BROOKFIELD TOTAL RETURN FUND INC.
Statement of Assets and Liabilities (Unaudited)
May 31, 2013
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investments in securities, at value (Note 2)
|
|
$
|
509,598,190
|
|
|
Investments in short-term securities, at value
|
|
|
99,993
|
|
|
|
|
|
|
|
|
Total investments, at value
|
|
|
509,698,183
|
|
|
Cash
|
|
|
11,162,249
|
|
|
Cash collateral for reverse repurchase agreements
|
|
|
836,948
|
|
|
Interest receivable
|
|
|
2,998,629
|
|
|
Receivable for investments sold
|
|
|
9,685,463
|
|
|
Principal paydown receivable
|
|
|
7,397
|
|
|
Prepaid expenses
|
|
|
32,967
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
534,421,836
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Reverse repurchase agreements (Note 6)
|
|
|
130,484,655
|
|
|
Interest payable for reverse repurchase agreements (Note 6)
|
|
|
63,640
|
|
|
Payable for TBA transactions
|
|
|
31,752,969
|
|
|
Payable for investments purchased
|
|
|
462,694
|
|
|
Investment advisory fee payable (Note 4)
|
|
|
205,691
|
|
|
Administration fee payable (Note 4)
|
|
|
63,289
|
|
|
Accrued expenses
|
|
|
102,775
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,135,713
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
371,286,123
|
|
|
|
|
|
|
|
|
Composition of Net Assets:
|
|
|
|
|
|
Capital stock, at par value ($0.01 par value, 50,000,000 shares authorized) (Note 7)
|
|
$
|
139,607
|
|
|
Additional paid-in capital (Note 7)
|
|
|
445,611,432
|
|
|
Distributions in excess of net investment income
|
|
|
(2,570,748
|
)
|
|
Accumulated net realized loss on investment transactions and futures transactions
|
|
|
(86,733,729
|
)
|
|
Net unrealized appreciation on investments
|
|
|
14,839,561
|
|
|
|
|
|
|
|
|
Net assets applicable to capital stock outstanding
|
|
$
|
371,286,123
|
|
|
|
|
|
|
|
|
Total investments at cost
|
|
$
|
494,858,622
|
|
|
|
|
|
|
|
|
Shares Outstanding and Net Asset Value Per Share:
|
|
|
|
|
|
Common shares outstanding
|
|
|
13,960,683
|
|
|
Net asset value per share
|
|
$
|
26.60
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
2013 Semi-Annual
Report
19
BROOKFIELD TOTAL RETURN FUND INC.
Statement of Operations (Unaudited)
For the Six Months Ended May 31, 2013
|
|
|
|
|
|
|
Investment Income (Note 2)
|
|
|
|
|
|
Interest
|
|
$
|
15,767,471
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment advisory fees (Note 4)
|
|
|
1,156,945
|
|
|
Administration fees (Note 4)
|
|
|
355,983
|
|
|
Legal fees
|
|
|
62,299
|
|
|
Directors’ fees
|
|
|
59,620
|
|
|
Reports to stockholders
|
|
|
58,024
|
|
|
Fund accounting servicing fees
|
|
|
51,016
|
|
|
Insurance
|
|
|
47,546
|
|
|
Audit and tax services
|
|
|
32,500
|
|
|
Registration fees
|
|
|
26,611
|
|
|
Transfer agent fees
|
|
|
24,434
|
|
|
Custodian fees
|
|
|
21,623
|
|
|
Miscellaneous
|
|
|
16,362
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,912,963
|
|
|
Interest expense on reverse repurchase agreements (Note 6)
|
|
|
511,231
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,424,194
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
13,343,277
|
|
|
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments (Notes 2 and 8):
|
|
|
|
|
|
Net realized gain (loss) on:
|
|
|
|
|
|
Investment transactions
|
|
|
(237,400
|
)
|
|
Futures transactions
|
|
|
26,415
|
|
|
|
|
|
|
|
|
Net realized loss on investment transactions and futures transactions
|
|
|
(210,985
|
)
|
|
|
|
|
|
|
|
Net change in unrealized appreciation on:
|
|
|
|
|
|
Investments
|
|
|
30,648,541
|
|
|
Futures
|
|
|
13,123
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation on investments and futures
|
|
|
30,661,664
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain on investment transactions and futures transactions
|
|
|
30,450,679
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
43,793,956
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
20 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Statements of Changes in Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
Months Ended
May 31, 2013
(Unaudited)
|
|
|
For the Fiscal
Year Ended
November 30,
2012
|
|
|
Increase (Decrease) in Net Assets Resulting from Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
13,343,277
|
|
|
$
|
21,752,374
|
|
|
Net realized loss on investment transactions and futures transactions
|
|
|
(210,985
|
)
|
|
|
(628,801
|
)
|
|
Net change in unrealized appreciation on investments and futures
|
|
|
30,661,664
|
|
|
|
31,204,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
43,793,956
|
|
|
|
52,328,170
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and Distributions to Stockholders (Note 2):
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(15,914,025
|
)
|
|
|
(22,081,984
|
)
|
|
Return of capital
|
|
|
—
|
|
|
|
(413,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions paid
|
|
|
(15,914,025
|
)
|
|
|
(22,495,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock Transactions (Note 7):
|
|
|
|
|
|
|
|
|
|
Proceeds from rights offering, net of offering costs
|
|
|
73,021
|
*
|
|
|
72,097,601
|
|
|
Reinvestment of dividends and distributions
|
|
|
29,572
|
|
|
|
254,361
|
|
|
Capital received as a result of shares issued due to fund merger
|
|
|
—
|
|
|
|
64,656,398
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital stock transactions
|
|
|
102,593
|
|
|
|
137,008,360
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
27,982,524
|
|
|
|
166,840,571
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
343,303,599
|
|
|
|
176,463,028
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
371,286,123
|
|
|
$
|
343,303,599
|
|
|
|
|
|
|
|
|
|
|
|
|
(including distributions in excess of net investment income of)
|
|
$
|
(2,570,748
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Transactions:
|
|
|
|
|
|
|
|
|
|
Shares issued or sold as result of rights offering
|
|
|
—
|
|
|
|
3,500,000
|
|
|
Reinvested shares
|
|
|
1,122
|
|
|
|
10,789
|
*
|
|
Shares issued due to fund merger
|
|
|
—
|
|
|
|
2,710,279
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in shares outstanding
|
|
|
1,122
|
|
|
|
6,221,068
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
This amount represents an adjustment to the offering costs that were charged to paid in capital in connection with the rights offering.
|
|
*
|
Share amounts have been adjusted to reflect the 1:4 reverse stock split that occurred effective August 22, 2012.
|
See Notes to Financial Statements.
2013 Semi-Annual
Report
21
BROOKFIELD TOTAL RETURN FUND INC.
Statement of Cash Flows (Unaudited)
For the Six Months Ended May 31, 2013
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for) operating activities:
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
43,793,956
|
|
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash used for operating activities:
|
|
|
|
|
|
Purchases of long-term portfolio investments
|
|
|
(112,230,810
|
)
|
|
Proceeds from disposition of long-term portfolio investments and principal paydowns
|
|
|
106,712,924
|
|
|
Purchases of short-term portfolio investments, net
|
|
|
(99,970
|
)
|
|
Proceeds from disposition of TBA transactions, net
|
|
|
397,851
|
|
|
Increase in interest receivable
|
|
|
(175,328
|
)
|
|
Increase in receivable for investments sold
|
|
|
(9,685,463
|
)
|
|
Decrease in principal paydown receivable
|
|
|
75,213
|
|
|
Decrease in prepaid expenses
|
|
|
95,511
|
|
|
Decrease in payable for investments purchased
|
|
|
(6,001,358
|
)
|
|
Decrease in payable for variation margin
|
|
|
(6,344
|
)
|
|
Increase in interest payable for reverse repurchase agreements
|
|
|
3,469
|
|
|
Increase in investment advisory fee payable
|
|
|
25,889
|
|
|
Increase in investment administration fee payable
|
|
|
7,969
|
|
|
Decrease in payable due to rights offering
|
|
|
(561,774
|
)
|
|
Decrease in accrued expenses
|
|
|
(103,344
|
)
|
|
Net accretion or amortization on investments and paydown gains or losses on investments
|
|
|
(7,828,867
|
)
|
|
Unrealized appreciation on investments
|
|
|
(30,648,541
|
)
|
|
Net realized loss on investment transactions
|
|
|
237,400
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(15,991,617
|
)
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
Net cash provided by reverse repurchase agreements
|
|
|
26,994,327
|
|
|
Net cash provided by rights offering
|
|
|
73,021
|
|
|
Distributions paid to stockholders, net of reinvestments
|
|
|
(15,884,453
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
11,182,895
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(4,808,722
|
)
|
|
Cash at beginning of period
|
|
|
16,807,919
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
11,999,197
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
Interest payments on the reverse repurchase agreements for the period ended May 31, 2013, totaled $507,762.
Non-cash financing activities included reinvestment of distributions of $29,572.
Cash at the end of the period includes $836,948 for margin calls on reverse repurchase agreements.
See Notes to Financial
Statements.
22 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
Months
Ended May 31,
2013
(Unaudited)
|
|
|
For the Fiscal Year Ended November 30,
|
|
|
|
|
|
2012
|
|
|
2011
4
|
|
|
2010
4
|
|
|
2009
4
|
|
|
2008
4
|
|
|
Per Share Operating Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
24.59
|
|
|
$
|
22.80
|
|
|
$
|
24.80
|
|
|
$
|
21.84
|
|
|
$
|
19.48
|
|
|
$
|
31.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.96
|
|
|
|
2.24
|
|
|
|
1.68
|
|
|
|
2.12
|
|
|
|
2.04
|
|
|
|
2.40
|
|
|
Net realized and unrealized gain (loss) on investment transactions
|
|
|
2.19
|
|
|
|
3.01
|
|
|
|
(1.20
|
)
|
|
|
2.92
|
|
|
|
2.60
|
|
|
|
(11.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net asset value resulting from operations
|
|
|
3.15
|
|
|
|
5.25
|
|
|
|
0.48
|
|
|
|
5.04
|
|
|
|
4.64
|
|
|
|
(8.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
(1.14
|
)
|
|
|
(2.24
|
)
|
|
|
(1.84
|
)
|
|
|
(2.08
|
)
|
|
|
(2.28
|
)
|
|
|
(2.92
|
)
|
|
Return of capital distributions
|
|
|
—
|
|
|
|
(0.04
|
)
|
|
|
(0.64
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions paid
|
|
|
(1.14
|
)
|
|
|
(2.28
|
)
|
|
|
(2.48
|
)
|
|
|
(2.08
|
)
|
|
|
(2.28
|
)
|
|
|
(2.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change due to rights offering
1
|
|
|
—
|
|
|
|
(1.18
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
26.60
|
|
|
$
|
24.59
|
|
|
$
|
22.80
|
|
|
$
|
24.80
|
|
|
$
|
21.84
|
|
|
$
|
19.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
26.19
|
|
|
$
|
24.05
|
|
|
$
|
22.56
|
|
|
$
|
24.04
|
|
|
$
|
20.80
|
|
|
$
|
17.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Return
†
|
|
|
13.95
|
%
2
|
|
|
17.29
|
%
|
|
|
4.11
|
%
|
|
|
26.63
|
%
|
|
|
32.45
|
%
|
|
|
(30.87
|
)%
|
|
Ratios to Average Net Assets/ Supplementary Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000s)
|
|
$
|
371,286
|
|
|
$
|
343,304
|
|
|
$
|
176,463
|
|
|
$
|
191,738
|
|
|
$
|
168,907
|
|
|
$
|
150,440
|
|
|
Operating expenses
|
|
|
1.07
|
%
3
|
|
|
1.30
|
%
|
|
|
1.18
|
%
|
|
|
1.23
|
%
|
|
|
1.29
|
%
|
|
|
1.26
|
%
|
|
Interest expense
|
|
|
0.29
|
%
3
|
|
|
0.41
|
%
|
|
|
0.53
|
%
|
|
|
0.31
|
%
|
|
|
0.14
|
%
|
|
|
0.79
|
%
|
|
Total expenses
|
|
|
1.36
|
%
3
|
|
|
1.71
|
%
|
|
|
1.71
|
%
|
|
|
1.54
|
%
|
|
|
1.43
|
%
|
|
|
2.05
|
%
|
|
Net investment income
|
|
|
7.50
|
%
3
|
|
|
9.19
|
%
|
|
|
6.83
|
%
|
|
|
9.34
|
%
|
|
|
10.01
|
%
|
|
|
9.09
|
%
|
|
Portfolio turnover rate
|
|
|
24
|
%
2
|
|
|
75
|
%
|
|
|
43
|
%
|
|
|
204
|
%
|
|
|
73
|
%
|
|
|
15
|
%
|
|
†
|
Total investment return is computed based upon the New York Stock Exchange market price of the Fund’s shares and excludes the effect of broker
commissions. Dividends and distributions are assumed to be reinvested at the prices obtained under the Fund’s dividend reinvestment plan.
|
|
1
|
Effective as of the close of business on September 20, 2012, the Fund issued transferrable rights to its stockholders to subscribe for up to 3,500,000
shares of common stock at a rate of one share for every 3 rights held. The subscription price was set at 90% of the average closing price for the last 5 trading days of the offering period. The shares were subscribed at a price of $21.50 which was
less than the NAV of $25.35 thus creating a dilutive effect on the NAV.
|
|
4
|
The Fund had a 1:4 reverse stock split with ex-dividend and payable dates of August 21, 2012 and August 22, 2012, respectively. Prior year net asset
values and per share amounts have been restated to reflect the impact of the reverse stock split. (See Notes to Financial Statements). The net asset value and market price reported at the original dates prior to the reverse stock split were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended November 30,
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net Asset Value (prior to reverse stock split)
|
|
$
|
5.70
|
|
|
$
|
6.20
|
|
|
$
|
5.46
|
|
|
$
|
4.87
|
|
|
Market Price (prior to reverse stock split)
|
|
$
|
5.64
|
|
|
$
|
6.01
|
|
|
$
|
5.20
|
|
|
$
|
4.40
|
|
See Notes to Financial Statements.
2013 Semi-Annual
Report
23
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
1. The Fund
Brookfield Total Return Fund Inc. (formerly Helios Total Return Fund, Inc.) (the “Fund”) was incorporated under the laws of the State of Maryland on May 26, 1989. The Fund is registered under the
Investment Company Act of 1940, as amended (the “1940 Act”), as a diversified, closed-end management investment company with its own investment objective.
On November 17, 2011, the Board of Directors of Helios Strategic Mortgage Income Fund Inc. (“HSM”) approved an Agreement and Plan of Reorganization providing for, among other things, the transfer of
the assets and liabilities of HSM into the Fund. On March 16, 2012, the stockholders of HSM approved the Agreement and Plan of Reorganization and the stockholders of the Fund approved the issuance of new shares. The reorganization of HSM into
the Fund was effective as of the opening of business of the New York Stock Exchange on April 2, 2012. The increase in the net assets to the Fund resulting from the merger with HSM amounted to $64,656,398.
Brookfield Investment Management Inc. (“BIM” or “Adviser”), a wholly-owned subsidiary of Brookfield Asset Management Inc., is
registered as an investment advisor under the Investment Advisers Act of 1940, as amended, and serves as investment advisor to the Fund.
The investment objective of the Fund is to provide a high total return, including short and long-term capital gains and a high level of current
income, through the management of a portfolio of securities. No assurances can be given that the Fund’s investment objective will be achieved.
2. Significant Accounting Policies
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Valuation of Investments:
Debt securities, including U.S. government securities, listed corporate bonds, other fixed income and asset-backed
securities, and unlisted securities and private placement securities, are generally valued at the bid price furnished by an independent pricing service or, if not valued by an independent pricing service, using bid prices obtained from at least two
active and reliable market makers in any such security or a broker-dealer. Short-term debt securities with remaining maturities of sixty days or less are valued at cost with interest accrued or discount accreted to the date of maturity, unless such
valuation, in the judgment of the Adviser’s Valuation Committee, does not represent market value.
Investments in equity securities
listed or traded on any securities exchange or traded in the over-the-counter market are valued at the last trade price as of the close of business on the valuation date. Equity securities for which no sales were reported for that date are valued at
“fair value” as determined in good faith by the Adviser’s Valuation Committee. Investments in open-end registered investment companies, if any, are valued at the net asset value (“NAV”) as reported by those investment
companies.
The Board of Directors has adopted procedures for the valuation of the Fund’s securities and has delegated the day to
day responsibilities for valuation determinations under these procedures to the Adviser. Securities are valued using unadjusted quoted market prices, when available, as supplied primarily by third party pricing services or dealers. When price
quotations for certain securities are not readily available or cannot be determined, a significant event has occurred that would materially affect the value of the security, or if the available quotations are not believed to be reflective of the
market value by the Adviser, those securities will be valued at “fair value” as determined in good faith by the Adviser’s Valuation Committee using procedures adopted by and under the supervision of the Fund’s Board of Directors.
The Valuation Committee is comprised of senior members of the Adviser’s management team. There can be no assurance that a Fund could purchase or sell a portfolio security at the price used to calculate the Fund’s NAV.
24 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
Fair valuation procedures may be used to value a substantial portion of the assets of the Fund.
The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio
security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Advisor determines that the quotation or price for a portfolio
security provided by a broker-dealer or an independent pricing service is inaccurate.
The “fair value” of securities may be
difficult to determine and thus judgment plays a greater role in the valuation process. The fair valuation methodology may include or consider the following guidelines, as appropriate: (1) evaluation of all relevant factors, including but not
limited to, pricing history, current market level, supply and demand of the respective security; (2) comparison to the values and current pricing of securities that have comparable characteristics; (3) knowledge of historical market
information with respect to the security; (4) other factors relevant to the security which would include, but not be limited to, duration, yield, fundamental analytical data, the Treasury yield curve, and credit quality.
The values assigned to fair valued investments are based on available information and do not necessarily represent amounts that might ultimately be
realized, since such amounts depend on future developments inherent in long-term investments. Changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities
valued at their last sale price, by an independent pricing service, or based on market quotations. Imprecision in estimating fair value can also impact the amount of unrealized appreciation or depreciation recorded for a particular portfolio
security and differences in the assumptions used could result in a different determination of fair value, and those differences could be material.
The Fund has established methods of fair value measurements in accordance with GAAP. Fair value denotes the price that the Fund would receive upon selling an investment in a timely transaction to an independent
buyer in the principal or most advantageous market of the investment. A three-tier hierarchy has been established to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value
measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique
used to measure fair value including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions
market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized in the three broad levels listed below.
|
|
|
|
|
|
|
|
|
|
|
•
|
|
Level 1 -
|
|
quoted prices in active markets for identical investments
|
|
|
|
|
|
|
|
|
•
|
|
Level 2 -
|
|
quoted prices in markets that are not active or other significant observable inputs (including, but not limited to: quoted prices for similar investments, quoted prices
based on recently executed transactions, interest rates, prepayment speeds, credit risk, etc.)
|
|
|
|
|
|
|
|
|
•
|
|
Level 3 -
|
|
significant unobservable inputs (including each Fund’s own assumptions in determining the fair value of investments)
|
The Adviser’s valuation policy, as previously stated, establishes parameters for the sources and types of
valuation analysis, as well as, the methodologies and inputs the Adviser uses in determining fair value, including the use of the Adviser’s Valuation Committee. If the Valuation Committee determines that additional techniques, sources or inputs
are appropriate or necessary in a given situation, such additional work will be undertaken.
2013 Semi-Annual
Report
25
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
To assess the continuing appropriateness of security valuations, the Adviser (or its third party
service provider who is subject to oversight by the Adviser), compares daily its prior day prices, prices on comparable securities and sales prices and challenges those prices that either remain unchanged or exceeds certain tolerance levels with the
third party pricing service or broker source. For those securities valued by fair valuations, the Valuation Committee reviews and affirms the reasonableness of the valuations based on such methodologies and fair valuation determinations on a regular
basis after considering all relevant information that is reasonably available.
The inputs or methodology used for valuing investments
are not necessarily an indication of the risk associated with investing in those securities.
The following table summarizes the
Fund’s investments categorized in the disclosure hierarchy as of May 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
U.S. Government & Agency Obligations
|
|
$
|
—
|
|
|
$
|
53,465,672
|
|
|
$
|
—
|
|
|
$
|
53,465,672
|
|
|
Asset-Backed Securities
|
|
|
—
|
|
|
|
24,067,712
|
|
|
|
—
|
|
|
|
24,067,712
|
|
|
Commercial Mortgage-Backed Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
185,682,964
|
|
|
|
185,682,964
|
|
|
Non-Agency Residential Mortgage-Backed Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
157,661,389
|
|
|
|
157,661,389
|
|
|
Interest-Only Securities
|
|
|
—
|
|
|
|
16,555,180
|
|
|
|
1,302,243
|
|
|
|
17,857,423
|
|
|
High Yield Corporate Bonds
|
|
|
—
|
|
|
|
54,613,373
|
|
|
|
5,524,657
|
|
|
|
60,138,030
|
|
|
Mezzanine Loan
|
|
|
—
|
|
|
|
—
|
|
|
|
10,725,000
|
|
|
|
10,725,000
|
|
|
Short-Term Investment
|
|
|
—
|
|
|
|
99,993
|
|
|
|
—
|
|
|
|
99,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
148,801,930
|
|
|
$
|
360,896,253
|
|
|
$
|
509,698,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides quantitative information about the Fund’s Level 3 values, as well as their
inputs, as of May 31, 2013. The table is not all-inclusive, but provides information on the significant Level 3 inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Assets
|
|
Fair Value as of
May 31, 2013
|
|
|
Valuation
Methodology
|
|
Significant
Unobservable
Input
|
|
Range
|
|
|
Commercial Mortgage-Backed Securities
|
|
$
|
185,682,964
|
|
|
Unadjusted quoted
market prices
|
|
(NBIB)
(1)
|
|
|
0.00 - 120.18
|
|
|
Non-Agency Residential Mortgage-Backed Securities
|
|
|
157,661,389
|
|
|
Unadjusted quoted
market prices
|
|
(NBIB)
(1)
|
|
|
0.00 - 364.49
|
|
|
Interest-Only Securities
|
|
|
1,302,243
|
|
|
Unadjusted quoted
market prices
|
|
(NBIB)
(1)
|
|
|
0.10 - 12.35
|
|
|
High Yield Corporate Bonds
|
|
|
5,524,657
|
|
|
Unadjusted quoted
market prices
|
|
(NBIB)
(1)
|
|
|
99.63 - 114.13
|
|
|
Mezzanine Loan
|
|
|
10,725,000
|
|
|
Unadjusted quoted
market prices
|
|
(NBIB)
(1)
|
|
|
107.25
|
|
|
(1)
|
The Fund generally uses prices provided by an independent pricing service, or broker non-binding indicative bid prices (NBIB) on or near the valuation date as
the primary basis for the fair value determinations. These bid prices are non-binding, and may not be determinative of fair value. Each bid price is evaluated by the Valuation Committee in conjunction with additional information compiled by the
Adviser.
|
26 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
The following is a reconciliation of assets in which significant unobservable inputs (Level 3)
were used in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in
Securities
|
|
Asset-
Backed
Securities
|
|
|
Commercial
Mortgage-
Backed
Securities
|
|
|
Non-Agency
Residential
Mortgage-
Backed
Securities
|
|
|
Interest
Only
Securities
|
|
|
High Yield
Corporate
Bonds
|
|
|
Mezzanine
Loan
|
|
|
Total
|
|
|
Balance as of November 30, 2012
|
|
$
|
10,741,144
|
|
|
$
|
145,767,740
|
|
|
$
|
164,634,656
|
|
|
$
|
14,507,895
|
|
|
$
|
2,555,850
|
|
|
$
|
—
|
|
|
$
|
338,207,285
|
|
|
Accrued Discounts (Premiums)
|
|
|
(1,097
|
)
|
|
|
(849,486
|
)
|
|
|
495,221
|
|
|
|
(294,457
|
)
|
|
|
(15,092
|
)
|
|
|
(14,125
|
)
|
|
|
(679,036
|
)
|
|
Realized Gain (Loss)
|
|
|
207,977
|
|
|
|
2,881,511
|
|
|
|
7,488,782
|
|
|
|
49,402,702
|
|
|
|
(1,750
|
)
|
|
|
—
|
|
|
|
59,979,222
|
|
|
Change in Unrealized Appreciation (Depreciation)
|
|
|
874,631
|
|
|
|
22,366,055
|
|
|
|
8,508,171
|
|
|
|
207,736
|
|
|
|
189,498
|
|
|
|
139,125
|
|
|
|
32,285,216
|
|
|
Purchases at cost
|
|
|
—
|
|
|
|
38,958,204
|
|
|
|
29,240,980
|
|
|
|
(14,904
|
)
|
|
|
1,682,610
|
|
|
|
10,600,000
|
|
|
|
80,466,890
|
|
|
Sales proceeds
|
|
|
(8,854,102
|
)
|
|
|
(23,441,060
|
)
|
|
|
(52,706,421
|
)
|
|
|
(49,988,498
|
)
|
|
|
(1,289,804
|
)
|
|
|
—
|
|
|
|
(136,279,885
|
)
|
|
Transfers into Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,995,875
|
|
|
|
—
|
|
|
|
3,995,875
|
(a)
|
|
Transfers out of Level 3
|
|
|
(2,968,553
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,518,231
|
)
|
|
|
(1,592,530
|
)
|
|
|
—
|
|
|
|
(17,079,314
|
)
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2013
|
|
$
|
—
|
|
|
$
|
185,682,964
|
|
|
$
|
157,661,389
|
|
|
$
|
1,302,243
|
|
|
$
|
5,524,657
|
|
|
$
|
10,725,000
|
|
|
$
|
360,896,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains or losses relating to assets still held at reporting date:
|
|
$
|
—
|
|
|
$
|
18,139,991
|
|
|
$
|
11,333,950
|
|
|
$
|
230
|
|
|
$
|
161,231
|
|
|
$
|
139,125
|
|
|
$
|
29,774,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Transfers in and out of Level 3 are due to a decline or an increase in market activity (e.g. frequency of trades), which resulted in a lack of or an increase
in available market inputs to determine price.
|
For the six months ended May 31, 2013, there was no security
transfer activity between Level 1 and Level 2. The basis for recognizing and valuing transfers is as of the end of the period in which the transfers occur.
Investment Transactions and Investment Income:
Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are calculated on the identified cost basis.
Interest income is recorded on the accrual basis. Discounts and premiums on securities are accreted and amortized, respectively on a daily basis, using the effective yield to maturity method adjusted based on management’s assessment of the
collectability of such interest. Dividend income is recorded on the ex-dividend date.
Taxes:
The Fund intends to continue to
meet the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income to its stockholders. Therefore, no federal income or excise tax provision
is required. The Fund may incur an excise tax to the extent it has not distributed all of its taxable income on a calendar year basis.
GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. An
evaluation of tax positions taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the taxing authority is required. Tax benefits of positions
not deemed to meet the more-likely-than-not threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of a deferred tax
asset; an increase in deferred tax liability; or a combination thereof. As of May 31, 2013, the Fund has determined that there are no uncertain tax positions or tax liabilities required to be accrued.
2013 Semi-Annual
Report
27
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
The Fund has reviewed all taxable years that are open for examination (
i.e.
, not barred by
the applicable statute of limitations) by taxing authorities of all major jurisdictions, including the Internal Revenue Service. As of May 31, 2013, open taxable years consisted of the taxable years ended November 30, 2009 through
November 30, 2012. No examination of the Fund’s tax returns is currently in progress.
Expenses:
Expenses directly
attributable to the Fund are charged directly to the Fund, while expenses which are attributable to the Fund and other investment companies advised by the Advisor are allocated among the respective investment companies, including the Fund, based
upon relative net assets.
Dividends and Distributions:
The Fund declares and pays dividends monthly from net investment income.
To the extent these distributions exceed net investment income, they may be classified as return of capital. The Fund also pays distributions at least annually from its net realized capital gains, if any. Dividends and distributions are recorded on
the ex-dividend date. All common shares have equal dividend and other distribution rights. A notice disclosing the source(s) of a distribution will be provided if payment is made from any source other than net investment income. Any such notice
would be provided only for informational purposes in order to comply with the requirements of Section 19(a) of the 1940 Act and not for tax reporting purposes. The tax composition of the Fund’s distributions for each calendar year is
reported on IRS Form 1099-DIV.
Dividends from net investment income and distributions from realized gains from investment transactions
have been determined in accordance with Federal income tax regulations and may differ from net investment income and realized gains recorded by the Fund for financial reporting purposes. These differences, which could be temporary or permanent in
nature, may result in reclassification of distributions; however, net investment income, net realized gains and losses and net assets are not affected.
When-Issued Purchases and Forward Commitments:
The Fund may purchase securities on a “when-issued” basis and may purchase or sell securities on a “forward commitment” basis in order to
hedge against anticipated changes in interest rates and prices and secure a favorable rate of return. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities takes place at a later date, which can be a month or more after the date of the transaction. At the time the Fund makes the commitment to purchase securities on a when-issued or forward commitment basis, the
Fund will record the transactions and thereafter reflect the values of such securities in determining its net asset value. At the time the Fund enters into a transaction on a when-issued or forward commitment basis, the Advisor will identify
collateral consisting of cash or liquid securities equal to the value of the when-issued or forward commitment securities and will monitor the adequacy of such collateral on a daily basis. On the delivery date, the Fund will meet its obligations
from securities that are then maturing or sales of the securities identified as collateral by the Advisor and/or from then available cash flow. When-issued securities and forward commitments may be sold prior to the settlement date. If the Fund
disposes of the right to acquire a when-issued security prior to its acquisition or disposes of the right to deliver or receive against a forward commitment, it can incur a gain or loss due to market fluctuation. There is always a risk that the
securities may not be delivered and that the Fund may incur a loss. Settlements in the ordinary course are not treated by the Fund as when-issued or forward commitment transactions and, accordingly, are not subject to the foregoing limitations even
though some of the risks described above may be present in such transactions.
TBA Transactions:
The Fund may enter into
to-be-announced (“TBA”) transactions to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. A TBA transaction is a purchase or sale of a U.S. government agency mortgage
pass-through security for future settlement at an agreed upon date. The term “U.S. government agency mortgage pass-through security” refers to a category of passthrough securities backed by pools of mortgages and issued by one of several
U.S. government-sponsored enterprises: the Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac). In the basic pass-through structure,
28 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
mortgages with similar issuer, term and coupon characteristics are collected and aggregated into a pool. The pool is assigned a CUSIP number and undivided interests in the pool are traded and
sold as pass-through securities. The holder of the security is entitled to a pro rata share of principal and interest payments (including unscheduled prepayments) from the pool of mortgage loans. TBA transactions increase the liquidity and pricing
efficiency of transactions in such mortgage-backed securities since they permit similar mortgage-backed securities to be traded interchangeably pursuant to commonly observed settlement and delivery requirements. Proceeds of TBA transactions are not
received until the contractual settlement date. The Fund may use TBA transactions to acquire and maintain exposure to mortgage-backed securities in either of two ways. Typically, the Fund will enter into TBA agreements and “roll over” such
agreements prior to the settlement date stipulated in such agreements. This type of TBA transaction is commonly known as a “TBA roll.” In a “TBA roll,” the Fund generally will sell the obligation to purchase the pools stipulated
in the TBA agreement prior to the stipulated settlement date and will enter into a new TBA agreement for future delivery of pools of mortgage pass-through securities. Alternatively, the Fund will enter into TBA agreements and settle such
transactions on the stipulated settlement date by actual receipt or delivery of the pools of mortgage pass-through securities stipulated in the TBA agreement. Unsettled TBA agreements are valued at the current market value of the underlying
securities, according to the procedures described above under “Valuation of Investments.” Each TBA position is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss.
TBA transactions outstanding at May 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Name
|
|
Interest Rate
|
|
|
Principal Amount
|
|
|
Current Payable
|
|
|
Federal Home Loan Mortgage Corporation
|
|
|
3.50
|
%
|
|
$
|
15,000,000
|
|
|
$
|
15,858,906
|
|
|
Federal National Mortgage Association
|
|
|
3.50
|
%
|
|
$
|
15,000,000
|
|
|
$
|
15,894,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
31,752,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Information:
The Fund invests in securities and distributes dividends and distributions which are
paid in cash or are reinvested at the discretion of stockholders. These activities are reported in the Statements of Changes in Net Assets. Additional information on cash receipts and cash payments is presented in the Statement of Cash Flows. Cash,
as used in the Statements of Cash Flows, is the amount reported as “Cash” and “Cash collateral for reverse repurchase agreements” in the Statement of Assets and Liabilities, and does not include short-term investments.
Accounting practices that do not affect reporting activities on a cash basis include carrying investments at value and accreting
discounts and amortizing premiums on debt obligations.
Financial Futures Contracts:
A futures contract is an agreement between
two parties to buy and sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or
received, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the
Fund’s basis in the contract.
The Fund invests in financial futures contracts to hedge against fluctuations in the value of
portfolio securities caused by changes in prevailing market interest rates. Should interest rates move unexpectedly, a Fund may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets. The Fund is at risk that it may not be able to close out a transaction because of an illiquid
market.
2013 Semi-Annual
Report
29
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
The following table sets forth the effect of derivative instruments on the Statement of Operations
for the six months ended May 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Accounted for
as Hedging Instruments
|
|
Location of Gains (Losses) on
Derivatives Recognized in Income
|
|
Net Realized Gains on
Futures Transactions
|
|
|
Change in
Unrealized
Appreciation on Futures
Transactions
|
|
|
Futures contracts
|
|
Futures transactions
|
|
$
|
26,415
|
|
|
$
|
13,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Risks of Investing in Asset-Backed Securities and Below-Investment Grade Securities
The value of asset-backed securities may be affected by, among other factors, changes in: interest rates, the market’s assessment of the
quality of the underlying assets, the creditworthiness of the servicer for the underlying assets, information concerning the originator of the underlying assets, or the creditworthiness or rating of the entities that provide any supporting letters
of credit, surety bonds, derivative instruments or other credit enhancement.
The value of asset-backed securities also will be affected
by the exhaustion, termination or expiration of any credit enhancement. The Fund has investments in below-investment grade debt securities, including mortgage-backed and asset-backed securities. Below-investment grade securities involve a higher
degree of credit risk than investment grade debt securities. In the event of an unanticipated default, the Fund would experience a reduction in its income, a decline in the market value of the securities so affected and a decline in the NAV of its
shares. During an economic downturn or period of rising interest rates, highly leveraged and other below-investment grade issuers frequently experience financial stress that could adversely affect their ability to service principal and interest
payment obligations, to meet projected business goals and to obtain additional financing.
The market prices of below-investment grade
debt securities are generally less sensitive to interest rate changes than higher-rated investments but are more sensitive to adverse economic or political changes or individual developments specific to the issuer than higher-rated investments.
Periods of economic or political uncertainty and change can be expected to result in significant volatility of prices for these securities. Rating services consider these securities to be speculative in nature.
Below-investment grade securities may be subject to market conditions, events of default or other circumstances which cause them to be considered
“distressed securities.” Distressed securities frequently do not produce income while they are outstanding. The Fund may be required to bear certain extraordinary expenses in order to protect and recover its investments in certain
distressed securities. Therefore, to the extent the Fund seeks capital growth through investment in such securities, the Fund’s ability to achieve current income for its stockholders may be diminished. The Fund is also subject to significant
uncertainty as to when and in what manner and for what value the obligations evidenced by distressed securities will eventually be satisfied (
e.g.
, through a liquidation of the obligor’s assets, an exchange offer or plan of
reorganization involving the securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or a plan of reorganization is adopted with respect to distressed securities held by the Fund,
there can be no assurance that the securities or other assets received by the Fund in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment
was made. Moreover, any securities received by the Fund upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of the Fund’s participation in negotiations with respect to any exchange offer or
plan of reorganization with respect to an issuer of such securities, the Fund may be restricted from disposing of distressed securities.
4.
Investment Advisory Agreement and Transactions with Related Parties
The Fund has entered into an Investment Advisory Agreement (the
“Advisory Agreement”) with the Adviser under which the Adviser is responsible for the management of the Fund’s portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the
operations of the Fund. The Advisory
30 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
Agreement provides, among other things, that the Adviser will bear all expenses of its employees and overhead incurred in connection with the performance of its duties under the Advisory
Agreement, and will pay all salaries of the Fund’s directors and officers who are affiliated persons (as such term is defined in the 1940 Act) of the Adviser. The Advisory Agreement provides that the Fund shall pay the Adviser a monthly fee for
its services at an annual rate of 0.65% of the Fund’s average weekly net assets. During the six months ended May 31, 2013, the Advisor earned $1,156,945 in investment advisory fees from the Fund.
The Fund has entered into an Administration Agreement with the Adviser. The Adviser has also entered into a sub-administration agreement with U.S.
Bancorp Fund Services, LLC (“Sub-Administrator”). The Adviser and Sub-Administrator perform administrative services necessary for the operation of the Fund, including maintaining certain books and records of the Fund and preparing reports
and other documents required by federal, state, and other applicable laws and regulations, and providing the Fund with administrative office facilities. For these services, the Fund shall pay to the Adviser a monthly fee at an annual rate of 0.20%
of the Fund’s average weekly net assets. During the six months ended May 31, 2013, the Adviser earned $355,983 in administration fees from the Fund. The Adviser is responsible for any fees due the Sub-Administrator.
5. Purchases and Sales of Investments
Purchases and sales of investments, excluding short-term securities and reverse repurchase agreements, for the six months ended May 31, 2013,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Securities (excluding
U.S. Government Securities)
|
|
|
U.S. Government Securities
|
|
|
Purchases
|
|
|
Sales
|
|
|
Purchases
|
|
|
Sales
|
|
|
$
|
108,835,224
|
|
|
$
|
102,705,999
|
|
|
$
|
3,395,586
|
|
|
$
|
4,006,925
|
|
For purposes of this note, U.S. Government securities may include securities issued by the U.S. Treasury, Federal
Home Loan Mortgage Corporation and Federal National Mortgage Association.
6. Borrowings
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them
at a mutually agreed upon date and price. Under the 1940 Act, reverse repurchase agreements will be regarded as a form of borrowing by the Fund unless, at the time it enters into a reverse repurchase agreement, it establishes and maintains a
segregated account with its custodian containing securities from its portfolios having a value not less than the repurchase price (including accrued interest). The Fund has established and maintained such accounts for its reverse repurchase
agreements.
Reverse repurchase agreements involve the risk that 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. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities, and the Fund’s use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreements.
2013 Semi-Annual
Report
31
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
At May 31, 2013, the Fund had the following reverse repurchase agreements outstanding:
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
|
Description
|
|
Maturity Amount
|
|
|
|
$4,115,297
|
|
|
Barclays, 1.00%, dated 05/01/13, maturity date 06/03/13
|
|
$
|
4,119,069
|
|
|
|
94,219
|
|
|
Barclays, 1.00%, dated 05/15/13, maturity date 06/03/13
|
|
|
94,269
|
|
|
|
4,607,438
|
|
|
Barclays, 1.00%, dated 05/13/13, maturity date 06/13/13
|
|
|
4,611,405
|
|
|
|
38,906
|
|
|
Barclays, 1.00%, dated 05/15/13, maturity date 06/13/13
|
|
|
38,937
|
|
|
|
3,041,812
|
|
|
Barclays, 1.00%, dated 05/15/13, maturity date 06/14/13
|
|
|
3,044,347
|
|
|
|
113,063
|
|
|
Barclays, 1.00%, dated 05/20/13, maturity date 06/14/13
|
|
|
113,142
|
|
|
|
5,941,220
|
|
|
Barclays, 1.00%, dated 05/20/13, maturity date 06/20/13
|
|
|
5,946,336
|
|
|
|
3,475,000
|
|
|
BNP Paribas Securities, 0.38%, dated 05/10/13, maturity date 06/10/13
|
|
|
3,476,137
|
|
|
|
956,500
|
|
|
Credit Suisse, 0.40%, dated 05/01/13, maturity date 06/03/13.
|
|
|
956,851
|
|
|
|
12,397,000
|
|
|
Goldman Sachs, 0.38%, dated 05/08/213, maturity date 06/07/13
|
|
|
12,400,926
|
|
|
|
1,222,000
|
|
|
JP Morgan Chase, 0.40%, dated 05/13/13, maturity date 06/13/13
|
|
|
1,222,421
|
|
|
|
3,379,000
|
|
|
JP Morgan Chase, 0.40%, dated 05/15/13, maturity date 06/14/13
|
|
|
3,380,126
|
|
|
|
3,802,700
|
|
|
JP Morgan Chase, 1.00%, dated 05/13/13, maturity date 06/13/13
|
|
|
3,805,975
|
|
|
|
18,576,900
|
|
|
JP Morgan Chase, 1.00%, dated 05/15/13, maturity date 06/14/13
|
|
|
18,592,381
|
|
|
|
2,743,600
|
|
|
JP Morgan Chase, 1.00%, dated 05/22/13, maturity date 06/21/13
|
|
|
2,745,886
|
|
|
|
3,896,000
|
|
|
JP Morgan Chase, 1.04%, dated 05/28/13, maturity date 06/28/13
|
|
|
3,899,498
|
|
|
|
6,160,000
|
|
|
JP Morgan Chase, 1.05%, dated 05/08/13, maturity date 06/07/13
|
|
|
6,165,386
|
|
|
|
3,027,000
|
|
|
JP Morgan Chase, 1.05%, dated 05/17/13, maturity date 06/17/13
|
|
|
3,029,737
|
|
|
|
20,246,000
|
|
|
JP Morgan Chase, 1.10%, dated 05/15/13, maturity date 06/14/13
|
|
|
20,264,528
|
|
|
|
3,253,000
|
|
|
JP Morgan Chase, 1.45%, dated 05/08/13, maturity date 06/07/13
|
|
|
3,256,929
|
|
|
|
8,028,000
|
|
|
JP Morgan Chase, 1.84%, dated 05/29/13, maturity date 06/17/13
|
|
|
8,035,808
|
|
|
|
21,370,000
|
|
|
JP Morgan Chase, 1.85%, dated 05/17/13, maturity date 06/17/13
|
|
|
21,404,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$130,484,655
|
|
|
Maturity Amount, Including Interest Payable
|
|
$
|
130,604,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of Assets Sold Under Agreements
|
|
$
|
165,790,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate
|
|
|
1.14
|
%
|
|
|
|
|
|
|
|
|
|
|
The average daily balance of reverse repurchase agreements outstanding for the Fund during the six months ended
May 31, 2013, was approximately $107,113,620 at a weighted average interest rate of 0.96%.
The maximum amount of reverse
repurchase agreements outstanding at any time during the period was $130,677,833, which was 23.73% of total assets for the Fund.
7. Capital Stock
The Fund has 50 million shares of $0.01 par value common stock authorized. Of the 13,960,683 shares outstanding at May 31,
2013 for the Fund, the adviser owned 4,647 shares.
The Fund is continuing its stock repurchase program, whereby an amount of up to 15%
of the original outstanding common stock of the Fund, or approximately 3.7 million of the Fund’s shares, is authorized for repurchase. The purchase prices may not exceed the then-current net asset value.
For the six months ended May 31, 2013 and the fiscal year ended November 30, 2012, no shares were repurchased for the Fund. Since
inception of the stock repurchase program for the Fund, 2,119,740 shares have been repurchased at an aggregate cost of $18,809,905 and at an average discount of 13.20% to net asset value. All shares repurchased have been retired.
As of the close of business March 30, 2012, pursuant to an Agreement and Plan of Reorganization previously approved by the Funds’ Board
of Directors, all of the assets, subject to the liabilities, of the Helios Strategic Mortgage Income Fund, Inc. were transferred to the Helios Total Return Fund, Inc. in exchange for corresponding shares of the Helios Total Return Fund, Inc. of
equal value. The purpose of the transaction was to combine two
32 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
funds with comparable investment objectives and strategies. The exchange ratio was 1.0657. The net asset value of the Helios Total Return Fund, Inc. shares on the close of business March 30,
2012, after the reorganization was $5.96, and a total of 10,841,114 shares were issued to shareholders of the Helios Strategic Mortgage Income Fund, Inc. in the exchange. The exchange was a tax-free event to Helios Strategic Mortgage Income Fund,
Inc. shareholders. For financial reporting purposes, assets received and shares issued by the Helios Total Return Fund, Inc. were recorded at fair value; however the cost basis of investments received from Helios Strategic Mortgage Income Fund, Inc.
was carried forward to align ongoing reporting of the Helios Total Return Fund, Inc’s. realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
The components of net assets immediately before the acquisition were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock
|
|
|
Accumulated net
investment loss
|
|
|
Accumulated net
realized loss on
investments
|
|
|
Net Unrealized
Depreciation
|
|
|
Net Assets
|
|
|
Helios Strategic Mortgage Income Fund, Inc.
|
|
$
|
135,113,940
|
|
|
$
|
(2,383,501
|
)
|
|
$
|
(51,684,861
|
)*
|
|
$
|
(16,388,730
|
)
|
|
$
|
64,656,398
|
|
|
Helios Total Return Fund, Inc.
|
|
|
277,545,747
|
|
|
|
(3,345,197
|
)
|
|
|
(65,951,948
|
)
|
|
|
(23,549,900
|
)
|
|
|
184,698,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
412,659,237
|
|
|
$
|
(5,728,698
|
)
|
|
$
|
(117,636,809
|
)
|
|
$
|
(39,938,630
|
)
|
|
$
|
249,355,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Due to rules under section 381 and 382 of the Internal Revenue Code, the combined fund will only be able to utilize $15,205,249 of the $51,336,999 capital
loss carryforward and the losses will be limited to $2,279,853 each year ($1,526,131 in the first short year) over the next 7 years. The combined fund may not utilize the remaining $36,131,750.
|
Assuming the acquisition of Helios Strategic Mortgage Income Fund, Inc. had been completed on December 1, 2011, the combined funds’ pro
forma results in the Statement of Operations during the fiscal year ended November 30, 2012 were as follows:
|
|
|
|
|
|
|
Net investment income
|
|
$
|
19,368,873
|
*
|
|
Net realized and unrealized gain (loss) on investment
|
|
$
|
15,628,193
|
**
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
34,997,066
|
|
|
*
|
$21,752,374 as reported in the Helios Total Return Fund, Inc. Statement of Operations, plus $(2,383,501) Helios Strategic Mortgage Income Fund, Inc.
pre-merger.
|
|
**
|
$30,575,796 as reported in the Helios Total Return Fund, Inc. Statement of Operations plus $(14,947,603) Helios Strategic Mortgage Income Fund, Inc.
pre-merger.
|
Because the combined funds have been managed as a single integrated Fund since the acquisition was
completed, it is not practicable to separate the amounts of income and expenses of HSM that have been included in the Fund’s Statement of Operations since March 31, 2012.
Effective August 22, 2012, the Fund affected a1 for 4 reverse stock split for its shares. All share transactions in capital stock and per
share data prior to August 22, 2012 have been restated to give effect to the reverse stock split. The reverse stock split had no impact on the overall value of a stockholder’s investment in the Fund.
The Fund issued to its stockholders of record as of the close of business on September 20, 2012 transferable rights to subscribe for up to an
aggregate of 3,500,000 shares of common stock of the Fund at a rate of one share of common stock for 3 rights held. The issue was fully subscribed at the subscription price of $21.50. The rights offering costs of approximately $675,947 and brokerage
and dealer-management commissions were charged directly against the proceeds of the rights offering. The Fund increased its capital by $72,097,601.
8. Financial Instruments
The Fund regularly
trades in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written
2013 Semi-Annual
Report
33
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
options, futures contracts and swap agreements and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment the Fund has in particular classes of financial instruments and does not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with
these instruments is meaningful only when all related and offsetting transactions are considered. During the six months ended May 31, 2013, the Fund had segregated sufficient cash and/or securities to cover any commitments under these
contracts.
There was no written option activity for the six months ended May 31, 2013 for the Fund. As of May 31, 2013, there
were no futures contracts outstanding.
9. Federal Income Tax Information
Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from GAAP.
The tax character of distributions for the six months ended May 31, 2013, is expected to be from ordinary income but will be determined at the
end of the Fund’s current fiscal year.
The tax character of distributions paid for the fiscal year ended November 30, 2012
was as follows:
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
22,081,984
|
|
|
Return of capital
|
|
|
413,975
|
|
|
|
|
|
|
|
|
Total distributions
|
|
$
|
22,495,959
|
|
|
|
|
|
|
|
At November 30, 2012, the Fund’s most recently completed tax year-end, the components of net assets
(excluding paid-in capital) on a tax basis were as follows:
|
|
|
|
|
|
|
Capital loss
carryforward
(1)
|
|
$
|
(85,088,454
|
)
|
|
Post-October capital loss deferral
|
|
|
(1,447,413
|
)
|
|
Book basis unrealized depreciation
|
|
|
(15,822,103
|
)
|
|
Plus: Cumulative timing difference
|
|
|
13,123
|
|
|
|
|
|
|
|
|
Tax basis unrealized depreciation on investments
|
|
|
(15,808,980
|
)
|
|
|
|
|
|
|
|
Total tax basis net accumulated losses
|
|
$
|
(102,344,847
|
)
|
|
|
|
|
|
|
|
(1)
|
To the extent that future capital gains are offset by capital loss carryforwards, such gains will not be distributed. Due to rules under section 381 and 382
of the Internal Revenue Code, the combined fund will only be able to utilize $15,205,249 of the $51,336,999 capital loss carryforward and the losses will be limited to $2,279,853 each year ($1,526,131 in the first short year) over the next 7 years.
The combined fund may not utilize the remaining $36,131,750.
|
As of November 30, 2012, the Fund’s capital
loss carryforwards were as follows:
|
|
|
|
|
|
|
Expiring In:
|
|
|
|
|
2013
|
|
$
|
2,216,675
|
|
|
2014
|
|
|
1,719,287
|
|
|
2015
|
|
|
3,792,571
|
|
|
2016
|
|
|
7,710,904
|
|
|
2017
|
|
|
38,404,880
|
|
|
2018
|
|
|
18,161,948
|
|
|
2019
|
|
|
12,712,591
|
|
|
Infinite
|
|
|
369,598
|
|
34 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
Federal Income Tax Basis:
The federal income tax basis of the Fund’s investments at
May 31, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Investments
|
|
|
Gross
Unrealized
Appreciation
|
|
|
Gross
Unrealized
Depreciation
|
|
|
Net Unrealized
Appreciation
|
|
|
$
|
494,858,622
|
|
|
$
|
41,306,404
|
|
|
$
|
(26,466,843
|
)
|
|
$
|
14,839,561
|
|
Capital Account Reclassifications:
Because federal income tax regulations differ in certain respects from
GAAP, income and capital gain distributions, if any, determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. These differences are primarily due to differing
treatments for gains/losses on principal payments of mortgage-backed and asset-backed securities, distribution reclassifications, and return of capital. Permanent book and tax differences, if any, relating to stockholder distributions will result in
reclassifications to paid-in-capital or to undistributed capital gains. These reclassifications have no effect on net assets or NAV per share. Any undistributed net income and realized gain remaining at fiscal year-end is distributed in the
following year.
10. Indemnification
Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course
of business, the Fund enters into contracts with its vendors and others that provide for indemnification. The Fund’s maximum exposure under these arrangements is unknown, since this would involve the resolution of certain claims, as well as
future claims that may be made, against the Fund. Thus, an estimate of the financial impact, if any, of these arrangements cannot be made at this time.
11. New Accounting Pronouncements
In
December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11 “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires disclosures to
make financial statements that are prepared under U.S. GAAP more comparable to those prepared under IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for
offset in the Statement of Assets and Liabilities as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, ASU 2011-11 requires disclosure of collateral received and posted in connection
with master netting agreements or similar arrangements. New disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.
In January 2013, the FASB issued ASU No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU
No. 2013-01 clarifies that ordinary trade receivables and payables are not included in the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities
borrowing and lending that are offset in accordance with specific criteria contained in the FASB Accounting Standards codification.
Management is currently evaluating the impact these amendments will have on the Fund’s financial statements and disclosures.
12. Exclusion for Definition of Commodity Pool Operator
Pursuant to amendments by the Commodity Futures Trading Commission to Rule 4.5 under the Commodity Exchange Act (“CEA”), the Adviser has filed a notice of exemption from registering as a “commodity
pool operator” with respect to the Fund. The Fund and the Adviser are therefore not subject to registration or regulation as a pool operator under the CEA. Effective December 31, 2012, in order to claim the Rule 4.5 exemption, the Fund is
limited in its ability to invest in commodity futures, options, swaps (including securities futures, broad-based stock index futures and financial futures contracts). The Fund will limit its transactions in such instruments (excluding
2013 Semi-Annual
Report
35
BROOKFIELD TOTAL RETURN FUND INC.
Notes to Financial Statements (Unaudited)
May 31, 2013
transactions entered into for “bona fide hedging purposes,” as defined under the Commodity Futures Trading Commission regulations) such that either: (i) the aggregate initial
margin and premiums required to establish its futures, options on futures and swaps do not exceed 5% of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and losses on such positions; or (ii) the
aggregate net notional value of its futures, options on futures and swaps does not exceed 100% of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and losses on such positions. The Fund and the Adviser
do not believe that complying with the amended rule will limit the Fund’s ability to use commodity futures, options and swaps to the extent that it has used them in the past. These limitations, however, may have an impact on the ability of the
Adviser to manage the Fund in the future and on the Fund’s performance.
13. Subsequent Events
GAAP requires recognition in the financial statements of the effects of all subsequent events that provide additional evidence about conditions that
existed at the date of the Statement of Assets and Liabilities. For non-recognized subsequent events that must be disclosed to keep the financial statements from being misleading, the Fund is required to disclose the nature of the event as well as
an estimate of its financial effect, or a statement that such an estimate cannot be made.
Dividends:
The Fund’s Boards of
Directors declared the following monthly dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Per Share
|
|
|
Record Date
|
|
|
Payable Date
|
|
|
$
|
0.1900
|
|
|
|
June 20, 2013
|
|
|
|
June 28, 2013
|
|
|
$
|
0.1900
|
|
|
|
July 18, 2013
|
|
|
|
July 26, 2013
|
|
Management has evaluated subsequent events in the preparation of the Fund’s financial statements and has
determined that other than the items listed herein, there are no events that require recognition or disclosure in the financial statements.
36 Brookfield
Investment Management Inc.
BROOKFIELD TOTAL RETURN FUND INC.