forward contracts,
swaps, caps, floors, collars and any other financial instruments or from
investing in securities or other instruments backed by
physical commodities or as otherwise permitted by (i) the 1940 Act, as amended
from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief applicable to the Fund from
the provisions of the 1940 Act, as amended from time to time.
5. Issue
senior securities, except the Fund may issue senior securities to the extent
permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption
or other relief applicable to the Fund from the provisions of the 1940 Act, as
amended from time to time.
6. Invest
more than 25% of the value of its total assets in securities of issuers in any
one industry, except that the Fund will concentrate
in the mortgage-backed securities industry, which shall include agency and
non-agency mortgage-backed securities. For the
purposes of the foregoing concentration policy, obligations issued or guaranteed
by the U.S. government or its agencies and instrumentalities
that are not mortgage-backed securities shall not be considered part of any
industry.
7.
Purchase or sell real estate or interests therein, although the Fund may
purchase securities of issuers which engage in real estate operations
and securities secured by real estate or interests therein.
8. Engage
in the underwriting of securities, except insofar as the Fund may be deemed an
underwriter under the 1933 Act, in disposing
of a portfolio security.
In
addition, as nonfundamental policies, which can be changed with Board approval
and without shareholder vote, the Fund will not:
1. Invest
its assets in the securities of any investment company except as may be
permitted by (i) the 1940 Act, as amended from time to time;
(ii) the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time; or (iii) an exemption
or other relief applicable to the Fund from the provisions of the 1940 Act, as
amended from time to time.
The Fund
has an operating policy, which may be changed by the Fund’s Board of Trustees,
not to borrow except from a bank for temporary
or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or
current value) of its total assets (not including
the amount borrowed).
Notwithstanding
any other investment policy or restriction, the Fund may seek to achieve its
investment objective by investing all or substantially
all of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
The
investment policies, limitations or practices of the Fund may not apply during
periods of unusual or adverse market, economic, political
or other conditions. Such market, economic, political or other conditions may
include periods of abnormal or heightened market
volatility, strained credit and/or liquidity conditions or increased
governmental intervention in the markets or industries. During
such periods, the Fund may not invest according to its principal investment
strategies or in the manner in which its name may
suggest, and may be subject to different and/or heightened risks. It is possible
that such unusual or adverse conditions may continue
for extended periods of time.
For
purposes of policies adopted in accordance with Rule 35d-1 under the 1940 Act,
the term “assets,” as defined in Rule 35d-1 under the
1940 Act, means net assets plus the amount of any borrowings for investment
purposes.
Disclosure
of Portfolio Holdings
The Fund’s
Board of Trustees and the Adviser have adopted policies and procedures regarding
disclosure of portfolio holdings (the “Policy”).
Pursuant to the Policy, the Adviser may disclose information concerning Fund
portfolio holdings only if such disclosure is consistent
with the antifraud provisions of the federal securities laws and the Fund’s and
the Adviser’s fiduciary duties to Fund shareholders.
In no instance may the Adviser or the Fund receive compensation or any other
consideration in connection with the disclosure
of information about the portfolio securities of the Fund. Consideration
includes any agreement to maintain assets in the Fund or in
other investment companies or accounts managed by the Adviser or by any
affiliated person of the Adviser. Non-public information
concerning portfolio holdings may be divulged to third parties only when the
Fund has a legitimate business purpose for doing so
and the recipients of the information are subject to a duty of confidentiality.
Under no circumstances shall current or prospective
Fund shareholders receive non-public portfolio holdings information, except as
described below.
The Fund
makes available on its public website the following portfolio holdings
information:
■ |
complete
portfolio holdings information monthly, at least 15 calendar days after
the end of each month; and |
■ |
top
10 holdings monthly, at least 15 calendar days after the end of each
month. |
The Fund
provides a complete schedule of portfolio holdings for the second and fourth
fiscal quarters in its Semi-Annual and Annual Reports,
and for the first and third fiscal quarters in its filings with the SEC as an
exhibit to Form N-PORT. These portfolio holdings
will be available on or about the date of this Statement of Additional
Information on the Fund’s public website, www.morganstanley.com/im/shareholderreports.
All other
portfolio holdings information that has not been disseminated in a manner making
it available generally as described above is
non-public information for purposes of the Policy.
The Fund
may make selective disclosure of non-public portfolio holdings information
pursuant to certain exemptions set forth in the Policy.
Third parties eligible for exemptions under the Policy and therefore eligible to
receive such disclosures currently include clients/shareholders
(such as redeeming shareholders in-kind), fund rating agencies, information
exchange subscribers, proxy voting or
advisory services, pricing services, consultants and analysts, portfolio
analytics providers, transition managers and service providers, provided
that the third party expressly agrees to maintain the disclosed information in
confidence and not to trade portfolio securities or related
derivative securities based on the non-public information. Non-public portfolio
holdings information may not be disclosed to a third
party pursuant to an exemption unless and until the third-party recipient has
entered into a non-disclosure agreement with the Fund
and the arrangement has been reviewed and approved, as set forth in the Policy
and discussed below. In addition, persons who owe a
duty of trust or confidence to the Fund or the Adviser may receive non-public
portfolio holdings information without entering
into a non-disclosure agreement. Currently, these persons include (i) the Fund’s
independent registered public accounting firm (as
of the Fund’s fiscal year-end and on an as-needed basis), (ii) counsel to the
Fund (on an as-needed basis), (iii) counsel to the Independent
Trustees (on an as-needed basis) and (iv) members of the Board of Trustees (on
an as-needed basis). Subject to the terms and
conditions of any agreement between the Adviser or the Fund and the third-party
recipient, if these conditions for disclosure
are satisfied, there shall be no restriction on the frequency with which Fund
non-public portfolio holdings information is released,
and no lag period shall apply (unless otherwise indicated below).
The
Adviser may provide interest lists to broker-dealers who execute securities
transactions for the Fund without entering into a non-disclosure
agreement with the broker-dealers, provided that the interest list satisfies all
of the following criteria: (1) the interest list must
contain only the CUSIP numbers and/or ticker symbols of securities held in all
registered management investment companies advised by
the Adviser or any affiliate of the Adviser (the “Morgan Stanley Funds”) on an
aggregate, rather than a fund-by-fund basis; (2) the
interest list will not disclose portfolio holdings on a fund-by-fund basis; (3)
the interest list must not contain information about the
number or value of shares owned by a specified Morgan Stanley Fund; (4) the
interest list may identify the investment strategy,
but not the particular Morgan Stanley Funds, to which the list relates; and (5)
the interest list may not identify the portfolio manager or
team members responsible for managing the Morgan Stanley Funds.
The Fund
may discuss or otherwise disclose performance attribution analyses (i.e.,
mention the effects of having a particular security in the
portfolio(s)) where such discussion is not contemporaneously made public,
provided that the particular holding has been disclosed
publicly or the information that includes such holding(s) has been made
available to shareholders requesting such information.
Additionally, any discussion of the analyses may not be more current than the
date the holding was disclosed publicly or the
information that includes such holding(s) has been made available to
shareholders requesting such information.
Portfolio
holdings information may be provided to broker-dealers, prime brokers, futures
commission merchants, or similar providers in
connection with the Fund’s portfolio trading or operational processing
activities; such entities generally need access to such information
in the performance of their duties and responsibilities to fund service
providers and are subject to a duty of confidentiality,
including a duty not to trade on material non-public information, imposed by law
or contract. Portfolio holdings information
may also be provided to affiliates of Morgan Stanley Investment Management
(“MSIM”) pursuant to regulatory requirements
or for legitimate business purposes, which may include risk management, or may
be reported by the Fund’s counterparties
to certain global trade repositories pursuant to regulatory
requirements.
The
Adviser and/or the Fund currently have entered into ongoing arrangements
regarding the selective disclosure of complete portfolio
holdings information with the following parties:
|
|
|
Name |
Frequency1
|
Lag
Time |
Service
Providers |
|
|
State
Street Bank and Trust Company |
Daily
basis |
Daily |
BlackRock
Financial Management Inc. |
Daily
basis |
2
|
KellyCo
Marketing |
Monthly
basis and Quarterly basis |
Varying
lag times after the date of the information |
R.R.
Donnelley & Sons Company |
Monthly
basis and Quarterly basis |
Varying
lag times after the date of the information |
Fund
Rating Agencies |
|
|
Refinitiv
Lipper |
Monthly
basis |
Approximately
six business days after month end |
Portfolio
Analytics Providers |
|
|
Bloomberg
Finance, L.P. |
Daily
basis |
Daily |
FactSet
Research Systems Inc. |
Daily
basis |
Daily |
Abel
Noser Solutions, LLC |
Daily
basis |
Daily |
1 |
Dissemination
of portfolio holdings information to entities listed above may occur less
frequently than indicated (or not at all). |
2 |
Information
will typically be provided on a real time basis or as soon thereafter as
possible. |
All
disclosures of non-public portfolio holdings information made to third parties
pursuant to the exemptions set forth in the Policy must be
reviewed and approved by the Adviser, which will also determine from
time-to-time whether such third parties should continue
to receive portfolio holdings information.
The
Adviser shall report quarterly to the Board of Trustees (or a designated
committee thereof) at the next regularly scheduled meeting:
(i) any material information concerning all parties receiving
non-public portfolio holdings information pursuant to an exemption;
and (ii) any new non-disclosure agreements entered into during the reporting
period. Procedures to monitor the use of such
non-public portfolio holdings information may include requiring annual
certifications that the recipients have utilized such information
only pursuant to the terms of the agreement between the recipient and the
Adviser and, for those recipients receiving information
electronically, acceptance of the information will constitute reaffirmation that
the third party expressly agrees to maintain
the disclosed information in confidence and not to trade portfolio securities
based on the non-public information.
MANAGEMENT
OF THE FUND
Board
of Trustees
General. The Board
of Trustees of the Fund oversees the management of the Fund, but does not itself
manage the Fund. The Trustees
review various services provided by or under the direction of the Adviser to
ensure that the Fund’s general investment policies
and programs are properly carried out. The Trustees also conduct their review to
ensure that administrative services are provided
to the Fund in a satisfactory manner.
Under
state law, the duties of the Trustees are generally characterized as a duty of
loyalty and a duty of care. The duty of loyalty requires a
Trustee to exercise his or her powers in the interest of the Fund and not the
Trustee’s own interest or the interest of another
person or organization. A Trustee satisfies his or her duty of care by acting in
good faith with the care of an ordinarily prudent
person and in a manner the Trustee reasonably believes to be in the best
interest of the Fund and its shareholders.
Trustees
and Officers. The Board
of the Fund consists of eleven Trustees. These same individuals also serve as
directors or trustees for
certain of the funds advised by the Adviser and Morgan Stanley AIP GP LP. None
of the Trustees have an affiliation or business connection
with the Adviser or any of its affiliated persons or own any stock or other
securities issued by the Adviser’s parent company,
Morgan Stanley. These are the “non-interested” or “Independent” Trustees as
defined under the 1940 Act.
Board
Structure and Oversight Function. The
Board’s leadership structure features an Independent Trustee
serving as Chairperson and the
Board Committees described below. The Chairperson participates in the
preparation of the agenda for meetings of the Board and the
preparation of information to be presented to the Board with respect to matters
to be acted upon by the Board. The Chairperson
also presides at all meetings of the Board and is involved in discussions
regarding matters pertaining to the oversight of the
management of the Fund between meetings.
The Board
of Trustees
operates using a system of committees to facilitate the timely and efficient
consideration of all matters of importance
to the Trustees,
the Fund and
Fund
stockholders, and to facilitate compliance with legal and regulatory
requirements and oversight
of the Fund’s
activities and associated risks. The Board of Trustees
has established six standing committees: (1) Audit Committee,
(2) Governance Committee, (3) Compliance and Insurance Committee, (4) Equity
Investment Committee, (5) Fixed Income,
Liquidity and Alternatives Investment Committee and (6) Risk Committee, which
are each comprised exclusively of Independent
Trustees.
Each committee charter governs the scope of the committee’s responsibilities
with respect to the oversight of the Fund.
The responsibilities of each committee, including their oversight
responsibilities, are described further under the caption “Independent
Trustees
and the Committees.”
The Fund
is subject to a number of risks, including investment, compliance, operational
and valuation risk, among others. The Board of
Trustees
oversees these risks as part of its broader oversight of the Fund’s affairs
through various Board and committee activities.
The Board has adopted, and periodically reviews, policies and procedures
designed to address various risks to the Fund. In addition,
appropriate personnel, including but not limited to the Fund’s Chief Compliance
Officer, members of the Fund’s administration
and accounting teams, representatives from the Fund’s independent registered
public accounting firm, the Fund’s Treasurer,
portfolio management personnel, risk management personnel and independent
valuation and brokerage evaluation service providers,
make regular reports regarding the Fund’s activities and related risks to the
Board of Trustees
and the committees, as appropriate.
These reports include, among others, quarterly performance reports, quarterly
risk reports and discussions with members of
the risk teams relating to each asset class. The Board’s committee
structure allows separate committees to focus on different aspects of risk
and the potential impact of these risks on some or all of the funds in the
complex and then report back to the full Board. In between
regular meetings, Fund officers also communicate with the Trustees
regarding material exceptions and items relevant to the Board’s
risk oversight function. The Board recognizes that it is not possible to
identify all of the risks that may affect the Fund, and that it is
not possible to develop processes and controls to eliminate all of the risks
that may affect the Fund. Moreover, the Board recognizes
that it may be necessary for the Fund to bear certain risks (such as investment
risk) to achieve its investment objectives.
As needed
between meetings of the Board, the Board or a specific committee receives and
reviews reports relating to the Fund and engages in
discussions with appropriate parties relating to the Fund’s operations and
related risks.
Management
Information
Trustees. The Fund
seeks as Trustees individuals of distinction and experience in business and
finance, government service or academia.
In determining that a particular Trustee was and continues to be qualified to
serve as Trustee, the Board has considered a variety of
criteria, none of which, in isolation, was controlling. Based on a review of the
experience, qualifications, attributes or skills of each
Trustee, including those enumerated in the table below, the Board has determined
that each of the Trustees is qualified to serve as a
Trustee of the Fund. In addition, the Board believes that, collectively, the
Trustees have balanced and diverse experience, qualifications,
attributes and skills that allow the Board to operate effectively in governing
the Fund and protecting the interests of shareholders.
Information about the Fund’s Governance Committee and Board of Trustees
nomination process is provided below under the
caption “Independent Trustees and the Committees.”
The
Trustees of the Fund, their birth years, addresses, positions held, length of
time served, their principal business occupations during the
past five years and other relevant professional experience, the number of
portfolios in the Fund Complex (described below)
overseen by each Independent Trustee and other directorships, if any, held by
the Trustees, are shown below (as of January 1, 2023). The
Fund Complex includes all open-end and closed-end funds (including all of their
portfolios) advised by the Adviser and any
registered funds that have an adviser that is an affiliate of the Adviser
(including, but not limited to, Morgan Stanley AIP GP LP) (the
“Morgan Stanley AIP Funds”).
|
|
|
|
|
|
Name,
Address and Birth Year of
Independent Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held
by Independent Trustee
During Past 5 Years** |
Frank
L. Bowman c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1944 |
Trustee |
Since
August 2006 |
President,
Strategic Decisions,
LLC (consulting)
(since February
2009); Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
Chairperson of the
Compliance and Insurance
Committee (since
October 2015); formerly,
Chairperson of
the Insurance Sub-Committee
of the Compliance
and Insurance
Committee (2007-2015);
served as President
and Chief Executive
Officer of the Nuclear
Energy Institute
(policy organization)
(February 2005-November
2008); retired
as Admiral, U.S. Navy
after serving over 38
years on active duty including
8 years as Director
of the Naval Nuclear
Propulsion Program
in the Department
of the Navy
and the U.S. Department
of Energy (1996-2004);
served as Chief
of Naval Personnel
(July 1994-September
1996) and on
the Joint Staff as Director
of Political Military
Affairs (June 1992-July
1994); knighted
as Honorary Knight
Commander of the
Most Excellent Order
of the British Empire;
awarded the Officier
de l’Orde National
du Mérite by the
French Government;
elected to the
National Academy of
Engineering (2009). |
83 |
Director
of Naval and Nuclear
Technologies LLP;
Director Emeritus of
the Armed Services YMCA;
Member of the National
Security Advisory
Council of the Center
for U.S. Global Engagement
and a former
member of the CNA
Military Advisory Board;
Chairman of the Board
of Trustees of Fairhaven
United Methodist
Church; Member
of the Board of
Advisors of the Dolphin
Scholarship Foundation;
Director of
other various nonprofit
organizations; formerly,
Director of BP,
plc (November 2010-May
2019). |
|
|
|
|
|
|
Name,
Address and Birth Year of
Independent Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held
by Independent Trustee
During Past 5 Years** |
Frances
L. Cashman c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1961 |
Trustee |
Since
February
2022 |
Chief
Executive Officer,
Asset Management
Division, Delinian
Ltd. (financial information)
(May 2021-Present);
Executive
Vice President
and various other
roles, Legg Mason
& Co. (asset management)
(2010-2020);
Managing Director,
Stifel Nicolaus
(2005-2010). |
84 |
Trustee
and Investment Committee
Member, Georgia
Tech Foundation
(Since June 2019);
Trustee and Chair
of Marketing Committee,
and Member
of Investment Committee,
Loyola Blakefield
(Since September
2017); Trustee,
MMI Gateway Foundation
(since September
2017); Director
and Investment
Committee Member,
Catholic Community
Foundation
Board (2012–2018);
Director and
Investment Committee
Member, St.
Ignatius Loyola Academy
(2011-2017). |
Kathleen
A. Dennis c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1953 |
Trustee |
Since August 2006 |
Chairperson
of the Governance
Committee
(since January
2021), Chairperson
of the Liquidity
and Alternatives
Sub-Committee
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
President, Cedarwood
Associates (mutual
fund and investment
management
consulting)
(since July 2006);
formerly, Senior Managing
Director of Victory
Capital Management
(1993-2006). |
83 |
Board
Member, University
of Albany Foundation
(2012-present);
Board Member,
Mutual Funds
Directors Forum (2014-present);
Director
of various non-profit
organizations. |
|
|
|
|
|
|
Name,
Address and Birth Year of
Independent Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held
by Independent Trustee
During Past 5 Years** |
Nancy
C. Everett c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1955 |
Trustee |
Since January 2015 |
Chairperson
of the Equity
Investment Committee
(since January
2021); Director
or Trustee of various
Morgan Stanley Funds
(since January 2015);
Chief Executive Officer,
Virginia Commonwealth
University
Investment Company
(since November
2015); Owner,
OBIR, LLC (institutional
investment
management
consulting)
(since June 2014);
formerly, Managing
Director, BlackRock,
Inc. (February
2011-December
2013) and Chief
Executive Officer,
General Motors
Asset Management
(a/k/a Promark
Global Advisors,
Inc.) (June 2005-May
2010). |
84 |
Formerly,
Member of Virginia
Commonwealth
University
School of Business
Foundation (2005-2016);
Member of
Virginia Commonwealth
University
Board of Visitors
(2013-2015); Member
of Committee on
Directors for Emerging
Markets Growth
Fund, Inc. (2007-2010);
Chairperson
of Performance
Equity Management,
LLC (2006-2010);
and Chairperson,
GMAM Absolute
Return Strategies
Fund, LLC (2006-2010). |
Eddie
A. Grier c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1955 |
Trustee |
Since
February
2022 |
Dean,
Santa Clara University
Leavey School
of Business (since
July 2021); Dean,
Virginia Commonwealth
University
School of Business
(2010-2021); President
and various other
roles, Walt Disney
Company (entertainment
and media)
(1981-2010). |
84 |
Director,
Witt/Kieffer, Inc.
(executive search) (since
2016); Director, NuStar
GP, LLC (energy)
(since August 2021);
Director, Sonida Senior
Living, Inc. (residential
community operator)
(2016-2021); Director,
NVR, Inc. (homebuilding)
(2013-2020);
Director, Middleburg
Trust Company
(wealth management)
(2014-2019);
Director, Colonial
Williamsburg Company
(2012-2021); Regent,
University of Massachusetts
Global (since
2021); Director and
Chair, ChildFund International
(2012-2021);
Trustee, Brandman
University (2010-2021);
Director, Richmond
Forum (2012-2019). |
|
|
|
|
|
|
Name,
Address and Birth Year of
Independent Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held
by Independent Trustee
During Past 5 Years** |
Jakki
L. Haussler c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1957 |
Trustee |
Since January 2015 |
Chairperson
of the Audit
Committee (since
January 2023) and
Director or Trustee of
various Morgan Stanley
Funds (since January
2015); Chairman,
Opus Capital
Group (since 1996);
formerly, Chief Executive
Officer, Opus
Capital Group (1996-2019);
Director, Capvest
Venture Fund, LP
(May 2000-December
2011); Partner,
Adena Ventures,
LP (July 1999-December
2010); Director,
The Victory Funds
(February 2005-July
2008). |
84 |
Director,
Vertiv Holdings
Co. (VRT) (since
August 2022); Director
of Cincinnati Bell
Inc. and Member, Audit
Committee and Chairman,
Governance and
Nominating Committee
(2008-2021);
Director of
Service Corporation International
and Member,
Audit Committee
and Investment
Committee; Director,
Barnes Group Inc.
(since July 2021); Director
of Northern Kentucky
University Foundation
and Member,
Investment Committee;
Member of Chase
College of Law Center
for Law and Entrepreneurship
Board of
Advisors; Director of Best
Transport (2005-2019);
Director of Chase
College of Law Board
of Visitors; formerly,
Member, University
of Cincinnati
Foundation Investment
Committee. |
|
|
|
|
|
|
Name,
Address and Birth Year of
Independent Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held
by Independent Trustee
During Past 5 Years** |
Dr.
Manuel H. Johnson c/o
Johnson Smick International,
Inc. 220 I
Street, NE Suite
200 Washington,
D.C. 20002 Birth
Year: 1949 |
Trustee |
Since July
1991 |
Senior
Partner, Johnson Smick
International, Inc.
(consulting firm); Chairperson
of the Fixed
Income, Liquidity
and Alternatives
Investment Committee
(since January
2021), Chairperson
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since July 1991);
Co-Chairman and a
founder of the Group
of Seven Council
(G7C) (international
economic commission);
formerly, Chairperson
of the Audit
Committee (July 1991-September
2006); Vice
Chairman of the Board
of Governors of the
Federal Reserve System
and Assistant Secretary
of the U.S. Treasury. |
83 |
Director
of NVR, Inc. (home
construction). |
Joseph
J. Kearns c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1942 |
Trustee |
Since August 1994 |
Senior
Adviser, Kearns &
Associates LLC (investment
consulting);
Chairperson
of the Audit
Committee (2006-2022)
and Director
or Trustee of various
Morgan Stanley Funds
(since August 1994);
formerly, Deputy
Chairperson of the
Audit Committee (July
2003-September 2006)
and Chairperson of
the Audit Committee
of various Morgan
Stanley Funds (since
August 1994); CFO
of the J. Paul Getty
Trust (1982-1999). |
84 |
Director,
Rubicon Investments
(since February
2019); Prior to
August 2016, Director
of Electro Rent
Corporation (equipment
leasing). Prior
to December 31, 2013,
Director of The Ford
Family Foundation. |
|
|
|
|
|
|
Name,
Address and Birth Year of
Independent Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held
by Independent Trustee
During Past 5 Years** |
Michael
F. Klein c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1958 |
Trustee |
Since August 2006 |
Chairperson
of the Risk Committee
(since January
2021); Managing
Director, Aetos
Alternatives Management,
LP (since March
2000); Co-President,
Aetos Alternatives
Management,
LP (since January
2004) and Co-Chief
Executive Officer of
Aetos Alternatives Management,
LP (since August
2013); Chairperson
of the Fixed
Income Sub-Committee
of the Investment
Committee (2006-2020)
and Director
or Trustee of various
Morgan Stanley Funds
(since August 2006);
formerly, Managing
Director, Morgan
Stanley & Co. Inc.
and Morgan Stanley
Dean Witter Investment
Management
and President,
various Morgan
Stanley Funds (June
1998-March 2000);
Principal, Morgan
Stanley & Co. Inc.
and Morgan Stanley
Dean Witter Investment
Management
(August 1997-December
1999). |
83 |
Director
of certain investment
funds managed
or sponsored by
Aetos Alternatives Management,
LP; Director
of Sanitized AG
and Sanitized Marketing
AG (specialty
chemicals). |
|
|
|
|
|
|
Name,
Address and Birth Year of
Independent Trustee |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s)
During Past
5 Years and Other
Relevant Professional
Experience |
Number
of Funds in
Fund Complex Overseen
by Independent
Trustee |
Other
Directorships Held
by Independent Trustee
During Past 5 Years** |
Patricia
A. Maleski c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1960 |
Trustee |
Since January 2017 |
Director
or Trustee of various
Morgan Stanley Funds
(since January 2017);
Managing Director,
JPMorgan Asset
Management (2004-2016);
Oversight and
Control Head of Fiduciary
and Conflicts of
Interest Program (2015-2016);
Chief Control
Officer—Global
Asset Management
(2013-2015);
President, JPMorgan
Funds (2010-2013);
Chief Administrative
Officer (2004-2013);
various other
positions including
Treasurer and
Board Liaison (since
2001). |
84 |
Trustee
(since January 2022)
and Treasurer (since
January 2023), Nutley
Family Service Bureau,
Inc. |
W.
Allen Reed c/o
Perkins Coie LLP Counsel
to the Independent
Trustees 1155
Avenue of the Americas 22nd
Floor New
York, NY 10036 Birth
Year: 1947 |
Chair
of the Board and Trustee |
Chair
of the Board since
August 2020 and Trustee
since August 2006 |
Chair
of the Boards of various
Morgan Stanley Funds
(since August 2020);
Director or Trustee
of various Morgan
Stanley Funds (since
August 2006); formerly,
Vice Chair of the
Boards of various Morgan
Stanley Funds (January
2020-August 2020);
President and Chief
Executive Officer of
General Motors Asset
Management; Chairman
and Chief Executive
Officer of the GM
Trust Bank and Corporate
Vice President
of General Motors
Corporation (August
1994-December
2005). |
83 |
Formerly,
Director of Legg
Mason, Inc. (2006-2019);
and Director
of the Auburn University
Foundation (2010-2015). |
* |
This
is the earliest date the Trustee began
serving the Morgan Stanley Funds. Each Trustee serves
an indefinite term, until his or her successor is
elected. |
** |
This
includes any directorships at public companies and registered investment
companies held by the Trustee
at any time during the past five years. |
The
executive officers of the Fund,
their birth years, addresses, positions held, length of time served and their
principal business occupations
during the past five years are shown below (as of January 1,
2023).
|
|
|
|
Name,
Address and Birth Year
of Executive Officer |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s) During Past 5 Years |
John
H. Gernon 522
Fifth Avenue New
York, NY 10036 Birth
Year: 1963 |
President
and Principal
Executive Officer |
Since
September 2013 |
President
and Principal Executive Officer of the Equity and Fixed Income Funds
and
the Morgan Stanley AIP Funds (since September 2013) and the Liquidity
Funds
and various money market funds (since May 2014) in the Fund Complex;
Managing
Director of the Adviser. |
|
|
|
|
Name,
Address and Birth Year
of Executive Officer |
Position(s)
Held with Registrant |
Length
of Time Served* |
Principal
Occupation(s) During Past 5 Years |
Deidre
A. Downes 1633
Broadway New
York, NY 10019 Birth
Year: 1977 |
Chief
Compliance Officer |
Since
November 2021 |
Executive
Director of the Adviser (since January 2021) and Chief Compliance
officer
of various Morgan Stanley Funds (since November 2021). Formerly, Vice
President
and Corporate Counsel at PGIM and Prudential Financial (October
2016
– December 2020). |
Francis
J. Smith 522
Fifth Avenue New
York, NY 10036 Birth
Year: 1965 |
Treasurer
and Principal
Financial Officer |
Treasurer
since July 2003
and Principal Financial
Officer since September
2002 |
Managing
Director of the Adviser and various entities affiliated with the Adviser;
Treasurer
(since July 2003) and Principal Financial Officer of various Morgan
Stanley
Funds (since September 2002). |
Mary
E. Mullin 1633
Broadway New
York, NY 10019 Birth
Year: 1967 |
Secretary |
Since
June 1999 |
Managing
Director of the Adviser; Secretary of various Morgan Stanley Funds
(since
June 1999). |
Michael
J. Key 522
Fifth Avenue New
York, NY 10036 Birth
Year: 1979 |
Vice
President |
Since
June 2017 |
Vice
President of the Equity and Fixed Income Funds, Liquidity Funds, various
money
market funds and the Morgan Stanley AIP Funds in the Fund Complex
(since
June 2017); Managing Director of the Adviser; Head of Product Development
for Equity and Fixed Income Funds (since August
2013). |
* |
This
is the earliest date the officer began serving the Morgan Stanley Funds.
Each officer serves a one-year term, until his or her successor is elected
and has qualified. |
In
addition, the following individuals who are officers of the Adviser or its
affiliates serve as assistant secretaries of the Fund:
Nicholas Di
Lorenzo, Princess Kludjeson, Francesca Mead, Sydney A. Walker and Jill R.
Whitelaw.
It is a
policy of the Fund’s
Board that each Trustee
shall invest in any combination of the Morgan Stanley Funds that the
Trustee
determines
meets his or her own specific investment objectives, without requiring any
specific investment in any particular Fund.
For each
Trustee, the dollar range of equity securities beneficially owned by the Trustee
in the Fund and in the Family of Investment Companies
(Family of Investment Companies includes all of the registered investment
companies advised by the Adviser and Morgan Stanley
AIP GP LP) for the calendar year ended December
31, 2022 is set forth in the table below.
|
|
|
Name
of Trustee |
Dollar
Range of Equity Securities in the Fund (as of
December 31, 2022) |
Aggregate
Dollar Range of Equity Securities in All Registered
Investment Companies Overseen by Trustee
in Family of Investment Companies (as of December
31, 2022) |
Independent: |
|
|
Frank
L. Bowman |
None |
over
$100,000 |
Frances
L. Cashman1
|
None |
None |
Kathleen
A. Dennis |
None |
over
$100,000 |
Nancy
C. Everett |
None |
over
$100,000 |
Eddie
A. Grier1
|
None |
None |
Jakki
L. Haussler |
None |
over
$100,000 |
Manuel
H. Johnson |
None |
over
$100,000 |
Joseph
J. Kearns2
|
None |
over
$100,000 |
Michael
F. Klein2
|
None |
over
$100,000 |
Patricia
A. Maleski |
None |
over
$100,000 |
W.
Allen Reed2
|
None |
over
$100,000 |
1 |
Ms.
Cashman and Mr. Grier became members of the Advisory Board of the Board of
Trustees on January 1, 2022 and Trustees on February 25,
2022. |
2 |
Includes
the total amount of compensation deferred by the Trustee at his election
pursuant to a deferred compensation plan. Such deferred compensation is
placed in a
deferral account and deemed to be invested in one or more of the Morgan
Stanley Funds (or portfolio thereof) that are offered as investment
options under the
plan. |
As to each
Independent Trustee and his or her immediate family members, no person owned
beneficially or of record securities of an investment
adviser or principal underwriter of the Fund, or a person (other than a
registered investment company) directly or indirectly
controlling, controlled by or under common control with an investment adviser or
principal underwriter of the Fund.
Independent
Trustees and the Committees. Law and
regulation establish both general guidelines and specific duties for the
Independent
Trustees.
The Board has six committees: (1) Audit Committee, (2) Governance Committee, (3)
Compliance and Insurance
Committee, (4) Equity Investment Committee, (5) Fixed Income, Liquidity and
Alternatives Investment Committee and (6) Risk
Committee.
The
Independent Trustees
are charged with recommending to the full Board approval of management, advisory
and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing fund performance, checking on the pricing of
portfolio securities, brokerage commissions, transfer agent costs and
performance and trading among funds in the same complex;
and approving fidelity bond and related insurance coverage and allocations, as
well as other matters that arise from time to time. The
Independent Trustees
are required to select and nominate individuals to fill any Independent
Trustee
vacancy on the board of any
fund that has a Rule 12b-1 plan of distribution. Most of the retail Morgan
Stanley Funds have a Rule 12b-1 plan.
The Board
of Trustees
has a separately-designated standing Audit Committee established in accordance
with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (the “1934 Act”). The Audit
Committee is charged with recommending to the full Board the
engagement or discharge of the Fund’s
independent registered public accounting firm; directing investigations into
matters within the
scope of the independent registered public accounting firm’s duties, including
the power to retain outside specialists; reviewing
with the independent registered public accounting firm the audit plan and
results of the auditing engagement; approving professional
services provided by the independent registered public accounting firm and other
accounting firms prior to the performance
of the services; reviewing the independence of the independent registered public
accounting firm; considering the range of audit
and non-audit fees; reviewing the adequacy of the Fund’s
system of internal controls and reviewing the valuation process. The
Fund has
adopted a formal, written Audit Committee Charter.
The
members of the Audit Committee of the Fund are
Nancy C. Everett, Eddie A. Grier, Jakki L. Haussler and Joseph J. Kearns.
None of
the members of the Fund’s
Audit Committee is an “interested person,” as defined under the 1940 Act, of the
Fund (with
such
disinterested Trustees
being “Independent Trustees”
or individually, an “Independent Trustee”).
Each Independent Trustee is
also
“independent” from the Fund under
the listing standards of the NYSE. The Chairperson of the Audit Committee of the
Fund is
Jakki L.
Haussler.
The Board
of Trustees
of the Fund also
has a Governance Committee. The Governance Committee identifies individuals
qualified to serve as
Independent Trustees
on the Fund’s
Board and on committees of the Board and recommends such qualified individuals
for nomination
by the Fund’s
Independent Trustees
as candidates for election as Independent Trustees,
advises the Fund’s
Board with respect to
Board composition, procedures and committees, develops and recommends to the
Fund’s
Board a set of corporate governance
principles applicable to the Fund,
monitors and makes recommendations on corporate governance matters and policies
and
procedures of the Fund’s
Board of Trustees
and any Board committees and oversees periodic evaluations of the Fund’s
Board and its
committees. The members of the Governance Committee of the Fund are
Kathleen A. Dennis, Manuel H. Johnson, Michael F. Klein,
Patricia A. Maleski and W. Allen Reed, each of whom is an Independent
Trustee.
In addition, W. Allen Reed (as Chair of the Morgan
Stanley Funds) periodically may attend other operating Committee meetings. The
Chairperson of the Governance Committee
is Kathleen A. Dennis.
The
Fund does
not have a separate nominating committee. While the Fund’s
Governance Committee recommends qualified candidates
for nominations as Independent Trustees,
the Board of Trustees
of the Fund
believes that the task of nominating prospective
Independent Trustees
is important enough to require the participation of all current Independent
Trustees,
rather than a separate
committee consisting of only certain Independent Trustees.
Accordingly, all the Independent Trustees
participate in the selection
and nomination of candidates for election as Independent Trustees
for the Fund.
Persons recommended by the Fund’s
Governance
Committee as candidates for nomination as Independent Trustees
shall possess such experience, qualifications, attributes,
skills and diversity so as to enhance the Board’s ability to manage and direct
the affairs and business of the Fund,
including,
when applicable, to enhance the ability of committees of the Board to fulfill
their duties and/or to satisfy any independence
requirements imposed by law, regulation or any listing requirements of the NYSE.
While the Independent Trustees
of the
Fund
expect to be able to continue to identify from their own resources an ample
number of qualified candidates for the Fund’s
Board as
they deem appropriate, they will consider nominations from shareholders to the
Board. Nominations from shareholders should be
in writing and sent to the Independent Trustees
as described below under the caption “Shareholder Communications.”
The Board
formed the Compliance and Insurance Committee to address insurance coverage and
oversee the compliance function for the
Fund and
the Board. The Compliance and Insurance Committee consists of Frank L. Bowman,
Kathleen A. Dennis and Patricia A.
Maleski, each of whom is an Independent Trustee.
The Chairperson of the Compliance and Insurance Committee is Frank L.
Bowman.
The Equity
Investment Committee and the Fixed Income, Liquidity and Alternatives Investment
Committees oversee the Fund’s
portfolio
investment process and review the performance of the Fund’s
investments. The Equity Investment Committee and the Fixed
Income, Liquidity and Alternatives Investment Committees also recommend to the
Board to approve or renew the Fund’s
Investment
Advisory and Administration Agreements. Each Investment Committee focuses on the
Fund’s
primary areas of investment,
namely equities, fixed income, liquidity and alternatives. Kathleen A. Dennis,
Nancy C. Everett, Eddie A. Grier, Jakki L. Haussler
and Michael F. Klein are members of the Equity Investment Committee. The
Chairperson of the Equity Investment Committee
is Nancy C. Everett. Frank L. Bowman, Frances L. Cashman, Manuel H. Johnson,
Joseph J. Kearns and Patricia A. Maleski
are members of the Fixed Income, Liquidity and Alternatives Investment
Committee. The Chairperson of the Fixed Income, Liquidity
and Alternatives Investment Committee is Manuel H. Johnson.
The Risk
Committee assists the Board in connection with the oversight of the Fund’s
risks, including investment risks, operational risks and
risks posed by the Fund’s
service providers as well as the effectiveness of the guidelines, policies and
processes for monitoring
and mitigating such risks. The members of the Risk Committee of the Fund are
Frances L. Cashman, Manuel H. Johnson,
Michael F. Klein and W. Allen Reed, each of whom is an Independent Trustee.
The Chairperson of the Risk Committee is Michael F.
Klein.
During the
Fund’s
fiscal year ended October
31, 2022, the Board of Trustees
held the following meetings:
|
|
Board
of Trustees/Committee |
Number
of Meetings |
Board
of Trustees |
6 |
Audit
Committee |
4 |
Governance
Committee |
4 |
Compliance
and Insurance Committee |
4 |
Equity
Investment Committee |
5 |
Fixed
Income, Liquidity and Alternatives Investment Committee |
5 |
Risk
Committee |
4 |
Experience,
Qualifications and Attributes
The Board
has concluded, based on each Trustee’s
experience, qualifications and attributes that each Board member should serve as
a Trustee.
Following is a brief summary of the information that led to and/or supports this
conclusion.
Mr. Bowman
has experience in a variety of business and financial matters through his prior
service as a Director or Trustee for various
funds in the Fund Complex, where he serves as Chairperson of the Compliance and
Insurance Committee (and formerly served as
Chairperson of the Insurance Sub-Committee of the Compliance and Insurance
Committee). Mr. Bowman also serves as a Director
of Naval and Nuclear Technologies LLP and Director Emeritus for the Armed
Services YMCA, and formerly served as a Director
of BP, plc. Mr. Bowman serves as a Chairman of the Board of Trustees of the
Fairhaven United Methodist Church. Mr. Bowman is
also a member of the National Security Advisory Council of the Center for U.S.
Global Engagement, a former member of the CNA
Military Advisory Board and a member of the Dolphin Scholarship Foundation
Advisory Board. Mr. Bowman retired as an Admiral in
the U.S. Navy after serving over 38 years on active duty including eight years
as Director of the Naval Nuclear Propulsion Program in
the Department of the Navy and the U.S. Department of Energy (1996-2004).
Additionally, Mr. Bowman served as the U.S.
Navy’s Chief of Naval Personnel (1994-1996) where he was responsible for the
planning and programming of all manpower, personnel,
training and education resources for the U.S. Navy, and on the Joint Staff as
Director of Political Military Affairs (1992-1994). In
addition, Mr. Bowman served as President and Chief Executive Officer of the
Nuclear Energy Institute. Mr. Bowman has received
such distinctions as a knighthood as Honorary Knight Commander of the Most
Excellent Order of the British Empire and the
Officier de l’Orde National du Mérite from the French Government, and was
elected to the National Academy of Engineering (2009). He
is President of the consulting firm Strategic Decisions, LLC.
With more
than 30 years of experience in the financial services industry, Ms. Cashman
possesses valuable insights and expertise regarding
governance, marketing, communications, and strategy. Ms. Cashman is Chief
Executive Officer of the Asset Management Division
of Delinian Ltd. Prior to that, Ms. Cashman spent over 20 years at Legg Mason
& Co., ultimately serving as Executive Vice President
and Global Head of Marketing and Communications. She has gained valuable
experience as Director of two investment management
entities and as a distribution leader reporting to boards of other mutual funds.
In addition, Ms. Cashman also serves as Trustee
for the Georgia Tech Foundation and the MMI Gateway Foundation.
Ms. Dennis
has over 25 years of business experience in the financial services industry and
related fields including serving as a Director or Trustee
of various other funds in the Fund Complex, where she serves as Chairperson of
the Governance Committee. Ms. Dennis possesses
a strong understanding of the regulatory framework under which investment
companies must operate based on her years of service to
this Board and her position as Senior Managing Director of Victory Capital
Management.
Ms.
Everett has over 35 years of experience in the financial services industry,
including roles with both registered investment companies
and registered investment advisers. Ms. Everett serves as the Chairperson of the
Equity Investment Committee. By serving on the
boards of other registered funds, such as GMAM Absolute Return Strategies Fund,
LLC and Emerging Markets Growth Fund,
Inc., Ms. Everett has acquired significant experience with financial,
accounting, investment and regulatory matters. Ms. Everett is
also a Chartered Financial Analyst.
During the
course of a career spanning more than 40 years in both academia and industry,
Mr. Grier has gained substantial experience
in management, operations, finance, marketing, and oversight. Mr. Grier is the
Dean of Santa Clara University’s Leavey School of
Business. Prior to that, Mr. Grier was the Dean of the Virginia Commonwealth
University School of Business. Before joining
academia, Mr. Grier spent 29 years at the Walt Disney Company where he served in
various leadership roles, including as President
of the Disneyland Resort. Mr. Grier also gained substantial oversight experience
serving on the boards of Sonia Senior Living,
Inc. (formerly, Capital Senior Living Corporation), NVR, Inc., and Middleburg
Trust Company. In addition, Mr. Grier
currently
serves as a Director of Witt/Kieffer, Inc., Director of NuStar GP, LLC, and
Regent of University of Massachusetts Global. Mr. Grier
is also a Certified Public Accountant.
With more
than 30 years of experience in the financial services industry, including her
years of entrepreneurial and managerial experience
in the development and growth of Opus Capital Group, Ms. Haussler brings a
valuable perspective to the Fund’s
Board, where she
serves as the Chairperson of the Audit Committee. Through her role at Opus
Capital and her service as a director of several venture
capital funds and other boards, Ms. Haussler has gained valuable experience
dealing with accounting principles and evaluating
financial results of large corporations. She is a certified public accountant
(inactive) and a licensed attorney in the State of Ohio
(inactive). The Board has determined that Ms. Haussler is an “audit committee
financial expert” as defined by the SEC.
In
addition to his tenure as a Director or Trustee of various other funds in the
Fund Complex, where he currently serves as the Chairperson
of the Fixed Income, Liquidity and Alternatives Investment Committee and
formerly served as Chairperson of the Audit Committee,
Dr. Johnson has also served as an officer or a board member of numerous
companies for over 20 years. These positions included
Co-Chairman and a founder of the Group of Seven Council, Director of NVR, Inc.,
Director of Evergreen Energy and Director
of Greenwich Capital Holdings. He also has served as Vice Chairman of the Board
of Governors of the Federal Reserve System and
Assistant Secretary of the U.S. Treasury. In addition, Dr. Johnson also served
as Chairman of the Financial Accounting Foundation,
which oversees the Financial Accounting Standards Board, for seven
years.
Mr. Kearns
gained extensive experience regarding accounting through his experience on the
Audit Committees of the boards of other funds in
the Fund Complex, including by previously serving as either Chairperson or
Deputy Chairperson of the Audit Committee for nearly
20 years, and through his position as Chief Financial Officer of the J. Paul
Getty Trust. He also has experience in financial, accounting,
investment and regulatory matters through his position as President and founder
of Kearns & Associates LLC, a financial consulting
company. Mr. Kearns previously served as a Director of Electro Rent Corporation
and previously served as Director of The Ford
Family Foundation.
Through
his prior positions as a Managing Director of Morgan Stanley & Co. Inc. and
Morgan Stanley Dean Witter Investment Management
and as President and a Trustee of the Morgan Stanley Institutional Funds, Mr.
Klein has experience in the management and
operation of registered investment companies, enabling him to provide management
input and investment guidance to the Board. Mr.
Klein is the Chairperson of the Risk Committee. Mr. Klein also has extensive
experience in the investment management industry
based on his current positions as Managing Director and Co-Chief Executive and
Co-President of Aetos Alternatives Management,
LP and as a Director of certain investment funds managed or sponsored by Aetos
Alternatives Management, LP. In addition,
he also has experience as a member of the board of other funds in the Fund
Complex.
Ms.
Maleski has over 30 years of experience in the financial services industry and
extensive experience with registered investment companies.
Ms. Maleski began her career as a certified public accountant at Price
Waterhouse LLP (“PW”) and was a member of PW’s
Investment Company Practice. After a brief stint at the Bank of New York, Ms.
Maleski began her affiliation with the JPMorgan
Funds, at the Pierpont Group, and then with J.P. Morgan Investment Management
Inc. From 2001-2013, Ms. Maleski held roles
with increasing responsibilities, from Vice President and Board Liaison,
Treasurer and Principal Financial Officer, Chief Administrative
Officer and finally President and Principal Executive Officer for the JPMorgan
Fund complex. Between 2013 and 2016, Ms.
Maleski served as Global Head of Oversight and Control of JPMorgan Asset
Management and then as Head of JPMorgan Chase’s
Fiduciary and Conflicts of Interest Program. Ms. Maleski has extensive
experience in the management and operation of funds in
addition to regulatory and accounting and valuation matters.
Mr. Reed
has experience on investment company boards and is experienced with financial,
accounting, investment and regulatory matters
through his prior service as a Director of iShares Inc. and his service as Chair
of the Board and as Trustee or Director of other funds in
the Fund Complex. Mr. Reed also gained substantial experience in the financial
services industry through his prior positions as a
Director of Legg Mason, Inc. and as President and CEO of General Motors Asset
Management.
The
Trustees’
principal occupations and other relevant professional experience during the past
five years or more are shown in the above
tables.
The Board
has adopted a policy that Board members are expected to retire no later than the
end of the year they reach the age of 78. The
Governance Committee has discretion to grant waivers from this retirement policy
under special circumstances, including for Board
members to continue serving in Chair or Chair-related roles beyond the
retirement age. Current Board members who reached the age of
75 as of January 1, 2021, are grandfathered as exceptions to the retirement
policy and may continue to serve on the Board until the
end of the year in which they turn 80 years of age.
Advantages
of Having the Same Individuals as Trustees for the Morgan Stanley
Funds. The
Independent Trustees and the Fund’s
management believe that having the same Independent Trustees for each of the
Morgan Stanley Funds avoids the duplication of effort
that would arise from having different groups of individuals serving as
Independent Trustees for each of the funds or even of sub-groups
of funds. They believe that having the same individuals serve as Independent
Trustees of all the Morgan Stanley Funds tends to
increase their knowledge and expertise regarding matters which affect the Fund
Complex generally and enhances their ability
to
negotiate on behalf of each fund with the fund’s service providers. This
arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent Trustees
serve on all fund boards enhances the ability of
each fund to obtain, at modest cost to each separate fund, the services of
Independent Trustees of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Morgan Stanley Funds.
Trustee
and Officer Indemnification. The
Fund’s Declaration of Trust provides that no Trustee, officer, employee or agent
of the Fund is
liable to the Fund or to a shareholder, nor is any Trustee, officer, employee or
agent liable to any third persons in connection with the
affairs of the Fund, except as such liability may arise from his/her or its own
bad faith, willful misfeasance, gross negligence or
reckless disregard of his/her or its duties. It also provides that all third
persons shall look solely to Fund property for satisfaction of claims
arising in connection with the affairs of the Fund. With the exceptions stated,
the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
Shareholder
Communications.
Shareholders may send communications to the Fund’s Board of Trustees.
Shareholders should send communications
intended for the Fund’s Board by addressing the communications directly to the
Board (or individual Board members)
and/or otherwise clearly indicating in the salutation that the communication is
for the Board (or individual Board members)
and by sending the communication to either the Fund’s office or directly to such
Board member(s) at the address specified for each
Trustee previously noted. Other shareholder communications received by the Fund
not directly addressed and sent to the Board will
be reviewed and generally responded to by management, and will be forwarded to
the Board only at management’s discretion
based on the matters contained therein.
Compensation
Each
Trustee
(except for the Chair of the Boards) receives an annual retainer fee of $335,000
($295,000 prior to January 1, 2023) for serving as
a Trustee of
the Morgan Stanley Funds.
The Audit
Committee Chairperson receives an additional annual retainer fee of $80,000, the
Risk Committee Chairperson, the Equity
Investment Committee Chairperson, Fixed Income, Liquidity and Alternatives
Investment Committee Chairperson and Governance
Committee Chairperson each receive an additional annual retainer fee of $50,000
and the Compliance and Insurance Committee
Chairperson receives an additional annual retainer fee of $65,000. The aggregate
compensation paid to each Trustee is
paid by
the Morgan Stanley Funds, and is allocated on a pro rata basis among each of the
operational funds of the Morgan Stanley Funds
based on the relative net assets of each of the funds. The Chair of the Boards
receives a total annual retainer fee of $630,000 ($590,000
prior to January 1, 2023) for his services and for administrative services
provided to each Board.
The
Fund also
reimburses such Trustees
for travel and other out-of-pocket expenses incurred by them in connection with
attending such
meetings. Trustees
of the Fund who
are employed by the Adviser receive no compensation or expense reimbursement
from the Fund for
their services as a Trustee.
Effective
April 1, 2004, the Fund began
a Deferred Compensation Plan (the “DC Plan”), which allows each Trustee to
defer payment of
all, or a portion, of the fees he or she receives for serving on the Board of
Trustees
throughout the year. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan
Stanley Funds that are offered as investment options under the DC Plan. At the
Trustee’s
election, distributions are either in one lump
sum payment, or in the form of equal annual installments over a period of five
years. The rights of an eligible Trustee
and the
beneficiaries to the amounts held under the DC Plan are unsecured and such
amounts are subject to the claims of the creditors of the
Fund.
Prior to
April 1, 2004, the Fund
maintained a similar Deferred Compensation Plan (the “Prior DC Plan”), which
also allowed each Independent
Trustee to
defer payment of all, or a portion, of the fees he or she received for serving
on the Board of Trustees
throughout
the year. Generally, the DC Plan amends and supersedes the Prior DC Plan and all
amounts payable under the Prior DC Plan are
now subject to the terms of the DC Plan (except for amounts paid during the
calendar year 2004, which remain subject to the terms
of the Prior DC Plan).
The
following table shows aggregate compensation payable to each of the Fund’s
Trustees
from the Fund for
the fiscal year ended October
31, 2022 and the aggregate compensation payable to each of the Fund’s
Trustees
by the Fund Complex (which includes all of the
Morgan Stanley Funds) for the calendar year ended December
31, 2022.
|
|
|
Compensation1
|
Name
of Independent Trustee: |
Aggregate
Compensation
From the
Fund2
|
Total
Compensation From
Fund and Fund
Complex Paid to
Trustee3
|
Frank
L. Bowman |
$191 |
$360,000 |
Frances
L. Cashman4
|
156 |
295,000 |
Kathleen
A. Dennis |
183 |
345,000 |
Nancy
C. Everett |
182 |
345,000 |
Eddie
A. Grier4
|
156 |
295,000 |
Jakki
L. Haussler |
156 |
295,000 |
Manuel
H. Johnson |
183 |
345,000 |
Joseph
J. Kearns2,3
|
198 |
375,000 |
Michael
F. Klein2,3
|
183 |
345,000 |
Patricia
Maleski |
156 |
295,000 |
W.
Allen Reed3
|
312 |
590,000 |
1 |
Includes
all amounts paid for serving as director/trustee of the funds in the Fund
Complex, as well as serving as Chair of the Boards or a Chairperson of a
Committee. |
2 |
The
amounts shown in this column represent the aggregate compensation before
deferral with respect to the Fund’s fiscal year. The following Trustees
deferred compensation
from the Fund during the fiscal year ended October
31, 2022: Mr. Kearns, $85 and Mr. Klein, $183. |
3 |
The
amounts shown in this column represent the aggregate compensation paid by
all of the funds in the Fund Complex as of December 31, 2022 before
deferral by
the Trustees under the DC Plan. As of December 31, 2022, the value
(including interest) of the deferral accounts across the Fund Complex for
Messrs. Kearns, Klein
and Reed pursuant to the deferred compensation plan was $1,003,275,
$3,052,005 and $3,795,878, respectively. Because the funds in the Fund
Complex have
different fiscal year ends, the amounts shown in this column are presented
on a calendar year basis. |
4 |
Ms.
Cashman and Mr. Grier became members of the Advisory Board of the Board of
Trustees on January 1, 2022 and Trustees on February 25,
2022. |
Prior to
December 31, 2003, 49 of the Morgan Stanley Funds (the “Adopting Funds”),
including the Fund, had adopted a retirement
program under which an Independent Trustee who
retired after serving for at least five years as an Independent Trustee of
any such
fund (an “Eligible Trustee”)
would have been entitled to retirement payments, based on factors such as length
of service, upon
reaching the eligible retirement age. On December 31, 2003, the amount of
accrued retirement benefits for each Eligible Trustee was
frozen, and will be payable, together with a return of 8% per annum, at or
following each such Eligible Trustee’s
retirement
as shown in the table below.
The
following table illustrates the retirement benefits accrued to the Fund’s
Independent Trustees
by the Fund for the fiscal year ended
October
31, 2022 and by the Adopting Funds for the calendar year ended December
31, 2022, and the estimated retirement benefits
for the Independent Trustees from
the Fund as of the fiscal year ended October
31, 2022 and from the Adopting Funds for each
calendar year following retirement. Only the Trustees listed
below participated in the retirement program.
|
|
|
|
|
|
Retirement
Benefits Accrued as Fund Expenses |
Estimated
Annual Benefits Upon Retirement1
|
Name
of Independent Trustee |
By
the Fund2
|
By
all Adopting Funds |
From
the Fund |
From
all Adopting Funds |
Manuel
H. Johnson |
$(179) |
$(5,498) |
$1,420 |
$55,816 |
1 |
Total
compensation accrued under the retirement plan, together with a return of
8% per annum, will be paid annually commencing upon retirement and
continuing
for the remainder of the Trustee’s life. |
2 |
Mr.
Johnson’s retirement expenses are negative due to the fact that his
retirement date has been extended and therefore his expenses have been
over accrued. |
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The
percentage ownership of shares of the Fund changes from time to time depending
on purchases and redemptions by shareholders and the
total number of shares outstanding.
As of
February 1, 2023, the Trustees and officers of the Fund, as a group, owned less
than 1% of any class of outstanding shares of beneficial
interest of the Fund.
The
following owned beneficially or of record 5% or more of the outstanding shares
of any class of the Fund as of February 1, 2023:
|
|
|
CLASS
A |
Fund |
Name
and Address |
%
of Class |
Mortgage
Securities Trust |
Morgan
Stanley & Co Harborside Financial
Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
63.53% |
Mortgage
Securities Trust |
National
Financial Services LLC For
Exclusive Benefit Of Our Cust ATTN
Mutual Funds Dept 4th Floor 499
Washington Blvd Jersey
City NJ 07310-1995 |
6.77% |
Mortgage
Securities Trust |
Charles
Schwab & Co Inc ATTN:
Mutual Funds 101
Montgomery ST San
Francisco CA 94104-4151 |
5.02% |
CLASS
L |
Fund |
Name
and Address |
%
of Class |
Mortgage
Securities Trust |
Morgan
Stanley & Co Harborside Financial
Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
91.90% |
Mortgage
Securities Trust |
Wells
Fargo Clearing Services LLC A/C
1699-0135 Special
Custody Acct For The Exclusive
Benefit Of Customer 2801
Market St Saint
Louis MO 63103-2523 |
5.47% |
CLASS
I |
Fund |
Name
and Address |
%
of Class |
Mortgage
Securities Trust |
Morgan
Stanley & Co Harborside Financial
Center Plaza
II 3rd Floor Jersey
City NJ 07311 |
43.35% |
Mortgage
Securities Trust |
LPL Financial Omnibus
Customer Account ATTN
Mutual Fund Trading 4707
Executive DR San
Diego CA 92121-3091 |
30.22% |
Mortgage
Securities Trust |
National
Financial Services LLC For
Exclusive Benefit Of Our Customers 499
Washington Blvd ATTN
Mutual Funds Dept - 4th Floor Jersey
City NJ 07310-1995 |
5.67% |
CLASS
R6 |
Fund |
Name
and Address |
%
of Class |
Mortgage
Securities Trust |
Morgan
Stanley Investment Management ATTN
Michael Agosta 1633
Broadway FL 26 New
York NY 10019-6708 |
100% |
INVESTMENT
ADVISORY AND OTHER SERVICES
Adviser
and Administrator
The
Adviser to the Fund is Morgan Stanley Investment Management Inc., a Delaware
corporation, whose address is 522 Fifth Avenue,
New York, NY 10036. The Adviser is a wholly-owned subsidiary of Morgan Stanley,
a Delaware corporation traded on the NYSE under
the symbol “MS.” Morgan Stanley is a preeminent global financial services firm
engaged in securities trading and brokerage
activities, as well as providing investment banking, research and analysis,
financing and financial advisory services. As of December
31, 2022, the Adviser, together with its affiliated asset management companies,
had approximately $1.3 trillion in assets under
management or supervision.
Pursuant
to an Investment Advisory Agreement (the “Investment Advisory Agreement”) with
the Adviser, the Fund has retained the Adviser to
manage and/or oversee the investment of the Fund’s assets, including the placing
of orders for the purchase and sale of portfolio
securities. The Fund pays the Adviser monthly compensation calculated daily by
applying the following annual rates to the net assets
of the Fund determined as of the close of each business day: 0.47% of the
portion of the daily net assets not exceeding $1 billion;
0.445% to the portion of the daily net assets exceeding $1 billion but not
exceeding $1.5 billion; 0.42% to the portion of the daily net
assets exceeding $1.5 billion but not exceeding $2 billion; 0.395% to the
portion of the daily net assets exceeding $2 billion but not
exceeding $2.5 billion; 0.37% to the portion of the daily net assets exceeding
$2.5 billion but not exceeding $5 billion; 0.345% to
the portion of the daily net assets exceeding $5 billion but not exceeding $7.5
billion; 0.32% to the portion of the daily net assets
exceeding $7.5 billion but not exceeding $10 billion; 0.295% to the portion of
the daily net assets exceeding $10 billion but not
exceeding $12.5 billion; and 0.27% to the portion of the daily net assets
exceeding $12.5 billion. The investment advisory fee is
allocated among the Classes pro rata based on the net assets of the Fund
attributable to each Class.
Administration
services are provided to the Fund by Morgan Stanley Investment Management Inc.,
a wholly-owned subsidiary of Morgan
Stanley, pursuant to a separate administration agreement (the “Administration
Agreement”) entered into by the Fund with the
Administrator. The Fund pays the Administrator monthly compensation which on an
annual basis equals 0.08% of average daily net
assets.
Morgan
Stanley Investment Management Inc., as the Adviser and the Administrator, has
agreed to reduce its advisory fee, its administration
fee, and/or reimburse the Fund, if necessary, if such fees would cause the total
annual operating expenses of the Fund to exceed
1.00% for Class A, 1.30% for Class L, 0.70% for Class I, 1.80% for Class C and
0.65% for Class R6. In determining the actual
amount of fee waivers and/or expense reimbursements for the Fund, if any, the
Adviser and Administrator exclude from total annual
operating expenses, acquired fund fees and expenses (as applicable), certain
investment related expenses, taxes, interest and other
extraordinary expenses (including litigation). The fee waivers and/or expense
reimbursements will continue for at least one year from the
date of the Prospectus or until such time as the Fund’s Board of Trustees acts
to discontinue all or a portion of such waivers and/or
reimbursements when it deems such action is appropriate. The Adviser and
Administrator may make additional voluntary fee waivers
and/or expense reimbursements. The Adviser and Administrator may discontinue the
voluntary fee waivers and/or expense reimbursements
at any time in the future.
The
following table reflects for the Fund (i) the advisory fee paid; and (ii) the
advisory fee waived and/or affiliated rebates for each of the past
three fiscal years ended October 31, 2020, 2021
and 2022:
|
|
|
|
|
|
|
|
|
Advisory
Fees Paid (After
Fee Waivers and/or Affiliated
Rebates) |
Advisory
Fees Waived |
Affiliated
Rebates |
2020 |
2021 |
2022 |
2020 |
2021 |
2022 |
2020 |
2021 |
2022 |
$598,816 |
$655,821 |
$522,450 |
$246,717 |
$265,475 |
$300,524 |
$18,655 |
$14,417 |
$11,852 |
For the
fiscal years ended October 31, 2020, 2021
and 2022, the Fund paid compensation under its Administration Agreement as
follows
(no administration fees were waived):
|
|
|
Compensation
Paid for the Fiscal Year
Ended October 31, |
2020 |
2021 |
2022 |
$147,096 |
$159,270 |
$142,098 |
Under a
Sub-Administration Agreement between the Administrator and State Street Bank and
Trust Company (“State Street”), State Street
provides certain administrative services to the Fund. For such services, the
Administrator pays State Street a portion of the fee the
Administrator receives from the Fund. The Administrator supervises and monitors
the administrative and accounting services provided
by State Street. Their services are also subject to the supervision of the
officers and Board of Trustees of the Fund. State Street’s
business address is One Lincoln Street, Boston, MA
02111-2101.
Principal
Underwriter
The Fund’s
principal underwriter is Morgan Stanley Distribution, Inc. (which has the
same address as the Adviser). In this capacity, the Fund’s
shares are distributed by the Distributor. The Distributor has entered into a
selected dealer agreement with Morgan Stanley
Smith Barney LLC and Morgan Stanley & Co. LLC, which through their own sales
organizations sell shares of the Fund. In addition,
the Distributor may enter into similar agreements with other selected
broker-dealers. The Distributor, a Delaware corporation,
is a wholly-owned subsidiary of Morgan Stanley.
The
Distributor bears all expenses it may incur in providing services under the
Distribution Agreement. These expenses include the payment to
Financial Intermediaries of any sales commissions, service fees and other
expenses for sales of the Fund’s shares incurred or paid by
Financial Intermediaries. The Distributor also pays certain expenses in
connection with the distribution of the Fund’s shares,
including the costs of preparing, printing and distributing advertising or
promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto used in connection with the offering and
sale of the Fund’s shares. The Fund bears the costs
of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the
costs of registering the Fund and its shares under federal and state securities
laws and pays filing fees in accordance with state
securities laws.
The Fund
and the Distributor have agreed to indemnify each other against certain
liabilities, including liabilities under the 1933 Act. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations, the
Distributor is not liable to the Fund or any of its shareholders
for any error of judgment or mistake of law or for any act or omission or for
any losses sustained by the Fund or its shareholders.
Services
Provided by the Adviser and Administrator
The
Adviser manages the investment of the Fund’s assets, including the placing of
orders for the purchase and sale of portfolio securities.
The Adviser obtains and evaluates the information and advice relating to the
economy, securities markets and specific securities
as it considers necessary or useful to continuously manage the assets of the
Fund in a manner consistent with its investment objective.
Under the
terms of the Administration Agreement, the Administrator maintains certain of
the Fund’s books and records and furnishes,
at its own expense, the office space, facilities, equipment, clerical help and
bookkeeping as the Fund may reasonably require in the
conduct of its business. The Administrator also assists in the preparation of
prospectuses, proxy statements and reports required
to be filed with federal and state securities commissions (except insofar as the
participation or assistance of the independent registered
public accounting firm and attorneys is, in the opinion of the Administrator,
necessary or desirable). The Administrator also bears
the cost of telephone service, heat, light, power and other utilities provided
to the Fund.
Expenses
not expressly assumed by the Adviser under the Investment Advisory Agreement or
by the Administrator under the Administration
Agreement or by the Distributor will be paid by the Fund. These expenses will be
allocated among the five Classes of shares pro
rata based on the net assets of the Fund attributable to each Class, except as
described below. Such expenses include, but are not
limited to: expenses of the Plan of Distribution pursuant to Rule 12b-1; charges
and expenses of any registrar, custodian, stock
transfer and dividend disbursing agent; brokerage commissions; taxes;
registration costs of the Fund and its shares under federal and state
securities laws; the cost and expense of printing, including typesetting, and
distributing prospectuses of the Fund and supplements
thereto to the Fund’s shareholders; all expenses of shareholders’ and Trustees’
meetings and of preparing, printing and mailing of
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or members of any advisory board or committee
who are not employees of the Adviser or any corporate affiliate of the Adviser;
all expenses incident to any dividend, withdrawal
or redemption options; charges and expenses of any outside service used for
pricing of the Fund’s shares; fees and expenses
of legal counsel, including counsel to the Trustees who are not interested
persons of the Fund or of the Adviser (not including
compensation or expenses of attorneys who are employees of the Adviser); fees
and expenses of the Fund’s independent registered
public accounting firm; membership dues of industry associations; interest on
Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Trustees) of the Fund which
inure to its benefit; extraordinary expenses (including,
but not limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of
the Fund’s operation. The 12b-1 fees relating to a particular Class will be
allocated directly to that Class. In addition, sub-accounting
and other expenses directly attributable to a particular Class (except advisory
or custodial fees) may be allocated directly to such
Class.
The
Investment Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard
of its obligations thereunder, the Adviser is not liable to the Fund or any of
its investors for any act or omission by the Adviser or
for any losses sustained by the Fund or its investors.
The
Investment Advisory Agreement will remain in effect from year-to-year, provided
continuance of the Investment Advisory Agreement
is approved at least annually by the vote of the holders of a majority, as
defined in the 1940 Act, of the outstanding shares
of the
Fund, or by the Trustees; provided that in either event such continuance is
approved annually by the vote of a majority of the Independent
Trustees.
The
Administration Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Administrator is not liable to the Fund or any of
its investors for any act or omission by the Administrator
or for any losses sustained by the Fund or its investors. The Administration
Agreement will continue unless terminated by either
party by written notice delivered to the other party within 30
days.
Dealer
Reallowances
Upon
notice to selected broker-dealers, the Distributor may reallow up to the full
applicable front-end sales charge during periods specified
in such notice. During periods when 90% or more of the sales charge is
reallowed, such selected broker-dealers may be deemed to
be underwriters as that term is defined in the 1933 Act.
Rule
12b-1 Plan
The Fund
has adopted an Amended and Restated Plan of Distribution, effective February 25,
2013, pursuant to Rule 12b-1 under the 1940
Act (the “Plan”), pursuant to which each Class, other than Class I and Class R6,
pays the Distributor compensation accrued daily and
payable monthly at the following maximum annual rates: 0.25%, 0.50% and 1.00% of
the average daily net assets of Class A, Class L
and Class C shares, respectively.
The
Distributor also receives the proceeds of front-end sales charges (“FSCs”) and
of contingent deferred sales charges (“CDSCs”) imposed on
certain redemptions of shares, which are separate and apart from payments made
pursuant to the Plan. The Distributor has
informed the Fund that it and/or Morgan Stanley & Co. LLC received the
proceeds of CDSCs and FSCs, for the last three fiscal years
ended October 31, as applicable, in approximate amounts as provided in the table
below.
|
|
|
|
|
|
|
Class |
2022 |
2021 |
2020 |
Class
A |
FSCs:1 CDSCs: |
$413 $14,215 |
FSCs:1 CDSCs: |
$54,032 $37,382 |
FSCs:1 CDSCs: |
$15,504 $163 |
Class
C |
CDSCs: |
$1,073 |
CDSCs: |
$17 |
CDSCs: |
$230 |
1 |
FSCs
apply to Class A only. |
The entire
fee payable by Class A shares and a portion of the fees payable by each of Class
L and Class C shares each year pursuant to the Plan
up to 0.25% of such Class’ average daily net assets are currently each
characterized as a “service fee” under the Rules of the Financial
Industry Regulatory Authority (“FINRA”) (of which the Distributor is a member).
The “service fee” is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion of
the Plan fees payable by a Class, if any, is characterized
as an “asset-based sales charge” as such is defined by the Rules of
FINRA.
Under the
Plan and as required by Rule 12b-1, the Trustees receive and review promptly
after the end of each calendar quarter a written
report provided by the Distributor of the amounts expended under the Plan and
the purpose for which such expenditures were made.
For the fiscal year ended October
31, 2022, Class A, Class L and Class C shares of the Fund made payments under
the Plan
amounting to $108,295, $4,385 and $29,866, respectively, which amounts are equal
to 0.25%, 0.50% and 1.00% of the average
daily net assets of Class A, Class L and Class C, respectively, for the fiscal
year.
The Plan
was adopted in order to permit the implementation of the Fund’s method of
distribution. Under this distribution method the Fund
offers five Classes, each with a different distribution
arrangement.
With
respect to Class A shares of the Fund, the Distributor generally compensates
Financial Intermediaries from proceeds of the FSC,
commissions for the sale of Class A shares, currently a gross sales credit of up
to 2.75% of the amount sold and an annual residual
commission, currently a residual of up to 0.50% of the current value of the
respective accounts for which they are dealers of record in
all cases.
With
respect to Class C shares of the Fund, a commission or transaction fee generally
will be compensated by the Distributor at the time of
purchase directly out of the Distributor’s assets (and not out of the Fund’s
assets) to Financial Intermediaries who initiate and are
responsible for such purchases computed based on a percentage of the dollar
value of such shares sold of up to 1.00% on Class C shares.
Proceeds
from any CDSC and any distribution fees on Class C shares are paid to the
Distributor and are used by the Distributor to defray its
distribution related expenses in connection with the sale of the Fund’s shares,
such as the payment to Financial Intermediaries
for selling such shares. With respect to Class C shares, the Financial
Intermediaries generally receive from the Distributor
ongoing distribution fees of up to 1.00% of the average daily net assets of the
Fund’s Class C shares annually commencing
in the second year after purchase.
With
respect to Class L shares of the Fund, the Financial Intermediaries generally
receive from the Distributor ongoing distribution fees of up
to 0.50% of the average daily net assets of the Fund’s Class L shares
annually.
The
distribution fee that the Distributor receives from the Fund under the Plan, in
effect, offsets distribution expenses incurred under the
Plan on behalf of the Fund and, in the case of Class C shares, opportunity
costs, such as the gross sales credit and an assumed
interest charge thereon (“carrying charge”). These expenses may include the cost
of Fund-related educational and/or business-related
trips or payment of Fund-related educational and/or promotional expenses of
Financial Intermediaries.
The Fund
may reimburse expenses incurred or to be incurred in promoting the distribution
of the Fund’s Class A, Class L and Class C shares
and/or in servicing shareholder accounts. Reimbursement will be made through
payments at the end of each month. The amount of
each monthly payment may in no event exceed an amount equal to a payment at the
annual rate of 0.25%, in the case of Class A,
0.50%, in the case of Class L and 1.00%, in the case of Class C, of the average
net assets of the respective Class during the month. No
interest or other financing charges, if any, incurred on any distribution
expenses on behalf of Class A and Class L will be reimbursable
under the Plan.
Each Class
paid 100% of the amounts accrued under the Plan with respect to that Class for
the fiscal year ended October
31, 2022 to the
Distributor. It is estimated that the Distributor spent this amount in
approximately the following ways: (i) 0.00% ($0)—advertising
and promotional expenses; (ii) 0.00% ($0)— printing and mailing of prospectuses
for distribution to other than current
shareholders; and (iii) 0.00% ($0) — other expenses, including the gross sales
credit and the carrying charge, of which 0% ($0)
represents carrying charges, 0.00% ($0) represents commission credits for
payments of commissions to Financial Intermediaries and 0.00%
($0) represents overhead and other branch office distribution-related expenses.
The amounts accrued by Class A and a portion of
the amounts accrued by Class L under the Plan during the fiscal year ended
October
31, 2022 were service fees. The remainder
of the amounts accrued by Class L were for expenses, which relate to
compensation of sales personnel and associated overhead
expenses.
In the
case of Class A, Class L and Class C shares, expenses incurred pursuant to the
Plan in any calendar year in excess of 0.25%, 0.50% or
1.00% of the average daily net assets of Class A, Class L or Class C shares,
respectively, will not be reimbursed by the Fund through
payments in any subsequent year, except that expenses representing a gross sales
commission credited to Financial Intermediaries
at the time of sale may be reimbursed in the subsequent calendar year. The
Distributor has advised the Fund that there were
no unreimbursed expenses representing a gross sales commission credited to
Financial Intermediaries in the case of Class A, Class L
or Class C shares at December
31, 2022 (the end of the calendar year). No interest or other financing charges
will be incurred
on any Class A, Class L or Class C distribution expenses incurred by the
Distributor under the Plan or on any unreimbursed expenses
due to the Distributor pursuant to the Plan.
No
interested person of the Fund nor any Independent Trustee has any direct
financial interest in the operation of the Plan except to the extent
that the Distributor, the Adviser, Morgan Stanley Smith Barney LLC or certain of
their employees may be deemed to have such an
interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts
expended thereunder by the Fund.
On an
annual basis, the Trustees, including a majority of the Independent Trustees,
consider whether the Plan should be continued. Prior to
approving the last continuation of the Plan, the Trustees requested and received
from the Distributor and reviewed all the information
which they deemed necessary to arrive at an informed determination. In making
their determination to continue the Plan, the
Trustees considered: (1) the Fund’s experience under the Plan and whether such
experience indicates that the Plan is operating
as anticipated; (2) the benefits the Fund had obtained, was obtaining and would
be likely to obtain under the Plan, including
that: (a) the Plan is essential in order to give Fund investors a choice of
alternatives for payment of distribution and service charges
and to enable the Fund to continue to grow and avoid a pattern of net
redemptions which, in turn, are essential for effective investment
management; and (b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance
expenses of Financial Intermediaries made possible by the 12b-1 fees, Financial
Intermediaries could not establish and maintain
an effective system for distribution, servicing of Fund shareholders and
maintenance of shareholder accounts; and (3) what services
had been provided and were continuing to be provided under the Plan to the Fund
and its shareholders. Based upon their review,
the Trustees, including each of the Independent Trustees, determined that
continuation of the Plan would be in the best interest
of the Fund and would have a reasonable likelihood of continuing to benefit the
Fund and its shareholders.
The Plan
may not be amended to increase materially the amount to be spent for the
services described therein without approval by the
shareholders of the affected Class or Classes of the Fund, and all material
amendments to the Plan must also be approved by the Trustees.
The Plan may be terminated at any time, without payment of any penalty, by vote
of a majority of the Independent Trustees
or by a vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act) on not more than 30 days’
written notice to any other party to the Plan. So long as the Plan is in effect,
the election and nomination of Independent Trustees
shall be committed to the discretion of the Independent
Trustees.
Other
Service Providers
Transfer
Agent/Dividend Disbursing Agent
SS&C
Global Investor and Distribution Solutions, Inc. (“SS&C GIDS”), 2000 Crown
Colony Drive, Quincy, MA 02169-0953, serves as
the Fund’s transfer agent and dividend disbursing agent for payment of dividends
and distributions on Fund shares.
Co-Transfer
Agent
Eaton
Vance Management is the co-transfer agent with respect to Fund. Eaton Vance
Management is a registered transfer agent and operates
the Fund’s call center. In connection therewith, Eaton Vance Management performs
certain transfer agency services related to
processing and relaying purchase and redemption orders to SS&C GIDS, the
Funds’ transfer agent. The Fund will bear the costs associated
with Eaton Vance Management’s provision of these transfer agency
services.
Custodian
and Independent Registered Public Accounting Firm
State
Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111-2101, is the
custodian of the Fund’s assets. Any of the Fund’s
cash balances with the Custodian in excess of $250,000 are unprotected by
federal deposit insurance. These balances may, at times,
be substantial.
Ernst
& Young LLP, located at 200 Clarendon Street, Boston, MA 02116-5021, serves
as the Fund’s independent registered public accounting
firm and provides audit and audit-related services, tax-related services and
assistance in connection with various SEC filings.
Securities
Lending
Pursuant
to an agreement between the Fund and State Street, the Fund may lend its
securities through State Street as securities lending
agent to certain qualified borrowers. As securities lending agent of the Fund,
State Street administers the Fund’s securities lending
program. These services include arranging the loans of securities with approved
borrowers and their return to the Fund upon loan
termination, negotiating the terms of such loans, selecting the securities to be
loaned and monitoring dividend activity relating to loaned
securities. State Street also marks-to-market daily the value of loaned
securities and collateral and may require additional collateral
as necessary from borrowers. State Street may also, in its capacity as
securities lending agent, invest cash received as collateral
in pre-approved investments in accordance with the Securities Lending
Authorization Agreement. State Street maintains records of
loans made and income derived therefrom and makes available such records that
the Fund deems necessary to monitor the securities
lending program.
The Fund
did not earn income or incur any costs or expenses relating to its securities
lending program during the most recent fiscal year.
Fund
Management
Other
Accounts Managed by the Portfolio Managers
Other
Accounts Managed by Portfolio Managers at October
31, 2022 (unless otherwise indicated):
|
|
|
|
|
|
|
|
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Portfolio
Managers |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Gregory
Finck |
2 |
$737.5
million |
14 |
$2.8
billion |
311
|
$4.4
billion1
|
Matt
Buckley |
1 |
$669.7 |
0 |
$0 |
0 |
$0 |
1 |
Of
these other accounts, one accounts with approximately $1 billion in
assets had performance-based fees. |
Because
the portfolio managers may manage assets for other investment companies, pooled
investment vehicles and/or other accounts (including
institutional clients, pension plans and certain high net worth individuals),
there may be an incentive to favor one client over
another resulting in conflicts of interest. For instance, the Adviser may
receive fees from certain accounts that are higher than the fee it
receives from the Fund, or it may receive a performance-based fee on certain
accounts. In those instances, the portfolio managers
may have an incentive to favor the higher and/or performance-based fee accounts
over the Fund. In addition, a conflict of interest
could exist to the extent the Adviser has proprietary investments in certain
accounts, where portfolio managers have personal investments
in certain accounts or when certain accounts are investment options in the
Adviser’s employee benefits and/or deferred compensation
plans. The portfolio managers may have an incentive to favor these accounts over
others. If the Adviser manages accounts
that engage in short sales of securities of the type in which the Fund invests,
the Adviser could be seen as harming the performance
of the Fund for the benefit of the accounts engaging in short sales if the short
sales cause the market value of the securities
to fall. The Adviser has adopted trade allocation and other policies and
procedures that it believes are reasonably designed to address
these and other conflicts of interest.
Portfolio
Manager Compensation Structure
Morgan
Stanley’s compensation structure is based on a total reward system of base
salary and incentive compensation, which is paid either in
the form of cash bonus, or for employees meeting the specified deferred
compensation eligibility threshold, partially as a cash bonus
and partially as mandatory deferred compensation. Deferred compensation granted
to MSIM employees are generally granted as
a mix of deferred cash awards under the Investment Management Alignment Plan
(“IMAP”) and equity-based awards in the form
of stock units. The portion of incentive compensation granted in the form of a
deferred compensation award and the terms of such
awards are determined annually by the Compensation, Management Development and
Succession Committee of the Morgan Stanley
Board of Directors.
Base
salary compensation.
Generally, portfolio managers receive base salary compensation based on the
level of their position with the
Adviser.
Incentive
compensation. In
addition to base compensation, portfolio managers may receive discretionary
year-end compensation.
Incentive
compensation may include:
■ |
A
mandatory program that defers a portion of incentive compensation into
restricted stock units or other awards based on Morgan
Stanley common stock or other plans that are subject to vesting and other
conditions. |
■ |
IMAP
is a cash-based deferred compensation plan designed to increase the
alignment of participants’ interests with the interests
of the Adviser’s clients. For eligible employees, a portion of their
deferred compensation is mandatorily deferred into
IMAP on an annual basis. Awards granted under IMAP are notionally invested
in referenced funds available pursuant to
the plan, which are funds advised by MSIM. Portfolio managers are required
to notionally invest a minimum of 40% of their
account balance in the designated funds that they manage and are included
in the IMAP notional investment fund menu. |
■ |
Deferred
compensation awards are typically subject to vesting over a multi-year
period and are subject to cancellation through
the payment date for competition, cause (i.e., any act or omission that
constitutes a breach of obligation to MSIM,
including failure to comply with internal compliance, ethics or risk
management standards, and failure or refusal to perform
duties satisfactorily, including supervisory and management duties),
disclosure of proprietary information, and solicitation
of employees or clients. Awards are also subject to clawback through the
payment date if an employee’s act or omission
(including with respect to direct supervisory responsibilities) causes a
restatement of the Firm’s consolidated financial
results, constitutes a violation of the Firm’s global risk management
principles, policies and standards, or causes a loss
of revenue associated with a position on which the employee was paid and
the employee operated outside of internal control
policies. |
MSIM
compensates employees based on principles of pay-for-performance, market
competitiveness and risk management. Eligibility for, and
the amount of any, discretionary compensation is subject to a multi-dimensional
process. Specifically, consideration is given to one or
more of the following factors, which can vary by portfolio management team and
circumstances:
■ |
Revenue
and profitability of the business and/or each fund/account managed by the
portfolio manager |
■ |
Revenue
and profitability of the Firm |
■ |
Return
on equity and risk factors of both the business units and Morgan
Stanley |
■ |
Assets
managed by the portfolio manager |
■ |
External
market conditions |
■ |
New
business development and business
sustainability |
■ |
Contribution
to client objectives |
■ |
Team,
product and/or MSIM performance |
■ |
The
pre-tax investment performance of the funds/accounts managed by the
portfolio manager (which may, in certain cases, be measured
against the applicable benchmark(s) and/or peer group(s) over one-, three-
and five-year periods) |
■ |
Individual
contribution and performance |
Further,
the Firm’s Global Incentive Compensation Discretion Policy requires compensation
managers to consider only legitimate, business
related factors when exercising discretion in determining variable incentive
compensation, including adherence to Morgan Stanley’s
core values, conduct, disciplinary actions in the current performance year, risk
management and risk outcomes.
Securities
Ownership of Portfolio Managers
As of
October
31, 2022 (unless otherwise noted), the dollar range of securities beneficially
owned (or held notionally through IMAP) by each
portfolio manager in the Fund is shown below:
|
|
Gregory
Finck |
Over
$1 million |
Matt
Buckley |
None |
Codes
of Ethics
The Fund,
the Adviser and the Distributor have each adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act. The Codes of
Ethics are designed to detect and prevent improper personal trading. The Codes
of Ethics permit personnel subject to the Codes of
Ethics to invest in securities, including securities that may be purchased, sold
or held by the Fund, subject to a number of restrictions
and controls, including prohibitions against purchases of securities in an
initial public offering and a preclearance requirement
with respect to personal securities transactions.
Proxy
Voting Policy and Proxy Voting Record
The Board
of Trustees believes that the voting of proxies on securities held by the Fund
is an important element of the overall investment
process. As such, the Trustees have delegated the responsibility to vote such
proxies to the Adviser.
A copy of
the Adviser’s Proxy Voting Policy (“Proxy Policy”) is attached hereto as
Appendix A. In addition, a copy of the Proxy Policy, as
well as the Fund’s most recent proxy voting record for the 12-month period ended
June 30, as filed with the SEC, are available
without charge on our web site at www.morganstanley.com/im. The Fund’s proxy
voting record is also available without charge on
the SEC’s web site at www.sec.gov.
Revenue
Sharing
This
section does not apply to Class R6 shares. The Adviser and/or the Distributor
may pay compensation, out of their own funds and not as
an expense of the Fund, to certain third parties, such as banks, brokers,
dealers, recordkeepers and administrators of various
deferred compensation plans, other financial intermediaries or financial
services firms or other persons (“Intermediary”) in connection
with the sale, distribution, marketing and retention of Fund shares and/or
shareholder servicing. For example, the Adviser or the
Distributor may pay additional compensation to a Intermediary for, among other
things, promoting the sale and distribution of Fund
shares, providing access to various programs, mutual fund platforms or preferred
or recommended mutual fund lists that may be
offered by a Intermediary, granting the Distributor access to a Intermediary’s
financial advisors and consultants, providing assistance
in the ongoing education and training of a Intermediary’s financial personnel,
conferences or seminars, sales, client and investor
events, due diligence events, other firm-sponsored events or other programs,
furnishing marketing support, finders or referral fees for
directing investors to the Fund, maintaining share balances and/or for
sub-accounting, recordkeeping, administrative, shareholder
or transaction processing services. The Adviser and/or Distributor will also
reimburse certain investors, or make payments to certain
third-party vendors, to defray costs incurred by investors for the use of
treasury management systems or other business-related
software for investments in funds. Such payments are in addition to any
distribution fees, shareholder servicing fees and/or transfer
agency fees that may be payable by the Fund. The additional payments may be
based on various factors, including level of
sales
(based on gross or net sales or some specified minimum sales or some other
similar criteria related to sales of the Fund and/or some or
all other Morgan Stanley Funds), amount of assets invested by the Intermediary’s
customers (which could include current or aged
assets of the Fund and/or some or all other Morgan Stanley Funds), the Fund’s
advisory fees, some other agreed upon amount or other
measures as determined from time to time by the Adviser and/or Distributor.
These categories of additional compensation are not
mutually exclusive and the Adviser and/or the Distributor may pay further types
of additional compensation in the future. The amount
of these payments may be different for different Intermediaries.
With
respect to Morgan Stanley Smith Barney LLC, these payments may include the
following amounts, which are paid in accordance
with the applicable compensation structure:
(1) an
ongoing annual fee in an amount of $582,650 in consideration of the Adviser’s
participation at various Morgan Stanley Smith Barney LLC
events, including seminars, conferences and meetings as determined by Morgan
Stanley Smith Barney LLC;
(2) an
ongoing annual fee in an amount of $575,000
in consideration of Morgan Stanley Smith Barney LLC providing Adviser with
access to
distribution analytical data in relation to sales of the Fund and certain other
products managed and/or sponsored by the Adviser or
its affiliates;
(3) on
Class I, Class A, Class L and Class C shares of the Fund
held in Morgan Stanley Smith Barney LLC brokerage and advisory accounts,
an ongoing annual fee in an amount up to 0.10% of the total average daily NAV of
such shares for the applicable quarterly period;
(4) on
Class I shares of the Fund held in Morgan Stanley Smith Barney LLC
brokerage and advisory accounts as of June 30, 2014, where each
such account holds $5 million or more in Class I shares of the Fund, or
had $4 million or more in assets (but less than $5 million)
as of June 30, 2014 and reached $5 million by December 31, 2014, an
ongoing annual fee in an amount equal to 35% of the
advisory fee the Adviser receives from the Fund based on the average daily NAV
of such shares for the applicable quarterly period;
(5) on
Class A and Class I shares of the Fund held in an account through
certain 401(k) platforms in Morgan Stanley Smith Barney LLC’s
Corporate Retirement Solutions, an ongoing annual fee in an amount up to 0.20%
of the total average daily NAV of such shares for
the applicable quarterly period; and
(6) on
purchases of $500,000 or more of Class A shares (for which no initial
sales charge was paid), Morgan Stanley Smith Barney LLC may,
at the discretion of the Distributor, receive a gross sales credit of up to
0.75% of the amount sold.*
*
Commissions or transaction fees paid when Morgan Stanley Smith Barney LLC or
other Intermediaries initiate and are responsible for
purchases of $500,00 or more are computed on a percentage of the dollar value of
such shares sold as follows: 0.75% on sales of $500,000
to $4 million, then 0.50% on sales over $4 million to $15 million and then 0.25%
on the excess over $15 million. Purchases
of Class A shares for which no initial sales charge is paid are subject to a
CDSC of 0.75% if the redemption of such shares occurs
within 12 months after purchase. The full amount of such CDSC will be retained
by the Distributor.
With
respect to Morgan Stanley & Co. LLC, these payments may include the
following amounts, which are paid in accordance with the
applicable compensation structure:
(1) on
shares of the Fund, a fee in an amount up to 20% of the advisory fee the Adviser
receives from the Fund attributable to such shares for
the applicable period, not to exceed one year.
The
prospect of receiving, or the receipt of, additional compensation, as described
above, by Intermediaries may provide such Intermediaries
and their financial advisors and other salespersons with an incentive to favor
sales of shares of the Fund over other investment
options with respect to which these Intermediaries do not receive additional
compensation (or receives lower levels of additional
compensation). These payment arrangements, however, will not change the price
that an investor pays for shares of the Fund or
the amount that the Fund receives to invest on behalf of an investor. Investors
may wish to take such payment arrangements into
account when considering and evaluating any recommendations relating to Fund
shares and should review carefully any disclosure
provided by Intermediaries as to their compensation.
Other
Payments to Intermediaries
The
Adviser and/or the Distributor may also make payments, out of their own assets
and not as an expense to the Fund,
to Intermediaries
to offset certain nominal expenses of Intermediaries related to setup,
connectivity or other technological maintenance of the
Intermediary’s investment platform and/or the provision of services with respect
to the Fund
or share class on an Intermediary’s
investment platform. Investors may wish to take such payment arrangements into
account when considering an investment
in Fund shares.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
Brokerage
Transactions
Subject to
the general supervision of the Trustees, the Adviser is responsible for
decisions to buy and sell securities for the Fund, the selection
of brokers and dealers to effect the transactions and the negotiation of
brokerage commissions, if any. Purchases and sales of securities
are normally transacted through issuers, underwriters or major dealers in U.S.
government securities acting as principals. Such
transactions are made on a net basis and do not involve payment of brokerage
commissions. The cost of securities purchased from an
underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread
between bid and asked prices. Options and futures transactions will usually be
effected through a broker and a commission will be
charged. On occasion, the Fund may also purchase certain money market
instruments directly from an issuer, in which case no
commissions or discounts are paid.
Pursuant
to an order issued by the SEC, the Fund is permitted to engage in principal
transactions in money market instruments, subject to
certain conditions, with Morgan Stanley & Co. LLC, a broker-dealer
affiliated with the Fund’s Adviser.
During the
fiscal years ended October 31, 2020, 2021
and 2022, the Fund did not effect any principal transactions with Morgan
Stanley
& Co. LLC.
Commissions
Brokerage
transactions in securities listed on exchanges or admitted to unlisted trading
privileges may be effected through Morgan Stanley
& Co. LLC and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions
on an exchange for the Fund, the commissions, fees or other remuneration
received by the affiliated broker or dealer must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period of time. This standard
would allow the affiliated broker or dealer to receive no more than the
remuneration which would be expected to be received
by an unaffiliated broker in a commensurate arm’s-length transaction.
Furthermore, the Trustees, including the Independent Trustees,
have adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to an
affiliated broker or dealer are consistent with the foregoing standard. The Fund
does not reduce the management fee it pays to the
Adviser by any amount of the brokerage commissions it may pay to an affiliated
broker or dealer.
During the
fiscal years ended October 31, 2020, 2021
and 2022, the Fund paid a total of $18,729, $0 and $11,850 respectively, in
brokerage
commissions.
During the
fiscal years ended October 31, 2020, 2021
and 2022, the Fund did not pay any brokerage commissions to an affiliated
broker or
dealer.
Brokerage
Selection
The
Adviser is responsible for decisions to buy and sell securities for the Fund,
for broker-dealer selection and for negotiation of commission
rates. The Adviser is prohibited from directing brokerage transactions on the
basis of the referral of clients or the sale of shares of
advised investment companies. Purchases and sales of securities on a stock
exchange are effected through brokers who charge a
commission for their services. In the OTC market, securities may be traded as
agency transactions through broker-dealers or traded on a “net”
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security
usually includes profit to the dealer. In underwritten offerings, securities are
purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter’s
concession or discount. When securities are purchased
or sold directly from or to an issuer, no commissions or discounts are
paid.
On
occasion, the Fund may purchase certain money market instruments directly from
an issuer without payment of a commission or concession.
Money market instruments are generally traded on a “net” basis with dealers
acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer.
The Fund
anticipates that certain of its transactions involving foreign securities will
be effected on foreign securities exchanges. There is also
generally less government supervision and regulation of foreign securities
exchanges and brokers than in the United States.
The
Adviser selects broker-dealers for the execution of transactions for the Fund in
accordance with their duty to seek “best execution”
(i.e., the most favorable terms of execution). In seeking best execution, the
Adviser is not obligated to choose the broker-dealer
offering the lowest available commission rate if, in the Adviser’s reasonable
judgment, (i) the total costs or proceeds from the transaction
might be less favorable than may be obtained elsewhere; (ii) a higher commission
is justified by the brokerage and research
services provided by the broker-dealer that fall within the safe harbor of
Section 28(e) of the 1934 Act or otherwise is permitted
under applicable law; or (iii) other considerations, such as the order size, the
time required for execution, the depth and breadth of
the market for the security or minimum credit quality requirements to transact
business with a particular broker-dealer.
The
research services received include services which aid the Adviser in fulfilling
its investment decision-making responsibilities, including
(a) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability
of securities or purchasers or sellers of securities; and (b) furnishing
analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts.
When
effecting transactions on behalf of the Fund, the Adviser may trade with any
broker-dealer on their list of approved broker-dealers.
Approved broker-dealers have met criteria as established by the Adviser’s
Trading and Research Governance team (“TRG”). TRG
reviews and approves broker-dealers periodically to determine whether
broker-dealers on the approved list continue to meet such
criteria. The approval lists are reported quarterly to the Adviser’s
Counterparty Governance Committee. When selecting an approved
broker-dealer (including an affiliate) to execute securities transactions, the
following factors may be considered: (i) best available
price; (ii) reliability, integrity and reputation in the industry (which may
include a review of financial information and creditworthiness);
(iii) execution capabilities, including block positioning, speed of execution
and quality and responsiveness of its trading
desk; (iv) knowledge of and access to the markets for the securities being
traded; (v) potential ability to obtain price improvement;
(vi) ability to maintain confidentiality; (vii) ability to handle
non-traditional trades; (viii) commission and commission-equivalent
rates; (ix) technology infrastructure; (x) clearance and settlement
capabilities; (xi) the size of the trade relative to other
trades in the same instrument; (xii) ability of a counterparty to commit its
capital to the Fund’s trade and its access to liquidity;
(xiii) counterparty restrictions associated with a portfolio, including
regulatory trading, documentation requirement or any specific
clearing broker-dealer requirements; (xiv) client-directed execution; (xv)
client-specific restrictions; and (xvi) such other factors as
may be appropriate.
Subject to
the duty to seek best execution, the Adviser uses a portion of the commissions
generated when executing client transactions to acquire
brokerage and research services that aid in fulfilling investment
decision-making responsibilities in accordance with Section 28(e) and
applicable law. Commissions paid to broker-dealers providing brokerage and
research services may be higher than those charged by
other broker-dealers. Subject to applicable law, the Adviser receives a benefit
when using client commissions to obtain brokerage
and research services because the Adviser does not have to produce or pay for
the brokerage research services itself. Therefore,
the Adviser has an incentive to select or recommend a broker-dealer based on its
interest in receiving brokerage and research
services, rather than solely on its clients’ interest in obtaining the best
price.
The
Adviser has adopted policies and procedures designed to help track and evaluate
the benefits received from brokerage and research
services, as well as to track how much clients pay above the amount that
broker-dealers from which the Adviser receives brokerage
and research services may have charged solely for execution of such trades. The
Adviser utilizes a voting system to assist in making a
good faith determination of the value of brokerage and research services it
receives in accordance with Section 28(e) and applicable
law. In many cases, these involve subjective judgments or approximations. The
Adviser has established a process for budgeting
research costs and allocating such costs across client accounts.
The
Adviser and certain other affiliated advisers have entered into commission
sharing arrangements (“CSAs”) with executing brokers (“CSA
Partners”) and a third-party vendor (“CSA Aggregator”). Pursuant to these
arrangements, and under the Adviser’s supervision, the CSA
Partners and CSA Aggregator track execution and research commissions separately
and pool and distribute research credits in
accordance with the policies and procedures discussed above to approved research
providers (which may include executing brokerage
firms or independent research providers (“Approved Research Providers”)) that
provide brokerage and research services. The CSA
Aggregator also reconciles research credits from trades with CSA Partners, and
pays Approved Research Providers and provides
other related administrative functions. In addition, a CSA Partner may provide
the Adviser with proprietary research it has developed
and, upon instruction, may retain research commission credits as compensation
for the provision of such proprietary research
services. The Adviser believes that these arrangements allow it to monitor the
amount of trading costs that are attributable to execution
services on the one hand and other brokerage and research services on the
other.
Transactions
that generate research credits include equity transactions executed on an agency
basis or via a riskless principal transaction
where the executing broker-dealer receives a commission. The Adviser does not
use CSAs or otherwise have arrangements to pay for
brokerage and research services with client commissions in connection with
trading fixed income securities. Consistent with
long-standing industry practice in the fixed income markets, however, the
Adviser, subject to applicable law, may receive brokerage
and research services and other information, including access to fixed income
trading platforms that dealers provide for no charge to
their customers in the ordinary course of business. Fixed income instruments
typically trade at a bid/ask spread and without an
explicit brokerage charge. While there is not a formal trading expense or
commission, clients will bear the implicit trading costs reflected
in these spreads.
The
Adviser may receive “mixed use” products and services from an Approved Research
Provider, where a portion of the product or service
assists in its investment decision-making process in accordance with Section
28(e) and a portion may be used for other purposes.
Where a product or service has a mixed use, the Adviser will make a reasonable
allocation of its cost according to its use and will use
client commissions to pay only for the portion of the product or service that
assists in its investment decision-making process. The
Adviser may have an incentive to allocate the costs to uses that assist in its
investment decision-making process because the Adviser
may pay for such costs with client commissions rather than its own resources. To
the extent the Adviser receives “mixed use”
products
and services, the Adviser will allocate the anticipated costs of a mixed use
product or service in good faith and maintain records
concerning allocations in order to mitigate such conflicts.
Client
accounts that pay a greater amount of commissions relative to other accounts may
bear a greater share of the cost of brokerage and
research services than such other accounts. The Adviser may use brokerage and
research services obtained with brokerage commissions
from some clients for the benefit of other clients whose brokerage commissions
do not pay for such brokerage and research
services. The Adviser may also share brokerage and research services with its
affiliated advisers, and the clients of its affiliated advisers
may receive the benefits of such brokerage and research services. These
arrangements remain subject to the Adviser’s overall obligation
to seek best execution for client trading.
The EU’s
Markets in Financial Instruments Directive II (“MiFID II”), which became
effective January 3, 2018, requires investment advisers
regulated under MiFID II to pay for research services separately from trade
execution services, either through their own resources
or a research payment account funded by a specific charge to a client. Although
the Adviser is not directly subject to the provisions
of MiFID II, certain of its affiliated advisers are, such as Morgan Stanley
Investment Management Limited; accordingly, as applicable,
the Adviser makes a reasonable valuation and allocation of the cost of research
services as between MiFID II client accounts
and other accounts that participate in CSAs and will pay for research services
received with respect to MiFID II client accounts
from its own resources. The Adviser and affiliated advisers subject to MiFID II
may separately pay for fixed income research from their
own resources. Following its withdrawal from the EU on January 31, 2020, the
United Kingdom has entered a transition period,
during which EU law (including MiFID II) will continue to apply in the United
Kingdom. Following the transition period, investment
managers in the United Kingdom may still be required to comply with certain
MiFID II equivalent requirements in accordance
with the handbook of rules and guidance issued by the Financial Conduct
Authority.
When
permitted under applicable law, portfolio managers generally will aggregate
orders of their clients for the same securities in a single
order so that such orders are executed simultaneously in order to facilitate
best execution and to reduce brokerage costs. The Adviser
effects aggregated orders in a manner designed to ensure that no participating
client is favored over any other client.
In
general, accounts that participate in an aggregated order will participate on a
pro rata or other objective basis. Pro rata allocation of securities
and other instruments will generally consist of allocation based on the order
size of a participating client account in proportion
to the size of the orders placed for other accounts participating in the
aggregated order. However, the Adviser may allocate such
securities and other instruments using a method other than pro rata if their
supply is limited, based on differing portfolio characteristics
among accounts or to avoid odd lots or small allocations, among other reasons.
These allocations are made in the good faith
judgment of the Adviser with a goal of seeking to ensure that fair and equitable
allocation occurs over time. There may be times that the
Adviser is not able to aggregate orders because of applicable law or other
considerations when doing so might otherwise be advantageous.
Regular
Broker-Dealers
During the
fiscal year ended October
31, 2022, the Fund did not purchase any securities issued by issuers who were
among the ten brokers or
ten dealers which executed transactions for or with the Fund in the largest
dollar amounts during the period. At October
31, 2022,
the Fund did not own any securities issued by any of such
issuers.
CAPITAL
STOCK AND OTHER SECURITIES
The
shareholders of the Fund are entitled to a full vote for each full share of
beneficial interest held. The Fund is authorized to issue an
unlimited number of shares of beneficial interest. All shares of beneficial
interest of the Fund are of $0.01 par value and are equal as to
earnings, assets and voting privileges except that each class will have
exclusive voting privileges with respect to matters relating to distribution
expenses borne solely by such class or any other matter in which the interests
of one class differ from the interests of any other
class. Also, Class A, Class L and Class C bear expenses related to the
distribution of their respective shares.
The Fund’s
Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional classes
of shares within any series. The Trustees have not
presently authorized any such additional series or classes of shares other than
as set forth in the Prospectus.
The Fund
is not required to hold annual meetings of shareholders and in ordinary
circumstances the Fund does not intend to hold such
meetings. The Trustees may call special meetings of shareholders for action by
shareholder vote as may be required by the 1940 Act or the
Declaration of Trust. Under certain circumstances, the Trustees may be removed
by the actions of the Trustees. In addition,
under certain circumstances, the shareholders may call a meeting to remove the
Trustees and the Fund is required to provide
assistance in communicating with shareholders about such a meeting. The voting
rights of shareholders are not cumulative, so that
holders of more than 50% of the shares voting can, if they choose, elect all
Trustees being selected, while the holders of the remaining
shares would be unable to elect any Trustees.
Under
Massachusetts law, shareholders of a business trust may, under certain limited
circumstances, be held personally liable as partners
for the obligations of the Fund. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or
obligations of the Fund, requires that notice of such Fund obligations include
such disclaimer, and provides for indemnification
out of the Fund’s property for any shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable
to meet its obligations. Given the above limitations on shareholder personal
liability, and the nature of the Fund’s assets and
operations, the possibility of the Fund being unable to meet its obligations is
remote and thus, in the opinion of Massachusetts counsel to
the Fund, the risk to Fund shareholders of personal liability is
remote.
The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees (as provided for in the Declaration
of Trust), and they may at any time lengthen or shorten their own terms or make
their terms of unlimited duration and appoint
their own successors, provided that always at least a majority of the Trustees
has been elected by the shareholders of the Fund.
PURCHASE,
REDEMPTION AND PRICING OF SHARES
The
Fund has suspended offering Class L shares of the Fund for sale to all
investors. The Class L shareholders of the Fund do not have the option
of purchasing additional Class L shares. However, the existing Class L
shareholders may invest in additional Class L shares through reinvestment
of dividends and distributions.
Purchase/Redemption
of Shares
Information
concerning how Fund shares are offered to the public (and how they are redeemed
and exchanged) is provided in the Fund’s
Prospectus.
Suspension
of Redemptions.
Redemptions are not made on days during which the NYSE is closed. The right of
redemption may be suspended
and the payment therefore may be postponed for more than seven days during any
period when (a) the NYSE is closed for other than
customary weekends or holidays; (b) the SEC determines trading on the NYSE is
restricted; (c) the SEC determines an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Transfer
Agent as Agent. With
respect to the redemption or repurchase of Fund shares, the application of
proceeds to the purchase of new
shares in the Fund or any other Morgan Stanley Funds and the general
administration of the exchange privilege, the Transfer Agent acts
as agent for the Distributor and for the shareholder’s authorized broker-dealer,
if any, in the performance of such functions.
With respect to exchanges, redemptions or repurchases, the Transfer Agent is
liable for its own negligence and not for the default or
negligence of its correspondents or for losses in transit. The Fund is not
liable for any default or negligence of the Transfer Agent, the
Distributor or any authorized broker-dealer.
The
Distributor and any authorized broker-dealer have appointed the Transfer Agent
to act as their agent in connection with the application
of proceeds of any redemption of Fund shares to the purchase of shares of any
other Morgan Stanley Fund and the general
administration of the exchange privilege. No commission or discounts will be
paid to the Distributor or any authorized broker-dealer
for any transaction pursuant to the exchange privilege.
Transfers
of Shares. In the
event a shareholder requests a transfer of Fund shares to a new registration,
the shares will be transferred without
sales charge at the time of transfer. With regard to the status of shares which
are either subject to the CDSC or free of such charge
(and with regard to the length of time shares subject to the charge have been
held), any transfer involving less than all of the shares in
an account will be made on a pro rata basis (that is, by transferring shares in
the same proportion that the transferred shares bear to
the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable
CDSC as if they had not been so transferred.
Outside
Brokerage Accounts/Limited Portability. Most Fund
shareholders hold their shares with Morgan Stanley Smith Barney LLC.
Please note that your ability to transfer your Fund shares to a brokerage
account at another securities dealer may be limited. Fund
shares may only be transferred to accounts held at securities dealers or
Financial Intermediaries. After a transfer, you may purchase
additional shares of the Morgan Stanley Fund(s) you owned before the transfer
and, in most instances, you will also be able to
purchase shares of most other Morgan Stanley Funds. If you transfer shares of a
fund that is not a Morgan Stanley Multi-Class Fund (for
example, a Morgan Stanley Money Market Fund) you will not be able to exchange
shares of that fund for any other Morgan
Stanley Fund after the transfer.
If you
wish to transfer Fund shares to a securities dealer or other financial
intermediary that has not entered into an agreement with the
Distributor, you may request that the securities dealer or financial
intermediary maintain the shares in an account at the Transfer Agent
registered in the name of such securities dealer or financial intermediary for
your benefit. You may also hold your Fund shares in your
own name directly with the Transfer Agent. In either case, you will continue to
have the ability to purchase additional
Morgan
Stanley Funds and will have full exchange privileges. Other options may also be
available; please check with the respective securities
dealer or financial intermediary. If you choose not to hold your shares with the
Transfer Agent, either directly or through a securities
dealer or other financial intermediary, you must redeem your shares and pay any
applicable CDSC.
Offering
Price
The Fund’s
Class I, Class C and Class R6 shares are offered at NAV and the Class A shares
are offered at NAV plus any applicable FSC which
is distributed among the Fund’s Distributor, Morgan Stanley Smith Barney LLC and
other Financial Intermediaries as described
in “Investment Advisory and Other Services — Rule 12b-1 Plan.” The NAV of the
Fund (excluding sales charges) is based on the
value of the Fund’s portfolio securities. NAV of each Class is calculated by
dividing the value of the portion of the Fund’s securities
and other assets attributable to that Class, less the total market value of the
liabilities attributable to that Class, by the number of
shares of that Class outstanding. The assets of each Class of shares are
invested in a single portfolio. The NAV of each Class,
however, will differ because the Classes have different ongoing
fees.
In the
calculation of the Fund’s NAV: (1) an equity portfolio security listed or traded
on an exchange is valued at its latest reported sale price
(or at the exchange official closing price if such exchange reports an official
closing price), and if there were no sales on a given day
and if there is no official exchange closing price for that day, the security is
valued at the mean between the last reported bid and
asked prices if such bid and asked prices are available on the relevant
exchanges; and (2) all other equity portfolio securities for which
OTC market quotations are readily available are valued at the latest reported
sale price (or at the market official closing price if
such market reports an official closing price), and if there was no trading in
the security on a given day and if there is no official
closing price from the relevant markets for that day, the security is valued at
the mean between the last reported bid and asked prices if
such bid and asked prices are available on the relevant markets. Listed equity
securities not traded on the valuation date with no
reported bid and asked prices available on the exchange are valued at the mean
between the current bid and asked prices obtained from one
or more reputable brokers or dealers. An unlisted equity security that does not
trade on the valuation date and for which bid and
asked prices from the relevant markets are unavailable is valued at the mean
between the current bid and asked prices obtained
from one or more reputable brokers or dealers. In cases where a security is
traded on more than one exchange, the security is valued on
the exchange designated as the primary market. When no market quotations are
readily available for a security or other asset,
including circumstances under which the Adviser determines that a market
quotation is not accurate, fair value for the security or other
asset will be determined in good faith using methods approved by the Fund’s
Board of Trustees. For valuation purposes, quotations
of foreign portfolio securities, other assets and liabilities and forward
contracts stated in foreign currency are translated into U.S.
dollar equivalents at the prevailing market rates prior to the close of the
NYSE. On any business day when the Securities Industry
and Financial Markets Association recommends that the securities markets
close trading early, the Fund may close trading early and
determine NAV as of an earlier time.
If the
NYSE is closed due to inclement weather, technology problems or any other reason
on a day it would normally be open for business,
or the NYSE has an unscheduled early closing on a day it has opened for
business, the Fund reserves the right to treat such day as a
business day and accept purchase and redemption orders until, and calculate its
NAV as of, the normally scheduled close of regular
trading on the NYSE for that day, so long as the Adviser believes there
generally remains an adequate market to obtain reliable
and accurate market quotations.
Certain of
the Fund’s portfolio securities may be valued using as an input evaluated prices
provided by an approved outside pricing service.
Prices obtained from these approved sources are monitored and reviewed by the
Adviser’s Valuation Committee and if not deemed to
represent fair value, may be overridden and valued using procedures approved by
the Board. The pricing service may utilize a
matrix system or other model incorporating attributes such as security quality,
maturity and coupon as the evaluation model parameters,
and/or research evaluations by its staff, including review of broker-dealer
market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service. Pricing services generally value securities assuming
orderly transactions of an institutional round lot size, but the Fund may hold
or transact in such securities in smaller, odd lot sizes.
Odd lots often trade at lower prices than institutional round lots.
Listed
options are valued at the last reported sales price on the exchange on which
they are listed (or at the exchange official closing price if
such exchange reports an official closing price). If an official closing price
or last reported sale price is unavailable, the listed option
should be fair valued at the mean between its latest bid and ask prices. If an
exchange closing price or bid and asked prices are not
available from the exchange, then the quotes from one or more brokers or dealers
may be used. Unlisted options and swaps are valued by
an approved outside pricing service or quotes from a broker or dealer. Unlisted
options and swaps cleared on a clearinghouse
or exchange may be valued using the closing price provided by the clearinghouse
or exchange. Futures are valued at the settlement
price on the exchange on which they trade or, if a settlement price is
unavailable, then at the last sale price on the exchange.
If the
Adviser determines that the valuation received from the outside pricing service
or broker or dealer is not reflective of the security’s
market value, such security is valued at its fair value as determined in good
faith using methods approved by the Fund’s Board of
Trustees.
Generally,
trading in foreign securities, as well as corporate bonds, U.S. government
securities and money market instruments, is substantially
completed each day at various times prior to the close of the NYSE. The values
of such securities used in computing the NAV of the
Fund are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the NYSE.
Occasionally, events which may affect the values of such securities and such
exchange rates may occur between the times at which
they are determined and the close of the NYSE. If events that may affect the
value of such securities occur during such period,
then these securities may be valued at their fair value as determined in good
faith using methods approved by the Fund’s Board of
Trustees.
In
general, fair value represents the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When there is no public market or
possibly no market at all for an asset, fair value
represents, in general, a good faith approximation of the current value of an
asset. A security that is fair valued may be valued at a price
higher or lower than actual market quotations or the value determined by other
funds using their own fair valuation procedures
or by other investors. The fair value of an asset may not be the price at which
that asset is ultimately sold.
The Fund
relies on various sources to calculate its NAV. The ability of the Fund to
calculate the NAV per share of the Fund is subject to
operational risks associated with processing or human errors, systems or
technology failures, cyber attacks and errors caused by third
party service providers, data sources, or trading counterparties. Such failures
may result in delays in the calculation of the Fund’s NAV
and/or the inability to calculate NAV over extended time periods. The Fund may
be unable to recover any losses associated
with such failures. In addition, if the third-party service providers and/or
data sources upon which the Fund directly or indirectly
relies to calculate its NAV or price individual securities are unavailable or
otherwise unable to calculate the NAV correctly, it may be
necessary for alternative procedures to be utilized to price the securities at
the time of determining the Fund’s NAV.
TAXES
The Fund
generally will make two basic types of distributions: ordinary dividends and
long-term capital gain distributions. These two types
of distributions are reported differently on a shareholder’s income tax return.
The tax treatment of the investment activities of the
Fund will affect the amount, timing and character of the distributions made by
the Fund. The following discussion is only a summary of
certain tax considerations generally affecting the Fund and shareholders of the
Fund and is not intended as a substitute for
careful tax planning. Tax issues relating to the Fund are not generally a
consideration for shareholders such as tax-exempt entities and
tax-advantaged retirement vehicles such as an IRA or 401(k) plan. Shareholders
are urged to consult their own tax professionals regarding
specific questions as to federal, state or local taxes.
Investment
Company Taxation. The Fund
intends to continue to qualify as a regulated investment company under
Subchapter M of the
Code. To continue to so qualify, the Fund will be required to, among other
things, satisfy an asset diversification test, a qualifying
income test and a distribution test. Assuming the Fund satisfies the foregoing
requirements, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, to the extent
that it timely distributes such income and capital
gains to its shareholders. If the Fund fails to qualify for any taxable year as
a regulated investment company, all of its taxable income
will be subject to tax at regular corporate income tax rates without any
deduction for distributions to shareholders, and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
the Fund’s current and accumulated earnings
and profits.
The Fund
generally intends to distribute sufficient income and gains so that the Fund
will not pay corporate income tax on its earnings.
The Fund also generally intends to distribute to its shareholders in each
calendar year a sufficient amount of ordinary income and
capital gains to avoid the imposition of a 4% excise tax. However, the Fund may
instead determine to retain all or part of any income
or net long-term capital gains in any year for reinvestment. In such event, the
Fund will pay federal income tax (and possibly
excise tax) on such retained income or gains.
Gains or
losses on sales of securities by the Fund will generally be long-term capital
gains or losses if the securities have a tax holding period of
more than one year at the time of such sale. Gains or losses on the sale of
securities with a tax holding period of one year or less will
be short-term capital gains or losses. Special tax rules may change the normal
treatment of gains and losses recognized by the Fund when
the Fund invests in foreign exchange forward contracts, options, futures
transactions and non-U.S. corporations classified as
“passive foreign investment companies.” Those special tax rules can, among other
things, affect the treatment of capital gain or loss as
long-term or short-term and may result in ordinary income or loss rather than
capital gain or loss. The application of these special rules
would therefore also affect the character of distributions made by the
Fund.
The Fund
may make investments in which it recognizes income or gain prior to receiving
cash with respect to such investment. For example,
under certain tax rules, the Fund may be required to accrue a portion of any
discount at which certain securities are purchased
as income each year even though the Fund receives no payments in cash on the
security during the year. To the extent that the Fund
makes such investments, it generally would be required to pay out such income or
gain as a distribution in each year to avoid
taxation at the Fund level. Such distributions will be made from the available
cash of the Fund or by liquidation of portfolio securities
if necessary. If a distribution of cash necessitates the liquidation of
portfolio securities, the Adviser will select which
securities
to sell. The Fund may realize a gain or loss from such sales. In the event the
Fund realizes net capital gains from such transactions,
its shareholders may receive a larger capital gain distribution, if any, than
they would in the absence of such transactions.
The Fund
may hold residual interests in REMICs. A portion of the net income allocable to
REMIC residual interest holders may be an “excess
inclusion.” Under Treasury regulations not yet issued, but that may apply
retroactively, excess inclusion income of the Fund will
be subject to federal income tax in all events. These regulations are expected
to provide that excess inclusion income of a regulated
investment company, such as the Fund, will be allocated to shareholders of the
regulated investment company in proportion
to the dividends received by shareholders, with the same consequences as if
shareholders held the related REMIC residual interest
directly.
In
general, excess inclusion income allocated to shareholders (i) cannot be offset
by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual
retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity)
subject to tax on unrelated business income, thereby
potentially requiring such an entity that is allocated excess inclusion income,
and that otherwise might not be required to file a tax
return, to file a tax return and pay tax on such income, and (iii) in the case
of a non-U.S. shareholder, will not qualify for any reduction
in U.S. federal withholding tax.
If at any
time during any taxable year a “disqualified organization” (as defined in the
Code) is a record holder of a share in a regulated investment
company, then the regulated investment company will be subject to a tax equal to
that portion of its excess inclusion income for
the taxable year that is allocable to the disqualified organization, multiplied
by the highest federal income tax rate imposed on
corporations. It is not expected that a substantial portion of the Fund’s assets
will be residual interests in REMICs.
Taxation
of Dividends and Distributions.
Shareholders normally will be subject to federal income taxes on the dividends
and other distributions
they receive from the Fund. Such distributions also may be subject to state and
local income tax. However, dividends attributable
to interest earned on direct obligations of the U.S. government may be exempt
from state and local taxes. Such dividends and
distributions, to the extent that they are derived from net investment income or
short-term capital gains, are generally taxable to the
shareholder as ordinary income regardless of whether the shareholder receives
such payments in additional shares or in cash. The Fund does
not anticipate that it will make distributions eligible for the reduced rate of
taxation applicable to qualified dividend income or
for the corporate dividends received reduction.
Distributions
of net long-term capital gains, if any, are taxable to shareholders as long-term
capital gains regardless of how long a shareholder
has held the Fund’s shares and regardless of whether the distribution is
received in additional shares or in cash. The maximum
individual rate applicable to and long-term capital gains is generally either
15% or 20%, depending on whether the individual’s
income exceeds certain threshold amounts.
Shareholders
are generally taxed on any income dividend or capital gain distributions from
the Fund in the year they are actually distributed.
However, if any such dividends or distributions are declared in October,
November or December and paid to shareholders
of record of such month in January then such amounts will be treated for tax
purposes as received by the shareholders on
December 31.
Certain
distributions reported by the Fund as section 163(j) interest dividends may be
treated as interest income by shareholders for purposes
of the tax rules applicable to interest expense limitations under Code section
163(j). Such treatment by the shareholder is generally
subject to holding period requirements and other potential limitations, although
the holding period requirements are generally
not applicable to dividends declared by money market funds and certain other
funds that declare dividends daily and pay such
dividends on a monthly or more frequent basis. The amount that the Fund is
eligible to report as a Section 163(j) dividend for a tax year
is generally limited to the excess of the Fund’s business interest income over
the sum of the Fund’s (i) business interest expense
and (ii) other deductions properly allocable to the Fund’s business interest
income.
An
additional 3.8% Medicare tax is imposed on certain net investment income
(including ordinary dividends and capital gain distributions
received from the Fund and net gains from redemptions or other taxable
dispositions of Fund shares) of U.S. individuals,
estates and trusts to the extent that such person’s “modified adjusted gross
income” (in the case of an individual) or “adjusted
gross income” (in the case of an estate or trust) exceeds certain threshold
amounts.
Shareholders
who are not citizens or residents of the United States and certain foreign
entities will generally be subject to withholding of U.S.
tax of 30% (or such lower treaty rate as may be applicable) on distributions
made by the Fund of investment income. Foreign shareholders
will generally be exempt from U.S. federal income tax on gains realized on the
sale of shares of the Fund, distributions of net
long-term capital gains and amounts retained by the Fund that are reported as
undistributed capital gains. Dividends paid by the Fund that
are derived from short-term capital gains and qualifying U.S. source net
interest income (including income from original issue
discount), and that are reported by the Fund as “interest-related dividends” or
“short-term capital gain dividends,” will generally not be
subject to U.S. withholding tax. However, depending on the circumstances, the
Fund may designate all, some or none of the Fund’s
potentially eligible dividends as exempt. Such investors are urged to consult
their tax advisors regarding the tax consequences to them of
dividends and distributions and the potential applicability of the U.S. estate
tax.
The Fund
is required to withhold U.S. tax (at a 30% rate) on payments of taxable
dividends made to certain non-U.S. entities that fail to
comply (or be deemed compliant) with extensive new reporting and withholding
requirements designed to inform the U.S. Department
of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be
requested to provide additional information
to the Fund to enable the Fund to determine whether withholding is
required.
After the
end of each calendar year, shareholders will be sent information on their
dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the amount of any dividends
eligible for the federal dividends received deduction for
corporations.
Purchases
and Redemptions and Exchanges of Fund Shares. Any
dividend or capital gains distribution received by a shareholder from any
investment company will have the effect of reducing the NAV of the shareholder’s
stock in that company by the exact amount of
the dividend or capital gains distribution. Furthermore, such dividends and
capital gains distributions are subject to federal
income taxes. If the NAV of the shares should be reduced below a shareholder’s
cost as a result of the payment of dividends or the
distribution of realized long-term capital gains, such payment or distribution
would be in part a return of the shareholder’s investment
but nonetheless would be taxable to the shareholder. Therefore, an investor
should consider the tax implications of purchasing
Fund shares immediately prior to a distribution record date.
Shareholders
normally will be subject to federal income taxes, and state and/or local income
taxes, on the sale or disposition of Fund shares. In
general, a sale of shares results in capital gain or loss, and for individual
shareholders, is taxable at a federal rate dependent upon the
length of time the shares were held. A redemption of a shareholder’s Fund shares
is normally treated as a sale for tax purposes.
Fund shares held for a period of one year or less at the time of such sale or
redemption will, for tax purposes, generally result in
short-term capital gains or losses and those held for more than one year will
generally result in long-term capital gains or losses.
The maximum individual rate applicable to long-term capital gains is generally
either 15% or 20%, depending on whether the individual’s
income exceeds certain threshold amounts. Any loss realized by shareholders upon
a sale or redemption of shares within six months
of the date of their purchase will be treated as a long-term capital loss to the
extent of any distributions of net long-term capital
gains with respect to such shares during the six-month period.
Gain or
loss on the sale or redemption of shares in the Fund is measured by the
difference between the amount of cash received (or the fair
market value of any property received) and the adjusted tax basis of the shares.
Shareholders should keep records of investments
made (including shares acquired through reinvestment of dividends and
distributions) so they can compute the tax basis of their
shares. Under certain circumstances, a shareholder may compute and use an
average cost basis in determining the gain or loss on the
sale or redemption of shares.
The Fund
(or its administrative agent) is required to report to the U.S. Internal Revenue
Service (“IRS”) and furnish to Fund shareholders
the cost basis information for sale transactions of shares purchased on or after
January 1, 2012. Shareholders may elect to have
one of several cost basis methods applied to their account when calculating the
cost basis of shares sold, including average cost, FIFO
(“first-in, first-out”), or some other specific identification method. Unless
you instruct otherwise, the Fund will use average
cost as its default cost basis method, and will treat sales as first coming from
shares purchased prior to January 1, 2012. If average
cost is used for the first sale of Fund shares covered by these new rules, the
shareholder may only use an alternative cost basis method for
shares purchased prospectively. Fund shareholders should consult with their tax
advisors to determine the best cost basis method for
their tax situation.
Exchanges
of Fund shares for shares of another fund, including shares of other Morgan
Stanley Funds, are also subject to similar tax treatment.
Such an exchange is treated for tax purposes as a sale of the original shares in
the Fund, followed by the purchase of shares in the
other fund.
The
ability to deduct capital losses may be limited. In addition, if a shareholder
realizes a loss on the redemption or exchange of a fund’s
shares and receives securities that are considered substantially identical to
that fund’s shares or reinvests in that fund’s shares or substantially
identical shares within 30 days before or after the redemption or exchange, the
transactions may be subject to the “wash sale”
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
Backup
Withholding. The Fund
may be required to withhold U.S. federal income tax (currently, at a rate of
24%) (“backup withholding”)
from all taxable distributions payable to (1) any shareholder who fails to
furnish the Fund with its correct taxpayer identification
number or a certificate that the shareholder is exempt from backup withholding,
and (2) any shareholder with respect to whom
the IRS notifies the Fund that the shareholder has failed to properly report
certain interest and dividend income to the IRS and to
respond to notices to that effect. An individual’s taxpayer identification
number is his or her social security number. The 24% backup
withholding tax is not an additional tax and may be credited against a
taxpayer’s regular federal income tax liability.
UNDERWRITERS
The Fund’s
shares are offered to the public on a continuous basis. The Distributor, as the
principal underwriter of the shares, has certain
obligations under the Distribution Agreement concerning the distribution of the
shares. These obligations and the compensation
the Distributor receives are described above in the sections titled “Principal
Underwriter” and “Rule 12b-1 Plan.”
PERFORMANCE
DATA
For the
30-day period ended October
31, 2022, the yield was 5.02%, 4.89%, 5.49%, 4.39%, and 5.55% for Class A, Class
L, Class I, Class C and Class R6, respectively. Effective April 29, 2022, Class
IS shares were renamed Class R6 shares.
|
|
|
|
|
|
Average
annual returns assuming deduction of maximum sales
charge Period
Ended October
31, 2022 |
Class |
Inception
Date |
1
Year |
5
Years |
10
Years |
Life
of Fund |
Class
A |
07/28/97 |
-13.68% |
-0.51% |
1.99% |
3.64% |
Class
L |
07/28/97 |
-10.90% |
-0.09% |
2.06% |
3.25% |
Class
I |
07/28/97 |
-10.33% |
0.54% |
2.72% |
4.00% |
Class
C |
04/30/15 |
-12.32% |
-0.60% |
N/A |
0.82% |
Class
R6 |
06/15/18 |
-10.41% |
N/A |
N/A |
0.50% |
|
|
|
|
|
|
Average
annual returns assuming NO deduction of sales charge Period
Ended October
31, 2022 |
Class |
Inception
Date |
1
Year |
5
Years |
10
Years |
Life
of Fund |
Class
A |
07/28/97 |
-10.77% |
0.15% |
2.33% |
3.78% |
Class
L |
07/28/97 |
-10.90% |
-0.09% |
2.06% |
3.25% |
Class
I |
07/28/97 |
-10.33% |
0.54% |
2.72% |
4.00% |
Class
C |
04/30/15 |
-11.46% |
-0.60% |
N/A |
0.82% |
Class
R6 |
06/15/18 |
-10.41% |
N/A |
N/A |
0.50% |
|
|
|
|
|
|
Aggregate
total returns assuming NO deduction of sales charge Period
Ended October
31, 2022 |
Class |
Inception
Date |
1
Year |
5
Years |
10
Years |
Life
of Fund |
Class
A |
07/28/97 |
-10.77% |
0.73% |
25.87% |
155.30% |
Class
L |
07/28/97 |
-10.90% |
-0.46% |
22.59% |
124.18% |
Class
I |
07/28/97 |
-10.33% |
2.75% |
30.82% |
169.41% |
Class
C |
04/30/15 |
-11.46% |
-2.97% |
N/A |
6.35% |
Class
R6 |
06/15/18 |
-10.41% |
N/A |
N/A |
2.20% |
|
|
|
|
|
|
Average
annual after-tax returns assuming deduction of maximum sales
charge Class
A Period
Ended October
31, 2022 |
Calculation
Methodology |
Inception
Date |
1
Year |
5
Years |
10
Years |
Life
of Fund |
After
taxes on distributions |
07/28/97 |
-14.81% |
-1.79% |
0.21% |
1.82% |
After
taxes on distributions and redemptions |
07/28/97 |
-8.06% |
-0.88% |
0.74% |
2.04% |
POTENTIAL
CONFLICTS OF INTEREST
As a
diversified global financial services firm, Morgan Stanley, the parent company
of the Adviser, engages in a broad spectrum of activities,
including financial advisory services, investment management activities,
lending, commercial banking, sponsoring and managing
private investment funds, engaging in broker-dealer transactions and principal
securities, commodities and foreign exchange
transactions, research publication and other activities. In the ordinary course
of its business, Morgan Stanley is a full-service investment
banking and financial services firm and therefore engages in activities where
Morgan Stanley’s interests or the interests of its
clients may conflict with the interests of the Fund.
Morgan Stanley advises clients and sponsors, manages or advises other
investment
funds and investment programs, accounts and businesses (collectively, together
with the Morgan Stanley Funds, any new or
successor funds, programs, accounts or businesses (other than funds, programs,
accounts or businesses sponsored, managed, or advised by
former direct or indirect subsidiaries of Eaton Vance Corp. (“Eaton Vance
Investment Accounts”)), the ‘‘MS Investment Accounts”,
and, together with the Eaton Vance Investment Accounts, the “Affiliated
Investment Accounts’’) with a wide variety of investment
objectives that in some instances may overlap or conflict with the Fund’s
investment objectives and present conflicts of interest.
In addition, Morgan Stanley or the Adviser may also from time to time create new
or successor Affiliated Investment Accounts
that may compete with the Fund
and present similar conflicts of interest. The discussion below enumerates
certain actual, apparent
and potential conflicts of interest. There is no assurance that conflicts of
interest will be resolved in favor of Fund shareholders
and, in fact, they may not be. Conflicts of interest not described below may
also exist.
The
discussions below with respect to actual, apparent and potential conflicts of
interest also may be applicable to or arise from the Eaton
Vance Investment Accounts whether or not specifically identified.
Material
Non-public and Other Information. It is
expected that confidential or material non-public information regarding an
investment
or potential investment opportunity may become available to the Adviser. If such
information becomes available, the Adviser
may be precluded (including by applicable law or internal policies or
procedures) from pursuing an investment or disposition opportunity
with respect to such investment or investment opportunity. The Adviser may also
from time to time be subject to contractual
‘‘stand-still’’ obligations and/or confidentiality obligations that may restrict
its ability to trade in certain investments on the Fund’s
behalf. In addition, the Adviser may be precluded from disclosing such
information to an investment team, even in circumstances
in which the information would be beneficial if disclosed. Therefore, the
investment team may not be provided access to
material non-public information in the possession of Morgan Stanley that might
be relevant to an investment decision to be made on behalf
of the Fund,
and the investment team may initiate a transaction or sell an investment that,
if such information had been known to
it, may not have been undertaken. In addition, certain members of the investment
team may be recused from certain investment-related
discussions so that such members do not receive information that would limit
their ability to perform functions of their
employment with the Adviser or its affiliates unrelated to that of the Fund.
Furthermore, access to certain parts of Morgan Stanley
may be subject to third party confidentiality obligations and to information
barriers established by Morgan Stanley in order to manage
potential conflicts of interest and regulatory restrictions, including without
limitation joint transaction restrictions pursuant
to the 1940 Act. Accordingly, the Adviser’s ability to source investments from
other business units within Morgan Stanley may be
limited and there can be no assurance that the Adviser will be able to source
any investments from any one or more parts of the Morgan
Stanley network.
The
Adviser may restrict its investment decisions and activities on behalf of the
Fund in
various circumstances, including because of applicable
regulatory requirements or information held by the Adviser or Morgan Stanley.
The Adviser might not engage in transactions
or other activities for, or enforce certain rights in favor of, the Fund
due to Morgan Stanley’s activities outside the Fund.
In
instances where trading of an investment is restricted, the Adviser may not be
able to purchase or sell such investment on behalf of the Fund,
resulting in the Fund’s
inability to participate in certain desirable transactions. This inability to
buy or sell an investment could have
an adverse effect on the Fund’s
portfolio due to, among other things, changes in an investment’s value during
the period its
trading is restricted. Also, in situations where the Adviser is required to
aggregate its positions with those of other Morgan Stanley business
units for position limit calculations, the Adviser may have to refrain from
making investments due to the positions held by other
Morgan Stanley business units or their clients. There may be other situations
where the Adviser refrains from making an investment
due to additional disclosure obligations, regulatory requirements, policies, and
reputational risk, or the Adviser may limit purchases
or sales of securities in respect of which Morgan Stanley is engaged in an
underwriting or other distribution capacity.
Morgan
Stanley has established certain information barriers and other policies to
address the sharing of information between different businesses
within Morgan Stanley. As a result of information barriers, the Adviser
generally will not have access, or will have limited access, to
certain information and personnel in other areas of Morgan Stanley and generally
will not manage the Fund with
the benefit of
the information held by such other areas. Morgan Stanley, due to its access to
and knowledge of funds, markets and securities
based on its prime brokerage and other businesses, may make decisions based on
information or take (or refrain from taking)
actions with respect to interests in investments of the kind held (directly or
indirectly) by the Fund in a
manner that may be adverse to
the Fund, and will not have any obligation or other duty to share information
with the Adviser.
In limited
circumstances, however, including for purposes of managing business and
reputational risk, and subject to policies and procedures
and any applicable regulations, Morgan Stanley personnel, including personnel of
the Adviser, on one side of an information
barrier may have access to information and personnel on the other side of the
information barrier through “wall crossings.”
The Adviser faces conflicts of interest in determining whether to engage in such
wall crossings. Information obtained in connection
with such wall crossings may limit or restrict the ability of the Adviser to
engage in or otherwise effect transactions on behalf of
the Fund
(including purchasing or selling securities that the Adviser may otherwise have
purchased or sold for the Fund
in the
absence of a wall crossing). In managing conflicts of interest that arise
because of the foregoing, the Adviser generally will be subject to
fiduciary requirements. The Adviser may also implement internal information
barriers or ethical walls, and the conflicts described
herein with respect to information barriers and otherwise with respect to Morgan
Stanley and the Adviser will also apply internally
within the Adviser. As a result, the Fund
may not be permitted to transact in (e.g., dispose of a security in whole or in
part) during
periods when it otherwise would have been able to do so, which could adversely
affect the Fund.
Other investors in the security
that are not subject to such restrictions may be able to transact in the
security during such periods. There may also be circumstances
in which, as a result of information held by certain portfolio management teams
in the Adviser, the Adviser limits an activity
or transaction for the Fund,
including if the Fund
is managed by a portfolio management team other than the team holding
such
information.
Investments
by Morgan Stanley and its Affiliated Investment Accounts. In
serving in multiple capacities to Affiliated Investment Accounts,
Morgan Stanley, including the Adviser and its investment teams, may have
obligations to other clients or investors in Affiliated
Investment Accounts, the fulfillment of which may not be in the best interests
of the Fund
or its shareholders. The Fund’s
investment
objectives may overlap with the investment objectives of certain Affiliated
Investment Accounts. As a result, the members of an
investment team may face conflicts in the allocation of investment opportunities
among the Fund
and other investment funds, programs,
accounts and businesses advised by or affiliated with the Adviser. Certain
Affiliated Investment Accounts may provide for higher
management or incentive fees or greater expense reimbursements or overhead
allocations, all of which may contribute to this conflict
of interest and create an incentive for the Adviser to favor such other
accounts.
Morgan
Stanley currently invests and plans to continue to invest on its own behalf and
on behalf of its Affiliated Investment Accounts
in a wide variety of investment opportunities globally. Morgan Stanley and its
Affiliated Investment Accounts, to the extent consistent
with applicable law and policies and procedures, will be permitted to invest in
investment opportunities without making such
opportunities available to the Fund
beforehand. Subject to the foregoing, Morgan Stanley may offer investments that
fall into the
investment objectives of an Affiliated Investment Account to such account or
make such investment on its own behalf, even though
such investment also falls within the Fund’s
investment objectives. The Fund
may invest in opportunities that Morgan Stanley
and/or one or more Affiliated Investment Accounts has declined, and vice versa.
All of the foregoing may reduce the number of
investment opportunities available to the Fund
and may create conflicts of interest in allocating investment opportunities.
Investors
should note that the conflicts inherent in making such allocation decisions may
not always be resolved to the Fund’s
advantage.
There can be no assurance that the Fund
will have an opportunity to participate in certain opportunities that fall
within their
investment objectives.
To seek to
reduce potential conflicts of interest and to attempt to allocate such
investment opportunities in a fair and equitable manner,
the Adviser has implemented allocation policies and procedures. These policies
and procedures are intended to give all clients of
the Adviser, including the Fund, fair access to investment opportunities
consistent with the requirements of organizational documents,
investment strategies, applicable laws and regulations, and the fiduciary duties
of the Adviser. Each client of the Adviser that is
subject to the allocation policies and procedures, including the Fund,
is assigned an investment team and portfolio manager(s) by the
Adviser. The investment team and portfolio managers review investment
opportunities and will decide with respect to the allocation
of each opportunity considering various factors and in accordance with the
allocation policies and procedures. The allocation
policies and procedures are subject to change. Investors should note that the
conflicts inherent in making such allocation decisions
may not always be resolved to the advantage of the
Fund.
It is
possible that Morgan Stanley or an Affiliated Investment Account, including
another Morgan Stanley Fund, will invest in or advise (in
the case of Morgan Stanley) a company that is or becomes a competitor of a
company of which the Fund
holds an investment.
Such investment could create a conflict between the Fund, on the one hand, and
Morgan Stanley or the Affiliated Investment
Account, on the other hand. In such a situation, Morgan Stanley may also have a
conflict in the allocation of its own resources
to the portfolio investment. Furthermore, certain Affiliated Investment Accounts
will be focused primarily on investing in other
funds which may have strategies that overlap and/or directly conflict and
compete with the
Fund.
In
addition, certain investment professionals who are involved in the Fund’s
activities remain responsible for the investment activities of other
Affiliated Investment Accounts managed by the Adviser and its affiliates, and
they will devote time to the management of such
investments and other newly created Affiliated Investment Accounts (whether in
the form of funds, separate accounts or other vehicles),
as well as their own investments. In addition, in connection with the management
of investments for other Affiliated Investment
Accounts, members of Morgan Stanley and its affiliates may serve on the boards
of directors of or advise companies which may
compete with the Fund’s
portfolio investments. Moreover, these Affiliated Investment Accounts managed by
Morgan Stanley
and its affiliates may pursue investment opportunities that may also be suitable
for the
Fund.
It should
be noted that Morgan Stanley may, directly or indirectly, make large investments
in certain of its Affiliated Investment Accounts,
and accordingly Morgan Stanley’s investment in the Fund
may not be a determining factor in the outcome of any of the foregoing
conflicts. Nothing herein restricts or in any way limits the activities of
Morgan Stanley, including its ability to buy or sell interests
in, or provide financing to, equity and/or debt instruments, funds or portfolio
companies, for its own accounts or for the accounts
of Affiliated Investment Accounts or other investment funds or clients in
accordance with applicable law.
Different
clients of the Adviser, including the Fund,
may invest in different classes of securities of the same issuer, depending on
the respective
clients’ investment objectives and policies. As a result, the Adviser and its
affiliates, at times, will seek to satisfy fiduciary obligations
to certain clients owning one class of securities of a particular issuer by
pursuing or enforcing rights on behalf of those clients
with respect to such class of securities, and those activities may have an
adverse effect on another client which owns a different class of
securities of such issuer. For example, if one client holds debt securities of
an issuer and another client holds equity securities of the
same issuer, if the issuer experiences financial or operational challenges, the
Adviser and its affiliates may seek a liquidation of the issuer
on behalf of the client that holds the debt securities, whereas the client
holding the equity securities may benefit from a reorganization
of the issuer. Thus, in such situations, the actions taken by the Adviser or its
affiliates on behalf of one client can negatively
impact securities held by another client. These conflicts also exist as between
the Adviser’s clients, including the Fund, and the
Affiliated Investment Accounts managed by Eaton Vance.
The
Adviser and its affiliates may give advice and recommend securities to other
clients which may differ from advice given to, or securities
recommended or bought for, the Fund
even though such other clients’ investment objectives may be similar to those of
the Fund.
The
Adviser and its affiliates manage long and short portfolios. The simultaneous
management of long and short portfolios creates conflicts
of interest in portfolio management and trading in that opposite directional
positions may be taken in client accounts, including
client accounts managed by the same investment team, and creates risks such as:
(i) the risk that short sale activity could adversely
affect the market value of long positions in one or more portfolios (and vice
versa) and (ii) the risks associated with the trading
desk receiving opposing orders in the same security simultaneously. The Adviser
and its affiliates have adopted policies and procedures
that are reasonably designed to mitigate these conflicts. In certain
circumstances, the Adviser invests on behalf of itself in securities
and other instruments that would be appropriate for, held by, or may fall within
the investment guidelines of its clients, including
the Fund.
At times, the Adviser may give advice or take action for its own accounts that
differs from, conflicts with, or is adverse to
advice given or action taken for any client.
From time
to time, conflicts also arise due to the fact that certain securities or
instruments may be held in some client accounts, including
the Fund,
but not in others, or that client accounts may have different levels of holdings
in certain securities or instruments.
In addition, due to differences in the investment strategies or restrictions
among client accounts, the Adviser may take action
with respect to one account that differs from the action taken with respect to
another account. In some cases, a client account may
compensate the Adviser based on the performance of the securities held by that
account. The existence of such a performance based fee
may create additional conflicts of interest for the Adviser in the allocation of
management time, resources and investment opportunities.
The Adviser has adopted several policies and procedures designed to address
these potential conflicts including a code of ethics
and policies that govern the Adviser’s trading practices, including, among other
things, the aggregation and allocation of trades
among clients, brokerage allocations, cross trades and best
execution.
In
addition, at times an investment team will give advice or take action with
respect to the investments of one or more clients that is not given
or taken with respect to other clients with similar investment programs,
objectives, and strategies. Accordingly, clients with similar
strategies will not always hold the same securities or instruments or achieve
the same performance. The Adviser’s investment teams also
advise clients with conflicting programs, objectives or strategies. These
conflicts also exist as between the Adviser’s clients, including
the Fund, and the Affiliated Investment Accounts managed by Eaton
Vance.
Morgan
Stanley and its affiliates maintain separate trading desks that operate
independently of each other and do not share information
with the Adviser. The Morgan Stanley and affiliate trading desks may compete
against the Adviser trading desks when implementing
buy and sell transactions, possibly causing certain Affiliated Investment
Accounts to pay more or receive less for a security
than other Affiliated Investment Accounts.
Investments
by Separate Investment Departments. The
entities and individuals that provide investment-related services for the
Fund and
certain other MS Investment Accounts (the “MS Investment Department”) may be
different from the entities and individuals
that provide investment-related services to Eaton Vance Investment Accounts (the
“Eaton Vance Investment Department”
and, together with the MS Investment Department, the “Investment Departments”).
Although Morgan Stanley has implemented
information barriers between the Investment Departments in accordance with
internal policies and procedures, each Investment
Department may engage in discussions and share information and resources with
the other Investment Department on certain
investment-related matters. The sharing of information and resources between the
Investment Departments is designed to further
increase the knowledge and effectiveness of each Investment Department. Because
each Investment Department generally makes
investment decisions and executes trades independently of the other, the quality
and price of execution, and the performance of
investments and accounts, can be expected to vary. In addition, each Investment
Department may use different trading systems and
technology and may employ differing investment and trading strategies. As a
result, an Eaton Vance Investment Account could trade in
advance of the Fund (and vice versa), might complete trades more quickly and
efficiently than the Fund, and/or achieve different
execution than the Fund on the same or similar investments made
contemporaneously, even when the Investment Departments
shared research and viewpoints that led to that investment decision. Any sharing
of information or resources between the
Investment Department servicing the Fund and the Eaton Vance Investment
Department may result, from time to time, in the Fund
simultaneously or contemporaneously seeking to engage in the same or similar
transactions as an account serviced by the other Investment
Department and for which there are limited buyers or sellers on specific
securities, which could result in less favorable execution
for the Fund than such Affiliated Investment Account. The MS Investment
Department will not knowingly or intentionally
cause the Fund to engage in a cross trade with an account serviced by the Eaton
Vance Investment Department, however,
subject to applicable law and internal policies and procedures, the Fund may
conduct cross trades with other accounts serviced
by the MS Investment Department. Although the MS Investment Department may
aggregate the Fund’s trades with trades of other
accounts serviced by the MS Investment Department, subject to applicable law and
internal policies and procedures, there will be no
aggregation or coordination of trades with accounts serviced by the Eaton Vance
Investment Department, even when both Investment
Departments are seeking to acquire or dispose of the same investments
contemporaneously.
Payments
to Broker-Dealers and Other Financial Intermediaries. The
Adviser and/or the Distributor may pay compensation, out of their
own funds and not as an expense of the Fund, to certain Financial Intermediaries
(which may include affiliates of the Adviser and the
Distributor), including recordkeepers and administrators of various deferred
compensation plans, in connection with the sale, distribution,
marketing and retention of shares of the Fund and/or shareholder servicing. For
example, the Adviser or the Distributor may pay
additional compensation to a Financial Intermediary for, among other things,
promoting the sale and distribution of Fund shares,
providing access to various programs, mutual fund platforms or preferred or
recommended mutual fund lists that may be offered by
a Financial Intermediary, granting the Distributor access to a Financial
Intermediary’s financial advisors and consultants, providing
assistance in the ongoing education and training of a Financial Intermediary’s
financial personnel, furnishing marketing support,
maintaining share balances and/or for sub-accounting, recordkeeping,
administrative, shareholder or transaction processing services.
Such payments are in addition to any distribution fees, shareholder servicing
fees and/or transfer agency fees that may be payable by
the Fund. The additional payments may be based on various factors, including
level of sales (based on gross or net sales or some
specified minimum sales or some other similar criteria related to sales of the
Fund and/or some or all other Morgan Stanley Funds),
amount of assets invested by the Financial Intermediary’s customers (which could
include current or aged assets of the Fund and/or
some or all other Morgan Stanley Funds), the Fund’s
advisory fee, some other agreed upon amount or other measures as determined
from time to time by the Adviser and/or the Distributor. The amount of these
payments may be different for different Financial
Intermediaries.
The
prospect of receiving, or the receipt of, additional compensation, as described
above, by Financial Intermediaries may provide such
Financial Intermediaries and their financial advisors and other salespersons
with an incentive to favor sales of shares of the Fund over other
investment options with respect to which these Financial Intermediaries do not
receive additional compensation (or receives
lower levels of additional compensation). These payment arrangements, however,
will not change the price that an investor pays for
shares of the Fund or the amount that the Fund receives to invest on behalf of
an investor. Investors may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to Fund shares and should review
carefully any disclosures provided by Financial Intermediaries as to their
compensation.
In
addition, in certain circumstances, the Adviser restricts, limits or reduces the
amount of the Fund’s investment, or restricts the type of
governance or voting rights it acquires or exercises, where the Fund
(potentially together with Morgan Stanley) exceeds a certain ownership
interest, or possesses certain degrees of voting or control or has other
interests.
Morgan
Stanley Trading and Principal Investing Activities.
Notwithstanding anything to the contrary herein, Morgan Stanley will
generally conduct its sales and trading businesses, publish research and
analysis, and render investment advice without regard for the Fund’s
holdings, although these activities could have an adverse impact on the value of
one or more of the Fund’s investments, or could
cause Morgan Stanley to have an interest in one or more portfolio investments
that is different from, and potentially adverse to that of
the Fund.
Furthermore, from time to time, the Adviser or its affiliates may invest “seed”
capital in the Fund,
typically to enable the
Fund to commence investment operations and/or achieve sufficient scale. The
Adviser and its affiliates may hedge such seed
capital exposure by investing in derivatives or other instruments expected to
produce offsetting exposure. Such hedging transactions,
if any, would occur outside of the
Fund.
Morgan
Stanley’s sales and trading, financing and principal investing businesses
(whether or not specifically identified as such, and including
Morgan Stanley’s trading and principal investing businesses) will not be
required to offer any investment opportunities to the Fund.
These businesses may encompass, among other things, principal trading activities
as well as principal investing.
Morgan
Stanley’s sales and trading, financing and principal investing businesses have
acquired or invested in, and in the future may acquire or
invest in, minority and/or majority control positions in equity or debt
instruments of diverse public and/or private companies.
Such activities may put Morgan Stanley in a position to exercise contractual,
voting or creditor rights, or management or other
control with respect to securities or loans of portfolio investments or other
issuers, and in these instances Morgan Stanley may, in its
discretion and subject to applicable law, act to protect its own interests or
interests of clients, and not the Fund’s
interests.
Subject to
the limitations of applicable law, the Fund
may purchase from or sell assets to, or make investments in, companies in
which
Morgan Stanley has or may acquire an interest, including as an owner, creditor
or counterparty.
Morgan
Stanley’s Investment Banking and Other Commercial Activities. Morgan
Stanley advises clients on a variety of mergers, acquisitions,
restructuring, bankruptcy and financing transactions. Morgan Stanley may act as
an advisor to clients, including other investment
funds that may compete with the Fund
and with respect to investments that the Fund
may hold. Morgan Stanley may give
advice and take action with respect to any of its clients or proprietary
accounts that may differ from the advice given, or may involve an
action of a different timing or nature than the action taken, by the Fund.
Morgan Stanley may give advice and provide recommendations
to persons competing with the Fund
and/or any of the Fund’s
investments that are contrary to the Fund’s best interests
and/or the best interests of any of its investments.
Morgan
Stanley could be engaged in financial advising, whether on the buy-side or
sell-side, or in financing or lending assignments that could
result in Morgan Stanley’s determining in its discretion or being required to
act exclusively on behalf of one or more third parties,
which could limit the Fund’s
ability to transact with respect to one or more existing or potential
investments. Morgan Stanley
may have
relationships with third-party funds, companies or investors who may have
invested in or may look to invest in portfolio companies,
and there could be conflicts between the Fund’s
best interests, on the one hand, and the interests of a Morgan Stanley
client or
counterparty, on the other hand.
To the
extent that Morgan Stanley advises creditor or debtor companies in the financial
restructuring of companies either prior to or after
filing for protection under Chapter 11 of the U.S. Bankruptcy Code or similar
laws in other jurisdictions, the Adviser’s flexibility
in making investments in such restructurings on the Fund’s
behalf may be limited.
Morgan
Stanley could provide investment banking services to competitors of portfolio
companies, as well as to private equity and/or private
credit funds; such activities may present Morgan Stanley with a conflict of
interest vis-a-vis the Fund’s
investment and may also
result in a conflict in respect of the allocation of investment banking
resources to portfolio companies.
To the
extent permitted by applicable law, Morgan Stanley may provide a broad range of
financial services to companies in which the
Fund
invests, including strategic and financial advisory services, interim
acquisition financing and other lending and underwriting or placement
of securities, and Morgan Stanley generally will be paid fees (that may include
warrants or other securities) for such services.
Morgan Stanley will not share any of the foregoing interest, fees and other
compensation received by it (including, for the avoidance
of doubt, amounts received by the Adviser) with the Fund,
and any advisory fees payable will not be reduced thereby.
Morgan
Stanley may be engaged to act as a financial advisor to a company in connection
with the sale of such company, or subsidiaries
or divisions thereof, may represent potential buyers of businesses through its
mergers and acquisition activities and may provide
lending and other related financing services in connection with such
transactions. Morgan Stanley’s compensation for such activities
is usually based upon realized consideration and is usually contingent, in
substantial part, upon the closing of the transaction.
Under these circumstances, the Fund
may be precluded from participating in a transaction with or relating to the
company
being sold or participating in any financing activity related to merger or
acquisition.
The
involvement or presence of Morgan Stanley in the investment banking and other
commercial activities described above (or the financial
markets more broadly) may restrict or otherwise limit investment opportunities
that may otherwise be available to the Fund. For
example, issuers may hire and compensate Morgan Stanley to provide underwriting,
financial advisory, placement agency, brokerage
services or other services and, because of limitations imposed by applicable law
and regulation, the Fund
may be prohibited from
buying or selling securities issued by those issuers or participating in related
transactions or otherwise limited in its ability to engage in
such investments.
Morgan
Stanley’s Marketing Activities. Morgan
Stanley is engaged in the business of underwriting, syndicating, brokering,
administering,
servicing, arranging and advising on the distribution of a wide variety of
securities and other investments in which the
Fund may
invest. Subject to the restrictions of the 1940 Act, including Sections 10(f)
and 17(e) thereof, the Fund
may invest in transactions
in which Morgan Stanley acts as underwriter, placement agent, syndicator,
broker, administrative agent, servicer, advisor, arranger
or structuring agent and receives fees or other compensation from the sponsors
of such products or securities. Any fees earned by
Morgan Stanley in such capacity will not be shared with the Adviser or the Fund.
Certain conflicts of interest, in addition to the
receipt of fees or other compensation, would be inherent in these transactions.
Moreover, the interests of one of Morgan Stanley’s
clients with respect to an issuer of securities in which the Fund
has an investment may be adverse to the Adviser’s or the
Fund’s
best interests. In conducting the foregoing activities, Morgan Stanley will be
acting for its other clients and will have no obligation
to act in the Adviser’s or the Fund’s
best interests.
Client
Relationships. Morgan
Stanley has existing and potential relationships with a significant number of
corporations, institutions and
individuals. In providing services to its clients, Morgan Stanley may face
conflicts of interest with respect to activities recommended
to or performed for such clients, on the one hand, and the Fund,
its shareholders or the entities in which the Fund invests,
on the other hand. In addition, these client relationships may present conflicts
of interest in determining whether to offer certain
investment opportunities to the
Fund.
In acting
as principal or in providing advisory and other services to its other clients,
Morgan Stanley may engage in or recommend activities
with respect to a particular matter that conflict with or are different from
activities engaged in or recommended by the Adviser on
the Fund’s
behalf.
Principal
Investments. To the
extent permitted by applicable law, there may be situations in which
the Fund’s
interests may conflict with the
interests of one or more general accounts of Morgan Stanley and its affiliates
or accounts managed by Morgan Stanley or its affiliates.
This may occur because these accounts hold public and private debt and equity
securities of many issuers which may be or become
portfolio companies, or from whom portfolio companies may be
acquired.
Transactions
with Portfolio Companies of Affiliated Investment Accounts. The
companies in which the Fund
may invest may be counterparties
to or participants in agreements, transactions or other arrangements with
portfolio companies or other entities of portfolio
investments of Affiliated Investment Accounts (for example, a company in which
the Fund
invests may retain a company in which an
Affiliated Investment Account invests to provide services or may acquire an
asset from such company or vice versa). Certain of these
agreements, transactions and arrangements involve fees, servicing payments,
rebates and/or other benefits to Morgan Stanley
or its
affiliates. For example, portfolio entities may, including at the encouragement
of Morgan Stanley, enter into agreements regarding
group procurement and/or vendor discounts. Morgan Stanley and its affiliates may
also participate in these agreements and may
realize better pricing or discounts as a result of the participation of
portfolio entities. To the extent permitted by applicable law, certain of
these agreements may provide for commissions or similar payments and/or
discounts or rebates to be paid to a portfolio entity of
an Affiliated Investment Account, and such payments or discounts or rebates may
also be made directly to Morgan Stanley or its
affiliates. Under these arrangements, a particular portfolio company or other
entity may benefit to a greater degree than the other
participants, and the Morgan Stanley Funds, investment vehicles and accounts
(which may or may not include the Fund)
that own an
interest in such entity will receive a greater relative benefit from the
arrangements than the Morgan Stanley Funds, investment
vehicles or accounts that do not own an interest therein. Fees and compensation
received by portfolio companies of Affiliated
Investment Accounts in relation to the foregoing will not be shared with
the Fund
or offset advisory fees payable.
Investments
in Portfolio Investments of Other Funds. To the
extent permitted by applicable law, when the Fund
invests in certain companies
or other entities, other funds affiliated with the Adviser may have made or may
be making an investment in such companies
or other entities. Other funds that have been or may be managed by the Adviser
may invest in the companies or other entities
in which the Fund
has made an investment. Under such circumstances, the Fund
and such other funds may have conflicts of interest
(e.g., over the terms, exit strategies and related matters, including the
exercise of remedies of their respective investments). If the
interests held by the Fund
are different from (or take priority over) those held by such other funds, the
Adviser may be required to make a
selection at the time of conflicts between the interests held by such other
funds and the interests held by the
Fund.
Allocation
of Expenses. Expenses
may be incurred that are attributable to the Fund
and one or more other Affiliated Investment Accounts
(including in connection with issuers in which the Fund
and such other Affiliated Investment Accounts have overlapping investments).
The allocation of such expenses among such entities raises potential conflicts
of interest. The Adviser and its affiliates intend to
allocate such common expenses among the Fund
and any such other Affiliated Investment Accounts on a pro rata basis or
in such
other manner as the Adviser deems to be fair and equitable or in such other
manner as may be required by applicable law.
Temporary
Investments. To more
efficiently invest short-term cash balances held by the Fund,
the Adviser may invest such balances on an
overnight “sweep” basis in shares of one or more money market funds or other
short-term vehicles. It is anticipated that the investment
adviser to these money market funds or other short-term vehicles may be the
Adviser (or an affiliate) to the extent permitted
by applicable law, including Rule 12d1-1 under the 1940 Act. In such a case, the
affiliated investment adviser may receive asset-based
fees in respect of the Fund’s
investment (which will reduce the net return realized by the
Fund).
Transactions
with Affiliates. The
Adviser and any investment sub-adviser might purchase securities from
underwriters or placement agents in
which a Morgan Stanley affiliate is a member of a syndicate or selling group, as
a result of which an affiliate might benefit from the
purchase through receipt of a fee or otherwise. Neither the Adviser nor any
investment sub-adviser will purchase securities on behalf
of the Fund
from an affiliate that is acting as a manager of a syndicate or selling group.
Purchases by the Adviser on behalf of
the Fund
from an affiliate acting as a placement agent must meet the requirements of
applicable law. Furthermore, Morgan Stanley
may face conflicts of interest when the Fund
uses service providers affiliated with Morgan Stanley because Morgan Stanley
receives
greater overall fees when they are used.
General
Process for Potential Conflicts. All of
the transactions described above involve the potential for conflicts of interest
between
the Adviser, related persons of the Adviser and/or their clients. The Advisers
Act, the 1940 Act and ERISA impose certain requirements
designed to decrease the possibility of conflicts of interest between an
investment adviser and its clients. In some cases, transactions
may be permitted subject to fulfillment of certain conditions. Certain other
transactions may be prohibited. In addition, the
Adviser has instituted policies and procedures designed to prevent conflicts of
interest from arising and, when they do arise, to ensure
that it effects transactions for clients in a manner that is consistent with its
fiduciary duty to its clients and in accordance with applicable
law. The Adviser seeks to ensure that potential or actual conflicts of interest
are appropriately resolved taking into consideration
the overriding best interests of the client.
FINANCIAL
STATEMENTS
FUND
COUNSEL
Dechert
LLP, located at 1095 Avenue of the Americas, New York, NY 10036, acts as the
Fund’s legal counsel.
*****
This SAI
and the Prospectus do not contain all of the information set forth in the
Registration Statement the Fund has filed with the SEC. The
complete Registration Statement may be obtained from the SEC.
APPENDIX
A — MORGAN STANLEY INVESTMENT MANAGEMENT EQUITY PROXY VOTING POLICY
AND PROCEDURES
I.
POLICY STATEMENT
Morgan
Stanley Investment Management’s policy and procedures for voting proxies, the
Equity Proxy Voting Policy and Procedures (the
“Policy”), with respect to securities held in the accounts of clients applies to
those Morgan Stanley Investment Management (“MSIM”)
entities that provide discretionary investment management services and for which
an MSIM entity has authority to vote proxies1. For
purposes of this Policy, clients shall include: Morgan Stanley U.S. registered
investment companies, other Morgan Stanley
pooled investment vehicles, and MSIM separately managed accounts (including
accounts for Employee Retirement Income Security
(“ERISA”) clients and ERISA-equivalent clients). This Policy is reviewed and
updated as necessary to address new and evolving
proxy voting issues and standards.
The MSIM
entities covered by this Policy currently include the following: Morgan Stanley
AIP GP LP, Morgan Stanley Investment Management
Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment
Management Company, Morgan Stanley
Saudi Arabia, MSIM Fund Management (Ireland) Limited, Morgan Stanley Asia
Limited, Morgan Stanley Investment Management
(Japan) Co. Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Eaton Vance CLO Manager
LLC, and, Morgan Stanley Eaton Vance CLO CM LLC (each an “MSIM Affiliate” and
collectively referred to as the “MSIM
Affiliates” or as “we” below).
Each MSIM
Affiliate will use its best efforts to vote proxies as part of its authority to
manage, acquire and dispose of account assets.
■ |
With
respect to the U.S. registered investment companies sponsored, managed or
advised by any MSIM Affiliate (the “MS Funds”),
each MSIM Affiliate will vote proxies under this Policy pursuant to
authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by the Board
of Directors/Trustees of the MS Funds. |
■ |
For
other pooled investment vehicles (e.g., UCITS), each MSIM Affiliate will
vote proxies under this Policy pursuant to authority
granted under its applicable investment advisory agreement or, in the
absence of such authority, as authorized by the relevant
governing board. |
■ |
For
separately managed accounts (including ERISA and ERISA-equivalent
clients), each MSIM Affiliate will vote proxies under this
Policy pursuant to authority granted under the applicable investment
advisory agreement or investment management agreement.
Where an MSIM Affiliate has the authority to vote proxies on behalf of
ERISA and ERISA-equivalent clients, the MSIM
Affiliate must do so in accordance with its fiduciary duties under ERISA
(and the Internal Revenue Code). |
■ |
In
certain situations, a client or its fiduciary may reserve the authority to
vote proxies for itself or an outside party or may provide
an MSIM Affiliate with a statement of proxy voting policy. The MSIM
Affiliate will comply with the client’s
policy. |
An MSIM
Affiliate will not vote proxies unless the investment management agreement,
investment advisory agreement or other authority
explicitly authorizes the MSIM Affiliate to vote proxies.
MSIM
Affiliates will vote proxies in a prudent and diligent manner and in the best
interests of clients, including beneficiaries of and participants
in a client’s benefit plan(s) for which the MSIM Affiliates manage assets,
consistent with the objective of maximizing long-term
investment returns (“Client Proxy Standard”) and this Policy. In addition to
voting proxies of portfolio companies, MSIM routinely
engages with, or, in some cases, may engage a third party to engage with, the
management or board of companies in which we invest
on a range of environmental, social and governance issues. Governance is a
window into or proxy for management and board
quality. MSIM engages with companies where we have larger positions, voting
issues are material or where we believe we can make a
positive impact on the governance structure. MSIM’s engagement process, through
private communication with companies, allows us
to understand the governance structures at investee companies and better inform
our voting decisions.
1 |
This
Policy does not apply to MSIM’s authority to exercise certain
decision-making rights associated with investments in loans and other
fixed income instruments (collectively,
for purposes hereof, “Fixed Income
Instruments”). |
Retention
and Oversight of Outsourced Proxy Voting - Certain
MSIM exchange-traded funds (“ETFs”) will follow Calvert Research
and Management’s (“Calvert”) Proxy Voting Policies and Procedures and the Global
Proxy Voting Guidelines set forth in Appendix A
of the Calvert Proxy Voting Policies and Procedures. MSIM’s oversight of
Calvert’s proxy voting engagement is ongoing pursuant
to the 40 Act Fund Service Provider and Vendor Oversight Policy.
Retention
and Oversight of Proxy Advisory Firms -
Institutional Shareholder Services (“ISS”) and Glass Lewis (together with
other proxy
research providers as we may retain from time to time, the “Research Providers”)
are independent advisers that specialize in providing
a variety of fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants,
and other institutional investors. The services provided include in-depth
research, global issuer analysis, record retention, ballot
processing and voting recommendations.
To
facilitate proxy voting, MSIM has retained Research Providers to provide company
level reports that summarize key data elements contained
within an issuer’s proxy statement. Although we are aware of the voting
recommendations included in the Research Providers’
company level reports, these recommendations are not an input into our vote nor
is any potential vote prepopulated based on a
Research Provider’s research. MSIM votes all proxies based on its own proxy
voting policies, consultation with the investment
teams, and
in the best interests of each client. In addition to research, MSIM retains ISS
to provide vote execution, reporting, and recordkeeping
services.
As part of
MSIM’s ongoing oversight of the Research Providers, MSIM performs periodic due
diligence on the Research Providers. Topics of
the reviews include, but are not limited to, conflicts of interest,
methodologies for developing their policies and vote recommendations,
and resources.
Voting
Proxies for Certain Non-U.S. Companies - Voting
proxies of companies located in some jurisdictions may involve several
problems
that can restrict or prevent the ability to vote such proxies or entail
significant costs. These problems include, but are not limited
to: (i) proxy statements and ballots being written in a language other than
English; (ii) untimely and/or inadequate notice of shareholder
meetings; (iii) restrictions on the ability of holders outside the issuer’s
jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person; (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the
shareholder meeting; and (vi) requirements to provide local agents with power of
attorney to facilitate our voting instructions. As a
result, we vote clients’ non-U.S. proxies on a best efforts basis only, after
weighing the costs and benefits of voting such proxies, consistent
with the Client Proxy Standard. ISS has been retained to provide assistance in
connection with voting non-U.S. proxies.
Securities
Lending - MS
Funds or any other investment vehicle sponsored, managed or advised by an MSIM
affiliate may participate
in a securities lending program through a third party provider. The voting
rights for shares that are out on loan are transferred
to the borrower and therefore, the lender (i.e., an MS Fund or another
investment vehicle sponsored, managed or advised by an MSIM
affiliate) is not entitled to vote the lent shares at the company meeting. In
general, MSIM believes the revenue received from the
lending program outweighs the ability to vote and we will not recall shares for
the purpose of voting. However, in cases in which MSIM
believes the right to vote outweighs the revenue received, we reserve the right
to recall the shares on loan on a best efforts
basis.
II.
GENERAL PROXY VOTING GUIDELINES
To promote
consistency in voting proxies on behalf of our clients, we follow this Policy
(subject to any exception set forth herein). As noted
above, certain ETFs will follow Calvert’s Global Proxy Voting Guidelines set
forth in Appendix A of Calvert’s Proxy Voting Policies
and Procedures and the proxy voting guidelines discussed in this section do not
apply to such ETFs. See Appendix A of Calvert’s
Proxy Voting Policies and Procedures for a general discussion of the proxy
voting guidelines to which these ETFs will be subject.
The Policy
addresses a broad range of issues, and provides general voting parameters on
proposals that arise most frequently. However,
details of specific proposals vary, and those details affect particular voting
decisions, as do factors specific to a given company.
Pursuant to the procedures set forth herein, we may vote in a manner that is not
in accordance with the following general guidelines,
provided the vote is approved by the Proxy Review Committee (see Section 3) and
is consistent with the Client Proxy Standard.
Morgan Stanley AIP GP LP (Morgan Stanley AIP”) will follow the procedures as
described in Appendix A.
We
endeavor to integrate governance and proxy voting policy with investment goals,
using the vote to encourage portfolio companies to enhance
long-term shareholder value and to provide a high standard of transparency such
that equity markets can value corporate assets
appropriately.
We seek to
follow the Client Proxy Standard for each client. At times, this may result in
split votes, for example when different clients
have varying economic interests and / or priorities reflected in their mandates
with respect to the outcome of a particular voting
matter (such as a case in which varied ownership interests in two companies
involved in a merger result in different stakes in the
outcome). We also may split votes at times based on differing views of portfolio
managers.
We may
abstain from or vote against matters for which disclosure is
inadequate.
A.
Routine Matters.
We
generally support routine management proposals. The following are examples of
routine management proposals:
■ |
Approval
of financial statements and auditor reports if delivered with an
unqualified auditor’s opinion. |
■ |
General
updating/corrective amendments to the charter, articles of association or
bylaws, unless we believe that such amendments
would diminish shareholder rights. |
■ |
Most
proposals related to the conduct of the annual meeting, with the following
exceptions. We generally oppose proposals that relate
to “the transaction of such other business which may come before the
meeting,” and open-ended requests for adjournment.
However, where management specifically states the reason for requesting an
adjournment and the requested adjournment
would facilitate passage of a proposal that would otherwise be supported
under this Policy (i.e., an uncontested corporate
transaction), the adjournment request will be supported. We do not support
proposals that allow companies to call a special
meeting with a short (generally two weeks or less) time frame for
review. |
We
generally support shareholder proposals advocating confidential voting
procedures and independent tabulation of voting results.
B.
Board of Directors.
1 |
Election
of Directors: Votes on board nominees can involve balancing a variety of
considerations. In vote decisions, we may take into
consideration whether the company has a majority voting policy in place
that we believe makes the director vote more meaningful.
In the absence of a proxy contest, we generally support the board’s
nominees for director except as follows: |
a |
We
consider withholding support from or voting against a nominee if we
believe a direct conflict exists between the interests
of the nominee and the public shareholders, including failure to meet
fiduciary standards of care and/or loyalty. We
may oppose directors where we conclude that actions of directors are
unlawful, unethical or negligent. We consider opposing
individual board members or an entire slate if we believe the board is
entrenched and/or dealing inadequately with
performance problems; if we believe the board is acting with insufficient
independence between the board and management;
or if we believe the board has not been sufficiently forthcoming with
information on key governance or other material
matters. |
b |
We
consider withholding support from or voting against interested directors
if the company’s board does not meet market standards
for director independence, or if otherwise we believe board independence
is insufficient. We refer to prevalent market
standards as promulgated by a stock exchange or other authority within a
given market (e.g., New York Stock Exchange
or Nasdaq rules for most U.S. companies, and The Combined Code on
Corporate Governance in the United Kingdom).
Thus, for an NYSE company with no controlling shareholder, we would expect
that at a minimum a majority of
directors should be independent as defined by NYSE. Where we view market
standards as inadequate, we may withhold votes
based on stronger independence standards. Market standards
notwithstanding, we generally do not view long board tenure
alone as a basis to classify a director as
non-independent. |
i |
At a
company with a shareholder or group that controls the company by virtue of
a majority economic interest in the company,
we have a reduced expectation for board independence, although we believe
the presence of independent directors
can be helpful, particularly in staffing the audit committee, and at times
we may withhold support from or vote
against a nominee on the view the board or its committees are not
sufficiently independent. In markets where board
independence is not the norm (e.g. Japan), however, we consider factors
including whether a board of a controlled
company includes independent members who can be expected to look out for
interests of minority holders. |
ii |
We
consider withholding support from or voting against a nominee if he or she
is affiliated with a major shareholder that
has representation on a board disproportionate to its economic
interest. |
c |
Depending
on market standards, we consider withholding support from or voting
against a nominee who is interested and who
is standing for election as a member of the company’s
compensation/remuneration, nominating/governance or audit committee. |
d |
We
consider withholding support from or voting against nominees if the term
for which they are nominated is excessive. We
consider this issue on a market-specific basis. |
e |
We
consider withholding support from or voting against nominees if in our
view there has been insufficient board renewal (turnover),
particularly in the context of extended poor company performance. Also, if
the board has failed to consider diversity,
including but not limited to, gender and ethnicity, in its board
composition. |
f |
We
consider withholding support from or voting against a nominee standing for
election if the board has not taken action to
implement generally accepted governance practices for which there is a
“bright line” test. For example, in the context of the
U.S. market, failure to eliminate a dead hand or slow hand poison pill
would be seen as a basis for opposing one or more
incumbent nominees. |
g |
In
markets that encourage designated audit committee financial experts, we
consider voting against members of an audit committee
if no members are designated as such. We also consider voting against the
audit committee members if the company
has faced financial reporting issues and/or does not put the auditor up
for ratification by shareholders. |
h |
We
believe investors should have the ability to vote on individual nominees,
and may abstain or vote against a slate of nominees
where we are not given the opportunity to vote on individual
nominees. |
i |
We
consider withholding support from or voting against a nominee who has
failed to attend at least 75% of the nominee’s board
and board committee meetings within a given year without a reasonable
excuse. We also consider opposing nominees
if the company does not meet market standards for disclosure on
attendance. |
j |
We
consider withholding support from or voting against a nominee who appears
overcommitted, particularly through service
on an excessive number of boards. Market expectations are incorporated
into this analysis; for U.S. boards, we generally
oppose election of a nominee who serves on more than five public company
boards (excluding investment companies),
or public company CEOs that serve on more than two outside boards given
level of time commitment required
in their primary job. |
k |
We
consider withholding support from or voting against a nominee where we
believe executive remuneration practices are poor,
particularly if the company does not offer shareholders a separate
“say-on-pay” advisory vote on pay. |
2 |
Discharge
of Directors’ Duties: In markets where an annual discharge of directors’
responsibility is a routine agenda item, we generally
support such discharge. However, we may vote against discharge or abstain
from voting where there are serious findings
of fraud or other unethical behavior for which the individual bears
responsibility. The annual discharge of responsibility represents
shareholder approval of disclosed actions taken by the board during the
year and may make future shareholder action against
the board difficult to pursue. |
3 |
Board
Independence: We generally support U.S. shareholder proposals requiring
that a certain percentage (up to 66⅔%) of the company’s
board members be independent directors, and promoting all-independent
audit, compensation and nominating/governance
committees. |
4 |
Board
Diversity: We generally support shareholder proposals urging diversity of
board membership with respect to gender, race or
other factors where we believe the board has failed to take these factors
into account. We will also consider not supporting the re-election
of the nomination committee and/or chair (or other resolutions when the
nomination chair is not up for re- election) where
we perceive limited progress in gender diversity, with the expectation
where feasible and with consideration of any idiosyncrasies
of individual markets, that female directors represent not less than a
third of the board, unless there is evidence that
the company has made significant progress in this area. In markets where
information on director ethnicity is available, and it
is legal to obtain it, and where it is relevant, we will generally also
consider not supporting the re-election of the nomination committee
chair (or other resolutions when the nomination chair is not up for
re-election) if the board lacks ethnic diversity and has
not outlined a credible diversity strategy. |
5 |
Majority
Voting: We generally support proposals requesting or requiring majority
voting policies in election of directors, so long as
there is a carve-out for plurality voting in the case of contested
elections. |
6 |
Proxy
Access: We consider proposals on procedures for inclusion of shareholder
nominees and to have those nominees included in
the company’s proxy statement and on the company’s proxy ballot on a
case-by-case basis. Considerations include ownership thresholds,
holding periods, the number of directors that shareholders may nominate
and any restrictions on forming a group |
7 |
Reimbursement
for Dissident Nominees: We generally support well-crafted U.S. shareholder
proposals that would provide for reimbursement
of dissident nominees elected to a board, as the cost to shareholders in
electing such nominees can be factored into
the voting decision on those nominees. |
8 |
Proposals
to Elect Directors More Frequently: In the U.S. public company context, we
usually support shareholder and management
proposals to elect all directors annually (to “declassify” the board),
although we make an exception to this policy where
we believe that long-term shareholder value may be harmed by this change
given particular circumstances at the company at
the time of the vote on such proposal. As indicated above, outside the
United States, we generally support greater accountability
to shareholders that comes through more frequent director elections, but
recognize that many markets embrace longer
term lengths, sometimes for valid reasons given other aspects of the legal
context in electing boards. |
9 |
Cumulative
Voting: We generally support proposals to eliminate cumulative voting in
the U.S. market context. (Cumulative voting
provides that shareholders may concentrate their votes for one or a
handful of candidates, a system that can enable a minority
bloc to place representation on a board.) U.S. proposals to establish
cumulative voting in the election of directors generally
will not be supported. |
10 |
Separation
of Chairman and CEO Positions: We vote on shareholder proposals to
separate the Chairman and CEO positions and/or
to appoint an independent Chairman based in part on prevailing practice in
particular markets, since the context for such
a practice varies. In many non-U.S. markets, we view separation of the
roles as a market standard practice, and support division
of the roles in that context. In the United States, we consider such
proposals on a case-by-case basis, considering, among
other things, the existing board leadership structure, company
performance, and any evidence of entrenchment or perceived
risk that power is overly concentrated in a single
individual. |
11 |
Director
Retirement Age and Term Limits: Proposals setting or recommending director
retirement ages or director term limits are
voted on a case-by-case basis that includes consideration of company
performance, the rate of board renewal, evidence of effective
individual director evaluation processes, and any indications of
entrenchment. |
12 |
Proposals
to Limit Directors’ Liability and/or Broaden Indemnification of Officers
and Directors: Generally, we will support such
proposals provided that an individual is eligible only if he or she has
not acted in bad faith, with gross negligence or with reckless
disregard of their duties. |
C.
Statutory Auditor Boards
The
statutory auditor board, which is separate from the main board of directors,
plays a role in corporate governance in several markets.
These boards are elected by shareholders to provide assurance on compliance with
legal and accounting standards and the company’s
articles of association. We generally vote for statutory auditor nominees if
they meet independence standards. In markets that
require disclosure on attendance by internal statutory auditors, however, we
consider voting against nominees for these positions who failed
to attend at least 75% of meetings in the previous year. We also consider
opposing nominees if the company does not meet
market standards for disclosure on attendance.
D.
Corporate Transactions and Proxy Fights.
We examine
proposals relating to mergers, acquisitions and other special corporate
transactions (i.e., takeovers, spin-offs, sales of assets,
reorganizations, restructurings and recapitalizations) on a case-by-case basis
in the interests of each fund or other account. Proposals
for mergers or other significant transactions that are friendly and approved by
the Research Providers usually are supported if there
is no portfolio manager objection. We also analyze proxy contests on a
case-by-case basis.
E.
Changes in Capital Structure.
1 |
We
generally support the following: |
■ |
Management
and shareholder proposals aimed at eliminating unequal voting rights,
assuming fair economic treatment of classes
of shares we hold. |
■ |
U.S.
management proposals to increase the authorization of existing classes of
common stock (or securities convertible into common
stock) if: (i) a clear business purpose is stated that we can support and
the number of shares requested is reasonable
in relation to the purpose for which authorization is requested; and/or
(ii) the authorization does not exceed 100%
of shares currently authorized and at least 30% of the total new
authorization will be outstanding. (We consider proposals
that do not meet these criteria on a case-by-case
basis.) |
■ |
U.S.
management proposals to create a new class of preferred stock or for
issuances of preferred stock up to 50% of issued capital,
unless we have concerns about use of the authority for anti-takeover
purposes. |
■ |
Proposals
in non-U.S. markets that in our view appropriately limit potential
dilution of existing shareholders. A major consideration
is whether existing shareholders would have preemptive rights for any
issuance under a proposal for standing share
issuance authority. We generally consider market-specific guidance in
making these decisions; for example, in the U.K.
market we usually follow Association of British Insurers’ (“ABI”)
guidance, although company-specific factors may be considered
and for example, may sometimes lead us to voting against share
authorization proposals even if they meet ABI guidance. |
■ |
Management
proposals to authorize share repurchase plans, except in some cases in
which we believe there are insufficient protections
against use of an authorization for anti-takeover
purposes. |
■ |
Management
proposals to reduce the number of authorized shares of common or preferred
stock, or to eliminate classes of preferred
stock. |
■ |
Management
proposals to effect stock splits. |
■ |
Management
proposals to effect reverse stock splits if management proportionately
reduces the authorized share amount set
forth in the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount generally
will be approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for
common stock increases. |
■ |
Management
dividend payout proposals, except where we perceive company payouts to
shareholders as inadequate. |
2 |
We
generally oppose the following (notwithstanding management
support): |
■ |
Proposals
to add classes of stock that would substantially dilute the voting
interests of existing shareholders. |
■ |
Proposals
to increase the authorized or issued number of shares of existing classes
of stock that are unreasonably dilutive, particularly
if there are no preemptive rights for existing shareholders. However,
depending on market practices, we consider
voting for proposals giving general authorization for issuance of shares
not subject to preemptive rights if the authority
is limited. |
■ |
Proposals
that authorize share issuance at a discount to market rates, except where
authority for such issuance is de minimis,
or if there is a special situation that we believe justifies such
authorization (as may be the case, for example, at a company
under severe stress and risk of
bankruptcy). |
■ |
Proposals
relating to changes in capitalization by 100% or
more. |
We
consider on a case-by-case basis shareholder proposals to increase dividend
payout ratios, in light of market practice and perceived market
weaknesses, as well as individual company payout history and current
circumstances. For example, currently we perceive low payouts to
shareholders as a concern at some Japanese companies, but may deem a low payout
ratio as appropriate for a growth company
making good use of its cash, notwithstanding the broader market
concern.
F.
Takeover Defenses and Shareholder Rights
1 |
Shareholder
Rights Plans: We generally support proposals to require shareholder
approval or ratification of shareholder rights plans
(poison pills). In voting on rights plans or similar takeover defenses, we
consider on a case-by-case basis whether the company
has demonstrated a need for the defense in the context of promoting
long-term share value; whether provisions of the defense
are in line with generally accepted governance principles in the market
(and specifically the presence of an adequate |
|
qualified
offer provision that would exempt offers meeting certain conditions from
the pill); and the specific context if the proposal
is made in the midst of a takeover bid or contest for
control. |
2 |
Supermajority Voting
Requirements: We generally oppose requirements for supermajority votes to
amend the charter or bylaws, unless
the provisions protect minority shareholders where there is a large
shareholder. In line with this view, in the absence of a large
shareholder we support reasonable shareholder proposals to limit such
supermajority voting requirements. Also, we oppose provisions
that do not allow shareholders any right to amend the charter of
bylaws. |
3 |
Shareholders
Right to Call a Special Meeting: We consider proposals to enhance a
shareholder’s rights to call meetings on a case-by-case
basis. At large-cap U.S. companies, we generally support efforts to
establish the right of holders of 10% or more of shares
to call special meetings, unless the board or state law has set a policy
or law establishing such rights at a threshold that we believe
to be acceptable. |
4 |
Written
Consent Rights: In the U.S. context, we examine proposals for shareholder
written consent rights on a case-by-case basis. |
5 |
Reincorporation:
We consider management and shareholder proposals to reincorporate to a
different jurisdiction on a case-by-case
basis. We oppose such proposals if we believe the main purpose is to take
advantage of laws or judicial precedents that reduce
shareholder rights. |
6 |
Anti-greenmail
Provisions: Proposals relating to the adoption of anti-greenmail
provisions will be supported, provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders (holders of at least 1% of the outstanding shares
and in certain cases, a greater amount) not made to all shareholders or
not approved by disinterested shareholders; and (iii)
contains no anti-takeover measures or other provisions restricting the
rights of shareholders. |
7 |
Bundled
Proposals: We may consider opposing or abstaining on proposals if
disparate issues are “bundled” and presented for a single
vote. |
G.
Auditors
We
generally support management proposals for selection or ratification of
independent auditors. However, we may consider opposing
such proposals with reference to incumbent audit firms if the company has
suffered from serious accounting irregularities and we
believe rotation of the audit firm is appropriate, or if fees paid to the
auditor for non-audit-related services are excessive. Generally,
to determine if non-audit fees are excessive, a 50% test will be applied (i.e.,
non-audit-related fees should be less than 50% of the
total fees paid to the auditor). We generally vote against proposals to
indemnify auditors.
H.
Executive and Director Remuneration
1 |
We
generally support the following: |
■ |
Proposals
for employee equity compensation plans and other employee ownership plans,
provided that our research does not
indicate that approval of the plan would be against shareholder interest.
Such approval may be against shareholder interest
if it authorizes excessive dilution and shareholder cost, particularly in
the context of high usage (“run rate”) of equity
compensation in the recent past; or if there are objectionable plan design
and provisions. |
■ |
Proposals
relating to fees to outside directors, provided the amounts are not
excessive relative to other companies in the country
or industry, and provided that the structure is appropriate within the
market context. While stock-based compensation
to outside directors is positive if moderate and appropriately structured,
we are wary of significant stock option
awards or other performance-based awards for outside directors, as well as
provisions that could result in significant forfeiture
of value on a director’s decision to resign from a board (such forfeiture
can undercut director independence). |
■ |
Proposals
for employee stock purchase plans that permit discounts, but only for
grants that are part of a broad-based employee
plan, including all non-executive employees, and only if the discounts are
limited to a reasonable market standard
or less. |
■ |
Proposals
for the establishment of employee retirement and severance plans, provided
that our research does not indicate that
approval of the plan would be against shareholder
interest. |
2 |
We
generally oppose retirement plans and bonuses for non-executive directors
and independent statutory auditors. |
3 |
In
the U.S. context, we generally vote against shareholder proposals
requiring shareholder approval of all severance agreements, but
we generally support proposals that require shareholder approval for
agreements in excess of three times the annual compensation
(salary and bonus) or proposals that require companies to adopt a
provision requiring an executive to receive accelerated
vesting of equity awards if there is a change of control and the executive
is terminated. We generally oppose shareholder
proposals that would establish arbitrary caps on pay. We consider on a
case-by-case basis shareholder proposals that seek
to limit Supplemental Executive Retirement Plans (SERPs), but support such
shareholder proposals where we consider SERPs
excessive. |
4 |
Shareholder
proposals advocating stronger and/or particular pay-for-performance models
will be evaluated on a case-by-case basis,
with consideration of the merits of the individual proposal within the
context of the particular company and its labor
|
|
markets,
and the company’s current and past practices. While we generally support
emphasis on long-term components of senior
executive pay and strong linkage of pay to performance, we consider
factors including whether a proposal may be overly prescriptive,
and the impact of the proposal, if implemented as written, on recruitment
and retention. |
5 |
We
generally support proposals advocating reasonable senior executive and
director stock ownership guidelines and holding requirements
for shares gained in executive equity compensation
programs. |
6 |
We
generally support shareholder proposals for reasonable “claw-back”
provisions that provide for company recovery of senior executive
bonuses to the extent they were based on achieving financial benchmarks
that were not actually met in light of subsequent
restatements. |
7 |
Management
proposals effectively to re-price stock options are considered on a
case-by-case basis. Considerations include the company’s
reasons and justifications for a re-pricing, the company’s competitive
position, whether senior executives and outside directors
are excluded, potential cost to shareholders, whether the re-pricing or
share exchange is on a value-for-value basis, and whether
vesting requirements are extended. |
8 |
Say-on-Pay:
We consider proposals relating to an advisory vote on remuneration on a
case-by-case basis. Considerations include a
review of the relationship between executive remuneration and performance
based on operating trends and total shareholder return
over multiple performance periods. In addition, we review remuneration
structures and potential poor pay practices, including
relative magnitude of pay, discretionary bonus awards, tax gross ups,
change-in-control features, internal pay equity and
peer group construction. As long-term investors, we support remuneration
policies that align with long-term shareholder returns. |
I.
Social and Environmental Issues.
Shareholders in the United States and certain other markets submit proposals
encouraging changes in
company disclosure and practices related to particular social and environmental
matters. MSIM believes that relevant social and
environmental issues, including principal adverse sustainability impacts, can
influence risk and return. Consequently, we consider
how to vote on proposals related to social and environmental issues on a
case-by-case basis by determining the relevance of social
and environmental issues identified in the proposal and their likely impacts on
shareholder value. In reviewing proposals on social and
environmental issues, we consider a company’s current disclosures and our
understanding of the company’s management of
material social and environmental issues in comparison to peers. We seek to
balance concerns on reputational and other risks that lie behind
a proposal against costs of implementation, while considering appropriate
shareholder and management prerogatives. We may
abstain from voting on proposals that do not have a readily determinable
financial impact on shareholder value and we may oppose
proposals that intrude excessively on management prerogatives and/or board
discretion. We generally vote against proposals requesting
reports or actions that we believe are duplicative, related to matters not
material to the business, or that would impose unnecessary
or excessive costs. We consider proposals on these sustainability risks,
opportunities and impacts on a case-by-case basis but
generally support proposals that seek to enhance useful disclosure. We focus on
understanding the company’s business and commercial
context and recognise that there is no one size fits all that can apply to all
companies. In assessing and prioritising proposals,
we carefully reflect on the materiality of the issues as well as the sector and
geography in which the company operates. We also
consider the explanation companies provide where they may depart from best
practice to assess the adequacy and appropriateness of
measures that are in place.
Environmental Issues
We
generally support proposals that, if implemented, would enhance useful
disclosure on climate, biodiversity, and other environmental
risks such as disclosures aligned with SASB (Sustainability Accounting Standards
Board) and the TCFD (Task Force on
Climate-related Financial Disclosures). We also generally support proposals that
aim to meaningfully reduce or mitigate a company’s
impact on the global climate. We generally will support reasonable proposals to
reduce negative environmental impacts and
ameliorate a company’s overall environmental footprint, including any threats to
biodiversity in ecologically sensitive areas. We generally
will also support proposals asking companies to report on their environmental
practices, policies and impacts, including environmental
damage and health risks resulting from operations, and the impact of
environmental liabilities on shareholder value.
Social Issues
We
generally support proposals that, if implemented, would enhance useful
disclosure on employee and board diversity, including gender,
race, and other factors. We consider proposals on other social issues on a
case-by-case basis but generally support proposals that:
■ |
Seek
to enhance useful disclosure or improvements on material issues such as
human rights risks, supply chain management. workplace
safety, human capital management and pay
equity. |
■ |
Encourage
policies to eliminate gender-based violence and other forms of harassment
from the workplace. |
We may
consider withholding support where we have material concerns in relation to a
company’s involvement/remediation of a breach of
global conventions such as UN Global Compact Principles on Human Rights, Labour
Standards, Environment and Business
Malpractice
J.
Funds of Funds. Certain
MS Funds advised by an MSIM Affiliate invest only in other MS Funds. If an
underlying fund has a shareholder
meeting, in order to avoid any potential conflict of interest, such proposals
will be voted in the same proportion as the votes of
the other shareholders of the underlying fund, unless otherwise determined by
the Proxy Review Committee. In markets where
proportional voting is not available we will not vote at the meeting, unless
otherwise determined by the Proxy Review Committee.
Other MS Funds invest in unaffiliated funds. If an unaffiliated underlying fund
has a shareholder meeting and the MS Fund owns
more than 25% of the voting shares of the underlying fund, the MS Fund will vote
its shares in the unaffiliated underlying
fund in the same proportion as the votes of the other shareholders of the
underlying fund to the extent possible.
Voting Conditions Triggered Under Rule
12d1-4
Rule
12d1-4 sets forth the conditions under which a registered fund (“acquiring
fund”) may invest in excess of the statutory limits of Section
12(d)(1) of the 1940 Act (for example by owning more than 3% of the total
outstanding voting stock) in another registered fund
(“acquired fund”). In the event that a Morgan Stanley “acquiring fund” invests
in an “acquired fund” in reliance on Rule 12d1-4 under
the 1940 Act, and the MS Fund and its “advisory group” (as defined in Rule
12d1-4) hold more than (i) 25% of the total outstanding
voting stock of a particular open-end fund (including ETFs) or (ii) 10% of the
total outstanding voting stock of a particular
closed-end fund, the Morgan Stanley “acquiring fund” and its “advisory group”
will be required to vote all shares of the open- or
closed-end fund held by the fund and its “advisory group” in the same proportion
as the votes of the other shareholders of the open-
or closed-end fund.
Because
MSIM and Eaton Vance are generally considered part of the same “advisory group,”
an Eaton Vance “acquiring fund” that is required
to comply with the voting conditions set forth in Rule 12d1-4 could potentially
implicate voting conditions for a MS Fund invested
in the same open- or closed-end fund as the Eaton Vance “acquiring fund.” The
Committee will be notified by Compliance if the
conditions are triggered for a particular open- or closed-end fund holding in an
MS Fund. In the event that the voting conditions
in Rule 12d1-4 are triggered, please refer to the Morgan Stanley Funds Fund of
Funds Investment Policy for specific information
on Rule 12d1-4 voting requirements and exceptions.
III.
ADMINISTRATION OF THE POLICY
The MSIM
Proxy Review Committee (the “Committee”) has overall responsibility for the
Policy. The Committee consists of investment
professionals who represent the different investment disciplines and geographic
locations of MSIM, and is chaired by the director
of the Global Stewardship Team (“GST”). Because proxy voting is an investment
responsibility and may affect shareholder value, and
because of their knowledge of companies and markets as well as their
understanding of their clients’ objectives, portfolio managers
and other members of investment staff play a key role in proxy voting, and the
GST will consult with investment teams ahead of
decisions on proxy votes. Consequently, there may be instances where we may
split votes at times based on differing views of portfolio
managers and / or different client objectives. The GST administers and
implements the Policy, as well as monitoring services
provided by the proxy advisory firms, third-party proxy engagements and other
research providers used in the proxy voting process.
As noted above, certain ETFs will follow Calvert’s Proxy Voting Policy and
Procedures, which is administered by Calvert’s Proxy
Voting and Engagement Department and overseen by Calvert’s Proxy Voting and
Engagement Committee. The GST periodically
monitors Calvert’s proxy voting with respect to securities held by the
ETFs.
The GST
Director is responsible for identifying issues that require Committee
deliberation or ratification. The GST, working with advice of
investment teams and the Committee, is responsible for voting on routine items
and on matters that can be addressed in line with
these Policy guidelines. The GST has responsibility for voting case-by-case
where guidelines and precedent provide adequate guidance.
The
Committee may periodically review and has the authority to amend, as necessary,
the Policy and establish and direct voting positions
consistent with the Client Proxy Standard.
GST and
members of the Committee may take into account Research Providers’
recommendations and research as well as any other relevant
information they may request or receive, including portfolio manager and/or
analyst comments and research, as applicable. Generally,
proxies related to securities held in client accounts that are managed pursuant
to quantitative, index or index-like strategies (“Index
Strategies”) will be voted in the same manner as those held in actively managed
accounts, unless economic interests or investment
guidelines of the accounts differ. Because accounts managed using Index
Strategies are passively managed accounts, research
from portfolio managers and/or analysts related to securities held in these
accounts may not be available. If the affected securities
are held only in accounts that are managed pursuant to Index Strategies, and the
proxy relates to a matter that is not described
in this Policy, the GST will consider all available information from the
Research Providers, and to the extent that the holdings
are significant, from the portfolio managers and/or analysts.
A.
Committee Procedures
The
Committee meets at least quarterly, and reviews and considers changes to the
Policy at least annually. Through meetings and/or written
communications, the Committee is responsible for monitoring and ratifying
material “split votes” (i.e., allowing certain shares of
the same issuer that are the subject of the same proxy solicitation and held by
one or more MSIM portfolios to be voted
differently
than other shares) and/or “override voting” (i.e., voting all MSIM portfolio
shares in a manner contrary to the Policy). The
Committee will review developing issues and approve upcoming votes, as
appropriate, for matters as requested by GST.
The
Committee reserves the right to review voting decisions at any time and to make
voting decisions as necessary to ensure the independence
and integrity of the votes.
B.
Material Conflicts of Interest
In
addition to the procedures discussed above, if the GST Director determines that
an issue raises a material conflict of interest, the GST
Director may request a special committee (“Special Committee”) to review, and
recommend a course of action with respect to, the
conflict(s) in question.
A
potential material conflict of interest could exist in the following situations,
among others:
1 |
The
issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and
the vote is on a matter that materially affects the issuer. |
2 |
The
proxy relates to Morgan Stanley common stock or any other security issued
by Morgan Stanley or its affiliates except if echo voting
is used, as with MS Funds, as described herein. |
3 |
Morgan
Stanley has a material pecuniary interest in the matter submitted for a
vote (e.g., acting as a financial advisor to a party to a
merger or acquisition for which Morgan Stanley will be paid a success fee
if completed). |
4 |
One
of Morgan Stanley’s independent directors or one of MS Funds’ directors
also serves on the board of directors or is a nominee
for election to the board of directors of a company held by an MS Fund or
affiliate. |
If the GST
Director determines that an issue raises a potential material conflict of
interest, depending on the facts and circumstances, the issue
will be addressed as follows:
1 |
If
the matter relates to a topic that is discussed in this Policy, the
proposal will be voted as per the Policy. |
2 |
If
the matter is not discussed in this Policy or the Policy indicates that
the issue is to be decided case-by-case, the proposal will be
voted in a manner consistent with the Research Providers, provided that
all the Research Providers consulted have the same recommendation,
no portfolio manager objects to that vote, and the vote is consistent with
MSIM’s Client Proxy Standard. |
3 |
If
the Research Providers’ recommendations differ, the GST Director will
refer the matter to a Special Committee to vote on the
proposal, as appropriate. |
Any
Special Committee shall be comprised of the GST Director, and at least two
portfolio managers (preferably members of the Committee),
as approved by the Committee. The GST Director may request non-voting
participation by MSIM’s General Counsel or his/her
designee and the Chief Compliance Officer or his/her designee. In addition to
the research provided by Research Providers, the
Special Committee may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems appropriate.
C.
Proxy Voting Reporting
The CGT
will document in writing all Committee and Special Committee decisions and
actions, which documentation will be maintained
by the GST for a period of at least six years. To the extent these decisions
relate to a security held by an MS Fund, the GST will
report the decisions to each applicable Board of Trustees/Directors of those MS
Funds (the “Board”) at each Board’s next regularly
scheduled Board meeting. The report will contain information concerning
decisions made during the most recently ended calendar
quarter immediately preceding the Board meeting.
In
addition, to the extent that Committee and Special Committee decisions and
actions relate to a security held by other pooled investment
vehicles, the GST will report the decisions to the relevant governing board of
the pooled investment vehicle.
MSIM will
promptly provide a copy of this Policy to any client requesting it. MSIM will
also, upon client request, promptly provide a report
indicating how each proxy was voted with respect to securities held in that
client’s account.
MSIM’s
Legal Department, in conjunction with GST and GST IT for MS Fund reporting and
with the AIP investment team for AIP
Closed-End 40 Act Fund reporting, is responsible for filing an annual Form N-PX
on behalf of each MS Fund and AIP Closed-End 40 Act
Fund for which such filing is required, indicating how all proxies were voted
with respect to each such fund’s holdings.
Also, MSIM
maintains voting records of individual agenda items a company meetings in a
searchable database on its website on a rolling
12-month basis.
In
addition, ISS provides vote execution, reporting and recordkeeping services to
MSIM.
IV.
RECORDKEEPING
Records
are retained in accordance with Morgan Stanley’s Global Information Management
Policy, which establishes general Firm-wide
standards and procedures regarding the retention, handling, and destruction of
official books and records and other information
of legal
or operational significance. The Global Information Management Policy
incorporates Morgan Stanley’s Master Retention Schedule,
which lists various record classes and associated retention periods on a global
basis.
Approved
by the Board September 2015, September 27-28, 2016, September 27-28, 2017,
October 3-4, 2018, September 24-25, 2019,
September 30-October 1, 2020, March 1-2, 2022; December 7-8, 2022.
APPENDIX
A
Appendix A
applies to the following accounts managed by Morgan Stanley AIP GP LP (i)
closed-end funds registered under the Investment
Company Act of 1940, as amended; (ii) discretionary separate accounts; (iii)
unregistered funds; and (iv) non-discretionary
accounts offered in connection with AIP’s Custom Advisory Portfolio Solutions
service.
Generally,
AIP will follow the guidelines set forth in Section II of MSIM’s Proxy Voting
Policy and Procedures. To the extent that such
guidelines do not provide specific direction, or AIP determines that consistent
with the Client Proxy Standard, the guidelines should not
be followed, the Proxy Review Committee has delegated the voting authority to
vote securities held by accounts managed by AIP to
the Fund of Hedge Funds investment team, the Private Markets investment team or
the Portfolio Solutions team of AIP. A summary of
decisions made by the applicable investment teams will be made available to the
Proxy Review Committee for its information
at the next scheduled meeting of the Proxy Review Committee.
In certain
cases, AIP may determine to abstain from determining (or recommending) how a
proxy should be voted (and therefore abstain
from voting such proxy or recommending how such proxy should be voted), such as
where the expected cost of giving due consideration
to the proxy does not justify the potential benefits to the affected account(s)
that might result from adopting or rejecting
(as the case may be) the measure in question.
Waiver
of Voting Rights
For
regulatory reasons, AIP may either 1) invest in a class of securities of an
underlying fund (the “Fund”) that does not provide for voting
rights; or 2) waive 100% of its voting rights with respect to the
following:
1 |
Any
rights with respect to the removal or replacement of a director, general
partner, managing member or other person acting in a
similar capacity for or on behalf of the Fund (each individually a
“Designated Person,” and collectively, the “Designated Persons”),
which may include, but are not limited to, voting on the election or
removal of a Designated Person in the event of such
Designated Person’s death, disability, insolvency, bankruptcy, incapacity,
or other event requiring a vote of interest holders of
the Fund to remove or replace a Designated Person;
and |
2 |
Any
rights in connection with a determination to renew, dissolve, liquidate,
or otherwise terminate or continue the Fund, which may
include, but are not limited to, voting on the renewal, dissolution,
liquidation, termination or continuance of the Fund upon
the occurrence of an event described in the Fund’s organizational
documents; provided,
however,
that, if the Fund’s organizational
documents require the consent of the Fund’s general partner or manager, as
the case may be, for any such termination
or continuation of the Fund to be effective, then AIP may exercise its
voting rights with respect to such matter. |
APPENDIX
B — DESCRIPTION OF RATINGS
Standard
& Poor’s Ratings Services
An S&P
Global Ratings issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific
financial obligation, a specific class of financial obligations, or a specific
financial program (including ratings on medium-term note
programs and commercial paper programs). It takes into consideration the
creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings’ view of the obligor’s capacity and
willingness to meet its financial commitments as they come due,
and this opinion may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event
of default.
Issue
credit ratings can be either long-term or short-term. Short-term ratings are
generally assigned to those obligations considered short-term
in the relevant market. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features
on long-term obligations. Medium-term notes are assigned long-term
ratings.
I.
S&P’s Long-Term Issue Credit Ratings
AAA: An
obligation rated ‘AAA’ has the highest rating assigned by S&P Global
Ratings. The obligor’s capacity to meet its financial commitments
on the obligation is extremely strong.
AA: An
obligation rated ‘AA’ differs from the highest-rated obligations only to a small
degree. The obligor’s capacity to meet its financial
commitments on the obligation is very strong.
A: An
obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor’s capacity to meet
its financial commitments on the obligation is still
strong.
BBB: An
obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances
are more likely to weaken the obligor’s capacity to meet its financial
commitments on the obligation.
BB; B;
CCC; CC; and C:
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having
significant speculative characteristics.
‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposure to adverse conditions.
BB: An
obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions that could
lead to the obligor’s inadequate capacity to meet its
financial commitments on the obligation.
B: An
obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated
‘BB’, but the obligor currently has the capacity to meet its
financial commitments on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s capacity
or willingness to meet its financial commitments on the obligation.
CCC: An
obligation rated ‘CCC’ is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the obligation.
In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitments on the obligation.
CC: An
obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The ‘CC’
rating is used when a default has not yet occurred
but S&P Global Ratings expects default to be a virtual certainty, regardless
of the anticipated time to default.
C: An
obligation rated ‘C’ is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority
or lower ultimate recovery compared with obligations that are rated
higher.
D: An
obligation rated ‘D’ is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category
is used when payments on an obligation are not made on the date due, unless
S&P Global Ratings believes that such payments
will be made within five business days in the absence of a stated grace period
or within the earlier of the stated grace period or 30
calendar days. The ‘D’ rating also will be used upon the filing of a bankruptcy
petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered to
‘D’ if it is subject to a distressed exchange offer.
NR: Indicates
that a rating has not been assigned or is no longer assigned.
Note: Ratings
from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the rating
categories.
II.
S&P’s Short-Term Issue Credit Ratings
A-1: A
short-term obligation rated ‘A-1’ is rated in the highest category by S&P
Global Ratings. The obligor’s capacity to meet its financial
commitments on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates
that the obligor’s capacity to meet its financial commitments on these
obligations is extremely strong.
A-2: A
short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse
effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the obligor’s
capacity to meet its financial commitments on the
obligation is satisfactory.
A-3: A
short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to weaken an obligor’s capacity to meet its financial
commitments on the obligation.
B: A
short-term obligation rated ‘B’ is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the
capacity to meet its financial commitments; however, it faces major ongoing
uncertainties that could lead to the obligor’s inadequate
capacity to meet its financial commitments.
C: A
short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the
obligation.
D: A
short-term obligation rated ‘D’ is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the ‘D’ rating
category is used when payments on an obligation are not made on the date due,
unless S&P Global Ratings believes that such payments
will be made within any stated grace period. However, any stated grace period
longer than five business days will be treated as five
business days. The ‘D’ rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered to
‘D’ if it is subject to a distressed exchange offer.
NR: Indicates
that a rating has not been assigned or is no longer assigned.
III.
Municipal Short-Term Note Ratings
SP-1: Strong
capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+)
designation.
SP-2:
Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of
the notes.
SP-3:
Speculative capacity to pay principal and interest.
D: ‘D’ is
assigned upon failure to pay the note when due, completion of a distressed
exchange offer, or the filing of a bankruptcy petition
or the taking of similar action anywhere default on an obligation is a virtual
certainty, for example, due to automatic stay provisions.
Moody’s
Investors, Inc.
Ratings
assigned on Moody’s global long-term and short-term rating scales are
forward-looking opinions of the relative credit risks of financial
obligations issued by non-financial corporates, financial institutions,
structured finance vehicles, project finance vehicles, and public
sector entities. Long-term ratings are assigned to issuers or obligations with
an original maturity of one year or more and reflect
both on the likelihood of a default on contractually promised payments and the
expected financial loss suffered in the event of default.
Short-term ratings are assigned to obligations with an original maturity of
thirteen months or less and reflect both on the likelihood
of a default on contractually promised payments and the expected financial loss
suffered in the event of default.
I.
Moody’s Global Long-Term Rating Scale
Aaa:
Obligations rated Aaa are judged to be of the highest quality, subject to the
lowest level of credit risk.
Aa:
Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk.
A:
Obligations rated A are judged to be upper-medium grade and are subject to low
credit risk.
Baa:
Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative
characteristics.
Ba:
Obligations rated Ba are judged to be speculative and are subject to substantial
credit risk.
B:
Obligations rated B are considered speculative and are subject to high credit
risk.
Caa:
Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
Ca:
Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and
interest.
C:
Obligations rated C are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note: Moody’s
appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic rating category.
Additionally, a “(hyb)” indicator is appended to all ratings of
hybrid securities issued by banks, insurers, finance companies, and securities
firms.
II.
Moody’s Global Short-Term Rating Scale
P-1: Issuers
(or supporting institutions) rated Prime-1 have a superior ability to repay
short-term debt obligations.
P-2: Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations.
P-3: Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to repay
short-term obligations.
NP: Issuers
(or supporting institutions) rated Not Prime do not fall within any of the Prime
rating categories.
Fitch
Ratings Inc.
Fitch
Ratings’ credit ratings relating to issuers are an opinion on the relative
ability of an entity to meet financial commitments, such as
interest, preferred dividends, repayment of principal, insurance claims or
counterparty obligations. Credit ratings relating to securities
and obligations of an issuer can include a recovery expectation. Credit ratings
are used by investors as indications of the likelihood
of receiving the money owed to them in accordance with the terms on which they
invested. The agency’s credit ratings cover the
global spectrum of corporate, sovereign financial, bank, insurance, and public
finance entities (including supranational and sub-national
entities) and the securities or other obligations they issue, as well as
structured finance securities backed by receivables or other
financial assets.
I.
Fitch’s Long-Term Issuer Credit Rating Scale
AAA: Highest
credit quality. ‘AAA’ ratings denote the lowest expectation of default risk.
They are assigned only in cases of exceptionally
strong capacity for payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable
events.
AA: Very high
credit quality. ‘AA’ ratings denote expectations of very low default risk. They
indicate very strong capacity for payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High
credit quality. ‘A’ ratings denote expectations of low default risk. The
capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to adverse business
or economic conditions than is the case for higher
ratings.
BBB: Good
credit quality. ‘BBB’ ratings indicate that expectations of default risk are
currently low. The capacity for payment of financial
commitments is considered adequate, but adverse business or economic conditions
are more likely to impair this capacity.
BB:
Speculative. ‘BB’ ratings indicate an elevated vulnerability to default risk,
particularly in the event of adverse changes in business or
economic conditions over time; however, business or financial flexibility exists
that supports the servicing of financial commitments.
B: Highly
speculative. ‘B’ ratings indicate that material default risk is present, but a
limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is vulnerable
to deterioration in the business and economic
environment.
CCC:
Substantial credit risk. Default is a real possibility.
CC: Very high
levels of credit risk. Default of some kind appears probable.
C: Near
default. A default or default-like process has begun, or the issuer is in
standstill, or for a closed funding vehicle, payment capacity
is irrevocably impaired. Conditions that are indicative of a ‘C’ category rating
for an issuer include: a. the issuer has entered into a
grace or cure period following non-payment of a material financial obligation;
b. the issuer has entered into a temporary negotiated
waiver or standstill agreement following a payment default on a material
financial obligation; c. the formal announcement by the
issuer or their agent of a distressed debt exchange; d. a closed financing
vehicle where payment capacity is irrevocably impaired such that
it is not expected to pay interest and/or principal in full during the life of
the transaction, but where no payment default is imminent.
RD:
Restricted default. ‘RD’ ratings indicate an issuer that in Fitch’s
opinion has experienced: a. an uncured payment default or distressed
debt exchange on a bond, loan or other material financial obligation, but b. has
not entered into bankruptcy filings, administration,
receivership, liquidation, or other formal winding-up procedure, and c. has not
otherwise ceased operating. This would
include: i. the selective payment default on a specific class or currency of
debt; ii. the uncured expiry of any applicable grace period,
cure period or default forbearance period following a payment default on a bank
loan, capital markets security or other
material
financial obligation; iii. the extension of multiple waivers or forbearance
periods upon a payment default on one or more material
financial obligations, either in series or in parallel; ordinary execution of a
distressed debt exchange on one or more material financial
obligations.
D: Default.
‘D’ ratings indicate an issuer that in Fitch’s opinion has entered into
bankruptcy filings, administration, receivership, liquidation
or other formal winding-up procedure or that has otherwise ceased
business.
Default
ratings are not assigned prospectively to entities or their obligations; within
this context, non-payment on an instrument that contains a
deferral feature or grace period will generally not be considered a default
until after the expiration of the deferral or grace period,
unless a default is otherwise driven by bankruptcy or other similar
circumstance, or by a distressed debt exchange.
Imminent
default, categorized under ‘C’, typically refers to the occasion where a payment
default has been intimated by the issuer and is all
but inevitable. This may, for example, be where an issuer has missed a scheduled
payment but (as is typical) has a grace period
during which it may cure the payment default. Another alternative would be where
an issuer has formally announced a distressed
debt exchange, but the date of the exchange still lies several days or weeks in
the immediate future.
In all
cases, the assignment of a default rating reflects the agency’s opinion as to
the most appropriate rating category consistent with the rest
of its universe of ratings and may differ from the definition of default under
the terms of an issuer’s financial obligations or local
commercial practice.
Note: The
modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added
to ‘AAA’ ratings and ratings below the ‘CCC’ category.
II.
Fitch’s Short-Term Ratings Assigned to Issuers or Obligations in Corporate,
Public and Structure Finance
F1: Highest
Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely
payment of financial commitments; may have an
added “+” to denote any exceptionally strong credit feature.
F2: Good
Short-Term Credit Quality. Good intrinsic capacity for timely payment of
financial commitments.
F3: Fair
Short-Term Credit Quality. The intrinsic capacity for timely payment of
financial commitments is adequate.
B:
Speculative Short-Term Credit Quality. Minimal capacity for timely payment of
financial commitments, plus heightened vulnerability
to near term adverse changes in financial and economic conditions.
C: High
Short-Term Default Risk. Default is a real possibility.
RD:
Restricted Default. Indicates an entity that has defaulted on one or more of its
financial commitments, although it continues to meet other
financial obligations. Typically applicable to entity ratings only.
D: Default.
Indicates a broad-based default event for an entity, or the default of a
short-term obligation.
Note: The
modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. For the short-term
rating category of ‘F1’, a ‘+’ may be appended.
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